-----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, ULZ12UvrUfgFrMLarWJ9mgo9E7hSLnnPJcaXQv3a6LLOvg992fcV7G1LCV8rCWmo JBXxGnwcEZrAKJMGpXONEg== 0000912057-99-001490.txt : 19991020 0000912057-99-001490.hdr.sgml : 19991020 ACCESSION NUMBER: 0000912057-99-001490 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19991019 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINISAR CORP CENTRAL INDEX KEY: 0001094739 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 943038428 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-87017 FILM NUMBER: 99730306 BUSINESS ADDRESS: STREET 1: 1308 MOFFETT PARK DR CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4085481000 MAIL ADDRESS: STREET 1: 1308 MOFFETT PARK DR CITY: SUNNYVALE STATE: CA ZIP: 94089 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 1999 REGISTRATION NO. 333-87017 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ FINISAR CORPORATION (Exact name of Registrant as specified in its charter) -------------------------- CALIFORNIA 3674 94-3038428 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code number) Identification incorporation or organization) No.)
1308 MOFFETT PARK DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 548-1000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------------ JERRY S. RAWLS CHIEF EXECUTIVE OFFICER FINISAR CORPORATION 1308 MOFFETT PARK DRIVE SUNNYVALE, CALIFORNIA 94089 (408) 548-1000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ PLEASE SEND COPIES OF ALL COMMUNICATIONS TO: DENNIS C. SULLIVAN, ESQ. PETER E. WILLIAMS III, ESQ. JOHN M FOGG, ESQ. BRIAN D. MCALLISTER, ESQ. ANDREW M. JACOBSON, ESQ. TIMOTHY J. HARRIS, ESQ. GRAY CARY WARE & FREIDENRICH LLP MORRISON & FOERSTER LLP 400 HAMILTON AVENUE 755 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94301-1825 PALO ALTO, CALIFORNIA 94304-1018 (650) 328-6561 (650) 813-5600 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. -------------------------- If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration 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 number of the earlier effective registration statement for the same offering. / / _________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration 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, check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE Common Stock (no par value)......... 8,855,000 shares $14.00 $123,970,000 $34,464 (3)
(1) Includes 1,155,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purposes of determining the registration fee pursuant to Rule 457(o) promulgated under the Securities Act. (3) A fee of $31,970 was previously paid by the Registrant pursuant to Rule 457(o) promulgated under the Securities Act in connection with the Registration Statement on September 13, 1999. Pursuant to Rule 457(b) of the Securities Act, such fee is credited against the registration fee, and accordingly, an additional $2,494 is being paid in connection with the filing of this Amendment No. 1 to the Registration Statement. ------------------------------ 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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8 (a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED OCTOBER 18, 1999 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. PROSPECTUS 7,700,000 SHARES [FINISAR LOGO] COMMON STOCK -------------- This is Finisar Corporation's initial public offering. We expect the public offering price to be between $12.00 and $14.00 per share. Currently, no public market exists for the shares. After pricing of this offering, we expect that the common stock will trade on the Nasdaq National Market under the symbol "FNSR." INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS. -----------------
PER SHARE TOTAL ----------- --------- Public offering price.................................................... $ $ Underwriting discount.................................................... $ $ Proceeds, before expenses, to Finisar Corporation........................ $ $
The underwriters may also purchase up to an additional 1,155,000 shares from some of our stockholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. We will not receive any of the proceeds from any shares that may be sold by the selling stockholders. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares will be ready for delivery on or about , 1999. ------------------ MERRILL LYNCH & CO. J.P. MORGAN & CO. DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED MORGAN KEEGAN & COMPANY, INC. SOUNDVIEW TECHNOLOGY GROUP ------------------ The date of this prospectus is , 1999. [INSIDE FRONT COVER] [FINISAR LOGO] FIBER OPTIC SOLUTIONS FOR GIGABIT ETHERNET AND FIBRE CHANNEL OPTICAL DATA LINKS OPTICAL LINK EXTENDERS [Picture of Finisar's Optical Data [Picture of Finisar's Optical Link Links.] Extenders.] - - Transmitters, Receivers, and - Extending the Distance of High-Speed Transceivers for Switches, Hubs, Data Links Servers and Storage Arrays - Up to 120 km - - Built-in Diagnostics - Built-in Self Test and Link Test - - Multi-mode and Single-mode for Multiple Transmission Distances OPTICITY NETWORK PERFORMANCE TEST SYSTEMS [Picture of Finisar's Opticity 3000.] [Picture of a Finisar Network Performance Test System.] - - Extending the Capacity of Fiber Optic - Testing and Monitoring of High-Speed Rings and Point-to-Point Links Networking Systems - - Multiple Channels up to 10 Gbps - Multiple High-Speed Protocols - - SNMP Compatible - Multiple Applications
[Diagram of optical networking system, including Gigabit Ethernet Local Area network, Gigabit Ethernet Remote Campus LAN, Multi-Protocol Internet Service Provider, Fibre Channel Remote SAN BackUp Site, Fibre Channel Storage Area network and pictures of four Finisar Corporation products.] TABLE OF CONTENTS
PAGE ----- Prospectus Summary......................................................................................... 1 Risk Factors............................................................................................... 5 Forward-Looking Statements................................................................................. 17 Use of Proceeds............................................................................................ 18 Dividend Policy............................................................................................ 18 Capitalization............................................................................................. 19 Dilution................................................................................................... 20 Selected Financial Data.................................................................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22 Business................................................................................................... 31 Management................................................................................................. 47 Related Party Transactions................................................................................. 54 Principal and Selling Stockholders......................................................................... 55 Description of Capital Stock............................................................................... 57 Shares Eligible for Future Sale............................................................................ 60 Underwriting............................................................................................... 61 Legal Matters.............................................................................................. 64 Experts.................................................................................................... 64 Where You Can Find More Information........................................................................ 64 Index to Financial Statements.............................................................................. F-1
INFORMATION IN PROSPECTUS Unless specifically stated, the information in this prospectus: - reflects the automatic conversion of all outstanding shares of our convertible redeemable preferred stock into an aggregate of 8,981,897 shares of our common stock and 12,039,486 shares of our redeemable preferred stock and the redemption of such shares of redeemable preferred stock for $2,640,260 upon the closing of this offering; - assumes no exercise of the underwriters' over-allotment option; - assumes the reincorporation of our company in Delaware prior to the closing of this offering; and - reflects the creation of a new class of preferred stock and an increase in the number of authorized shares of common stock to 200,000,000 upon the closing of this offering. Beginning in fiscal 2000, our financial records have been maintained on the basis of a fiscal year ending on April 30, with fiscal quarters ending on the Sunday closest to the end of the period (thirteen week periods). For ease of comparison, all references to period end dates in this prospectus have been presented as though the period ended on the last day of the calendar month. The first quarter of fiscal 2000 ended on August 1, 1999. You should rely only on the information contained in this prospectus. Neither we nor the underwriters have authorized any person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date. Finisar is a registered trademark of Finisar Corporation. This prospectus contains product names, trade names and trademarks of Finisar and other organizations. PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. FINISAR CORPORATION We are a leading provider of fiber optic subsystems and network performance test systems which enable high-speed data communications over Gigabit Ethernet-based local area networks, or LANs, and Fibre Channel-based storage area networks, or SANs. Our optical subsystems convert electrical signals into optical signals for reliable, high-speed data transmission over varying distances, speeds and transmission mediums. We sell our optical subsystems to manufacturers of networking and storage equipment that develop and market systems based on Gigabit Ethernet and Fibre Channel, which are advanced transmission protocols used in high-speed LAN and SAN applications. LANs interconnect computer users within an organization and allow users to share common computer resources. SANs allow storage to be networked among users and provide high-speed interconnections between storage systems and servers. We also provide unique network performance test systems which assist networking and storage equipment manufacturers in the efficient design of reliable, high-speed networking systems and the testing and monitoring of the performance of these systems. The growing number of users accessing networks, the increasing need to accommodate data traffic which requires greater transmission capacity, or bandwidth, and the increasingly important role that data communication networks play within corporations and other organizations has created the need for a new generation of high-speed, high-performance networking and storage systems that rely on fiber optic transmission technology. Many of these systems operate over Gigabit Ethernet-based LANs, Fibre Channel-based SANs or extended versions of these networks. These systems utilize fiber optic subsystems which enable them to transmit data at very high speeds with high accuracy, often over long distances. In addition to creating a need for optical subsystems, complex transmission protocols such as Gigabit Ethernet and Fibre Channel have resulted in a demand for advanced network performance test systems. As these protocols have emerged, system testing has become more difficult, requiring increasingly sophisticated and specialized test systems capable of capturing data at high speeds, filtering the data and identifying various types of intermittent errors and other network problems. The development and manufacture of high quality, cost-effective fiber optic subsystems for LANs and SANs present a number of significant technical challenges. Data integrity, reliability and standards compliance become increasingly difficult at high transmission speeds. Additionally, manufacturers require optical subsystems which support a broad range of network applications. To date, we believe that only a limited number of companies have developed the specialized expertise required to engineer fiber optic subsystems and network performance test systems which meet the requirements of manufacturers of high-speed data networking and storage systems. Our optical subsystems and network performance test systems are designed to provide the following key benefits to systems manufacturers: VALUE-ADDED FUNCTIONS AND INTELLIGENCE. Our high-speed fiber optic subsystems are engineered to provide our customers with value-added functionality beyond the basic capability of enabling high-speed data transmission. For example, many of our optical subsystems include a microprocessor containing specially developed software that allows customers to monitor the optical performance of each port on their systems in real time. Additionally, many of our subsystems are engineered to automatically recognize different versions of the Fibre Channel protocol and to interoperate with our customers' older, installed networking systems, often referred to as legacy systems. Real-time monitoring and interoperability are particularly important in the Gigabit Ethernet LAN and Fibre Channel SAN markets where reliability and time to market are critical. Our test systems also contain value-added software functions that permit users to simulate and track errors. 1 HIGH LEVEL OF DATA INTEGRITY. Through the use of advanced packaging and circuit design, our optical subsystems deliver data at very high speeds over varying distances with very low error rates. This high level of data integrity allows our subsystems to operate reliably over a wide range of temperatures and other field conditions which we believe enables our customers to design and deliver more robust systems. HIGH RELIABILITY. We design all of our optical subsystems to provide the high reliability required for data networking and storage applications that are critical to an enterprise. Our products have very low failure rates. Using standard statistical methodology and testing, we have been able to predict that some of our products can be expected to operate reliably for up to 40 million hours. In addition, because our subsystems are designed to emit lower levels of electromagnetic interference, or EMI, than the standards set by the Federal Communications Commission, we offer manufacturers greater flexibility in the design of their systems and integration of other components and subsystems. BROAD OPTICAL SUBSYSTEM PRODUCT LINE. We offer a broad line of optical subsystems which operate at varying protocols, speeds, fiber types, voltages, wavelengths and distances and are available in a variety of industry standard packaging configurations, or form factors. The breadth of our optical subsystems product line is important to many of our customers who manufacture a wide range of networking products for diverse applications. BROAD TEST SYSTEM PRODUCT LINE. We offer a broad line of test systems to assist our customers in efficiently designing reliable, high-speed networking systems and testing and monitoring the performance of these systems. We believe our test systems enable our customers to focus their attention on the development of new products, reduce overall development costs and speed time to market. Our goal is to be the optical subsystem and network performance test system provider of choice for multiple protocols and network applications. We intend to maintain our technological leadership through continual enhancement of our existing products and the development of new products as evolving technology permits higher speed transmission of data, with greater capacity, over longer distances. We plan to leverage our relationships with our existing customers as they enter new, high-speed data communications markets and to expand our sales and marketing organization in order to establish new relationships with other key data and storage networking manufacturers. We intend to capitalize on our customers' satisfaction and our service-oriented approach to take advantage of cross-selling opportunities. We also plan to expand our international sales efforts. We sell our products to leading networking and storage equipment manufacturers such as 3Com, EMC, Emulex, IBM, Newbridge Networks and Sun Microsystems, as well as emerging manufacturers such as Brocade Communications and Extreme Networks. For the fiscal year ended April 30, 1999, we had revenues of $35.5 million and net income of $3.1 million. For the quarter ended July 31, 1999, we had revenues of $13.9 million and net income of $1.3 million. CORPORATE INFORMATION Finisar was incorporated in California in April 1987. Our principal executive offices are located at 1308 Moffett Park Drive, Sunnyvale, California 94089, our telephone number is (408) 548-1000 and our website is located at www.finisar.com. Information on our website is not a part of this prospectus. 2 THE OFFERING Common stock offered......................... 7,700,000 shares Common stock to be outstanding after this offering................................... 49,707,462 shares Use of proceeds.............................. To repay outstanding indebtedness and redeem our redeemable preferred stock and for general corporate purposes, principally working capital and capital expenditures. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... FNSR
The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of September 30, 1999 and excludes: - 2,036,740 shares of common stock issuable upon exercise of options outstanding at September 30, 1999 under our 1989 and 1999 stock option plans, with a weighted average exercise price of $1.2054 per share, 268,000 shares issuable upon exercise of options granted subsequent to September 30, 1999 with an exercise price of $10.20 per share, and an additional 5,065,000 shares reserved for issuance under our 1999 stock option plan as of October 15, 1999; and - 250,000 shares of common stock reserved for issuance under our 1999 employee stock purchase plan. 3 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto included elsewhere in this prospectus. The statement of operations data for the fiscal years ended April 30, 1997, 1998 and 1999 are derived from, and are qualified by reference to, our audited financial statements included elsewhere in this prospectus. The statement of operations data for the fiscal years ended April 30, 1995 and 1996 are derived from unaudited financial statements not included in this prospectus. The statement of operations data for the three month periods ended July 31, 1998 and 1999 and the balance sheet data as of July 31, 1999 are derived from, and are qualified by reference to, our unaudited financial statements included elsewhere in this prospectus.
THREE MONTHS ENDED FISCAL YEAR ENDED APRIL 30, JULY 31, ----------------------------------------------------- -------------------- 1995 1996 1997 1998 1999 1998 1999 --------- --------- --------- --------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: Revenues..................... $ 2,684 $ 5,660 $ 8,457 $ 22,067 $ 35,471 $ 6,794 $ 13,879 Gross profit................. 1,822 2,538 5,019 13,362 19,957 4,128 7,627 Income from operations....... 654 700 1,374 7,094 5,254 1,603 2,247 Net income................... 433 463 947 4,358 3,077 1,053 1,300 Net income per share (1): Basic...................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04 Diluted.................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03 Shares used in per share calculations (1): Basic...................... 44,000 44,000 44,000 43,753 36,860 41,800 29,464 Diluted.................... 44,000 44,000 44,000 43,753 44,938 41,800 42,610
JULY 31, 1999 ------------------------------------------- PRO PRO FORMA ACTUAL FORMA(2) AS ADJUSTED(3) --------- ----------- ------------------- BALANCE SHEET DATA: Cash and cash equivalents........................ $ 5,404 $ 5,404 $ 83,642 Working capital.................................. 14,007 14,007 92,245 Total assets..................................... 24,459 24,459 102,697 Long-term debt................................... 11,019 11,019 4 Convertible redeemable preferred stock........... 26,260 -- -- Total stockholders' equity (deficit)(4).......... (19,950) 3,669 95,562
- ------------------------ (1) See Note 1 to our financial statements for a description of the computation of the number of shares and net income per share. (2) The pro forma amounts give effect to the conversion of all outstanding shares of our convertible redeemable preferred stock into 8,981,897 shares of our common stock and 12,039,486 shares of our redeemable preferred stock. (3) The pro forma as adjusted amounts reflect the pro forma amounts, as further adjusted to reflect the sale of 7,700,000 shares of common stock by Finisar in this offering, at an assumed initial public offering price of $13.00 per share after deducting the estimated underwriting discount and estimated offering expenses, and our receipt and application of the net proceeds, including the repayment of our term loan and redemption of all outstanding shares of redeemable preferred stock upon the closing of this offering. See "Use of Proceeds" and "Capitalization." (4) Total stockholders' equity (deficit) reflects retained earnings of $10.8 million prior to giving effect to the repurchase of shares of our common stock for $31.7 million in November 1998. 4 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING A DECISION TO BUY OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES. OUR FUTURE REVENUES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE FROM QUARTER TO QUARTER, AND IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate significantly in the future due to a variety of factors, some of which are outside of our control. Accordingly, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indications of future performance. Some of the factors that could cause our quarterly or annual operating results to fluctuate include market acceptance of our products and the Gigabit Ethernet and Fibre Channel standards, product development and production, competitive pressures and customer retention. We may experience a delay in generating or recognizing revenues for a number of reasons. Orders at the beginning of each quarter typically do not equal expected revenues for that quarter and are generally cancelable at any time. Accordingly, we depend on obtaining orders in a quarter for shipment in that quarter to achieve our revenue objectives. Failure to ship these products by the end of a quarter may adversely affect our operating results. Furthermore, our customer agreements typically provide that the customer may delay scheduled delivery dates and cancel orders within specified time frames without significant penalty. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our business. It is likely that in some future quarters our operating results may fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock would significantly decline. OUR SUCCESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE EMERGING HIGH-SPEED LAN, SAN AND EXTENDED NETWORK MARKETS Our optical subsystem and network performance test system products are used exclusively in high-speed local area networks, or LANs, storage area networks, or SANs, and extended networks. Accordingly, widespread adoption of high-speed LANs, SANs and extended networks is critical to our future success. The markets for high-speed LANs, SANs and extended networks have only recently begun to develop and are rapidly evolving. Because these markets are new and evolving, it is difficult to predict their potential size or future growth rate. Potential end-user customers who have invested substantial resources in their existing data storage and management systems may be reluctant or slow to adopt a new approach, like high-speed LANs, SANs or extended networks. Our success in generating revenue in these emerging markets will depend, among other things, on the growth of these markets. There is significant uncertainty as to whether these markets ultimately will develop or, if they do develop, that they will develop rapidly. If the markets for high-speed LANs, SANs or extended networks fail to develop or develop more slowly than expected, or if our products do not achieve widespread market acceptance in these markets, our business would be significantly harmed. 5 WE WILL FACE CHALLENGES TO OUR BUSINESS IF OUR TARGET MARKETS ADOPT ALTERNATE STANDARDS TO FIBRE CHANNEL AND GIGABIT ETHERNET TECHNOLOGY OR IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS We have based our product offerings principally on Fibre Channel and Gigabit Ethernet standards and our future success is substantially dependent on the continued market acceptance of these standards. If an alternative technology is adopted as an industry standard within our target markets, we would have to dedicate significant time and resources to redesign our products to meet this new industry standard. For example, manufacturers have begun to develop networking systems with per-port transmission speeds of 10 gigabits per second, or Gbps, ten times faster than Gigabit Ethernet. We cannot assure you that we will be successful in re-designing our products or developing new products to meet this new standard or any other standard that may emerge. Our products comprise only a part of an entire networking system, and we depend on the companies that provide other components to support industry standards as they evolve. The failure of these companies, many of which are significantly larger than we are, to support these industry standards could negatively impact market acceptance of our products. Moreover, if we introduce a product before an industry standard has become widely accepted, we may incur significant expenses and losses due to lack of customer demand, unusable purchased components for these products and the diversion of our engineers from future product development efforts. In addition, because we may develop some products prior to the adoption of industry standards, we may develop products that do not comply with the eventual industry standard. Our failure to develop products that comply with industry standards would limit our ability to sell our products. Finally, if new standards evolve, we may not be able to successfully design and manufacture new products in a timely fashion, if at all, that meet these new standards. In the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Internationally, products that we develop also will be required to comply with standards established by local authorities in various countries. Failure to comply with existing or evolving standards established by regulatory authorities or to obtain timely domestic or foreign regulatory approvals or certificates could significantly harm our business. WE DEPEND ON LARGE PURCHASES FROM A FEW SIGNIFICANT CUSTOMERS, AND ANY LOSS, CANCELLATION, REDUCTION OR DELAY IN PURCHASES BY THESE CUSTOMERS COULD HARM OUR BUSINESS A small number of customers have accounted for a significant portion of our revenues. Our success will depend on our continued ability to develop and manage relationships with significant customers. Sales to Newbridge Networks Corporation and EMC Corporation represented 34.9% and 19.0% of our revenues during the three month period ended July 31, 1999, 25.1% and 20.8% of our revenues for fiscal 1999 and 43.9% and 14.6% of our revenues for fiscal 1998. Although we are attempting to expand our customer base, we expect that significant customer concentration will continue for the foreseeable future. The markets in which we sell our products are dominated by a relatively small number of systems manufacturers, thereby limiting the number of our potential customers. Our dependence on large orders from a relatively small number of customers makes our relationship with each customer critically important to our business. We cannot assure you that we will be able to retain our largest customers, that we will be able to attract additional customers or that our customers will be successful in selling their products which incorporate our products. We have in the past experienced delays and reductions in orders from some of our major customers. In addition, our customers have in the past sought price concessions from us and will continue to do so in the future. Further, some of our customers may in the future shift their purchases of products from us to our competitors or to joint ventures between these customers and our competitors. The loss of one or more of our largest customers, any reduction or delay in sales to these customers, our inability to successfully develop relationships with additional customers or future price concessions that we may make could significantly harm our business. 6 BECAUSE WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS, OUR CUSTOMERS MAY CEASE PURCHASING OUR PRODUCTS AT ANY TIME IF WE FAIL TO MEET OUR CUSTOMERS' NEEDS We do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide any assurance of future sales. Accordingly: - our customers can stop purchasing our products at any time without penalty; - our customers are free to purchase products from our competitors; and - our customers are not required to make minimum purchases. Sales are typically made pursuant to individual purchase orders, often with extremely short lead times. If we are unable to fulfill these orders in a timely manner, we will lose sales and customers. OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE EFFECTIVELY, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET ACCEPTANCE The markets for our products are characterized by rapid technological change, frequent new product introductions, changes in customer requirements and evolving industry standards. We expect that new technologies will emerge as competition and the need for higher and more cost effective bandwidth increases. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. We have in the past experienced delays in product development and such delays may occur in the future. Therefore, to the extent customers defer or cancel orders in the expectation of a new product release or there is any delay in development or introduction of our new products or enhancements of our products, our operating results would suffer. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including: - changing product specifications and customer requirements; - difficulties in hiring and retaining necessary technical personnel; - difficulties in reallocating engineering resources and overcoming resource limitations; - difficulties with contract manufacturers; - changing market or competitive product requirements; and - unanticipated engineering complexities. The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Any failure to respond to technological change would significantly harm our business. CONTINUED COMPETITION IN OUR MARKETS MAY LEAD TO A REDUCTION IN OUR PRICES, REVENUES AND MARKET SHARE The markets for optical subsystems and network performance test systems for use in LANs, SANs and extended networks are highly competitive. Our current competitors include a number of domestic and international companies, many of which have substantially greater financial, technical, marketing, distribution resources and brand name recognition than we have. We expect that more companies, including some of our customers, will enter the market for optical subsystems and network performance 7 test systems. We may not be able to compete successfully against either current or future competitors. Increased competition could result in significant price erosion, reduced revenue, lower margins or loss of market share, any of which would significantly harm our business. For optical subsystems, we compete primarily with Agilent Technologies, Inc., Cielo Communications, Inc., International Business Machines Corporation and Vixel Corporation. For network performance test systems, we compete primarily with Ancot Corporation, I-Tech Corporation and Xyratex International. Our competitors continue to introduce improved products with lower prices, and we will have to do the same to remain competitive. In addition, some of our current and potential customers may attempt to integrate their operations by producing their own optical subsystems and network performance test systems or acquiring one of our competitors, thereby eliminating the need to purchase our products. Furthermore, larger companies in other related industries, such as the telecommunications industry, may develop or acquire technologies and apply their significant resources, including their distribution channels and brand name recognition, to capture significant market share. WE EXPECT AVERAGE SELLING PRICES OF OUR PRODUCTS TO DECREASE WHICH MAY REDUCE GROSS MARGINS OR REVENUES, AND, AS A RESULT, WE MUST CONTINUE TO REDUCE OUR PRODUCT COSTS IN ORDER TO PRICE OUR PRODUCTS COMPETITIVELY The market for optical subsystems is characterized by declining average selling prices resulting from factors such as increased competition, the introduction of new products and increased unit volumes as manufacturers continue to deploy network and storage systems. We have in the past experienced and in the future may experience, substantial period-to-period fluctuations in operating results due to declining average selling prices. We anticipate that average selling prices will decrease in the future in response to product introductions by competitors or us, or by other factors, including price pressures from significant customers. Therefore, we must continue to develop and introduce on a timely basis new products that incorporate features that can be sold at higher average selling prices. Failure to do so could cause our revenues and gross margins to decline, which would significantly harm our business. We may be unable to reduce the cost of our products sufficiently to enable us to compete with others. Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures or lead to improved gross margins. In order to remain competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We may not be successful in redesigning our products or delivering our products to market in a timely manner. We cannot assure you that any redesign will result in sufficient cost reductions to allow us to reduce the price of our products to remain competitive or improve our gross margin. WE ARE SUBJECT TO A PENDING LEGAL PROCEEDING In April 1999, Methode Electronics, a manufacturer of electronic component devices, filed a lawsuit against us and another manufacturer alleging that our optoelectronic products infringe four patents held by Methode. The lawsuit seeks monetary damages and injunctive relief. We believe that we have strong defenses against Methode's lawsuit, and we intend to defend the suit vigorously. However, the litigation is in the preliminary stage, and we cannot predict its outcome. The litigation process is inherently uncertain and we may not prevail. Patent litigation is particularly complex and can extend for a protracted time, which can substantially increase the cost of such litigation. In connection with the Methode litigation, we have incurred, and expect to continue to incur, substantial legal fees and expenses. The Methode litigation has also diverted, and is expected to continue to divert, the efforts and attention of some of our key management and technical personnel. As a result, our defense of this litigation, regardless of its eventual outcome, has been, and will likely continue to be, costly and time consuming. Should the outcome of the litigation be adverse to us, we could be required to pay significant monetary damages to Methode and could be enjoined from selling those of our products found to infringe Methode's patents unless and until we are able to negotiate a license from Methode. 8 In the event that we obtain a license from Methode, we would likely be required to make royalty payments with respect to sales of our products covered by the license. Any such royalty payments would increase our cost of revenues and reduce our gross profit. If we are required to pay significant monetary damages, are enjoined from selling any of our products or are required to make royalty payments pursuant to any such license agreement, our business would be significantly harmed. See "Business--Pending Legal Proceeding." OUR CUSTOMERS OFTEN EVALUATE OUR PRODUCTS FOR LONG AND VARIABLE PERIODS WHICH CAUSES THE TIMING OF PURCHASES AND OUR RESULTS OF OPERATIONS TO BE UNPREDICTABLE The period of time between our initial contact with a customer and the receipt of an actual purchase order may span a year or more. During this time, customers may perform, or require us to perform, extensive and lengthy evaluation and testing of our products before purchasing and using them in their equipment. Our customers do not typically share information on the duration or magnitude of these qualification procedures. The length of these qualification processes also may vary substantially by product and customer, and, thus, cause our results of operations to be unpredictable. While our potential customers are qualifying our products and before they place an order with us, we may incur substantial sales and marketing expenses and expend significant management effort. Even after incurring such costs we ultimately may not sell any products to such potential customers. In addition, these qualification processes often make it difficult to obtain new customers, as customers are reluctant to expend the resources necessary to qualify a new supplier if they have one or more existing qualified sources. Once our products have been qualified, our agreements with our customers have no minimum purchase commitments. Failure of our customers to incorporate our products into their systems would significantly harm our business. WE DEPEND ON CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR ASSEMBLY REQUIREMENTS AND IF THESE MANUFACTURERS FAIL TO PROVIDE US WITH ADEQUATE SUPPLIES OF HIGH-QUALITY PRODUCTS, OUR COMPETITIVE POSITION, REPUTATION AND BUSINESS COULD BE HARMED We currently rely on three contract manufacturers for substantially all of our assembly requirements. We do not have long term contracts with any of these manufacturers. We have experienced delays in product shipments from contract manufacturers in the past, which in turn delayed product shipments to our customers. We may in the future experience similar delays or other problems, such as inferior quality and insufficient quantity of product, any of which could significantly harm our business. We cannot assure you that we will be able to effectively manage our contract manufacturers or that these manufacturers will meet our future requirements for timely delivery of products of sufficient quality and quantity. We intend to regularly introduce new products and product enhancements, which will require that we rapidly achieve volume production by coordinating our efforts with those of our suppliers and contract manufacturers. The inability of our contract manufacturers to provide us with adequate supplies of high-quality products or the loss of any of our contract manufacturers would cause a delay in our ability to fulfill orders while we obtain a replacement manufacturer and would significantly harm our business. If the demand for our products grows, we will need to increase our material purchases, contract manufacturing capacity and internal test and quality assurance functions. Any disruptions in product flow could limit our revenue, adversely affect our competitive position and reputation and result in additional costs or cancellation of orders under agreements with our customers. In addition, we are considering sourcing a significant portion of our contract manufacturing internationally. Additional risks associated with international contract manufacturing include: - unexpected changes in regulatory requirements; - legal uncertainties regarding liability, tariffs and other trade barriers; - inadequate protection of intellectual property in some countries; 9 - greater incidence of shipping delays; - limited oversight of manufacturing operations; - potential political and economic instability; and - currency fluctuations. Any of these factors could significantly impair our ability to source our contract manufacturing requirements internationally. WE MAY LOSE SALES IF OUR SUPPLIERS FAIL TO MEET OUR NEEDS We currently purchase several key components used in the manufacture of our products from single or limited sources. We depend on these sources to meet our needs. Moreover, we depend on the quality of the products supplied to us over which we have limited control. We have encountered shortages and delays in obtaining components in the past and expect to encounter shortages and delays in the future. If we cannot supply products due to a lack of components, or are unable to redesign products with other components in a timely manner, our business will be significantly harmed. We have no long-term or short-term contracts for any of our components. As a result, a supplier can discontinue supplying components to us without penalty. If a supplier discontinued supplying a component, our business may be harmed by the resulting product manufacturing and delivery delays. We use rolling forecasts based on anticipated product orders to determine our component requirements. Lead times for materials and components that we order vary significantly and depend on factors such as specific supplier requirements, contract terms and current market demand for particular components. If we overestimate our component requirements, we may have excess inventory, which would increase our costs. If we underestimate our component requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would significantly harm our business. WE ARE DEPENDENT ON WIDESPREAD MARKET ACCEPTANCE OF TWO PRODUCT FAMILIES, AND OUR REVENUES WILL DECLINE IF THE MARKET DOES NOT CONTINUE TO ACCEPT EITHER OF THESE PRODUCT FAMILIES We currently derive substantially all of our revenue from sales of our optical subsystems and network performance test systems. We expect that revenue from these products will continue to account for substantially all of our revenue for the foreseeable future. Accordingly, widespread acceptance of these products is critical to our future success. If the market does not continue to accept either our optical subsystems or our network performance test systems, our revenues will decline significantly. Factors that may affect the market acceptance of our products include the continued growth of the markets for LANs, SANs and extended versions of these networks and, in particular, Gigabit Ethernet and Fibre Channel-based technologies as well as the performance, price and total cost of ownership of our products and the availability, functionality and price of competing products and technologies. Many of these factors are beyond our control. In addition, in order to achieve widespread market acceptance, we must differentiate ourselves from the competition through product offerings and brand name recognition. We cannot assure you that we will be successful in making this differentiation or achieving widespread acceptance of our products. Failure of our existing or future products to maintain and achieve widespread levels of market acceptance will significantly impair our revenue growth. BECAUSE OF INTENSE COMPETITION FOR TECHNICAL PERSONNEL, WE MAY NOT BE ABLE TO RECRUIT OR RETAIN NECESSARY PERSONNEL We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, technical, sales and marketing, finance and manufacturing personnel. In particular, we will need to increase the number of technical staff members with experience in high-speed networking applications as we further develop our product lines. Competition for these highly skilled employees in our industry is intense. Our failure to attract and retain these qualified employees could 10 significantly harm our business. The loss of the services of any of our qualified employees, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel could hinder the development and introduction of and negatively impact our ability to sell our products. In addition, employees may leave our company and subsequently compete against us. Moreover, companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We have been subject to claims of this type and may be subject to such claims in the future as we seek to hire qualified personnel. Some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE US TO INCUR COSTS TO UPGRADE OUR INFRASTRUCTURE We have experienced a period of rapid growth, which has placed a significant strain on our resources. Unless we manage our growth effectively, we may make mistakes in operating our business, such as inaccurate sales forecasting, material planning and financial reporting, which may result in fluctuations in our operating results and cause the price of our stock to decline. We plan to continue to expand our operations significantly. This anticipated growth will continue to place a significant strain on our management and operational resources. In order to manage our growth effectively, we must implement and improve our operational systems, procedures and controls on a timely basis. If we cannot manage growth effectively, our business could be significantly harmed. OUR PRODUCTS MAY CONTAIN DEFECTS WHICH MAY CAUSE US TO INCUR SIGNIFICANT COSTS, DIVERT OUR ATTENTION FROM PRODUCT DEVELOPMENT EFFORTS AND RESULT IN A LOSS OF CUSTOMERS Networking products frequently contain undetected software or hardware defects when first introduced or as new versions are released. Our products are complex and defects may be found from time to time. In addition, our products are often embedded in or deployed in conjunction with our customers' products which incorporate a variety of components produced by third parties. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relation problems or loss of customers, all of which would harm our business. OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY SIGNIFICANTLY HARM OUR BUSINESS Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. To date, we have relied primarily on proprietary processes and know-how to protect our intellectual property. Although we have filed for several patents, some of which have issued, we cannot assure you that any patents will issue as a result of pending patent applications or that our issued patents will be upheld. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the 11 validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of resources and could significantly harm our business. CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS The networking industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. We are currently involved in a patent infringement lawsuit. See "Risk Factors--We are subject to a pending legal proceeding." In addition, from time to time, other parties may assert patent, copyright, trademark and other intellectual property rights to technologies and in various jurisdictions that are important to our business. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could significantly harm our business. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could significantly harm our business. Royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. In addition, our agreements with our customers typically require us to indemnify our customers from any expense or liability resulting from claimed infringement of third party intellectual property rights. In the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed. IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES OPERATION AND RESELLER DISTRIBUTION CHANNELS OR SUCCESSFULLY MANAGE OUR EXPANDED SALES ORGANIZATION, OUR ABILITY TO INCREASE OUR REVENUES WILL BE HARMED Historically, we have relied primarily on a limited direct sales organization, supported by third party manufacturers' representatives, to sell our products domestically and on indirect distribution channels to sell our products internationally. Our distribution strategy focuses primarily on developing and expanding our direct sales organization in North America and our indirect distribution channels internationally. We may not be able to successfully expand our direct sales organization and the cost of any expansion may exceed the revenue generated. To the extent that we are successful in expanding our direct sales organization, we cannot assure you that we will be able to compete successfully against the significantly larger and well-funded sales and marketing operations of many of our current or potential competitors. In addition, if we fail to develop relationships with significant international resellers or domestic manufacturers' representatives, of if these resellers or representatives are not successful in their sales or marketing efforts, sales of our products may decrease and our business would be significantly harmed. We have granted exclusive rights to substantially all of our resellers to sell our product and to our representatives to market our products in their specified territories. Our resellers and representatives may not market our products effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support. Our inability to effectively manage the expansion of our domestic sales and support staff or maintain existing or establish new relationships with domestic manufacturer representatives and international resellers would harm our business. 12 IF WE OR OUR SUPPLIERS, MANUFACTURERS, CUSTOMERS OR SERVICE PROVIDERS FAIL TO BE YEAR 2000 COMPLIANT, OUR BUSINESS MIGHT BE SEVERELY DISRUPTED The risk that software or hardware inaccurately process dates following the year 2000 presents several risks for our business. In particular, we are subject to: - costs associated with the failure of our products to be year 2000 compliant, including potential warranty or other claims from our customers, which may result in significant expense to us; - business shutdowns or slowdowns as a result of a failure of the internal management systems we use to run our business, which could disrupt our business operations; - interruption of product or component supplies, or a reduction in product quality, as a result of the failure of systems used by our manufacturers or suppliers; and - reductions or deferrals in sales activities as a result of year 2000 compliance issues of our customers. Our internal year 2000 compliance review is focused on reviewing our internal computer information and security systems for year 2000 compliance, and developing and implementing remedial programs to resolve year 2000 issues in a timely manner; however, we have not tested our products in every possible computer environment, and therefore such products may not be fully year 2000 compliant. Additionally, we are contacting our third party suppliers and manufacturers and requesting their written assurances that their systems are year 2000 compliant. To date, our year 2000 costs have been primarily driven by the cost of our personnel conducting the year 2000 compliance review. We estimate such costs to date have been $100,000. If our suppliers, manufacturers, vendors, major distributors and partners fail to correct their year 2000 problems, these failures could result in an interruption in, or a failure of, our normal business activities or operations. In particular, the failure of a sole or limited source supplier or contract manufacturer to be year 2000 compliant could seriously interrupt our manufacturing process, which could substantially reduce our revenues. If a year 2000 problem occurs, it may be difficult to determine which vendor's products have caused the problem. These failures could interrupt our operations and damage our relationships with our customers. Due to the general uncertainty inherent in the year 2000 problem resulting from the readiness of third-party suppliers and vendors, we are unable to determine at this time whether any year 2000 failures will harm us. Our customers' purchasing plans could be affected by year 2000 issues if they need to expend significant resources to fix their existing systems. This situation may reduce funds available to purchase our products. Therefore, some customers may wait to purchase our products until after the year 2000, which may reduce our revenue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance." ANY ACQUISITIONS THAT WE UNDERTAKE COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND HARM OUR OPERATING RESULTS We expect to review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities. While we have no current agreements or negotiations underway, we may buy businesses, products or technologies in the future. If we make any future acquisitions, we could issue stock that would dilute existing stockholders' percentage ownership, incur substantial debt or assume contingent liabilities. Our experience in acquiring other business and technologies is limited. Potential acquisitions also involve numerous risks, including: - problems assimilating the purchased operations, technologies or products; 13 - unanticipated costs associated with the acquisition; - diversion of management's attention from our core business; - adverse effects on existing business relationships with suppliers and customers; - risks associated with entering markets in which we have no or limited prior experience; and - potential loss of key employees of purchased organizations. We cannot assure you that we would be successful in overcoming problems encountered in connection with such acquisitions, and our inability to do so could significantly harm our business. OUR EXECUTIVE OFFICERS AND DIRECTORS AND ENTITIES AFFILIATED WITH THEM WILL CONTINUE TO OWN A LARGE PERCENTAGE OF OUR VOTING STOCK AFTER THE OFFERING, WHICH WILL ALLOW THEM TO CONTROL ALL MATTERS REQUIRING STOCKHOLDER APPROVAL Upon completion of this offering, our executive officers, directors and 5% or greater stockholders will beneficially own 33,503,887 shares or approximately 66.5% of the outstanding shares of common stock, or shares or %, assuming the full exercise of the underwriters' over-allotment option. These stockholders, acting together, would be able to control all matters requiring approval by stockholders, including the election or removal of directors and the approval of mergers or other business combination transactions. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have an adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the market price for their shares of common stock. See "Principal and Selling Stockholders." IF WE ARE UNABLE TO EXPAND OUR INTERNATIONAL OPERATIONS OR MANAGE THEM EFFECTIVELY, OUR BUSINESS WOULD BE SIGNIFICANTLY HARMED Historically, substantially all of our sales have been made to customers in North America. To address expanding international markets, we have recently established relationships with distributors in Japan, the United Kingdom and Israel. The growth of our distribution channels outside of North America will be subject to a number of risks and uncertainties, including: - the difficulties and costs of obtaining regulatory approvals for our products; - unexpected changes in regulatory requirements; - legal uncertainties regarding liability, tariffs and other trade barriers; - inadequate protection of intellectual property in some countries; - increased difficulty in collecting delinquent or unpaid accounts; - potentially adverse tax consequences; - adoption of different local standards; and - potential political and economic instability. Any of these factors could significantly harm our existing international operations and business or significantly impair our ability to expand into international markets. Our international sales currently are U.S. dollar-denominated. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets. In the future, we may elect to invoice some of our international customers in 14 local currency. Doing so will subject us to fluctuations in exchange rates between the U.S. dollar and the particular local currency. DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE OR PREVENT A POTENTIAL TAKEOVER, EVEN IF SUCH A TRANSACTION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS Some provisions of our Certificate of Incorporation and Bylaws, as well as provisions of Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include: - authorizing the board to issue additional preferred stock; - prohibiting cumulative voting in the election of directors; - limiting the persons who may call special meetings of stockholders; - prohibiting stockholder actions by written consent; - creating a classified Board of Directors pursuant to which our directors are elected for staggered three-year terms; and - establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. For a more detailed discussion of such anti-takeover provisions, see "Description of Capital Stock." OUR MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING AND MAY NOT OBTAIN A SIGNIFICANT RETURN ON THE USE OF THESE PROCEEDS Net proceeds of this offering are not allocated for a specific purpose. Our management will have broad discretion in determining how to spend the net proceeds from this offering and may spend the proceeds in a manner that our stockholders may not deem desirable. We cannot assure you that our investments and use of the net proceeds of this offering will yield favorable returns or results. OUR HEADQUARTERS AND CONTRACT MANUFACTURERS ARE ALL LOCATED IN NORTHERN CALIFORNIA WHERE NATURAL DISASTERS MAY OCCUR Currently, our corporate headquarters and contract manufacturers are located in Northern California. Northern California historically has been vulnerable to natural disasters and other risks, such as earthquakes, fires and floods, which at times have disrupted the local economy and posed physical risks to our and our manufacturers' property. We presently do not have redundant, multiple site capacity in the event of a natural disaster. In the event of such disaster, our business would suffer. SUBSTANTIAL NUMBERS OF SHARES OF OUR COMMON STOCK WILL BECOME AVAILABLE FOR SALE IN THE PUBLIC MARKET SIMULTANEOUSLY, WHICH COULD CAUSE THE MARKET PRICE OF OUR STOCK TO DECLINE Sales of substantial amounts of our common stock in the public market following this offering, or the appearance that a large number of shares is available for sale, could cause the market price of our common stock to decline. The number of shares of common stock available for sale in the public market will be limited by lock-up agreements under which the holders of substantially all of our outstanding shares of common stock and options and warrants to purchase common stock will agree not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Upon the expiration of these lock-up agreements and assuming the full exercise of all vested options to purchase common stock outstanding on October 15, 1999, approximately 39,807,829 shares of common 15 stock will become eligible for sale simultaneously. Moreover, Merrill Lynch may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. In addition to the adverse effect a price decline could have on holders of common stock, that decline would likely impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities. See "Shares Eligible for Future Sale" and "Underwriting." YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE OF THE STOCK YOU PURCHASE The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of the outstanding common stock immediately after the offering. Therefore, based on an assumed initial public offering price of $13.00 per share, if you purchase our common stock in this offering you will suffer immediate dilution of approximately $11.06 per share. If additional shares are sold by the underwriters following exercise of their over-allotment option, or if outstanding options or warrants for our common stock are exercised, there will be further dilution. See "Dilution." OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES AT OR ABOVE THE OFFERING PRICE There previously has not been a public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market or how liquid that market might become. The initial public offering price for our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. For a discussion of the factors to be considered in determining the initial public offering price, see "Underwriting." In addition, the stock market in general, and the Nasdaq National Market and stocks of technology companies in particular, have experienced extreme price and volume fluctuations. This volatility is often unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been initiated against these companies. This litigation, if initiated, could result in substantial costs and a diversion of management's attention and resources, which would significantly harm our business. 16 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. We use words like "anticipates," "believes," "plans," "expects," "future," "intends" and similar expressions to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about us, including: - uncertainty regarding the commercial acceptance of high-speed networking and storage technologies; - uncertainty regarding our future operating results; - our ability to introduce new products; - delays or losses of sales due to long sales and implementation cycles for our products; - the possibility of lower prices, reduced gross margins and loss of market share due to increased competition; and - increased demands on our resources due to anticipated growth. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events. 17 USE OF PROCEEDS We estimate our net proceeds from the sale of the 7,700,000 shares of common stock offered by Finisar in this offering to be approximately $91.9 million, based on an assumed initial public offering price of $13.00 per share and after deducting the estimated underwriting discount and offering expenses. We will not receive any of the proceeds from any shares that may be sold by the selling stockholders upon exercise of the underwriters' over-allotment option. We intend to use the net proceeds of this offering: - to repay outstanding indebtedness of approximately $11.0 million under our bank credit facility; - to redeem all outstanding shares of our redeemable preferred stock for $2,640,260; and - for general corporate purposes, including capital expenditures and working capital. We may also use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. However, we have no current commitments or agreements with respect to any of these types of acquisitions or investments. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. Borrowings under our credit facility bear interest at our election at the time of borrowing at either the London Interbank Offering Rate or the bank's prime rate. The interest rate on our credit facility was 7.38% per annum as of September 30, 1999. DIVIDEND POLICY We have never paid cash dividends on our capital stock. We currently intend to retain future earnings to finance the growth and development of our business, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, the terms of our bank credit agreement currently prohibit the payment of dividends on our capital stock. 18 CAPITALIZATION The following table sets forth our short-term debt and total capitalization as of July 31, 1999: - on an actual basis; - on a pro forma basis, giving effect to the conversion of all outstanding shares of convertible redeemable preferred stock into 8,981,897 shares of common stock and 12,039,486 shares of redeemable preferred stock; and - on a pro forma basis, as further adjusted to reflect the sale of 7,700,000 shares of common stock by Finisar in this offering, at an assumed initial public offering price of $13.00 per share after deducting the estimated underwriting discount and estimated offering expenses, and our receipt and application of the net proceeds.
JULY 31, 1999 ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Current portion of capital lease obligations.................................. $ 51 $ 51 $ 51 --------- ----------- ----------- --------- ----------- ----------- Long-term portion of note payable and capital lease obligations............... $ 11,019 $ 11,019 $ 4 Convertible redeemable preferred stock, no par value: 12,100,000 shares authorized, 12,039,486 shares issued and outstanding, actual; 12,100,000 shares authorized, no shares issued or outstanding, pro forma; no shares authorized, issued or outstanding, proforma as adjusted..................... 26,260 -- -- Redeemable preferred stock, no par value: 12,100,000 shares authorized, no shares issued or outstanding, actual; 12,100,000 shares authorized, 12,039,486 issued and outstanding, pro forma; no shares authorized, issued or outstanding, pro forma as adjusted....................................... -- 2,640 -- Stockholders' equity (deficit): Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual and pro forma; 5,000,000 shares authorized, no shares issued or outstanding, pro forma as adjusted..................... -- -- -- Common stock, no par value; 75,000,000 shares authorized, 32,512,365 shares issued and outstanding, actual; 75,000,000 shares authorized, 41,494,262 shares issued and outstanding, pro forma; Common Stock, $0.001 par value; 200,000,000 shares authorized, 49,194,262 shares issued and outstanding, pro forma as adjusted (1)....................... 4,073 27,692 119,585 Deferred stock compensation............................................... (1,373) (1,373) (1,373) Notes receivable from stockholders........................................ (1,671) (1,671) (1,671) Retained earnings (accumulated deficit) (2)............................... (20,979) (20,979) (20,979) --------- ----------- ----------- Total stockholders' equity (deficit) (2)................................ $ (19,950) $ 3,669 $ 95,562 --------- ----------- ----------- --------- ----------- ----------- Total capitalization.................................................. $ 17,329 $ 17,328 $ 95,566 --------- ----------- ----------- --------- ----------- -----------
- ------------------------------ (1) Excludes: - 1,356,540 shares of common stock issuable upon exercise of options outstanding at July 31, 1999 under our 1989 and 1999 stock option plans, with a weighted average exercise price of $0.50 per share, 1,470,000 shares of common stock issuable upon exercise of options granted subsequent to July 31, 1999 with a weighted average exercise price of $3.5347 per share, and an additional 5,065,000 shares reserved for issuance under our 1999 stock option plan as of October 15, 1999; and - 250,000 shares of common stock reserved for issuance under our 1999 employee stock purchase plan. See "Management--Stock Plans," "Description of Capital Stock" and Note 6 to our financial statements. (2) Reflects retained earnings of $10.8 million prior to giving effect to the repurchase of shares of our common stock for $31.7 million in November 1998. 19 DILUTION The pro forma net tangible book value of our common stock as of July 31, 1999 was approximately $3.6 million, or $0.09 per share. Pro forma net tangible book value per share represents the amount of our total assets, excluding net intangible assets, less our total liabilities, divided by the total number of shares of common stock outstanding, after giving effect to the conversion of all outstanding shares of convertible redeemable preferred stock into an aggregate of 8,981,897 shares of common stock and 12,039,486 shares of redeemable preferred stock, and the redemption of all outstanding shares of redeemable preferred stock. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and the pro forma net tangible book value per share of our common stock immediately after the offering. After giving effect to the sale of the 7,700,000 shares of common stock by us in this offering, at an assumed initial public offering price of $13.00 per share, and after deducting the estimated underwriting discount and estimated offering expenses payable by us, the pro forma net tangible book value of our common stock would have been $95.5 million, or $1.94 per share. This represents an immediate increase in net tangible book value of $1.85 per share to existing stockholders and an immediate dilution of $11.06 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share................. $ 13.00 --------- Pro forma net tangible book value per share as of July 31, 1999........................................................ $ 0.09 Increase per share attributable to new investors.............. $ 1.85 --------- Pro forma net tangible book value per share after this offering...................................................... $ 1.94 --------- Dilution per share to new investors............................. $ 11.06 --------- ---------
The following table summarizes, on a pro forma basis, as of July 31, 1999: - the number of shares of common stock purchased from us; - the total consideration paid to us; - the average price per share paid by existing stockholders; and - the average price per share paid by new investors, before deducting the estimated underwriting discount and offering expenses payable by us.
SHARES PURCHASED TOTAL CONSIDERATION -------------------------- --------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------- ----------- -------------- ----------- ------------- Existing stockholders........................... 41,494,262 84.3% $ 26,799,005 21.1% $ 0.65 New investors................................... 7,700,000 15.7 100,100,000 78.9 13.00 ------------- ----- -------------- ----- Total....................................... 49,194,262 100.0% $ 126,899,005 100.0% ------------- ----- -------------- ----- ------------- ----- -------------- -----
In the event that the underwriters exercise in full their over-allotment option, sales by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to 40,339,262, or approximately 82.0% of the total number of shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to 8,855,000, or approximately 18.0% of the total number of shares of common stock outstanding after this offering. See "Principal and Selling Stockholders." The information in the above table excludes 1,356,540 shares of common stock issuable upon exercise of options outstanding at July 31, 1999 under our 1989 and 1999 stock option plans, with a weighted average exercise price of $0.50 per share, and 1,470,000 shares of common stock issuable upon exercise of options granted subsequent to July 31, 1999 with a weighted average exercise price of $3.5347 per share as of October 15, 1999. To the extent these options are exercised, there will be further dilution to the new investors. See "Management--Stock Plans" and Note 6 to our financial statements. 20 SELECTED FINANCIAL DATA You should read the following selected financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto included elsewhere in this prospectus. The statement of operations data set forth below for the years ended April 30, 1997, 1998 and 1999 and the balance sheet data as of April 30, 1998 and 1999 are derived from, and are qualified by reference to, our audited financial statements included elsewhere in this prospectus. The balance sheet data as of April 30, 1997 are derived from audited financial statements not included in this prospectus. The statement of operations data set forth below for the years ended April 30, 1995 and 1996 and the balance sheet data as of April 30, 1995 and 1996 are derived from unaudited financial statements not included in this prospectus. The statement of operations data set forth below for the three month periods ended July 31, 1998 and 1999 and the balance sheet data as of July 31, 1999 are derived from, and are qualified by reference to, our unaudited financial statements included elsewhere in this prospectus. The unaudited financial statements include all normal recurring adjustments that we consider necessary for a fair presentation of our financial position and results of operations. The results of operations for the three months ended July 31, 1999 are not necessarily indicative of the results that may be expected for the full fiscal year ending April 30, 2000, or any other future period.
THREE MONTHS ENDED FISCAL YEAR ENDED APRIL 30, JULY 31, ----------------------------------------------------- -------------------- 1995 1996 1997 1998 1999 1998 1999 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues........................................ $ 2,684 $ 5,660 $ 8,457 $ 22,067 $ 35,471 $ 6,794 $ 13,879 Cost of revenues................................ 862 3,122 3,438 8,705 15,514 2,666 6,252 --------- --------- --------- --------- --------- --------- --------- Gross profit.................................... 1,822 2,538 5,019 13,362 19,957 4,128 7,627 --------- --------- --------- --------- --------- --------- --------- Operating expenses: Research and development...................... 745 1,442 2,536 3,806 7,864 1,394 2,840 Sales and marketing........................... 144 116 645 1,629 4,145 833 1,542 General and administrative.................... 279 280 464 833 2,299 298 759 Amortization of deferred compensation......... -- -- -- -- 395 -- 239 --------- --------- --------- --------- --------- --------- --------- Total operating expenses.................... 1,168 1,838 3,645 6,268 14,703 2,525 5,380 --------- --------- --------- --------- --------- --------- --------- Income from operations.......................... 654 700 1,374 7,094 5,254 1,603 2,247 Interest income (expense), net.................. 1 10 13 4 (275) (7) (90) Other income (expense), net..................... -- -- -- (25) (28) 25 (28) --------- --------- --------- --------- --------- --------- --------- Income before income taxes...................... 655 710 1,387 7,073 4,951 1,621 2,129 Provision for income taxes...................... 222 247 440 2,715 1,874 568 829 --------- --------- --------- --------- --------- --------- --------- Net income...................................... $ 433 $ 463 $ 947 $ 4,358 $ 3,077 $ 1,053 $ 1,300 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income per share: Basic......................................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted....................................... $ 0.01 $ 0.01 $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used in per share calculations: Basic......................................... 44,000 44,000 44,000 43,753 36,860 41,800 29,464 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted....................................... 44,000 44,000 44,000 43,753 44,938 41,800 42,610 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
APRIL 30, ----------------------------------------------------- JULY 31, 1995 1996 1997 1998 1999 1999 --------- --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents....................... $ 474 $ 772 $ 422 $ 722 $ 5,044 $ 5,404 Working capital................................. 757 856 1,685 5,729 13,011 14,007 Total assets.................................... 1,277 1,948 2,987 7,761 20,955 24,459 Long-term debt.................................. -- -- -- 416 11,032 11,019 Convertible redeemable preferred stock.......... -- -- -- -- 26,260 26,260 Total stockholders' equity (deficit)............ 678 1,141 2,088 6,447 (21,503) (19,950)
21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. The following discussion should be read together with our financial statements and related notes thereto included elsewhere in this prospectus. OVERVIEW We are a leading provider of fiber optic subsystems and network performance test systems which enable high-speed data communications over local area networks, or LANs, and storage area networks, or SANs. We are focused on providing high-performance, reliable, value-added optical subsystems for networking and storage equipment manufacturers that develop and market systems based on Gigabit Ethernet and Fibre Channel protocols. Our line of optical subsystems supports a wide range of network applications, transmission speeds, distances and mediums. We also provide unique network performance test systems which assist networking and storage equipment manufacturers in the design of reliable, high-speed networking systems and the testing and monitoring of the performance of these systems. We were incorporated in 1987 and funded our initial product development efforts largely through revenues derived under research and development contracts. After shipping our first product in 1991, we continued to finance our operations principally through internal cash flow and periodic bank borrowings until November 1998. At that time we raised $5.6 million of net proceeds from the sale of equity securities and bank borrowings to fund the continued growth and development of our business. Our revenues are derived principally from sales of our optical subsystems and network performance test systems to networking and storage systems manufacturers. Sales to our two largest customers accounted for 45.1% of our revenues for the fiscal year ended April 30, 1999 and 53.5% of our revenues for the three months ended July 31, 1999. Although we are attempting to expand our customer base, we expect that significant customer concentration will continue for the foreseeable future. We sell our products through our direct sales force, with the support of our manufacturers' representatives, directly to domestic customers and indirectly through distribution channels to international customers. We recognize revenues at the time of shipment. The evaluation and qualification cycle prior to the initial sale for our optical subsystems may span a year or more, while the sales cycle for our test systems is usually considerably shorter. Historically, substantially all of our sales have been made to customers in North America. To address expanding international markets, we have recently established relationships with distributors in Japan, the United Kingdom and Israel. The market for optical subsystems is characterized by declining average selling prices resulting from factors such as increased competition, the introduction of new products and increased unit volumes as manufacturers continue to deploy network and storage systems. We anticipate that our average selling prices will decrease in future periods, although the timing and amount of these decreases cannot be predicted with any certainty. Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead and warranty expense. We outsource the majority of our assembly operations, and we conduct manufacturing engineering, supply chain management, quality assurance and documentation control at our facility in Sunnyvale, California. Accordingly, a significant portion of our cost of revenues consists of payments to our contract manufacturers. There can be no assurance 22 that we will be able to reduce our cost of revenues to keep pace with anticipated decreases in average selling prices. Our gross profit margins vary among our product families, and our gross margins are generally higher on our network performance test systems than on our optical subsystems. We expect that our overall gross margins will fluctuate from period to period as a result of shifts in product mix, anticipated decreases in average selling prices and our ability to reduce product costs. Research and development expenses consist primarily of salaries and related expenses for design engineers and other technical personnel, the cost of developing prototypes and fees paid to consultants. We charge all research and development expenses to operations as incurred. We believe that continued investment in research and development is critical to our long-term success. Accordingly, we expect that our research and development expenses will increase in future periods. Sales and marketing expenses consist primarily of commissions paid to manufacturers' representatives, salaries and related expenses for personnel engaged in sales, marketing and field support activities and other costs associated with the promotion of our products. We intend to pursue aggressive selling and marketing campaigns and to expand our direct sales organization. We therefore expect that our sales and marketing expenses will increase in future periods. General and administrative expenses consist primarily of salaries and related expenses for administrative, finance and human resources personnel, professional fees and other corporate expenses. We expect that, in support of our continued growth and our operations as a public company, general and administrative expenses will continue to increase for the foreseeable future. General and administrative expenses are also likely to be affected in future periods by significant legal fees and expenses incurred in connection with pending patent litigation. In connection with the grant of stock options to employees between August 1, 1998 and April 30, 1999, we recorded deferred stock compensation of $2.0 million in fiscal 1999, representing the difference between the deemed value of our common stock for accounting purposes and the option exercise price of these options at the date of grant. Deferred compensation is presented as a reduction of stockholder's equity, with accelerated amortization recorded over the vesting period which is typically five years. We amortized $395,000 and $239,000 of deferred compensation during fiscal 1999 and the three months ended July 31, 1999. In connection with stock options granted in August and September 1999, we will record additional deferred compensation of $4.8 million in the three months ending October 31, 1999. We expect to record amortization expense relating to deferred stock compensation approximately as follows: $2.2 million during the remainder of fiscal 2000, $1.9 million during fiscal 2001, $1.1 million during fiscal 2002, $609,000 during fiscal 2003 and $336,000 thereafter. The amount of deferred compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. 23 RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of revenues for the periods indicated:
THREE MONTHS ENDED FISCAL YEAR ENDED APRIL 30, JULY 31, ------------------------------- -------------------- 1997 1998 1999 1998 1999 --------- --------- --------- --------- --------- Revenues..................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues............................................. 40.7 39.4 43.7 39.2 45.0 --------- --------- --------- --------- --------- Gross profit................................................. 59.3 60.6 56.3 60.8 55.0 --------- --------- --------- --------- --------- Operating expenses: Research and development................................... 30.0 17.2 22.2 20.5 20.5 Sales and marketing........................................ 7.6 7.4 11.7 12.3 11.1 General and administrative................................. 5.5 3.8 6.5 4.4 5.5 Amortization of deferred compensation...................... -- -- 1.0 -- 1.7 --------- --------- --------- --------- --------- Total operating expenses................................. 43.1 28.4 41.4 37.2 38.8 --------- --------- --------- --------- --------- Income from operations....................................... 16.2 32.2 14.9 23.6 16.2 Interest income (expense), net............................... 0.2 0.0 (0.8) (0.1) (0.6) Other income (expense), net.................................. -- (0.1) (0.1) 0.4 (0.2) --------- --------- --------- --------- --------- Income before income taxes................................... 16.4 32.1 14.0 23.9 15.4 Provision for income taxes................................... 5.2 12.3 5.3 8.4 6.0 --------- --------- --------- --------- --------- Net income................................................... 11.2% 19.8% 8.7% 15.5% 9.4% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
COMPARISON OF THREE MONTHS ENDED JULY 31, 1999 AND JULY 31, 1998 REVENUES. Revenues increased 104% from $6.8 million for the three months ended July 31, 1998 to $13.9 million for the three months ended July 31, 1999. This increase was primarily due to increased unit sales of our optical subsystems and, to a lesser extent, increased unit sales of our network performance test systems. Sales of optical subsystems and test systems accounted for 68.3% and 31.7%, respectively, of revenues for the three months ended July 31, 1999, compared to 54.0% and 46.0%, respectively, for the three months ended July 31, 1998. Sales to Newbridge Networks and EMC Corporation accounted for 34.9% and 19.0%, respectively, of revenues for the three months ended July 31, 1999, compared to 14.9% and 32.0%, respectively, for the three months ended July 31, 1998. GROSS PROFIT. Gross profit increased from $4.1 million for the three months ended July 31, 1998 to $7.6 million for the three months ended July 31, 1999. As a percentage of revenues, gross profit decreased from 60.8% for the three months ended July 31, 1998 to 55.0% for the three months ended July 31, 1999. This decrease in gross profit margin was primarily related to a shift in product mix, with a greater proportion of revenues being generated by sales of optical subsystems, compared to sales of network performance test systems. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased 104% from $1.4 million for the three months ended July 31, 1998 to $2.8 million for the three months ended July 31, 1999. This increase was primarily related to an increase in the number of research and development personnel and increased expenditures for materials purchased for development projects currently in process. Despite this increase, research and development expenses remained constant as a percentage of revenues at 20.5% in the three months ended July 31, 1998 and 1999. SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 85% from $833,000 for the three months ended July 31, 1998 to $1.5 million for the three months ended July 31, 1999. This 24 increase was primarily related to an increase in commissions paid to manufacturers' representatives associated with the increase in revenues and an increase in the number of sales and marketing personnel. Sales and marketing expenses declined as a percentage of revenues from 12.3% in the three months ended July 31, 1998 to 11.1% in the three months ended July 31, 1999. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 155% from $298,000 for the three months ended July 31, 1998 to $759,000 for the three months ended July 31, 1999. This increase was primarily the result of increased legal expenses, most of which were incurred in connection with pending patent litigation, increased expenses for other professional services, and an increase in the number of general and administrative personnel. General and administrative expenses increased as a percentage of revenues from 4.4% in the three months ended July 31, 1998 to 5.5% in the three months ended July 31, 1999. INTEREST INCOME (EXPENSE), NET. Interest income (expense), net decreased from an expense of $7,000 for the three months ended July 31, 1998 to an expense of $90,000 for the three months ended July 31, 1999. The increase in interest expense reflected additional interest associated with a term loan of $11.0 million beginning in November 1998. PROVISION FOR INCOME TAXES. The provision for income taxes increased from $568,000 for the three months ended July 31, 1998 based on an effective rate of 35.0% to $829,000 for the three months ended July 31, 1999 based on a projected annual effective tax rate of 35.0%, excluding the impact of deferred stock compensation charges of 3.9%. The projected 1999 annual effective tax rate differs from the statutory rate primarily due to state taxes offset by research and development credits and projected benefits from a foreign sales corporation. See Note 7 to our financial statements. COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1997, 1998 AND 1999 REVENUES. Revenues increased from $8.5 million in fiscal 1997 to $22.1 million in fiscal 1998 and $35.5 million in fiscal 1999. The 161% increase from fiscal 1997 to fiscal 1998 reflected increased unit sales across both of our product lines, with sales of optical subsystems and network performance test systems representing 75.8% and 24.2% of revenues, respectively, in fiscal 1998, compared to 71.9% and 28.1% in fiscal 1997. The 61% increase from fiscal 1998 to fiscal 1999 was primarily due to increased unit sales of test systems which accounted for 40.1% of revenues in fiscal 1999, while optical subsystems accounted for 59.9%. Sales to our two principal customers during fiscal 1997, 1998 and 1999 were as follows:
PERCENTAGE OF REVENUES SALES (IN MILLIONS) ------------------------------- ------------------------------- 1997 1998 1999 1997 1998 1999 --------- --------- --------- --------- --------- --------- Newbridge Networks................................ $ 3.5 $ 9.7 $ 8.9 41.4% 43.9% 25.1% EMC............................................... $ 0.1 $ 3.2 $ 7.4 1.2% 14.6% 20.8%
GROSS PROFIT. Gross profit increased from $5.0 million in fiscal 1997 to $13.4 million in fiscal 1998 and $20.0 million in fiscal 1999. With product mix remaining relatively unchanged between fiscal 1997 and 1998, our gross profit margin remained relatively constant at 59.3% in fiscal 1997 and 60.6% in fiscal 1998. Our gross profit margin decreased to 56.3% in fiscal 1999 reflecting startup costs associated with the introduction of new optical subsystem products and lower average selling prices for some optical subsystems which more than offset the shift in product mix toward a greater percentage of higher-margin test system sales. 25 RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased from $2.5 million in fiscal 1997 to $3.8 million in fiscal 1998 and $7.9 million in fiscal 1999. The 50% increase from fiscal 1997 to fiscal 1998 was primarily due to an increase in the number of research and development personnel. The 107% increase from fiscal 1998 to fiscal 1999 was primarily related to an increase in the number of research and development personnel and increased expenditures related to prototype development. Research and development expenses declined as a percentage of revenues from 30.0% in fiscal 1997 to 17.2% in fiscal 1998 reflecting the 161% increase in revenues, but increased to 22.2% in fiscal 1999. SALES AND MARKETING EXPENSES. Sales and marketing expenses increased from $645,000 in fiscal 1997 to $1.6 million in fiscal 1998 and $4.1 million in fiscal 1999. The 153% increase from fiscal 1997 to fiscal 1998 and the 154% increase from fiscal 1998 to fiscal 1999 were each primarily due to increases in commissions paid to manufacturers' representatives as a result of increased sales and increases in the number of direct sales and marketing personnel. Sales and marketing expenses as a percentage of revenues remained relatively unchanged at 7.6% in fiscal 1997 compared to 7.4% in fiscal 1998, but increased to 11.7% in fiscal 1999. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased from $464,000 in fiscal 1997 to $833,000 in fiscal 1998 and $2.3 million in fiscal 1999. The 80% increase in fiscal 1998 was primarily related to an increase in the number of administrative personnel. The 176% increase in fiscal 1999 was primarily related to an expense of $397,000 in connection with the relocation of our primary operations from Mountain View, California to our new facility in Sunnyvale, California as well as increased expenditures for legal and other professional services. General and administrative expenses declined as a percentage of revenues from 5.5% in fiscal 1997 to 3.8% in fiscal 1998 and increased to 6.5% in fiscal 1999. INTEREST INCOME (EXPENSE), NET. Interest income (expense), net remained relatively unchanged from fiscal 1997 to fiscal 1998. In fiscal 1999, interest expense of $275,000 reflected borrowings under our $11.0 million term loan beginning in November 1998. PROVISION FOR INCOME TAXES. The provision for income taxes increased from $440,000 in fiscal 1997 to $2.7 million in fiscal 1998 and decreased to $1.9 million in fiscal 1999. The provision for income taxes is based on annual effective tax rates of 31.7%, 38.4% and 35.0%, excluding the impact of deferred stock compensation charges of 2.8%. The annual effective tax rates differ from the statutory rate primarily due to state taxes, offset by research and development tax credits. See Note 7 to our financial statements. 26 QUARTERLY RESULTS OF OPERATIONS The following table presents unaudited quarterly statement of operations data for the five quarters ended July 31, 1999, and such data expressed as a percentage of revenues. This information reflects all normal non-recurring adjustments that we consider necessary for a fair presentation of such information in accordance with generally accepted accounting principles. The results for any quarter are not necessarily indicative of results that may be expected for any future period.
THREE MONTHS ENDED ----------------------------------------------------- JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, 1998 1998 1999 1999 1999 --------- --------- --------- --------- --------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenues..................................................... $ 6,794 $ 7,402 $ 8,985 $ 12,290 $ 13,879 Cost of revenues............................................. 2,666 3,058 4,171 5,619 6,252 --------- --------- --------- --------- --------- Gross profit................................................. 4,128 4,344 4,814 6,671 7,627 --------- --------- --------- --------- --------- Operating expenses: Research and development................................... 1,394 1,764 1,890 2,816 2,840 Sales and marketing........................................ 833 871 1,160 1,281 1,542 General and administrative................................. 298 421 484 1,096 759 Amortization of deferred compensation...................... -- 99 120 176 239 --------- --------- --------- --------- --------- Total operating expenses................................. 2,525 3,155 3,654 5,369 5,380 --------- --------- --------- --------- --------- Income from operations....................................... 1,603 1,189 1,160 1,302 2,247 Interest income (expense), net............................... (7) 17 (141) (144) (90) Other income (expense), net.................................. 25 -- (21) (32) (28) --------- --------- --------- --------- --------- Income before income taxes................................... 1,621 1,206 998 1,126 2,129 Provision for income taxes................................... 568 458 384 464 829 --------- --------- --------- --------- --------- Net income................................................... $ 1,053 $ 748 $ 614 $ 662 $ 1,300 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- AS A PERCENTAGE OF REVENUES: Revenues..................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues............................................. 39.2 41.3 46.4 45.7 45.0 --------- --------- --------- --------- --------- Gross profit................................................. 60.8 58.7 53.6 54.3 55.0 --------- --------- --------- --------- --------- Operating expenses: Research and development................................... 20.5 23.8 21.1 22.9 20.5 Sales and marketing........................................ 12.3 11.8 12.9 10.4 11.1 General and administrative................................. 4.4 5.7 5.4 8.9 5.5 Amortization of deferred compensation...................... -- 1.3 1.3 1.4 1.7 --------- --------- --------- --------- --------- Total operating expenses................................. 37.2 42.6 40.7 43.6 38.8 --------- --------- --------- --------- --------- Income from operations....................................... 23.6 16.1 12.9 10.7 16.2 Interest income (expense), net............................... (0.1) 0.2 (1.6) (1.2) (0.6) Other income (expense), net.................................. 0.4 -- (0.2) (0.3) (0.2) --------- --------- --------- --------- --------- Income before income taxes................................... 23.9 16.3 11.1 9.2 15.4 Provision for income taxes................................... 8.4 6.2 4.3 3.8 6.0 --------- --------- --------- --------- --------- Net income................................................... 15.5% 10.1% 6.8% 5.4% 9.4% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Revenues increased steadily over the last five quarters as a result of increased unit sales to an expanding customer base. The 37% increase in revenues for the three months ended April 30, 1999 was primarily due to substantial increases in shipments to several of our major customers and the introduction of a new optical subsystem product. Gross profit margins fluctuated over the five-quarter period, principally as a result of a shift in product mix toward a greater percentage of lower margin optical subsystem products and a lower percentage of higher margin test systems. Gross margins were also negatively impacted in the second 27 half of fiscal 1999 by start-up costs associated with the introduction of new optical subsystem products and lower average selling prices for some optical subsystems. Quarterly increases in operating expenses reflected the continued expansion of our operations throughout the five-quarter period. An expense of $397,000 in connection with the relocation of our primary operations to our new facility was included in general and administrative expenses for the fourth quarter ended April 30, 1999. Net interest expense increased significantly beginning in the three months ended January 31, 1999 as a result of the $11.0 million term loan in November 1998. We may experience a delay in generating or recognizing revenues for a number of reasons. Orders at the beginning of each quarter typically do not equal expected revenues for that quarter and are generally cancelable at any time. Accordingly, we depend on obtaining orders in a quarter for shipment in that quarter to achieve our revenue objectives. In addition, the timing of product releases, purchase orders and product availability could result in significant product shipments at the end of a quarter. Failure to ship these products by the end of a quarter may adversely affect our operating results. Furthermore, our customer agreements typically provide that the customer may delay scheduled delivery dates and cancel orders within specified time frames without significant penalty. Most of our expenses, such as employee compensation and lease payments for facilities and equipment are relatively fixed in the near term. In addition, our expense levels are based in part on our expectations regarding future revenues. As a result, any shortfall in revenues relative to our expectations could cause significant changes in our operating results from quarter to quarter. Our quarterly and annual operating results have fluctuated in the past and are likely to fluctuate significantly in the future due to a variety of factors, some of which are outside of our control. Due to the foregoing factors, you should not rely on our quarterly revenues and operating results to predict our future performance. LIQUIDITY AND CAPITAL RESOURCES From our inception through November 1998, we financed our operations primarily through internal cash flow and periodic bank borrowings. In November 1998, we raised $5.6 million of net proceeds from the sale of preferred stock and bank borrowings to fund the continued growth and development of our business. As of July 31, our principal sources of liquidity were $5.4 million in cash and cash equivalents, and $6.5 million available under a revolving loan facility. Borrowings under the facility are collateralized by substantially all of our assets and bear interest at our election at the time of borrowing at either the London Interbank Offering Rate or the bank's prime rate. The interest rate on our facility was 7.04% as of July 31, 1999. Net cash provided by operating activities was $742,000 in fiscal 1998, $1.1 million in fiscal 1999 and $913,000 in the three months ended July 31, 1999. Cash provided by operations for these periods was primarily due to continued growth in revenues and net income offset in part by an increase in related assets and liabilities for working capital purposes. Net cash used in investing activities was $855,000 in fiscal 1998, $2.1 million in fiscal 1999 and $550,000 in the three months ended July 31, 1999. Net cash used in investing activities consisted primarily of purchases of equipment. Net cash provided by financing activities was $413,000 in fiscal 1998 and $5.4 million in fiscal 1999, and $2,000 was used in the three months ended July 31, 1999. Net cash provided by financing activity in fiscal 1999 primarily consisted of net proceeds of $26.3 million from the sale of preferred stock and $11.0 million in bank borrowings under a term loan, offset by $31.7 million used to repurchase shares of our outstanding common stock. We had no material commitments for capital expenditures at July 31, 1999, but we expect such expenditures to total approximately $5.0 million in fiscal 2000. These expenditures will primarily be for equipment, furniture and leasehold improvements. We also have total minimum lease obligations of 28 $8.7 million from July 31, 1999 through April 30, 2007, under non-cancelable operating and capital leases. We believe that our existing balances of cash and cash equivalents, together with the net proceeds of this offering, our available credit facilities and cash flow expected to be generated from our future operations, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time. Our future capital requirements will depend on many factors, including the rate of revenue growth, the extent to which we utilize subcontractors, the timing and extent of spending to support product development efforts and the expansion of our sales and marketing efforts. There can be no assurance that additional equity or debt financing, if required, will be available on terms that are acceptable or at all. IMPACT OF YEAR 2000 Many currently installed computer systems and software products are coded to accept only two-digit entries in date code fields. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. Computer programs or hardware that have date-sensitive software or embedded chips and have not been upgraded to comply with these "year 2000" requirements may recognize a date using "00" as the year 1900 rather that the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. GENERAL READINESS ASSESSMENT. The year 2000 problem can affect the computers, software and other equipment that we use in our operations. As a result, we have instituted a year 2000 compliance plan, implemented by a team of our internal information technology staff responsible for monitoring the assessment and remediation of our year 2000 projects and reporting that status to our executive staff. This project team is continuing to assess the potential effect and costs of remediating the year 2000 problem for our internal systems. To date, we have not obtained verification or validation from any independent third parties of our processes to assess and correct any of our year 2000 problems or the costs associated with these activities. ASSESSMENT OF FINISAR'S PRODUCTS. We have assessed the ability of our products to operate properly in the year 2000. We believe that our current products are year 2000 compliant. Accordingly, we do not believe that the year 2000 issue presents a material exposure as it relates to our products. ASSESSMENT OF INTERNAL INFRASTRUCTURE. We believe that we have identified most of the major computers, software applications and related equipment used in connection with our internal operations that need to be evaluated to determine if they must be modified, upgraded or replaced to minimize the possibility of a material disruption to our business. Based on a review of these computer systems, we have determined that, except for a limited number of computers that run under the Microsoft Windows95 operating system, our computer systems and applications are compliant with the year 2000 format. We expect to remediate any remaining year 2000 problems prior to December 31, 1999. SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, telephone switches, security systems and other common devices, may be affected by the year 2000 problem. We have assessed the potential effect of the year 2000 problem on our office and facilities equipment and have determined that no problems exist that cannot be remediated by the replacement of relatively inexpensive equipment. COSTS OF REMEDIATION. We estimate the total cost to us of completing any required modifications, upgrades or replacements of our internal systems will not exceed $100,000, most of which we expect to incur during calendar year 1999. Based on the activities described above, we do not believe that the year 2000 problem will have a material adverse effect on our business or operating results. 29 SUPPLIERS. As part of our review of the year 2000 problem, we have contacted third-party suppliers of components and key contractors used in the assembly of our products to identify and, to the extent possible, resolve issues involving the year 2000 problem. However, we have limited or no control over the actions of these third-party suppliers and subcontractors. Thus, while we expect that we will be able to resolve any significant year 2000 problems with these third parties, there can be no assurance that these suppliers will resolve any or all year 2000 problems before the occurrence of a material disruption to the operation of our business. Any failure on the part of these third parties to timely resolve year 2000 problems with their systems in a timely manner could have a material adverse effect on our business. We expect to complete this process before December 31, 1999. MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. We expect to identify and resolve all year 2000 problems that could materially adversely affect our business operations before December 31, 1999. However, we believe that it is not possible to determine with complete certainty that all year 2000 problems affecting us have been identified or corrected. The number of devices and systems that could be affected and the interactions among these devices and systems are too numerous to address. In addition, no one can accurately predict whether failures will occur as a result of the year 2000 problem or the severity, timing, duration or financial consequences of these potential failures. As a result, we believe that the following consequences are possible: - a significant number of operational inconveniences and inefficiencies for us, our contract manufacturers and our customers that will divert management's time and attention and financial and human resources from ordinary business activities; - possible business disputes and claims, including claims under product warranty, due to year 2000 problems experienced by our customers and incorrectly attributed to our products, which we believe will be resolved in the ordinary course of business; and - a few serious business disputes alleging that we failed to comply with the terms of contracts or industry standards of performance, some of which could result in litigation or contract termination. CONTINGENCY PLANS. While we have not yet fully developed a comprehensive contingency plan to address situations that may result if we are is unable to achieve year 2000 readiness of our critical operations, such a plan is likely to include the accelerated replacement of affected equipment or software which could have a material adverse impact on our financial results and operations. DISCLAIMER. The discussion of our efforts and expectations relating to year 2000 compliance are forward-looking statements. Our ability to achieve year 2000 compliance, and the level of incremental costs associated therewith, could be adversely affected by, among other things, the availability and cost of contract personnel and external resources, third-party suppliers' ability to modify proprietary software and unanticipated problems not identified in the ongoing compliance review. 30 BUSINESS We are a leading provider of fiber optic subsystems and network performance test systems which enable high-speed data communications over local area networks, or LANs, and storage area networks, or SANs. We are focused on providing high-performance, reliable, value-added optical subsystems, which convert electrical signals into optical signals, for networking and storage equipment manufacturers that develop and market systems based on Gigabit Ethernet and Fibre Channel, which are advanced transmission protocols used in LAN and SAN applications. Our line of optical subsystems supports a wide range of network applications, transmission speeds, distances and mediums. We also provide unique network performance test systems which assist networking and storage equipment manufacturers in the efficient design of reliable, high-speed networking systems and the testing and monitoring of the performance of these systems. We sell our products to leading networking and storage equipment manufacturers such as 3Com, EMC, Emulex, IBM, Newbridge Networks and Sun Microsystems, as well as emerging manufacturers such as Brocade Communications and Extreme Networks. For the fiscal year ended April 30, 1999, we had revenues of $35.5 million and net income of $3.1 million. For the quarter ended July 31, 1999, we had revenues of $13.9 million and net income of $1.3 million. INDUSTRY BACKGROUND The ubiquity of computing by businesses, organizations and individuals worldwide and the need to interconnect multiple computing and storage devices to enable widespread communications has given rise to the multi-billion dollar computer networking and storage industries. There has been a rapid growth in the number of corporate and residential users accessing communications networks. This growth has resulted in large-scale equipment expenditures by enterprises and service providers to develop and expand their network and storage infrastructures. Networking and storage equipment expenditures are also accelerating due to the need to upgrade equipment to reliably accommodate data traffic which requires greater transmission capacity, or bandwidth, such as e-commerce and online transaction processing-related traffic, multimedia file transfers and movement of large blocks of stored data across networks. The transmission and storage of data has become increasingly mission-critical as enterprises increasingly rely on data-intensive applications to support a wider range of functions over a geographically dispersed employee and customer base. The continuing expansion of the network infrastructure, the growing number of users accessing networks, the need to accommodate higher bandwidth, and the increasingly mission-critical nature of data networking and storage networking have created the need for a new generation of high-speed, high-performance networking and storage systems that rely on fiber optic transmission technology. EVOLUTION OF NETWORKS, NETWORKING SYSTEMS AND NETWORKING PROTOCOLS GIGABIT ETHERNET AND LOCAL AREA NETWORKS. Early LANs were implemented to connect a limited number of users within relatively close proximity. Most of these LANs used the Ethernet transmission protocol which was developed to allow users to access the LAN and share basic common services such as file servers and printers. Because these early LANs had relatively limited performance requirements, short connection distances and low transmission speeds, systems on these LANs were generally connected by copper cabling. As deployment of LANs increased, Ethernet became the predominant LAN technology, with a greater than 95% market share in 1998 in terms of port shipments according to the Dell'Oro Group. As bandwidth needs and server processing power increased and larger numbers of users strained the early LAN infrastructure, Ethernet technology evolved from the original 10 megabits per second, or Mbps, version to 100 Mbps Fast Ethernet. In response to continually increasing bandwidth and performance requirements, Gigabit Ethernet technology, which operates at 1,000 Mbps, was introduced in 1998. Dataquest estimates that sales of Gigabit Ethernet switches will increase from $364 million in 1998 to over $3.7 billion in 2002, representing a compound annual growth rate of 79%. These switches 31 contain varying numbers of ports which serve as the connection to the network. According to Dataquest, the number of Gigabit Ethernet port shipments is projected to grow from 211,000 in 1998 to over 6 million in 2002, representing a compound annual growth rate of 130%. Most of these Gigabit Ethernet ports will rely on fiber optic subsystems, which allow data to be transmitted accurately, at very high speeds and over long distances. Although the transmission speeds currently offered by Gigabit Ethernet are expected to meet the increasing bandwidth needs of enterprise and service provider networks for the near future, manufacturers have begun to develop networking systems with per-port transmission speeds of 10 gigabits per second, or Gbps, ten times faster than Gigabit Ethernet. Because of the scalability and migration capacity built into the Gigabit Ethernet protocol, manufacturers developing these systems are able to leverage this standard much as they did when they migrated from 100 Mbps Fast Ethernet to 1,000 Mbps Gigabit Ethernet. This next generation of high-speed networking systems will require even higher performance fiber optic subsystems. FIBRE CHANNEL AND STORAGE AREA NETWORKS. Like data networking technology, data storage technology has evolved rapidly over the past decade. Traditionally, storage devices were connected to a single server and LAN in close proximity using a standard interface protocol known as the Small Computer Systems Interface, or SCSI. SCSI currently allows storage devices and servers to communicate at a maximum speed of 80 megabytes per second, over a maximum transmission distance of 12 meters and supports a maximum of 15 devices on a single bus. Although these distances and speeds were sufficient for early storage applications, SCSI has become a limiting technology for emerging storage applications, which require networking at high speeds over long distances and need to interconnect large numbers of users. In recent years, demand has increased for faster, more efficient interconnection of data storage systems with servers and LANs. Contributing to this demand are: - the need to connect increasing numbers of storage devices and servers to a growing number of users; - the need to interconnect servers and storage systems supplied by multiple vendors; - the increasingly mission-critical nature of stored data and the need for rapid access to this data; and - the expense and complexity associated with managing increasingly large amounts of data storage. Although advances in technology, including the recent development of Gigabit Ethernet, increased LAN transmission speeds by more than 1,000 times during the 1990s, storage-to-server data transmission speeds on SCSI-based systems increased by less than ten times during this period. This speed disparity created a bottleneck between storage systems and servers and the LANs connected to those servers. Recently, the Fibre Channel interconnect protocol has been standardized to address the speed, distance and connectivity limitations of SCSI-based storage while maintaining backward compatibility with the installed base of SCSI-based storage systems. Fibre Channel allows up to 126 devices to communicate at rates up to 1.062 Gbps over distances of up to 10 kilometers. The Fibre Channel protocol has enabled the development of high-speed storage area networks, or SANs, which provide the interconnection between storage systems and servers. Fibre Channel-based SANs provide many benefits, including transmission speeds comparable to high-speed LANs and transmission distances which allow broader sharing of resources. SANs also enable enhanced network applications such as storage backup, and better overall storage management achievable through centralized storage resources. IDC projects that the market for Fibre Channel systems will grow from $2.2 billion in 1998 to over $19.6 billion in 2002, representing a compound annual growth rate of 73%. In addition, emf Associates forecasts the number of Fibre Channel port shipments will grow from 2.2 million in 1998 to over 46.7 million in 2002, representing a compound annual growth rate of 115%. Most of these ports will rely on fiber optic subsystems to transmit and receive data at very high speeds with high accuracy, and often over long distances. Like manufacturers 32 of Gigabit Ethernet-based LAN systems, Fibre Channel-based SAN system manufacturers are already developing the next generation of SAN products with speeds of 2.125 Gbps, twice as fast as current Fibre Channel speeds. Like Gigabit Ethernet, the Fibre Channel protocol is scalable, allowing for the potential development of systems with speeds of over 8 Gbps. The speeds contemplated by future generation SAN systems will require even higher performance fiber optics subsystems. In addition to SANs, Fibre Channel technology is being used in other high-speed data communications applications including the interconnection of clusters of switches based on the asynchronous transfer mode, or ATM, protocol. ATM switches are often used in service provider network cores to switch traffic between multiple networks. In these core networks, multiple switches are often grouped together in a service provider's central office. The interconnections between these systems are often provided by Fibre Channel-based subsystems which allow high-speed, cost-effective communication links between these switches. EXTENDED LANS AND SANS. As technologies such as Gigabit Ethernet and Fibre Channel have enabled transmission of data at higher speeds over longer distances than previous networking technologies permitted, they have allowed the geographic extension of LANs and SANs over installed but unused fiber optic cable, known as "dark" fiber lines. Enterprises have recently begun to lease dark fiber from service providers to implement these extended networks. These extended LANs and SANs can interconnect network systems throughout a corporate campus or metropolitan area rather than only within a single building. Extended networks enable organizations to use their networks for enhanced applications such as real-time backup storage at distances of up to 120 kilometers for disaster protection. In addition, by using dark fiber lines, extended data networks can offer organizations a potentially cost-effective way to address increased bandwidth requirements. We believe that future extended networks will incorporate both Fibre Channel and Gigabit Ethernet transmission protocols. As with shorter-distance LANs and SANs, these extended networks will require high-performance fiber optic subsystems. DEMAND FOR HIGH-SPEED DATA COMMUNICATION TEST SYSTEMS The design and development of data and storage networking systems require extensive testing to ensure system performance and reliability. As new, highly complex transmission protocols such as Gigabit Ethernet and Fibre Channel have emerged, system testing has become more difficult, requiring increasingly sophisticated and specialized test systems capable of capturing data at high speeds, filtering the data and identifying various types of intermittent errors and other network problems. Other new technologies are continually being developed, such as the System Input/Output, or SIO, transmission protocol, which is being engineered to interconnect clusters of computer devices. In the past, many systems manufacturers designed their own test equipment each time they developed a new product. However, as the pace of technological change has accelerated, the performance requirements of data communications systems have increased and competition has afforded shorter market windows within which manufacturers can develop and introduce new products. Thus, system manufacturers have increasingly focused on the design and development of their own products and turned to specialized independent suppliers for state-of-the-art test equipment. As Ethernet and Fibre Channel-based systems reach even higher transmission speeds and new standards like SIO emerge, the internal development of test equipment by systems manufacturers will become more challenging, further increasing the demand for high performance, easy-to-use test systems from independent suppliers. EVOLUTION OF FIBER OPTIC SUBSYSTEMS FOR NETWORKING Fiber optic transmission technology was originally developed for use in long distance telecommunications networks to increase capacity and speed. In contrast, early LANs and storage systems, with their relatively limited performance requirements, short connection distances and low transmission speeds, did not require the performance capabilities of fiber optics. Systems on these networks were generally interconnected using copper cabling. 33 As the bandwidth, storage capacity and transmission distance requirements of enterprises and service providers have increased, it has become necessary to utilize the superior transmission capabilities of fiber optics to build practical, high-speed LANs based on Gigabit Ethernet technology and high-speed SANs based on Fibre Channel. As these fiber optic LANs and SANs are being deployed, fiber optics is becoming the dominant transmission technology for high-speed data networking and storage applications. Systems connected with fiber optics require optical subsystems to convert electrical signals into optical signals and back into electrical signals at high speeds. The development and manufacture of high quality, cost-effective fiber optic subsystems for LANs and SANs present a number of significant technical challenges, including the following: - As data rates increase, it becomes significantly more difficult to maintain data integrity because high speed signals can be degraded unless subsystem components such as lasers, detectors and integrated circuits are properly integrated and packaged; - The increasingly mission-critical nature of data transmission and storage has magnified the impact of system failures, increasing the need for system reliability and the importance of real-time performance monitoring; - Manufacturers of high speed networking equipment require optical subsystems that support a wide range of transmission distances, protocols and applications; and - Compliance with standards set by the Federal Communications Commission, or FCC, for electromagnetic interference emissions, or EMI, is significantly more difficult to achieve at higher data rates. To date, we believe that only a limited number of companies have developed the specialized expertise required to engineer fiber optic subsystems and test systems which meet the requirements of manufacturers of high-speed data networking and storage systems. THE FINISAR SOLUTION We are a leading provider of fiber optic subsystems and network performance test systems which enable high-speed data communications over LANs and SANs. We are focused on providing high-performance, reliable, value-added optical subsystems for networking and storage equipment manufacturers that develop and market systems based on Gigabit Ethernet and Fibre Channel protocols. Our line of optical subsystems supports a wide range of network applications, transmission speeds, distances and mediums. We also provide unique network performance test systems which assist networking and storage equipment manufacturers in the efficient design of reliable, high-speed networking systems and the testing and monitoring of the performance of these systems. Our products provide the following key benefits to manufacturers of high-speed data networking and storage systems: VALUE-ADDED FUNCTIONS AND INTELLIGENCE. Our high-speed fiber optic subsystems are engineered to deliver value-added functionality and intelligence. For example, many of our optical subsystems include a microprocessor containing specially-developed software that allows customers to monitor the optical performance of each port on their systems in real time. In addition, many of our subsystems are engineered to automatically recognize different versions of the Fibre Channel protocol and to interoperate with our customers' older, installed networking systems, often referred to as legacy systems. Real-time monitoring and interoperability are particularly important in the Gigabit Ethernet LAN and Fibre Channel SAN markets where reliability and time to market are critical. Our test systems also contain value-added software functions that permit users to simulate and track errors. HIGH LEVEL OF DATA INTEGRITY. Through the use of advanced packaging and circuit design, our optical subsystems deliver data at very high speeds over varying distances with very low error rates. We engineer our subsystems to exceed the industry standard error rate of 1 bit per trillion bits transmitted. This degree of data integrity allows our subsystems to operate reliably over a wide range of 34 temperatures and other field conditions which we believe enables our customers to design and deliver more robust systems. HIGH RELIABILITY. We design all of our subsystems to provide the high reliability required for data networking and storage applications that are critical to an enterprise. Using standard statistical methodology and testing, we have been able to predict that some of our products can be expected to operate reliably for up to 40 million hours. Our subsystems are engineered to operate with minimal power requirements thereby increasing product life, and to function across a wide range of temperatures and voltages. This reliability and flexibility have allowed our subsystems to be designed into the products of manufacturers who provide systems for a variety of mission-critical applications. In addition, because our subsystems emit lower levels of EMI than the standards set by the FCC standards, we offer manufacturers greater flexibility in the design of their systems and integration of other components and subsystems. BROAD OPTICAL SUBSYSTEM PRODUCT LINE. We offer a broad line of optical subsystems which operate at varying protocols, speeds, fiber types, voltages, wavelengths and distances and are available in a variety of industry standard packaging configurations, or form factors. Our optical subsystems are designed to comply with key networking protocols such as Fibre Channel and Gigabit Ethernet and to plug directly into standard port configurations used in our customers' products. The breadth of our optical subsystems product line is important to many of our customers who manufacture a wide range of networking products for diverse applications. BROAD TEST SYSTEM PRODUCT LINE. We believe that we are a leading provider of network performance test systems for Fiber Channel-based networks. We offer a broad line of test systems to assist our customers in efficiently designing reliable, high-speed networking systems and testing and monitoring the performance of these systems. We believe our test systems enable our customers to focus their attention on the development of new products, reduce overall development costs and speed time to market. STRATEGY Our objective is to be the leading provider of fiber optic subsystems and test systems to manufacturers of high-speed data networking and storage systems. Key elements of our strategy include the following: MAINTAIN TECHNOLOGY LEADERSHIP IN HIGH-SPEED FIBER OPTIC TRANSMISSION. We have been focused on the development of fiber optic subsystems since 1988. Current Finisar employees were actively involved in the original development of the Fibre Channel standard and, more recently, in the development and implementation of Gigabit Ethernet and the emerging SIO protocol. Our years of engineering experience, our multi-disciplinary technical expertise and our participation in the development of industry standards have enabled us to become a leader in the design and development of fiber optic subsystems and test systems. We intend to maintain our technological leadership through continual enhancement of our existing products and the development of new products as evolving technology permits higher speed transmission of data, with greater capacity, over longer distances. For example, we are designing flexible hardware and software architectures to support emerging technologies such as 10 Gbps Ethernet, 2 Gbps Fibre Channel, wavelength division multiplexing, or WDM, and the SIO protocol. We also intend to focus on increased product integration to enhance the price/performance capabilities of our products. LEVERAGE CORE COMPETENCIES ACROSS MULTIPLE, HIGH-GROWTH MARKETS. We believe that fiber optic technology will increasingly become the transmission technology of choice for multiple high-growth data communication markets, including Gigabit Ethernet-based LANs, Fibre Channel-based SANs and extended LANs and SANs. These markets are characterized by differentiated applications with unique design criteria such as product function, performance, cost, in-system monitoring, size limitations and 35 software. We intend to target opportunities where our core competencies in high-speed data transmission protocols such as Gigabit Ethernet, Fibre Channel and SIO can be leveraged into leadership positions as these technologies are extended across multiple markets and applications. Our goal is to be the optical subsystem and network performance test system provider of choice for multiple protocols and network applications. STRENGTHEN AND EXPAND CUSTOMER RELATIONSHIPS. Over the past 11 years, we have established valuable relationships and a loyal base of customers by providing high-quality products and superior service. Our service-oriented approach has allowed us to work closely with leading data and storage network system manufacturers, understand and address their current needs and anticipate their future requirements. We intend to leverage our relationships with our existing customers as they enter new, high-speed data communications markets. We have recently established new customer relationships with several emerging Gigabit Ethernet and Fibre Channel networking equipment manufacturers. We intend to expand our sales and marketing organization in order to establish new relationships with other key data communications network manufacturers. CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. Many manufacturers of high-speed data networking and storage systems purchase both optical subsystems and test systems from third-party providers. Frequently, however, different groups or departments within a manufacturer's organization are responsible for qualifying and purchasing subsystems and test equipment. We are increasingly able to capitalize on our customers' satisfaction with one of our product lines and our service-oriented approach to gain valuable introductions that lead to sales of our other product line. As this trend develops, we intend to leverage our unique expertise in both optical subsystems and test systems. In particular, the widespread acceptance of our Fibre Channel test systems is providing opportunities to develop new customers for our optical subsystems. EXPAND INTERNATIONAL OPERATIONS. Historically, substantially all of our sales have been made to system manufacturers located in North America. In the fiscal year ended April 30, 1999, sales to customers outside North America represented less than 3% of our total revenues. Recently, manufacturers in other parts of the world have developed and introduced high-speed networking products based on the Gigabit Ethernet and Fibre Channel protocols and international markets for our products are beginning to expand. To better address these expanding international markets, we have recently established relationships with distributors in Japan, the United Kingdom and Israel. We intend to further extend our international operations by expanding our network of distributors and sales representatives in key international markets. As international Fibre Channel and Gigabit Ethernet standards are substantially the same as those in North America, we do not expect that we will require substantial product development efforts to enter international markets. PRODUCTS We provide a broad line of complementary optical subsystems and test systems for high-speed data communications over Gigabit Ethernet LANs and Fibre Channel SANs. OPTICAL SUBSYSTEMS Our optical subsystems product line consists of three product families--optical data links, optical link extenders and Opticity 3000. Our optical data links are integrated into our customers' systems and used for both short- and long-distance fiber optic communications. Our optical link extenders are external subsystems used for fiber optic communications over long distances. Our Opticity 3000 is an external link extender subsystem which also includes multiplexer functionality that permits multi-channel data transmission over long distances. 36 OPTICAL DATA LINKS Our family of optical data link products consists of transmitters, receivers and transceivers based on the Gigabit Ethernet and Fibre Channel protocols. A transmitter converts electrical signals into optical signals for transmission over fiber optics. A receiver converts incoming optical signals into electric signals. A transceiver combines both transmitter and receiver functions. Our optical data link products perform these functions with high reliability and data integrity and support a wide range of protocols, transmission speeds, fiber types, wavelengths, transmission distances, form factors and software enhancements. As illustrated below, an optical data link is plugged into a port on a switch, hub, server or storage array and provides the physical connection from that system to the LAN, SAN or extended network. [Diagram of optical data link using Finisar Corporation products.] Our high-speed fiber optic subsystems are engineered to deliver value-added functionality and intelligence. Most of our optical data link products include a microprocessor with proprietary embedded software that allows customers to monitor transmitted and received optical power, temperature, drive current and other link parameters of each port on their systems in real time. In addition, our intelligent optical data links are used by many enterprise networking and storage system manufacturers to enhance the ability of their systems to diagnose and correct abnormalities in fiber optic networks. 37 The following table describes our principal optical data link products:
TRANSMISSION TRANSMISSION FORM SOFTWARE PROTOCOLS SPEED (GBPS) FIBER TYPES WAVELENGTHS(NM) DISTANCES FACTORS ENHANCEMENTS - ------------------------------------------------------------------------------------------------------------------ TRANSMITTERS Fibre Channel 1.062 Multimode 850 500 m 17-pin Built-in diagnostics Gigabit Ethernet 1.25 Singlemode 1310 10 km 1550 30 km 80 km - ------------------------------------------------------------------------------------------------------------------ RECEIVERS Fibre Channel 1.062 Multimode 850 500 m 17-pin Reports on received optical power levels Gigabit Ethernet 1.25 Singlemode 1310 10 km 1550 30 km 80 km - ------------------------------------------------------------------------------------------------------------------ TRANSCEIVERS Fibre Channel 1.062 Multimode 850 500 m 28-pin Built-in diagnostics Gigabit Ethernet 1.25 Singlemode 1310 10 km 9-pin OFC auto-sense 1550 30 km GBIC Serial identification 80 km RJ-45
OPTICAL LINK EXTENDERS Our FLX-2000 family of optical link extenders allows enterprises to extend the distance of fiber optic links in Gigabit Ethernet and Fibre Channel-based networks while preserving data integrity and reliability. Using our optical link extenders, Gigabit Ethernet networks can be extended from the maximum standard distance of 5 kilometers to up to 120 kilometers, and Fibre Channel networks can be extended from the maximum standard distance of 10 kilometers to up to 120 kilometers. Our optical link extenders enable new network applications such as remote storage and real-time backup, as well as geographic extensions of a network. In addition, our optical link extenders provide a value-added diagnostic function by measuring the bit error rate on data links and monitoring and reporting system status. OPTICITY 3000 Introduced in September 1999, our Opticity 3000 combines link extender and basic, cost-effective wavelength division multiplexing functions that allow enterprises and service providers to extend the distance of transmission and increase the amount of data transmitted over fiber optic data links. The Opticity 3000 is able to multiplex up to eight channels of Fibre Channel or Gigabit Ethernet traffic on a single fiber pair, providing aggregate full-duplex bandwidth of up to 10 Gbps. The Opticity 3000 can be remotely managed using standard network management protocols such as the Simple Network Management Protocol. Opticity 3000 also has features such as redundant power supply designed to maximize reliability and uptime in case of failures. NETWORK PERFORMANCE TEST SYSTEMS Our GT and GLA family of network performance test systems assist networking and storage system manufacturers in the efficient design of reliable, high-speed networking systems and the testing and monitoring of the performance of these systems. We believe we are the leading supplier of test equipment for the Fibre Channel protocol used in enterprise SANs. We also offer Gigabit Ethernet test systems. Our test systems allow engineers, service technicians and network managers to capture data at 38 high speeds, filter the data and identify various types of intermittent errors and other network problems. We recently contracted with Intel Corporation to provide test systems which support the emerging NGIO protocol. NGIO is a peripheral component interconnect, or PCI, bus replacement technology for use in all platforms from the desktop to clustered enterprise level systems. We recently introduced a new family of test systems for use in the development and commercialization of products based on NGIO technology and we delivered our first NGIO test system, a data analyzer, in September 1999. More recently, Intel has combined its NGIO development effort with the efforts of IBM and others who had been supporting a competing specification called Future IO. The combined effort has been re-designated System Input/Output, or SIO. We expect to support the emerging SIO standard as a leading supplier of test equipment for products based on this new standard. Our GT and GLA family of test system products includes data generators, data analyzers, error injector/data jammers and low-cost, real-time link monitors. The following table describes our GT and GLA family of products:
INTRODUCTION PROTOCOL TRANSMISSION PRODUCT DESCRIPTION DATE SUPPORTED SPEED APPLICATION CONFIGURATION - --------------------------------------------------------------------------------------------------------------- GIGABIT LINK ANALYZERS GLA-2100 5/94 Fibre Channel 1.062 Gbps Physical Layer PC-Hosted Testing GLA-3100ES 10/96 ESCON 200 Mbps R&D Service PC-Hosted GLA-3100FC 1/97 Fibre Channel 1.062 Gbps R&D Service PC-Hosted - --------------------------------------------------------------------------------------------------------------- GT FIBRE CHANNEL GIGABIT TRAFFIC SYSTEM GT-A 1/98 Fibre Channel 1.062 Gbps R&D Portable, Desk Protocol and Top, High Performance Analysis Perf. Tower Card Set GT-G 1/98 Fibre Channel 1.062 Gbps Inter-operability Portable, Desk Data Generator Card Top, High Perf. Tower GT-J 2/99 Fibre Channel 1.062 Gbps Error Recovery Portable, Desk Error Injector Module Top, High Perf. Tower - --------------------------------------------------------------------------------------------------------------- GT FIBRE CHANNEL GIGABIT TRAFFIC JAMMER Full Duplex 2/99 Fibre Channel 1.062 Gbps Error Recovery Portable, Desk Error Injector System Top, High Perf. Tower - --------------------------------------------------------------------------------------------------------------- GT GIGABIT TRAFFIC CHECK GT-C-FC 5/98 Fibre Channel 1.062 Gbps Field Service Hand Held Link Monitor GT-C-GE 5/98 Gigabit 1.25 Gbps Field Service Hand Held Link Monitor Ethernet
39 CUSTOMERS The following table is a list of our customers who have purchased more than $75,000 of our products during the 12-month period ended July 31, 1999: 3Com Corporation Essential Communications Mitsui & Co. Ltd. Alcatel Extreme Networks, Inc. Mylex Corporation Amdahl Corporation Fermi National Accelerator Lab Network Appliance, Inc. Atl Products, Incorporated. Fibre Technologies Ltd. Newbridge Networks Corporation Boeing Corporation Fujitsu Computer Products Qlogic Corporation Brocade Communications Systems, Inc. Gadzoox Networks, Inc. Quantum Corporation Bull Electronics GCH Test & Computer Services Ltd. Raytheon Corporation Comdisco, Incorporated Hewlett-Packard Corporation Seagate Technology Inc. Compaq Computer Corporation Hitachi Sequent Computer Systems, Inc. ConvergeNet Technologies Inc. Hy-Line Computer Components Storage Networks Inc. Crossroads Systems, Incorporated International Business Machines Storagetek, Inc. Corp. Data General Corporation Inrange Technologies Corp. Sun Microsystems Inc. Dell Computers Corporation Intel Corporation The Shure Group Digital Equipment Corporation Jaycor Networks Inc. Thomas & Betts Corporation Dolch Computer Systems Lockheed Martin Corporation Vixel Corporation EG&G Incorporated LSI Logic Corporation VME Microsystems International EMC Corporation McData Corporation W J Hughes Research Center Emulex Corporation McDonnell Douglas Corporation Western Digital Corporation
Sales to our two principal customers, Newbridge Networks and EMC Corporation, accounted for 43.9% and 14.6% of our revenues in fiscal 1998, 25.1% and 20.8% in fiscal 1999 and 34.9% and 19.0% in the three months ended July 31, 1999. CUSTOMER CASE STUDIES The following are representative examples of how our customers have used our products: STORAGE ARRAY MANUFACTURER. A manufacturer of storage arrays required a Fibre Channel optical subsystem for a new, high-performance storage array. The manufacturer specified high reliability and the ability to tolerate relatively large variances in system temperature and voltage. We supplied a unique Fibre Channel transceiver that operates over ranges of -10 DEG.C to +85 DEG.C and 5Vplus or minus10%, compared to industry standard ranges of 0 DEG.C to 50 DEG.C and 5Vplus or minus5%. In addition, the diagnostic and communications microprocessor incorporated into our transceiver allows the manufacturer's storage arrays to automatically monitor their optical network connections and set alarms when abnormal conditions are detected. We currently are the sole source supplier of Fibre Channel optical transceivers used in the manufacturer's storage arrays. The same manufacturer was faced with the challenge of demonstrating to its customers that its storage systems could reliably recover from error conditions and move data over a Fibre Channel link between the customer's storage array and computer systems. Errors in computer storage networks are typically random and difficult to reproduce and track to their source. Because of the relationship we had built supplying transceivers, the manufacturer contacted us about its problem. We supplied our GT-J Error Injector Module, which the manufacturer used to inject errors into its network systems in a controlled and repeatable manner. This test system also allowed the manufacturer to capture detailed information about each injected error and the behavior of the storage system as it attempted to detect the error and correct the problem. With this information, the manufacturer was able to modify its storage system software to ensure that errors were automatically recognized and corrected, increasing the reliability of its storage systems and satisfying its customers. Because of the successful application of this test system, the manufacturer subsequently began using other Finisar test systems in multiple levels of its product verification, from low-level software and hardware testing to systems integration. 40 TELECOMMUNICATIONS SWITCH MANUFACTURER. A telecommunications switch manufacturer required high-speed links to connect clusters of switches within its customers' central offices. The customer desired the high level of reliability of a core telecommunications system, delivered over mulitmode optical fiber. We developed unique transmitter and receiver subsystems incorporating a long-wavelength, telecommunications-grade laser to accommodate the customer's specification. These subsystems have operated reliably for an aggregate of more than a billion operating hours over a two and one-half year period. Recently, the customer also began using our singlemode optical subsystems to connect switch frames over longer distances between multiple offices. The customer ships its switches throughout the world, and we are currently the single source supplier of optical subsystems for these inter-switch links. GIGABIT ETHERNET SWITCH MANUFACTURER. A Gigabit Ethernet switch manufacturer required optical transceivers that could operate at a wider temperature range (-10 DEG.C to +85 DEG.C) with lower electromagnetic interference emissions than other available products. After six months of testing, the customer qualified our GBIC optical transceivers, initially for use in its newest switch product and, more recently in all its switch platforms which support the GBIC form factor. The customer has designated Finisar as its single source supplier for GBIC optical transceivers. As a result of the performance of our GBIC transceivers, the customer has qualified other Finisar optical subsystems for use in some of its other high-speed switches. MERCHANT BANK. A merchant bank required long distance storage backup for trading floor applications on servers at two sites located in the same city but beyond the standard distance supported by the Fibre Channel protocol. These applications contain critical data on equity trades and currency conversion rates that require real-time backup. The customer selected our Fibre Channel link extenders to allow the two sites to be connected over two different routes of leased single-mode fiber cable. One route is 14 kilometers in length, and the other is 37 kilometers. The two routes use different ducts installed in different parts of the city. Each server has access to local and remote data storage systems. The network is configured so that all points in the network are linked to all other points, allowing all disks to be mirrored in real-time and for a data path in operation to remain operational in the event of a major outage. This configuration provides disaster protection in case either fiber cable is damaged. TECHNOLOGY The development of high quality fiber optic subsystems and test systems for high-speed data communications requires multidisciplinary expertise in the following six technology areas: HIGH FREQUENCY SEMICONDUCTOR DESIGN. Our fiber optic subsystems development efforts are supported by an engineering team that specializes in analog/digital integrated circuit design. This group works in both silicon and gallium arsenide, or GaAs, semiconductor technologies where circuit element frequencies are very fast and can be as high as 60 GHz. We have designed proprietary circuits including laser drivers and receiver pre- and post-amplifiers. Our designs allowed us to be early entrants in the 1.0 Gbps data communications market and more recently in the 2.5 Gbps data communications market. These advanced semiconductor devices provide significant cost advantages and will be critical in the development of future products capable of even faster data rates. OPTICAL SUBSYSTEM DESIGN. Finisar has established itself as a low-cost design leader beginning with its initial Gbps optical subsystems in 1992. From that base we have developed new singlemode laser alignment approaches and low-cost, all-metal packaging techniques for improved EMI performance and environmental tolerance. We develop our own component and packaging and designs and integrate these designs with proprietary manufacturing processes that allow our products to be manufactured in high volume. 41 COMPLEX LOGIC DESIGN. Our test equipment designs are based on field programmable gate arrays, or FPGAs. In recent customer trials, our newest products are being used to operate with clock frequencies of up to 125 MHz and logic densities up to 1 million gates per chip. Our test systems use FPGAs that are programmed by the host PC and therefore can be configured differently for different tests. All of our logic design is done in the VHDL hardware description language which will enable migration to ASICs as volumes warrant. We develop VHDL code in a modular fashion for reuse in logic design which comprises a critical portion of our intellectual property. This re-usable technology base of logic design is available for use in both our test system and optical subsystem product lines and allows us to reduce the time to market for our new and enhanced products. SOFTWARE TECHNOLOGY. We devote substantial engineering resources to the development of software technology for use in all of our product lines. We have developed software to control our test systems, analyze data collected by our test systems, and monitor, maintain, test and calibrate our optical subsystems. A majority of our software technology and expertise is focused on the use of object-oriented development techniques to develop software subsystems that can be reused across multiple product lines. We have created substantial intellectual property in the area of data analysis software for our Fibre Channel test equipment. This technology allows us to rapidly sort, filter and analyze large amounts of data using a proprietary database format. This database format is both hardware platform-independent and protocol-independent. This independence allows all of the software tools developed for our existing test products to be utilized in all of our new test products that collect data traces. Because the database format is also protocol-independent, new protocols can be added quickly and easily. Another important component of our intellectual property is our graphical user interface, or GUI, design. Many years of customer experience with our test products have enabled us to define a simple yet effective method to display complex protocols in clear and concise GUIs for intuitive use by engineers. SYSTEM DESIGN. The design of all of our products requires a combination of sophisticated technical competencies--optical engineering, high-speed digital and analog design, ASIC design and software engineering. We have built an organization of people with skills in all of these areas. It is the integration of these technical competencies that enables us to produce products that meet the needs of our customers. Our combination of these technical competencies has enabled us to design and manufacturer optical subsystems with built-in optical test multiplexing, and network monitoring, as well as test systems that integrate optical and protocol testing with user interface software. MANUFACTURING SYSTEM DESIGN. The design skills gained in our test systems group are also used in the manufacturing of our optical subsystems. We utilize our high-speed FPGA design blocks and concepts and GUI software elements to provide specialized manufacturing test systems for our internal use. These test systems are optimized for test capacity and broad test coverage. We use automated, software-controlled testing to enhance the field reliability of all Finisar products. All of our products are subjected to temperature testing of powered systems as well as full functional tests. COMPETITION The market for optical subsystems and network performance test systems for use in LANs, SANs and extended networks are highly competitive. We believe the principal competitive factors in the optical subsystem and test system markets are: - product performance, features, functionality and reliability; - price/performance characteristics; - timeliness of new product introductions; - adoption of emerging industry standards; 42 - service and support; - size and scope of distribution network; - brand name; - access to customers; and - size of installed customer base. We believe we compete favorably with our competitors with respect to most of the foregoing factors. However, we cannot assure you that we will be able to compete successfully against either current or future competitors. SALES, MARKETING AND TECHNICAL SUPPORT We sell our products in North America through our direct sales force and a network of independent manufacturers' representatives. Our direct sales force maintains close contact with our customers and provides technical support to our manufacturers' representatives. In our international markets, our direct sales force works with local resellers who assist us in providing support and maintenance to the territories they cover. We have recently established relationships with distributors in Japan, the United Kingdom and Israel. Both our optical subsystems and our network performance test systems are often sold to the same customer. We are increasingly able to capitalize on our customers' satisfaction with one of our product lines and our service-oriented approach to gain valuable introductions that can lead to sales of our other product line. We anticipate that we will continue to benefit from these trends in the future. Our marketing efforts are focused on increasing awareness of our optical subsystems and test systems product lines and our brand name. Key components of our marketing efforts include: - continuing our active participation in industry associations and standards committees to promote and further enhance Gigabit Ethernet and Fibre Channel technologies, promote standardization in the LAN and SAN markets, and increase our visibility as industry experts; and - leveraging major trade show events and LAN and SAN conferences to promote our broad product lines. In addition, our marketing group provides marketing support services for our executive staff, our direct sales force and our manufacturers' representatives and resellers. Through our marketing activities, we provide technical and strategic sales support to our direct sales personnel and resellers including in-depth product presentations, technical manuals, sales tools, pricing, marketing communications, marketing research, trademark administration and other support functions. A high level of continuing service and support is critical to our objective of developing long-term customer relationships. We emphasize customer service and technical support in order to provide our customers and their end users with the knowledge and resources necessary to successfully utilize our product line. Our customer service utilizes a technical team of field and factory applications engineers, technical marketing personnel and, when required, product design engineers. We provide extensive customer support throughout the qualification and sale process. In addition, we also provide many resources through our World Wide Web site, including product documentation and technical information. We intend to continue to provide our customers with comprehensive product support and believe it is critical to remaining competitive. 43 MANUFACTURING We outsource the majority of our assembly operations, and we conduct manufacturing engineering, supply chain management, quality assurance and documentation control operations at our facility in Sunnyvale, California. This approach enables us to focus on our design strengths, reduce fixed costs and capital expenditures and provide flexibility in meeting market demand. We currently rely on three U.S.-based contract manufacturers for substantially all of our assembly operations. We do not have long-term contracts with any of our contract manufacturers, and none of them are obligated to perform assembly services for us for any specific period or at any specified price, except as may be provided in a particular purchase order. We are currently considering the use of contract manufacturers in Asia for a portion of our assembly requirements. We design and develop a number of the key components of our products, including ASICs, printed circuit boards and software. In addition, our manufacturing team works closely with our engineers to manage the supply chain. Product testing and burn-in are performed at our facility. We also use inspection, testing and statistical process controls to assure the quality and reliability of our products. In addition, most of our optical subsystems have an intelligent interface that allows us to monitor product quality during the manufacturing process. Although we use standard parts and components for our products where possible, we currently purchase a few key components used in the manufacture of our products from single or limited sources. Our principal single source components include ASICs and lasers. Generally, purchase commitments with our single or limited source suppliers are on a purchase order basis. Any interruption or delay in the supply of any of these components, or the inability to procure these components from alternate sources at acceptable prices and within a reasonable time, would substantially harm our business. In addition, qualifying additional suppliers can be time-consuming and expensive and may increase the likelihood of errors. We use a rolling twelve-month forecast based on anticipated product orders to determine our material requirements. Lead times for materials and components we order vary significantly, and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. It is our practice to maintain a 12-month inventory of sole source components to decrease the risk of a component shortage. RESEARCH AND DEVELOPMENT In fiscal 1998 and fiscal 1999, our research and development expenses were $3.8 million and $7.9 million, respectively. We believe that our future success depends on our ability to continue to enhance our existing products and to develop new products that maintain technological competitiveness. We focus our product development activities on addressing the evolving needs of our customers within the LAN, SAN and extended network markets. We work closely with our original equipment manufacturers and system integrators to monitor changes in the marketplace. We design our products around current industry standards and will continue to support emerging standards that are consistent with our product strategy. Our research and development groups are aligned with our different product lines and we have specific groups devoted to ASIC design and test, gigabit per second subsystem design, test equipment hardware and software design. In addition, our research and development also includes manufacturing engineer efforts whereby we examine each product for its manufacturability, predicted reliability, expected lifetime and manufacturing costs. We are currently undertaking development efforts for our product lines with emphasis on increasing reliability, integrity and performance, as well as value-added functions. Some examples of products that we are working on are 10 Gbps Ethernet and 2.125 Gbps Fibre Channel optical subsystems. We also intend to focus on increased product integration to enhance the price/performance capabilities of our products. We believe that our research and development efforts are key to our 44 ability to maintain technical competitiveness and to deliver innovative products that address the needs of the market. However, there can be no assurance that our product development efforts will result in commercially successful products, or that our products will not be rendered obsolete by changing technology or new product announcements by other companies. INTELLECTUAL PROPERTY Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. To date, we have relied primarily on proprietary processes and know-how to protect our intellectual property. Although we have filed for several patents, some of which have issued, we cannot assure you that any patents will issue as a result of pending patent applications or that our issued patents will be upheld. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of resources and could significantly harm our business. The networking industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies and in various jurisdictions that are important to our business. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could significantly harm our business. Any claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could significantly harm our business. Royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. In addition, our agreements with our customers typically require us to indemnify our customers from any expense or liability resulting from claimed infringement of third party intellectual property rights. In the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed. PENDING LITIGATION In April 1999, Methode Electronics, a manufacturer of electronic component devices, filed a lawsuit against us and another manufacturer, Hewlett-Packard Co., in the United States District Court for the Northern District of Illinois alleging that our optoelectronic products infringe four patents held by Methode. The lawsuit seeks monetary damages and injunctive relief. In August 1999, the Court granted a motion to transfer the case to the United States District Court for the Northern District of California. It is our position that the Methode patents are invalid, unenforceable and/or not infringed by our products. We believe that we have strong defenses against Methode's lawsuit, and we intend to defend the suit vigorously. However, the litigation is in the preliminary stage, and we cannot predict its outcome. The litigation process is inherently uncertain. Patent litigation is particularly complex and can extend for a protracted time, which can substantially increase the cost of such litigation. In connection 45 with the Methode litigation, we have incurred, and expect to continue to incur, substantial legal fees and expenses. The Methode litigation has also diverted, and is expected to continue to divert, the efforts and attention of some of our key management and technical personnel. As a result, our defense of this litigation, regardless of its eventual outcome, has been, and will likely continue to be, costly and time consuming. Should the outcome of the litigation be adverse to us, we could be required to pay significant monetary damages to Methode and could be enjoined from selling those of our products found to infringe Methode's patents unless and until we are able to negotiate a license from Methode. In the event we obtain a license from Methode, we would likely be required to make royalty payments with respect to sales of our products covered by the license. Any such payments would increase our cost of revenues and reduce our gross profit. If we are required to pay significant monetary damages, are enjoined from selling any of our products or are required to make royalty payments pursuant to any such license agreement, our business would be significantly harmed. FACILITIES Our facility is located in Sunnyvale, California. We lease approximately 50,000 square feet for our corporate headquarters which includes research and development, sales and marketing, general and administrative and manufacturing operations. This lease expires in July 2006. We believe our current facilities will be adequate to meet our needs for the foreseeable future. In addition, we have an option to lease approximately 25,000 additional square feet at the same location to accommodate our future space requirements. We may exercise this option upon the expiration of a third-party lease with a maximum term of three years. In addition, we continue to lease our prior facility in Mountain View, California under a lease expiring in May 2002. We intend to continue subleasing this 20,000 square foot facility through the expiration of the lease term. EMPLOYEES As of September 30, 1999, we employed a total of 186 full-time employees. We also from time to time employ part-time employees and hire contractors. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our employee relations are good. 46 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors, and their ages as of September 30, 1999, are as follows:
NAME AGE POSITION(S) - --------------------------------------------- --- ------------------------------------------------------------ Jerry S. Rawls............................... 55 President, Chief Executive Officer and Director Frank H. Levinson............................ 46 Chairman of the Board and Chief Technical Officer Mark J. Farley............................... 37 Vice President, Digital Systems Engineering Jan Lipson................................... 48 Vice President, Optical Engineering Stephen K. Workman........................... 48 Vice President, Finance, Chief Financial Officer and Secretary Michael C. Child............................. 44 Director Roger C. Ferguson............................ 56 Director
JERRY S. RAWLS has served as a member of our Board of Directors since March 1989, as our President since April 1989 and as our Chief Executive Officer since August 1999. From September 1968 to February 1989, Mr. Rawls was employed by Raychem Corporation, a materials science and engineering company, where he held various management positions including Division General Manager of the Aerospace Products Division and Interconnection Systems Division. Mr. Rawls holds a B.S. in Mechanical Engineering from Texas Tech University and an M.S. in Industrial Administration from Purdue University. FRANK H. LEVINSON founded Finisar in April 1987 and has served as a member of our Board of Directors since February 1988 and as our Chairman of the Board and Chief Technical Officer since August 1999. Mr. Levinson also served as our Chief Executive Officer from February 1988 to August 1999. From September 1980 to December 1983, Mr. Levinson was a Member of Technical Staff at AT&T Bell Laboratories. From January 1984 to July 1984, he was a Member of Technical Staff at Bellcore, a provider of services and products to the communications industry. From April 1985 to December 1985, Mr. Levinson was the principal optical scientist at Raychem Corporation, and from January 1986 to February 1988, he was Optical Department Manager at Raynet, Inc., a fiber optic systems company. Mr. Levinson holds a B.S. in Mathematics/Physics from Butler University and an M.S. and Ph.D. in Astronomy from the University of Virginia. MARK J. FARLEY has served as our Vice President, Digital Systems Engineering since April 1996. From August 1991 to April 1996, Mr. Farley was a consulting design engineer. During that time, Mr. Farley was heavily involved in the design of Finisar's early products. From September 1986 to August 1991, Mr. Farley was a hardware design manager with Raynet, Inc. From September 1984 to September 1986, he was a hardware design manager at Tandem Computers. Mr. Farley holds a B.S. in Electrical Engineering from the Massachusetts Institute of Technology. JAN LIPSON has served as our Vice President, Optical Engineering since April 1998. From June 1995 to April 1998, Mr. Lipson was Vice-President, Advanced Technology for Ortel Corporation, a fiber optic components supplier to the cable television industry. From March 1982 to June 1995, Mr. Lipson was employed by AT&T Bell Laboratories, and most recently held the position of Department Head and Development Manager for the Subsystems Development Group in the Lightwave Communications Area. From October 1978 to March 1982, Mr. Lipson was a member of the technical staff at Los Alamos National Labs. Mr. Lipson holds a B.S. in Physics from the California Institute of Technology, a Ph.D. in Physics from the University of California at San Diego and an M.B.A. from the University of Pittsburgh. STEPHEN K. WORKMAN has served as our Vice President, Finance and Chief Financial Officer since March 1999 and as our Secretary since August 1999. From November 1989 to March 1999, Mr. Workman served as Chief Financial Officer at Ortel Corporation. Mr. Workman holds a B.S. in Engineering Science and an M.S. in Industrial Administration from Purdue University. 47 MICHAEL C. CHILD has been a member of our Board of Directors since November 1998. Mr. Child has been employed by TA Associates, Inc., a venture capital investment firm, since July 1982 where he currently serves as a Managing Director. Mr. Child holds a B.S. in Electrical Engineering from the University of California at Davis and an M.B.A. from the Stanford Graduate School of Business. ROGER J. FERGUSON has been a member of our Board of Directors since August 1999. Mr. Ferguson has served as Chief Executive Officer of Semio Inc., an early stage software company, since July 1999 and as a principal in VenCraft, LLC, a venture capital partnership, since July 1997. From 1993 to 1997, Mr. Ferguson was Chief Executive Officer of DataTools, Inc., a database software company. From 1987 to 1993, Mr. Ferguson served as Chief Operating Officer for Network General Inc., a network analysis company. Mr. Ferguson also serves on the Boards of Directors of Microtest, Inc. and several other private companies. Mr. Ferguson holds a B.A. in Psychology from Dartmouth College and an M.B.A. from the Amos Tuck School at Dartmouth. Our President, Secretary and Chief Financial Officer are elected by the Board of Directors, all other executive officers are elected by the Board of Directors or appointed by the President, and all officers serve at the discretion of the Board of Directors. Each of our officers and directors, other than nonemployee directors, devotes his full time to the affairs of Finisar. COMPOSITION OF THE BOARD OF DIRECTORS Our Board of Directors is currently fixed at four directors. Mr. Child was elected to serve on our Board of Directors pursuant to a voting agreement entered into in November 1998 in connection with the sale of our convertible redeemable preferred stock. This agreement will terminate upon the closing of this offering. Upon the closing of this offering, our certificate of incorporation will provide that the terms of office of the members of the Board of Directors will be divided into three classes: Class I, whose term will expire at the annual meeting of stockholders to be held in 2000, Class II, whose term will expire at the annual meeting of stockholders to be held in 2001 and Class III, whose term will expire at the annual meeting of stockholders to be held in 2002. The Class I director will be Mr. Ferguson, the Class II director will be Mr. Levinson and the Class III directors will be Messrs. Child and Rawls. At each annual meeting of stockholders after the initial classification, the successors to directors whose term will then expire will be elected to serve from the time of election and qualification until the third annual meeting following their election. Our nonemployee directors devote such time to our affairs as is necessary to discharge their duties. There are no family relationships among any of our directors, officers or key employees. BOARD COMMITTEES The audit committee of our Board of Directors recommends the appointment of our independent auditors, reviews our internal accounting procedures and financial statements and consults with and reviews the services provided by our independent auditors, including the results and scope of their audit. The audit committee currently consists of Messrs. Child and Ferguson. The compensation committee of our Board of Directors reviews and recommends to the Board of Directors the compensation and benefits of all executive officers of Finisar and establishes and reviews general policies relating to compensation and benefits of Finisar employees. The compensation committee currently consists of Messrs. Child and Ferguson. COMPENSATION OF DIRECTORS Directors of Finisar do not receive cash compensation for their services as directors or members of committees of the Board of Directors. However, non-employee directors are eligible to receive stock options. We do reimburse directors for their reasonable expenses incurred in attending meetings of the Board of Directors. 48 EXECUTIVE COMPENSATION SUMMARY COMPENSATION INFORMATION The following table sets forth information regarding compensation received during the fiscal year ended April 30, 1999 by our Chief Executive Officer and each of our other executive officers whose total salary and bonus earned during the fiscal year ended April 30, 1999 exceeded $100,000: SUMMARY COMPENSATION TABLE
LONG-TERM AND OTHER COMPENSATION ------------------------- ANNUAL COMPENSATION NUMBER OF --------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION - ----------------------------------------------- --------- --------- ----------------- ---------- ------------- Jerry S. Rawls (2) ............................ $ 190,000 $ 106,192 $ 4,677 -- $ -- President Frank H. Levinson (2) ......................... 190,000 106,192 3,581 -- -- Chief Executive Officer Mark J. Farley ................................ 160,000 64,731 2,857 -- -- Vice President, Digital Systems Engineering Jan Lipson .................................... 140,000 44,077 162 300,000 (3) -- Vice President, Optical Engineering
- ------------------------------ (1) Represents contributions to each executive officer's 401(k) plan account. (2) In August 1999, Mr. Rawls was elected to the additional office of Chief Executive Officer, and Mr. Levinson became Chairman of the Board and Chief Technical Officer. (3) This option is immediately exercisable, subject to a right of repurchase in favor of Finisar which lapses at the rate of 20% per year over a period of five years. OPTION GRANTS The following table sets forth information regarding grants of stock options to each of the executive officers named in the Summary Compensation Table above during the fiscal year ended April 30, 1999. All of these options were granted under our 1989 stock option plan. The percentage of total options set forth below is based on an aggregate of 2,900,000 options granted during the fiscal year. All options were granted at the fair market value of our common stock, as determined by the Board of Directors on the date of grant. Potential realizable values are net of exercise price, but before taxes associated with exercise. Amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with rules of the SEC and do not represent Finisar's estimate or projection of the future common stock price. 49 OPTIONS GRANTED IN FISCAL YEAR ENDED APRIL 30, 1999
POTENTIAL REALIZABLE VALUE INDIVIDUAL GRANTS AT ASSUMED ANNUAL --------------------------------------------- DEEMED RATES OF NUMBER OF % OF TOTAL VALUE PER STOCK PRICE SECURITIES OPTIONS SHARE AT APPRECIATION UNDERLYING GRANTED TO EXERCISE DATE OF FOR OPTION TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION GRANT -------------------- NAME GRANTED FISCAL YEAR ($/SHARE) DATE ($/SHARE) 5% 10% - ------------------------- ----------- ----------------- ------------- ------------- ------------- --------- --------- Jerry S. Rawls........... -- -- -- -- -- -- -- Frank H. Levinson........ -- -- -- -- -- -- -- Mark J. Farley........... -- -- -- -- -- -- -- Jan Lipson............... 300,000(1) 10.3 0.15 8/6/08 0.15 $ 28,300 $ 71,718
- ------------------------------ (1) This option is immediately exercisable, subject to a right of repurchase in favor of Finisar which lapses at the rate of 20% per year over a period of five years. OPTION EXERCISES AND FISCAL YEAR-END HOLDINGS The following table sets forth the number of shares of common stock acquired and the value realized upon exercise of stock options during the fiscal year ended April 30, 1999 and the number of shares of common stock subject to exercisable and unexercisable options held as of April 30, 1999 by each of the executive officers named in the Summary Compensation Table above. AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND VALUES AT APRIL 30, 1999
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY NUMBER OF OPTIONS AT 4/30/99 OPTIONS AT 4/30/99 (2) SHARES ACQUIRED ON VALUE ------------------------ ------------------------ NAME EXERCISE REALIZED (1) VESTED UNVESTED VESTED UNVESTED - ------------------------- ----------- ------------- ----------- ----------- ----------- ----------- Jerry S. Rawls........... -- -- -- -- -- -- Frank H. Levinson........ -- -- -- -- -- -- Mark J. Farley........... 1,538,460 $ 30,769 -- 661,540 -- $ 780,617 Jan Lipson............... 300,000 33,000 -- -- -- --
- ------------------------------ (1) The value realized upon exercise is based on the deemed fair value of the underlying securities on the date of exercise, minus the per share exercise price, multiplied by the number of shares acquired upon exercise. (2) The value of unexercised options set forth above is calculated based on the deemed fair value of the underlying securities on April 30, 1999 of $1.31 per share, minus the exercise price. STOCK PLANS 1999 STOCK OPTION PLAN Finisar's 1999 stock option plan was adopted by the Board of Directors and approved by the stockholders in April 1999. Finisar is authorized to issue up to 7,000,000 shares of common stock under this plan. This number of shares will be increased on May 1, 2001 and each subsequent May 1 during the term of the plan by 5% of the number of shares of common stock issued and outstanding on the immediately preceding April 30. The 1999 stock option plan is currently being administered by the Board of Directors. The plan allows grants of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to employees, including officers and employee directors. In addition, it allows grants of nonstatutory options to employees, non-employee directors and consultants. The plan expires in April 2009, but may be terminated sooner by the Board of Directors. The exercise price of incentive stock options granted under the 1999 stock option plan must not be less than the fair market value of a share of the common stock on the date of grant. In the case of 50 nonstatutory stock options, the exercise price must not be less than 85% of the fair market value of a share of the common stock on the date of grant. With respect to an incentive stock option granted to any optionee who owns stock representing more than 10% of the voting power of all classes of Finisar's outstanding capital stock, the exercise price of the option must be equal to at least 110% of the fair market value of a share of the common stock on the date of grant, and the term of the option may not exceed five years. The terms of all other options may not exceed ten years. The aggregate fair market value (determined as of the date of option grant) of the common stock for which incentive stock options may become exercisable for the first time by any optionee may not exceed $100,000 in any calendar year. The Board of Directors has the discretion to determine vesting schedules and exercise requirements, if any, of all options granted under the plan. However, the plan provides that in connection with a change in control, if the acquiring corporation fails to assume the plan's outstanding options or replace them with substantially equivalent new options, all options will become immediately exercisable in full. In addition, the plan allows the Board of Directors to provide in any option agreement full acceleration of the exercisability of these options if, within 12 months following a change in control, the optionee is terminated without cause or resigns for "good reason," which includes: - the assignment of any duties, or limitation of responsibilities, that are substantially inconsistent with the optionee's status prior to the change of control, - the relocation of an optionee's principal work place more than fifty miles from his work place prior to the change of control or the imposition of substantially more demanding travel requirements, or - any material reduction in base compensation, bonus or benefits. As of September 30, 1999, under the 1999 stock option plan 672,800 shares of common stock had been issued upon exercise of options outstanding, options to purchase 994,200 shares of common stock, with a weighted average exercise price of $2.1659, were outstanding, and 5,333,000 shares of common stock remained available for future grants. 1989 STOCK OPTION PLAN Finisar's 1989 stock option plan was adopted by the Board of Directors and approved by the stockholders in April 1989. Prior to the expiration of its ten-year term in April 1999, a total of 7,675,611 shares of common stock were reserved for issuance under the 1989 stock option plan. Although no additional options will be granted under this plan, the options for 1,042,540 shares of common stock outstanding as of September 30, 1999 will remain subject to its provisions and the plan will continue to be administered by the Board of Directors. The 1989 stock option plan allowed the grant of incentive stock options and nonstatutory stock options. The exercise price of incentive stock options granted under the plan was required to be not less than the fair market value of a share of the common stock on the date of grant. The exercise price of nonstatutory stock options granted under the plan was required to be not less than 85% of the fair market value of a share of common stock on the date of grant. With respect to any optionee who owned stock representing more than 10% of the voting power of all classes of Finisar's outstanding capital stock, the exercise price of any option was required to be equal to at least 110% of the fair market value of a share of the common stock on the date of grant, the term of any incentive stock option could not exceed five years and the term of any nonstatutory stock option could not exceed five years and one day. The terms of all other options could not exceed ten years. The aggregate fair market value (determined as of the date of option grant) of the common stock for which incentive stock options could become exercisable for the first time by any optionee could not exceed $100,000 in any calendar year. The Board of Directors had the discretion to determine vesting schedules and exercise requirements, if any, of all option grants under this plan. However, the plan provided that in connection with a sale of all or substantially all of the assets of Finisar, or a merger of Finisar with or into another corporation, if the acquiring corporation fails to assume the plan's outstanding options or 51 replace them with equivalent new options, all options will become immediately vested and exercisable in full. As of September 30, 1999, under the 1989 stock option plan 6,618,660 shares of common stock had been issued upon exercise of options outstanding and options to purchase 1,042,540 shares of common stock, at a weighted average exercise price of $0.285, were outstanding. 1999 EMPLOYEE STOCK PURCHASE PLAN Finisar's 1999 employee stock purchase plan was adopted by the Board of Directors and approved by the stockholders in September 1999. A total of 250,000 shares of common stock are reserved for issuance under the plan, cumulatively increased by 250,000 shares on May 1, 2001 and each May 1 thereafter through May 1, 2010. This plan, which is intended to qualify under Section 423 of the Internal Revenue Code, will be administered by the Board of Directors. Employees, including officers and employee directors, are eligible to participate in the plan if they are employed by Finisar for more than 20 hours per week and more than five months in any calendar year. The plan will be implemented during sequential 12-month offering periods, generally commencing on or about December 1 of each year. However, the first such offering period will commence on the effective date of this offering and will terminate on November 30, 2000. In addition, a six-month offering period will generally commence on June 1 of each year. The employee stock purchase plan permits eligible employees to purchase our common stock through payroll deductions, which may not exceed 20% of the employee's total compensation. Stock may be purchased under the plan at a price equal to 85% of the fair market value of our common stock on either the first or the last day of the offering period, whichever is lower. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of a participant's employment with Finisar. Participants may not purchase shares of common stock having a value, measured at the beginning of the offering period, greater than $25,000 in any calendar year or more than a number of shares in any offering period determined by dividing $25,000 (or $12,500 with respect to a six-month offering period) by the fair market value of a share of Finisar common stock determined at the beginning of the offering period. 401(k) PLAN Our 401(k) retirement and deferred savings plan covers all eligible employees and is intended to qualify as a tax-qualified plan under the Internal Revenue Code. Employees are eligible to participate in the plan on the first day of the month immediately following twelve months of service with Finisar. The plan provides that each participant may contribute up to 12% of his or her pre-tax gross compensation up to a statutory limit, which is $10,000 in calendar year 1999. All amounts contributed by participants and earnings on participant contributions are fully vested at all times. Finisar may contribute an amount equal to one-half of the first 5% of each participant's contribution. Finisar's contributions vest one-fifth per year over five years. Finisar's contributions to the plan through July 31, 1999 totaled approximately $113,000. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY As permitted by the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation which provide that our directors shall not be personally liable for monetary damages to Finisar or its stockholders for a breach of fiduciary duty as a director, except liability for: - a breach of the director's duty of loyalty to Finisar or its stockholders; - acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; 52 - an act related to our unlawful stock repurchase or payment of a dividend under Section 174 of the Delaware General Corporation Law; or - transactions from which the director derived an improper personal benefit. These limitations of liability do not apply to liabilities arising under the federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate of incorporation also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law. As permitted by the Delaware General Corporation Law, our bylaws provide that: - we are required to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; - we are required to advance expenses, as incurred, to our directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and - the rights provided in the bylaws are not exclusive. We intend to enter into separate indemnification agreements with each of our directors and officers which may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements may require us, among other things, to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers, other than liabilities arising from willful misconduct. These indemnification agreements also may require us to advance any expenses incurred by the directors or officers as a result of any proceeding against them as to which they could be indemnified and to obtain directors' and officers' insurance if available on reasonable terms. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification by us is sought. In addition, we are not aware of any threatened litigation or proceeding which may result in a claim for indemnification. We intend to maintain directors' and officers' liability insurance. 53 RELATED PARTY TRANSACTIONS FINANCING TRANSACTION In November 1998, we sold and issued an aggregate of 12,039,486 shares of our convertible redeemable preferred stock at a price of $2.1932 per share. TA Associates, Inc., of which Mr. Child is a Managing Director, and its affiliated entities purchased 9,422,305 of such shares for an aggregate purchase price of $20,665,000. Upon the closing of this offering, each share of convertible redeemable preferred stock will be converted into 0.7460371 of a share of common stock and one share of redeemable preferred stock, and all outstanding shares of redeemable preferred stock will be redeemed for $0.2193 per share. LOAN TO OFFICER In August 1998, we loaned $225,000 to Mr. Lipson. This loan was evidenced by a promissory note bearing interest at the rate of 2% per annum and collateralized by a deed of trust owned by Mr. Lipson. Mr. Lipson repaid this loan in full in December 1998. CONTRIBUTIONS TO CAPITAL AND REPURCHASES OF COMMON STOCK In March 1998, Mr. Levinson and his wife contributed 2,200,000 shares of our common stock, having a fair market value of $0.13 per share, to the capital of Finisar. We used a portion of the proceeds of our convertible redeemable preferred stock financing and related bank borrowings in November 1998 to repurchase 7,397,922 shares of our common stock from Mr. Levinson at a per share price of $2.1932 for an aggregate purchase price of $16,225,123, 5,439,373 and 1,400,000 shares of our common stock from Mr. Rawls and a trust for the benefit of members of his family, respectively, at a per share price of $2.1932 for aggregate purchase prices of $11,929,633 and $3,070,480, respectively, and 220,000 shares of our common stock from Mr. Farley at a per share price of $2.1932 for an aggregate purchase price of $482,504. Giving effect to the repurchases of common stock, the net proceeds from our sale of the convertible redeemable preferred stock were $5.6 million. OPTION GRANTS AND EXERCISES In March 1998, we granted Mr. Farley an option to purchase an aggregate of 2,200,000 shares of common stock, with an exercise price of $0.13 per share. Mr. Farley exercised a portion of this option to purchase 1,538,460 shares. The exercise price was paid by Mr. Farley by delivery to us of a promissory note in the principal amount of $200,000, bearing interest at the rate of 6% per annum and collateralized by shares of our common stock owned by Mr. Farley. Mr. Farley repaid this loan in full in January 1999. In March 1999, we granted Mr. Workman an option to purchase an aggregate of 200,000 shares of common stock, with an exercise price of $1.31 per share. Mr. Workman exercised this option in full in April 1999. The exercise price was paid by Mr. Workman by delivery to us of a promissory note in the principal amount of $262,000 bearing interest at the rate of 6% per annum. This promissory note is payable in full by April 2004 and is collateralized by shares of our common stock owned by Mr. Workman. OTHER TRANSACTIONS We intend to enter into indemnification agreements with each of our directors and officers. These indemnification agreements will require Finisar to indemnify such individuals to the fullest extent permitted by Delaware law. 54 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information known to us regarding the beneficial ownership of our common stock as of September 30, 1999, and as adjusted to reflect the sale of the common stock offered hereby, by: - each stockholder who is known by us to beneficially own more than 5% of common stock; - each of our executive officers listed on the Summary Compensation Table under "Management;" - each of our directors; and - all of our executive officers and directors as a group.
PERCENTAGE OF SHARES BENEFICIALLY OWNED (1) NUMBER OF SHARES ---------------------------- BENEFICIALLY OWNED BEFORE AFTER BENEFICIAL OWNER (1)(2) OFFERING OFFERING (2) - --------------------------------------------------------------- ----------------------- ----------- --------------- SIGNIFICANT STOCKHOLDERS: Entities affiliated with TA Associates, Inc. (3)............... 7,029,388 16.7% 14.1% Entities affiliated with Summit Partners (4)................... 1,843,660 4.4 3.7 EXECUTIVE OFFICERS AND DIRECTORS: Jerry S. Rawls................................................. 8,470,627 20.2 17.0 Frank H. Levinson (5).......................................... 15,598,872 37.1 31.4 Mark J. Farley (6)............................................. 1,885,000 4.4 3.7 Jan Lipson (7)................................................. 300,000 * * Michael C. Child (8)........................................... 7,029,388 16.7 14.1 Roger C. Ferguson (9).......................................... 20,000 * * All executive officers and directors as a group (7 persons)(10)................................................. 33,503,887 78.5 66.5
- ------------------------ * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. All shares of common stock subject to options exercisable within 60 days following September 30, 1999 are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the number of shares beneficially owned and the percentage of ownership of that person. They are not, however, deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other person. Accordingly, percent ownership is based on: (i) before the offering, 42,007,462 shares of Common Stock outstanding as of September 30, 1999 plus any shares issuable pursuant to options held by the person or group in question which may be exercised within 60 days of September 30, 1999; and (ii) after the offering, an additional 7,700,000 shares to be issued by the Company in the offering. Except as indicated in the other footnotes to the table and subject to applicable community property laws, based on information provided by the persons named in the table, these persons have sole voting and investment power with respect to all shares of the common stock shown as beneficially owned by them. (2) Assumes no exercise of the underwriters' over-allotment option. If the underwriters exercise their over-allotment option in full, the selling stockholders will sell an aggregate of 1,155,000 shares of Common Stock. In such event, (i) entities affiliated with TA Associates, Inc. will sell between 910,456 and 1,147,751 shares and will beneficially own between 5,881,637 and 6,118,932 shares, or between 11.8% and 12.3% of the outstanding common stock, after completion of this offering, and (ii) other selling shareholders will sell between 7,249 and 244,544 shares. 55 (3) Includes 1,699,095 shares held by Advent Atlantic and Pacific III L.P., 5,097,285 shares held by TA/ Advent VIII, L.P., 102,047 shares held by TA Investors LLC and 130,961 shares held by TA Executives Fund LLC. TA/Advent VIII L.P., Advent Atlantic & Pacific III L.P., TA Executives Fund LLC and TA Investors LLC are part of an affiliated group of investment partnerships. The general partner of TA/Advent VIII L.P. is TA Associates VIII LLC. The general partner of Advent Atlantic and Pacific III L.P. is TA Associates AAP III Partners L.P. TA Associates, Inc. is the general partner of TA Associates AAP III Partner L.P. and is the sole manager of TA Advent VIII LLC, TA Executives Fund LLC and TA Investors LLC. In such capacity, TA Associates, Inc., through an executive committee, exercises sole voting and investment power with respect to all shares held of record by the named investment partnerships; individually, no stockholder, director or officer of TA Associates, Inc., is deemed to have or share such voting or investment power. The address of TA Associates, Inc. is 125 High Street, High Street Tower, Suite 2500, Boston, MA 02110. (4) Includes 1,408,567 shares held by Summit Ventures V, L.P., 250,728 shares held by Summit Ventures V Companion Fund L.P., 95,083 shares held by Summit V Advisors Fund (QP), L.P., 29,057 shares held by Summit V Advisors Fund, L.P. and 60,225 shares held by Summit Investors III, L.P., each of which is an affiliate of Summit Partners, L.P. Summit Partners V, L.P. is the general partner of each of Summit Ventures V, L.P., Summit Ventures V Companion Fund, L.P., Summit Ventures V Advisors Fund (QP), L.P. and Summit V Advisors Fund, L.P. Summit Partners, LLC is the general partner of Summit Partners V, L.P. Summit Partners, LLC, through an investment committee, exercises sole voting and investment power with respect to the shares owned by the Summit Funds; individually no member of Summit Partners LLC is deemed to have or share such voting or investment power. The address of Summit Partners, LLC is c/o Walter Kortschak, 499 Hamilton Avenue, Suite 200, Palo Alto, CA 94301. (5) Includes 14,098,872 shares held by the Frank H. & Wynnette Levinson 1998 Revocable Trust, 500,000 shares held by the Rose Wynnette Levinson 1998 Gift Trust, 500,000 shares held by the Alana Marie Levinson 1998 Gift Trust and 500,000 shares held by the Frank Henry Levinson 1998 Gift Trust. (6) Includes 661,540 shares issuable upon exercise of options exercisable within 60 days following September 30, 1999 and 300,000 shares held by the Julia Christine Farley Irrevocable Trust. (7) Includes 240,000 shares subject to a right of repurchase in favor of Finisar which lapses over time. (8) Mr. Child disclaims beneficial ownership of all shares held by affiliates of TA Associates, Inc. of which Mr. Child is a Managing Director, except to the extent of 14,454 shares of common stock in which he has an ownership interest through TA Investors LLC and 2,551 shares of common stock in which the Child Childrens Trust has an ownership interest through TA Investors LLC. (9) Includes 20,000 shares subject to a right of repurchase in favor of Finisar which lapses over time. (10) Including 7,012,383 shares held by TA Associates, Inc. and its affiliates as to which Mr. Child disclaims beneficial ownership. See Note 3 above. 56 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, our authorized capital stock will consist of 200,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. The following is a summary of the material terms of our common stock and preferred stock. Please see our certificate of incorporation, filed as an exhibit to the registration statement of which this prospectus is a part, for more detailed information. COMMON STOCK As of September 30, 1999, there were 33,025,565 shares of our common stock outstanding held of record by 140 stockholders. The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Upon the closing of this offering, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Subject to preferences applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably any dividends declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of Finisar, holders of common stock are entitled to share ratably in the assets remaining after payment of liabilities and the liquidation preferences of any outstanding preferred stock. Holders of our common stock have no preemptive, conversion or redemption rights. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon the closing of this offering will be, fully paid and non-assessable. PREFERRED STOCK Upon the closing of this offering, all shares of our convertible redeemable preferred stock outstanding will be converted into an aggregate of 8,981,897 shares of common stock and 12,039,486 shares of redeemable preferred stock, and all outstanding shares of redeemable preferred stock will be redeemed. Thereafter, up to 5,000,000 shares of undesignated preferred stock will be authorized for issuance. Our Board of Directors has the authority, without further action by its stockholders, to issue preferred stock in one or more series. In addition, the Board of Directors may fix the rights, preferences and privileges of any preferred stock it determines to issue. Any or all of these rights may be superior to the rights of the common stock. Preferred stock could thus be issued quickly with terms calculated to delay or prevent a change in control of Finisar or to make removal of management more difficult. Additionally, the issuance of preferred stock may decrease the market price of our common stock. At present, we have no plans to issue any shares of preferred stock. REGISTRATION RIGHTS Under the Securities Purchase Agreement dated as of November 6, 1998, the purchasers of our convertible redeemable preferred stock have various registration rights with respect to the 8,981,897 shares of common stock into which their convertible redeemable preferred stock will be converted upon the closing of this offering. Beginning 180 days after the date of this prospectus, these holders have the right to require Finisar, on not more than two occasions, to file a registration statement under the Securities Act to register their shares at our expense. Demand for this registration must be made by holders of at least 20% of the shares that are entitled to this registration. The underwriters of the offering have the right, subject to some limitations, to limit the number of shares included. If we propose to register any of our securities under the Securities Act for our own account or for the account of other security holders, the purchasers of our convertible redeemable preferred stock are entitled to notice of that registration and have the right to include some or all of their shares of common stock in that registration, at our expense, subject to marketing and other limitations. 57 The purchasers of our convertible redeemable preferred stock have the right to require Finisar, no more frequently than twice during any nine month period, to file a registration statement on Form S-3 under the Securities Act to register their shares at Finisar's expense. Demand for this registration must be made by the holders of at least 20% of the shares that are entitled to this registration. The underwriters of this offering have the right, subject to some limitations, to limit the number of shares included. ANTITAKEOVER PROVISIONS DELAWARE LAW Finisar will be subject to Section 203 of the Delaware General Corporation Law regulating corporate takeovers, which prohibits a Delaware corporation from engaging in any business combination with an "interested stockholder," unless: - prior to the date of the transaction, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; - the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers, and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Except as otherwise specified in Section 203, an "interested stockholder" is defined to include (a) any person that is the owner of 15% or more of the outstanding voting securities of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the date of determination and (b) the affiliates and associates of any such person. CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS Provisions of our certificate of incorporation and bylaws, which will become effective upon the closing of this offering, may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of Finisar. These provisions could cause the price of our common stock to decrease. Some of these provisions allow us to issue preferred stock without any vote or further action by the stockholders, eliminate the right of stockholders to act by written consent without a meeting and eliminate cumulative voting in the election of directors. These provisions may make it more difficult for stockholders to take specific corporate actions and could have the effect of delaying or preventing a change in control of Finisar. Our certificate of incorporation provides that, upon the closing of this offering, the Board of Directors will be divided into three classes of directors, with each class serving a staggered three-year term. See "Management--Composition of the Board of Directors." The classification system of electing directors may discourage a third party from making a tender offer or otherwise attempting to obtain control of us and may maintain the incumbency of the Board of Directors, because the classification of the Board of Directors generally increases the difficulty of replacing a majority of the directors. 58 TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is American Stock Transfer and Trust Company. LISTING Finisar has applied to have its common stock approved for listing on the Nasdaq National Market under the trading symbol "FNSR." 59 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has not been a public market for our common stock. Future sales of substantial amounts of our common stock in the public market, or the possibility of these sales, could adversely affect the trading price of the common stock. Upon completion of this offering, we will have outstanding 49,707,462 shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options to purchase common stock after September 30, 1999. Of these shares, the 7,700,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by "affiliates" of Finisar, as defined in Rule 144 under the Securities Act, which would be subject to the limitations and restrictions described below. The remaining 42,007,462 shares of common stock outstanding upon completion of this offering will be "restricted securities" as defined in Rule 144. These securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below. Sales of these restricted securities in the public market, or the availability of these shares for sale, could adversely affect the trading price of our common stock. Holders of approximately 39,807,829 of these restricted securities, including all of our officers and directors and the entities affiliated with them, have entered into lock-up agreements providing that, subject to limited exceptions, they will not sell, directly or indirectly, any common stock without the prior consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated for a period of 180 days from the date of this prospectus. All of these restricted securities will be eligible for sale in the public market, subject in some cases to the volume limitations and other restrictions of Rule 144, beginning 180 days after the date of this prospectus upon expiration of the lock-up agreements described above. Shares issued upon exercise of options granted by us prior to the date of this prospectus will be available for sale in the public market under Rule 701 of the Securities Act. Rule 701 permits resales of these shares in reliance upon Rule 144 but without compliance with various restrictions, including the holding period requirement, imposed under Rule 144. In general, under Rule 144, beginning 90 days after the date of this prospectus, a person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares not to exceed the greater of (1) one percent of the then outstanding shares of common stock or (2) the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner of sale and notice requirements, as well as to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been an affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. We have reserved an aggregate of 34,550,000 shares of common stock for issuance pursuant to our 1989 and 1999 stock option plans and our 1999 employee stock purchase plan. As of September 30, 1999, options to purchase an aggregate of 2,036,740 shares of common stock were outstanding under our stock option plans. We intend to file registration statements on Form S-8 under the Securities Act approximately 90 days after the date of this prospectus to register an aggregate of 7,614,740 shares of common stock issued or reserved for issuance under our stock option plans and employee stock purchase plan. Shares of common stock issued under the foregoing plans, after the filing of related registration statements, will be freely tradable in the public market, subject in the case of the holders to the Rule 144 limitations applicable to Finisar affiliates, lock-up agreements with the underwriters and vesting restrictions imposed by Finisar. 60 UNDERWRITING GENERAL Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, Morgan Keegan & Company, Inc. and SoundView Technology Group, Inc. are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in a purchase agreement, we have agreed to sell to each of the underwriters, and each of the underwriters, severally and not jointly, has agreed to purchase, the number of shares of our common stock set forth opposite its name below.
NUMBER OF UNDERWRITERS SHARES - ------------------------------------------------------------------------------------------- ---------- Merrill Lynch, Pierce, Fenner & Smith Incorporated..................................................................... J.P. Morgan Securities Inc. ............................................................... Dain Rauscher Wessels...................................................................... Morgan Keegan & Company, Inc. ............................................................. SoundView Technology Group, Inc. .......................................................... ---------- Total............................................................................ 7,700,000 ---------- ----------
Subject to the terms and conditions set forth in the purchase agreement, each of the underwriters is committed to purchase all of the shares of our common stock being sold pursuant to the purchase agreement if any shares of our common stock are purchased. Under certain circumstances, under the terms of the purchase agreement, the commitments of the non-defaulting underwriters may be increased or the purchase agreement may be terminated. We and the selling stockholders have agreed to indemnify the underwriters against some liabilities, including some liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities. The shares of common stock are being offered by the several underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the underwriters and certain other conditions. The underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. COMMISSIONS AND DISCOUNTS The representatives have advised us that they propose initially to offer the shares of our common stock to the public at the initial public offering price set forth on the cover page of this prospectus, and to certain dealers at such price less a concession not in excess of $ per share of common stock. The underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of common stock on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The following table shows the per share and total public offering price, the underwriting discount to be paid by us and the selling stockholders to the underwriters and the proceeds before expenses to 61 us and the selling stockholders. This information is presented assuming either no exercise or full exercise by the underwriters of their over-allotment options.
WITHOUT WITH PER SHARE OPTION OPTION ---------- ---------- ---------- Public offering price.............................................. $ $ $ Underwriting discount.............................................. $ $ $ Proceeds, before expenses, to Finisar.............................. $ $ $ Proceeds to the selling stockholders............................... $ $ $
The expenses of the offering, exclusive of the underwriting discount, are estimated at $ and are payable by us. OVER-ALLOTMENT OPTION The selling stockholders have granted to the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of 1,155,000 additional shares of common stock from the selling stockholders at the public offering price less the underwriting discount. The underwriters may exercise this option solely to cover over-allotments, if any, made on the sale of our common stock offered hereby. To the extent that the underwriters exercise this option, each underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares of our common stock proportionate to such underwriter's initial amount reflected in the foregoing table. RESERVED SHARES At our request, the underwriters have reserved approximately shares of our common stock for sale at the public offering price to our directors, consultants and other persons with relationships to Finisar. The number of shares of our common stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of the offering will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. NO SALES OF SIMILAR SECURITIES We, our executive officers and directors, and most of our existing stockholders have agreed, with certain exceptions, not to directly or indirectly: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of our common stock or any securities convertible into or exchangeable or exercisable for our common stock, whether now owned or later acquired by the person executing the agreement or with respect to which the person executing the agreement later acquires the power of disposition, or file any registration statement under the Securities Act relating to any shares of our common stock for a period of 180 days after the date of this prospectus; or - enter into any swap or other agreement that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of our common stock, whether any such swap or transaction is to be settled by delivery of our common stock or other securities, in cash or otherwise, without the prior written consent of Merrill Lynch for a period of 180 days after the date of this prospectus. See "Shares Eligible for Future Sale." 62 NASDAQ NATIONAL MARKET LISTING Before this offering, there has been no public market for our common stock. The public offering price will be determined through negotiations among us and the representatives. In addition to prevailing market conditions the factors to be considered by us and the representatives in determining the public offering price of our common stock are: - the valuation multiples of publicly traded companies that the representatives believe to be comparable to us; - certain aspects of our financial information; - the history of, and the prospects for, our company and the industry in which we compete; - an assessment of our management, our past and present operations, the prospects for, and timing of, our future revenue; - the present state of our development; - the percentage interest of Finisar being sold as compared to the valuation for the entire company; and - the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. There can be no assurance that an active trading market will develop for our common stock or that our common stock will trade in the public market subsequent to the offering at or above the public offering price. We have applied for a listing of our common stock on the Nasdaq National Market under the symbol "FNSR." The underwriters have advised us that they do not expect sales to accounts over which the underwriters exercise discretionary authority to exceed 5% of the total number of shares of our common stock offered by them. PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of our common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and certain selling group members to bid for and purchase our common stock. As an exception to these rules, the representatives are permitted to engage in certain transactions that stabilize the price of our common stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock. If the underwriters create a short position in our common stock in connection with the offering, that is, if they sell more shares of common stock than are set forth on the cover page of this prospectus, the representatives may reduce that short position by purchasing common stock in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The representatives may also impose a penalty bid on certain underwriters and selling group members. This means that, if the representatives purchase shares of our common stock in the open market to reduce the underwriters' short position or to stabilize the price of our common stock, they may reclaim the amount of the selling concession from the underwriters and selling group members that sold those shares as part of the offering. The imposition of a penalty bid might also have an effect on the price of our common stock to the extent that it discourages resales of our common stock. 63 Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain legal matters relating to the offering will be passed upon for the underwriters by Morrison & Foerster LLP, Palo Alto, California. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements and schedule at April 30, 1998 and 1999 and for the fiscal years ended April 30, 1997, 1998 and 1999, as set forth in their report. We have included our financial statements and schedule in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's reports, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the SEC a registration statement on Form S-1, including the exhibits and schedules thereto, under the Securities Act with respect to the shares to be sold in this offering. This prospectus does not contain all the information set forth in the registration statement. For further information about us and the shares to be sold in this offering, please refer to the registration statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to, are not necessarily complete, and in each instance please refer to the copy of the contract, agreement or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by this reference. You may read and copy all or any portion of the registration statement or any reports, statements or other information we file with the SEC at the SEC's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.C., Washington, D.C. 20549 and at the regional offices of the SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048 and the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings, including the registration statement will also be available to you on the SEC's Web site. The address of this site is http://www.sec.gov. 64 FINISAR CORPORATION FINANCIAL STATEMENTS INDEX Report of Ernst & Young LLP, Independent Auditors..................................... F-2 Audited Financial Statements Balance Sheets........................................................................ F-3 Statements of Operations.............................................................. F-4 Statement of Convertible Redeemable Preferred Stock and Changes in Stockholders' Equity (Deficit).................................................................... F-5 Statements of Cash Flows.............................................................. F-6 Notes to Financial Statements......................................................... F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Finisar Corporation We have audited the accompanying balance sheets of Finisar Corporation as of April 30, 1998 and 1999, and the related statements of operations, convertible redeemable preferred stock and changes in stockholders' equity (deficit), and cash flows for each of the three years in the period ended April 30, 1999. These financial statements are the responsibility of Finisar Corporation'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 Finisar Corporation at April 30, 1998 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 1999, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Palo Alto, California June 25, 1999 F-2 FINISAR CORPORATION BALANCE SHEETS
PRO FORMA STOCKHOLDERS' EQUITY AT APRIL 30, JULY 31, ---------------------- JULY 31, 1999 (NOTE 1998 1999 1999 1) --------- ----------- ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 721,675 $ 5,043,796 $ 5,403,638 Accounts receivable (net of allowance for doubtful accounts of $16,538, $265,138 and $407,318 at April 30, 1998, 1999 and July 31, 1999)........................... 2,787,515 6,656,148 7,561,823 Inventories............................................... 2,731,323 5,236,328 6,959,246 Deferred income taxes..................................... 387,200 1,047,442 1,047,442 Prepaid expenses.......................................... -- 193,505 164,550 --------- ----------- ----------- Total current assets........................................ 6,627,713 18,177,219 21,136,699 Income taxes receivable..................................... 81,385 -- -- Other assets................................................ -- 295,976 465,692 Property and equipment, net................................. 1,052,241 2,481,735 2,856,145 --------- ----------- ----------- Total assets................................................ $7,761,339 $20,954,930 $24,458,536 --------- ----------- ----------- --------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 265,276 $ 1,394,461 $ 2,514,526 Accrued compensation...................................... 116,108 1,498,811 1,402,862 Other accrued liabilities................................. 372,972 1,476,408 1,949,588 Income tax payable........................................ -- 742,669 1,211,669 Note payable, current portion............................. 100,000 -- -- Capital lease obligations, current portion................ 44,047 53,539 50,952 --------- ----------- ----------- Total current liabilities................................... 898,403 5,165,888 7,129,597 --------- ----------- ----------- Long-term liabilities: Note payable, long-term portion........................... 350,000 11,015,000 11,015,000 Capital lease obligations, long-term portion.............. 66,244 17,462 4,381 --------- ----------- ----------- Total long-term liabilities................................. 416,244 11,032,462 11,019,381 --------- ----------- ----------- Commitments and contingencies Convertible redeemable preferred stock: No par value, 12,100,000 shares authorized: no shares issued and outstanding at April 30, 1998; 12,039,486 shares issued and outstanding at April 30, 1999 and July 31, 1999; no shares issued and outstanding pro forma; liquidation preference $26,405,000 at April 30, 1999 and July 31, 1999........................................... -- 26,259,664 26,259,664 $ -- Redeemable preferred stock: No par value, 12,100,000 shares authorized; no shares issued and outstanding at April 30, 1998, 1999 or July 31, 1999; 12,039,486 shares issued and outstanding pro forma................................................... -- -- -- 2,640,260 Stockholders' equity (deficit): Common stock: No par value, 75,000,000 shares authorized; 41,800,000, 32,382,365, 32,512,365 and 41,494,262 shares issued and outstanding at April 30, 1998 and 1999, July 31, 1999 and pro forma, respectively...................... 95,200 3,908,824 4,072,824 27,692,228 Deferred stock compensation............................... -- (1,612,178) (1,372,986) (1,372,986) Notes receivable from stockholders........................ -- (1,520,788) (1,671,437) (1,671,437) Retained earnings (accumulated deficit)................... 6,351,492 (22,278,942) (20,978,507) (20,978,507) --------- ----------- ----------- ------------ Total stockholders' equity (deficit)........................ 6,446,692 (21,503,084) (19,950,106) $3,669,298 --------- ----------- ----------- ------------ ------------ Total liabilities and stockholders' equity (deficit)........ $7,761,339 $20,954,930 $24,458,536 --------- ----------- ----------- --------- ----------- -----------
SEE ACCOMPANYING NOTES. F-3 FINISAR CORPORATION STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED APRIL 30, THREE MONTHS ENDED JULY 31, ------------------------------------------ --------------------------- 1997 1998 1999 1998 1999 ------------ ------------- ------------- ------------ ------------- (UNAUDITED) Revenues............................... $ 8,457,000 $ 22,066,942 $ 35,471,114 $ 6,793,507 $ 13,879,459 Cost of revenues....................... 3,438,000 8,704,928 15,513,930 2,665,500 6,252,055 ------------ ------------- ------------- ------------ ------------- Gross profit........................... 5,019,000 13,362,014 19,957,184 4,128,007 7,627,404 ------------ ------------- ------------- ------------ ------------- Operating expenses: Research and development............. 2,536,000 3,806,132 7,863,646 1,393,903 2,840,391 Sales and marketing.................. 645,000 1,629,451 4,145,370 833,652 1,542,143 General and administrative........... 463,622 832,548 2,299,346 297,943 758,873 Amortization of deferred stock compensation....................... -- -- 395,202 -- 239,192 ------------ ------------- ------------- ------------ ------------- Total operating expenses............... 3,644,622 6,268,131 14,703,564 2,525,498 5,380,599 ------------ ------------- ------------- ------------ ------------- Income from operations................. 1,374,378 7,093,883 5,253,620 1,602,509 2,246,805 Interest income........................ 15,000 38,141 154,058 -- 98,755 Interest expense....................... (2,000) (33,240) (428,507) (6,607) (188,141) Other income (expense) net............. -- (25,451) (28,173) 25,253 (27,984) ------------ ------------- ------------- ------------ ------------- Income before income taxes............. 1,387,378 7,073,333 4,950,998 1,621,155 2,129,435 Provision for income taxes............. 440,000 2,714,900 1,873,693 568,169 829,000 ------------ ------------- ------------- ------------ ------------- Net income............................. $ 947,378 $ 4,358,433 $ 3,077,305 $ 1,052,986 $ 1,300,435 ------------ ------------- ------------- ------------ ------------- ------------ ------------- ------------- ------------ ------------- Net income per share: Basic................................ $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04 ------------ ------------- ------------- ------------ ------------- ------------ ------------- ------------- ------------ ------------- Diluted.............................. $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03 ------------ ------------- ------------- ------------ ------------- ------------ ------------- ------------- ------------ ------------- Shares used in computing net income per share: Basic................................ 44,000,000 43,752,877 36,860,000 41,800,000 29,463,905 ------------ ------------- ------------- ------------ ------------- ------------ ------------- ------------- ------------ ------------- Diluted.............................. 44,000,000 43,752,877 44,937,917 41,800,000 42,609,931 ------------ ------------- ------------- ------------ ------------- ------------ ------------- ------------- ------------ ------------- Pro forma net income per share: Basic................................ $ 0.07 $ 0.03 ------------- ------------- ------------- ------------- Diluted.............................. $ 0.07 $ 0.03 ------------- ------------- ------------- ------------- Shares used in computing pro forma net income per share: Basic................................ 41,166,389 38,445,802 ------------- ------------- ------------- ------------- Diluted.............................. 44,937,917 42,609,931 ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES. F-4 FINISAR CORPORATION STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
STOCKHOLDERS' EQUITY (DEFICIT) ----------------------------------------- CONVERTIBLE REDEEMABLE PREFERRED STOCK COMMON STOCK ------------------------ ------------------------- DEFERRED STOCK SHARES AMOUNT SHARES AMOUNT COMPENSATION ----------- ----------- ----------- ------------ -------------- Balance at April 30, 1996......................... -- $ -- 44,000,000 $ 95,200 $ -- Net income and comprehensive income............. -- -- -- -- -- ----------- ----------- ----------- ------------ -------------- Balance at April 30, 1997......................... -- -- 44,000,000 95,200 -- Contribution of shares by principal shareholder................................... -- -- (2,200,000) -- -- Net income and comprehensive income............. -- -- -- -- -- ----------- ----------- ----------- ------------ -------------- Balance at April 30, 1998......................... -- -- 41,800,000 95,200 -- Stock options exercised......................... -- -- 5,039,660 1,806,244 -- Issuance of preferred stock at $2.1932 per share, net of issuance costs of $145,334 12,039,486 26,259,664 -- -- -- Repurchase of common stock at $2.1932 per share......................................... -- -- (14,457,295) -- -- Deferred stock compensation..................... -- -- -- 2,007,380 (2,007,380) Amortization of deferred stock compensation..... -- -- -- -- 395,202 Net income and comprehensive income............. -- -- -- -- -- ----------- ----------- ----------- ------------ -------------- Balance at April 30, 1999......................... 12,039,486 26,259,664 32,382,365 3,908,824 (1,612,178) Stock options exercised (unaudited)................................... -- -- 130,000 164,000 -- Amortization of deferred stock compensation (unaudited)................................... -- -- -- -- 239,192 Net income and comprehensive income (unaudited)................................... -- -- -- -- -- ----------- ----------- ----------- ------------ -------------- Balance at July 31, 1999 (unaudited).............. 12,039,486 $26,259,664 32,512,365 $ 4,072,824 $(1,372,986) ----------- ----------- ----------- ------------ -------------- ----------- ----------- ----------- ------------ -------------- STOCKHOLDERS' EQUITY (DEFICIT) ------------------------------------------- NOTES RETAINED TOTAL RECEIVABLE EARNINGS STOCKHOLDERS' FROM (ACCUMULATED EQUITY STOCKHOLDERS DEFICIT) (DEFICIT) ------------ ------------ ------------- Balance at April 30, 1996......................... $ -- $ 1,045,681 $ 1,140,881 Net income and comprehensive income............. -- 947,378 947,378 ------------ ------------ ------------- Balance at April 30, 1997......................... -- 1,993,059 2,088,259 Contribution of shares by principal shareholder................................... -- -- -- Net income and comprehensive income............. -- 4,358,433 4,358,433 ------------ ------------ ------------- Balance at April 30, 1998......................... -- 6,351,492 6,446,692 Stock options exercised......................... (1,520,788) -- 285,456 Issuance of preferred stock at $2.1932 per share, net of issuance costs of $145,334 -- -- -- Repurchase of common stock at $2.1932 per share......................................... -- (31,707,739) (31,707,739) Deferred stock compensation..................... -- -- -- Amortization of deferred stock compensation..... -- -- 395,202 Net income and comprehensive income............. -- 3,077,305 3,077,305 ------------ ------------ ------------- Balance at April 30, 1999......................... (1,520,788) (22,278,942) (21,503,084) Stock options exercised (unaudited)................................... (150,649) -- 13,351 Amortization of deferred stock compensation (unaudited)................................... -- -- 239,192 Net income and comprehensive income (unaudited)................................... -- 1,300,435 1,300,435 ------------ ------------ ------------- Balance at July 31, 1999 (unaudited).............. $(1,671,437) $(20,978,507) $ (19,950,106) ------------ ------------ ------------- ------------ ------------ -------------
SEE ACCOMPANYING NOTES. F-5 FINISAR CORPORATION STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FISCAL YEARS ENDED APRIL 30, JULY 31, ---------------------------------- --------------------- 1997 1998 1999 1998 1999 --------- ---------- ----------- --------- ---------- (UNAUDITED) OPERATING ACTIVITIES Net income......................................... $ 947,378 $4,358,433 $ 3,077,305 $1,052,986 $1,300,435 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization.................... 41,127 161,699 432,628 65,027 176,008 Amortization of deferred stock compensation...... -- -- 395,202 -- 239,192 Loss on fixed assets disposal.................... -- 29,963 237,498 -- -- Changes in operating assets and liabilities: Accounts receivable............................ (764,617) (1,583,937) (3,868,633) (946,732) (905,675) Inventories.................................... (505,663) (1,780,709) (2,505,005) (492,561) (1,722,918) Other assets................................... (720) 7,900 (489,481) (4,903) (140,761) Deferred income taxes.......................... -- (240,622) (660,242) -- -- Accounts payable............................... (53,890) (178,640) 1,129,185 (302,258) 1,120,065 Accrued compensation........................... 20,450 54,758 1,382,703 503,143 (95,949) Income tax payable............................. -- (298,478) 824,054 61,170 469,000 Other accrued liabilities...................... 109,278 211,928 1,103,436 693,954 473,180 --------- ---------- ----------- --------- ---------- Net cash provided by (used in) operating activities....................................... (206,657) 742,295 1,058,650 629,826 912,577 --------- ---------- ----------- --------- ---------- INVESTING ACTIVITIES Purchases of property and equipment................ (143,642) (855,446) (2,099,620) (144,406) (550,418) --------- ---------- ----------- --------- ---------- Net cash used in investing activities.............. (143,642) (855,446) (2,099,620) (144,406) (550,418) --------- ---------- ----------- --------- ---------- FINANCING ACTIVITIES Payments on capital lease obligations.............. -- (37,367) (39,290) -- (15,668) Proceeds from borrowings under bank note........... -- 500,000 11,015,000 -- -- Repayments of borrowings under bank note........... -- (50,000) (450,000) (25,000) -- Proceeds from issuance of common stock............. -- -- 285,456 -- 13,351 Proceeds from issuance of preferred stock.......... -- -- 26,259,664 -- -- Repurchase of common stock......................... -- -- (31,707,739) -- -- --------- ---------- ----------- --------- ---------- Net cash provided by (used in) financing activities....................................... -- 412,633 5,363,091 (25,000) (2,317) --------- ---------- ----------- --------- ---------- Net (decrease) increase in cash and cash equivalents...................................... (350,299) 299,482 4,322,121 460,420 359,842 Cash and cash equivalents at beginning of period... 772,492 422,193 721,675 721,675 5,043,796 --------- ---------- ----------- --------- ---------- Cash and cash equivalents at end of period......... $ 422,193 $ 721,675 $ 5,043,796 $1,182,095 $5,403,638 --------- ---------- ----------- --------- ---------- --------- ---------- ----------- --------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest............................. $ 1,595 $ 32,659 $ 363,650 $ 6,607 $ 188,141 --------- ---------- ----------- --------- ---------- --------- ---------- ----------- --------- ---------- Cash paid for taxes................................ $ 440,000 $3,254,000 $ 1,709,881 $ 50,699 $ 360,000 --------- ---------- ----------- --------- ---------- --------- ---------- ----------- --------- ---------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Acquisition of property and equipment under capital lease obligations................................ $ 15,211 $ 132,447 $ -- $ -- $ -- --------- ---------- ----------- --------- ---------- --------- ---------- ----------- --------- ---------- Issuance of common stock in exchange for notes receivable....................................... $ -- $ -- $ 1,520,788 $ -- $ 150,649 --------- ---------- ----------- --------- ---------- --------- ---------- ----------- --------- ---------- Deferred stock compensation related to options granted.................................. $ -- $ -- $ 2,007,380 $ -- $ -- --------- ---------- ----------- --------- ---------- --------- ---------- ----------- --------- ----------
SEE ACCOMPANYING NOTES. F-6 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Finisar Corporation ("Finisar" or the "Company") was incorporated in the state of California on April 17, 1987. Finisar designs, manufactures, and markets fiber optic subsystems and network performance test systems for high-speed data communications. INTERIM FINANCIAL INFORMATION The interim financial information at July 31, 1999 and for the three months ended July 31, 1998 and 1999 is unaudited but, in the opinion of management, has been prepared on the same basis as the annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) that Finisar considers necessary for a fair presentation of its financial position at such date and its operating results and cash flows for those periods. Results for the interim period are not necessarily indicative of the results to be expected for the entire year, or any future period. FISCAL PERIODS In fiscal 2000, the Company began to maintain its financial records on the basis of a fiscal year ending on April 30, with fiscal quarters ending on the Sunday closest to the end of the period (thirteen week periods). For ease of reference, all references to period end dates have been presented as though the period ended on the last day of the calender month. The first quarter of fiscal 2000 ended on August 1, 1999. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. REVENUE RECOGNITION Revenue is recognized at the time of product shipment, net of allowances for estimated returns. Warranty expenses are also estimated and provided for at the time of shipment. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject Finisar to concentrations of credit risk include cash and cash equivalents and accounts receivable. Finisar places its cash and cash equivalents with high-credit quality financial institutions. At times, such investments may be in excess of FDIC insurance limits. Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. Accounts receivable from two customers represented 32.3% and 33.2% of the total balance at April 30, 1998, 32.2% and 18.2% at April 30, 1999 and 23.5% and 28.5% at July 31, 1999, respectively. Generally, Finisar does not require collateral or other security to support customer receivables. Finisar performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management. Losses to date have been within management's expectations. F-7 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CURRENT VULNERABILITIES DUE TO CERTAIN CONCENTRATIONS Finisar sells products primarily to customers located in North America. During fiscal 1997, 1998, and 1999, revenues from two customers represented 41.4% and 1.2%, and 43.9% and 14.6%, and 25.1% and 20.8% of total revenues, respectively (34.9% and 19.0% in the quarter ended July 31, 1999). RESEARCH AND DEVELOPMENT Research and development expenditures are charged to operations as incurred. CASH AND CASH EQUIVALENTS Finisar's cash equivalents consist of money market funds with qualified financial institutions. Finisar considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, generally five years. STOCK-BASED COMPENSATION Finisar accounts for employee stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). NET INCOME PER SHARE Basic and diluted net income per share are presented in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS 128"), for all periods presented. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98, common shares and convertible preferred shares issued or granted for nominal consideration prior to the anticipated effective date of Finisar's initial public offering (the "Offering," see Note 10) should be included in the calculation of basic and diluted net income per share as if they had been outstanding for all periods presented. To date, Finisar has not had any issuances or grants for nominal consideration. Basic net income per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from options (under the treasury stock method) and convertible redeemable preferred stock (on an if- converted basis) outstanding during the period. Basic and diluted pro forma net income per share have been computed as described above and also give effect to the conversion of all convertible redeemable preferred stock which automatically convert upon the completion of the Company's initial public offering. F-8 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table presents the calculation of basic and diluted and pro forma basic and pro forma diluted net income per share:
THREE MONTHS ENDED JULY FISCAL YEARS ENDED APRIL 30, 31, ---------------------------------------- -------------------------- 1997 1998 1999 1998 1999 ------------ ------------ ------------ ------------ ------------ (UNAUDITED) Numerator: Net income............................. $ 947,378 $ 4,358,433 $ 3,077,305 $ 1,052,986 $ 1,300,435 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Historical: Denominator for basic net income per share: Weighted-average shares outstanding--basic................... 36,860,000 29,463,905 Effect of dilutive securities: Employee stock options................. -- -- 728,448 -- 1,240,289 Stock subject to repurchase............ -- -- 3,043,080 -- 2,923,840 Convertible redeemable preferred stock................................ -- -- 4,306,389 -- 8,981,897 ------------ ------------ ------------ ------------ ------------ Dilutive potential common shares......... -- -- 8,077,917 -- 13,146,026 ------------ ------------ ------------ ------------ ------------ Denominator for diluted net income per share.................................. 44,000,000 43,752,877 44,937,917 41,800,000 42,609,931 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic net income per share............... $ 0.02 $ 0.10 $ 0.08 $ 0.03 $ 0.04 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Diluted net income per share............. $ 0.02 $ 0.10 $ 0.07 $ 0.03 $ 0.03 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Denominator for pro forma basic net income per share: Weighted average shares outstanding--basic................... 36,860,000 29,463,905 Convertible redeemable preferred stock................................ 4,306,389 8,981,897 ------------ ------------ Weighted-average shares outstanding--pro forma basic......... 41,166,389 38,445,802 ------------ ------------ Effect of dilutive securities: Employee stock options................. 728,448 1,240,289 Stock subject to repurchase............ 3,043,080 2,923,840 ------------ ------------ Pro forma dilutive potential common shares................................. 3,771,528 4,164,129 ------------ ------------ Denominator for pro forma diluted net income per share....................... 44,937,917 42,609,931 ------------ ------------ ------------ ------------ Pro forma basic net income per share..... $ 0.07 $ 0.03 ------------ ------------ ------------ ------------ Pro forma diluted net income per share... $ 0.07 $ 0.03 ------------ ------------ ------------ ------------
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY If the Offering is consummated, all of the convertible redeemable preferred stock will be automatically converted into common stock and redeemable preferred stock upon completion of the F-9 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) offering (see Note 10). Unaudited pro forma stockholders' equity at July 31, 1999, as adjusted for the assumed conversion of such shares, is disclosed on the balance sheets. COMPREHENSIVE INCOME Effective May 1, 1998, Finisar adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income". Comprehensive income is equal to net income for all periods presented and has been disclosed in the statement of stockholders' equity. SEGMENT REPORTING Effective May 1, 1998, Finisar adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 superseded SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS 131 did not affect Finisar's results of operations or financial position. EFFECT OF NEW ACCOUNTING STATEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). Finisar is required to adopt SFAS 133 for the year ending April 30, 2002. SFAS 133 establishes methods of accounting for derivative financial instruments and hedging activities. Because Finisar currently holds no derivative financial instruments as defined by SFAS 133 and does not currently engage in hedging activities, adoption of SFAS 133 is not expected to have a material effect on Finisar's financial condition or results of operations. In March 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize certain costs related to internal use software once certain criteria have been met. Finisar is required to implement SOP 98-1 for the year ending April 30, 2000. Adoption of SOP 98-1 is not expected to have a material effect on Finisar's financial condition or results of operations. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the current presentation. F-10 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. INVENTORIES Inventories consist of the following:
APRIL 30, -------------------------- JULY 31, 1998 1999 1999 ------------ ------------ ------------ (UNAUDITED) Raw materials........................................................... $ 1,546,445 $ 2,907,811 $ 3,717,834 Work-in-process......................................................... 988,788 1,763,038 2,856,203 Finished goods.......................................................... 196,090 565,479 385,209 ------------ ------------ ------------ $ 2,731,323 $ 5,236,328 $ 6,959,246 ------------ ------------ ------------ ------------ ------------ ------------
3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
APRIL 30, -------------------------- JULY 31, 1998 1999 1999 ------------ ------------ ------------ (UNAUDITED) Computer equipment...................................................... $ 505,343 $ 839,547 $ 1,011,128 Office equipment, furniture, and fixtures............................... 422,852 445,421 445,421 Research and development equipment...................................... 215,888 1,021,549 1,185,272 Manufacturing equipment................................................. 146,583 773,352 988,466 ------------ ------------ ------------ 1,290,666 3,079,869 3,630,287 Accumulated depreciation and amortization............................... (238,425) (598,134) (774,142) ------------ ------------ ------------ Property and equipment, net............................................. $ 1,052,241 $ 2,481,735 $ 2,856,145 ------------ ------------ ------------ ------------ ------------ ------------
Finisar has financed $132,447 of equipment purchased under capital lease arrangements as of April 30, 1998 and 1999 and July 31, 1999. Accumulated amortization of assets acquired under capital leases was $17,063, $43,552 and $50,174 at April 30, 1998 and 1999 and July 31, 1999, respectively. F-11 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. COMMITMENTS Future minimum payments under noncancelable capital and operating lease agreements are as follows as of April 30, 1999:
OPERATING CAPITAL LEASE LEASE ------------ ---------- Fiscal years ending April 30: 2000.......................................................... $ 349,300 $ 59,176 2001.......................................................... 363,128 17,144 2002.......................................................... 377,650 -- 2003.......................................................... 31,572 -- ------------ ---------- Total minimum payments required................................. $ 1,121,650 76,320 ------------ ------------ Amount representing interest.................................... (5,319) ---------- Present value of future lease payments.......................... 71,001 Current portion................................................. (53,539) ---------- Long-term portion............................................... $ 17,462 ---------- ----------
Rent expense was approximately $77,034, $412,000, $366,905 and $136,822 for the years ended April 30, 1997, 1998, and 1999 and the quarter ended July 31, 1999. In August 1999, Finisar entered into a new facility operating lease. This lease is non-cancellable and has a term of 7 years. Future lease payments for fiscal years 2000, 2001, 2002, 2003, and thereafter are $580,306, $1,012,944, $1,044,032, $1,075,120 and $3,904,110, respectively. 5. LOAN AGREEMENT On November 4, 1998, Finisar borrowed the principal amount of $11,015,000 under a secured term loan agreement and entered into a secured revolving loan facility for additional borrowings of up to $6,500,000. The revolving loan facility expires in April 2003. No amounts were outstanding under the revolving loan facility at April 30, 1999 or July 31, 1999. All business assets have been pledged as collateral for borrowings under the term loan and the revolving loan facility. The term loan is repayable quarterly, commencing April 30, 2001. Quarterly repayment amounts are $275,375, $826,125, and $1,652,250 in 2001, 2002, and 2003, respectively. Interest is payable monthly on the outstanding principal amount of borrowings under the term loan and the revolving loan facility at the effective prime or LIBOR rate (7.04% at April 30, 1999 and July 31, 1999). Finisar believes that as of April 30, 1999, the fair value of the term loan approximates its carrying value. The loan agreement contains certain financial covenants and currently prohibits the payment of dividends. At April 30, 1999 and July 31, 1999, Finisar was in compliance with those covenants. 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) COMMON STOCK Finisar's Articles of Incorporation provide for the issuance of up to 75,000,000 shares of common stock. The holder of each share of common stock shall have the right to one vote. F-12 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) Common stock subject to future issuance is as follows:
JULY 31, 1999 APRIL 30, ------------ 1999 ------------ (UNAUDITED) Conversion of convertible redeemable preferred stock.............. 8,981,897 8,981,897 Exercise of outstanding options................................... 1,486,540 1,356,540 Common stock available for grant under stock option plans........................................................... 6,535,000 6,535,000 ------------ ------------ 17,003,437 16,873,437 ------------ ------------ ------------ ------------
CONVERTIBLE REDEEMABLE PREFERRED STOCK Holders of convertible redeemable preferred stock are entitled to non cumulative dividends at an annual rate equal to $0.1316 per share (adjusted for stock splits and like events), in preference to other stockholders if, when and as declared by the board of directors. No dividends have been declared as of April 30, 1999 or July 31, 1999. The holders of outstanding convertible redeemable preferred stock, voting as a single class, are entitled to appoint one director of Finisar. In all other matters, each holder of convertible redeemable preferred stock has voting rights based on the number of shares of common stock into which the preferred stock is convertible, as described below. The holders of outstanding convertible redeemable preferred stock are entitled to receive upon liquidation and in certain other circumstances (a merger, acquisition, or similar event), an amount per share of $2.1932 plus all accrued but unpaid dividends (including any unpaid interest on such amounts). Any remaining assets shall be distributed on a pro rata basis among the holders of all common stock and preferred stock (on an if-converted basis). Upon the approval of the holders of a majority of the outstanding shares of convertible redeemable preferred stock, the convertible redeemable preferred stock will be redeemed by Finisar for cash in three installments of the following percentages on the following dates: November 6, 2004 (33.3%); November 6, 2005 (50%); and November 6, 2006 (16.7%). The redemption price for each share is $2.1932 plus all accrued but unpaid dividends (including any unpaid interest on such amounts). At the option of each individual holder of convertible redeemable preferred stock, each share of convertible redeemable preferred stock is convertible, without any payment of additional consideration, into one fully paid share of redeemable preferred stock and one fully paid share of common stock (adjusted for stock splits, stock sales, issue of options, warrants, and like events). Upon the closing of an underwritten public offering prior to July 30, 2000 (in which the aggregate net proceeds exceed $20,000,000) each share of convertible redeemable preferred stock will be automatically converted into one fully paid share of redeemable preferred stock and a fraction of a fully paid share of common stock as determined under a formula contained in the Articles of Incorporation. If the public offering price exceeds $7.0955 per share, each share of convertible redeemable preferred stock will be automatically converted into approximately 0.746 shares of common stock. On November 6, 1998 and November 25, 1998, Finisar issued an aggregate of 12,039,486 shares of convertible redeemable preferred stock to investors at $2.1932 per share, resulting in gross cash proceeds of $26,405,000. F-13 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) REDEEMABLE PREFERRED STOCK Holders of outstanding redeemable preferred stock are entitled to non cumulative dividends at an annual rate equal to $0.0381 per share (adjusted for stock splits and like events), in preference to holders of common stock as and when declared by the board of directors. No dividends have been declared as of April 30, 1999 or July 31, 1999. The holders of redeemable preferred stock have no voting rights. The holders of redeemable preferred stock are entitled to receive upon liquidation and in certain other circumstances (a merger, acquisition, or similar event), an amount per share of $0.6345 plus all accrued but unpaid dividends (including any unpaid interest on such amounts). Upon the approval of the majority of redeemable preferred stockholders, the redeemable preferred shares must be redeemed by Finisar for cash. The redemption price for each share shall be $0.6345 plus all accrued but unpaid dividends (including any unpaid interest on such amounts). Upon the closing of an underwritten public offering, Finisar may elect at any time, to redeem in cash all of the outstanding shares of redeemable preferred stock. At any time after the sixth anniversary of the issuance of the redeemable preferred stock, any holder of redeemable preferred stock can require Finisar to redeem in cash up to 33% of the outstanding shares of redeemable preferred stock held at that time. This redemption percentage increase to 66% after the seventh anniversary and to 100% on the eighth anniversary of the issuance of shares. At April 30, 1999 and July 31, 1999, no redeemable preferred stock had been issued. STOCK PLANS As discussed in Note 1 and as permitted under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), Finisar has elected to follow APB Opinion No. 25 and related interpretations in accounting for stock-based awards to employees. During fiscal 1989 and 1999, Finisar adopted the 1989 and 1999 Stock Option Plans (the "Plans"). Under the Plans, 34,300,000 shares of Finisar's common stock are reserved for issuance upon exercise of options that may be granted to eligible participants. Under the Plans, options to purchase common stock may be granted at an exercise price of not less than 85% of the fair value of a share of common stock on the date of grant (110% of the fair value in certain instances) as determined by the board of directors. For purposes of determining the fair market value of the common stock, the board of directors has considered a number of factors including appraisals by independent third parties, the price paid for convertible redeemable preferred stock in arms'-length transactions and the illiquid nature of the common stock. Options generally vest over five years and have a maximum term of 10 years. All options granted under the Plans are immediately exercisable. As of April 30, 1999, 3,043,080 shares issued upon exercise of options are subject to repurchase (2,923,840 shares at July 31, 1999). F-14 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) A summary of activity under the Plans is as follows:
OPTIONS OUTSTANDING WEIGHTED- OPTIONS ---------------------------- AVERAGE AVAILABLE FOR NUMBER OF EXERCISE GRANT SHARES PRICE PER SHARE PRICE ------------- ----------- --------------- ------------- Balance at April 30, 1996........................... 18,430,800 7,269,200 $ 0.0027-$0.02 $ 0.0033 Options granted................................... (442,000) 442,000 $ 0.05 $ 0.05 Options canceled.................................. 7,000,000 (7,000,000) $ 0.0027 $ 0.0027 ------------- ----------- --------------- ------------- Balance at April 30, 1997........................... 24,988,800 711,200 $ 0.0125-$0.05 $ 0.038 Options granted................................... (2,937,000) 2,937,000 $ 0.13 $ 0.13 Options canceled.................................. 22,000 (22,000) $ 0.05 $ 0.05 ------------- ----------- --------------- ------------- Balance at April 30, 1998........................... 22,073,800 3,626,200 $ 0.0125-$0.13 $ 0.1125 Decrease in authorized shares..................... (12,638,800) -- -- -- Options granted................................... (2,900,000) 2,900,000 $ 0.15-$1.31 $ 0.7029 Options exercised................................. -- (5,039,660) $ 0.0125-$1.31 $ 0.3593 ------------- ----------- --------------- ------------- Balance at April 30, 1999........................... 6,535,000 1,486,540 $ 0.05-$1.31 $ 0.5693 Options exercised (unaudited)..................... -- (130,000) $ 0.05-$1.31 $ 1.2615 ------------- ----------- --------------- ------------- Balance at July 31, 1999 (unaudited)................ 6,535,000 1,356,540 $ 0.05-$1.31 $ 0.5029 ------------- ----------- --------------- ------------- ------------- ----------- --------------- -------------
OPTIONS OUTSTANDING AND EXERCISABLE ---------------------------------------------------- NUMBER WEIGHTED- WEIGHTED- OUTSTANDING AT AVERAGE REMAINING AVERAGE EXERCISE PRICE APRIL 30, 1999 CONTRACTUAL LIFE EXERCISE PRICE - ----------------------------------------------------------------- -------------- ------------------- --------------- (IN YEARS) $0.05............................................................ 107,000 7.72 $ 0.05 $0.13............................................................ 691,540 8.76 $ 0.13 $0.15............................................................ 116,000 9.18 $ 0.15 $0.26............................................................ 15,000 9.32 $ 0.26 $1.31............................................................ 557,000 9.81 $ 1.31 -------------- $0.05-$1.31...................................................... 1,486,540 9.12 -------------- --------------
The weighted-average fair value of options granted during fiscal 1999 was $0.15. RESTRICTED SHARES ISSUED FOR PROMISSORY NOTES During fiscal 1999, employees exercised options for 2,646,308 shares of common stock in exchange for promissory notes in the aggregate principal amount of $1,520,788. The notes are full recourse, are secured by the shares and bear interest at a rate of 6% per annum. The shares are restricted and are subject to a right of repurchase at the original exercise price in favor of Finisar. This repurchase right lapses in accordance with the original vesting schedule of the option, which is generally five years. F-15 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) DEFERRED STOCK COMPENSATION In connection with the grant of certain stock options to employees, Finisar recorded deferred stock compensation of $2,007,380 during fiscal 1999, representing the difference between the deemed value of common stock for accounting purposes and the option exercise price of these options at the date of grant. Deferred compensation is presented as a reduction of stockholders' equity, with graded amortization recorded over the five year vesting period. The Company recorded amortization of deferred stock compensation of approximately $395,000 and $239,000 during these periods based on a graded vesting method. At July 31, 1999, approximately $1,400,000 remained to be amortized on a graded vesting method over the corresponding vesting period of each respective option, generally five years. The amortization expense relates to options awarded to employees in all operating expense categories. The amount of deferred compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. ACCOUNTING FOR STOCK-BASED COMPENSATION Pro forma information regarding net income is required by SFAS 123 as if Finisar had accounted for its employee stock options granted subsequent to April 30, 1995 under the fair value method of SFAS 123. The fair value for Finisar's stock option grants was estimated at the date of grant using the minimum value option valuation model. The minimum value option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because Finisar's stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards. The fair value of these options was estimated at the date of grant using the minimum value method option pricing model with the following weighted-average assumptions for fiscal years 1997, 1998, and 1999: risk-free interest rates of 6% for 1997 and 1998 and 5.5% for 1999; a dividend yield of 0%; and a weighted-average expected life of the option of four years. F-16 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Finisar Corporation's pro forma information is as follows:
FISCAL YEARS ENDED APRIL 30, ---------------------------------------- 1997 1998 1999 ------------ ------------ ------------ Net income: As reported....................................... $ 947,378 $ 4,358,433 $ 3,077,305 ------------ ------------ ------------ ------------ ------------ ------------ Pro forma......................................... $ 946,924 $ 4,332,764 $ 3,032,651 ------------ ------------ ------------ ------------ ------------ ------------ Basic net income per share: As reported....................................... $ 0.02 $ 0.10 $ 0.08 ------------ ------------ ------------ ------------ ------------ ------------ Pro forma......................................... $ 0.02 $ 0.10 $ 0.07 ------------ ------------ ------------ ------------ ------------ ------------ Diluted net income per share: As reported....................................... $ 0.02 $ 0.10 $ 0.06 ------------ ------------ ------------ ------------ ------------ ------------ Pro Forma......................................... $ 0.02 $ 0.10 $ 0.06 ------------ ------------ ------------ ------------ ------------ ------------
7. INCOME TAXES Finisar's provision for income taxes consists of the following:
YEAR ENDED APRIL 30, -------------------------------------- 1997 1998 1999 ---------- ------------ ------------ Current: Federal............................................. $ 422,773 $ 2,390,613 $ 1,995,827 State............................................... 122,740 564,909 538,107 ---------- ------------ ------------ 545,513 2,955,522 2,533,934 Deferred: Federal............................................. (81,773) (225,479) (508,263) State............................................... (23,740) (15,143) (151,978) ---------- ------------ ------------ (105,513) (240,622) (660,241) ---------- ------------ ------------ Provision for income taxes............................ $ 440,000 $ 2,714,900 $ 1,873,693 ---------- ------------ ------------ ---------- ------------ ------------
Finisar provision for income taxes differs from the amount computed by applying the federal statutory rate to income taxes as follows:
YEAR ENDED APRIL 30, ------------------------------- 1997 1998 1999 --------- --------- --------- Expected income tax provision at U.S. federal statutory rate (34%).......................................................... 34.0% 34.0% 34.0% State taxes, net of federal benefit.............................. 5.0 5.0 4.8 Research & development credits................................... (7.0) (0.8) (4.0) Other permanent differences...................................... (0.3) 0.2 3.0 --------- --------- --------- 31.7% 38.4% 37.8% --------- --------- --------- --------- --------- ---------
F-17 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES (CONTINUED) Significant components of Finisar's deferred federal and state income taxes are as follows:
APRIL 30, ------------------------ 1998 1999 ---------- ------------ Deferred tax assets: Inventory reserve................................................. $ 164,934 $ 503,049 Accruals not currently deductible................................. 235,587 679,639 ---------- ------------ Total deferred tax assets........................................... 400,521 1,182,688 Deferred tax liabilities: Tax depreciation over book depreciation............................. (13,321) (135,246) ---------- ------------ Net deferred tax assets............................................. $ 387,200 $ 1,047,442 ---------- ------------ ---------- ------------
8. SEGMENTS AND GEOGRAPHIC INFORMATION Finisar operates in one industry segment, the design, manufacture, and marketing of fiber optic subsystems and network performance test systems for high-speed data communications. The following is a summary of operations within geographic areas based on the location of the entity purchasing the Company's product:
YEARS ENDED APRIL 30, ------------------------------------------ 1997 1998 1999 ------------ ------------- ------------- THREE MONTHS ENDED JULY 31, 1999 ------------- (UNAUDITED) Revenues from sales to unaffiliated customers: United States....................................... $ 4,676,165 $ 9,877,244 $ 24,822,399 $ 8,128,699 Canada.............................................. 3,573,479 9,695,295 8,940,592 4,876,732 Rest of the World................................... 207,356 2,494,403 1,708,123 874,028 ------------ ------------- ------------- ------------- $ 8,457,000 $ 22,066,942 $ 35,471,114 $ 13,879,459 ------------ ------------- ------------- ------------- ------------ ------------- ------------- -------------
Revenues generated in the U.S. and Canada (collectively, North America) are all to customers located in those geographic regions. 9. PENDING LITIGATION In April 1999, Methode Electronics, a manufacturer of electronic component devices, filed a lawsuit against Finisar and another manufacturer, Hewlett-Packard Co., in the United States District Court for the Northern District of Illinois alleging that Finisar's optoelectronic products infringe four patents held by Methode. The lawsuit seeks monetary damages and injunctive relief. In August 1999, the Court granted a motion to transfer the case to the United States District Court for the Northern District of California. It is Finisar's position that the Methode patents are invalid, unenforceable and/or not infringed by Finisar's products. Finisar believes that it has strong defenses against Methode's lawsuit, and Finisar intends to defend the suit vigorously and does not believe it will have a material impact on its results of operations or financial position. However, the litigation is in the preliminary stage, and Finisar cannot predict its outcome. The litigation process is inherently uncertain. Patent litigation is particularly complex and can extend for a protracted time, which can substantially increase the cost of such litigation. Should the outcome of the litigation be adverse, Finisar could be required to F-18 FINISAR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. PENDING LITIGATION (CONTINUED) pay significant monetary damages to Methode and could be enjoined from selling those of Finisar's products found to infringe Methode's patents unless and until Finisar is able to negotiate a license from Methode. If Finisar is required to pay significant monetary charges, is enjoined from selling any of Finisar's products or is required to make royalty payments pursuant to any such business agreement, Finisar's business would be significantly harmed. 10. EVENTS SUBSEQUENT TO THE DATE OF THE AUDIT REPORT The board of directors has authorized Finisar to file a registration statement with the U.S. Securities and Exchange Commission for an initial public offering of its common stock. If the offering is consummated under the terms presently anticipated, all of the currently outstanding shares of convertible redeemable preferred stock will be automatically converted into 8,981,897 shares of common stock and 12,039,486 shares of redeemable preferred stock and all shares of such redeemable preferred stock will be redeemed for approximately $2,640,000 from the net proceeds of the offering. REINCORPORATION In September 1999, Finisar's board of directors authorized the reincorporation of the Company in the state of Delaware. Following the reincorporation, Finisar will be authorized to issue 200,000,000 shares of $0.001 par value common stock and 5,000,000 shares of $0.001 par value preferred stock. The board of directors has the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. 1999 EMPLOYEE STOCK PURCHASE PLAN Finisar's 1999 Employee Stock Purchase Plan was adopted by the board of directors and approved by the stockholders in September 1999. A total of 250,000 shares of common stock are reserved for issuance under the plan, cumulatively increased by 250,000 shares on May 1, 2001 and each May 1 thereafter through May 1, 2010. Employees, including officers and employee directors, are eligible to participate in the plan if they are employed by Finisar for more than 20 hours per week and more than five months in any calendar year. The plan will be implemented during sequential 12-month offering periods, generally commencing on or about December 1 of each year. However, the first such offering period will commence on the effective date of the offering and will terminate on November 30, 2000. In addition, a six-month offering period will generally commence on June 1 of each year. The employee stock purchase plan permits eligible employees to purchase Finisar common stock through payroll deductions, which may not exceed 20% of the employee's total compensation. Stock may be purchased under the plan at a price equal to 85% of the fair market value of Finisar common stock on either the first or the last day of the offering period, whichever is lower. 1999 STOCK OPTION PLAN Finisar's 1999 Stock Option Plan was amended by the board of directors and approved by the stockholders in September 1999. The amendment increased the aggregate maximum number of shares that may be issued under the Plan on May 1, 2001 and each May 1 thereafter by a number of shares equal to 5% of the number of shares of Finisar's common stock issued and outstanding as of the immediately preceding April 30, subject to certain restrictions on the aggregate maximum number of shares that may be issued pursuant to incentive stock options. F-19 [INSIDE BACK COVER] [FINISAR LOGO] FIBER OPTIC SOLUTIONS FOR GIGABIT ETHERNET AND FIBRE CHANNEL - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Through and including , 1999, (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 7,700,000 SHARES [FINISAR LOGO] COMMON STOCK ------------------ P R O S P E C T U S ------------------ MERRILL LYNCH & CO. J.P. MORGAN & CO. DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED MORGAN KEEGAN & COMPANY, INC. SOUNDVIEW TECHNOLOGY GROUP , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all costs and expenses, other than the underwriting discounts and commissions payable by the Registrant in connection with the sale and distribution of the common stock being registered. All amounts shown are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market application fee. Securities and Exchange Commission registration fee............. $ 34,464 NASD filing fee................................................. 12,000 Nasdaq National Market application fee.......................... 95,000 Blue sky qualification fees and expenses........................ 6,000 Printing and engraving expenses................................. 150,000 Legal fees and expenses......................................... 300,000 Accounting fees and expenses.................................... 240,000 Director and officer liability insurance........................ 300,000 Transfer agent and registrar fees............................... 7,500 Miscellaneous expenses.......................................... 55,036 --------- Total......................................................... $1,200,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law permits indemnification of officers, directors and other corporate agents under certain circumstances and subject to certain limitations. The Registrant's certificate of incorporation and bylaws provide that the Registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the Registrant intends to enter into separate indemnification agreements (Exhibit 10.1) with its directors and officers which would require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from willful misconduct of a culpable nature). The Registrant also intends to maintain director and officer liability insurance, if available on reasonable terms. These indemnification provisions and the indemnification agreements may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed 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. See also related undertakings in Item 17 below. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. (a) Since July 31, 1996, Finisar has issued and sold the following unregistered securities: 1. From inception through July 31, 1999, Finisar issued options to purchase an aggregate of 40,328,200 shares of common stock under its 1989 and 1999 stock options plans, of which 6,769,660 have been exercised. 2. In November 1998, Finisar sold 12,039,486 shares of its convertible redeemable preferred stock to certain investors at a purchase price of $2.1932 per share, for an aggregate purchase price of $26,405,000. There were no underwriters employed in connection with any of the transactions set forth in this Item 15. The issuances described in Items 15(a)(1) and 15(a)(2) were deemed exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. Certain issuances described in Item 15(a)(1) were deemed exempt from registration under the Securities Act in reliance on Section 4(2) or Rule 701 promulgated thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about Finisar or had access, through employment or other relationships, to such information. For additional information concerning these equity investment transactions, see the section entitled "Certain Transactions" in the prospectus. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------------------- 1.1 Form of Purchase Agreement 3.1 Amended and Restated Articles of Incorporation of Registrant 3.2 Amended and Restated Bylaws of Registrant 3.3 Certificate of Incorporation of Registrant (Delaware) 3.4 Bylaws of Registrant (Delaware) 3.5 Form of Restated Certificate of Incorporation of Registrant to be filed after the closing of the offering 4.1 Specimen certificate representing the common stock 5.1 Opinion of Gray Cary Ware & Freidenrich LLP 10.1 Form of Indemnity Agreement between Registrant and Registrant's directors and officers 10.2 1989 Stock Option Plan *10.3 1999 Stock Option Plan *10.4 1999 Employee Stock Purchase Plan 10.5 Securities Purchase Agreement between Registrant and certain investors, dated as of November 6, 1998 10.6 Shareholders' Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998 10.7 Voting Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998 10.8 Loan Agreement between Registrant and Fleet National Bank, dated as of November 6, 1998
II-2
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------------------- 10.9 Security Agreement between Registrant and Fleet National Bank, dated as of November 4, 1998 10.10 Security Agreement Re: Contracts, Leases, License and Permits between Registrant and Fleet National Bank, dated as of November 4, 1998 10.11 Building Office Lease for 582 Market Street, Suite 609-610, San Francisco, CA, dated December 17, 1996 between Registrant and Niantic Corporation 10.12 Building Lease for 274 Ferguson Drive, Mountain View, CA, dated April 30, 1997 between Registrant and DM Group VIII and DM Group VIII-E 10.13 Building Lease for 1308 Moffett Park Drive, Sunnyvale, CA, dated May 26, 1999 between Registrant and Aetna Life Insurance Company 23.1 Consent of Ernst & Young LLP, independent auditors 23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1) *24.1 Power of Attorney 27.1 Financial Data Schedule
- ------------------------ * Previously filed. (B) FINANCIAL STATEMENT SCHEDULES. The following financial statement schedule of Finisar is filed as part of this Registration Statement and should be read in conjunction with the financial statements and related notes.
SCHEDULE PAGE - ----------------------------------------------------------------------------------------------------------- ----------- II -- Valuation and Qualifying Accounts.................................................................... S-1
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes 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. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the 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 hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to II-3 Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this amendment no. 1 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Sunnyvale, State of California, on October 18, 1999 FINISAR CORPORATION BY: /S/ STEPHEN K. WORKMAN ----------------------------------------- Stephen K. Workman VICE PRESIDENT, FINANCE, CHIEF FINANCIAL OFFICER AND SECRETARY Pursuant to the requirements of the Securities Act, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated: SIGNATURE TITLE DATE - ------------------------------ --------------------------------- ------------- /s/ JERRY S. RAWLS* President and Chief Executive October 18, - ------------------------------ Officer (PRINCIPAL EXECUTIVE 1999 Jerry S. Rawls OFFICER) /s/ FRANK H. LEVINSON* Chairman of the Board and Chief October 18, - ------------------------------ Technical Officer 1999 Frank H. Levinson Vice President, Finance, Chief October 18, /s/ STEPHEN K. WORKMAN Financial Officer and Secretary 1999 - ------------------------------ (PRINCIPAL FINANCIAL AND Stephen K. Workman ACCOUNTING OFFICER) /s/ MICHAEL C. CHILD* Director October 18, - ------------------------------ 1999 Michael C. Child /s/ ROGER C. FERGUSON* Director October 18, - ------------------------------ 1999 Roger C. Ferguson *By: /s/ STEPHEN K. WORKMAN ------------------------- Stephen K. Workman ATTORNEY-IN-FACT
II-5 FINISAR CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT ---------------------------- BEGINNING CHARGED TO CHARGED TO BALANCE AT OF COSTS AND OTHER DEDUCTIONS-- END OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD ----------- ----------- --------------- --------------- ---------- (IN THOUSANDS) ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended April 30, 1997..................... $ -- $ -- $ -- $ -- $ -- Year ended April 30, 1998..................... -- 16,538 -- -- 16,538 Year ended April 30, 1999..................... 16,538 248,600 -- -- 265,138
S-1 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - --------- ------------------------------------------------------------------------------------------------------- 1.1 Form of Purchase Agreement 3.1 Amended and Restated Articles of Incorporation of Registrant 3.2 Amended and Restated Bylaws of Registrant 3.3 Certificate of Incorporation of Registrant (Delaware) 3.4 Bylaws of Registrant (Delaware) 3.5 Form of Restated Certificate of Incorporation of Registrant to be filed after the closing of the offering 4.1 Specimen certificate representing the common stock 5.1 Opinion of Gray Cary Ware & Freidenrich LLP 10.1 Form of Indemnity Agreement between Registrant and Registrant's directors and officers 10.2 1989 Stock Option Plan *10.3 1999 Stock Option Plan *10.4 1999 Employee Stock Purchase Plan 10.5 Securities Purchase Agreement between Registrant and certain investors, dated as of November 6, 1998 10.6 Shareholders' Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998 10.7 Voting Agreement among Registrant and certain of its shareholders, dated as of November 6, 1998 10.8 Loan Agreement between Registrant and Fleet National Bank, dated as of November 6, 1998 10.9 Security Agreement between Registrant and Fleet National Bank, dated as of November 4, 1998 10.10 Security Agreement Re: Contracts, Leases, License and Permits between Registrant and Fleet National Bank, dated as of November 4, 1998 10.11 Building Office Lease for 582 Market Street, Suite 609-610, San Francisco, CA, dated December 17, 1996 between Registrant and Niantic Corporation 10.12 Building Lease for 274 Ferguson Drive, Mountain View, CA, dated April 30, 1997 between Registrant and DM Group VIII and DM Group VIII-E 10.13 Building Lease for 1308 Moffett Park Drive, Sunnyvale, CA, dated May 26, 1999 between Registrant and Aetna Life Insurance Company 23.1 Consent of Ernst & Young LLP, independent auditors 23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1) *24.1 Power of Attorney 27.1 Financial Data Schedule
- ------------------------ * Previously filed. EX-1.1 2 EXHIBIT 1.1 Exhibit 1.1 [Draft of 09/28/99] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FINISAR CORPORATION (a Delaware corporation) __________ Shares of Common Stock PURCHASE AGREEMENT Dated: _________, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS SECTION 1. Representations and Warranties.....................................................3 SECTION 2. Sale and Delivery to Underwriters; Closing........................................11 SECTION 3. Covenants of the Company..........................................................12 SECTION 4. Payment of Expenses...............................................................15 SECTION 5. Conditions of Underwriters' Obligations...........................................16 SECTION 6. Indemnification...................................................................19 SECTION 7. Contribution......................................................................22 SECTION 8. Representations, Warranties and Agreements to Survive Delivery....................23 SECTION 9. Termination of Agreement..........................................................24 SECTION 10. Default by One or More of the Underwriters........................................24 SECTION 11. Default by the Company............................................................25 SECTION 12. Notices...........................................................................25 SECTION 13. Parties...........................................................................26 SECTION 14. Governing Law and Time............................................................26 SECTION 15. Effect of Headings................................................................26
i FINISAR CORPORATION (a Delaware corporation) ___________ Shares of Common Stock (Par Value $_____ Per Share) PURCHASE AGREEMENT _______, 1999 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated J.P. Morgan & Co. Dain Rauscher Wessels, a division of Dain Rauscher Incorporated Morgan Keegan & Company, Inc. Soundview Technology Group, Inc. as Representatives of the several Underwriters C/O MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Finisar Corporation, a Delaware corporation (the "Company"), and the persons listed in Schedule B hereto (the "Selling Stockholders"), confirm their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other Underwriters named in Schedule A hereto (collectively, the "Underwriters", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch, J.P. Morgan & Co., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, Morgan Keegan & Company, Inc. and Soundview Technology Group, Inc. are acting as Representatives, (in such capacity, the "Representatives"), with respect to (i) the sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $_____ per share, of the Company ("Common Stock") set forth in Schedules A and B hereto and (ii) the grant by the Selling Stockholders to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of __________ additional shares of Common Stock to cover over-allotments, if any. The aforesaid __________ shares of Common Stock (the "Initial Securities") to be purchased by the Underwriters and all or any part of the ___________ shares of Common Stock subject to the option described in Section 2(b) hereof (the "Option Securities") are hereinafter called, collectively, the "Securities". The Company and the Selling Stockholders understand that the Underwriters propose to make a public offering of the Securities as soon as the Representatives deem advisable after this Agreement has been executed and delivered. The Company, the Selling Stockholders and the Underwriters agree that up to _______ shares of the Securities to be purchased by the Underwriters (the "Reserved Securities") shall be reserved for sale by the Underwriters to certain eligible employees and persons having business relationships with the Company, as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. ("NASD") and all other applicable laws, rules and regulations. To the extent that such Reserved Securities are not orally confirmed for purchase by such eligible employees and persons having business relationships with the Company by the end of the first business day after the date of this Agreement, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-_____) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The information included in such prospectus or in such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final prospectus in the form first furnished to the Underwriters for use in connection with the offering of the Securities is herein called the "Prospectus." If Rule 434 is relied on, the term 2 "Prospectus" shall refer to the preliminary prospectus dated _____, 1999 together with the Term Sheet and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). SECTION 1. REPRESENTATIONS AND WARRANTIES. (a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company represents and warrants to each Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each Underwriter, as follows: (i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, any preliminary prospectus and any supplement thereto or prospectus wrapper prepared in connection therewith, at their respective times of issuance and at the Closing Time, complied and will comply in all material respects with any applicable laws or regulations of foreign jurisdictions in which the Prospectus and such preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the offer and sale of Reserved Securities . Neither the Prospectus nor any amendments or supplements thereto (including any prospectus wrapper), at the time the Prospectus or any such amendment or supplement was issued and at the Closing Time (and, if any Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434 and the Prospectus shall not be "materially different", as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement 3 or Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through Merrill Lynch expressly for use in the Registration Statement or Prospectus. Each preliminary prospectus and the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) INDEPENDENT ACCOUNTANTS. The accountants who certified the financial statements and supporting schedules included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iii) FINANCIAL STATEMENTS. The financial statements included in the Registration Statement and the Prospectus, together with the related schedules and notes, present fairly the financial position of the Company at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. (iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company, other than those in the ordinary course of business, which are material with respect to the Company, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (v) GOOD STANDING OF THE COMPANY. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of 4 property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vi) NO SUBSIDIARIES. The Company has no subsidiaries. (vii) CAPITALIZATION. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or pursuant to the exercise of convertible securities or options referred to in the Prospectus). The shares of issued and outstanding capital stock, including the Securities to be purchased by the Underwriters from the Selling Stockholders, have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock, including the Securities to be purchased by the Underwriters from the Selling Stockholders, was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (viii) AUTHORIZATION OF AGREEMENT. This Agreement has been duly authorized, executed and delivered by the Company. (ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The Securities to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectus and such description conforms to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (x) ABSENCE OF DEFAULTS AND CONFLICTS. The Company is not in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company is a party or by which it may be bound, or to which any of the property or assets of the Company is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use of Proceeds") and compliance by the Company with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, the Agreements 5 and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company. (xi) ABSENCE OF LABOR DISPUTE. No labor dispute with the employees of the Company exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xii) ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement or the performance by the Company of its obligations hereunder; the aggregate of all pending legal or governmental proceedings to which the Company is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xiii) ACCURACY OF EXHIBITS. There are no contracts or documents which are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits thereto which have not been so described and filed as required. (xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company owns or possesses, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by it, and the Company has not received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company therein, and which infringement or conflict (if the subject of any unfavorable 6 decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement, except (i) such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws and (ii) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered. (xvi) POSSESSION OF LICENSES AND PERMITS. The Company possesses such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by it; the Company is in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and the Company has not received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xvii) TITLE TO PROPERTY. The Company has good and marketable title to all real property owned by the Company and good title to all other properties owned by it, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectus or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company; and all of the leases and subleases material to the business of the Company under which the Company holds properties described in the Prospectus, are in full force and effect, and the Company has no notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company to the continued possession of the leased or subleased premises under any such lease or sublease. (xviii) COMPLIANCE WITH CUBA ACT. The Company has complied with, and is and will be in compliance with, the provisions of that certain Florida act relating to disclosure of doing business with Cuba, codified as Section 517.075 of the Florida statutes, and the rules and regulations thereunder (collectively, the "Cuba Act") or is exempt therefrom. 7 (xix) INVESTMENT COMPANY ACT. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xx) ENVIRONMENTAL LAWS. Except as described in the Registration Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) the Company is not in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company has all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company relating to Hazardous Materials or any Environmental Laws. (xxi) REGISTRATION RIGHTS. There are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act that has not waived that right. (b) REPRESENTATIONS AND WARRANTIES BY THE SELLING STOCKHOLDERS. The Selling Stockholders represent and warrant to each Underwriter as of the date hereof, as of the Closing Time, and, if the Selling Stockholders are selling Option Securities on a Date of Delivery, as of each such Date of Delivery, and agree with each Underwriter, as follows: (i) ACCURATE DISCLOSURE. To the best knowledge of such Selling Stockholder, the representations and warranties of the Company contained in Section 1(a) hereof are true and correct; such Selling Stockholder has reviewed and is familiar with the Registration Statement and the Prospectus and neither the Prospectus nor any amendments or supplements thereto (including any prospectus wrapper) includes any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; such Selling Stockholder is not prompted to sell the Securities to 8 be sold by such Selling Stockholder hereunder by any information concerning the Company or any subsidiary of the Company which is not set forth in the Prospectus. (ii) AUTHORIZATION OF AGREEMENTS. Each Selling Stockholder has the full right, power and authority to enter into this Agreement and a Power of Attorney and Custody Agreement (the "Power of Attorney and Custody Agreement") and to sell, transfer and deliver the Securities to be sold by such Selling Stockholder hereunder. The execution and delivery of this Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities to be sold by such Selling Stockholder and the consummation of the transactions contemplated herein and compliance by such Selling Stockholder with its obligations hereunder have been duly authorized by such Selling Stockholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities to be sold by such Selling Stockholder or any property or assets of such Selling Stockholder pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder may be bound, or to which any of the property or assets of such Selling Stockholder is subject, nor will such action result in any violation of the provisions of the charter or by-laws or other organizational instrument of such Selling Stockholder, if applicable, or any applicable treaty, law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over such Selling Stockholder or any of its properties. (iii) GOOD AND MARKETABLE TITLE. Such Selling Stockholder has and will at the Closing Time and, if any Option Securities are purchased, on the Date of Delivery have good and marketable title to the Securities to be sold by such Selling Stockholder hereunder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind, other than pursuant to this Agreement; and upon delivery of such Securities and payment of the purchase price therefor as herein contemplated, assuming each such Underwriter has no notice of any adverse claim, each of the Underwriters will receive good and marketable title to the Securities purchased by it from such Selling Stockholder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind. (iv) DUE EXECUTION OF POWER OF ATTORNEY AND CUSTODY AGREEMENT. Such Selling Stockholder has duly executed and delivered, in the form heretofore furnished to the Representatives, the Power of Attorney and Custody Agreement with ___________ and ____________ as attorneys-in-fact (the "Attorneys-in-Fact") and __________, as custodian (the "Custodian"); the Custodian is authorized to deliver the Securities to be sold by such Selling Stockholder hereunder and to accept payment therefor; and each Attorney-in-Fact is authorized to execute and deliver this Agreement and the certificate referred to in Section 5(f) or that may be required pursuant to Sections 5(l) and 5(m) on behalf of such Selling Stockholder, to sell, assign and transfer to the Underwriters the Securities to be sold by such Selling Stockholder hereunder, to determine the purchase 9 price to be paid by the Underwriters to such Selling Stockholder, as provided in Section 2(a) hereof, to authorize the delivery of the Securities to be sold by such Selling Stockholder hereunder, to accept payment therefor, and otherwise to act on behalf of such Selling Stockholder in connection with this Agreement. (v) ABSENCE OF MANIPULATION. Such Selling Stockholder has not taken, and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or consent, approval, authorization, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by each Selling Stockholder of its obligations hereunder or in the Power of Attorney and Custody Agreement, or in connection with the sale and delivery of the Securities hereunder or the consummation of the transactions contemplated by this Agreement, except (i) such as may have previously been made or obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities law, and (ii) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities are offered. (vii) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days from the date of the Prospectus, such Selling Stockholder will not, without the prior written consent of Merrill Lynch, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Securities to be sold hereunder. (vii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for all of the Securities to be sold by such Selling Stockholder pursuant to this Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures guaranteed, have been placed in custody with the Custodian with irrevocable conditional instructions to deliver such Securities to the Underwriters pursuant to this Agreement. (ix) NO ASSOCIATION WITH NASD. Neither such Selling Stockholder nor any of his/her/its affiliates directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, or has any other association with (within the meaning of Article I, Section 1(m) of the By-laws of the National Association 10 of Securities Dealers, Inc.), any member firm of the National Association of Securities Dealers, Inc. (c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of the Company delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of the Selling Stockholders as such and delivered to the Representatives or to counsel for the Underwriters pursuant to the terms of this Agreement shall be deemed a representation and warranty by such Selling Stockholder to the Underwriters as to the matters covered thereby. SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING. (a) INITIAL SECURITIES. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter and each Underwriter, severally and not jointly, agrees to purchase from the Company, at the price per share set forth in Schedule C, that proportion of the number of Initial Securities set forth in Schedule B opposite the name of the Company, which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter, plus any additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, bears to the total number of Initial Securities, subject, in each case, to such adjustments among the Underwriters as the Representatives in their sole discretion shall make to eliminate any sales or purchases of fractional securities. (b) OPTION SECURITIES. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Selling Stockholders acting severally and not jointly, hereby grant an option to the Underwriters, severally and not jointly, to purchase up to an additional __________ shares of Common Stock, as set forth in Schedule B, at the price per share set forth in Schedule C, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representatives to the Selling Stockholders setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Representatives, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter bears to the total number of Initial Securities, subject in each case to such adjustments as the Representatives in their discretion shall make to eliminate any sales or purchases of fractional shares. 11 (c) PAYMENT. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Morrison & Foerster LLP, 755 Page Mill Road, Palo Alto, California 94304-1018, or at such other place as shall be agreed upon by the Representatives and the Company, at 7:00 A.M. (California time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Representatives and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Representatives and the Company and the Selling Stockholders, on each Date of Delivery as specified in the notice from the Representatives to the Selling Stockholders. Payment shall be made to the Company and the Selling Stockholders by wire transfer of immediately available funds to bank accounts designated by the Company and the Custodian pursuant to each Selling Stockholder's Power of Attorney and Custody Agreement, as the case may be, against delivery to the Representatives for the respective accounts of the Underwriters of certificates for the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder. (d) DENOMINATIONS; REGISTRATION. Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations and registered in such names as the Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial Securities and the Option Securities, if any, will be made available for examination and packaging by the Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each Underwriter as follows: (a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Representatives immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order 12 suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) FILING OF AMENDMENTS. The Company will give the Representatives notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, will furnish the Representatives with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Representatives or counsel for the Underwriters shall object. (c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished or will deliver to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) DELIVERY OF PROSPECTUSES. The Company has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when the Prospectus is required to be delivered under the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Prospectus. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to amend the Registration Statement or amend 13 or supplement the Prospectus in order that the Prospectus will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply with such requirements, and the Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. (f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts, in cooperation with the Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representatives may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) RULE 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) USE OF PROCEEDS. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectus under "Use of Proceeds". (i) INCLUSION IN NASDAQ NATIONAL MARKET. The Company will use its best efforts to effect and maintain the quotation of the Securities on the Nasdaq National Market and will file with the Nasdaq National Market all documents and notices required by the Nasdaq National Market of companies that have securities that are traded in the over-the-counter market and quotations for which are reported by the Nasdaq National Market. (j) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days from the date of the Prospectus, the Company will not, without the prior written consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any 14 transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectus, or (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectus. (k) REPORTING REQUIREMENTS. The Company, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder. (l) COMPLIANCE WITH NASD RULES. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted as required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release. (m) COMPLIANCE WITH RULe 463. The Company will file with the Commission such reports on Form SR as may be required pursuant to Rule 463 of the 1933 Act Regulations. SECTION 4. PAYMENT OF EXPENSES. (a) EXPENSES. The Company and the Selling Stockholder will pay or cause to be paid all expenses incident to the performance of their obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectus and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities, (ix) the filing fees incident to, and 15 the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the NASD of the terms of the sale of the Securities, (x) the fees and expenses incurred in connection with the inclusion of the Securities in the Nasdaq National Market, and (xi) all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, in connection with matters related to the Reserved Securities which are designated by the Company for sale to employees and others having a business relationship with the Company. (b) EXPENSES OF THE SELLING STOCKHOLDERS. The Selling Stockholders, jointly and severally, will pay all expenses incident to the performance of their respective obligations under, and the consummation of the transactions contemplated by this Agreement, including (i) any stamp duties, capital duties and stock transfer taxes, if any, payable upon the sale of the Securities to the Underwriters, and their transfer between the Underwriters pursuant to an agreement between such Underwriters, and (ii) the fees and disbursements of their respective counsel and accountants. (c) TERMINATION OF AGREEMENT. If this Agreement is terminated by the Representatives in accordance with the provisions of Section 5, Section 9(a)(i) or Section 11 hereof, the Company and the Selling Stockholders shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters. (d) ALLOCATION OF EXPENSES. The provisions of this Section shall not affect any agreement that the Company and the Selling Stockholders may make for the sharing of such costs and expenses. SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders contained in Section 1 hereof or in certificates of any officer of the Company or on behalf of the Selling Stockholders delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) OPINIONS OF COUNSEL FOR COMPANY. At Closing Time, the Representatives shall have received the favorable opinions, dated as of Closing Time, of Gray Cary Ware & 16 Freidenrich LLP, counsel for the Company, and Penni & Edmonds, patent counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters to the effect set forth in Exhibits A-1 and A-2, respectively, hereto and to such further effect as counsel to the Underwriters may reasonably request. (c) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. At Closing Time, the Representatives shall have received the favorable opinion, dated as of Closing Time, of ________________________, counsel for the Selling Stockholders, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters to the effect set forth in Exhibit B hereto and to such further effect as counsel to the Underwriters may reasonably request. (d) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the Representatives shall have received the favorable opinion, dated as of Closing Time, of Morrison & Foerster LLP, counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters with respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Company), (viii) through (x), inclusive, (xii), (xiv) (solely as to the information in the Prospectus under "Description of Capital Stock -- Common Stock") and the penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to the Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and certificates of public officials. (e) OFFICERS' CERTIFICATE. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business, and the Representatives shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are contemplated by the Commission. (f) CERTIFICATE OF SELLING STOCKHOLDERS. At Closing Time, the Representative shall have received a certificate of an Attorney-in-Fact on behalf of each Selling Stockholder, dated as of Closing Time, to the effect that (i) the representations and warranties of each Selling Stockholder contained in Section 1(b) hereof are true and correct in all respects with the same force and effect as though expressly made at and as of Closing Time and (ii) each Selling 17 Stockholder has complied in all material respects with all agreements and all conditions on its part to be performed under this Agreement at or prior to Closing Time. (g) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this Agreement, the Representatives shall have received from Ernst & Young LLP a letter dated such date, in form and substance satisfactory to the Representatives, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (h) BRING-DOWN COMFORT LETTER. At Closing Time, the Representatives shall have received from Ernst & Young LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (g) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (i) APPROVAL INCLUSION IN NASDAQ NATIONAL MARKET. At Closing Time, the Securities shall have been approved for inclusion in the Nasdaq National Market, subject only to official notice of issuance. (j) NO OBJECTION. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (k) LOCK-UP AGREEMENTS. At the date of this Agreement, the Representatives shall have received an agreement substantially in the form of Exhibit C hereto signed by the persons listed on Schedule D hereto. (l) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Company and the Selling Stockholders contained herein and the statements in any certificates furnished by the Company and the Selling Stockholders hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representatives shall have received: (i) OFFICERS' CERTIFICATE. A certificate, dated such Date of Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(e) hereof remains true and correct as of such Date of Delivery. (ii) CERTIFICATE OF SELLING STOCKHOLDERS. A certificate, dated such Date of Delivery, of an Attorney-in-Fact on behalf of each Selling Stockholder confirming that the certificate delivered at Closing Time pursuant to Section 5(f) remains true and correct as of such Date of Delivery. 18 (iii) OPINIONS OF COUNSEL FOR COMPANY. The favorable opinion of Gray Cary Ware & Freidenrich LLP counsel for the Company, and Penni & Edmonds, patent counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Section 5(b) hereof. (iv) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. The favorable opinion of _________________________, counsel for the Selling Stockholders, in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (v) OPINION OF COUNSEL FOR UNDERWRITERS. The favorable opinion of Morrison & Foerster LLP, counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(d) hereof. (vi) BRING-DOWN COMFORT LETTER. A letter from Ernst & Young LLP, in form and substance satisfactory to the Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representatives pursuant to Section 5(g) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (m) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of Delivery counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and the Selling Stockholders in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Representatives and counsel for the Underwriters. (n) TERMINATION OF AGREEMENT. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several Underwriters to purchase the relevant Option Securities, may be terminated by the Representatives by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. INDEMNIFICATION. (a) INDEMNIFICATION OF UNDERWRITERS. The Company and the Selling Stockholders, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if 19 any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of (A) the violation of any applicable laws or regulations of foreign jurisdictions where Reserved Securities have been offered and (B) any untrue statement or alleged untrue statement of a material fact included in the supplement or prospectus wrapper material distributed in any foreign jurisdictions in connection with the reservation and sale of the Reserved Securities to eligible employees and others having a business relationship with the Company or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectus or preliminary prospectus, not misleading; (iii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the natured referred to in Section 6(a)(ii)(A) hereof; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (iv) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the natured referred to in Section 6(a)(ii)(A) hereof, to the extent that any such expense is not paid under (i), (ii) or (iii) above; PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and 20 the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS AND SELLING STOCKHOLDERS. Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Selling Stockholder and each person, if any, who controls each Selling Stockholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 6(a), as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. 21 (d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(iii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) INDEMNIFICATION FOR RESERVED SECURITIES. In connection with the offer and sale of the Reserved Securities, the Company agrees, promptly upon a request in writing, to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of eligible employees and others having a business relationship with the Company to pay for and accept delivery of Reserved Securities which, by the end of the first business day following the date of this Agreement, were subject to a properly confirmed agreement to purchase. (f) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION. The provisions of this Section shall not affect any agreement among the Company and the Selling Stockholder with respect to indemnification. SECTION 7. CONTRIBUTION. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholder on the one hand and the Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders on the one hand and of the Underwriters on the other hand in connection with the statements or omissions, or in connection with any violation of the nature referred to in Section 6(a)(ii)(A) hereof, which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the Selling Stockholders and the total underwriting discount received by the Underwriters, in each case as set forth on the cover of the Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the Securities as set forth on such cover. 22 The relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stockholders or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or any violation of the nature referred to in Section 6(a)(ii)(A) hereof. The Company and the Selling Stockholder and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company or any Selling Stockholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company or such Selling Stockholder, as the case may be. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in Schedule A hereto and not joint. The provisions of this Section shall not affect any agreement among the Company and the Selling Stockholders with respect to contribution. SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or the Selling Stockholders submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any 23 Underwriter or controlling person, or by or on behalf of the Company or the Selling Stockholders, and shall survive delivery of the Securities to the Underwriters. SECTION 9. TERMINATION OF AGREEMENT. (a) TERMINATION; GENERAL. The Representatives may terminate this Agreement, by notice to the Company and the Selling Stockholders, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representatives, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the Nasdaq National Market, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) LIABILITIES. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs 24 after the Closing Time, the obligation of the Underwriters to purchase and of the Company to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the Underwriters to purchase and the Selling Stockholders to sell the relevant Option Securities, as the case may be, either the (i) Representatives or (ii) the Company and any Selling Stockholder shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10. SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING STOCKHOLDERS OR THE COMPANY. (a) If a Selling Stockholder shall fail at Closing Time or at a Date of Delivery to sell and deliver the number of Securities which such Selling Stockholder or Selling Stockholders are obligated to sell hereunder, and the remaining Selling Stockholders do not exercise the right hereby granted to increase, pro rata or otherwise, the number of Securities to be sold by them hereunder to the total number to be sold by all Selling Stockholders as set forth in Schedule B hereto, then the Underwriters may, at the option of the Representatives, by notice from the Representatives to the Company and the non-defaulting Selling Stockholders, either (a) terminate this Agreement without any liability on the fault of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to purchase the Securities which the non-defaulting Selling Stockholders and the Company has agreed to sell hereunder. No action taken pursuant to this Section 11 shall relieve any Selling Stockholder so defaulting from liability, if any, in respect of such default. In the event of a default by any Selling Stockholder as referred to in this Section 11, each of the Representatives, the Company and the non-defaulting Selling Stockholders shall have the right to postpone Closing Time or Date of Delivery for a period not exceeding seven days in order to effect any required change in the Registration Statement or Prospectus or in any other documents or arrangements. (b) If the Company shall fail at Closing Time or at any Date of Delivery to sell the number of Securities that it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any nondefaulting party; provided, however, that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. SECTION 12. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representatives 25 at North Tower, World Financial Center, New York, New York 10281-1201 and 101 California Street, Suite 1420, San Francisco, California 94111, attention of Stephen R. Miller; notices to the Company shall be directed to it at 1308 Moffett Park Drive, Sunnyvale, California 94089, attention of _____________; and notices to the Selling Stockholders shall be directed to them at ___________________________________, attention of _______________. SECTION 13. PARTIES. This Agreement shall each inure to the benefit of and be binding upon the Underwriters, the Company and the Selling Stockholders and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Company and the Selling Stockholders and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters, the Company and the Selling Stockholders and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. EFFECT OF HEADINGS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. 26 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Attorney-in-Fact for the Selling Stockholder a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters, the Company and the Selling Stockholder in accordance with its terms. Very truly yours, FINISAR CORPORATION By ------------------------------------- Title ---------------------------------- By ------------------------------------- Name ----------------------------------- As Attorney-in-Fact acting on behalf of the Selling Stockholders named in Schedule B hereto CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED J.P. MORGAN & CO. DAIN RAUSCHER WESSELS, A DIVISION OF DAIN RAUSCHER INCORPORATED MORGAN KEEGAN & COMPANY, INC. SOUNDVIEW TECHNOLOGY GROUP, INC. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By ---------------------------------------------------- Authorized Signatory For themselves and as Representatives of the other Underwriters named in Schedule A hereto. 27 SCHEDULE A
Number of Name of Underwriter Initial Securities ------------------- ------------------ Merrill Lynch, Pierce, Fenner & Smith Incorporated.............................. J.P. Morgan & Co................................................ Dain Rauscher Wessels, a division of Dain Rauscher Incorporated. Morgan Keegan & Company, Inc.................................... Soundview Technology Group, Inc................................. ------- Total..................................................
Sch A - 1 SCHEDULE B
Number of Initial Maximum Number of Option Securities to be Sold Securities to be Sold --------------------- ------------------------ FINISAR CORPORATION [Selling Stockholders] Total...............................
Sch B - 1 SCHEDULE C FINISAR CORPORATION __________ Shares of Common Stock (Par Value $_____ Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $______. 2. The purchase price per share for the Securities to be paid by the several Underwriters shall be $______, being an amount equal to the initial public offering price set forth above less $______ per share; provided that the purchase price per share for any Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities. Sch C -1 SCHEDULE D List of persons and entities subject to lock-up All Stockholders, optionholders, warrant holders, officers and directors Sch D -1 Exhibit A-1 FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Purchase Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the Purchase Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or pursuant to the exercise of convertible securities or options referred to in the Prospectus); the shares of issued and outstanding capital stock of the Company, including the Securities to be purchased by the Underwriters from the Selling Stockholder(s), have been duly authorized and validly issued and are fully paid and non-assessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (v) The Securities to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to the Purchase Agreement and, when issued and delivered by the Company pursuant to the Purchase Agreement against payment of the consideration set forth in the Purchase Agreement, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder. (vi) The issuance and sale of the Securities by the Company and the sale of the Securities by the Selling Stockholder is not subject to the preemptive or other similar rights of any securityholder of the Company. (vii) To the best of our knowledge, the Company does not have any subsidiaries. (viii) The Purchase Agreement has been duly authorized, executed and delivered by the Company. A-1-1 (ix) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. (x) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information and the Rule 434 Information, as applicable, the Prospectus, and each amendment or supplement to the Registration Statement and Prospectus, as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein or omitted therefrom, as to which we need express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. (xi) If Rule 434 has been relied upon, the Prospectus was not "materially different," as such term is used in Rule 434, from the prospectus included in the Registration Statement at the time it became effective. (xii) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements, with any applicable requirements of the charter and by-laws of the Company and the requirements of the Nasdaq National Market. (xiii) To the best of our knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary is a party, or to which the property of the Company or any subsidiary is subject, before or brought by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the Purchase Agreement or the performance by the Company of its obligations thereunder. (xiv) The information in the Prospectus under "Description of Capital Stock--Common Stock", "Description of Capital Stock--Preferred Stock" and in the Registration Statement under Item 14, to the extent that it constitutes (a) matters of law, (b) summaries of legal matters, the Company's charter and bylaws or legal proceedings, or (c) legal conclusions, has been reviewed by us and is correct in all material respects. (xv) To the best of our knowledge, there are no statutes or regulations that are required to be described in the Prospectus that are not described as required. (xvi) All descriptions in the Registration Statement of contracts and other documents to which the Company or its subsidiaries are a party are accurate in all material respects; to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or A-1-2 filed or incorporated by reference as exhibits thereto, and the descriptions thereof or references thereto are correct in all material respects. (xvii) To the best of our knowledge, neither the Company nor any subsidiary is in violation of its charter or by-laws and no default by the Company or any subsidiary exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectus or filed or incorporated by reference as an exhibit to the Registration Statement. (xviii) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the Purchase Agreement or for the offering, issuance, sale or delivery of the Securities. (xix) The execution, delivery and performance of the Purchase Agreement and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectus under the caption "Use Of Proceeds") and compliance by the Company with its obligations under the Purchase Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(x) of the Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, known to us, to which the Company or any subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their respective properties, assets or operations. (xx) To the best of our knowledge, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act. (xxi) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. (xxii) Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable), (except for financial statements and schedules and other A-1-3 financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A-1-4 Exhibit A-2 FORM OF OPINION OF COMPANY'S PATENT COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The information in the Prospectus under "Risk Factors -- We are subject to a pending legal proceeding" and "Business--Pending Litigation" has been reviewed by us and is correct in all material respects. (ii) Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable), (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (iii) To our knowledge, there are no legal or governmental proceedings other than proceedings described in the sections of the Prospectus referred to above in paragraph (i) and patent applications pending, relating to patent rights of the Company to which the Company is a party, and, to our knowledge, no such proceedings are threatened or contemplated by governmental authorities or others. (iv) To our knowledge, the Company has not received any communication in which it is alleged that the Company is infringing or violating the patent rights of third parties other than with respect to the proceedings described in the sections of the Prospectus referred to above in paragraph (i). In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A-2-1 Exhibit B FORM OF OPINION OF COUNSEL FOR THE SELLING STOCKHOLDER TO BE DELIVERED PURSUANT TO SECTION 5(c) (i) No filing with, or consent, approval, authorization, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, (other than the issuance of the order of the Commission declaring the Registration Statement effective and such authorizations, approvals or consents as may be necessary under state securities laws, as to which we need express no opinion) is necessary or required to be obtained by the Selling Stockholders for the performance by each Selling Stockholder of its obligations under the Purchase Agreement or in the Power of Attorney and Custody Agreement, or in connection with the offer, sale or delivery of the Securities. (ii) Each Power of Attorney and Custody Agreement has been duly executed and delivered by the respective Selling Stockholder named therein and constitutes the legal, valid and binding agreement of each Selling Stockholder. (iii) The Purchase Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder. (iv) Each Attorney-in-Fact has been duly authorized by the Selling Stockholders to deliver the Securities on behalf of the Selling Stockholders in accordance with the terms of the Purchase Agreement. (v) The execution, delivery and performance of the Purchase Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities and the consummation of the transactions contemplated in the Purchase Agreement and in the Registration Statement and compliance by the Selling Stockholders with their obligations under the Purchase Agreement have been duly authorized by all necessary action on the part of the Selling Stockholders and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities or any property or assets of the Selling Stockholders pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other instrument or agreement to which any Selling Stockholder is a party or by which it may be bound, or to which any of the property or assets of the Selling Stockholders may be subject nor will such action result in any violation of the provisions of the charter or by-laws of the Selling Stockholders, if applicable, or any law, administrative regulation, judgment or order of any governmental agency or body or any administrative or court decree having jurisdiction over such Selling Stockholder or any of its properties. (vi) To the best of our knowledge, each Selling Stockholder has valid and marketable title to the Securities to be sold by such Selling Stockholder pursuant to the Purchase Agreement, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any B-1 kind, and has full right, power and authority to sell, transfer and deliver such Securities pursuant to the Purchase Agreement. By delivery of a certificate or certificates therefor such Selling Stockholder will transfer to the Underwriters who have purchased such Securities pursuant to the Purchase Agreement (without notice of any defect in the title of such Selling Stockholder and who are otherwise bona fide purchasers for purposes of the Uniform Commercial Code) valid and marketable title to such Securities, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. (vii) Nothing has come to our attention that would lead us to believe that the Registration Statement or any amendment thereto, including the Rule 430A Information and Rule 434 Information (if applicable), (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectus was issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-2 Exhibit C FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO SECTION 5(K) __________, 1999 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan & Co., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, Morgan Keegan & Company, Inc., Soundview Technology Group, Inc., as Representatives of the several Underwriters to be named in the within-mentioned Purchase Agreement C/O MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED North Tower World Financial Center New York, New York 10281-1209 Re: PROPOSED PUBLIC OFFERING BY FINISAR CORPORATION Dear Sirs: The undersigned, a securityholder and/or an officer and/or director of Finisar Corporation, a Delaware corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") proposes to enter into a Purchase Agreement (the "Purchase Agreement") with the Company providing for the public offering of shares (the "Securities") of the Company's common stock, par value $[_____] per share (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a securityholder and/or an officer and/or director of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Purchase Agreement that, during a period of 180 days from the date of the Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any C-1 transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. In addition, the undersigned hereby waives any right to receive notice of the proposed offering and related registration and to cause the Company to include in the proposed registration any securities of the undersigned. Very truly yours, Signature: -------------------------------- Print Name: ------------------------------- C-2 EX-3.1 3 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF FINISAR CORPORATION Jerry S. Rawls and Wynette Levinson certify that: They are the President and Secretary, respectively, of Finisar Corporation, a California corporation (the "Corporation"). The Amended and Restated Articles of Incorporation of the Corporation are hereby amended and restated in their entirety to read as set forth: *** I. The name of this corporation is Finisar Corporation. II. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. III. AUTHORIZATION TO ISSUE TWO CLASSES. This Corporation is authorized to issue two classes of shares designated, respectively, Preferred Stock and Common Stock. The Corporation is authorized to issue 24,200,000 shares of Preferred Stock, no par value (the "Preferred Stock") and 75,000,000 shares of Common Stock, no par value (the "Common Stock"). IV. A. SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK 1. DESIGNATION. A total of Twelve Million One Hundred Thousand (12,100,000) shares of the Corporation's Preferred Stock shall be designated as Series A Convertible Redeemable Preferred Stock, no par value per share (the "Convertible Preferred Stock"). 2. ELECTION OF DIRECTORS; VOTING. (a) ELECTION OF DIRECTORS. The holders of outstanding shares of Convertible Preferred Stock shall, voting together as a separate class, be entitled to elect one (1) Director ("Director") of the Corporation. Such Director shall be the candidate receiving the highest number of affirmative votes (with only the holders of Convertible Preferred Stock entitled to cast one vote for or against each candidate with respect to each share of Convertible Preferred Stock held by such holder) of the outstanding shares of Convertible Preferred Stock (the "Convertible Preferred Stock Director Designee"), with votes cast against such candidates and votes withheld having no legal effect. The election of the Convertible Preferred Stock Director Designee by the holders of the Convertible Preferred Stock shall occur (i) at the annual meeting of holders of capital stock, (ii) at any special meeting of holders of capital stock, (iii) at any special meeting of holders of Convertible Preferred Stock called by holders of a majority of the outstanding shares of Convertible Preferred Stock or (iv) by the written consent of holders of a majority of the outstanding shares of Convertible Preferred Stock. If at any time when any share of Convertible Preferred Stock is outstanding the Convertible Preferred Stock Director Designee should cease to be a Director for any reason, the vacancy shall only be filled by the vote or written consent of the holders of the outstanding shares of Convertible Preferred Stock, voting together as a separate class, in the manner and on the basis specified above. (b) VOTING GENERALLY. Each holder of Convertible Preferred Stock shall be entitled to the number of votes equal to the largest number of full shares of Common Stock into which the shares of Convertible Stock held by such holder could be converted pursuant to Section A.6 hereof on the record date for such meeting or the effective date of the written consent of shareholders, if applicable. Each holder of Convertible Preferred Stock shall be entitled to notice of any shareholders' meeting in accordance with the bylaws of the Corporation and shall vote with holders of the Common Stock, voting together as a single class, upon all matters submitted to a vote of shareholders excluding those matters required to be submitted to a class or series vote pursuant to the terms hereof (including without limitation Section A.8) or by law. 3. DIVIDENDS. (a) The holders of shares of Convertible Preferred Stock will be entitled to receive, if when and as declared by the Board of Directors, out of any funds legally available therefor, noncumulative dividends at the rate of 6% of the Convertible Base Liquidation Preference Amount (as defined below) per share per annum (appropriately adjusted for stock splits and combinations) for each share of Convertible Preferred Stock then held by them ( the "Convertible Preferred Stock Dividend Rate"). Such dividends may be payable quarterly or otherwise as the Board of Directors may from time to time determine. Dividends may be declared and paid upon shares of Common Stock in any fiscal year of the Corporation, only if dividends shall have been paid to or declared and set apart upon all shares of Convertible Preferred Stock, and all shares of any other series of Preferred Stock on a parity with the Convertible Preferred Stock, at its annual rate for each quarter of such fiscal year of the Corporation, including the quarter in which such dividends upon shares of Common Stock are declared, or if the amount of dividends to be paid on each share of Common Stock exceed the amount payable at the Convertible Preferred Stock Dividend Rate, an amount of dividends on each share of Convertible Preferred Stock equal to the amount to be paid on each share of Common Stock in excess of the amount to be paid on each share of Common Stock, and all redemptions then due and payable on the Convertible Preferred Stock shall have been paid in full or set apart for payment in full. No right shall accrue to holders of Convertible Preferred Stock by reason of the fact that dividends on said shares are not declared in any prior year, nor shall any undeclared or unpaid dividends bear or accrue interest. (b) If any dividend or other distribution payable in property other than cash is declared on the Common Stock excluding any dividend or other distribution for which adjustment to the Conversion Price (as defined below) is provided by Section A.7(a), each holder of shares of Convertible Preferred Stock on the record date for such dividend or distribution shall be entitled to receive on the date of payment or distribution of such dividend or other distribution, the same property that such holder would have received if on such record date such holder was the holder of record of the number of shares of Common Stock into which the shares of Convertible Preferred Stock then held by such holder are convertible. 4. LIQUIDATION. (a) LIQUIDATION PREFERENCE. (i) Upon any Liquidation Event (as defined below), each holder of outstanding shares of Convertible Preferred Stock shall be entitled to be paid first out of the assets of the Corporation available for distribution to shareholders, whether such assets are capital, surplus or earnings, and before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Convertible Preferred Stock, an amount in cash equal to (i) $2.1932 per share of Convertible Preferred Stock held by such holder (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Convertible Preferred Stock) (the "Convertible Base Liquidation Preference Amount"), plus (ii) any accrued but unpaid dividends to which such holder of outstanding shares of Convertible Preferred Stock is then entitled pursuant to Sections A.3 and A.5(d) hereof, plus (iii) any interest accrued pursuant to Section A.5(c) to which such holder of Convertible Preferred Stock is entitled (collectively, the "Convertible Preferred Liquidation Preference Amount"), and thereafter shall share ratably with the holders of Common Stock, with such distributions to be made as if each share of Convertible Preferred Stock had been converted into the number of shares of Common Stock issuable upon the conversion of such holder's shares of Convertible Preferred Stock immediately prior to any such Liquidation Event; PROVIDED, HOWEVER, that if, upon any Liquidation Event, the amounts payable with respect to the Convertible Preferred Stock are not paid in full, the holders of the Convertible Preferred Stock shall share ratably any distribution of assets in proportion to the full preferential amounts to which they are entitled. The provisions of this Section A.4 shall not in any way limit the right of the holders of Convertible Preferred Stock to elect to convert their shares of Convertible Preferred Stock into Redeemable Preferred Stock and Common Stock pursuant to Section A.6 prior to or in connection with any Liquidation Event. (ii) For purposes of these Articles, the term "Liquidation Event" shall mean (v) any liquidation, dissolution or winding up of the Corporation or any of its subsidiaries; (w) a merger or consolidation of the Corporation with or into another entity or any other transaction or series of related transactions, in any such case in connection with or as a result of which the Corporation is not the surviving entity or the owners of the Corporation's outstanding equity securities prior to the transaction or series of related transactions do not own at least a majority of the outstanding equity securities of the surviving, resulting or consolidated entity; (x) any purchase by any party of shares of capital stock of the Corporation (either through a negotiated stock purchase or a tender for such shares), the effect of which is that such party that did not beneficially own a majority of the voting power of the outstanding shares of capital stock of the Corporation immediately prior to such purchase beneficially owns at least a majority of such voting power immediately after such purchase; (y) the redemption or repurchase of shares representing a majority of the voting power of the outstanding shares of capital stock of the Corporation; or (z) the sale or lease or other disposition of all or substantially all of the assets of the Corporation or winding up of the Corporation and shall entitle the holders of the Convertible Preferred Stock to receive at the closing in cash, securities or other property (valued as provided in Section A.4(a)(iii) below) amounts as specified in Section A.4(a)(i). (iii) Whenever the distribution provided for in this Section A.4(a) shall be payable in securities or property other than cash, the value of such distribution shall be the fair market value of such securities or other property. Securities shall be valued in the manner set forth in the definitive agreement for such acquisition, merger, consolidation or other transaction, and if no such method of valuation is set forth in such definitive agreement: (x) If traded on a securities exchanges or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the thirty (30) day period ending three (3) days prior to the closing; (y) If actively traded over-the-counter but not on the Nasdaq National Market, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the closing; and (z) If there is no active market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors of the Corporation. (b) NOTICE. Prior to the occurrence of any Liquidation Event, the Corporation will furnish each holder of Convertible Preferred Stock notice in accordance with Section A.9 together with a certificate prepared by the chief financial officer of the Corporation describing in detail the facts of such Liquidation Event, stating in detail the amount(s) per share of Convertible Preferred Stock each holder of Convertible Preferred Stock would receive pursuant to the provisions of Section A.4(a) hereof and stating in detail the fact upon which such amount was determined. 5. REDEMPTION. (a) REDEMPTION EVENTS. (i) The holder or holders of not less than a majority in voting power of the outstanding Convertible Preferred Stock may require the Corporation to redeem the outstanding Convertible Preferred Stock in three equal installments with the first such installment for thirty-three and one-third percent (33-1/3%) of the then outstanding shares of Convertible Preferred Stock being due and payable on November 6, 2004 the second such installment for fifty percent (50%) of the then-outstanding shares of Convertible Preferred Stock being due and payable on November 6, 2005 and the third and final such installment for all remaining outstanding shares of Convertible Preferred Stock being due and payable on November 6, 2006. (ii) An election pursuant to subparagraph (i) of this Section A.5(a) shall be made by such holders giving the Corporation and each other holder of Convertible Preferred Stock not less than ninety (90) days prior written notice, which notice shall set forth the date for such redemption. (b) REDEMPTION DATE; REDEMPTION PRICE. Upon the election of the holders of at least a majority of the voting power of the outstanding Convertible Preferred Stock to cause the Corporation to redeem the Convertible Preferred Stock pursuant to Section A.5(a)(i), all holders of Convertible Preferred Stock shall be deemed to have elected to cause all of the Convertible Preferred Stock to be so redeemed. Any date upon which a redemption shall occur in accordance with Section A.5(a) shall be referred to as a "Convertible Preferred Redemption Date." The redemption price for each share of Convertible Preferred Stock redeemed pursuant to Section A.5 shall be an amount in cash equal to (i) the Convertible Base Liquidation Preference Amount plus (ii) any accrued but unpaid dividends on such shares of Convertible Preferred Stock pursuant to Sections A.3 and A.5(d) hereof, plus (iii) any interest accrued with respect to such share of Convertible Preferred Stock pursuant to Section A.5(c) to which such holder of Convertible Preferred Stock is entitled (collectively, the "Convertible Preferred Redemption Price"). The aggregate Convertible Preferred Redemption Price shall be payable in cash in immediately available funds to the respective holders of the Convertible Preferred Stock on the Convertible Preferred Redemption Date, subject to Section A.5(c). After an election has been made under this Section A.5(b) by the holders of at least a majority of the voting power of the outstanding Convertible Preferred Stock, until the full Convertible Preferred Redemption Price has been paid to such holders for all shares of Convertible Preferred Stock being redeemed: (A) no dividend whatsoever shall be paid or declared, and no distribution shall be made, on any capital stock of the Corporation (other than the Convertible Preferred Stock in accordance with Section A.5(d)); and (B) no shares of capital stock of the Corporation (other than the Convertible Preferred Stock in accordance with this Section A.5) shall be purchased, redeemed or acquired by the Corporation and no monies shall be paid into or made available for a sinking fund or set aside or made available for the purchase, redemption or acquisition thereof. Notwithstanding the election to cause the Corporation to redeem the Convertible Preferred Stock as provided above, until the full Convertible Preferred Redemption Price has been paid to the holders of the Convertible Preferred Stock, the holders of at least a majority of the voting power of the outstanding Convertible Preferred Stock may rescind such election by providing written notice thereof to the Corporation. (c) REDEMPTION PROHIBITED. If, at a Convertible Preferred Redemption Date, the Corporation is prohibited under the Corporations Code of the State of California from redeeming all shares of Convertible Preferred Stock for which redemption is required hereunder, then it shall redeem such shares on a pro-rata basis among the holders of Convertible Preferred Stock in proportion to the full respective redemption amounts to which they are entitled hereunder to the extent possible and shall redeem the remaining shares to be redeemed as soon as the Corporation is not prohibited from redeeming some or all of such shares under the Corporations Code of the State of California. The shares of Convertible Preferred Stock not redeemed shall remain outstanding and entitled to all of the rights and preferences provided in these Articles. In the event that the Corporation fails to redeem shares for which redemption is required pursuant to this Section A.5, then during the period from the applicable Convertible Preferred Redemption Date through the date on which such shares are redeemed, the applicable Convertible Preferred Redemption Price of such shares shall bear interest at the per annum rate of the greater of (i) 9% or (ii) 3% over the Citibank, N.A. prime rate published in the Wall Street Journal on such Convertible Preferred Redemption Date, compounded annually; PROVIDED, HOWEVER, that in no event shall such interest exceed the maximum permitted rate of interest under applicable law (the "Maximum Permitted Rate"). In the event that fulfillment of any provision hereof results in such rate of interest being in excess of the Maximum Permitted Rate, the obligation to be fulfilled shall automatically be reduced to the extent required to eliminate such excess. (d) DIVIDEND AFTER CONVERTIBLE PREFERRED REDEMPTION DATE. From and after a Convertible Preferred Redemption Date, no shares of Convertible Preferred Stock subject to redemption shall be entitled to dividends, if any, as contemplated by Section A.3; PROVIDED, HOWEVER, that in the event that shares of Convertible Preferred Stock are unable to be redeemed and continue to be outstanding in accordance with Section A.5(c), such shares shall continue to be entitled to dividends and interest thereon as provided in Sections A.3 and A.5(c) until the date on which such shares are actually redeemed by the Corporation. (e) SURRENDER OF CERTIFICATES. The Corporation shall give, not less than 10 days prior to the Convertible Preferred Redemption Date, written notice (the "Redemption Notice") to all holders of the Convertible Preferred Stock, which shall require each holder submitting shares for redemption to surrender to the Corporation on or before the Convertible Preferred Redemption Date, at the place designated in the Redemption Notice, such holder's certificate or certificates representing the shares of Convertible Preferred Stock to be redeemed. On or prior to the Redemption Date, each holder of shares of Convertible Preferred Stock submitted for redemption shall surrender the certificate or certificates evidencing such shares to the Corporation, at the place designated in the Redemption Notice and shall thereupon be entitled to receive payment of the appropriate Redemption Price by certified check or wire transfer. In the event the certificate or certificates are lost, stolen or missing, the holder of Convertible Preferred Stock shall deliver an affidavit or agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith (an "Affidavit of Loss") with respect to such certificates at the place set forth in the Redemption Notice. Each surrendered certificate shall be cancelled and retired; PROVIDED, HOWEVER, that if the holder has exercised its redemption right pursuant to Section A.5(a)(i) or the Corporation is prohibited from redeeming all shares of Convertible Preferred Stock as provided in Section A.5(c), the holder shall not be required to surrender said certificate(s) to the Corporation until said holder has received a new stock certificate for those shares of Convertible Preferred Stock not so redeemed. 6. CONVERSION. The holders of the Convertible Preferred Stock shall have the following conversion rights: (a) CONVERSION UPON ELECTION. Upon the written election of the holder or holders of not less than a majority in voting power of the outstanding shares of Convertible Preferred Stock, which may be exercised at any time, and without the payment of any additional consideration, each of the outstanding shares of Convertible Preferred Stock shall be automatically converted into (i) the number of fully paid and nonassessable shares of Common Stock which results from dividing the Conversion Price (as defined in this Section A.6(a)) per share in effect for the Convertible Preferred Stock at the time of conversion into the per share Conversion Value (as defined in this Section A.6(a)) of the Convertible Preferred Stock and (ii) one (1) fully paid and non-assessable share of Redeemable Preferred Stock per share of Convertible Preferred Stock. The foregoing election may be conditioned on the occurrence of any Liquidation Event or initial public offering. The "Conversion Price" for each share of Convertible Preferred Stock shall initially be $2.1932 and the "Conversion Value" for each share of Convertible Preferred Stock shall be initially $2.1932. The Conversion Price per share of Convertible Preferred Stock shall be subject to adjustment from time to time as provided in Section A.7 hereof. The number of shares of Common Stock into which a share of Convertible Preferred Stock is convertible is hereinafter referred to as the "Common Stock Conversion Rate." The number of shares of Redeemable Preferred Stock into which a share of Convertible Preferred Stock is convertible is hereinafter referred to as the "Redeemable Conversion Rate." If the holders of shares of Convertible Preferred Stock elect to convert the outstanding shares of Convertible Preferred Stock at a time when there are any accrued but unpaid dividends or other amounts due on or in respect of such shares, such dividends and other amounts shall become part of the Redeemable Liquidation Preference Amount, and shall become payable and shall be paid in full upon a Liquidation Event as set forth in Section B.4 or redemption of the Redeemable Preferred Stock (as set forth in Section B.5). (b) AUTOMATIC CONVERSION UPON QPO. Each share of Convertible Preferred Stock shall automatically be converted, without the payment of any additional consideration (except as set forth in the final paragraph of this Section A.6(b)), into shares of Common Stock and Redeemable Preferred Stock as of, and in all cases subject to, the closing of the Corporation's first QPO (as defined below in this Section A.6(b)); PROVIDED that if a closing of a QPO occurs, all outstanding shares of Convertible Preferred Stock shall be deemed to have been converted into shares of Common Stock and Redeemable Preferred Stock as provided herein immediately prior to such closing. Any such conversion shall be at the Common Stock Conversion Rate and Redeemable Conversion Rate in effect upon the closing of the QPO, as provided in Section A.6(a). "QPO" and "Qualified Public Offering" mean a firm commitment public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, PROVIDED that (i) such registration statement covers the offer and sale of Common Stock of which the aggregate net proceeds after deducting underwriting discounts and commissions attributable to sales for the account of the Corporation exceed $20,000,000 at a per share price to public (as set forth in the final prospectus in connection with such public offering (the "Public Offering Price") equal to at least two (2) times the Conversion Price, and (ii) all shares of Redeemable Preferred Stock which are outstanding or issuable upon such automatic conversion are redeemed immediately upon and as of the closing of such offering or contemporaneously with such offering for cash. If the holders of shares of Convertible Preferred Stock are required to convert the outstanding shares of Convertible Preferred Stock pursuant to this Section A.6(b) at a time when there are any accrued but unpaid dividends or other amounts due on or in respect of such shares, such dividends and other amounts shall be paid in full in cash by the Corporation in connection with such conversion. (c) PROCEDURE FOR CONVERSION UPON ELECTION. Upon the execution of the election to convert pursuant to Section A.6(a), all outstanding shares of Convertible Preferred Stock shall be converted automatically into shares of Common Stock and Redeemable Preferred Stock at the applicable conversion rates specified in Section A.6(a), without any further action by the holders of such shares and whether or not the certificates representing such shares of Convertible Preferred Stock are surrendered to the Corporation or its transfer agent. The Corporation shall not be obligated to issue certificates evidencing the shares of Redeemable Preferred Stock or Common Stock issuable upon such conversion unless certificates evidencing such shares of the Convertible Preferred Stock so converted, or an Affidavit or Affidavits of Loss with respect to such certificates, are delivered to the Corporation or its transfer agent. Upon such conversion, all rights with respect to the Convertible Preferred Stock so converted shall terminate, except any of the rights of the holders thereof upon surrender of their certificate or certificates therefor or delivery of an Affidavit of Loss thereof to receive certificates for the number of shares of Common Stock and Redeemable Preferred Stock into which such Convertible Preferred Stock has been converted. Upon such surrender of a certificate representing Convertible Preferred Stock, or delivery of an Affidavit of Loss, the Corporation shall issue and send by hand delivery, by courier or by first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, certificates for the number of shares of Common Stock and Redeemable Preferred Stock to which such holder shall be entitled upon conversion. The issuance of certificates for Common Stock and Redeemable Preferred Stock upon conversion of Convertible Preferred Stock will be made without charge to the holders of such shares for any issuance tax in respect thereof or other costs incurred by the Corporation in connection with such conversion and the related issuance of such stock. Certificates so surrendered shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. Notwithstanding anything to the contrary set forth in this Section A.6(c), in the event that the holders of shares of Convertible Preferred Stock elect to convert such shares pursuant to Section A.6(a) conditioned upon the occurrence of any Liquidation Event or initial public offering, then (i) the conversion shall be effective as of and shall be subject to the occurrence of such Liquidation Event or initial public offering, and (ii) if such Liquidation Event or initial public offering occurs, then the conversion shall be deemed to have occurred immediately prior thereto; provided that the Corporation shall make appropriate provisions (x) for the Common Stock issued upon such conversion to be treated on the same basis as all other Common Stock in such Liquidation Event or initial public offering, provided further that such conversion shall not be construed to provide or require the registration of any shares of Common Stock for sale; and (y) for the payment of the Redeemable Liquidation Preference Amount (as defined in Section B.4) in connection with any Liquidation Event or the redemption of the Redeemable Preferred Stock (issued upon such conversion) upon election of such redemption in connection with any Liquidation Event or initial public offering, if applicable, as provided herein. (d) PROCEDURE FOR AUTOMATIC CONVERSION. As of, and in all cases subject to, the closing of a QPO (the "Automatic Conversion Date"), all outstanding shares of Convertible Preferred Stock shall be converted automatically into shares of Common Stock and Redeemable Preferred Stock at the applicable conversion rates specified in Section A.6(a) and without any further action by the holders of such shares and whether or not the certificates representing such shares of Convertible Preferred Stock are surrendered to the Corporation or its transfer agent; PROVIDED, HOWEVER, that all holders of Convertible Preferred Stock shall be given prior written notice of the occurrence of a QPO in accordance with Section A.9 hereof. The Corporation shall not be obligated to issue certificates evidencing the shares of Redeemable Preferred Stock or Common Stock issuable on the Automatic Conversion Date (or the payment for the shares of Redeemable Preferred Stock which are redeemed immediately after such automatic conversion as provided below and in Section B.5(a)(i)) unless certificates evidencing such shares of the Convertible Preferred Stock being converted, or an Affidavit or Affidavits of Loss with respect to such certificates, are delivered to the Corporation or its transfer agent. On the Automatic Conversion Date, all rights with respect to the Convertible Preferred Stock so converted shall terminate, except any of the rights of the holders thereof upon surrender of their certificate or certificates therefor or delivery of an Affidavit of Loss thereof to receive certificates for the number of shares of Common Stock and Redeemable Preferred Stock into which such Convertible Preferred Stock has been converted (or the payment to which such holder is entitled as provided below and in Sections A.6(b) and B.5(a)(i)). All accrued and unpaid dividends shall be paid in full prior to or upon the closing of such QPO. Certificates so surrendered shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. Upon surrender of such certificates or Affidavit of Loss the Corporation shall issue and deliver to such holder, promptly (and in any event in such time as is sufficient to enable such holder to participate in such QPO) at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock and number of shares of Redeemable Preferred Stock into which the shares of the Convertible Preferred Stock surrendered were convertible on the Automatic Conversion Date. Notwithstanding anything to the contrary set forth in this Section A.6(d), the Corporation may deliver, in lieu of certificates for Redeemable Preferred Stock, a payment in an amount and form determined pursuant to Section B.5(b) hereof on account of the redemption of such Redeemable Preferred Stock, and upon such payment the Redeemable Preferred Stock into which such Convertible Preferred Stock would have been converted shall be deemed to have been issued and redeemed by the Corporation. (e) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock and Redeemable Preferred Stock solely for the purpose of effecting the conversion of the shares of Convertible Preferred Stock such number of its shares of Common Stock and Redeemable Preferred Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Convertible Preferred Stock, and if at any time the number of authorized but unissued shares of Convertible Preferred Stock, shares of Common Stock and Redeemable Preferred Stock shall not be sufficient to effect the conversion of all then outstanding shares of Convertible Preferred Stock, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock and Redeemable Preferred Stock to such number of shares as shall be sufficient for such purpose. (f) NO CLOSING OF TRANSFER BOOKS. The Corporation shall not close its books against the transfer of shares of Convertible Preferred Stock in any manner which would interfere with the timely conversion of any shares of Convertible Preferred Stock. 7. ADJUSTMENTS. The Conversion Price in effect from time to time shall be subject to adjustment from and after the original issue date of the Convertible Preferred Stock, as follows: (a) ADJUSTMENTS TO CONVERSION PRICE. (i) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of the Common Stock, the Conversion Price shall simultaneously with the happening of such dividend, subdivision or split be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section A.7(a)(i) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of shareholders entitled to receive such dividend or distribution (on a retroactive basis) and in the case of a subdivision or combination shall become effective immediately as of the effective date thereof. (ii) SALE OF COMMON STOCK. In the event the Corporation shall at any time, or from time to time, issue, sell or exchange any shares of Common Stock (including shares held in the Corporation's treasury, but excluding up to an aggregate 6,075,611 shares of Common Stock (as appropriately adjusted for stock splits, stock dividends and the like)) issued or issuable to officers, Directors, employees of, or consultants, advisors, independent contractors to the Corporation (collectively, "Eligible Employees") or upon the exercise of options or other rights issued to such Eligible Employees (the "Excluded Shares"), for a consideration per share less than the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares, then, and thereafter successively upon ech such issuance, sale or exchange, the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares shall forthwith be reduced to an amount determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (X) the number of shares of Common Stock and Preferred Stock of all classes outstanding immediately prior to the issuance of such additional shares of Common Stock (excluding treasury shares but including shares of Common Stock issuable upon conversion or exchange of outstanding convertible or exchangeable securities of the Company), plus (Y) the number of shares of Common Stock to which the net aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued would purchase at the Conversion Price (prior to adjustment), and (B) the denominator of which shall be (X) the number of shares of Common Stock and Preferred Stock of all classes outstanding immediately prior to the issuance of such additional shares of Common Stock (excluding treasury shares but including shares of Common Stock issuable upon conversion or exchange of outstanding convertible or exchangeable securities of the Company), plus (Y) the number of such additional shares of Common Stock so issued. (iii) SALE OF OPTIONS, RIGHTS OR CONVERTIBLE SECURITIES. In the event the Corporation shall at any time or from time to time, issue options, warrants or rights to subscribe for shares of Common Stock or issue any securities convertible into or exchangeable for shares of Common Stock (other than any options or warrants for Excluded Shares), for a consideration per share (determined by dividing the Net Aggregate Consideration (as determined below) by the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted to the fullest extent permitted by their terms) less than the Conversion Price in effect immediately prior to the issuance of such options or rights or convertible or exchangeable securities, the Conversion Price in effect immediately prior to the issuance of such options, warrants or rights or securities shall be reduced to an amount determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (X) the number of shares of Common Stock and Preferred Stock of all classes outstanding immediately prior to the issuance of such options, rights or convertible securities (excluding treasury shares but including shares of Common Stock issuable upon conversion or exchange of outstanding convertible or exchangeable securities of the Company), plus (Y) the number of shares of Common Stock which the total amount of consideration received by the Corporation for the issuance of such options, warrants, rights or convertible securities plus the minimum amount set forth in the terms of such security as payable to the Corporation upon the exercise or conversion thereof (the "Net Aggregate Consideration") would purchase at the Conversion Price prior to adjustment, and (B) the denominator of which shall be (X) the number of shares of Common Stock and Preferred Stock of all classes outstanding immediately prior to the issuance of such options, warrants, rights or convertible securities (excluding treasury shares but including shares of Common Stock issuable upon conversion or exchange of outstanding convertible or exchangeable securities of the Company), plus (Y) the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted. (iv) EXPIRATION OR CHANGE IN PRICE. If the consideration per share provided for in any options or rights to subscribe for shares of Common Stock or any securities exchangeable for or convertible into shares of Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such options or convertible securities provided for such changed consideration per share (determined as provided in Section A.7(a)(iii) hereof), at the time initially granted, issued or sold; PROVIDED that such adjustment of the Conversion Price will be made only as and to the extent that the Conversion Price effective upon such adjustment remains less than or equal to the Conversion Price that would be in effect if such options, rights at securities had not been issued. No adjustment of the Conversion Price shall be made under this Section A.7(a) upon the issuance of any additional share of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities if an adjustment shall previously have been made upon the issuance of such warrants, options or other rights. Any adjustment of the Conversion Price shall be disregarded if, as, and when the rights to acquire shares of Common Stock upon exercise or conversion of the warrants, options, rights or convertible securities which gave rise to such adjustment expire or are canceled without having been exercised, so that the Conversion Price effective immediately upon such cancellation or expiration shall be equal to the Conversion Price in effect at the time of the issuance of the expired or canceled warrants, options, rights or convertible securities, with such additional adjustments as would have been made to that Conversion Price had the expired or canceled warrants, options, rights or convertible securities not been issued. (b) OTHER ADJUSTMENTS. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the holders of Convertible Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Convertible Preferred Stock been converted into Common Stock and Redeemable Preferred Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section A.7 as applied to such distributed securities. If the Common Stock issuable upon the conversion of the Convertible Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section A.7), then and in each such event the holder of each share of Convertible Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Convertible Preferred Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (c) MERGERS AND OTHER REORGANIZATIONS. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section A.7) or a merger or consolidation of the Corporation with or into another Corporation or the sale of all or substantially all of the Corporation's properties and assets to any other person, then, as a part of and as a condition to the reorganization, merger, consolidation or sale, lawful and adequate provision shall be made so that the holders of the Convertible Preferred Stock shall thereafter be entitled to receive upon conversion of the Convertible Preferred Stock the number of shares of stock or other securities or property of the Corporation or of the successor Corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate provisions shall be made with respect to the rights of the holders of the Convertible Preferred Stock after the reorganization, merger, consolidation or sale to the end that the provisions of this Section A.7 (including without limitation provisions for adjustment of the Conversion Price and the number of shares purchasable upon conversion of the Convertible Preferred Stock) shall thereafter be applicable, as nearly as may be, with respect to any shares of stock, securities or assets to be deliverable thereafter upon the conversion of the Convertible Preferred Stock. (d) SPECIAL ADJUSTMENTS TO CONVERSION PRICE OF CONVERTIBLE PREFERRED STOCK. In addition to the foregoing adjustments, if the Corporation shall effect a firmly-underwritten initial public offering prior to July 30, 2000, the Conversion Price shall be adjusted as follows: (i) If the Public Offering Price ("POP") is less than or equal to $4.4113, then no adjustment shall be made to the Conversion Price under this Section A.7(d). (ii) If the POP is greater than $4.4113 and less than or equal to $5.7135, then the Conversion Price shall be adjusted by the following formula (rounded to the nearest hundredth of a cent): Conversion Price = $2.1932+[(POP - $4.4113)/($5.7135-$4.4113)]* ($2.5250-$2.1932). (iii) If the POP is greater than $5.7135 and less than or equal to $7.0955, then the Conversion Price shall be adjusted by the following formula (rounded to the nearest hundredth of a cent): Conversion Price = $2.5250+[(POP - $5.7135)/($7.0955-$5.7135)]* ($2.9398-$2.5250). (iv) If the POP is greater than $7.0955, then the Conversion Price shall be $2.9398, subject to adjustment as provided elsewhere in this Section A.7. The prices set forth above, including the POP, wherever appearing, shall be adjusted for stock splits, stock dividends, reclassifications, combinations and the like. (e) CERTIFICATE OF ADJUSTMENT. Upon the occurrence of each adjustment or readjustment pursuant to this Section A.7, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Convertible Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustments is based. The Corporation shall, upon written request at any time of any holder of Convertible Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Prices before and after such adjustment or readjustment, and (iii) the number of shares of Common Stock and Redeemable Preferred Stock and the amount, if any, of other property which at the time would be received upon the conversion of such holder's shares of Convertible Preferred Stock. 8. COVENANTS. So long as any shares of Convertible Preferred Stock shall be outstanding, the Corporation shall not, without first having provided the written notice of such proposed action to each holder of outstanding shares of Convertible Preferred Stock and having obtained the affirmative vote or, written consent of the holders of at least a majority in voting power of the outstanding shares of Convertible Preferred Stock, voting as a single class, with each share of Convertible Preferred Stock entitling the holder thereof to one vote per share of Convertible Preferred Stock held by such holder: (a) directly or indirectly redeem, purchase, or otherwise acquire for consideration any share of its Common Stock or any other class of its capital stock except for (i) redemption of Convertible Preferred Stock or Redeemable Preferred Stock pursuant to and as provided in this Certificate, (ii) repurchase of up to 14,610,000 shares of Common Stock from the shareholders of the Corporation pursuant to Repurchase Agreements entered into before December 4, 1998, (iii) redemption or repurchase of Common Stock valued at a maximum of $10,000 per annum issued pursuant to the Plan from Eligible Employees (as defined in Section A.7(a)(ii)) pursuant to an agreement containing vesting and/or repurchase provisions approved by the Board of Directors of the Corporation or a committee thereof, or (iv) repurchase of Common Stock pursuant to and only to the extent required by the Amended and Restated Shareholders' Agreement dated effective November 4, 1998 by and among the Corporation, the Investors and the Employee Holders (as defined therein); (b) adopt any amendment to these Articles, to the Corporation's Bylaws or adopt any certificate of designations, preferences and rights for another series of the Corporation's capital stock that eliminates, amends or restricts or otherwise adversely affects the rights and preferences of the Convertible Preferred Stock or the Redeemable Preferred Stock, or increase the authorized shares of Convertible Preferred Stock or Redeemable Preferred Stock; (c) with the exception of the repurchase of up to 14,610,000 shares of Common Stock within thirty (30) days of the filing of these Articles, declare or make dividend payments on any shares of Common Stock or any other class of the Corporation's capital stock; (d) create, or obligate itself to create, any class or series of shares having preference over or being on a parity with the Convertible Preferred Stock or the Redeemable Preferred Stock; (e) increase the size of the Board of Directors to more than seven (7) members; or (f) pay any bonuses to the Corporation's executive officers other than bonuses consistent with past practices unless any such bonus shall have been approved by the compensation committee of the Board of Directors. Further, the Corporation and each subsidiary of the Corporation shall not, by amendment of these Articles of Incorporation or any certificate of designations, preferences and rights for another series of the Corporation's capital stock or through any Liquidation Event or other reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation and each subsidiary of the Corporation but shall at all times in good faith assist in the carrying out of all the provisions of these Articles and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders of the Convertible Preferred Stock and the Redeemable Preferred Stock set forth in these Articles against impairment. Any successor to the Corporation or any subsidiary of the Corporation shall agree, as a condition to such succession, to carry out and observe the obligations of the Corporation hereunder with respect to the Convertible Preferred Stock and the Redeemable Preferred Stock. 9. NOTICE. (a) LIQUIDATION EVENTS. In the event (i) the Corporation establishes a record date to determine the holders of any class of securities who are entitled to receive any dividend or other distribution or who are entitled to vote at a meeting (or by written consent) in connection with any of the transactions identified in clause (ii) hereof, or (ii) any Liquidation Event (as defined in Section A.4), QPO (as defined in Section A.6) or any other public offering becomes reasonably likely to occur, the Corporation shall mail or cause to be mailed by first class mail (postage prepaid) to each holder of Convertible Preferred Stock (or each holder of Redeemable Preferred Stock, as applicable) at least twenty (20) business days prior to such record date specified therein or the expected effective date of any such transaction, whichever is earlier, a notice specifying (A) the date of such record date for the purpose of such dividend or distribution or meeting or consent and a description of such dividend or distribution or the action to be taken at such meeting or by such consent, (B) the date on which any such Liquidation Event, QPO or other public offering is expected to become effective, and (C) the date on which the books of the Corporation shall close or a record shall be taken with respect to any such event. (b) WAIVER OF NOTICE. The holder or holders of not less than a majority in voting power of the outstanding shares of Convertible Preferred Stock (or Redeemable Preferred Stock, as applicable) may, at any time upon written notice to the Corporation, waive any notice provisions specified herein for the benefit of such holders, and any such waiver shall be binding upon the holders of all such securities. (c) GENERAL. In the event that the Corporation provides any notice, report or statement to any holder of Common Stock, the Corporation shall at the same time provide a copy of any such notice, report or statement to each holder of outstanding shares of Convertible Preferred Stock (or Redeemable Preferred Stock, as applicable). 10. NO REISSUANCE OF CONVERTIBLE PREFERRED STOCK. No share or shares of Convertible Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be cancelled, retired and eliminated from the shares which the Corporation shall be authorized to issue. B. REDEEMABLE PREFERRED STOCK 1. DESIGNATION. A total of Twelve Million One Hundred Thousand (12,100,00) shares of the Corporation's Preferred Stock shall be designated as Redeemable Preferred Stock, no par value per share (the "Redeemable Preferred Stock"). 2. VOTING. (a) VOTING GENERALLY. Except with respect to the election to redeem the Redeemable Preferred Stock pursuant to Section B.5, the holders of Redeemable Preferred Stock shall not be entitled to vote on any matters except to the extent otherwise required under the Corporations Code of the State of California. (b) WAIVER OF NOTICE. The holder or holders of not less than a majority in voting power of the outstanding shares of Redeemable Preferred Stock may, at any time upon written notice to the Corporation, waive any notice provisions specified herein for the benefit of such holders, and any such waiver shall be binding upon the holders of all such securities. 3. DIVIDENDS. (a) The holders of shares of Redeemable Preferred Stock will be entitled to receive, if, when and as declared by the Board of Directors, out of any funds legally available therefor, noncumulative dividends at the rate of 6% of the Redeemable Base Liquidation Preferred Amount (as defined below) per share per annum (appropriately adjusted for stock splits and combinations) for each share of Redeemable Preferred Stock then held by them. Such dividends may be payable quarterly or otherwise as the Board of Directors may from time to time determine. Dividends may be declared and paid upon shares of Common Stock in any fiscal year of the Corporation, only if dividends shall have been paid to or declared and set apart upon all shares of Redeemable Preferred Stock, and all shares of any other series of Preferred Stock on a parity with the Redeemable Preferred Stock, at its annual rate for each quarter of such fiscal year of the Corporation, including the quarter in which such dividends upon shares of Common Stock are declared and all redemptions then due and payable on the Convertible Preferred Stock and the Redeemable Preferred Stock shall have been paid in full or set apart for payment in full. No right shall accrue to holders of Redeemable Preferred Stock by reason of the fact that dividends on said shares are not declared in any prior year, nor shall any undeclared or unpaid dividends bear or accrue interest. (b) If any dividend or other distribution payable in property other than cash is declared on the Common Stock, each holder of shares of Redeemable Preferred Stock on the record date for such dividend or distribution shall be entitled to receive on the date of payment or distribution of such dividend or other distribution the same property that such holder would have received if such holder was the holder of a like number of shares of Common Stock. 4. LIQUIDATION. Upon any Liquidation Event, each holder of an outstanding share of Redeemable Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for the distribution to shareholders, whether such assets are capital, surplus or earnings, and before any amount shall be paid or distributed to the holders of Common Stock or of any other stock ranking on liquidation junior to the Redeemable Preferred Stock, an amount in cash equal to the sum of (a) $0.6345 per share of Redeemable Preferred Stock held by such holder (adjusted appropriately for stock splits, stock dividends, recapitalizations and the like with respect to the Redeemable Preferred Stock) (which amount shall be referred to hereinafter as the "Initial Redeemable Base Liquidation Amount" or "IRBLA"), plus (b) any accrued but unpaid dividends to which such holder of outstanding shares of Redeemable Preferred Stock is entitled pursuant to Sections B.3 and B.5(d) hereof (the sum of the IRBLA and the amount determined under clause (b) being referred to hereinafter as the "Redeemable Base Liquidation Amount" or "RBLA"), plus (c) any accrued but unpaid dividends or other amounts due in respect of the shares of Convertible Preferred Stock converted into such shares of Redeemable Preferred Stock, plus (d) any interest accrued pursuant to Section B.5(c) to which such holder of outstanding shares of Redeemable Preferred Stock is entitled, if any (the sum of the RBLA and the amount determined under clause (c) being referred to hereinafter as the "Redeemable Liquidation Preference Amount"); PROVIDED, HOWEVER, that if, upon any Liquidation Event, the amounts payable with respect to the Redeemable Liquidation Preference Amount are not paid in full, the holders of the Redeemable Preferred Stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled. Notwithstanding the foregoing, if the Corporation effects a firmly-underwritten initial public offering, the Initial Redeemable Base Liquidation Amount shall be adjusted as follows: (i) If the POP is less than or equal to $4.4113, then no adjustment shall be made to the IRBLA. (ii) If the POP is greater than $4.4113 and less than or equal to $5.7135, then the IRBLA shall be determined by the following formula (rounded to the nearest hundredth of cent): IRBLA = $0.6345 - [(POP - $4.4113)/($5.7135 - $4.4113)]* ($0.6345- $0.4269). (iii) If the POP is greater than $5.7135 and less than or equal to $7.0955, then the IRBLA shall be determined by the following formula (rounded to the nearest hundredth of a cent): IRBLA = $0.4269 - [(POP - $5.7135)/($7.0955 - $5.7135)]*($0.4269-$0.2193). (iv) If the POP is greater than $7.0955, then the IRBLA shall be $0.2193. The prices set forth above, including the POP, wherever appearing, shall be adjusted for stock splits, stock dividends, reclassifications, combinations and the like. 5. REDEMPTION. (a) REDEMPTION EVENTS. (i) UPON ELECTION OF HOLDERS UPON A QPO. Upon the election of the holder or holders of not less than a majority of the outstanding Redeemable Preferred Stock, the Corporation shall redeem in cash all (and not less than all, except as set forth in Section B.5(c)) of the outstanding shares of Redeemable Preferred Stock upon the closing of the QPO. The foregoing election shall be made by such holders giving the Corporation and each other holder of the Redeemable Preferred Stock written notice not less than five (5) days prior to the closing of the QPO. (ii) UPON ELECTION OF CORPORATION UPON A QPO. The Corporation may elect to redeem in cash all (but not less than all, other than pursuant to Section B.5(c) below) of the outstanding shares of Redeemable Preferred Stock at any time upon the closing of a QPO. The foregoing election shall be made by the Corporation giving each holder of Redeemable Preferred Stock written notice not less than five (5) days prior to the closing of a QPO. (iii) LAPSE OF TIME. (A) At any time after the sixth anniversary of the issuance of the Convertible Preferred Stock on any one occasion any holder of Redeemable Preferred Stock may require the Corporation to redeem in cash up to thirty-three percent (33%) of the outstanding shares of Redeemable Preferred Stock held by such holder at such time. (B) At any time after the seventh anniversary of the issuance of the Convertible Preferred Stock on any one occasion any holder of Redeemable Preferred Stock may require the Corporation to redeem up to sixty-six percent (66%) of the outstanding shares of Redeemable Preferred Stock held by such holder at such time. (C) At any time after the eighth anniversary of the issuance of the Convertible Preferred Stock on any one occasion any holder of Redeemable Preferred Stock may require the Corporation to redeem in cash up to one hundred percent (100%) of the outstanding shares of Redeemable Preferred Stock held by such holder at such time. (D) UPON A LIQUIDATION EVENT. Upon the election of the holder or holders of not less than a majority in voting power of the outstanding Redeemable Preferred Stock, the Corporation shall redeem in cash all (and not less than all, other than pursuant to Section B.5(c) below) of the outstanding shares of Redeemable Preferred Stock upon the occurrence of a Liquidation Event or public offering not constituting a QPO. The foregoing election shall be made by such holders giving the Corporation and each other holder of Redeemable Preferred Stock (or Convertible Stock, as applicable) not less than five (5) days prior written notice, which notice shall set forth the date for such redemption. (b) REDEMPTION DATE, REDEMPTION PRICE. Any holder of Redeemable Preferred Stock may exercise such holder's right of redemption pursuant to Section B.5(a)(iii) by such holder giving the Corporation not less than ten (10) days prior written notice, which notice shall set forth the date for such redemption. Upon the election of the holders of not less than a majority in voting power of the outstanding Redeemable Preferred Stock to cause the Corporation to redeem the Redeemable Preferred Stock pursuant to Section B.5(a)(i) or (a)(iv), all holders of Redeemable Preferred Stock shall be deemed to have elected to cause the Redeemable Preferred Stock subject to such election to be so redeemed. Any date upon which a redemption shall actually occur in accordance with Section B.5(a) shall be referred to as a "Redemption Date." The redemption price for each share of Redeemable Preferred Stock redeemed pursuant to this Section B.5 shall be the per share Redeemable Liquidation Preference Amount (the "Redemption Price"). The aggregate Redemption Price shall be payable in cash in immediately available funds on the Redemption Date. Until the aggregate Redemption Price, including any interest thereon, has been paid in cash for all shares of Redeemable Preferred Stock redeemed as of the applicable Redemption Date or Redemption Notes have been issued pursuant to Section B.5(a)(i); (A) no dividend whatsoever shall be paid or declared, and no distribution shall be made, on any capital stock of the Corporation (other than the Redeemable Preferred Stock in accordance with Section B.5(d)); and (B) no shares of capital stock of the Corporation (other than the Redeemable Preferred Stock in accordance with this Section B.5) shall be purchased, redeemed or acquired by the Corporation and no monies shall be paid into or set aside or made available for a sinking fund for the purchase, redemption or acquisition thereof. (c) REDEMPTION PROHIBITED. If, at a Redemption Date, the Corporation is prohibited under the Corporations Code of the State of California from redeeming all shares of Redeemable Preferred Stock for which redemption is required hereunder, then it shall redeem such shares on a pro-rata basis among the holders of Redeemable Preferred Stock in proportion to the full respective redemption amounts to which they are entitled hereunder to the extent possible and shall redeem the remaining shares to be redeemed as soon as the Corporation is not prohibited from redeeming some or all of such shares under the Corporations Code of the State of California, subject to the last paragraph of Section A.8. The shares of Redeemable Preferred Stock not redeemed shall remain outstanding and entitled to all of the rights and preferences provided in these Articles. In the event that the Corporation fails for any reason to redeem shares for which redemption is triggered pursuant to Section B.5 (other than pursuant to the third sentence of Section B.5(a)(i)), including without limitation due to a prohibition of such redemption under the Corporations Code of the State of California, then during the period from the applicable Redemption Date through the date on which such shares are redeemed, the applicable Redeemable Base Liquidation Amount of such shares shall bear interest at the greater of (i) 9% or (ii) 3% over the Citibank N.A. prime rate published in the Wall Street Journal on the Redemption Date, compounded annually; provided, however, that in no event shall such interest rate exceed the Maximum Permitted Rate. (d) DIVIDEND AFTER REDEMPTION DATE. From and after the closing of a QPO or upon consummation of a Liquidation Event or a public offering not constituting a QPO (in the case of a redemption pursuant to Section B.5(a)(i) or (iv)) or the date specified for redemption in the election notice as set forth in Section B.5(a)(ii) or (v) or Section B.5(v), no shares of Redeemable Preferred Stock subject to redemption shall be entitled to any further dividends pursuant to Section B.3 hereof; PROVIDED, HOWEVER, that in the event that shares of Redeemable Preferred Stock are unable to be redeemed and continue to be outstanding in accordance with Section B.5(c), such shares shall continue to be entitled to dividends and interest thereon as provided in Sections B.3 and B.5(c) until the date on which such shares are actually redeemed by the Corporation. (e) SURRENDER OF CERTIFICATES. The Corporation shall give, not less than 10 days prior to the Redemption Date, a Redemption Notice to all holders of the Redeemable Preferred Stock which shall require each holder submitting shares for redemption to surrender to the Corporation on or before the Redemption Date, at the place designated in the Redemption Notice, such holder's certificate or certificates representing the shares of Redeemable Preferred Stock to be redeemed. On or prior to the Redemption Date, each holder of shares of Redeemable Preferred Stock submitted for redemption shall surrender the certificate or certificates evidencing such shares to the Corporation, at the place designated in the Redemption Notice and shall thereupon be entitled to receive payment of the appropriate Redemption Price by certified check or wire transfer. In the event the certificates are lost, stolen or missing, the holder of Redeemable Preferred Stock shall deliver an Affidavit of Loss with respect to such certificates at the place set forth in the Redemption Notice. Each surrendered certificate shall be canceled and retired; PROVIDED, HOWEVER, that if the holder has exercised its right pursuant to Section B.5(a)(iii)(A) or the Corporation has exercised its right pursuant to Section B.5(a)(v)(A), the holder shall not be required to surrender said certificate(s) to the Corporation until said holder has received a new stock certificate for those shares of Redeemable Preferred Stock not so redeemed. 6. NOTICE. In the event that the Corporation provides or is required to provide notice to any holder of Convertible Preferred Stock or any holder of Common Stock in accordance with the provisions of this Certificate (including the provisions of Section A.9) and/or the Corporation's bylaws, the Corporation shall at the same time provide a copy of such notice to each holder of outstanding Redeemable Preferred Stock. 7. NO REISSUANCE OF REDEEMABLE PREFERRED STOCK. No share or shares of Redeemable Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired and eliminated from the shares which the Corporation shall be authorized to issue. 1. LIMITATION OF DIRECTORS' LIABILITY. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. 2. INDEMNIFICATION OF CORPORATION AGENTS. This corporation is authorized to provide indemnification of its agents (as defined in Section 310 of the California General Corporations Law) through bylaws provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by such Section 317, subject only to the limits set forth in Section 204 of the California General Corporations Law with respect to actions for breach of duty to the corporation and shareholders. 3. REPEAL OR MODIFICATION. Any repeal or modification of the foregoing provisions of this Article V shall not adversely affect any right of indemnification or limit of liability of an agent of this corporation relating to acts or omissions occurring prior to such repeal or modification." * * * The foregoing amendment and restatement has been duly approved by the Board of Directors of the Company. The foregoing amendment and restatement has been duly approved by the required vote of shareholders in accordance with Sections 902 and 903 of the California General Corporations Law. The total number of outstanding shares is 45,737,660 shares of Common Stock. The number of shares voting in favor of the amendment equaled or exceeded the votes required. The percentage vote was more than 50% of the outstanding Common Stock. We further declare under penalty of perjury under the laws of California that the matters set forth in this amendment and restatement are true of our own knowledge. Executed in Palo Alto, California on November 1, 1998. /s/ Jerry S. Rawls --------------------------------- Jerry S. Rawls, President /s/ Wynette Levinson --------------------------------- Wynette Levinson, Secretary EX-3.2 4 EXHIBIT 3.2 RESTATED BYLAWS OF FINISAR CORPORATION RESTATED BYLAWS OF FINISAR CORPORATION ARTICLE I CORPORATE OFFICES 1.1 PRINCIPAL OFFICE The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state and the corporation has one or more business offices in such state, then the board of directors shall fix and designate a principal business office in the State of California. 1.2 OTHER OFFICES The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 PLACE OF MEETINGS Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of shareholders shall be held on the 2nd Tuesday of July in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 1 2.3 SPECIAL MEETING A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders (but subject to the provisions of the next paragraph of this Section 2.4 any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal. 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of shareholders shall be given either (i) personally or (ii) by first-class mail or (iii) by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the record date for the shareholders' meeting, or (iv) by telegraphic or other written communication. Notices not personally delivered shall be sent charges prepaid and shall be addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.6 QUORUM The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the 3 date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun. Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the articles of incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Code or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates' names have been placed in nomination prior to commencement of the voting and the shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly 4 held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the board of directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders has not been received, then the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these bylaws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent," 5 pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code. If the board of directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these bylaws. 2.12 PROXIES Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless 6 otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. 2.13 INSPECTORS OF ELECTION Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the Code and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the 7 outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall not be less than (3) nor more than (5). The exact number of directors shall be four (4) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). The undersigned further certifies that this amendment has been duly approved by the directors of the corporation at a meeting of the Board of Directors held on October 30, 1998. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS Directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the board of directors by resolution 8 declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 9 3.8 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of directors), the articles of incorporation, and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors. 3.10 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 10 3.13 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 3.14 APPROVAL OF LOANS TO OFFICERS* The corporation may, upon the approval of the board of directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the board of directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the board of directors, and (iii) the approval of the board of directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; (d) the amendment or repeal of these bylaws or the adoption of new bylaws; - -------- * This Section is effective only if it has been approved by the shareholders in accordance with Sections 315(b) and 152 of the Code. 11 (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of such committees. 4.2 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such 12 period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. The chairman of the board shall also be the chief executive officer of the corporation. 5.7 PRESIDENT Subject to the supervisory powers given by the board of directors to the chairman of the board, if there be such an officer, the president shall, subject to the control of the board of directors and Chief Executive Officer, have general supervision, direction, and control of the business and the officers of the corporation; he shall preside at all meetings of the shareholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors; and he shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for 13 them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with 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, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 14 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official 15 capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. 6.5 INSURANCE INDEMNIFICATION The corporation shall have the power to 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 or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.6 CONFLICTS No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the board of directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation who holds at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders' names, addresses, and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be 16 made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BYLAWS The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at its principal business office in California the original or a copy of these bylaws as amended to date, which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in such state, then the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date. 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS The accounting books and records and the minutes of proceedings of the shareholders, of the board of directors, and of any committee or committees of the board of directors shall be kept at such place or places as are designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION BY DIRECTORS Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind as well as the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney. The right of inspection includes the right to copy and make extracts of documents. 17 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days) before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain (i) a balance sheet as of the end of the fiscal year, (ii) an income statement, (iii) a statement of changes in financial position for the fiscal year, and (iv) any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, then the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The quarterly income statements and balance sheets referred to in this Section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or by the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. 7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other 18 corporation or corporations standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the board of directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 CERTIFICATES FOR SHARES A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The board of directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total 19 amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the chairman of the board or the vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate ceases to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 RIGHT OF FIRST REFUSAL No shareholder shall sell, assign, pledge, or in any other manner transfer any of the shares of stock of the corporation or any right or interest therein, whether voluntarily or by operation of law, or by gift or otherwise, except by a transfer which meets the requirements hereinafter set forth in this bylaw: (a) If the shareholder receives from anyone a bona fide offer acceptable to the shareholder to purchase any of his shares of stock, then the shareholder shall first give written notice thereof to the corporation. The notice shall name the proposed transferee and state the number of shares to be transferred, the price per share and all other terms and conditions of the offer. (b) For fifteen (15) days following receipt of such notice, the corporation shall have the option to purchase all or any lesser part of the shares specified in the notice at the price and upon the terms set forth in such bona fide offer. In the event the corporation elects to 20 purchase all the shares, it shall give written notice to the selling shareholder of its election and settlement for said shares be made as provided below in paragraph (d). (c) In the event the corporation does not elect to acquire all of the shares specified in the selling shareholder's notice, the Secretary of the corporation shall, within fifteen (15) days of receipt of said selling shareholder's notice, give written notice thereof to the shareholders of the corporation other than the selling shareholder. Said written notice shall state the number of shares that the corporation has elected to purchase and the number of shares that the corporation has elected to purchase and the number of shares remaining available for purchase (which shall be the same as the number contained in said selling shareholder's notice, less any such shares that the corporation has elected to purchase). Each of the other shareholders shall have the option to purchase that proportion of the shares available for purchase as the number of shares owned by each of said other shareholders bears to the total issued and outstanding shares of the corporation, excepting those shares owned by the selling shareholder. A shareholder electing to exercise such option shall, within ten (10) days after mailing of the corporation's notice, give notice to the corporation specifying the number of shares such shareholder will purchase. Within such ten-day period, each of said other shareholders shall give written notice stating how many additional shares such shareholder will purchase if additional shares are made available. Failure to respond in writing within said ten-day period to the notice given by the Secretary of the corporation shall be deemed a rejection of such shareholder's right to acquire a proportionate part of the shares of the selling shareholder. In the event one or more shareholders do not elect to acquire the shares available to them, said shares shall be allocated on a pro rata basis to the shareholders who requested shares in addition to their pro rata allotment. (d) In the event the corporation and/or shareholders, other than the selling shareholder, elect to acquire any of the shares of the selling shareholder as specified in said selling shareholder's notice, the Secretary of the corporation shall so notify the selling shareholder and settlement thereof shall be made in cash within thirty (30) days after the Secretary of the corporation receives said selling shareholder's notice; provided that if the terms of payment set forth in said selling shareholder's notice were other than cash against delivery, the corporation and/or its other shareholders shall pay for said shares on the same terms and conditions set forth in said selling shareholder's notice. (e) In the event the corporation and/or its other shareholders do not elect to acquire all of the shares specified in the selling shareholder's notice, said selling shareholder may, within the sixty-day period following the expiration of the option rights granted to the corporation and other shareholders herein, sell elsewhere the shares specified in said selling shareholder's notice which were not acquired by the corporation and/or its other shareholders, in accordance with the provisions of paragraph (d) of this bylaw, provided, that said sale shall not be on terms and conditions more favorable to the purchaser than those contained in the bona fide offer set forth in said selling shareholder's notice. All shares so sold by said selling shareholder shall continue to be subject to the provisions of this bylaw in the same manner as before said transfer. (f) Anything to the contrary contained herein notwithstanding, the following transactions shall be exempt from the provisions of this bylaw: 21 (1) A shareholder's transfer of any or all shares held either during such shareholder's lifetime or on death by will or intestacy to such shareholder's immediate family. "Immediate family" as used herein shall mean spouse, lineal descendant, father, mother, brother, or sister of the shareholder making such transfer. (2) A shareholder's bona fide pledge or mortgage of any shares with a commercial lending institution, provided that any subsequent transfer of said shares by said institution shall be conducted in the manner set forth in this Section. (3) A shareholder's transfer of any or all of such shareholder's shares to any other shareholder of the corporation. (4) A shareholder's transfer of any or all of such shareholder's shares to a person who, at the time of such transfer, is an officer or director of the corporation. (5) A corporate shareholder's transfer of any or all of its shares pursuant to and in accordance with the terms of any merger, consolidation, reclassification of shares or capital reorganization of the corporate shareholder, or pursuant to a sale of all or substantially all of the stock or assets of a corporate shareholder. (6) A corporate shareholder's transfer of any or all of its shares to any or all of its shareholders. (7) A transfer by a shareholder which is a limited or general partnership to any or all of its partners. In any such case, the transferee, assignee, or other recipient shall receive and hold such stock subject to the provisions of this bylaw, and there shall be no further transfer of such stock except in accord with this bylaw. (g) The provisions of this Section may be waived with respect to any transfer either by the corporation, upon duly authorized action of its board of directors, or by the shareholders, upon the express written consent of the owners of a majority of the voting power of the corporation (excluding the votes represented by those shares to be sold by the selling shareholder). This Section may be amended or repealed either by a duly authorized action of the Board of Directors or by the shareholders, upon the express written consent of the owners of a majority of the voting power of the corporation. (h) Any sale or transfer, purported sale or transfer, of securities of the corporation shall be null and void unless the terms, conditions, and provisions of this bylaw are strictly observed and followed. (i) That certificates representing shares of stock of the corporation shall bear on their face the following legend so long as the foregoing right of first refusal remains in effect: 22 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION AND ITS OTHER SHAREHOLDERS, AS PROVIDED IN THE BYLAWS OF THE CORPORATION." ARTICLE IX AMENDMENTS 9.1 AMENDMENT BY SHAREHOLDERS New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, then the authorized number of directors may be changed only by an amendment of the articles of incorporation. 9.2 AMENDMENT BY DIRECTORS Subject to the rights of the shareholders as provided in Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors), may be adopted, amended or repealed by the board of directors. 23 EX-3.3 5 EXHIBIT 3.3 CERTIFICATE OF INCORPORATION OF FINISAR DELAWARE CORPORATION FIRST: The name of this corporation is Finisar Delaware Corporation (hereinafter sometimes referred to as the "Corporation"). SECOND: The address of the registered office of the Corporation in the State of Delaware is Incorporating Services, Ltd., 15 East North Street, in the City of Dover, County of Kent. The name of the registered agent at that address is Incorporating Services, Ltd. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is One Thousand (1,000) shares of Common Stock, par value $0.001 per share (the "Common Stock"). FIFTH: The name and mailing address of the incorporator is: Lynn Rooke c/o Gray Cary Ware & Freidenrich LLP 400 Hamilton Avenue Palo Alto, CA 94301 SIXTH: The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by Statute or by this Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. Election of directors need not be by written ballot unless the Bylaws so provide. SEVENTH: The Board of Directors is authorized to make, adopt, amend, alter or repeal the Bylaws of the Corporation. The stockholders shall also have power to make, adopt, amend, alter or repeal the Bylaws of the Corporation. EIGHTH: This Corporation reserves the right to amend or repeal any of the provisions contained in this Certificate of Incorporation in any manner now or hereafter permitted by law, and the rights of the stockholders of this Corporation are granted subject to this reservation. NINTH: To the fullest extent permitted by the Delaware General Corporation Law, a director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of the foregoing provisions of this Article NINTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a corporation under the laws of the State of Delaware, do make, file and record this Certificate of Incorporation, do certify that the facts herein stated are true, and accordingly, have hereto set my hand this 1st day of September, 1999. /s/ Lynn Rooke ------------------------------ Lynn Rooke EX-3.4 6 EXHIBIT 3.4 BYLAWS OF FINISAR DELAWARE CORPORATION TABLE OF CONTENTS
Page ---- ARTICLE I STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1 Annual Meeting.. . . . . . . . . . . . . . . . . . . 1 Section 1.2 Special Meetings.. . . . . . . . . . . . . . . . . . 1 Section 1.3 Notice of Meetings.. . . . . . . . . . . . . . . . . 1 Section 1.4 Quorum.. . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.5 Conduct of the Stockholders' Meeting.. . . . . . . . 2 Section 1.6 Conduct of Business. . . . . . . . . . . . . . . . . 2 Section 1.7 Notice of Stockholder Business.. . . . . . . . . . . 2 Section 1.8 Proxies and Voting.. . . . . . . . . . . . . . . . . 3 Section 1.9 Stock List.. . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . 4 Section 2.1 Number and Term of Office. . . . . . . . . . . . . . 4 Section 2.2 Vacancies and Newly Created Directorships. . . . . . 4 Section 2.3 Removal. . . . . . . . . . . . . . . . . . . . . . . 4 Section 2.4 Regular Meetings.. . . . . . . . . . . . . . . . . . 4 Section 2.5 Special Meetings.. . . . . . . . . . . . . . . . . . 4 Section 2.6 Quorum.. . . . . . . . . . . . . . . . . . . . . . . 5 Section 2.7 Participation in Meetings by Conference Telephone. . 5 Section 2.8 Conduct of Business. . . . . . . . . . . . . . . . . 5 Section 2.9 Powers.. . . . . . . . . . . . . . . . . . . . . . . 5 Section 2.10 Compensation of Directors. . . . . . . . . . . . . . 6 Section 2.11 Nomination of Director Candidates. . . . . . . . . . 6 ARTICLE III COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 3.1 Committees of the Board of Directors.. . . . . . . . 7 Section 3.2 Conduct of Business. . . . . . . . . . . . . . . . . 7 ARTICLE IV OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 4.1 Generally. . . . . . . . . . . . . . . . . . . . . . 8 Section 4.2 Chairman of the Board. . . . . . . . . . . . . . . . 8 Section 4.3 President. . . . . . . . . . . . . . . . . . . . . . 8 Section 4.4 Vice President.. . . . . . . . . . . . . . . . . . . 8 Section 4.5 Treasurer. . . . . . . . . . . . . . . . . . . . . . 8 Section 4.6 Secretary. . . . . . . . . . . . . . . . . . . . . . 8 Section 4.7 Delegation of Authority. . . . . . . . . . . . . . . 9 Section 4.8 Removal. . . . . . . . . . . . . . . . . . . . . . . 9 Section 4.9 Action With Respect to Securities of Other Corporations . . . . . . . . . . . . . . . . . . . . 9 ARTICLE V STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 5.1 Certificates of Stock. . . . . . . . . . . . . . . . 9 Section 5.2 Transfers of Stock.. . . . . . . . . . . . . . . . . 9 Section 5.3 Record Date. . . . . . . . . . . . . . . . . . . . . 9 i TABLE OF CONTENTS (continued) Page ---- Section 5.4 Lost, Stolen or Destroyed Certificates . . . . . . . 9 Section 5.5 Regulations. . . . . . . . . . . . . . . . . . . . . 10 ARTICLE VI NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 6.1 Notices. . . . . . . . . . . . . . . . . . . . . . . 10 Section 6.2 Waivers. . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE VII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 10 Section 7.1 Facsimile Signatures.. . . . . . . . . . . . . . . . 10 Section 7.2 Corporate Seal.. . . . . . . . . . . . . . . . . . . 10 Section 7.3 Reliance Upon Books, Reports and Records.. . . . . . 10 Section 7.4 Fiscal Year. . . . . . . . . . . . . . . . . . . . . 11 Section 7.5 Time Periods.. . . . . . . . . . . . . . . . . . . . 11 ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . 11 Section 8.1 Right to Indemnification . . . . . . . . . . . . . . 11 Section 8.2 Right of Claimant to Bring Suit. . . . . . . . . . . 12 Section 8.3 Non-Exclusivity of Rights. . . . . . . . . . . . . . 12 Section 8.4 Indemnification Contracts. . . . . . . . . . . . . . 12 Section 8.5 Insurance. . . . . . . . . . . . . . . . . . . . . . 12 Section 8.6 Effect of Amendment. . . . . . . . . . . . . . . . . 12 ARTICLE IX AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 9.1 Amendment of Bylaws. . . . . . . . . . . . . . . . . 13
ii FINISAR DELAWARE CORPORATION A DELAWARE CORPORATION BYLAWS ARTICLE I STOCKHOLDERS Section 1.1 ANNUAL MEETING. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen months subsequent to the later of the date of incorporation or the last annual meeting of stockholders. Section 1.2 SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of the meeting, may be called only (i) by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exists any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) or (ii) by the holders of not less than 10% of all shares entitled to cast votes at the meeting, voting together as a single class and shall be held at such place, on such date, and at such time as they shall fix. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice. Section 1.3 NOTICE OF MEETINGS. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 1.4 QUORUM. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 1.5 CONDUCT OF THE STOCKHOLDERS' MEETING. At every meeting of the stockholders, the Chairman, if there is such an officer, or if not, the President of the Corporation, or in his absence the Vice President designated by the President, or in the absence of such designation any Vice President, or in the absence of the President or any Vice President, a chairman chosen by the majority of the voting shares represented in person or by proxy, shall act as Chairman. The Secretary of the Corporation or a person designated by the Chairman shall act as Secretary of the meeting. Unless otherwise approved by the Chairman, attendance at the stockholders' meeting is restricted to stockholders of record, persons authorized in accordance with Section 8 of these Bylaws to act by proxy, and officers of the Corporation. Section 1.6 CONDUCT OF BUSINESS. The Chairman shall call the meeting to order, establish the agenda, and conduct the business of the meeting in accordance therewith or, at the Chairman's discretion, it may be conducted otherwise in accordance with the wishes of the stockholders in attendance. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. The Chairman shall also conduct the meeting in an orderly manner, rule on the precedence of and procedure on, motions and other procedural matters, and exercise discretion with respect to such procedural matters with fairness and good faith toward all those entitled to take part. The Chairman may impose reasonable limits on the amount of time taken up at the meeting on discussion in general or on remarks by any one stockholder. Should any person in attendance become unruly or obstruct the meeting proceedings, the Chairman shall have the power to have such person removed from participation. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at a meeting except in accordance with the procedures set forth in this Section 1.6 and Section 1.7, below. The Chairman of a meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 1.6 and Section 1.7, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Section 1.7 NOTICE OF STOCKHOLDER BUSINESS. At an annual or special meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) properly brought before the meeting by or at the direction of the Board of Directors, (c) properly brought before an annual meeting by a stockholder, or (d) properly brought before a special meeting by a stockholder, but if, and only if, the notice of a special 2 meeting provides for business to be brought before the meeting by stockholders. For business to be properly brought before a meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder proposal to be presented at an annual meeting shall be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's (or the Corporation's predecessor's) proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, or in the event of a special meeting, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual or special meeting (a) a brief description of the business desired to be brought before the annual or special meeting and the reasons for conducting such business at the special meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Section 1.8 PROXIES AND VOTING. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. No stockholder may authorize more than one proxy for his shares. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his or her name on the record date for the meeting, except as otherwise provided herein or required by law. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law, all other matters shall be determined by a majority of the votes cast. Section 1.9 STOCK LIST. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. 3 The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. ARTICLE II BOARD OF DIRECTORS Section 2.1 NUMBER AND TERM OF OFFICE. The number of directors shall initially be four (4) and, thereafter, shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). A vacancy resulting from the removal of a director by the stockholders as provided in Article II, Section 2.3 below may be filled at special meeting of the stockholders held for that purpose. All directors shall hold office until the expiration of the term for which elected and until their respective successors are elected, except in the case of the death, resignation or removal of any director. Section 2.2 VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification or other cause (other than removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 2.3 REMOVAL. Subject to the rights of holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Vacancies in the Board of Directors resulting from such removal may be filled by a majority of the directors then in office, though less than a quorum, or by the stockholders as provided in Article II, Section 2.1 above. Directors so chosen shall hold office until the new annual meeting of stockholders. Section 2.4 REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 2.5 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by one-third of the directors then in office (rounded up to the nearest whole number) or by the chief executive officer and shall be held at such place, on such date, and at such time as they 4 or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not fewer than five (5) days before the meeting or by telegraphing or personally delivering the same not fewer than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 2.6 QUORUM. At any meeting of the Board of Directors, a majority of the total number of authorized directors shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 2.7 PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 2.8 CONDUCT OF BUSINESS. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or requited by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 2.9 POWERS. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: (a) To declare dividends from time to time in accordance with law; (b) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (c) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (d) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (e) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (f) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; 5 (g) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (h) To adopt from time to time regulations, not inconsistent with these bylaws, for the management of the Corporation's business and affairs. Section 2.10 COMPENSATION OF DIRECTORS. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. Section 2.11 NOMINATION OF DIRECTOR CANDIDATES. Subject to the rights of holders of any class or series of Preferred Stock then outstanding, nominations for the election of Directors may be made by the Board of Directors or a proxy committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of Directors generally. However, any stockholder entitled to vote in the election of Directors generally may nominate one or more persons for election as Directors at a meeting only if timely notice of such stockholder's intent to make such nomination or nominations has been given in writing to the Secretary of the Corporation. To be timely, a stockholder nomination for a director to be elected at an annual meeting shall be received at the Corporation's principal executive offices not less than 120 calendar days in advance of the date that the Corporation's (or the Corporation's Predecessor's) Proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, or in the event of a nomination for director to be elected at a special meeting, notice by the stockholders to be timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the special meeting was mailed or such public disclosure was made. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote for the election of Directors on the date of such notice and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) 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; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. In the event that a person is validly designated as a nominee in accordance with this Section 2.11 and shall thereafter become unable or unwilling to stand for election to the Board of Directors, the Board of Directors or the stockholder who proposed such nominee, as the case may be, may designate a substitute nominee upon delivery, not fewer than five days prior to the 6 date of the meeting for the election of such nominee, of a written notice to the Secretary setting forth such information regarding such substitute nominee as would have been required to be delivered to the Secretary pursuant to this Section 2.11 had such substitute nominee been initially proposed as a nominee. Such notice shall include a signed consent to serve as a director of the Corporation, if elected, of each such substitute nominee. If the chairman of the meeting for the election of Directors determines that a nomination of any candidate for election as a Director at such meeting was not made in accordance with the applicable provisions of this Section 2.11, such nomination shall be void; provided, however, that nothing in this Section 2.11 shall be deemed to limit any voting rights upon the occurrence of dividend arrearages provided to holders of Preferred Stock pursuant to the Preferred Stock designation for any series of Preferred Stock. ARTICLE III COMMITTEES Section 3.1 COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors, by a vote of a majority of the whole Board, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 3.2 CONDUCT OF BUSINESS. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third of the authorized members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. 7 ARTICLE IV OFFICERS Section 4.1 GENERALLY. The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Secretary and a Treasurer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. The Chairman of the Board, if there shall be such an officer, and the President shall each be members of the Board of Directors. Any number of offices may he held by the same person. Section 4.2 CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by these bylaws. Section 4.3 PRESIDENT. The President shall be the chief executive officer of the Corporation. Subject to the provisions of these bylaws and to the direction of the Board of Directors, he or she shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers, employees and agents of the Corporation. Section 4.4 VICE PRESIDENT. Each Vice President shall have such powers and duties as may be delegated to him or her by the Board of Directors. One Vice President shall be designated by the Board to perform the duties and exercise the powers of the President in the event of the President's absence or disability. Section 4.5 TREASURER. Unless otherwise designated by the Board of Directors, the Chief Financial Officer of the Corporation shall be the Treasurer. The Treasurer shall have the responsibility for maintaining the financial records of the Corporation and shall have custody of all monies and securities of the Corporation. He or she shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as the Board of Directors may from time to time prescribe. Section 4.6 SECRETARY. The Secretary shall issue all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders, the Board of Directors, and all committees of the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe. 8 Section 4.7 DELEGATION OF AUTHORITY. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Section 4.8 REMOVAL. Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors. Section 4.9 ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V STOCK Section 5.1 CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any of or all the signatures on the certificate may be facsimile. Section 5.2 TRANSFERS OF STOCK. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 5.3 RECORD DATE. The Board of Directors may fix a record date, which shall not be more than sixty (60) nor fewer than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for the other action hereinafter described, as of which there shall be determined the stockholders who are entitled: to notice of or to vote at any meeting of stockholders or any adjournment thereof; to receive payment of any dividend or other distribution or allotment of any rights; or to exercise any rights with respect to any change, conversion or exchange of stock or with respect to any other lawful action. Section 5.4 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. 9 Section 5.5 REGULATIONS. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI NOTICES Section 6.1 NOTICES. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram, mailgram, telecopy or commercial courier service. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice shall be deemed to be given shall be the time such notice is received by such stockholder, director, officer, employee or agent, or by any person accepting such notice on behalf of such person, if hand delivered, or the time such notice is dispatched, if delivered through the mails or be telegram or mailgram. Section 6.2 WAIVERS. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII MISCELLANEOUS Section 7.1 FACSIMILE SIGNATURES. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 7.2 CORPORATE SEAL. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. Section 7.3 RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care. 10 Section 7.4 FISCAL YEAR. The fiscal year of the Corporation shall be as fixed by the Board of Directors. Section 7.5 TIME PERIODS. In applying any provision of these bylaws which require that an act be done or not done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 8.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative ("proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation, or of a Partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by Delaware Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said Law permitted the Corporation to provide prior to such amendment) against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid or to be paid in settlement and amounts expended in seeking indemnification granted to such person under applicable law, this bylaw or any agreement with the Corporation) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer or employee and shall inure to the benefit of his or her heirs, executors and administrators; PROVIDED, HOWEVER, that, except as provided in Section 8.2 of this Article VIII, the Corporation shall indemnify any such person seeking indemnity in connection with an action, suit or proceeding (or part thereof) initiated by such person only if (a) such indemnification is expressly required to be made by law, (b) the action, suit or proceeding (or part thereof) was authorized by the Board of Directors of the Corporation, (c) such indemnification is provided by the Corporation, in its sole discretion, pursuant to the powers vested in the Corporation under the Delaware General Corporation Law, or (d) the action, suit or proceeding (or part thereof) is brought to establish or enforce a right to indemnification under an indemnity agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; PROVIDED, HOWEVER, that, unless the Delaware General Corporation Law then so prohibits, the payment of such expenses incurred by a director or officer of the Corporation in his or her capacity as a director or officer (and not in any other capacity in which service was or is tendered by such person while a director or officer, including, without limitation. service to an employee benefit plan) in advance of the 11 final disposition of such proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it should be determined ultimately that such director or officer is not entitled to be indemnified under this Section or otherwise. Section 8.2 RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 1 of this Article VIII is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if such suit is not frivolous or brought in bad faith, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The burden of proving such claim shall be on the claimant. It shall be a defense to any such action (other then an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to this Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Section 8.3 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person in Sections 1 and 2 shall not be exclusive of any other right which such persons may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 8.4 INDEMNIFICATION CONTRACTS. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determinates, greater than, those provided for in this Article VIII. Section 8.5 INSURANCE. The Corporation shall maintain insurance to the extent reasonably available, at its expense, to protect itself and any such director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. Section 8.6 EFFECT OF AMENDMENT. Any amendment, repeal or modification of any provision of this Article VIII by the stockholders and the directors of the Corporation shall not 12 adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. ARTICLE IX AMENDMENTS Section 9.1 AMENDMENT OF BYLAWS. The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of By-Laws of the Corporation by the stockholders shall require, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. 13 CERTIFICATE OF SECRETARY I hereby certify that I am the duly elected and acting Secretary of Finisar Delaware Corporation, a Delaware corporation (the "Corporation"), and that the foregoing Bylaws, comprising thirteen (13) pages, constitute the Bylaws of the Corporation as duly adopted on September 9, 1999, by the unanimous written consent of the Board of Directors of the Corporation. IN WITNESS WHEREOF, I have hereunto subscribed my name on September 9, 1999. /s/ Stephen K. Workman ----------------------------------- Stephen K. Workman EX-3.5 7 EXHIBIT 3.5 RESTATED CERTIFICATE OF INCORPORATION OF FINISAR CORPORATION (Pursuant to Section 245 of the General Corporation Law of the State of Delaware) Finisar Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware on September 1, 1999 (the "Corporation") certifies as follows: 1. The Corporation's Restated Certificate of Incorporation was duly adopted by the Board of Directors by unanimous written consent in accordance with Section 245 of the General Corporation Law. 2. The Corporation's Restated Certificate of Incorporation only restates and integrates and does not further amend the provisions of the Corporation's Certificate of Incorporation as theretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of the Restated Certificate. 3. The Corporation's Certificate of Incorporation is restated to read in full as follows: FIRST: The name of the Corporation is Finisar Corporation. SECOND: The address of the registered office of the Corporation in the State of Delaware is Incorporating Services, Ltd., 15 East North Street, in the City of Dover, County of Kent. The name of the registered agent at that address is Incorporating Services, Ltd. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. FOURTH: A. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 205,000,000 consisting of 200,000,000 shares of Common Stock, par value one-tenth of one cent ($.001) per share (the "Common Stock") and 5,000,000 shares of Preferred Stock, par value one-tenth of one cent ($.001) per share (the "Preferred Stock"). B. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of 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, 1 preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereon. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock. FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. B. The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide. C. On and after the closing date of the first sale of the Corporation's Common Stock pursuant to a firmly underwritten registered public offering (the "IPO"), 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 stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. Prior to such sale, unless otherwise provided by law, any action which may otherwise be taken at any meeting of the stockholders may be taken without a meeting and without prior notice, if a written consent describing such actions is signed by the holders of outstanding shares having not less than the minimum number of votes which would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. D. Special meetings of stockholders of the Corporation may be called only (1) by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) or (2) by the holders of not less than ten percent (10%) of all of the shares entitled to cast votes at the meeting. 2 SIXTH: A. The number of directors shall initially be set at four (4) and, thereafter, shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). Upon the closing of the IPO, the directors shall be divided into three classes with the term of office of the first class (Class I) to expire at the first annual meeting of the stockholders following the IPO; the term of office of the second class (Class II) to expire at the second annual meeting of stockholders held following the IPO; the term of office of the third class (Class III) to expire at the third annual meeting of stockholders; and thereafter for each such term to expire at each third succeeding annual meeting of stockholders after such election. Subject to the rights of the holders of any series of Preferred Stock then outstanding, a vacancy resulting from the removal of a director by the stockholders as provided in Article SIXTH, Section C below may be filled at a special meeting of the stockholders held for that purpose. All directors shall hold office until the expiration of the term for which elected, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. B. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation or other cause (other than removal from office by a vote of the stockholders) may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. C. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any time, with or without cause, but only by the affirmative vote of the holders of at least a majority of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Vacancies in the Board of Directors resulting from such removal may be filled by a majority of the directors then in office, though less than a quorum, or by the stockholders as provided in Article SIXTH, Section A above. Directors so chosen shall hold office for a term expiring at the next annual meeting of stockholders at which the term of office of 3 the class to which they have been elected expires, and until their respective successors are elected, except in the case of the death, resignation, or removal of any director. SEVENTH: The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board). The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of Bylaws of the Corporation by the stockholders shall require, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. EIGHTH: 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, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing provisions of this Article EIGHTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. NINTH: The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; PROVIDED, HOWEVER, that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any 4 class or series of the stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 66-2/3% of the voting power of all of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal this Article NINTH, Article FIFTH, Article SIXTH, Article SEVENTH or Article EIGHTH. IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate to be signed by a duly authorized officer on this ____ day of ___________, 1999. FINISAR CORPORATION By: --------------------------------------- Stephen K. Workman, Vice President of Finance, Chief Financial Officer and Secretary 5 EX-4.1 8 EXHIBIT 4.1 Exhibit 4.1 FRONT COMMON STOCK COMMON STOCK FINISAR CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 31787A THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF FINISAR CORPORATION. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: CHIEF FINANCIAL OFFICER AND SECRETARY CHIEF EXECUTIVE OFFICER AND PRESIDENT COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY ________________________ AUTHORIZED SIGNATURE Page 1 BACK FINISAR CORPORATION A statement of 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 and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of designation, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof upon request and without charge from the Secretary of the Corporation at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - ......................... Custodian ......................... (Cust) (Minor) under Uniform Gifts to Minors Act .............................................................. (State) UNIF TRF MIN ACT - ................. Custodian (until age ..........)............................ (Cust) (Minor) under Uniform Transfers to Minors Act .............................................................. (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER Page 2 IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ______________________ X___________________________ X___________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed Page 3 By _________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-5.1 9 EXHIBIT 5.1 Exhibit 5.1 [GRAY CARY WARE & FREIDENRICH LLP Letterhead] October 15, 1999 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 RE: FINISAR CORPORATION REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: As counsel to Finisar Corporation (the "Company"), we are rendering this opinion in connection with a proposed sale of those certain shares of the Company's newly-issued Common Stock as set forth in the Registration Statement on Form S-1 to which this opinion is being filed as Exhibit 5.1 (the "Shares"). We have examined all instruments, documents and records which we deemed relevant and necessary for the basis of our opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies. Based on such examination, we are of the opinion that the Shares identified in the above-referenced Registration Statement will be, upon effectiveness of the Registration Statement and receipt by the Company of payment therefor, validly authorized, legally issued, fully paid, and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the above-referenced Registration Statement and to the use of our name wherever it appears in said Registration Statement, including the Prospectus constituting a part thereof, as originally filed or as subsequently amended. Very truly yours, /s/ Gray Cary Ware & Freidenrich LLP GRAY CARY WARE & FREIDENRICH LLP EX-10.1 10 EXHIBIT 10.1 INDEMNITY AGREEMENT This Indemnity Agreement, dated as of __________, 1999, is made by and between Finisar Delaware Corporation, a Delaware corporation (the "Company"), and _________________ (the "Indemnitee"). RECITALS A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors, officers or agents of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors, officers and other agents. B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors, officers and agents with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take. C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so enormous (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of directors, officers and other agents. D. The Company believes that it is unfair for its directors, officers and agents and the directors, officers and agents of its subsidiaries to assume the risk of huge judgments and other expenses which may occur in cases in which the director, officer or agent received no personal profit and in cases where the director, officer or agent was not culpable. E. The Company recognizes that the issues in controversy in litigation against a director, officer or agent of a corporation such as the Company or its subsidiaries are often related to the knowledge, motives and intent of such director, officer or agent, that he is usually the only witness with knowledge of the essential facts and exculpating circumstances regarding such matters, and that the long period of time which usually elapses before the trial or other disposition of such litigation often extends beyond the time that the director, officer or agent can reasonably recall such matters; and may extend beyond the normal time for retirement for such director, officer or agent with the result that he, after retirement or in the event of his death, his spouse, heirs, executors or administrators, may be faced with limited ability and undue hardship in maintaining an adequate defense, which may discourage such a director, officer or agent from serving in that position. F. Based upon their experience as business managers, the Board of Directors of the Company (the "Board") has concluded that, to retain and attract talented and experienced individuals to serve as directors, officers and agents of the Company and its subsidiaries and to encourage such individuals to take the business risks necessary for the success of the Company and its subsidiaries, it is necessary for the Company to contractually indemnify its directors, 1 officers and agents and the directors, officers and agents of its subsidiaries, and to assume for itself maximum liability for expenses and damages in connection with claims against such directors, officers and agents in connection with their service to the Company and its subsidiaries, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its subsidiaries and the Company's stockholders. G. Section 145 of the General Corporation Law of Delaware, under which the Company is organized ("Section 145"), empowers the Company to indemnify its directors, officers, employees and agents by agreement and to indemnify persons who serve, at the request of the Company, as the directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by Section 145 is not exclusive. H. The Company desires and has requested the Indemnitee to serve or continue to serve as a director, officer or agent of the Company and/or one or more subsidiaries of the Company free from undue concern for claims for damages arising out of or related to such services to the Company and/or one or more subsidiaries of the Company. I. Indemnitee is willing to serve, or to continue to serve, the Company and/or one or more subsidiaries of the Company, provided that he is furnished the indemnity provided for herein. AGREEMENT NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. DEFINITIONS. (a) AGENT. For the purposes of this Agreement, "agent" of the Company means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary of the Company; or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or a subsidiary of the Company, or was a director, officer, employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation. (b) EXPENSES. For purposes of this Agreement, "expenses" include all out of pocket expenses costs of any type or nature whatsoever (including, without limitation, all attorneys' fees and related disbursements), actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement or Section 145 or otherwise; provided, 2 however, that "expenses" shall not include any judgments, fines, ERISA excise taxes or penalties, or amounts paid in settlement of a proceeding. (c) PROCEEDING. For the purposes of this Agreement, "proceeding" means any threatened, pending, or completed action, suit or other proceeding, whether civil, criminal, administrative, or investigative. (d) SUBSIDIARY. For purposes of this Agreement, "subsidiary" means any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more other subsidiaries, or by one or more other subsidiaries. 2. AGREEMENT TO SERVE. The Indemnitee agrees to serve and/or continue to serve as agent of the Company, at its will (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an agent of the Company, so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing; provided, however, that nothing contained in this Agreement is intended to create any right to continued employment by Indemnitee. 3. LIABILITY INSURANCE. (a) MAINTENANCE OF D&O INSURANCE. The Company hereby covenants and agrees that, so long as the Indemnitee shall continue to serve as an agent of the Company and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that the Indemnitee was an agent of the Company, the Company, subject to Section 3(c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) RIGHTS AND BENEFITS. In all policies of D&O Insurance, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if the Indemnitee is a director; or of the Company's officers, if the Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if the Indemnitee is not a director or officer but is a key employee. (c) LIMITATION ON REQUIRED MAINTENANCE OF D&O INSURANCE. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 4. MANDATORY INDEMNIFICATION. Subject to Section 9 below, the Company shall indemnify the Indemnitee as follows: 3 (a) SUCCESSFUL DEFENSE. To the extent the Indemnitee has been successful on the merits or otherwise in defense of any proceeding (including, without limitation, an action by or in the right of the Company) to which the Indemnitee was a party by reason of the fact that he is or was an Agent of the Company at any time, against all expenses of any type whatsoever actually and reasonably incurred by him in connection with the investigation, defense or appeal of such proceeding. (b) THIRD PARTY ACTIONS. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. (c) DERIVATIVE ACTIONS. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by or in the right of the Company by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against all expenses actually and reasonably incurred by him in connection with the investigation, defense, settlement, or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders; except that no indemnification under this subsection 4(c) shall be made in respect to any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction unless and only to the extent that the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such amounts which the court shall deem proper. (d) ACTIONS WHERE INDEMNITEE IS DECEASED. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, and if prior to, during the pendency of after completion of such proceeding Indemnitee becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors and administrators against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred to the extent Indemnitee would have been entitled to indemnification pursuant to Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive. (e) Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) 4 for which payment is actually made to Indemnitee under a valid and collectible insurance policy of D&O Insurance, or under a valid and enforceable indemnity clause, by-law or agreement. 5. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a proceeding, but not entitled, however, to indemnification for all of the total amount hereof, the Company shall nevertheless indemnify the Indemnitee for such total amount except as to the portion hereof to which the Indemnitee is not entitled. 6. MANDATORY ADVANCEMENT OF EXPENSES. Subject to Section 8(a) below, the Company shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall be determined ultimately that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee within twenty (20) days following delivery of a written request therefor by the Indemnitee to the Company. 7. NOTICE AND OTHER INDEMNIFICATION PROCEDURES. (a) Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. (b) If, at the time of the receipt of a notice of the commencement of a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (c) In the event the Company shall be obligated to pay the expenses of any proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that (i) the Indemnitee shall have the right to employ his counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of 5 interest between the Company and the Indemnitee in the conduct of any such defense; or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 8. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board, (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the General Corporation Law of Delaware or (iv) the proceeding is brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145. (b) LACK OF GOOD FAITH. To indemnify the Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (c) UNAUTHORIZED SETTLEMENTS. To indemnify the Indemnitee under this Agreement for any amounts paid in settlement of a proceeding unless the Company consents to such settlement, which consent shall not be unreasonably withheld. 9. NON-EXCLUSIVITY. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provision of law, the Company's Certificate of Incorporation or Bylaws, the vote of the Company's stockholders or disinterested directors, other agreements, or otherwise, both as to action in his official capacity and to action in another capacity while occupying his position as an agent of the Company, and the Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee. 10. ENFORCEMENT. Any right to indemnification or advances granted by this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Indemnitee, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under this Agreement (other than an action brought to enforce a claim for expenses pursuant to Section 6 hereof, provided that the required undertaking has been tendered to the Company) that Indemnitee is not entitled to indemnification because of the limitations set forth in Sections 4 and 8 hereof. Neither the failure of the Corporation (including its Board of Directors or its stockholders) to have made a determination prior to the 6 commencement of such enforcement action that indemnification of Indemnitee is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its stockholders) that such indemnification is improper, shall be a defense to the action or create a presumption that Indemnitee is not entitled to indemnification under this Agreement or otherwise. 11. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 12. SURVIVAL OF RIGHTS. (a) All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an agent of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein. (b) The Company shall require any successor to the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, 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. 13. INTERPRETATION OF AGREEMENT. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent permitted by law including those circumstances in which indemnification would otherwise be discretionary. 14. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 13 hereof. 15. MODIFICATION AND WAIVER. 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. 7 16. NOTICE. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 17. GOVERNING LAW. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. 18. CONSENT TO JURISDICTION. The Company and the Indemnitee each hereby consent to the jurisdiction of the courts of the State of Delaware with respect to any action or proceeding which arises out of or relates to this Agreement. 8 The parties hereto have entered into this Indemnity Agreement effective as of the date first above written. THE COMPANY: FINISAR DELAWARE CORPORATION By ------------------------------------ Its ----------------------------------- Address: 1308 Moffett Park Drive Sunnyvale, California 94089 INDEMNITEE: -------------------------------------- [NAME] Address: -------------------------------------- -------------------------------------- 9 EX-10.2 11 EXHIBIT 10.2 FINISAR CORPORATION 1989 STOCK OPTION PLAN 1. PURPOSES OF THE PLAN. The purposes of this Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees and Consultants of the Company and to promote the success of the Company's business. Options granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options, at the discretion of the Board and as reflected in the terms of the written option agreement. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "BOARD" shall mean the Committee, if one has been appointed, or the Board of Directors of the Company, if no Committee is appointed. (b) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (c) "COMMITTEE" shall mean the Committee appointed by the Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed. (d) "COMMON STOCK" shall mean the Common Stock of the Company. (e) "COMPANY" shall mean Finisar Corporation, a California corporation. (f) "CONSULTANT" shall mean any person who is engaged by the Company or any Parent or Subsidiary to render consulting services and is compensated for such consulting services, and any director of the Company whether compensated for such services or not; provided that if and in the event the Company registers any class of any equity security pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the term Consultant shall thereafter not include directors who are not compensated for their services or are paid only a director's fee by the Company. (g) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" shall mean the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. (h) "EMPLOYEE" shall mean any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (i) "INCENTIVE STOCK OPTION" shall mean an Option intended to qualify as an incentive stock option within the meaning of Section 422A of the Code. (j) "NONSTATUTORY STOCK OPTION" shall mean an Option not intended to qualify as an Incentive Stock Option. (k) "OPTION" shall mean a stock option granted pursuant to the Plan. (l) "OPTIONED STOCK" shall mean the Common Stock subject to an Option. (m) "OPTIONEE" shall mean an Employee or Consultant who receives an Option. (n) "PARENT" shall mean a "parent corporation", whether now or hereafter existing, as defined in Section 425(e) of the Code. (o) "PLAN" shall mean this 1989 Stock Option Plan. (p) "SHARE" shall mean a share of the Common Stock, as adjusted in accordance with Section 11 of the Plan. (q) "SUBSIDIARY" shall mean a "subsidiary corporation", whether now or hereafter existing, as defined in Section 425(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is 54,600 shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Notwithstanding any other provision of the Plan, shares issued under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan. 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. The Plan shall be administered by the Board of Directors of the Company. (i) Subject to subparagraph (ii), the Board of Directors may appoint a Committee consisting of not less than two members of the Board of Directors to administer the Plan on behalf of the Board of Directors, subject to such terms and conditions as the Board of Directors may prescribe. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. Members of the Board who are either eligible for Options or have been granted Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan, except that no such member shall act upon the granting of an Option to himself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting of Options to him. (ii) Notwithstanding the foregoing subparagraph (i), if and in any event the Company registers any class of any equity security pursuant to Section 12 of the Exchange Act, from the effective date of such registration until six months after the termination of such registration, any grants of Options to officers or directors shall only be made by the Board of Directors; provided, however, that if a majority of the Board of Directors is eligible to participate in this Plan or any other stock option or other stock plan of the Company or any of its affiliates, or has been eligible at any time during the prior one year period (or, if shorter, the period following the initial registration of the Company's equity securities under Section 12 of the Exchange Act), any grants of Options to directors must be made by, or only in accordance with the recommendation of, a Committee consisting of three or more persons, who may but need not be directors or employees of the Company, appointed by the Board of Directors and having full authority to act in the matter, none of whom is eligible to participate in this Plan or any other stock option or other stock plan of the Company or any of its affiliates, or has been eligible at any time during the prior one-year period (or, if shorter, the period following the initial registration of the Company's equity securities under Section 12 of the Exchange Act). Any Committee administering the Plan with respect to grants to officers who are not also directors shall conform to the requirements of the preceding sentence. Once appointed, the Committee shall continue to serve until otherwise directed by the Board of Directors. (iii) Subject to the foregoing subparagraphs (i) and (ii), from time to time the Board of Directors may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. (b) POWERS OF THE BOARD. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion: (i) to grant Incentive Stock Options or Nonstatutory Stock Options; (ii) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (iii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iv) to determine the Employees or Consultants to whom, and the time or times at which, Options shall be granted and the number of shares to be represented by each Option; (v) to interpret the Plan; (vi) to prescribe, amend and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each Option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option; (viii) to accelerate or defer (with the consent of the Optionee) the exercise date of any Option, consistent with the provisions of Section 5 of the Plan; (ix) to authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) EFFECT OF BOARD'S DECISION. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other holders of any options granted under the Plan. 5. ELIGIBILITY. (a) Nonstatutory Stock Options may be granted only to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option may, if he is otherwise eligible, be granted an additional Option or Options. (b) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate fair market value of the Shares with respect to which options designated as Incentive Stock options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. (c) For purposes of Section 5(b), Options shall be taken into account in the order in which they were granted, and the fair market value of the Shares shall be determined as of the time the option with respect to such Shares is granted. (d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with his right or the Company's right to terminate his employment or consulting relationship at any time, with or without cause. 6. TERM OF PLAN. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company as described in Section 17 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13 of the Plan. 7. TERM OF OPTION. The term of each Incentive Stock Option shall be ten (10) years from the date of grant thereof or such shorter term as may be provided in the Incentive Stock Option Agreement. The term of each Nonstatutory Stock Option shall be ten (10) years and one (1) day from the date of grant thereof or such shorter term as may be provided in the Nonstatutory Stock Option Agreement. However, in the case of an Option granted to an Optionee who, at the time the option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, (a) if the Option is an Incentive Stock Option, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Incentive Stock Option Agreement, or (b) if the Option is a Nonstatutory Stock Option, the term of the Option shall be five (5) years and one (1) day from the date of grant thereof or such shorter term as may be provided in the Nonstatutory Stock Option Agreement. 8. EXERCISE PRICE AND CONSIDERATION. (a) The per Share exercise price for the Shares to be issued pursuant to exercise of an option shall be such price as is determined by the Board, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the fair market value per Share on the date of grant. (B) granted to any Employee, the per Share exercise price shall be no less than 100% of the fair market value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted to a person who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the fair market value per Share on the date of the grant. (B) granted to any person, the per Share exercise price shall be no less than 85% of the fair market value per Share on the date of grant. (b) The fair market value shall be determined by the Board in its discretion; provided, however, that where there is a public market for the Common Stock, the fair market value per Share shall be the mean of the bid and asked prices (or the closing price per share if the Common Stock is listed on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System) of the Common Stock for the date of grant, as reported in the Wall Street Journal (or, if not so reported, as otherwise reported by the NASDAQ System) or, in the event the Common Stock is listed on a stock exchange, the fair market value per Share shall be the closing price on such exchange on the date of grant of the Option, as reported in the Wall Street Journal. (c) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of cash, check, promissory note, other Shares of Common Stock which (i) either have been owned by the Optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (ii) have a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under Sections 408 and 409 of the California General Corporation Law. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company (Section 315(b) of the California General Corporation Law). 9. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. In the event that the exercise of an Option is treated in part as the exercise of an Incentive Stock Option and in part as the exercise of a Nonstatutory Stock Option pursuant to Section 5(b), the Company shall issue a separate stock certificate evidencing the Shares treated as acquired upon exercise of an Incentive Stock Option and a separate stock certificate evidencing the Shares treated as acquired upon exercise of a Nonstatutory Stock Option, and shall identify each such certificate accordingly in its stock transfer records. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the event of termination of an Optionee's Continuous Status as an Employee or Consultant (as the case may be), such Optionee may, but only within thirty (30) days (or such other period of time, not exceeding three (3) months in the case of an Incentive Stock Option or six (6) months in the case of a Nonstatutory Stock Option, as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his Option to the extent that he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of such termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. (c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 9(b) above, in the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of his total and permanent disability (as defined in Section 22(e)(3) of the Code), he may, but only within six (6) months (or such other period of time not exceeding twelve (12) months as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) from the date of such termination (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), exercise his Option to the extent he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. (d) DEATH OF OPTIONEE. Notwithstanding the provisions of Section 9(b) above, in the event of the death of an Optionee: (i) during the term of the Option who is at the time of his death an Employee or Consultant of the Company and who shall have been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee or Consultant six (6) months after the date of death; or (ii) within thirty (30) days (or such other period of time not exceeding three (3) months as is determined by the Board, with such determination in the case of an Incentive Stock Option being made at the time of grant of the Option) after the termination of Continuous Status as an Employee or Consultant, the Option may be exercised, at any time within six (6) months following the date of death (but in no event later than the date of expiration of the term of such option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 10. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. In the event of the proposed dissolution or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless such successor corporation does not agree to assume the Option or to substitute an equivalent option, in which case the Board shall, in lieu of such assumption or substitution, provide for the Optionee to have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Board makes an Option fully exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify the Optionee that the Option shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option will terminate upon the expiration of such period. 12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 13. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, the following revisions or amendments shall require approval of the shareholders of the Company in the manner described in Section 17 of the Plan: any increase in the number of Shares subject to the Plan, other than in connection with an adjustment under Section 11 of the Plan; (ii) any change in the designation of the class of persons eligible to be granted Options; or (iii) if the Company has a class of equity securities registered under Section 12 of the Exchange Act at the time of such revision or amendment, any material increase in the benefits accruing to participants under the Plan. (b) SHAREHOLDER APPROVAL. If any amendment requiring shareholder approval under Section 13(a) of the Plan is made subsequent to the first registration of any class of equity securities by the Company under Section 12 of the Exchange Act, such shareholder approval shall be solicited as described in Section 17 of the Plan. (c) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 15. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. OPTION AGREEMENT. Options shall be evidenced by written option agreements in such form as the Board shall approve. 17. SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months before or after the date the Plan is adopted. (b) If and in the event that the Company registers any class of equity securities pursuant to Section 12 of the Exchange Act, any required approval of the shareholders of the Company obtained after such registration shall be solicited substantially in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. (c) If any required approval by the shareholders of the Plan itself or of any amendment thereto is solicited at any time otherwise than in the manner described in Section 17(b) hereof, then the Company shall, at or prior to the first annual meeting of shareholders held subsequent to the later of (1) the first registration of any class of equity securities of the Company under Section 12 of the Exchange Act or (2) the granting of an Option hereunder to an officer or director after such registration, do the following: furnish in writing to the holders entitled to vote for the Plan substantially the same information which would be required (if proxies to be voted with respect to approval or disapproval of the Plan or amendment were then being solicited) by the rules and regulations in effect under Section 14(a) of the Exchange Act at the time such information is furnished; and file with, or mail for filing to, the Securities and Exchange Commission four copies of the written information referred to in subsection (i) hereof not later than the date on which such information is first sent or given to shareholders. 18. INFORMATION TO OPTIONEES. The Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all shareholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. EX-10.5 12 EXHIBIT 10.5 +SECURITIES PURCHASE AGREEMENT FINISAR CORPORATION NOVEMBER 6, 1998 TABLE OF CONTENTS 1. Authorization, Issuance and Sale of the Preferred Shares. . . . . . 1 1.1 Authorization; Amended and Restated Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Sale of Preferred Shares by the Company. . . . . . . . . . . 1 2. Closing Date; Subsequent Closing and Delivery . . . . . . . . . . . 1 2.1 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 Subsequent Sale of Preferred Shares. . . . . . . . . . . . . 1 3. Representations and Warranties of the Company and the Founders. . . 2 3.1 Organization and Standing; Articles and By-Laws. . . . . . . 2 3.2 Corporate Power. . . . . . . . . . . . . . . . . . . . . . . 2 3.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 2 3.4 Capitalization . . . . . . . . . . . . . . . . . . . . . . . 3 3.5 Authorization. . . . . . . . . . . . . . . . . . . . . . . . 3 3.6 Compliance with Other Instruments, None Burdensome, etc. . . 4 3.7 Proprietary Agreements . . . . . . . . . . . . . . . . . . . 4 3.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.9 Governmental Consents, etc . . . . . . . . . . . . . . . . . 5 3.10 Offering . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.11 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.12 Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.14 Financial Statements . . . . . . . . . . . . . . . . . . . . 8 3.15 Absence of Changes . . . . . . . . . . . . . . . . . . . . . 9 3.16 Financial Plan and Projections . . . . . . . . . . . . . . .10 3.17 Registration Rights. . . . . . . . . . . . . . . . . . . . .10 3.18 Proprietary Rights . . . . . . . . . . . . . . . . . . . . .10 3.19 Certain Transactions . . . . . . . . . . . . . . . . . . . .12 3.20 Corporate Documents, Minute Books. . . . . . . . . . . . . .12 3.21 Compliance With Law. . . . . . . . . . . . . . . . . . . . .12 3.22 Brokers' and Finders' Fees/Contractual Limitations . . . . .13 3.23 Certain Payments . . . . . . . . . . . . . . . . . . . . . .13 3.24 Books and Records. . . . . . . . . . . . . . . . . . . . . .13 3.25 Foreign Corrupt Practices Act. . . . . . . . . . . . . . . .13 3.26 Environmental and Safety Matters . . . . . . . . . . . . . .14 3.27 Manufacturing and Marketing. . . . . . . . . . . . . . . . .15 3.28 Returns and Complaints . . . . . . . . . . . . . . . . . . .15 3.29 Labor Agreements and Actions . . . . . . . . . . . . . . . .15 3.30 Section 83(b) Elections. . . . . . . . . . . . . . . . . . .16 3.31 Employee Benefit Plans . . . . . . . . . . . . . . . . . . .16 3.32 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . .16 3.33 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . .16 3.34 Shareholder Agreements . . . . . . . . . . . . . . . . . . .16 3.35 Products . . . . . . . . . . . . . . . . . . . . . . . . . .16
i 4. Representations and Warranties of Purchasers and Restrictions on Transfer Imposed by the Securities Act. . . . . . . . . . . . . . .18 4.1 Representations and Warranties by the Purchasers . . . . . .18 (a) Authority. . . . . . . . . . . . . . . . . . . . . . .18 (b) Authorization. . . . . . . . . . . . . . . . . . . . .18 (c) Investment Intent. . . . . . . . . . . . . . . . . . .18 (d) Shares Not Registered. . . . . . . . . . . . . . . . .18 (e) Knowledge and Experience . . . . . . . . . . . . . . .18 (f) Not Organized to Purchase. . . . . . . . . . . . . . .19 (g) Holding Requirements . . . . . . . . . . . . . . . . .19 (h) Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended) . . . . . . . . . . . . . . . . . . . .19 4.2 Legends. . . . . . . . . . . . . . . . . . . . . . . . . . .19 (a) Federal Legend . . . . . . . . . . . . . . . . . . . .19 (b) Other Legends. . . . . . . . . . . . . . . . . . . . .19 4.3 Removal of Legend and Transfer Restrictions. . . . . . . . .20 4.4 Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . .20 4.5 No Transfer. . . . . . . . . . . . . . . . . . . . . . . . .20 4.6 Permitted Transfers. . . . . . . . . . . . . . . . . . . . .20 5. Conditions to Closing . . . . . . . . . . . . . . . . . . . . . . .20 5.1 Conditions to Purchasers' Obligations. . . . . . . . . . . .20 (a) Representations and Warranties Correct; Performance of Obligations . . . . . . . . . . . . . . . . . . .21 (b) Consents and Waivers . . . . . . . . . . . . . . . . .21 (c) Election of Directors. . . . . . . . . . . . . . . . .21 (d) Filing of the Articles . . . . . . . . . . . . . . . .21 (e) Ancillary Agreements . . . . . . . . . . . . . . . . .21 (f) Delivery of Financial Statements . . . . . . . . . . .21 (g) Compliance Certificate . . . . . . . . . . . . . . . .21 (h) Opinion of Counsel . . . . . . . . . . . . . . . . . .21 (i) Reservation of Common Stock. . . . . . . . . . . . . .21 (j) Indemnification Agreements . . . . . . . . . . . . . .21 (k) Financing. . . . . . . . . . . . . . . . . . . . . . .22 (l) Due Diligence Review . . . . . . . . . . . . . . . . .22 (m) Hart-Scott-Rodino. . . . . . . . . . . . . . . . . . .22 5.2 Conditions to Obligations of the Company . . . . . . . . . .22 6. Affirmative Covenants of the Company. . . . . . . . . . . . . . . .22 6.1 Financial Information. . . . . . . . . . . . . . . . . . . .22 6.2 Conflicts of Interest. . . . . . . . . . . . . . . . . . . .23 6.3 Key-Man Insurance. . . . . . . . . . . . . . . . . . . . . .23 6.4 Proprietary Agreements . . . . . . . . . . . . . . . . . . .23 6.5 Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . .23 6.6 Actions. . . . . . . . . . . . . . . . . . . . . . . . . . .24 6.7 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . .24 6.8 Offer of Redemption. . . . . . . . . . . . . . . . . . . . .24 7. Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . .24
ii 7. Registration. . . . . . . . . . . . . . . . . . . . . . . . . . . .24 7.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . .24 7.2 Requested Registration . . . . . . . . . . . . . . . . . . .25 (a) Request for Registration . . . . . . . . . . . . . . .25 (c) Underwriting . . . . . . . . . . . . . . . . . . . . .25 7.3 Company Registration . . . . . . . . . . . . . . . . . . . .26 (a) Notice of Registration . . . . . . . . . . . . . . . .26 (b) Underwriting . . . . . . . . . . . . . . . . . . . . .26 7.4 Form S-3 . . . . . . . . . . . . . . . . . . . . . . . . . .27 7.5 Expenses of Registration . . . . . . . . . . . . . . . . . .27 7.6 Registration Procedures. . . . . . . . . . . . . . . . . . .27 7.7 Indemnification. . . . . . . . . . . . . . . . . . . . . . .27 7.8 Information by Holder. . . . . . . . . . . . . . . . . . . .29 7.9 Sale Without Registration. . . . . . . . . . . . . . . . . .29 7.10 Rule 144 Reporting . . . . . . . . . . . . . . . . . . . . .30 7.11 Transfer of Registration Rights. . . . . . . . . . . . . . .30 7.12 Limitations on Subsequent Registration Rights. . . . . . . .30 7.13 "Market Stand-Off" Agreement . . . . . . . . . . . . . . . .31 7.14 Expiration of Rights . . . . . . . . . . . . . . . . . . . .31 8. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . .31 8.1 Waivers and Amendments . . . . . . . . . . . . . . . . . . .31 8.2 Governing Law. . . . . . . . . . . . . . . . . . . . . . . .31 8.3 Survival . . . . . . . . . . . . . . . . . . . . . . . . . .32 8.4 Successors and Assigns . . . . . . . . . . . . . . . . . . .32 8.5 Entire Agreement . . . . . . . . . . . . . . . . . . . . . .32 8.6 Notices, etc . . . . . . . . . . . . . . . . . . . . . . . .32 8.7 Severabilily . . . . . . . . . . . . . . . . . . . . . . . .32 8.8 Finder's Fees and Other Fees . . . . . . . . . . . . . . . .32 8.9 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . .32 8.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . .33 8.11 Delays or Omissions. . . . . . . . . . . . . . . . . . . . .33 8.12 Certain Representations and Warranties . . . . . . . . . . .33
iii LIST OF SCHEDULES AND EXHIBITS SCHEDULE 1 - Schedule of Purchasers SCHEDULE 2 - Capitalization EXHIBIT A - Amended and Restated Articles of Incorporation EXHIBIT B - Schedule of Exceptions EXHIBIT C - Form of Shareholders' Agreement EXHIBIT D - Redemption Agreement EXHIBIT E - Voting Agreement EXHIBIT F - Holders of Outstanding Options, Warrants, Convertible Securities and Other Purchase Rights of the Company EXHIBIT G - Form of Proprietary Information and Inventions Agreement EXHIBIT H - Material Contracts EXHIBIT I - Form of Opinion of Counsel for the Company
FINISAR CORPORATION SECURITIES PURCHASE AGREEMENT THIS AGREEMENT is made as of November 6, 1998, by and among Finisar Corporation, a California corporation (the "Company"), Jerry S. Rawls and Frank Levinson (each, a "Founder" and collectively, the "Founders") and each of the persons named in the Schedule of Purchasers attached hereto as SCHEDULE 1 (herein individually, a "Purchaser" and collectively, the "Purchasers"). The parties hereby agree as follows: 1. AUTHORIZATION, ISSUANCE AND SALE OF THE PREFERRED SHARES. 1.1 AUTHORIZATION; AMENDED AND RESTATED ARTICLES OF INCORPORATION. The Company has authorized the issuance and sale pursuant to the terms and conditions contained herein at a purchase price of $2.1932 per share of up to 12,100,000 shares of its Series A Convertible Preferred Stock (the "Preferred Shares"). The Preferred Shares have the rights, preferences and privileges as set forth in the Company's Amended and Restated Articles of Incorporation (the "Articles") attached hereto as EXHIBIT A. 1.2 SALE OF PREFERRED SHARES BY THE COMPANY. Subject to the terms and conditions hereof, at the Closing, the Company will issue and sell to the Purchasers and the Purchasers will purchase from the Company the number of Preferred Shares specified opposite each such Purchaser's name on SCHEDULE 1, at a purchase price per Preferred Share as indicated in Section 1.1. 2. CLOSING DATE; SUBSEQUENT CLOSING AND DELIVERY. 2.1 CLOSING DATE. (a) PURCHASE AND SALE. The closing of the purchase and sale of up to 12,100,000 Preferred Shares shall be held at the offices of special counsel to the Purchasers, Brobeck, Phleger & Harrison LLP, 2200 Geng Road, Palo Alto, California, at 1:00 p.m. on November 6, 1998, or at such time and place as the Company and the Purchasers may agree in writing. (b) CLOSING. The closing referred to in subsection (a) above is hereinafter referred to as the "Closing" and the date of the Closing is hereinafter referred to as the "Closing Date". 2.2 DELIVERY. Subject to the terms of this Agreement, at the Closing, the Company will deliver to the Purchasers the certificates representing the Preferred Shares to be purchased by the Purchasers at such Closing as indicated on SCHEDULE 1, against payment of the purchase price therefor by, at the option of the Purchasers, a check or checks or wire transfer payable to the order of the Company. 2.3 SUBSEQUENT SALE OF PREFERRED SHARES. Provided that (i) the representations and warranties of the Company and the Founders set forth in this Agreement are then true and accurate, without additional exceptions, (ii) the Company has fulfilled each of its covenants and agreements that it has undertaken to fulfill, without additional exceptions and (iii) the Company has not breached any provision or obligation or other agreement under this Agreement, the Company shall sell up to the balance of the Preferred Shares not sold to the Purchasers pursuant to Section 2.1(a) of this Agreement to additional Purchasers set forth on SCHEDULE 1 as the same may be amended from time to time, with each such Purchaser to become a "Purchaser" for purposes of this Agreement and a "Holder" for purposes of the Shareholders' Agreement (as defined herein), having the rights and obligations hereunder and thereunder. Such sale of additional Preferred Shares, if any, shall occur at a subsequent closing to take place at the offices of Brobeck, Phleger & Harrison LLP, 2200 Geng Road, Palo Alto, California no later than 30 days following the Closing (the "Second Closing"). At the Second Closing, the Purchasers shall be entitled to an updated Schedule of Exceptions, a revised compliance certificate and an updated opinion of Company counsel dated the date of the Second Closing each in form satisfactory to the Purchasers in their sole discretion. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE FOUNDERS. The Company represents and warrants to the Purchasers, and in addition, with respect to the representations and warranties set forth in Sections 3.4, 3.6, 3.7, 3.8, 3.11, 3.14, 3.16, 3.18, 3.19, 3.20 and 3.32 and subject to Section 8.12 hereof, the Founders represent and warrant to the Purchasers that, except as set forth on a Schedule of Exceptions attached hereto as EXHIBIT B (which exceptions shall be deemed to be representations and warranties as if made hereunder): 3.1 ORGANIZATION AND STANDING; ARTICLES AND BY-LAWS. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is qualified or licensed to do business as a foreign corporation in all jurisdictions where such qualification or licensing is required, except where the failure to so qualify would not have a material adverse effect upon the Company's business, financial condition, results of operations or prospects. Copies of all of the Company's Articles, Bylaws, minutes and consents of shareholders and of the Board of Directors have been previously provided to special counsel for the Purchasers. 3.2 CORPORATE POWER. The Company has now, or will have at the Closing Date, the legal capacity and all requisite corporate power and authority to enter into this Agreement, the Shareholders' Agreement (the "Shareholders' Agreement") in the form attached hereto as EXHIBIT C, to enter into the Redemption Agreements (as defined below) attached hereto as EXHIBIT D, to enter into the Voting Agreement attached as EXHIBIT E (the "Voting Agreement"), to adopt the Articles and to sell and issue the Preferred Shares and to issue the Common Stock issuable upon conversion of the Preferred Shares and to carry out its obligations and related activities hereunder and thereunder. This Agreement, the Shareholders' Agreement, the Redemption Agreements and the Articles are valid and binding obligations of the Company and all other parties that approved them, enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, moratorium, and other laws of general application affecting the enforcement of creditors' rights. 3.3 SUBSIDIARIES. The Company does not own or control, directly or indirectly, more than one percent of the stock, capital or equity interests or profits in any other 2 corporation, association, or other business entity. Each subsidiary of the Company (each a "Subsidiary" and collectively the "Subsidiaries") is listed on the Schedule of Exceptions. Neither the Company nor any of the Subsidiaries is a participant in any joint venture, partnership, or similar arrangement. The Company owns all of the shares of capital stock of each Subsidiary (direct or indirect), free and clear of all liens, encumbrances or claims at the Closing. 3.4 CAPITALIZATION. The authorized capital stock of the Company is 75,000,000 shares of Common Stock, no par value, of which 45,752,660 shall be issued and outstanding immediately prior to the Closing, 12,100,000 shares of Series A Convertible Preferred Stock, no par value, of which no shares shall be issued and outstanding immediately prior to the Closing and up to all of which may be purchased and sold hereunder and 12,100,000 shares of Redeemable Preferred Stock, of which no shares shall be issued and outstanding prior to the Closing. The holders of record of the presently issued and outstanding shares of capital stock immediately prior to the Closing are as set forth on SCHEDULE 2. All such issued and outstanding shares have been duly authorized and validly issued, fully paid and nonassessable, were issued for consideration not less than their fair market value and were or will be issued in compliance with all applicable state and federal laws concerning the issuance of securities. The Company has reserved 6,075,611 shares of Common Stock for issuance pursuant to its 1989 Stock Option Plan (including options currently outstanding and exercised pursuant to such stock option plan). The holders of any and all rights, warrants, convertible securities, or conversion or exercise rights to purchase or acquire from the Company any of its shares of capital stock, along with the maximum number of shares of capital stock issuable upon exercise of such rights are set forth on EXHIBIT F hereto. Except for such rights, there are no outstanding rights, warrants, convertible securities, conversion rights or agreements for the purchase or acquisition from the Company of any shares of its capital stock. 3.5 AUTHORIZATION. (a) CORPORATE ACTION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the sale and issuance of the Preferred Shares and the issuance of the Common Stock upon conversion of the Preferred Shares and the performance of the Company's obligations and activities hereunder and under the Shareholders' Agreement, the Redemption Agreements and the Articles has been taken. The Company has duly reserved an aggregate of 12,100,000 shares of Common Stock for issuance upon conversion of the Preferred Shares. (b) VALID ISSUANCE. The Preferred Shares to be issued and sold by the Company to the Purchasers, when issued in compliance with the provisions of this Agreement, and the shares of Common Stock issuable upon conversion of the Preferred Shares, when issued in accordance with the provisions of the Articles and pursuant to the terms thereof, will be duly authorized, validly issued, fully paid and nonassessable and will be free of any liens or encumbrances. The rights, preferences, privileges and restrictions of the Preferred Shares are as set forth in the Articles. (c) NO PREEMPTIVE RIGHTS. Except as provided in this Agreement or the Shareholders' Agreement, no person (individual or corporate or partnership) has any right of first refusal or any preemptive rights in connection with the issuance and sale of the Preferred 3 Shares, the issuance of the Common Stock upon conversion of the Preferred Shares or any future issuances of securities by the Company. 3.6 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. Neither the Company nor any of the Subsidiaries is in violation of any term of its Articles or Bylaws, nor is the Company or any of the Subsidiaries in violation of or in default in any respect under the terms of any mortgage, indenture, contract, agreement, instrument, judgment or decree applicable to it or its properties and neither the Company nor any Subsidiary is in violation of any order, statute, law, rule or regulation applicable to it or its properties. The execution, delivery and performance of and compliance with this Agreement, the Shareholders' Agreement and the Articles, the issuance and sale of the Preferred Shares and the consummation of the other transactions set forth in this Agreement, including the redemption of Common Stock pursuant to the Redemption Agreements, the Articles, the Voting Agreement, the Redemption Agreements and the Shareholders' Agreement do not and will not (a) result in any such violation, (b) be in conflict with or constitute a default under any such term, statute, including Chapter 5 of the California Corporations Code, rule or regulation, (c) result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company pursuant to any such term, statute, rule or regulation, or (d) result in any liability to the Company, its officers and directors or the Purchasers. There is no such term or other provision which will cause a material adverse effect in the business condition, affairs or operations of the Company, any Subsidiary or any of their respective properties or assets. 3.7 PROPRIETARY AGREEMENTS. All personnel, including consultants, retained by the Company and any of its Subsidiaries have executed agreements regarding confidentiality and proprietary information in the form attached hereto as EXHIBIT G. Each employee-inventor has validly and properly assigned his or her rights to the Company on all inventions, pending patent applications and patents issued and other intellectual property rights used or useful in the business and operations of the Company and any of its Subsidiaries. To the extent that the Company or any of its Subsidiaries have ever utilized the services of a person who provides technical services or business advice and services without becoming an employee of the Company (herein referred to as a "consultant" or "consultants") each such person has validly and properly assigned to the Company or any of its Subsidiaries his or her rights in and to all copyrights and works of authorship relating to the Company's Products (as defined below) and business. To the Company's knowledge none of the Company's employees or consultants is in violation thereof and the Company will use its best efforts to prevent any such violation by any such employee or consultant. To the Company's knowledge, none of the Company's employees or consultants is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of it his or her best efforts to promote the interests of the Company or any of its Subsidiaries or that would conflict with the Company's business as conducted or as proposed to be conducted or that would prevent any such employee or consultant from assigning inventions to the Company or any of its Subsidiaries. The Company does not believe that it is or will be necessary for the Company or any of its Subsidiaries to utilize any inventions of any of its employees or consultants (or persons it currently intends to hire) made prior to their employment by or relationship with the Company or any of its Subsidiaries. 4 3.8 LITIGATION. There is no action, proceeding or investigation pending against the Company, any Subsidiary or any of their respective officers, directors or, to the Company's knowledge, against any other employees or consultants of the Company or any of its Subsidiaries (or, to the Company's knowledge, any basis therefor or threat thereof): (1) which might result, either individually or in the aggregate, in (a) any material adverse change in the business, conditions, affairs, operations or prospects of the Company, any of its Subsidiaries or in any of their respective properties or assets or of any shareholder, (b) any material adverse impairment of the right or ability of the Company or any of its Subsidiaries to carry on its business as now conducted or as proposed to be conducted, or (c) any material liability on the part of the Company or any of its Subsidiaries or any shareholder; or (2) which questions the validity of this Agreement the Shareholders' Agreement the Redemption Agreements, the Voting Agreement or the Articles or any action taken or to be taken in connection herewith. Neither the Company nor or any of its Subsidiaries is a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or any of its Subsidiaries currently pending or which the Company or any Subsidiary currently intends to initiate. 3.9 GOVERNMENTAL CONSENTS, ETC. No consent approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Company is required in connection with: (a) the valid execution and delivery of this Agreement, the Shareholders' Agreement, the Redemption Agreements, the Voting Agreement or the Articles; (b) the offer, sale or issuance of the Preferred Shares or the issuance of the shares of Common Stock issuable upon conversion of the Prefer-red Shares; or (c) the obtaining of the consents, permits and waivers specified in subsection S. I (b) hereof, except filings or qualifications under the California Corporate Securities Law of 1968, as amended (the "Law"), or other applicable blue sky laws, and for filings required to be made by each of Purchaser and the Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and all rules and regulations promulgated thereunder (the "HSR Act") which filings or qualifications, if required, shall be timely filed or obtained prior to the sale of the Preferred Shares. 3.10 OFFERING. In reliance in part on the representations and warranties of the Purchasers in Section 4 hereof, the offer, sale and issuance of the Preferred Shares in conformity with the terms of this Agreement will not result in a violation of the requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act") or the qualification or registration requirements of the Law or other applicable blue sky laws. 3.11 TAXES. (a) For purposes of this Agreement, the following terms have the following meanings: "Tax" (and, with correlative meaning, 'Taxes" and "Taxable") means any and all taxes or obligations with respect thereto, including, without limitation, (i) any income, profits, alternative or add-on minimum tax, gross receipts, sales, use, value-added, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, net worth, premium, property, environmental or windfall profit tax, custom, duty or other tax, governmental fee or assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any governmental entity responsible for the imposition of any such tax (domestic or foreign) (a "Taxing Authority"), (ii) 5 any liability for the payment of any amounts of the type described in clause (i) above as a result of being a member of an affiliated, consolidated, combined or unitary group for any Taxable period or as the result of being a transferee or successor thereof and (iii) any liability for the payment of any amounts of the type described in clause (i) or (ii) above as a result of any express or implied obligation to indemnify any other person. For purpose of this representation, the term "Company" shall refer to and include any of the Subsidiaries. (b) All Tax returns, statements, reports and forms (including estimated Tax returns and reports and information returns and reports) required to be filed with any Taxing Authority with respect to any Taxable period ending on or before the time of Closing, by or on behalf of the Company (collectively, the "Company's Returns"), have been or will be completed and filed in correct form when due (including any extensions of such due date), and all amounts shown to be due thereon on or before the time of Closing have been or will be paid on or before such date. The Company's financial statements fully accrue all actual and contingent liabilities required in accordance with generally accepted accounting principles ("GAAP") for Taxes with respect to all periods through the dates thereof in accordance with GAAP. The April 30, 1998 balance sheet fully and properly accrues all actual and contingent liabilities as required in accordance with GAAP for Taxes with respect to all periods through April 30, 1998 and the Company has not and will not incur any tax liability in excess of the amount reflected on the April 30, 1998 balance sheet with respect to such periods less any amount thereof that represents a reserve for deferred Taxes established to reflect any differences between book and tax income. Neither the Company nor any member of any affiliated or combined group of which the Company has been a member have granted any extension or waiver of the limitation period applicable to any of the Company's Returns except as a result of obtaining an extension of time to file a Return. (c) With respect to all amounts in respect of material Taxes imposed upon the Company or for which the Company is or could be liable, whether to taxing authorities (as, for example, under law) or to other persons or entities (as, for example, under tax allocation agreements), with respect to all taxable periods or portions of periods ending on or before the time of Closing, all applicable tax laws and agreements have been fully complied with, and all such amounts required to be paid by the Company to Taxing authorities or others on or before the Closing have been or will be paid except as would not have a material adverse effect on the Company, its business or assets. Except for current periods with respect to which taxes are not yet due, the Company does not owe any material Taxes on compensation paid to any of its employees. (d) There is no claim, audit action, suit, proceeding, or investigation now pending or threatened against or with respect to the Company in respect of any Tax or assessment. There are no liabilities for Taxes with respect to any notice of deficiency or similar document of any Tax Authority received by the Company which has not been satisfied in full (including liabilities for interest, additions to tax and penalties thereon and related expenses) except as would not have a material adverse effect on the Company, its business or assets. Neither the Company nor any person on behalf of the Company has entered into or will enter into any agreement or consent pursuant to Section 341(f) of the Code. There are no liens for Taxes upon the assets of the Company except liens for current Taxes not yet due. The Company has not been and will not be required to include any adjustment in Taxable income for any Tax 6 period (or portion thereof) pursuant to Section 481 or 263A of the Code or any comparable provision under state or foreign Tax laws as a result of transactions, events or accounting methods employed prior to the Closing. (e) There is no contract, agreement, plan or arrangement covering any current or former employee or consultant of the Company that, individually 'or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Section 28OG or Section 162 of the Code (as determined without regard to Section 28OG(b)(4)). Other than pursuant to this Agreement, the Company is not a party to or bound by (and will not prior to the time of Closing become a party to or bound by) any material tax indemnity, tax sharing or tax allocation agreement (whether written, unwritten or arising under operation of federal law as a result of being a member of a group filing consolidated tax returns, under operation of certain state laws as a result of being a member of a unitary group, or under comparable laws of other states or foreign jurisdictions) which includes a party other than the Company. None of the assets of the Company (i) are property that the Company is required to treat as owned by any other person pursuant to the so-called "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (ii) directly or indirectly secures any debt the interest on which is tax exempt under Section 103(a) of the Code, or (iii) are "tax exempt use property" within the meaning of Section 168(h) of the Code. The ' Company has not participated in (and prior to the time of Closing the Company will not participate in) an international boycott within the meaning of Section 999 of the Code. The Company has previously provided or made available to the Purchaser true and correct copies of all of the Company's Returns, and, as reasonably requested by the Purchaser prior to or following the date hereof, will make available promptly presently existing information statements, reports, work papers, Tax opinions and memoranda and other Tax data and documents. (f) The Company is not or has not been, a United States real property holding corporation (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. (g) No shareholders of the Company are other than a United States person within the meaning of the Code. (h) The Company does not have and has not had a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States of America and such foreign country and the Company has not engaged in a trade or business within any foreign country. (i) The Company is not party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal income tax purposes. (j) All material elections with respect to Taxes affecting the Company as of the date of this Agreement and as of the Closing are or will be set forth in the Schedule of Exceptions. 7 (k) The Company is not currently and never have been subject to the reporting requirements of Section 6038A of the Code. 3.12 TITLE. The Company and all of its Subsidiaries own their respective properties and assets, including the properties and assets reflected in the Financial Statements (as defined below), free and clear of all liens, mortgages, loans or encumbrances except liens for current taxes, and such encumbrances and liens which arise in the ordinary course of business and do not materially impair the Company's or any of its Subsidiaries' ownership or use of such property or assets. With respect to the property and assets leased by the Company and each of its Subsidiaries, the Company and each of its Subsidiaries are in compliance with such leases and hold valid leasehold interests free and clear of any liens, claims or encumbrances. 3.13 MATERIAL CONTRACTS AND COMMITMENTS. All of the contracts, mortgages, indentures, agreements, instruments and transactions to which the Company or any Subsidiary is a party or by which they are bound (excluding purchase orders made in the ordinary course of business to the Company or any of its Subsidiaries or placed by the Company or any of its Subsidiaries) which involve obligations of, or payments to, the Company or any of its Subsidiaries in excess of Fifty Thousand Dollars ($50,000) and all agreements between the Company or any of its Subsidiaries and any of their respective officers, directors, employees and consultants are either (i) attached as exhibits to this Agreement or (ii) set forth on the list attached hereto as EXHIBIT H (the "Contracts"), copies of which have been provided to special counsel to the Purchasers. All of the Contracts are valid, binding and in full force and effect in all respects and enforceable by or against the Company or any of its Subsidiaries in accordance with their respective terms in all respects, subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and rules or laws concerning equitable remedies. The Company is not in default under any of such Contracts. To the Company's knowledge no other party to any of the Contracts is in material default thereunder. 3.14 FINANCIAL STATEMENTS. (a) The Company has delivered to the Purchasers true, correct and complete copies of (i) its audited consolidated balance sheets, income statements, statements of shareholders' equity and statements of cash flows, including notes thereto, at and for the year ended April 30, 1998; and (ii) its unaudited consolidated balance sheets, income statements, statements of shareholders' equity and statements of cash flows for the year ended April 30, 1997 (collectively, the "Financials"). (b) The Company has delivered to the Purchasers true, correct and complete copies of its balance sheet, income statement, statement of shareholders' equity and statement of cash flows at and for the five months ended September 30, 1998 which have been prepared internally by the Company's management (such financial statements, together with the Financials, are referred to herein as the "Financial Statements"). (c) The Financial Statements fairly and accurately present the Company's financial position as of those dates and the results of operations and changes in its 8 financial position for such periods ended, and have been prepared in accordance with GAAP applied on a consistent basis, except for the absence of footnotes. (d) There are no debts, liabilities or claims against the Company or any of its Subsidiaries that are not currently reflected in the Financial Statements, contingent or otherwise, which are or would be of a nature required to be reflected in a balance sheet prepared in accordance with GAAP. Neither the Company nor any of its Subsidiaries have any material liabilities other than those set forth in the Financial Statements. The Company maintains a standard system of accounting, including with respect to revenue recognition, in accordance with GAAP. The Company's financial reserves are adequate to cover warranty and similar claims incurred and expected to be incurred and expected tax liability. (e) All of the accounts receivable and notes receivable owing to the Company as of the date hereof constitute valid and enforceable claims arising from bona fide transactions in the ordinary course of business, and there are no known, contingent or asserted claims, refusals to pay, rights of return or other rights of set-off against any thereof. 3.15 ABSENCE OF CHANGES. Except as contemplated by this Agreement, since August 31, 1998, (a) neither the Company nor any of its Subsidiaries has entered into any transaction which was not in the ordinary course of business, (b) there has been no material adverse change in the condition (financial or otherwise) of the business, property, assets, liabilities or prospects of the Company or any of its Subsidiaries other than changes in the ordinary course of business, none of which, individually or in the aggregate, has been materially adverse, (c) there has been no damage to, destruction of or loss of physical property (whether or not covered by insurance) affecting in a materially adverse way the assets, financial condition, operating results, business or operations of the Company or any of its Subsidiaries, (d) neither the Company nor any of its Subsidiaries has declared or paid any dividend or made any distribution on its stock, or redeemed, purchased or otherwise acquired any of its stock, (e) neither the Company nor any of its Subsidiaries has changed any compensation arrangement or agreement with any of its key employees or officers, or changed the rate of pay of its employees as a group, (f) neither the Company nor any of its Subsidiaries has received notice that there has been a cancellation of an order for the Company's or any of its Subsidiaries' products or a loss of a customer of the Company or any of its Subsidiaries, the cancellation or loss of which would affect in a materially adverse way the business of the Company or any of its Subsidiaries, (g) neither the Company nor any of its Subsidiaries has changed or amended any Contract by which the Company or any of its Subsidiaries or any of their assets are bound or subject, (h) there has been no resignation or termination of employment of any key officer or consultant of the Company or any of its Subsidiaries and the Company does not know of any impending resignation or termination of employment of any such officer or consultant that if consummated would have a material adverse effect on the business of the Company or any of its Subsidiaries, (i) there has been no labor dispute involving the Company or any of its Subsidiaries or any of their employees and none is pending or threatened, 0) there has been no change in the material contingent obligations of the Company or any of its Subsidiaries (nor in any contingent obligation of the Company or any of its Subsidiaries regarding any director, shareholder or key employee or officer of the Company or any of its Subsidiaries) by way of guaranty, endorsement, indemnity, warranty or otherwise, (k) there have been no loans made by the Company or any of its Subsidiaries to any of their consultants, officers or directors other than travel advances and 9 other advances made in the ordinary course of business, (1) there has been no waiver by the Company or any of its Subsidiaries of a material right or of a material debt owing to it, (m)there has not been any satisfaction or discharge of any lien, claims or encumbrance or any payment of any obligation by the Company or any of its Subsidiaries, except in the ordinary course of business and which is not material to the assets, properties, financial condition, prospects, operating results or business of the Company or any of its Subsidiaries, and (n) there has been no other event or condition of any character pertainig to and materially adversely affecting the assets or business prospects of the Company or any of its Subsidiaries. 3.16 FINANCIAL PLAN AND PROJECTIONS. The projections of the Company previously delivered to the Purchasers were prepared in good faith by the Company and were made based on assumptions that the Company and the Founders believed were reasonable under the circumstances at the time made. 3.17 REGISTRATION RIGHTS. Other than as granted pursuant to this Agreement, the Company has not granted or agreed to grant any rights to register any security as that term is defined in this Agreement, including piggyback registration rights, to any person or entity. 3.18 PROPRIETARY RIGHTS. (a) The Company and each of its Subsidiaries has full, complete and undisputed right, title and interest in and to all patents, patent applications, trademarks, trademark applications, license rights, service marks, trade names, copyrights, trade secrets, information, mask work registrations, and other proprietary rights and processes (collectively, "Proprietary Rights") necessary for or used in their businesses as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others. The Schedule of Exceptions contains a list of all patents and patent applications owned or licensed by the Company and each of its Subsidiaries. (b) The Schedule of Exceptions sets forth a true and complete list of all contracts, licenses and other agreements to which the Company and each of its Subsidiaries is a party, which affect any item of the Proprietary Rights. (c) Except as set forth in the Schedule of Exceptions: (i) The Company and each of its Subsidiaries either own or have the exclusive right to use, sell, license and dispose of, to bring actions for the infringement of and otherwise exercise all Proprietary Rights, including Proprietary Rights which comprise trade secret rights (hereinafter, "Trade Secrets"), free and clear of all encumbrances. (ii) The Company and each of its Subsidiaries has taken all appropriate actions and made all applicable applications and filings which are necessary and appropriate pursuant to applicable laws to perfect or protect their interests in all Proprietary Rights. (iii) The execution, delivery and performance of this Agreement and the Shareholders' Agreement and the consummation of the transactions contemplated hereby and thereby will not (A) cause the forfeiture or termination or give rise to a right of forfeiture or termination or give rise to a right of forfeiture or 10 termination of any Proprietary Right, or (B) in any way impair the right of the Company or any of its Subsidiaries to use, sell, license or dispose of or to bring any action for the infringement of, any Proprietary Right or any products or technology designed, developed, manufactured, sold or serviced by the business of the Company or any of its Subsidiaries (collectively, "Products"). (iv) The manufacture, marketing, license, sale or use of any Products does not or would not (A) violate any license or agreement with any third party, (B) infringe on any non-patent Proprietary Right of any third party or (C) to the Company's knowledge, infringe any third party patent rights. Neither the Company, any of its Subsidiaries nor, to the Company's knowledge, any of their employees or consultants has misappropriated any third party Trade Secrets. There is no claim or litigation pending or, to the best of the Company's knowledge, threatened, contesting the validity, ownership or right to use, sell, license or dispose of any Proprietary Right, nor is there any basis for any such claim. (v) To the best of the Company's knowledge, no third party is infringing on any Proprietary Right where such infringement could or would limit the protection afforded by the Proprietary Rights to the use, sale, license, sublicense or disposition of the Products or prevent the future enforcement of such Proprietary Right. (vi) The Company and each of its Subsidiaries has taken all steps reasonably necessary or appropriate (including, without limitation, entering into appropriate confidentiality, nondisclosure and noncompetition agreements, the forms of which have been delivered to the Purchasers or its special counsel, with all employees and consultants of the Company and each of its Subsidiaries) to safeguard and maintain the secrecy and confidentiality of, and the Company's and each of its Subsidiaries' proprietary rights in, all Proprietary Rights. (vii) All Trade Secrets will have remained under the exclusive control of the Company or each of its Subsidiaries, as the case may be, at all times prior to the Closing Date and have not been used, divulged or appropriated for the benefit of any person other than the Company or any of its Subsidiaries or to the detriment of the Company or any of its Subsidiaries. (d) Except as set forth in the Schedule of Exceptions: (i) The Company and each of the Subsidiaries has performed, or are now performing, their obligations, and the Company and each of its Subsidiaries are not in default in any material respect (or would by the lapse of time or the giving of notice or both be in default in any material respect), under any license or agreement listed or required to be listed in the Schedule of Exceptions. To the Company's knowledge no other party to such licenses and agreements is in default in any material respect (or would by the lapse of time or the giving of notice or both, be in default in any material respect) thereunder or has breached in any material respect any terms or provisions thereof. (ii) No third party has raised any claim, dispute or controversy with respect to any of the licenses or agreements which is listed or required to be listed in the Schedule of Exceptions. Neither the Company nor any of its Subsidiaries has received written 11 notice or warning or oral notice or warning of alleged nonperformance, delay in delivery or other noncompliance by the Company or any of its Subsidiaries with respect to its obligations under any such licenses or agreements. (e) Neither the Company nor any of its Subsidiaries nor, to the Company's knowledge, any of their employees or consultants is making unpermitted use of any confidential information of third parties or any confidential information in which any of their present or past consultants has claimed a proprietary interest; and the Company is not aware of any facts that would give rise to such a claim. To the Company's knowledge no employee or consultant to the Company or any of its Subsidiaries is in violation or would be in violation of any agreement with any former employer. (f) The Company and each its Subsidiaries have satisfied all material obligations pursuant to any and all consulting agreements, and neither the Company nor any of its Subsidiaries is using or has developed any unpermitted derivatives or unpermitted modifications of technology relating to such consulting agreements without the consent of the other party to such consulting agreements. (g) Neither the Company nor any of its Subsidiaries has any reasonable basis to believe that any one of them has any present or future liability under any agreement to (a) provide indemnification for infringement or misappropriation of any third party rights or otherwise; or (b) provide updates, enhancements, modifications, bug fixes, support, maintenance or the like of any Products or their technology. 3.19 CERTAIN TRANSACTIONS. Neither the Company nor any of its Subsidiaries is indebted, directly or indirectly, to any of their officers, directors or shareholders or to their spouses or children, in any amount whatsoever; and none of said officers, directors or shareholders, or any member of their immediate families, are indebted to the Company or any of its Subsidiaries or own, directly or indirectly, 1% of the outstanding equity of any firm or corporation with which the Company or any of its Subsidiaries is affiliated or with which the Company or any of its Subsidiaries has a material business relationship. No such officer, director or shareholder, or any member of their immediate families, is, directly or indirectly, interested in any material contract with the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries is guarantor or indemnitor of any indebtedness of any other person, fu-m or corporation. 3.20 CORPORATE DOCUMENTS, MINUTE BOOKS. Except for amendments necessary to satisfy representations and warranties or conditions contained herein (the form of which amendments has been approved by the Purchasers), the Articles of Incorporation and Bylaws of the Company and each of its Subsidiaries are in the form previously provided to special counsel to the Purchasers. The minute books of the Company previously provided to special counsel to the Purchasers contain a complete summary of all meetings of directors and shareholders since the time of incorporation of the Company. 3.21 COMPLIANCE WITH LAW. The Company and each of its Subsidiaries has complied and is in compliance with all applicable foreign, federal, state and, to the best of the Company's knowledge, local laws, statutes, licensing requirements, rules, and regulations, and 12 judicial or administrative or zoning decisions except as would not have a material adverse effect on the Company's business, assets or properties. The Company and each of its Subsidiaries has been granted all licenses, permits (temporary and otherwise), authorizations, and approvals from foreign, federal, state and local government regulatory or zoning bodies necessary to carry on its business as now and as proposed to be conducted, all of which are currently valid and in full force and effect. All such licenses, permits, authorizations, and approvals shall be valid and in full force and effect following the Closing. To the Company's knowledge there is no order issued, investigation, or proceeding pending or threatened, or notice served with respect to any violation of any law, ordinance, order, writ, decree, rule, or regulation issued by any federal state, local or foreign court or governmental agency or instrumentality applicable to the Company. The Company has valid use permits for its business as now conducted. 3.22 BROKERS' AND FINDERS' FEES/CONTRACTUAL LIMITATIONS. The Company is not obligated to pay any fees or expenses of any broker or finder in connection with the origin, negotiation, or execution of this Agreement or in connection with any transactions contemplated hereby. Neither the Company, any Founder nor any officer, director, employee, shareholder, agent, or representative of the Company (collectively 'Agent/Representatives") is or has been subject to any agreement, letter of intent, or understanding of any kind which prohibits, limits, or restricts the Company or its Agent/Representatives from negotiating, entering into and consummating this Agreement and the transactions contemplated hereby. 3.23 CERTAIN PAYMENTS. Neither the Company nor any person directly or indirectly on behalf of the Company has, made or received any payment that was not legal to make or receive which payments have or could be expected to have a material adverse effect on the business of the Company. 3.24 BOOKS AND RECORDS. The books and records of the Company to which the Purchasers and their accountants and attorneys have been given access are the true books and records of the Company and truly and fairly reflect the underlying facts and transactions in all material respects. 3.25 FOREIGN CORRUPT PRACTICES ACT. None of the activities or types of conduct below have been or may have been engaged in by the Company, either directly or indirectly: (a) Any bribes or kickbacks to government officials or their relatives, or any other payments to such persons, whether or 'not legal, to obtain or retain business or to receive favorable treatment with regard to business; or (b) Any bribes or kickbacks to persons other than government officials, or to relatives of such persons, or any other payments to such persons or their relatives, whether or not legal, to obtain or retain business or to receive favorable treatment with regard to business; or (c) Any illegal contributions made to any political party, political candidate or holder of governmental office; or 13 (d) Any bank accounts, funds or pools of funds created or maintained without being reflected on the corporate books of account, or as to which the receipts and disbursements therefrom have not been reflected on such books; or (e) Any receipts or disbursements, the actual nature of which has been "disguised" or intentionally misrecorded on the corporate books of account; or (f) Fees paid to consultants or commercial agents which exceeded the reasonable value of the services purported to have been rendered; or (g) Any payments or reimbursements made to personnel of the Company for the purposes of enabling them to expend time or to make contributions or payments of the kind or for the purpose referred to in subparagraphs (a)-(f) above. The Company has not violated the United States Corrupt Foreign Practices Act or any other similar laws, statute, rule or regulation of any country. 3.26 ENVIRONMENTAL AND SAFETY MATTERS. (a) Except as disclosed in the Schedule of Exceptions: (i) To the knowledge of the Company, there has been no disposal, release or threatened release of any hazardous substance or hazardous waste on, from or under the property owned or leased currently or in the past by the Company or any of its Subsidiaries or any predecessor, except as permitted under federal, state and local laws. For purposes of this Agreement, the terms "disposal," "release," "hazardous substance" and "hazardous waste" shall have the definitions assigned thereto under federal, state and local laws applicable to the Company and each of its Subsidiaries, the assets of the Company and each of its Subsidiaries and the property owned or leased by the Company and each of its Subsidiaries, including without limitation the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. _9601 et seq., as amended, and any regulations promulgated thereto, except that "hazardous substance' and "hazardous waste" shall also include all varieties of petroleum hydrocarbons, refined or unrefined asbestos, polychlorinated biphenyls and urea formaldehyde and other materials classified as hazardous or toxic under any Environmental Laws (as defined below). (ii) To the knowledge of the Company, the Company and each of its Subsidiaries, the operation of their businesses, and any real property that the Company and each of its Subsidiaries presently lease or otherwise occupy or use (the "Premises") are in compliance with all applicable Environmental Laws (as defined below) and orders or directives of any governmental authorities with respect to and under such Environmental Laws including, without limitation, any Environmental Laws or orders or directives with respect to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the release, emission or discharge of any hazardous substance or hazardous waste or any regulations, plans, judgments, injunctions or notices promulgated or approved thereunder: (a) which are applicable to the operations of the Company and each of its Subsidiaries or the Premises, or the assets or the business or operations of the Company and each of its Subsidiaries, or (b) which may give rise to any liability of the Company and each of its Subsidiaries or 14 otherwise form the basis of any ongoing or threatened claims, actions, demands, suits, proceedings, hearings, studies or investigations against or relating to the Company or any of its Subsidiaries. (iii) Neither the Company nor any of its Subsidiaries has received any citation, directive, letter or other communication, written or oral, or any notice of any proceedings, claims or lawsuits, from any person, entity or governmental authority arising out of any alleged violations of Environmental Laws by the Company or its Subsidiaries, nor is the Company aware of any basis therefor. (iv) The Company and each of its Subsidiaries have obtained and are maintaining in full force and effect all necessary material permits, licenses and approvals required by any Environmental Laws applicable to the Premises and the business operations conducted thereon and are in material compliance with all such permits, licenses and approvals. (v) To the knowledge of the Company, no disposal or release of a hazardous substance or hazardous waste has come to be located on or beneath the Premises or any of the real property owned or leased in the -past by the Company or any of its Subsidiaries or any predecessor. (vi) The Schedule of Exceptions sets forth (a) all arrangements that the Company and each of its Subsidiaries currently have and in the past have had in effect for the removal, disposal, release and/or processing of waste and byproducts, including any hazardous substances or hazardous waste, and (b) all reports, studies and evaluations conducted by the Company or any of its Subsidiaries, or received by the Company or any of its Subsidiaries, with respect to the removal, disposal, release and/or processing of waste and by-products, including any hazardous substances or hazardous waste. (b) The term "Environmental Laws" shall mean any federal, state or local law, ordinance or regulation pertaining to the protection of human health or the environment including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sections 9601, et _M., Emergency Planning and Community Right-To-Know Act, 42 U.S.C. Sections I 1001, et seq., and the Resource Conservation and Recovery Act 42 U.S.C. Sections 6901, et seq. 3.27 MANUFACTURING AND MARKETING. Neither the Company nor any of its Subsidiaries has granted rights to manufacture, produce, assemble, license, market, or sell their Products to any other person and is not bound by any agreement that affects the Company's or any of its Subsidiaries exclusive right to develop, manufacture, assemble, distribute, market or sell their Products. 3.28 RETURNS AND COMPLAINTS. Neither the Company nor any of its Subsidiaries has received any customer complaints concerning their Products and/or services, nor have they had any of their Products returned by a purchaser thereof due to the failure to meet specifications, other than minor, nonrecurring warranty problems, and claims not in excess of $25,000, individually or $100,000, in the aggregate, for any single customer. 15 3.29 LABOR AGREEMENTS AND ACTIONS. Neither the Company nor any of its Subsidiaries is bound by or subject to (and none of their assets or properties are bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or has sought to represent any of the employees or consultants of the Company or any of its Subsidiaries. There is no strike or other labor dispute involving the Company or any of its Subsidiaries pending, or threatened, that could have an adverse effect on the assets, properties, financial condition, operating results or business of the Company or any of its Subsidiaries (as such business is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees or consultants. The employment of each employee or consultant of the Company and each of its Subsidiaries is terminable at the will of the Company or each of the its Subsidiaries. The Company and each of its Subsidiaries have complied in all material respects with all applicable state and federal equal employment opportunity and other laws related to employment. 3.30 SECTION 83(b) ELECTIONS. To the Company's knowledge, all individuals who have purchased shares of the Company's Common Stock that are subject to a risk of forfeiture have timely filed elections under Section 83(b) of the Code (as defined below) and any analogous provisions of applicable state tax laws. 3.31 EMPLOYEE BENEFIT PLANS. Neither the Company nor any of its Subsidiaries has any "employee benefit plan" as defined in the Employee Retirement Income Security Act of 1974, as amended. 3.32 DISCLOSURE. The copies of all instruments, agreements and other documents and information delivered by or provided to the Company and each of its Subsidiaries to the Purchasers or their special counsel are and will be complete and correct in all respects as of the date of delivery thereof. No representations or warranties made by the Company or the Founders in this Agreement, any exhibit or schedule hereto, or any written information furnished or to be prepared and furnished by the Company or the Founders pursuant hereto or in connection with the transactions contemplated hereby which is referenced in or attached to the Schedule of Exceptions contains or will. contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements or facts contained herein or therein, not misleading in light of the circumstance under which they were made. 3.33 INSURANCE. The Company and each of its Subsidiaries maintain insurance covering property damage, including environmental, and liability reasonably prudent under commercially reasonable business practices. The Company and each of its Subsidiaries have in full force and effect products liability and errors and omissions insurance in amounts customary for companies similarly situated. 3.34 SHAREHOLDER AGREEMENTS. Except as otherwise contemplated by this Agreement, the Shareholders' Agreement, the Redemption Agreements and the Voting Agreement, (a) there are no agreements or arrangements between the Company or any of its Subsidiaries and any of the Company's or any of the Subsidiaries' shareholders or to the Company's knowledge, between any of the Company's or any of the Subsidiaries' shareholders which adversely affect any shareholder's ability or right freely to alienate or vote such shares and 16 (b) to the Company's knowledge, none of the Company's or any of the Subsidiaries' shareholders is affiliated with Or has any agreements or arrangements with any customer of, or supplier to, the Company or any of its Subsidiaries. 3.35 PRODUCTS. (a) There are no known defects in the design or technology embodied in any product which the Company or any of its Subsidiaries markets or has marketed in the past that impair or are likely to impair the intended use of the product or injure any consumer of the product or third party, except that warranty claims may arise in the normal course of business for products shipped prior to the Closing Date in an aggregate amount of no more than the warranty reserves established by the Company. The Company and each of its Subsidiaries have delivered to the Purchasers copies of their warranty policies and all outstanding warranties or guarantees relating to any of the Company's or each of the Subsidiaries' products other than warranties or guarantees implied by law. The Company is not aware of any claim asserting (a) any damage, loss or injury caused by any product, or (b) any breach of any express or implied product warranty or any other similar claim with respect to any product of the Company or any of its Subsidiaries other than standard warranty obligations (to replace, repair or refund) made by the Company or any of its Subsidiaries in the ordinary course of business, except for those claims that, if adversely determined against the Company or any of its Subsidiaries, would not have a material and adverse effect on the Company's or any of its Subsidiaries' business. (b) None of the products and services sold, licensed, rendered, or otherwise provided by the Company (or by any of its Subsidiaries) in the conduct of their respective businesses (excluding products and services sold, licensed, rendered, or otherwise provided by the Company which have been combined with products of other companies) will malfunction, will cease to function, will generate materially incorrect data or will produce materially incorrect results and will not cause any of the above with respect to the property or business of third parties using such products or services when processing, providing or receiving (i) date-related data from, into and between the Twentieth (20th) and Twenty-First (21st) centuries, or (ii) date-related data in connection with any valid date in the Twentieth (20th) and Twenty-First (21st) centuries, causing a material adverse effect on the Company, its business or the property or business of any third parties using such products or services. (c) Neither the Company nor any subsidiary has made any other representations or warranties specifically relating to the ability of any product or service sold, licensed, rendered, or otherwise provided by the Company (or by any of its subsidiaries) in the conduct of their respective businesses to operate without malfunction, to operate without ceasing to function, to generate correct data or to product correct results when processing, providing or receiving (i) date-related data from, into and between the Twentieth (20th) and Twenty-First (21st) centuries, and (ii) date-related data in connection with any valid date in the Twentieth (20th) and Twenty-First (21st) centuries. 17 4. REPRESENTATIONS AND WARRANTIES OF PURCHASERS AND RESTRICTIONS ON TRANSFER IMPOSED BY THE SECURITIES ACT. 4.1 REPRESENTATIONS AND WARRANTIES BY THE PURCHASERS. Each Purchaser represents and warrants to the Company (as to itself only) as follows: (a) AUTHORITY. It is a corporation or partnership (as indicated by its signature to this Agreement) and is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Each Purchaser has now, and will have at the Closing Date, all requisite legal and (if applicable) corporate or partnership power to enter into this Agreement, to purchase the Preferred Shares hereunder and to perform its obligations under the terms of this Agreement. (b) AUTHORIZATION. All corporate or partnership action (if applicable) on the part of such Purchaser necessary for the purchase of the Preferred Shares and the performance of such Purchaser's obligations hereunder and thereunder has taken or will be taken prior to the Closing Date. This Agreement, when executed and delivered by such Purchaser will constitute a valid and legally binding obligation of such Purchaser, enforceable in accordance with its terms, except as enforcement may be limited by applicable bankruptcy laws or other similar laws affecting creditors' rights generally, and except that the availability of equitable remedies may be limited. (c) INVESTMENT INTENT. Purchaser is acquiring the Preferred Shares and the Common Stock issuable upon conversion of the Preferred Shares (collectively the "Securities") for investment for such Purchaser's own account, not as nominee or agent, and not with a view to, or for resale in connection with any distribution or public offering thereof within the meaning of the Securities Act and the Law. Purchaser has the full right, power and authority to enter into and perform this Agreement and the Shareholders' Agreement. Purchaser understands and acknowledges that the Company will rely on this representation in entering this Agreement. (d) SHARES NOT REGISTERED. Purchaser understands and acknowledges that the offering of the Preferred Shares pursuant to this Agreement will not be registered under the Securities Act or qualified under the Law on the grounds that the offering and sale of securities contemplated by this Agreement are exempt from registration under the Securities Act pursuant to Section 4(2) thereof and exempt from registration pursuant to Section 25102(f) of the Law, and other applicable state securities or blue sky laws, and that the Company's reliance upon such exemptions is predicated upon such Purchaser's representations set forth in this Agreement. Purchaser acknowledges and understands that the Securities must be held indefinitely unless the Securities are subsequently registered under the Securities Act and qualified under the Law or an exemption from such registration and such qualification is available. (e) KNOWLEDGE AND EXPERIENCE. Purchaser (i) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of such Purchaser's prospective investment in the Securities; (ii) has the ability to bear the economic risks of such Purchaser's prospective investment; (iii) has been furnished with and has had access to such information as such Purchaser has considered necessary to make a 18 determination as to the purchase of the Securities together with such additional information as is necessary to verify the accuracy of the information supplied; (iv) has had all questions which have been asked by such Purchaser answered by the Company; and (v) has not been offered the Securities by any form of advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or any seminar or meeting whose attendees have been invited by any such media. (f) NOT ORGANIZED TO PURCHASE. Purchaser has not been organized for the purpose of purchasing the Securities. (g) HOLDING REQUIREMENTS. Purchaser understands that if the Company does not (i) register its Common Stock with the Securities and Exchange Commission ("SEC") pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) become subject to Section 15(d) of the Exchange Act, (iii) supply information pursuant to Rule 15c2-11 thereunder, or (iv) have a registration statement covering the Securities (or a filing pursuant to the exemption from registration under Regulation A of the Securities Act covering the Securities) under the Securities Act in effect when it desires to sell the Securities, such Purchaser may be required to hold the Securities for an indeterminate period. Purchaser also understands that any sale of the Securities that might be made by such Purchaser in reliance upon Rule 144 under the Securities Act may be made only in limited amounts in accordance with the terms and conditions of that rule. (h) HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (AS AMENDED). As a result of this transaction, no Purchaser will hold voting securities of the Company that either (i) are valued at $15 million or more, or (ii) based on the representation set forth in Section 3.4, represent 15% or more of the outstanding voting securities of the Company. As defined in 16 CFR Section 801.1(a)(3) and (b), each Purchaser (i) is not controlled by any other, and (ii) does not control any other entity that holds voting securities of the Company each of which is listed on Schedule 2. 4.2 LEGENDS. Each certificate representing the Securities may be endorsed with the following legends: (a) FEDERAL LEGEND. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE ACT OR (ii) IN COMPLIANCE WITH RULE 144, OR (iii) PURSUANT TO AN OPINION OF COUNSEL, SATISFACTORY TO THE CORPORATION, THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION. (b) OTHER LEGENDS. Any other legends required by the Law or other applicable state blue sky laws. The Company need not register a transfer of legended Securities, 19 and may also instruct its transfer agent not to register the transfer of the Securities, unless the conditions specified in each of the foregoing legends are satisfied. 4.3 REMOVAL OF LEGEND AND TRANSFER RESTRICTIONS. Any legend endorsed on a certificate pursuant to subsection 4.2(a) and the stop transfer instructions with respect to such legended Securities shall be removed, and the Company shall issue a certificate without such legend to the holder of such Securities if such Securities are registered and sold under the Securities Act and a prospectus meeting the requirements of Section 10 of the Securities Act is available or if such holder satisfies the requirements of Rule 144(k) and, where reasonably deemed necessary by the Company, provides the Company with an opinion of counsel for such holder of the Securities, reasonably satisfactory to the Company, to the effect that (i) such holder meets the requirements of Rule 144(k) or (ii) a public sale, transfer or assignment of such Securities may be made without registration. 4.4 RULE 144. Purchaser is aware of the adoption of the Rule 144 by the SEC promulgated under the Securities Act, which permits limited public resales of securities acquired in a nonpublic offering, subject to the satisfaction of certain conditions. The Purchaser understands that under Rule 144, the conditions include, among other things the availability of certain current public information about the issuer and the resale occurring not fewer than two years after the party has purchased and paid for the securities to be sold. 4.5 NO TRANSFER. Purchaser covenants that in no event will such Purchaser dispose of any of the Securities (other than in conjunction with an effective registration statement for the Securities under the Securities Act or in compliance with Rule 144 promulgated under the Securities Act) unless and until (i) such Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Purchaser shall have furnished the Company with an opinion of counsel reasonably satisfactory in form and substance to the Company to the effect that (x) such disposition will not require registration under the Securities Act and (y) appropriate action necessary for compliance with the Securities Act, the Law and any other applicable state, local or foreign law has been taken. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144. 4.6 PERMITTED TRANSFERS. Notwithstanding the provisions of this Agreement, no registration statement or opinion of counsel shall be necessary for a transfer by a Purchaser which is a partnership to a partner of such partnership or a former partner of such partnership who leaves such partnership after the date hereof, or to the estate of any such partner or former partner of the transfer by gift, will or intestate succession of any partner to his spouse or lineal descendants or ancestors, if the transferee agrees in writing to be bound by the terms of this Agreement, and the Shareholders' Agreement to the same extent as if he were an original Purchaser hereunder. 5. CONDITIONS TO CLOSING. 5.1 CONDITIONS TO PURCHASERS' OBLIGATIONS. The obligation of the Purchasers to purchase the Preferred Shares at the Closing is subject to the fulfillment to its satisfaction, on 20 or prior to the Closing Date (unless otherwise specified), of the following conditions, any, of which may be waived in accordance with the provisions of this Agreement: (a) REPRESENTATIONS AND WARRANTIES CORRECT; PERFORMANCE OF OBLIGATIONS. The representations and warranties made by the Company and the Founders in Section 3 hereof shall be true and correct when made, and shall be true and correct on the Closing with the same force and effect as if they had been made on and as of said date. The Company's business, results of operations, properties and assets shall not be adversely affected in any way prior to the Closing Date from April 30, 1998. -The Company and the Founders shall have performed all obligations and conditions herein required to be performed or observed by it on or prior to the Closing Date. (b) CONSENTS AND WAIVERS. The Company shall have obtained in a timely fashion any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement. (c) ELECTION OF DIRECTORS. Effective upon the Closing, Michael Child shall have been appointed to the Company's Board of Directors, which shall consist of not more than seven (7) other members. (d) FILING OF THE ARTICLES. The Articles shall have been accepted for filing with the Secretary of State of California. (e) ANCILLARY AGREEMENTS. The Company, the Founders and the Purchasers shall have executed and delivered the Shareholders' Agreement in the form attached as EXHIBIT C hereto and the Voting Agreement attached as EXHIBIT E hereto. (f) DELIVERY OF FINANCIAL STATEMENTS. The Company shall have provided to the Purchasers copies of the Financial Statements in form and substance reasonably satisfactory to the Purchasers. (g) COMPLIANCE CERTIFICATE. The Company shall have delivered a Certificate, executed by the Chief Executive Officer of the Company and each Founder, dated the Closing Date, certifying to the fulfillment of the conditions specified in subsections a., b. and c. of this Section 5. 1. (h) OPINION OF COUNSEL. The Purchasers shall have received an opinion from the Company's and the Founders' counsel, in substantially the form attached hereto as EXHIBIT I. (i) RESERVATION OF COMMON STOCK. The shares of Common Stock issuable upon conversion of the Preferred Shares shall have been duly authorized and reserved for issuance upon such conversion and exercise. (j) INDEMNIFICATION AGREEMENTS. The Company shall have entered, into indemnification agreements effective at the Closing with its directors and the persons who will become directors at the Closing, in form satisfactory to the Purchasers. 21 (k) FINANCING. The Company shall have entered into definitive documentation of commitments for a senior credit facility in the amount of not less than $10 million, in form satisfactory to the Purchasers in their sole discretion, effective on the date hereof. (l) DUE DILIGENCE REVIEW. The Purchasers shall be satisfied, in their sole discretion, with the due diligence review of the business, legal, accounting and other investigations undertaken by the Purchasers and their advisors and agents with respect to the Company and its Subsidiary. (m) HART-SCOTT-RODINO. Any inquiry required by the Federal Trade Commission (the "FTC') under the HSR Act shall have been early terminated or the applicable waiting period under the HSR Act any applicable law shall have expired. 5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's obligation to sell the Preferred Shares at the Closing is subject to the condition that (i) the representations and warranties made by the Purchasers in Section 4.1 hereof shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of said date; (ii) any inquiry of the FTC required under the HSR Act shall have been subject to early termination or shall have expired; (iii) the Articles shall have been accepted for filing with the Secretary of State of California; (iv) the Company, the Founders and the Purchasers shall have executed and delivered the Shareholders' Agreement in the form attached as EXHIBIT C hereto; (v) the Company, the Founders and the Purchasers shall have executed and delivered the Voting Agreement in the form attached as EXHIBIT E hereto; and (vi) the Company shall have entered into definitive documentation for a senior credit facility in the amount of not less than $10 million, in form satisfactory to the Purchasers in their sole discretion. 6. AFFIRMATIVE COVENANTS OF THE COMPANY. The Company hereby covenants and agrees as follows: 6.1 FINANCIAL INFORMATION. The Company agrees to provide the Purchasers with audited consolidated balance sheets and audited consolidated statements of income and changes in financial position within 60 days of the Closing, for the fiscal years ending April 30, 1997 and April 30, 1998. In addition, until the first to occur of (a) the date on which the Company is required to file a report with the SEC pursuant to the Exchange Act by reason of the Company having registered any of its securities pursuant to Section 12(g) of the Exchange Act or (b) quotations for the Common Stock of the Company are reported by the automated quotations systems operated by the National Association of Securities Dealers, Inc. or by an equivalent quotations system or (c) shares of the Common Stock of the Company are listed - -on a national securities exchange registered under Section 6 of the Exchange Act, the Company will furnish to each Purchaser: (i) as soon as practicable after the end of each fiscal year, and in any event within 90 days thereafter, audited consolidated balance sheets of the Company and its subsidiaries, as at the end of such fiscal year, and audited consolidated statements of income and audited consolidated statements of changes in financial position (or equivalent cash flow 22 statements if required by the Financial Accounting Standards Board) of the Company and its subsidiaries, for such year, prepared in accordance with GAAP, all in reasonable detail and, certified by independent public accountants of recognized national standing selected by the Company, and (ii) as soon as practicable after the end of each month (except the last month of the fiscal year), and in any event within 30 days thereafter, consolidated balance sheets of the Company and its subsidiaries, as of the end of such month; and consolidated statements of income and consolidated statements of changes in financial position (or equivalent cash flow statements if required by the Financial Standards Board), for such month and for the current fiscal year to date, prepared in accordance with GAAP (expect for the required footnotes), all in reasonable detail and signed, subject to changes resulting from year-end audit adjustments, by the principal financial officer or chief executive officer of the Company, and (iii) as soon as practicable after its adoption or approval by the Company's Board of Directors, but not later than the commencement of such fiscal year, an annual plan for each fiscal year which shall include quarterly capital and operating expense budgets, cash flow statements, projected balance sheets and profit and loss projections for each such quarter and for the end of the year, itemized in such detail as the Board of Directors may reasonably determine. 6.2 CONFLICTS OF INTEREST. The Company shall use its best efforts to ensure that the Company's employees, during the term of their employment with the Company, do not engage in activities which would result in a conflict of interest with the Company. The Company's obligations hereunder include, but are not limited to, requiring that the Company's employees devote their primary productive time, ability and attention to the business of the Company (provided, however, the Company's employees may engage in other business activity if such activity does not materially interfere with their obligations to the Company), requiring that all of the Company's employees enter into agreements regarding proprietary information and confidentiality. 6.3 KEY-MAN INSURANCE. The Company shall obtain at commercially reasonable rates .within thirty (30) days of the Closing and maintain in force, until canceled or modified with the written consent of Purchasers holding more than fifty percent (50"/*) of the Securities, an insurance policy -or., the lives of each of Jerry S. Rawls and Frank Levinson, each in the amount of $1,000,000 naming the Company as holder and beneficiary. The obligations of the Company pursuant to this Section 6.3 shall terminate upon the consummation of an initial public offering. 6.4 PROPRIETARY AGREEMENTS. The Company and each of its Subsidiaries will use their best efforts to prevent any employee or consultant from violating the confidentiality and proprietary information agreement entered into between the Company and each of its employees and consultants. 6.5 RULE 144. The Company covenants that (i) at all times after the Company first becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, 23 the Company will use its best efforts to comply with the current public information requirements of Rule 144(c)(1) under the Securities Act; and (ii) at all such times as Rule 144 is available for use by the Purchaser, the Company will furnish the Purchasers upon request with all information within the possession of the Company required for the preparation and filing of Form 144. 6.6 ACTIONS. The Company covenants and agrees to perform its obligations and agreements set forth in the Articles. 6.7 USE OF PROCEEDS. Within thirty (30) days of the date of the Closing, the Company will use a portion of the proceeds of the sale of the Series A Preferred Stock to repurchase up to 14,237,295 shares of Common Stock owned beneficially by the Founders and not more than 372,500 shares of Common Stock owned beneficially (or issuable upon exercise of stock options held by) employees of the Company other than the Founders at a price of no greater than $2.1932 per share pursuant to the Redemption Agreements attached in the form of EXHIBIT D hereto (the "Redemption Agreement"). 6.8 OFFER OF REDEMPTION. The Company will offer each eligible holder of the Company's securities the right to have a pro rata portion of such securities repurchased by the Company at substantially the same time and upon the same terms as set forth in the Redemption Agreements pursuant to a stock repurchase plan to commence on or about the Closing Date. 7. REGISTRATION. 7.1 DEFINITIONS. As used in this Section 7: (a) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and the declaration or ordering of the effectiveness of such registration statement; (b) The term "Registrable Securities" means: (i) any Common Stock issued or to be issued pursuant to conversion of the Preferred Shares issued hereunder or at any subsequent closing; and (ii) any other Common Stock issued as a dividend or other distribution with respect to, or in exchange for or in replacement of, the Preferred Shares or the shares of Common Stock issued pursuant to conversion of the Preferred Shares; (c) The term "Holder" means any Purchaser or other holder of outstanding Registrable Securities who acquired such securities in accordance with Section 7.11 hereof, (d) The term "Initiating Holders" means any Holder or Holders making a request for registration pursuant to the provisions of Section 7.2; and (e) The term "Substantial Amount of Registrable Securities" means at least twenty percent (20%) of the Registrable Securities which have not been resold to the public in a registered public offering. 24 7.2 REQUESTED REGISTRATION. (a) REQUEST FOR REGISTRATION. If at any time after the date that is the earlier of two years after the Closing Date or 180 days after the effective date of the first registration statement for an initial public offering of securities of the Company, the Company shall receive from the Holders of a Substantial Amount of Registrable Securities a written request that the Company effect any registration, qualification or compliance with respect to all or part of the Registrable Securities, the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders; and (ii) as soon as practicable, use its best efforts to effect all such registrations, qualifications and compliances (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under the applicable state securities laws and appropriate compliance with exemptive regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit the sale and distribution of such portion of such Holders' Registrable Securities as are specified in such request together with such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written notice given within thirty (30) days after receipt of such written notice from the Company. (b) The Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 7.2 after the Company has effected two registrations under this Section 7.2. (c) UNDERWRITING. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as part of their request made pursuant to Section 7.2(a) and the Company shall include such information in the written notice referred to 'm Section 7.2(a)(i). The right of any Holder to registration pursuant to Section 7.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting. The Company shall (together with all Holders proposing to distribute their securities) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 7.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be registered and underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders thereof in proportion, as nearly as practicable, to the respective aggregate amounts of Registrable Securities held by such Holders at the time of filing the registration statement. In no event, however, shall any Registrable Securities be eliminated from the registration until any and all shares being sold for the account of the Company or shareholders who are not Holders are first eliminated. If any Holder disapproves of the terms of the underwriting, he may elect to withdraw therefrom by written notice to the Company, the underwriters and the Initiating Holders. The Registrable Securities so withdrawn shall also be withdrawn from registration. 25 7.3 COMPANY REGISTRATION. (a) NOTICE OF REGISTRATION. If at any time or from time to time, the Company shall determine to register any of its securities, either for its own account or the account of a security holder or holders, in connection with an offering of its securities to the general public for cash (other than a registration relating solely to employee stock option or purchase plans or relating solely to an SEC Rule 145 transaction or to debt securities), the Company will: (i) promptly give to each Holder written notice thereof, and (ii) include in such registration (and any related qualification under state securities laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder or Holders and received by the Company within twenty (20) days after the written notice from the Company described in clause 7.3(a)(i) above is mailed or personally delivered by the Company, except as set forth in Section 7.3(b) below. (b) UNDERWRITING. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 7.2(a)(i). In such event the right of any Holder to registration pursuant to Section 7.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting. All Holders proposing to distribute their Registrable Securities through such underwriting (the "Participating Holders") shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 7.3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the total number of shares of Registrable Securities to be included in the registration and underwriting (the "Total Included Shares") may be limited (i) in the case of the Company's initial public offering of the sale of the Company's securities to the general public, to zero and (ii) in the case of any other registration, to any amount no less than 50% of all shares to be distributed through such underwriting, provided other holders of registration rights are similarly cut back or excluded. In case of any such limitation under this Section 7.3(b), the Company shall so advise all Participating Holders and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all the Participating Holders and other holders of incidental or "piggyback" registration rights in proportion, as nearly as practicable, to the respective amounts of Registrable Securities entitled to inclusion in such registration held by such Participating Holders at the time of filing the registration statement, provided, however, that securities of persons other than Holders shall be reduced before any Registrable Securities are reduced from such underwriting unless the number of Registrable Securities to be included in such underwriting has an aggregate value measured by the offering price to the public of not less than the aggregate purchase price paid by the Holders under this Agreement. If any Holder disapproves of the terms of any such underwriting, he or it may elect to withdraw therefrom by written notice to the Company and the underwriter. Any securities excluded or withdrawn from such underwriting shall not be transferred prior to 90 days 26 after the effective date of the registration statement for such underwriting, or such shorter period as the underwriter may require. 7.4 FORM S-3. The Company shall uses its best efforts to qualify for registration of Form S-3 or its successor form. After the Company has qualified for the use of Form S-3, Holders of a Substantial Amount of Registrable Securities then outstanding shall have the right to request registrations on Form S-3 (which request shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of Shares by such Holders); provided, however, the Company shall not be required to effect a registration pursuant to this Section 7.4 if it has, within any nine month period preceding the date of any request under this Section 7.4 already effected two registrations pursuant to this Section 7.4. The Company shall give written notice to all Holders of Registrable Securities of the receipt of a request for registration pursuant to this Section 7.4 and shall provide a reasonable opportunity for other Holders to participate in &e registration, provided that if the registration is for an underwritten offering, the terms of subsection 7.2(b) shall apply to all participants in such offering. Subject to the foregoing, the Company will use its best efforts to effect promptly the registration of all shares of Registrable Securities on Form S-3 to the extent requested by the Holder or Holders thereof for purposes of disposition. 7.5 EXPENSES OF REGISTRATION. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 7 (exclusive of discounts, commissions and stock transfer fees), including without limitation, all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company, accounting fees incidental to or required by such registration and the fees and disbursements of counsel retained by the Holders with respect to such registration, shall be home by the Company. 7.6 REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by the Company pursuant to Section 7, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) keep such registration, qualification or compliance pursuant to Section 7.2, 7.3 or 7.4 effective (i) until the Holder or Holders have completed the distribution described in the registration statement relating thereto for shelf offerings; or until the Holder(s) shall have completed the distribution for all other offerings; and (b) furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request. 7.7 INDEMNIFICATION. (a) The Company will indemnify, defend and hold harmless each Holder of Registrable Securities, each of its officers, directors and partners, and each person controlling or deemed controlling such Holder, with respect to which registration, qualification or compliance has been effected pursuant to this Section 7 and, each underwriter, if any, and 27 each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against ail claims, losses, damages, costs, expenses and liabilities whatsoever (or actions in respect-thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other documents (including any related registration, statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any state securities law or of any rule or regulation promulgated under the Securities Act or any state securities law applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers and directors, and each person controlling or deemed controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, cost, expense, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, cost, expense or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by any Holder or underwriter and stated to be specifically for use therein. (b) Each Holder will, if Registrable Securities held by or issuable-to such person are included in the securities as to which such registration, qualification or compliance is being effected, indemnify, defend and hold harmless the Company, each of its directors and officers who sign such registration statement, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other Holder, each of such other Holder's officers and directors and each person controlling such other Holder, against all claims, losses, damages, costs, expenses and liabilities whatsoever (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other documents (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such other Holders, such directors, officers, persons or underwriters for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, cost, expense, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder and stated to be specifically for use therein; provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement becomes effective or the amended prospectus filed with the SEC pursuant to Rule 424(b) (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any underwriter or any Holder, if there is no underwriter, if a copy of the Final Prospectus was furnished to the 28 person or entity asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act; and provided further, the total amount for which any Holder shall be liable under this Section 7.7 shall not in any event exceed the lesser of (A) aggregate proceeds received by such Holder from the sale of Registrable Securities held by such Holder in such registration and (B) that portion of aggregate losses, claims, damages, liabilities or expenses indemnified against as is equal to the proportion of the total number of Registrable Securities being sold by such Holder to the total number of shares of Common Stock being sold by the Company and all persons for which shares are registered in such offering; and provided further, however, that no Holder shall be required to enter into an Underwriting Agreement that provides for any greater potential liability to it than as set forth herein. (c) Each party entitled to indemnification under this Section 7.7 (the "Indemnified Party") shall give notice to the party required to provide the indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnifying party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 7.7. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. If any such Indemnified Party shall have been advised by counsel chosen by it that there may be one or more legal defenses available to such Indemnifying Party which are different from or additional to those available to the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action on behalf of such Indemnified Party and will reimburse such Indemnified Party and any person controlling such Indemnified Party for the reasonable fees and expenses of any counsel retained by the Indemnified Party, it being understood that the Indemnifying Party shall not in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for such Indemnified Party or controlling person, which firm shall be designated in writing by the Indemnified Party to the Indemnifying Party. 7.8 INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such persons and the distribution proposed by such persons as the Company may request in writing and as such shall be required in connection with any registration, qualification or compliance referred to in this Section 7. 7.9 SALE WITHOUT REGISTRATION. If at the time of any transfer (other than a transfer not involving a change in beneficial ownership) of any Shares or Registrable Securities, such Shares or Registrable Securities shall not be registered under the Securities Act, the Company may require, as a condition of allowing such transfer, that the holder or transferee 29 thereof furnish to the Company (a) such information as is necessary in order to establish that such transfer may be made without registration under the Securities Act; and (b) at the expense of such holder or transferee, an opinion by legal counsel designated by such holder or transferee and satisfactory to the Company, satisfactory in form and substance to the Company, to the effect that such transfer may be made without registration under such Act; provided that nothing contained in this Section 7.9 shall relieve the Company from complying with any request for registration, qualification or compliance made pursuant to the other provisions of this Section 7. 7.10 RULE 144 REPORTING. With a view to making available to Purchaser the benefits of certain rules and regulations of the SEC which may permit the sale of the Shares or Registrable Securities to the public without registration, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety days after the effective date of the first registration flied by the Company which involves a sale of securities of the Company to the general public; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to Purchaser so long as Purchaser owns any Preferred Shares or Registrable Securities forthwith upon request a written statement by the Company that it has complied with the reporting requirements of said Rule 144 (at any time after ninety days after the effective date of said fast registration statement filed by the Company) and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as may be reasonably requested in availing Purchaser of any rule or regulation of the SEC permitting the selling of any such securities without registration. 7.11 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to register securities granted by the Company under Sections 7.2, 7.3 and 7.4 may be assigned or transferred by any Purchaser to a transferee or assignee who acquires any Preferred Shares or Registrable Securities, provided that such transfers or assignments may otherwise be effected in accordance with applicable securities laws and provided further that the Company is given notice of any such assignment or transfer. 7.12 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the Closing Date, the Company shall not, without the prior written consent of the Holders of securities having more than 50% of the voting power of such securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Sections 7.2, hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in Section 7.2. 30 7.13 "MARKET STAND-OFF" AGREEMENT. Each Holder and each Founder hereby agree that during the period of duration specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Securities Act, which period shall not exceed 180 days, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell or offer to sell or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except common stock included in such registration; provided, however, that: (a) such agreement shall be applicable only to the first such registration statement of the Company which covers Common Stock (or other securities) to be sold on its behalf to the public in an underwritten offering; and (b) such agreement shall not be required unless all officers and directors and one percent (I%) or greater shareholders of the Company and all other persons with registration rights (whether or not pursuant to this Agreement) or persons purchasing Common Stock from the Company at any time after the date of this Agreement become bound by similar agreements. In order to enforce the foregoing covenant the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares of securities of every other person subject to the foregoing restriction) until the end of such period. 7.14 EXPIRATION OF RIGHTS. All registration rights shall expire and not apply to any Holder upon the date seven years from the closing date of the Company's first registered sale of securities to the general public. 8. MISCELLANEOUS. 8.1 WAIVERS AND AMENDMENTS. With the written consent of the record holders of at least a majority of the Preferred Shares, the obligations of the Company and the rights of the holders of the Preferred Shares under this Agreement may be waived or amended (either generally or in a particular instance); provided, however, that no such waiver or amendment shall reduce the aforesaid proportion of Preferred Shares, the holders of which are required to consent to any waiver or supplemental agreement, without the consent of the record holders of all of the Preferred Shares. Upon the effectuation of each such waiver or amendment the Company shall promptly give written notice thereof to the record holders of the Preferred Shares who have not previously consented thereto in writing. Except to the extent provided in this Section 8. 1, this Agreement or any provision hereof may be amended, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the amendment, waiver, discharge or termination is sought. No amendment or waiver of Section 7.13 of this Agreement shall be binding on any Holder unless each such Holder has consented in writing to be bound by such amendment or waiver. 8.2 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 31 8.3 SURVIVAL. Liabilities for and the representations, warranties, covenants and agreements made herein shall survive the Closing of the transactions contemplated hereby, notwithstanding any investigation made by the Purchasers. 8.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 8.5 ENTIRE AGREEMENT. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof and they supersede, merge and render void every other prior written and/or oral understanding or agreement among or between the parties hereto. 8.6 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be delivered personally, mailed by first class mail, postage prepaid, or delivered by courier or overnight delivery, addressed (a) if to a Purchaser, at such Purchaser's address set forth in the Schedule of Purchasers, or at such other address as such Purchaser shall have furnished to the Company in writing with a copy to Warren T. Lazarow, Esq. and David A. Makarechian, Esq., Brobeck, Phleger & Harrison LLP, 2200 Geng Road, Palo Alto, California 94303 or (b) if to the Company, at its address set forth at the beginning of this Agreement or at such other address as the Company shall have furnished to the Purchasers in writing with a copy to Blair Stewart, Esq., Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94394. Notices that are mailed shall be deemed received five (5) days after deposit in the United States mail. Notices sent by courier or overnight delivery shall be deemed received two (2) days after they have been so sent. 8.7 SEVERABILILY. In case any provision of this Agreement shall be found by a court of law to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be effected or impaired thereby. 8.8 FINDER'S FEES AND OTHER FEES. (a) The Company (i) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement, and (ii) hereby agrees to indemnify and to hold Purchasers harmless from and against any liability for commission or compensation in the nature of a finder's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which the Company, or any of its employees or representatives, is responsible. (b) Each Purchaser represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement. 8.9 EXPENSES. The Company and the Purchasers shall each bear their own expenses and legal fees in connection with the consummation of this transaction; provided, however, that the Company will pay the fees and expenses of special counsel for the Purchasers up to $45,000, together with disbursements and expenses incurred by special counsel in connection with all transactions leading up to and including the Closing. 32 8.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 8.11 DELAYS OR OMISSIONS. No delay or omission to exercise any right power or remedy accruing to any holder of any securities issued or to be issued hereunder shall impair any such right, power or remedy of such holder, nor shall it be construed to be a waiver of any breach or default under this Agreement, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any delay or omission to exercise any right, power or remedy or any waiver of any single breach or default be deemed a waiver of any other right, power or remedy or breach or default theretofore or thereafter occurring. All remedies, either under this Agreement, or by law otherwise afforded to the Purchasers or their affiliates, shall be cumulative and not alternative. 8.12 CERTAIN REPRESENTATIONS AND WARRANTIES. The representations and warranties made by the Founders in Section 3 hereof, shall be deemed made to the knowledge of the Founders. Notwithstanding anything to the contrary contained in this Agreement, absent fraud or willful misrepresentation, the amount of damages recoverable from each Founder for breaches of representations and warranties hereunder shall be as follows: (a) the amount of damages recoverable from each Founder shall be limited to the amount of the aggregate proceeds received by that Founder upon the redemption of shares under the Redemption Agreement that are owned or beneficially owned by such Founder (including shares held by any trust for the benefit of such Founder), net of any income tax liability thereon; and (b) to the extent that each of Jerry S. Rawls and Frank Levinson owes damages for a breach of a representation or warranty made under Section 3 hereunder, then the aggregate damages owed by Jerry S. Rawls, Frank Levinson, and the Company shall be recoverable one-@d apiece from each of Jerry S. Rawls, Frank Levinson, and the Company; provided, however, that if any of Jerry S. Rawls, Frank Levinson, or the Company for any reason is unable to satisfy its obligations under this subparagraph b., the Purchasers may recover the amount owed from Jerry S. Rawls and Frank Levinson, up to the maximum amount that is consistent with subparagraph a. above. Nothing in the foregoing sentence shall be deemed to increase the liability of any Founder, or to limit the liability of the Company, or to limit the amount of damages recoverable from the Company. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 33 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FINISAR CORPORATION By: /s/ Jerry S. Rawls ------------------------------ Jerry S. Rawls President FOUNDERS: /s/ Jerry S. Rawls --------------------------------- Jerry S. Rawls /s/ Frank Levinson --------------------------------- Frank Levinson 34 PURCHASERS: TA INVESTORS LLC By: TA Associates Inc. its Manager --------------------------------------- Michael Child Managing Director ADVENT ATLANTIC AND PACIFIC III L.P. By: TA Associates AAP III Partners, its General Partner By: TA Associates, Inc., its General Partner --------------------------------------- Michael C. Child Managing Director TA/ADVENT III L.P. By: TA Associates VIII LLC, its General Partner By: TA Associates, Inc., its General Partner --------------------------------------- Michael C. Child Managing Director TA EXECUTIVE FUND LLC By: TA Associates Inc., its General Partner --------------------------------------- Michael C. Child Managing Director SUMMIT VENTURES V, L.P. By: Summit Partners V, L.P., its General Partner By: Summit Partners, LLC, its General Partner /s/ Walter G. Kortschak --------------------------------------- Member Name: Walter G. Kortschak --------------------------------- SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT DATED AS OF NOVEMBER 6, 1998 35 SUMMIT V COMPANION FUND, L.P. By: Summit Partners V, L.P., its General Partner By: Summit Partners LLC, its General Partner /s/ Walter G. Kortschak --------------------------------------- Member Name: Walter G. Kortschak --------------------------------- SUMMIT V ADVISORS FUND, LLP By: Summit Partners LLC its General Partner /s/ Walter G. Kortschak --------------------------------------- Member Name: Walter G. Kortschak --------------------------------- SUMMIT V ADVISORS FUND (Q.P), L.P. By: Summit Partners, LLC its General Partner /s/ Walter G. Kortschak --------------------------------------- Member Name: Walter G. Kortschak --------------------------------- SUMMIT INVESTORS III, L.P. /s/ Walter G. Kortschak --------------------------------------- General Partner Name: Walter G. Kortschak --------------------------------- SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT DATED AS OF NOVEMBER 6, 1998 36 WS INVESTMENT CO. 98-B /s/ Blair W. Stewart, Jr. --------------------------------------- Blair W. Stewart, Jr. PICKARD FAMILY TRUST /s/ W. Jeffers Pickard --------------------------------------- W. Jeffers Pickard Trustee STANFORD UNIVERSITY /s/ Carol Gilmer --------------------------------------- Carol Gilmer Gift Administrator, Stanford Management Co. On behalf of the Board of Trustees Of the Leland Stanford Junior University SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT DATED AS OF NOVEMBER 6, 1998 37 JOHN GALLANT /s/ John Gallant --------------------------------------- John Gallant ROBERT CURTIN /s/ Robert Curtin --------------------------------------- Robert Curtin MICHAEL MAICHEN /s/ Michael Maichen --------------------------------------- Michael Maichen STEPHEN DICHIARA /s/ Stephen Dichiara --------------------------------------- Stephen Dichiara SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT DATED AS OF NOVEMBER 6, 1998 38 EX-10.6 13 EXHIBIT 10.6 SHAREHOLDERS' AGREEMENT THIS SHAREHOLDERS' AGREEMENT dated as of November 6, 1998 is made by and among Finisar Corporation, a California corporation (the "Company"), the undersigned holders of the Company's Common Stock (collectively the "Employee Holders" and each individually an "Employee Holder") and the undersigned holders (the "Purchasers") of Series A Preferred Stock of the Company (the "Preferred Shares"). WITNESSETH: WHEREAS, the parties desire to set forth certain rights and restrictions related to the ownership and disposition of their respective shares of capital stock in the Company (referred to from time to time as "shares"); NOW, THEREFORE, in consideration of the premises and the mutual promises set forth in this Agreement, THE PARTIES AGREE AS FOLLOWS: 1. RESTRICTIONS ON TRANSFER OF SHARES BY EMPLOYEE HOLDERS. Except as otherwise provided in this Agreement, the Employee Holders will not sell, assign, transfer, pledge, hypothecate, or otherwise encumber or dispose of in any way, all or any part of or any interest in the shares now or hereafter owned or held by him. Any sale, assignment, transfer, pledge, hypothecation or other encumbrance or disposition of shares not made in conformance with this Agreement shall be null and void, shall not be recorded on the books of the Company and shall not be recognized by the Company. 2. PREEMPTIVE RIGHT. 2.1 DEFINITIONS. (a) EQUITY SECURITIES. For purposes of this Agreement, the term "Equity Securities" shall mean any securities having voting rights in the election of the Board of Directors or any securities evidencing an ownership interest in the Company, or any securities convertible into or exercisable for any shares of the foregoing, or any agreement or commitment to issue any of the foregoing. (b) HOLDERS. For purposes of this Agreement, the term "Holders" shall mean the Purchasers or persons who have acquired shares from any of such persons or their transferees or assignees in accordance with the provisions of this Agreement. 2.2 THE RIGHT. If the Company shall issue any Equity Securities, it shall offer to sell to each Holder a Ratable Portion of such Equity Securities on the same terms and conditions and at the lowest price as are issued in such offering as such Equity Securities are issued to any person. "Ratable Portion" shall mean that portion of such Equity Securities that bears the same ratio to all such Equity Securities (including for this purpose all Equity Securities which may be purchased by all Holders pursuant to this Section 2) as the number of shares of Common Stock held by the Holder, from conversion of the Preferred Shares and the number of shares of Common Stock into which the Preferred Shares held by the Holder are then convertible, bears to the Outstanding Common Shares. "Outstanding Common Shares" means all shares of Common Stock then outstanding and all shares of Common Stock issuable upon conversion of all convertible securities then outstanding (except the Equity Securities so issued and any stock options and warrants). 2.3 NOTICE. The Company shall give written notice of the proposed issuance of Equity Securities to each Holder not later than twenty (20) days prior to issuance. Such notice shall contain all material terms and conditions of the issuance and of the Equity Securities. Each Holder may elect to exercise all or any portion of its rights under this Section 2 by giving written notice to the Company within fifteen (15) days of the Company's notice. If the consideration paid by others for the Equity Securities is not cash, the value of the consideration shall be determined in good faith by the Company's Board of Directors, and any electing Holder which cannot for any reason pay for the Equity Securities in the form of non-cash consideration may pay the cash equivalent thereof, as determined by the Board of Directors. All payments shall be delivered by electing Holders to the Company not later than the date specified by the Company in its notice, but in no event earlier than twenty (20) days after the Company's notice. Each Holder shall have a right of overallotment such that, if any other Holder fails to exercise the right to purchase its full Ratable Portion of the Equity Securities, the other participating Holders may, before the date ten (10) days following the expiration of the fifteen (15) day period, set forth above, exercise an additional right to purchase, on a pro rata basis, the Equity Securities not previously purchased by so notifying the Company, in writing, within such ten (10) day period. Each Holder shall be entitled to apportion Equity Securities to be purchased among its partners and affiliates, provided that such Holder notifies the Company of such allocation. 2.4 LIMITATION. The provisions of this Section 2 shall not apply to (i) issuances after the date of this Agreement of up to 6,075,611 shares of Common Stock (and options to purchase such Common Stock including options currently outstanding and exercised pursuant to such stock option plan) to employees, officers, directors and consultants of the Company (adjusted for any stock splits, stock dividends, recapitalizations and the like after the date hereof), which number includes all existing options outstanding as of the date hereof; (ii) issuances pursuant to a firmly underwritten public offering registered under the Securities Act of 1933, as amended (the "Securities Act"); and (iii) issuances of Common Stock upon conversion of the Preferred Shares. 3. AGREEMENTS AMONG THE COMPANY, THE PURCHASERS AND THE EMPLOYEE HOLDERS. 3.1 RIGHTS OF REFUSAL. (a) THE COMPANY'S RIGHT. If at any time an Employee Holder proposes to sell Equity Securities to one or more third parties pursuant to an understanding with such third parties in a transaction (the "Transfer"), then the Employee Holder shall give the Company and each Holder written notice of his intention (the "Transfer Notice"), describing the offered shares ("Offered Shares"), the identity of the prospective transferee and the consideration and the material terms and conditions upon which the proposed Transfer is to be made. The Transfer Notice shall certify that the Employee Holder believes in good faith he or she has received a firm offer from the prospective transferee and in good faith believes a binding 2 agreement for Transfer is obtainable on the terms set forth, and shall also include a copy of any written proposal or letter of intent or other agreement relating to the proposed Transfer. The Company shall have an option for a period of ten (10) days from receipt of the Transfer Notice to purchase the Offered Shares at the same price and subject to the same material terms and conditions as described in the Transfer Notice. The Company may only exercise such purchase option and, thereby, purchase all, and not less than all, of the Offered Shares, by notifying the Employee Holder in writing, before expiration of the initial ten (10) day period as to the number of such shares which it wishes to purchase. If the Company gives the Employee Holder notice that it desires to purchase such shares, then payment for the Offered Shares shall be by check or wire transfer, against delivery of the Offered Shares to be purchased at a place agreed upon between the parties and at the time of the scheduled closing therefor. If the Company fails to purchase all of the Offered Shares by exercising the option granted in this Section 3.1(a) within the period provided, the Employee Holder shall be subject to the options granted to the Holders pursuant to this Agreement. (b) THE HOLDERS' RIGHT. Subject only to the Company's right set forth in Section 3.1(a), if at any time an Employee Holder proposes a Transfer, then, after the Company has declined its option, the Employee Holder shall give each Holder an additional Transfer Notice describing the Offered Shares, the identity of the prospective transferee and the consideration and the material terms and conditions upon which the proposed Transfer is to be made. The Transfer Notice shall certify that the Employee Holder has received a firm offer from the prospective transferee and in good faith believes a binding agreement for Transfer is obtainable on the terms set forth, and shall also include a copy of any written proposal or letter of intent or other agreement relating to the proposed Transfer. The Company, upon request of the Employee Holder, will provide a list of the addresses of the Holders. (c) HOLDER OPTION. The Holders shall have an option for a period of twenty (20) days from the Holder's receipt of the Transfer Notice from the Employee Holder set forth in Section 3.1(b) to purchase their respective pro rata shares of the Offered Shares at the same price and subject to the same material terms and conditions as described in the Transfer Notice. Each of such persons may exercise such purchase option and, thereby, purchase all or any portion of his or its pro rata shares (with any reallotments as provided below) of the Offered Shares, by notifying the Employee Holder and the Company in writing, before expiration of the initial twenty (20) day period as to the number of such shares which he or it wishes to purchase. Each Holder's pro rata share of the Offered Shares shall be a fraction of the Offered Shares, of which the number of shares of Common Stock which have been issued and are held by such Holder or issuable upon conversion of the Preferred Shares or exercise of warrants held by such Holder on the date of the Holder's receipt of the Transfer Notice from the Employee Holder (the "Notice Date") shall be the numerator and the total number of shares of Common Stock issued or issuable upon conversion of all Preferred Shares or exercise of warrants held by all Holders on the Notice Date shall be the denominator. Each Holder shall have a right of overallotment such that, if any other Holder fails to exercise the right to purchase its full pro rata share of the Offered Shares, the other participating Holders before the date ten (10) days following the expiration of the initial twenty (20) day period, exercise an additional right to purchase, on a pro rata basis, the Offered Shares not previously purchased by so notifying the Employee Holder and the Company, in writing, within such ten (10) day period. Each Holder shall be entitled to apportion the Offered Shares to be purchased among its partners and affiliates, provided that 3 such Holder notifies the Employee Holder of such allocation. If a Holder gives the Employee Holder notice that it desires to purchase its share and, as the case may be, its overallotment, then payment for the Offered Shares shall be by check or wire transfer, against delivery of the Offered Shares to be purchased at a place agreed upon between the parties and at the time of the scheduled closing therefor. (d) FAILURE TO NOTIFY. If the Holders fail to purchase all of the Offered Shares by exercising the options granted in this Section 3.1 within the periods provided, the Employee Holder shall be entitled for a period of sixty (60) days thereafter to complete the proposed Transfer of the balance of such shares not purchased by the Holders upon the terms and conditions specified in the Transfer Notice. If the Employee Holder has not so transferred the Offered Shares during such period, the Employee Holders shall not thereafter make a Transfer of shares without again first offering such shares to the other parties in the manner provided in this Section 3.1. 3.2 RIGHT OF CO-SALE. (a) THE RIGHT. If at any time an Employee Holder proposes to sell any shares of Equity Securities to any third party in a transaction (the "Transaction") and the Company and the Holders as a group do not exercise their respective rights of refusal as to the Offered Shares pursuant to Section 3.1, then each Holder (a "Selling Holder" for purposes of this subsection 3.2) which notifies the Employee Holder in writing within twenty (20) days after receipt of the Transfer Notice referred to in Section 3.1(a), shall have the opportunity to sell a pro rata portion of Equity Securities which the Employee Holder proposes to sell to such third party in the Transaction. In such instance, the Employee Holder shall assign so much of his interest in the proposed agreement of sale as the Selling Holder shall be entitled to and shall request hereunder, and the Selling Holder shall assume such part of the obligations of the Employee Holder under such agreement as shall relate to the sale of the securities by the Selling Holder. For the purposes of this Section 3.2, the "pro rata portion" which the Selling Holder shall be entitled to sell shall be an amount of Equity Securities (assuming the exercise and conversion of all such securities to Common Stock) equal to a fraction of the total amount of Equity Securities (assuming the exercise and conversion of all such securities to Common Stock) proposed to be sold. The numerator of such fraction shall be the number of Equity Securities (assuming the exercise and conversion of all such securities to Common Stock) owned by a Selling Holder (exclusive of the options referenced in clause (i) of Section 2(d)) and the denominator shall be the total number of Equity Securities (assuming the exercise and conversion of all such securities to Common Stock) owned by all participating Selling Holders and the Employee Holder. Each Selling Holder shall notify the Employee Holder whether it elects to sell an amount equal to, more than or less than its pro rata share of the Equity Securities so offered. Each Holder shall have a right of overallotment such that if any other Holder fails to exercise its co-sale right to sell its pro rata portion of the Offered Shares, the participating Holders may exercise an additional right to sell, on a pro rata basis, the Offered Shares not previously sold by so notifying the Employee Holder in writing. Each Selling Holder shall be entitled to apportion Equity Securities to be sold among its partners and affiliates, provided that such Selling Holder notifies the Employee Holder of such allocation. 4 (b) FAILURE TO NOTIFY. If within twenty (20) days after the Employee Holder gives his aforesaid notice to the Holders, the Holders do not notify the Employee Holder that they desire to sell all of their pro rata portions of the Equity Securities described in such notice for the price and on the terms and conditions set forth therein, then the Employee Holder may, subject to Section 3.1 hereof and the overallotment right, sell during a period of sixty (60) days thereafter such Equity Securities as to which the Holders do not elect to sell. Any such sale shall be made only to persons identified in the Employee Holder's notice and at the same price and upon the same terms and conditions as those set forth in the notice. In the event the Employee Holder has not sold the Equity Securities or entered into an agreement to sell the Equity Securities within such sixty (60) day period, the Employee Holder shall not thereafter sell any Equity Securities without first notifying the Holders in the manner provided above and giving the same sales opportunity. 3.3 LIMITATIONS TO RIGHTS OF LAST REFUSAL AND CO-SALE. Notwithstanding the provisions of Section 3.1 and 3.2 of this Agreement, each Employee Holder may sell or otherwise assign, with or without consideration, (i) up to ten (10) percent of the Employee Holder's Equity Securities held by him on the date hereof, in any one full year, up to an aggregate of twenty (20) percent of such Employee Holder's Equity Securities, and (ii) Equity Securities to any spouse or member of his immediate family, or to a custodian, trustee (including a trustee of a voting trust), executor, or other fiduciary for the account of his spouse or members of his immediate family, or to a trust for himself, or a charitable remainder trust, as to which sales the provisions of Section 3.2 shall not apply; provided, that each such transferee or assignee, prior to the completion of the sale, transfer, or assignment shall have executed documents assuming the obligations of the Employee Holder under this Agreement with respect to the transferred securities. 4. ASSIGNMENTS AND TRANSFERS. The rights granted pursuant to this Agreement may be freely assigned or transferred by any Holder. 5. LEGEND. Each existing or replacement certificate for shares now owned by the Employee Holders shall bear the following legend upon its face: "THE OWNERSHIP, TRANSFER, ENCUMBRANCE, PLEDGE, ASSIGNMENT, OR OTHER DISPOSITION OF THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED THEREBY, ARE SUBJECT TO THE RESTRICTIONS CONTAINED IN A SHAREHOLDERS' AGREEMENT, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE COMPANY." 6. EFFECT OF CHANGE IN COMPANY'S CAPITAL STRUCTURE. Appropriate adjustments shall be made in the number, exercise price and class of shares in the event of a stock dividend, stock split, reverse stock split, combination, reclassification or like change in the capital structure of the Company. If, from time to time, there is any stock dividend, stock split or other change in the character or amount of any of the outstanding stock of the Company, then in such event any and all new, substituted or additional securities to which the Employee Holders are entitled by reason of the Employee Holders' ownership of the stock shall be immediately subject to the 5 rights and obligations set forth in Sections 2 and 3 with the same force and effect as the stock subject to such rights immediately before such event. 7. NOTICES. Any notice required or permitted by any provision of this Agreement shall be given in writing, and shall be delivered either personally or by registered or certified mail, postage prepaid, addressed (i) in the case of the Employee Holder to his address as is designated in writing from time to time by such party, (ii) in the case of the Company, to its principal office, (iii) in the case of any Purchaser which is an original party to this Agreement at the address of such Purchaser as set forth in the Schedule of Purchasers attached as EXHIBIT A hereto or such other address for such Purchaser as shall be designated in writing from time to time by such Purchaser, and, (iv) in the case of any transferee of a party to this Agreement or its transferee, to such transferee at its address as designated in writing by such transferee to the Company from time to time. 8. BINDING EFFECT. This Agreement and each and every term, covenant and condition thereof, including all restrictions herein contained upon the sale, transfer, assignment or other disposition or encumbrance of stock, shall be binding upon and inure to the benefit of the transferees, legatees, donees, heirs, executors, administrators, personal representatives, successors and assigns of each of the parties. 9. TERM. The term of this Agreement shall expire upon the earliest of (i) immediately prior to the closing of the Company's first firmly underwritten public offering registered under the Securities Act of 1933, as amended, the terms of which cause an automatic conversion of the Preferred Shares into Common Stock pursuant to the Company's then existing Articles of Incorporation, or (ii) 10 years from the date hereof, or (iii) as to any Purchaser which (with its affiliates) holds less than 25% of the shares purchased pursuant to the Securities Purchase Agreement, dated November 6, 1998, by and among the Company, the Founders (as defined therein) and each of the Purchasers named on SCHEDULE 1 thereto. 10. ENTIRE AGREEMENT. This instrument contains the entire understanding of the parties with respect to the subject matter hereof, supersedes all other agreements between or among any of the parties with respect to the subject matter hereof and cannot be altered or otherwise amended except pursuant to an instrument in writing signed by each of the parties to this Agreement. This Agreement shall be interpreted under the laws of the State of California without reference to its principles of conflicts of law, The Employee Holders and the Company each represent and warrant to the Purchasers that they have not entered into any agreements and are not bound by any covenants or other provisions that would prevent them from complying with each of the provisions of this Agreement. 11. ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Securities Purchase Agreement or the Articles of Incorporation, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 12. AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company, 6 the written consent of the Employee Holders holding more than 50% of the Common Stock then held by all Employee Holders as a group, and the written consent of the holders of more than 50% of the Common Stock issued or issuable upon conversion of the Preferred Shares then outstanding. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities have been converted), each future holder of all such securities, and the Company. 13. RIGHTS; SEPARABILITY. Unless otherwise expressly provided herein, an Employee Holder's rights hereunder are several rights, not rights jointly held with any other Employee Holder. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. [Remainder of this page intentionally left blank.] 7 IN WITNESS WHEREOF, this Agreement has been duly executed effective as of the date and year first above written. FINISAR CORPORATION: By: /s/ Jerry S. Rawls ------------------------------------ Jerry S. Rawls President EMPLOYEE HOLDERS: /s/ Jerry S. Rawls --------------------------------------- /s/ Frank H. Levinson --------------------------------------- 8 PURCHASERS: TA INVESTORS LLC By: TA Associates, Inc. its Manager /s/ Michael Child ---------------------------------------- Michael Child Managing Director ADVENT ATLANTIC AND PACIFIC III L.P. By: TA Associates AAP III Partners its General Partner By: TA Associates, Inc. its General Partner /s/ Michael Child ---------------------------------------- Michael C. Child Managing Director TA/ADVENT VIII L.P. By: TA Associates VIII LLC its General Partner By: TA Associates, Inc. its Manager /s/ Michael Child ---------------------------------------- Michael C. Child Managing Director TA EXECUTIVES FUND LLC By: TA Associates, Inc. its Manager /s/ Michael Child ---------------------------------------- Michael C. Child Managing Director SIGNATURE PAGE TO SHAREHOLDERS' AGREEMENT 9 SUMMIT VENTURES V, L.P. By: Summit Partners V, L.P. its General Partner By: Summit Partners, LLC its General Partner /s/ Walter G. Kortschak --------------------------------------- Member Name: Walter G. Kortschak ------------------------- SUMMIT V COMPANION FUND, L.P. By: Summit Partners V, L.P. its General Partner By: Summit Partners, LLC its General Partner /s/ Walter G. Kortschak --------------------------------------- Member Name: Walter G. Kortschak ------------------------- SUMMIT V ADVISORS FUND, L.P. By: Summit Partners, LLC its General Partner /s/ Walter G. Kortschak --------------------------------------- Member Name: Walter G. Kortschak ------------------------- SUMMIT V ADVISORS FUND (QP), L.P. By: Summit Partners, LLC its General Partner /s/ Walter G. Kortschak --------------------------------------- Member Name: Walter G. Kortschak ------------------------- SUMMIT INVESTORS III, L.P. /s/ Walter G. Kortschak --------------------------------------- General Partner Name: Walter G. Kortschak ------------------------- SIGNATURE PAGE TO SHAREHOLDERS' AGREEMENT 10 WS INVESTMENT CO. 98-B /s/ Blair W. Stewart, Jr. --------------------------------------- Blair W. Stewart, Jr. PICKARD FAMILY TRUST /s/ W. Jeffers Pickard --------------------------------------- W. Jeffers Pickard Trustee STANFORD UNIVERSITY /s/ Carol Gilmer --------------------------------------- Carol Gilmer UNIVERSAL TECHNOLOGY, INC. /s/ John Gallant --------------------------------------- John Gallant President SIGNATURE PAGE TO SHAREHOLDERS' AGREEMENT 11 JOHN GALLANT /s/ John Gallant --------------------------------------- John Gallant ROBERT CURTIN /s/ Robert Curtin --------------------------------------- Robert Curtin MICHAEL MAICHEN /s/ Michael Maichen --------------------------------------- Michael Maichen STEPHEN DICHIARA /s/ Stephen Dichiara --------------------------------------- Stephen Dichiara SIGNATURE PAGE TO SHAREHOLDERS' AGREEMENT 12 EX-10.7 14 EXHIBIT 10.7 VOTING AGREEMENT THIS AGREEMENT is made as of the 6th day of November, 1998, by and among Finisar Corporation, a California corporation (the "Company), Frank Levinson and Jerry Rawls (each, a "Founder" and collectively, the "Founders") and each of the persons named in the Schedule of Purchasers (the "Purchasers") attached to the Securities Purchase Agreement (the "Purchase Agreement"), dated November 6, 1998, by and among the Company, the Founders and the Purchasers. WHEREAS, the Purchasers are purchasing up to an aggregate of 12,100,000 shares of Series A Convertible Preferred Stock pursuant to the Purchase Agreement; WHEREAS, in order to induce the Purchasers to consummate their purchase of the Series A Convertible Preferred Stock, the parties have agreed to execute this Voting Agreement pursuant to the terms and conditions set forth below; and WHEREAS, the Amended and Restated Articles of Incorporation of the Company (the "Amended and Restated Articles") provide that at each annual or special election of the Company's directors, the holders of the then outstanding shares of Series A Convertible Preferred Stock voting together as a single class, shall be entitled to elect one (1) director and that at each annual or special election of the Company's directors, the holders of the then outstanding shares of Common Stock, voting together as a single class, shall be entitled to elect all remaining directors; NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. AGREEMENT TO VOTE. Each of the Purchasers and the Founders, as holders of Series A Convertible Preferred Stock, and Common Stock, respectively, agrees to vote all securities owned by him or it, or act by written consent of shareholders, as the case may be, in accordance with, the provisions of this Agreement. 2. BOARD SIZE. Each of the Purchasers and the Founders agree to vote their securities to ensure that the size of the Company's Board of Directors shall be set at not more than seven (7) directors; provided, however, that such Board size may be increased or decreased pursuant to an amendment of this Agreement in accordance with Section 7 hereof. 3. ELECTION OF SERIES A PREFERRED STOCK DIRECTORS. Each of the Purchasers and the Founders agree to vote their securities as follows: (a) To elect (and against the removal of, except for cause) one (1) and only one (1) designee of TA Associates or one of its affiliates (the "TA Associates Designee") so long as any Series A Convertible Preferred Stock remains outstanding. Any vacancy occurring because of the death, resignation or removal of the TA Associate Designee shall be filled according to this sub-paragraph 3(a). (b) The initial TA Associates Designee pursuant to this Section 3 shall be Mike Child. 1 4. ELECTION OF COMMON STOCK DIRECTORS. Each of the Purchasers agree to vote their Series A Preferred Stock in proportion and for the same candidates that is voted by a majority of the outstanding shares of Common Stock. 5. SUCCESSORS IN INTEREST. (a) The provisions of this Agreement shall be binding upon the successors in interest to any of the shares of Series A Convertible Preferred Stock and Common Stock. The Company shall not permit the transfer of any of such securities on its books or issue new certificates representing any of such securities unless and until each person to whom such securities are to be transferred shall have executed a written agreement, substantially in the form of this Agreement, pursuant to which such person becomes a party to this Agreement, and agrees to be bound by all the provisions hereof as if such person was a party hereunder. (b) Each certificate representing any of such securities shall bear a legend reading as follows: THE SHARES EVIDENCED HEREBY ARE SUBJECT TO THE TERMS OF A VOTING AGREEMENT (A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE FROM THE ISSUER), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SUCH VOTING AGREEMENT. 6. TERMINATION. This Agreement shall terminate on the date on which no shares of the Series A Convertible Preferred Stock remains outstanding. 7. AMENDMENTS AND WAIVERS. Any term hereof may be amended and the observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of (a) the Company, (b) the Purchasers, or their assigns, holding not less than a majority of the Series A Convertible Preferred Stock then outstanding purchased pursuant to the Purchase Agreement and (c) the Founders. Any amendment or waiver so effected shall be binding upon the Company, all parties hereto, any assignee of any such party, and any other shareholder of the Company subject to the terms of this Agreement, whether or not such party, assignee, or other shareholder entered into or approved such amendment or waiver. 8. STOCK SPLITS, STOCK DIVIDENDS, ETC. In the event of any stock split, stock dividend, recapitalization, reorganization, or the like, any securities issued with respect to the Series A Convertible Preferred Stock shall become "Series A Convertible Preferred Stock" for purposes of this Agreement and shall be endorsed with the legend set forth in Section 5(b) hereof. 9. ENFORCEABILITY/SEVERABILITY. The parties hereto agree that each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law. If any provision of this Agreement shall nevertheless be held to be prohibited by or invalid under applicable law, (a) such provision shall be effective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of 2 this Agreement, and (b) the parties shall, to the extent permissible by applicable law, amend this Agreement, or enter into a voting agreement under which the Series A Convertible Preferred Stock shall be transferred, so as to make effective and enforceable the intent of this Agreement. 10. GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to contracts among California residents entered into and to be performed entirely within California. 11. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12. SUCCESSORS AND ASSIGNS. The provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year herein above first written. FINISAR CORPORATION By: /s/ Jerry Rawls ------------------------------------ Jerry Rawls FOUNDERS: /s/ Frank Levinson --------------------------------------- Frank Levinson /s/ Jerry Rawls --------------------------------------- Jerry Rawls 3 SIGNATURE PAGE TO VOTING AGREEMENT PURCHASERS: TA INVESTORS LLC By: TA Associates Inc. its Manager /s/ Michael Child ----------------------------------- Michael Child Managing Director ADVENT ATLANTIC AND PACIFIC III L.P. By: TA Associates AAP III Partners its General Partner By: TA Associates Inc. its General Partner /s/ Michael Child ----------------------------------- Michael Child Managing Director TA/ADVENT VIII L.P. By: TA Associates VIII LLC its General Partner By: TA Associates Inc. its Manager /s/ Michael Child ----------------------------------- Michael Child Managing Director TA EXECUTIVES FUND LLC By: TA Associates Inc. its Manager /s/ Michael Child ----------------------------------- Michael Child Managing Director 4 SIGNATURE PAGE TO VOTING AGREEMENT SUMMIT VENTURES V, L.P. By: Summit Partners V, L.P. its General Partner By: Summit Partners, LLC its General Partner /s/ Walter G. Kortschak - ------------------------------------------- Member Name: Walter G. Kortshak ------------------------------------- SUMMIT V COMPANION FUND, L.P. By: Summit Partners V, L.P. its General Partner By: Summit Partners, LLC its General Partner /s/ Walter G. Kortschak - ------------------------------------------- Member Name: Walter G. Kortschak ------------------------------------- SUMMIT V ADVISORS FUND, L.P. By: Summit Partners, LLC its General Partner /s/ Walter G. Kortschak - ------------------------------------------- Member Name: Walter G. Kortschak ------------------------------------- SUMMIT V ADVISORS FUND (QP), L.P. By: Summit Partners, LLC its General Partner /s/ Walter G. Kortschak - ------------------------------------------- Member Name: Walter G. Kortschak ------------------------------------- 5 SIGNATURE PAGE TO VOTING AGREEMENT SUMMIT INVESTORS III, L.P. /s/ Walter G. Kortschak - ------------------------------------------- General Partner Name: Walter G. Kortschak ------------------------------------- WS INVESTMENT CO. 98-B /s/ Blair W. Stewart, Jr. - ------------------------------------------- Blair W. Stewart, Jr. PICKARD FAMILY TRUST /s/ W. Jeffers Pickard - ------------------------------------------- W. Jeffers Pickard Trustee STANFORD UNIVERSITY /s/ Carol Gilmer - ------------------------------------------- Carol Gilmer UNIVERSAL TECHNOLOGY, INC. /s/ John Gallant - ------------------------------------------- John Gallant President 6 SIGNATURE PAGE TO VOTING AGREEMENT JOHN GALLANT /s/ John Gallant - ------------------------------------------- John Gallant ROBERT CURTIN /s/ Robert Curtin - ------------------------------------------- Robert Curtin MICHAEL MAICHEN /s/ Michael Maichen - ------------------------------------------- Michael Maichen STEPHEN DICHIARA /s/ Stephen Dichiara - ------------------------------------------- Stephen Dichiara 7 EX-10.8 15 EXHIBIT 10.8 LOAN AGREEMENT BY AND BETWEEN FINISAR CORPORATION AND FLEET NATIONAL BANK, AS AGENT AND A LENDER AND THE OTHER FINANCIAL INSTITUTIONS HEREAFTER PARTIES HERETO $11,015,000 SECURED TERM LOAN AND $6,500,000 SECURED REVOLVING CREDIT LOAN November 6, 1998 LOAN AGREEMENT FINISAR CORPORATION, a California corporation with a principal place of business at 274 Ferguson Drive, Mountain View, California 94043 (hereinafter the "Borrower"), and FLEET NATIONAL BANK, a national banking association organized under the laws of the United States and having an office at One Federal Street, Boston, Massachusetts 02110 (hereinafter sometimes the "Agent") as Agent for itself and each of the other Lenders who now and/or hereafter become parties to this Agreement pursuant to the terms of SECTION 9.11 hereof, sometimes "Fleet" and sometimes in its capacity as a lender "Lender" and such Lenders hereby agree as follows: ARTICLE 1. DEFINITIONS AND ACCOUNTING AND OTHER TERMS Section 1.1. CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "ADJUSTED LIBOR RATE" means, with respect to any Libor Loan to be made by the Lenders for the Interest Period applicable to such Libor Loan, the interest rate per annum determined in good faith by the Agent (fixed throughout such Interest Period (subject to adjustments for the Libor Rate Reserve Percentage)) and rounded upwards, if necessary, to the next 1/16 of 1%) which is equal to the quotient of (i) the rate of interest determined by the Agent to be the average of the interest rates per annum at which Dollar deposits in immediately available funds are offered to each Reference Lender by first-class banks in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the Business Day on which such Interest Period begins, in an amount approximately equal to the principal amount of such Libor Loan, for a period of time equal to such Interest Period and (ii) a number equal to the number one minus the Libor Rate Reserve Percentage. The "Libor Rate Reserve Percentage" applicable to any Interest Period means the average of the maximum effective rates (expressed as a decimal) of the statutory reserve requirements (without duplication, but including, without limitation, basic, supplemental, marginal and emergency reserves) applicable to each Reference Lender during such Interest Period under regulations of the Board of Governors of the Federal Reserve System (or any successor), including without limitation Regulation D or any other regulation dealing with maximum reserve requirements which are applicable to each Reference Lender with respect to its "Eurocurrency Liabilities," as that term may be defined from time to time by the Board of Governors of the Federal Reserve System (or any successor) or are otherwise imposed by the Board of Governors of the Federal Reserve System (or any successor) and which in any other respect relate directly to the funding of loans bearing interest at rates based on the interest rates at which Dollar deposits in immediately available funds are offered to banks by first-class banks in the London interbank market. If any Reference Lender fails to provide its offered quotation to the Agent, the Adjusted Libor Rate shall be determined in good faith on the basis of the offered quotation of the other Reference Lender. The Adjusted Libor Rate shall be adjusted automatically on and as of the effective date of any change in the Libor Rate Reserve Percentage. "ADVANCE" and "ADVANCES" means the funding by any Lender of all or a portion of the Loans in accordance with this Agreement. "AFFILIATE" means singly and collectively, the TA and Summit Investors and any Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, the Borrower. For purposes of this definition, a Person shall be deemed to be "controlled by" the Borrower if the Borrower possesses, directly or indirectly, power either to (i) vote 20% or more of the securities having ordinary voting power for the election of directors of such Person or (ii) direct or cause the direction of the management and policies of such Person whether by contract or otherwise, and the legal representative, successor or assign of any such Person. "AGENT" means Fleet National Bank or any other Person which is at the time in question serving as the agent under the terms of Article 8 hereof and the other Financing Documents. "AGREEMENT" means this loan agreement, as the same may from time to time be amended. "A.M." means a time from and including 12 o'clock midnight to and excluding 12 o'clock noon on any Business Day using Eastern Standard (Daylight Savings) time. "APPLICABLE MARGIN" means for each Libor Loan, two and three quarters percent (2.75%) per annum; provided, however, that if, at any time on or after the receipt by the Agent of (x) the pro forma quarterly financial statements for the Borrower's October 31, 1998 fiscal quarter together with pro forma adjustments reflecting the Related Transactions and the Loans and (y) the Borrower's quarterly financial statements for each subsequent Borrower fiscal quarter provided to the Agent by the Borrower pursuant to SECTION 5.3.3 hereof, the ratio of (a) total Indebtedness for Borrowed Money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of the most recently ended fiscal quarter of the Borrower to (b) EBITDA, (i) is less than or equal to 1.5:1.0, but greater than .5:1.0 and if and so long as no Event of Default or Default exists and is continuing, the Applicable Margin shall, subject to the last sentence of this definition, be two percent (2.00%), or (ii) is less than or equal to .5:1.0 and if and so long as no Event of Default or Default exists and is continuing, the Applicable Margin shall, subject to the last sentence of this definition, be one and one quarter percent (1.25); provided further, however, that if on any date the Borrower would be entitled to an Applicable Margin other than two and three quarters percent (2.75%) except for the fact that a Default exists, the Applicable Margin shall not change until the first to occur of (a) such Default becoming an Event of Default and (b) waiver or cure of such Default, at which time the Applicable Margin shall be adjusted or remain the same in accordance with the provisions of this definition preceding this further proviso. Any change in the Applicable Margin required pursuant to the foregoing shall become effective on the fifth Business Day after the Agent receives the Borrower's financial statement for the Borrower's fiscal quarter or year-end, as the case may be, in question; provided, however, that each of the above-referenced interest rates shall remain in effect only so long as Borrower qualifies therefor and provided further, however, that interest rate reductions shall become final only on the basis of Borrower's annual audited financial statements and in the event that such annual audited financial statements establish that the Borrower was not entitled to a rate 3 reduction which was previously granted, the Borrower shall, upon written demand by the Agent, repay to the Agent for the account of each Lender an amount equal to the excess of interest at the rate which should have been charged based on such annual audited financial statements and the rate actually charged on the basis of Borrower's quarterly financial statement(s) (provided that in the event of a dispute as to the appropriate fiscal quarter as to which any adjustment should be allocated, the decision of the independent accountants of the Borrower shall be made in accordance with GAAP and shall be binding upon the Agent, the Lenders and the Borrower absent manifest error); and provided further, however, that in the event that Borrower fails to provide any financial statement on a timely basis in accordance with SECTION 5.3.3, any interest rate increase payable as a result thereof shall be retroactively effective to the date which is 5 Business Days after the date on which the financial statement in question should have been received by the Agent in accordance with SECTION 5.3.3, and the Borrower shall pay any amount due as a result thereof upon written demand from the Agent. The Agent shall send the Borrower written acknowledgment of each change in the Applicable Margin in accordance with the Agent's customary procedures as in effect from time to time, but the failure to send such acknowledgment shall have no effect on the effectiveness or applicability of the foregoing provisions of this definition or Borrowees obligations with respect to payment and calculation of interest on Libor Loans. "AUTHORIZED REPRESENTATIVE" means the duly appointed President and the Controller of the Borrower and such other senior personnel of the Borrower as shall be duly authorized and designated in writing by the Borrower to execute documents, instruments and agreements on its behalf and to perform the functions of Authorized Representative under any of the Financing Documents. "BORROWED MONEY" means any obligation to repay funded Indebtedness, any Indebtedness evidenced by notes, bonds, debentures, guaranties or similar obligations including without limitation the Loans and any obligation to pay money under a conditional sale agreement, any Capitalized Lease Obligation, any reimbursement obligation for any standby letter of credit, any other Letter of Credit and any obligations in respect of banker's and other acceptances or similar obligations. "BORROWER" has the meaning assigned in the first paragraph of this Agreement. "BUDGET" has the meaning assigned to such term in SECTION 5.3.7. "BUSINESS CONDITION" means the financial condition, business, and assets of a Person. "BUSINESS DAY" means (i) for all purposes other than as covered by clause (ii) below, any day on which banks in Boston, Massachusetts or San Francisco, California are not authorized or required by applicable law to close; and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Libor Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in Dollar deposits in the London interbank market. "CAPITAL EXPENDITURES" means all expenditures paid or incurred by the Borrower or any Subsidiary in respect of (i) the acquisition, construction, improvement or replacement of land, 4 buildings, machinery, equipment, any other fixed assets or leaseholds and (ii) to the extent related to and not included in (i) above, materials, contract labor and direct labor, which expenditures have been or should be, in accordance with GAAP, capitalized on the books of the Borrower or such Subsidiary. Where a fixed asset is acquired by a lease which is required to be capitalized pursuant to Statement of Financial Accounting Standards number 13 or any successor thereto, the amount required to be capitalized in accordance therewith shall be considered to be an expenditure in the year such asset is first leased. "CAPITALIZED LEASE OBLIGATIONS" means all lease obligations which have been or should be, in accordance with GAAP, capitalized on the books of the lessee. "CASH EQUIVALENT INVESTMENTS" means any Investment in (i) direct obligations of the United States or any agency, authority or instrumentality thereof, or obligations guaranteed by the United States or any agency, authority or instrumentality thereof, whether or not supported by the full faith and credit of, a right to borrow from or the ability to be purchased by the United States; (ii) commercial paper rated in the highest grade by a nationally recognized statistical rating agency or which, if not rated, is issued or guaranteed by any issuer with outstanding long-term debt rated A or better by any nationally recognized statistical rating agency; (iii) demand and time deposits with, and certificates of deposit and bankers acceptances issued by, any office of the Agent, any Lender or any other bank or trust company which is organized under the laws of the United States or any state thereof and has capital, surplus and undivided profits aggregating at least $500,000,000, the outstanding long-term debt of which or of the holding company of which it is a subsidiary is rated A or better by any nationally recognized statistical rating agency; (iv) any short-term note which has a rating of MIG-2 or better by Moody's Investors Service Inc. or a comparable rating from any other nationally recognized statistical rating agency; (v) any municipal bond or other governmental obligation (including without limitation any industrial revenue bond or project note) which is rated A or better by any nationally recognized statistical rating agency; (vi) any other obligation of any issuer, the outstanding long-term debt of which is rated A or better by any nationally recognized statistical rating agency; (vii) any repurchase agreement with any financial institution described in clause (iii) above, relating to any of the foregoing instruments and fully collateralized by such instruments; (viii) shares of any open-end diversified investment company that has its assets invested only in investments of the types described in clause (i) through (vii) above at the time of purchase and which maintains a constant net asset value per share; and (ix) shares of any open-end diversified investment company registered under the Investment Company Act of 1940, as amended, which maintains a constant net asset value per share in accordance with regulations of the Securities & Exchange Commission, has aggregate net assets of not less than $50,000,000 on the date of purchase and either derives at least 95% of its gross income from interest on or gains from the sale of investments of the type described in clauses (i) through (vii), above or has at least 85% of the weighted average value of its assets invested in investments of such types; provided that the purchase of any shares in any particular investment company shall be limited to an aggregate amount owned at any one time of $500,000. Each Cash Equivalent Investment shall have a maturity of less than one year at the time of purchase; provided that the maturity of any repurchase agreement shall be deemed to be the repurchase date and not the maturity of the subject security and that the maturity of any variable or floating rate note subject to prepayment at the option of the holder shall be the period remaining (including any notice period remaining) before the holder is entitled to prepayment. 5 "CHANGE OF CONTROL" means, at any time prior to the completion of a Qualified Initial Public Offering, any one of the following events: (i) any change in the ownership of the Borrower such that the TA and Summit Investors in the aggregate own less than 12.5% or the TA and Summit Investors and Frank Levinson and Jerry S. Rawls in the aggregate own less than 50.1% of the equity interests in the Borrower on a fully-diluted basis or (ii) any decrease in any of the voting rights in the Borrower now held by the TA and Summit Investors such that they cease to collectively hold 12.5% or more or the TA and Summit Investors and Frank Levinson and Jerry Rawls in the aggregate cease to collectively hold 50.1% or more of the voting rights in the Borrower on a fully-diluted basis. "CLOSING DATE" means the date on which all of the conditions precedent set forth in SECTION 3.1 of this Agreement have been satisfied or waived and the Term Loan is funded in accordance with this Agreement. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMITMENT" means the Lenders' several commitments to make or maintain the Loans as set forth in SECTION 2.1 hereof in the maximum outstanding amount of each Lender's Pro Rata Share of $17,515,000 less the reductions set forth in SECTION 2.1 and less any reductions and prepayments or repayments of the Term Loan as set forth in SECTION 2.6. "COMMONLY CONTROLLED ENTITY" means a Person, whether or not incorporated, which is under common control with the Borrower within the meaning of section 414(b) or (c) of the Code. "CONSOLIDATED NET WORTH" means the excess of the total assets of the Borrower and the Subsidiaries over Consolidated Total Liabilities, all determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED TOTAL LIABILITIES" means all liabilities of the Borrower and the Subsidiaries which would, in accordance with GAAP on a consolidated basis, be classified as liabilities of a corporation conducting a business the same as or similar to that of the Borrower and any of the Subsidiaries, including, without limitation, any Capitalized Lease Obligations and fixed prepayments of, and sinking fund payments and reserves with respect to, Indebtedness. "DEFAULT" means an event or condition which with the giving of notice or lapse of time or both would become an Event of Default. "DISCHARGED RIGHTS AND OBLIGATIONS" shall have the meaning assigned to such term in SECTION 9.11.4. "DOLLARS" and the sign "$" mean lawful money of the United States of America. "EBITDA" means, for any fiscal period, Net Income PLUS, to the extent accounted for in Net Income, Interest Expense, taxes, depreciation, amortization, other non-cash charges and non-recurring extraordinary costs incurred by the Borrower and any Subsidiaries prior to December 31, 1998 in connection with closing of the Loans and the Related Transactions, for such periods determined on an accrual and consolidated basis in accordance with GAAP; 6 provided that for the Borrower fiscal quarter ending January 31, 1999, EBITDA shall be the EBITDA for such fiscal quarter multiplied by four, for the Borrower fiscal quarter ending April 30, 1999 EBITDA shall be determined by adding EBITDA for such fiscal quarter and for the Borrower fiscal quarter ending January 31, 1999 and multiplying such sum times two, for the Borrower fiscal quarter ending July 31, 1999 EBITDA shall be determined by adding EBITDA for such fiscal quarter and for the Borrower fiscal quarters ending January 31, 1999 and April 30, 1999 and multiplying each sum times one and one-third and thereafter EBITDA shall be determined for the Borrower fiscal quarter in question and for the immediately preceding three Borrower fiscal quarters. "EFFECTIVE PRIME" means the Prime Rate plus one-half of one percent (.50%) per annum; provided, however, that if, at any time on or after the receipt by the Agent of (x) the quarterly financial statements for the Borrower's October 31, 1998 fiscal quarter together with pro forma adjustments reflecting the Related Transactions and the Loans and (y) the Borrower's quarterly financial statements for each subsequent Borrower fiscal quarter provided to the Agent by the Borrower pursuant to SECTION 5.3.3 hereof, the ratio of (a) total Indebtedness for Borrowed Money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of the most recently ended fiscal quarter of the Borrower to (b) EBITDA, is less than or equal to 1.5:1.0, and if and so long as no Event of Default or Default exists and is continuing, Effective Prime shall, subject to the last sentence of this definition, be the Prime Rate; provided, further, however, that if on any date the Borrower would be entitled to an Effective Prime other than the Prime Rate plus .50% except for the fact that a Default exists, the Effective Prime shall not change until the first to occur of (a) such Default becoming an Event of Default and (b) waiver or cure of such Default, at which time the Effective Prime shall be adjusted or remain the same in accordance with the provisions of this definition preceding this further proviso. Any change in Effective Prime required pursuant to the foregoing shall become effective on the fifth Business Day after the Agent receives the Borrower's financial statement for the Borrower's fiscal quarter or year-end, as the case may be, in question; provided, however, that each of the above-referenced interest rates shall remain in effect only so long as Borrower qualifies therefor and provided further, however, that interest rate reductions shall become final only on the basis of Borrower's annual audited financial statements and in the event that such annual audited financial statements establish that the Borrower was not entitled to a rate reduction which was previously granted, the Borrower shall, upon written demand by the Agent repay to the Agent for the account of each Lender an amount equal to the excess of interest at the rate which should have been charged based on such annual audited financial statements and the rate actually charged on the basis of Borrower's quarterly financial statement(s) (provided that in the event of a dispute as to the appropriate fiscal quarter as to which any adjustment should be allocated, the decision of the independent accountants of the Borrower shall be made in accordance with GAAP and shall be binding upon the Agent, the Lenders and the Borrower absent manifest error); and provided further, however, that in the event that Borrower fails to provide any financial statement on a timely basis in accordance with SECTION 5.3.3, any interest rate increase payable as a result thereof shall be retroactively effective to the date which is 5 Business Days after the date on which the financial statement in question should have been received by the Agent in accordance with SECTION 5.3.3, and the Borrower shall pay any amount due as a result thereof upon written demand from the Agent. The Agent shall send the Borrower written acknowledgment of each change in the Effective Prime in accordance with the Agent's 7 customary procedures as in effect from time to time, but the failure to send such acknowledgment shall have no effect on the effectiveness or applicability of the foregoing provisions of this definition or Borrower's obligations with respect to payment and calculation of interest on Prime Rate Loans. "ELIGIBLE RECEIVABLES" means accounts receivable of the Borrower evidencing Indebtedness of Persons to the Borrower for goods actually sold and delivered or services actually performed in the ordinary course of business by the Borrower to or for such Person, as to which goods or services no notice has been received by Borrower from such Person to the effect that such goods or services are not acceptable and which accounts receivable have been outstanding for less than ninety (90) days since their respective due dates (provided that such due dates shall in no event be more than 30 days after receipt by such Person of an invoice for such accounts receivable), but excluding, however, (i) accounts receivable owing by officers, directors, shareholders or employees of Borrower, (ii) accounts receivable with respect to which goods are placed on consignment, guaranteed sale, "bill and hold" or other terms by reason of which the payment by the account debtor may be conditional, (iii) accounts receivable owing by the United States or any agency, department or instrumentality thereof unless such accounts are freely assignable to the Agent under the United States Assignment of Claims Act and the Borrower has separately assigned each such account to the Agent in compliance with such Act, (iv) accounts receivable owing by any Subsidiary or Affiliate of Borrower, (v) accounts receivable with respect to which Borrower or any Subsidiary or Affiliate is liable to the account debtor for goods sold or services provided to Borrower or any Subsidiary or Affiliate by such account debtor to the extent of Borrower's or any Subsidiary's or Affiliate's liability to such account debtor, (vi) accounts receivable which are due and payable to the Borrower from an account debtor located outside the United States of America other than Foreign Receivables, (vii) any accounts receivable as to which the account debtor has claimed any setoff or dispute to the extent of the amount in dispute, (viii) any accounts receivable subject to any Lien other than pursuant to the Security Documents, and other than Permitted Encumbrances, (ix) any accounts receivable owing by any Person which is insolvent and/or the subject of any bankruptcy, receivership or other insolvency proceeding, (x) any accounts receivable deemed by the Agent in the Agent's sole discretion exercised in good faith uncollectible and (xi) any accounts receivable arising out of progress billings and/or bills for customer deposits. "EQUITY" means the Investments in Dollars by the New Stockholders in the Borrower, made on or prior to the date of this Agreement in the aggregate amount of not less than $25,000,000 as set forth in EXHIBIT 1.1. "EQUITY DOCUMENTS" means, collectively, all documents entered into by the Borrower, the Old Stockholders and/or any of the New Stockholders in connection with the investment of the Equity. "ERISA" means the Employee Retirement Income Security Act of 1974 as amended from time to time. "EVENTS OF DEFAULT" has the meaning assigned to that term in SECTION 6.1 of this Agreement. 8 "EXHIBIT" means, when followed by a letter, the exhibit attached to this Agreement bearing that letter and by such reference fully incorporated in this Agreement. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/16th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York, PROVIDED that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next succeeding Business Day as so published, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Agent on such day on such transactions as determined by the Agent in its discretion exercised in good faith. "FINANCING DOCUMENTS" means, collectively, this Agreement, each Note, the Security Documents, the Side Letter, the Post-Closing Letter, any agreement with any Lender providing any interest rate protection arrangement and each other agreement, instrument or document now or hereafter executed in connection herewith or therewith. "FOREIGN RECEIVABLES" means accounts receivable which are due and payable to the Borrower from an account debtor located outside the United States of America and which account debtor is approved in writing by the Agent and/or which accounts receivable are supported by a letter of credit issued by a financial institution acceptable to the Agent. "GAAP" means generally accepted accounting principles in effect from time to time in the United States of America. "HAZARDOUS MATERIAL" shall mean any substance or material defined or designated as a hazardous or toxic waste, hazardous or toxic material, hazardous or toxic substance, or other similar term, by any United States federal, state or local environmental statute, regulation or ordinance. "INDEBTEDNESS" means, without duplication for any Person, (i) all indebtedness or other obligations of said Person for Borrowed Money or for the deferred purchase price of property or services, including, without limitation, all reimbursement obligations of said Person with respect to standby and/or documentary letters of credit, (ii) all indebtedness or other obligations of any other Person ("Other Person") for Borrowed Money or for the deferred purchase price of property or services, the payment or collection of which said Person has guaranteed (except by reason of endorsement for deposit or collection in the ordinary course of business) or in respect of which said Person is liable, contingently or otherwise, including, without limitation, liable by way of agreement to purchase or lease, to provide funds for payment, to supply funds to purchase, sell or lease property or services primarily to assure a creditor of such Other Person against loss or otherwise to invest in or make a loan to the Other Person, or otherwise to assure a creditor of such Other Person against loss, (iii) all indebtedness or other obligations of any Person for Borrowed Money or for the deferred purchase price of property or services secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in any property owned by said Person, whether or not said Person has assumed or become liable for the payment of such indebtedness or obligations, 9 (iv) Capitalized Lease Obligations of said Person and (v) obligations of such Person under contracts pursuant to which such Person has agreed to purchase interest rate protection or swap interest rate obligations. In no event shall "Indebtedness" include (a) obligations in respect of leases property classified as operating leases in accordance with GAAP, (b) any obligations properly classified as trade payables in accordance with GAAP, or (c) any obligations of any Person that would not appear on such Person's balance sheet or would not be properly classified as contingent obligations in accordance with GAAP. "INTEREST ADJUSTMENT DATE" means (i) as to any Prime Rate Loan to be converted to a Libor Loan the Business Day elected by the Borrower in its applicable Interest Rate Election, but being not less than three (3) Business Days after the receipt by the Agent before 1:00 o'clock P.M. on a Business Day of an Interest Rate Election electing the Libor Rate as the interest rate on such Loan; and (ii) as to any Libor Loan, the last Business Day of the Interest Period pertaining to such Libor Loan. "INTEREST EXPENSE" means, with respect to any fiscal quarter, the aggregate amount required to be accrued by the Borrower and any Subsidiaries in such fiscal quarter for interest, fees, charges and expenses, however characterized, on its Indebtedness, including, without limitation, all such interest, fees, charges and expenses required to be accrued with respect to Indebtedness under the Financing Documents (excluding those fees and expenses incurred by the Borrower prior to the Closing Date (even if paid subsequent to the Closing Date) in connection with the negotiation and closing of the financing transactions contemplated by the Financing Documents, including the fees of counsel to the Agent and appraisal or audit fees all determined in accordance with GAAP. "INTEREST PERIOD" means: With respect to each Libor Loan: (i) initially, the period commencing on the date of such Libor Loan and ending one, three or six or such greater number of months thereafter as may be acceptable to all of the Lenders and as the Borrower may elect in the applicable Interest Rate Election and subject to SECTION 2.9; and (ii) thereafter, each period commencing on the last day of the immediately preceding Interest Period applicable to such Libor Loan and ending one, three or six or such greater number of months thereafter as may be acceptable to the Majority Lenders and as the Borrower may elect in the applicable Interest Rate Election and subject to SECTION 2.9; PROVIDED THAT clauses (i) and (ii) of this definition are subject to the following: (A) any Interest Period (other than an Interest Period determined pursuant to clause (C) below) which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; 10 (B) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (C) below, end on the last Business Day of a calendar month; and (C) for the Term Loan, no Interest Period shall end after the Term Loan Repayment Date and for the Revolving Credit Loan, no Interest Period shall end after the Revolving Credit Repayment Date; and (D) with respect to all Libor Loans, no more than six (6) Interest Periods may be in effect at any time. "INTEREST RATE ELECTION" means the Borrower's irrevocable telecopied or telephonic notice of election, which shall be promptly confirmed by a written notice of election that Effective Prime or the Libor Rate shall apply to all or any portion of the Loans, which shall, subject to this Agreement, be effective on the next Interest Adjustment Date, such telecopied or telephonic notice and written confirmation thereof to be in the form of EXHIBIT 1.4 and to be received by the Agent prior to 1:00 o'clock P.M. on a Business Day and at least three (3) Business Days prior to an Interest Adjustment Date in the case of a Libor Loan, and by 1:00 o'clock P.M. on an Interest Adjustment Date in the case of a Prime Rate Loan (or four (4) Business Days in the case of an Interest Rate Election as to which the consent of the Lenders is required), each such Interest Rate Election, subject to the terms of this Agreement to apply to the Advance or the Loan referred to in such Interest Rate Election or to effect a change in the interest rate on the applicable portion of the Loans then outstanding, as applicable, with respect to which such Interest Rate Election was made, such change to occur on the Interest Adjustment Date next succeeding receipt of such Interest Rate Election by the Agent. Any Interest Rate Election received by the Agent after 1:00 o'clock P.M. on a Business Day shall be deemed, for all purposes of this Agreement to have been received prior to 1:00 o'clock P.M. on the next succeeding Business Day. "INVESTMENT" means any investment in any Person whether by means of a purchase of capital stock, notes, bonds, debentures or other evidences of Indebtedness and/or by means of a capital or partnership contribution, loan, deposit, advance or other means, excluding amounts due from customers for services or products delivered or sold in the ordinary course of business. "LENDER" means Fleet, or any financial institution which hereafter becomes a party hereto pursuant to the terms of SECTION 9.11, each in their individual capacity, and "Lenders" means Fleet, and each of such financial institutions. "LETTER OF CREDIT" means an irrevocable stand-by or commercial letter of credit issued by the Agent for the account of the Borrower pursuant to a Letter of Credit Agreement subject to and in accordance with this Agreement. "LETTER OF CREDIT AGREEMENT" means an application and agreement for stand-by or commercial letter of credit in such form as may at any time be customarily required by the Agent for its issuance of stand-by or commercial letters of credit. "LIBOR LOAN" means any portion of any Loan bearing interest at the Libor Rate. 11 "LIBOR RATE" means, for any Interest Period, the Adjusted Libor Rate in effect on the first day of such Interest Period (subject to adjustment as provided in the definition of Adjusted Libor Rate) plus the Applicable Margin for Libor Loans from time to time in effect. "LIEN" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other) or other security agreement or similar arrangement of any kind or nature whatsoever (including without limitation any conditional sale or other title retention agreement and any Capitalized Lease Obligation) having substantially the same economic effect as any of the foregoing. "LOANS" and "LOAN" means at any time the outstanding principal amount of Indebtedness owed to the Lenders or to any lender, as the context may require pursuant to this Agreement. "MAJORITY LENDERS" means Lenders holding an aggregate Pro Rata Share of the outstanding principal balance of the Loans in an amount equal to or in excess of 66.67% of the total outstanding principal balance of the Loans and if there is no outstanding principal balance of the Loans, Lenders having at least 66.67% of the Commitment. "MATERIAL ADVERSE EFFECT" means material adverse effect on (i) the ability of the Borrower and any Subsidiaries taken as a whole to fulfill their obligations under any of the Financing Documents or (ii) the Business Condition of the Borrower and any Subsidiaries taken as a whole. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NET INCOME" means, for any fiscal period, the net after tax income (loss) of the Borrower and any Subsidiaries for such period determined on an accrual and consolidated basis in accordance with GAAP. "NET OUTSTANDING AMOUNT OF ELIGIBLE RECEIVABLES" means the net amount of Eligible Receivables outstanding after eliminating from the aggregate amount of outstanding Eligible Receivables all payments, adjustments and credits applicable thereto. "NET OUTSTANDING AMOUNT OF FOREIGN RECEIVABLES" means the net amount of Foreign Receivables outstanding after eliminating from the aggregate amount of outstanding Foreign Receivables all payments, adjustments and credits applicable thereto. "NEW STOCKHOLDERS" means the TA and Summit Investors, Frank Levinson, Jerry S. Rawls and the other Persons who exercise their options in common stock of the Borrower concurrently with the closing of the Related Transactions and their Affiliates. "NOTE" means any promissory note of the Borrower payable to the order of a Lender and substantially in the form of EXHIBIT 1.5 or EXHIBIT 1.6 and evidencing all or a portion of the Loan and "Notes" means all of the Notes, collectively. "OBLIGATIONS" mean any and all Indebtedness, obligations and liabilities of Borrower and/or any Subsidiaries under any of the Financing Documents to any one or more of the 12 Lenders and/or the Agent of every kind and description, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising, including, without limitation, all Loans, interest, taxes, fees, charges, and expenses under the Financing Documents and attorneys' fees chargeable to the Borrower and/or any Subsidiaries or incurred by any of the Lenders (subject to the terms hereof) and/or the Agent under any of the Financing Documents. "OFFICER'S CERTIFICATE" means a certificate signed by an Authorized Representative and delivered to the Agent on behalf of the Lenders. "OLD STOCKHOLDERS" means Frank Levinson, Jerry S. Rawls and those Persons who held options for common stock of the Borrower prior to Closing of the Related Transactions and their Affiliates. "OTHER TAXES" has the meaning assigned to such terms in SECTION 2.5.3.2(b). "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to subtitle A of Title IV of ERISA. "P.M." means a time from and including 12 o'clock noon on any Business Day to the end of such Business Day using Eastern Standard (Daylight Savings) time. "PERMITTED ENCUMBRANCES" means each Lien granted pursuant to any of the Security Documents, those Liens, security interests and defects in title permitted under SECTION 5.2.1 and those Liens listed on EXHIBIT 1.8 hereto. "PERSON" means an individual, corporation, partnership, limited liability company, joint venture, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. "PLAN" means an employee benefit plan as defined in Section 3(3) of ERISA maintained for employees of the Borrower or any Commonly Controlled Entity. "POST-CLOSING LETTER" means that certain letter agreement between the Borrower and the Agent dated the Closing Date and listing certain post-closing actions to be completed by the Borrower. "PREMISES" has the meaning assigned to such term in SECTION 4.1.21.1. "PRIME RATE" means the higher of (i) the floating rate of interest per annum designated from time to time by the Agent as being its "prime rate" of interest, such interest rate to be adjusted on the effective date of any change thereof by the Agent, it being understood that such rate of interest may not be the lowest rate of interest from time to time charged by the Agent and (ii) the Federal Funds Rate plus one-half percent (.50%), such interest rate to be adjusted on the effective date of any change thereof. "PRIME RATE LOAN(S)" means any portion of the Loans bearing interest at Effective Prime. 13 "PROJECTIONS" means the Borrower's written projections of Borrower's future performance for the period ending on the Revolving Credit Repayment Date on a consolidated basis delivered to the Agent prior to the Closing and attached to this Agreement as EXHIBIT 1.12. "PRO RATA SHARE" means (i) with respect to the Commitment, each Lender's percentage share of the Commitment as set forth immediately opposite such Lender's name on EXHIBIT 1.9, and (ii) with respect to the Loans, each Lender's percentage share of the aggregate outstanding principal balance of the Loans and "Pro Rata Shares" means such percentage shares of the Lenders. "QUALIFIED INITIAL PUBLIC OFFERING" means the Borrower and/or any Subsidiary filing a Form S-1 or any other form of registration statement then available for registration with the Securities and Exchange Commission or otherwise conducting an initial public offering of any class of the Borrower's or any Subsidiary's securities, which such offering generates $20,000,000 or more in net proceeds for the account of the Borrower or a Subsidiary, as the case may be. "REFERENCE LENDER(S)" means the Agent unless the Agent resigns said responsibility, at which time and thereafter such term means one or two Lenders selected in good faith by the Agent in its discretion from time to time (and not with a view to maximizing rate quotes) as a reference lender for purposes of determining the Adjusted Libor Rate. "RELATED TRANSACTIONS" means the Borrower's receipt of the Equity, the Borrower's repurchase of certain capital stock from certain of the Old Stockholders on or prior to the Closing Date and the Borrower's issuance of capital stock to the New Stockholders, the completion (unless waived) of the conditions precedent to the Borrower's receipt of the Equity as set forth in the Related Transaction Documents, the repayment of certain outstanding Indebtedness for Borrowed Money of the Borrower, the repurchase by the Borrower on or after the Closing Date for up to an aggregate of $1,000,000 of capital stock of the Borrower from its employee stockholders in accordance with the Related Transaction Documents and any other transactions described in the Related Transaction Documents. "RELATED TRANSACTION DOCUMENTS" means the documents listed on EXHIBIT 1.2. "REPORTABLE EVENT" shall have the meaning assigned to that term in Section 4043 of ERISA for which the requirement of 30 days' notice to the PBGC has not been waived by the PBGC. "REQUEST" means a written request for the Loans in the form of EXHIBIT 1.10, received by the Agent on behalf of the Lenders from the Borrower in accordance with this Agreement, specifying the date on which the Borrower desires such Loans and the disbursement instructions of the Borrower with respect thereto. "REVOLVING CREDIT LOAN" means the revolving credit loans to be made by the Lenders to the Borrower from time to time in the maximum outstanding principal amount of the Revolving Credit Loan Commitment, all subject and pursuant to SECTION 2.1.0. 14 "REVOLVING CREDIT LOAN COMMITMENT" means the Lenders' several commitments to make Revolving Credit Loans to the Borrower in accordance with SECTION 2.1.0 and this Agreement and in the maximum outstanding amount of each Lender's Pro Rata Share of $6,500,000, as such amount may be reduced pursuant to SECTION 2.6.4. "REVOLVING CREDIT LOAN FORMULA AMOUNT" an amount equal to the sum of (i) eighty percent (80%) of the Net Outstanding Amount of Eligible Receivables, PLUS (ii) fifty percent (50%) of the Net Outstanding Amount of Foreign Receivables, PLUS (iii) one hundred percent (100%) of the Net Outstanding Amount of Eligible Receivables supported by a letter of credit from a financial institution reasonably acceptable to the Agent (without in each case any duplication such as including amounts in more than one of (i), (ii) or (iii) above). "REVOLVING CREDIT NOTE" means each revolving credit note of the Borrower, payable to the order of a Lender in the form of EXHIBIT 1.5 hereto evidencing the Indebtedness of the Borrower to such Lender with respect to the Revolving Credit Loan. "REVOLVING CREDIT REPAYMENT DATE" means the earlier to occur of (i) October 31, 2003 and (ii) such earlier date on which the Revolving Credit Loan becomes due and payable pursuant to the terms hereof "SECTION" means, when followed by a number, the section or subsection of this Agreement bearing that number. "SECURITY DOCUMENTS" means any and all documents, instruments and agreements now or hereafter providing security for the Loans and any other Indebtedness of the Borrower or any Subsidiary to any of the Lenders and/or the Agent, including without limitation the following documents, instruments and agreements between the Agent and the Borrower or any Subsidiary; any deeds of trust or mortgages on real property interests (fee, leasehold and easement) of the Borrower and any Subsidiary granting Liens thereon; landlord lien waivers and consents as may be reasonably requested by the Agent; security agreements granting first Liens (subject to Permitted Encumbrances, as applicable) on all Borrower's and any Subsidiary's fixtures and tangible and intangible personal property including without limitation patents, trademarks, copyrights, service marks and applications therefor and notices thereof; collateral assignments of Borrower's and any Subsidiary's contracts, licenses, permits, easements and leases; collateral assignments of life insurance; any guaranty by a Subsidiary; any pledge of the capital stock of any Subsidiary; casualty and liability insurance policies providing coverage to the Agent for the benefit of the Lenders, UCC-1 financing statements or similar filings perfecting the above-referenced security interests, pledges and assignments, all as executed, delivered to and accepted by the Agent on or prior to the Closing Date or subsequent to the Closing Date as may be required by this Agreement, as any of the foregoing may be amended in writing by the Agent and Borrower and any other party or parties thereto. "SELLING LENDER" shall have the meaning assigned to such term in SECTION 9.11.1. "SIDE LETTER" means that certain side letter of even date with this Agreement between the Borrower and the Agent regarding certain fees payable by the Borrower as same may hereafter be amended or supplemented. 15 "SINGLE EMPLOYER PLAN" means any Plan as defined in Section 4001(a)(15) of ERISA. "STOCKHOLDERS" means, collectively, the Old Stockholders and the New Stockholders. "SUBSIDIARY" means any corporation or entity other than the Borrower of which more than 50% of the outstanding capital stock or voting interests or rights having ordinary voting power to elect a majority of the board of directors or other managers of such entity (irrespective of whether or not at the time capital stock or voting interests or rights of any other class or classes of such Person shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by the Borrower or by the Borrower and/or one or more Subsidiaries or the management of which corporation or entity is under control of the Borrower and/or any other Subsidiary, directly or indirectly through one or more Persons and any other Person which, under GAAP, should at any time for financial reporting purposes be consolidated or combined with the Borrower and/or any other Subsidiary. "SUBSTITUTED LENDER" has the meaning set forth in SECTION 9.11 hereof. "SUBSTITUTION AGREEMENT" has the meaning assigned to such term in SECTION 9.11.1. "TA AND SUMMIT INVESTORS" means any venture capital or other fund or entity for which TA Associates, Inc., a Delaware corporation, or Summit Partners LLC and/or one or more general partners of TA Associates, Inc. or Summit Partners LLC directly or indirectly through one or more intermediaries serves as general partner, manager or in a like capacity. "TAXES" has the meaning set forth in SECTION 2.5.3.2(a) hereof. "TERM LOAN" means the term loan in the aggregate principal amount of $11,015,000 to be made or maintained by the Lenders pursuant to SECTION 2.1.1 hereof. "TERM NOTE" means a term note of the Borrower payable to the order of a Lender in the form of Exhibit 1.6 hereto evidencing the Indebtedness of the Borrower to such Lender with respect to the Term Loan. "TERM LOAN REPAYMENT DATE" means the earlier to occur of (i) October 31, 2003 and (ii) such earlier date on which the Term Loan becomes due and payable pursuant to the terms hereof. "TOTAL DEBT SERVICE" means, at any date of determination, the sum of (i) Interest Expense for the Borrower fiscal quarter in question and for the immediately preceding three Borrower fiscal quarters and (ii) scheduled and mandatory principal payments on Borrower's Indebtedness for Borrowed Money for the Borrower fiscal quarter in question and the immediately succeeding three Borrower fiscal quarters or, if greater, the total amount of Borrower's Indebtedness for Borrowed Money divided by four (4), but excluding any mandatory payments of principal required pursuant to SECTIONS 2.6.1.3 and 2.6.1.4. "UNUSED FEES" has the meaning assigned to such term in SECTION 2.2.2. 16 Section 1.2. ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP, calculations of amounts for the purposes of calculating any financial covenants or ratios hereunder shall be made in accordance with GAAP applied on a basis consistent with those used in the Borrower's financial statements referred to in SECTION 4.1.5 (other than departures therefrom not material in their impact), and all financial data submitted pursuant to this Agreement shall be prepared in accordance with GAAP (except, in the case of unaudited financial statements, the absence of footnotes and that such statements are subject to changes resulting from year-end adjustments made in accordance with GAAP), unless otherwise agreed to by the Agent. Section 1.3. OTHER TERMS. References to "Articles", "Sections", "subsections" and "Exhibits" shall be to Sections, subsections and Exhibits of this Agreement unless otherwise specifically provided. In this Agreement, "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific section, paragraph or clause in which the respective word appears; words importing any gender include the other genders; references to "writing" include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to agreements and other contractual instruments shall be deemed to include subsequent amendments, assignments, and other modifications thereto, but only to the extent such amendments, assignments and other modifications are not prohibited by the terms of this Agreement or any other Financing Document; references to Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. ARTICLE 2. AMOUNT AND TERMS OF THE LOANS Section 2.1. THE LOANS. Section 2.1.0. THE REVOLVING CREDIT LOANS. Each of the Lenders severally agrees, subject to the terms and conditions of this Agreement including without limitation Borrower's compliance with SECTION 3.1.1.20, to make Advances of Revolving Credit Loans to the Borrower in a minimum aggregate amount of Advances from the Lenders pursuant to any Request of $100,000 and an integral multiple of $50,000 thereafter from time to time after receipt by the Agent from time to time before the Revolving Credit Repayment Date of, and at the times provided for in, a Request and an Interest Rate Election from the Borrower in accordance with this Agreement, during the period commencing on the Closing Date and ending on the Business Day immediately preceding the Revolving Credit Repayment Date, in an aggregate principal amount at any one time outstanding not to exceed the lesser of (i) such Lender's Pro Rata Share of the Revolving Credit Loan Formula Amount and (ii) such Lender's Pro Rata Share of the Revolving Credit Loan Commitment less, in each case, such Lender's Pro Rata Share of the aggregate amount of the outstanding stated amount of any Letter of Credit or Letter of Credit Agreement, and any unreimbursed amounts thereunder. 17 Promptly after receipt of a Request and Interest Rate Election, Agent shall notify each Lender by telephone, telex or telecopy of the proposed borrowing. Subject to the immediately preceding paragraph, each Lender agrees that after its receipt of notification from Agent of Agent's receipt of a Request and Interest Rate Election, such Lender shall send its Pro Rata Share (or such portion thereof as may be necessary to provide Agent with such Pro Rata Share in Dollars and in immediately available funds, without consideration or use of any contra accounts of any Lender) of the requested Loan by wire transfer to Agent so that Agent receives such Pro Rata Share in Dollars and in immediately available funds not later than 12:00 P.M. (Boston, Massachusetts time) on the first day of the Interest Period for any such requested Libor Loan and on the Business Day for such Advance set forth in Borrower's Request for any such requested Prime Rate Loan, and Agent shall advance funds to the Borrower by depositing such funds in Borrower's account with the Agent upon Agent's receipt of such Pro Rata Shares in the amount of the Pro Rata Shares of such Loan in Agent's possession. Unless Agent shall have been notified by any Lender (which notice may be telephonic if confirmed promptly in writing) prior to the first day of the Interest Period in respect of any Loan which such Lender is obligated to make under this Agreement, that such Lender does not intend to make available to Agent such Lender's Pro Rata Share of such Loan on such date, Agent may assume that such Lender has made such amount available to Agent on such date and Agent in its sole discretion may, but shall not be obligated to, make available to the Borrower a corresponding amount on such date. If such corresponding amount is not in fact made available to Agent by such Lender, Agent shall be entitled to recover such corresponding amount from such Lender promptly upon demand by Agent together with interest thereon, for each day from such date until the date such amount is paid to Agent, at the Federal Funds Rate for three (3) Business Days and thereafter at the interest rate on the Loan in question. If such Lender does not pay such corresponding amount forthwith upon Agent's demand therefor, Agent shall promptly notify the Borrower and the Borrower shall promptly pay such corresponding amount to Agent. Nothing contained in this Section shall be deemed to relieve any Lender from its obligation to fulfill its obligations hereunder or to prejudice any rights which the Borrower may have against any Lender as a result of any default by such Lender hereunder. Throughout the term of the Revolving Credit Loans, the Revolving Credit Loan Commitment and principal amount of the Revolving Credit Loans may, at the Borrower's option, be made available to the Borrower prior to the Revolving Credit Repayment Date by issuance of Letters of Credit having an expiration date prior to the earlier to occur of (a) the first anniversary date of the date of issuance of any such Letter of Credit or (b) three (3) Business Days prior to the Revolving Credit Repayment Date, reasonably promptly after submission by the Borrower to the Agent of a Letter of Credit Agreement, duly completed and executed by the Borrower and otherwise in form and substance satisfactory to the Agent. The Borrower shall pay upon demand by the Agent such fees and costs as the Agent and/or the Lenders may from time to time establish for issuance, transfer, amendment and negotiation of each Letter of Credit. In the event that the Borrower shall fail to reimburse the Agent under any Letter of Credit or Letter of Credit Agreement, and any outstanding Indebtedness of the Borrower relating thereto, the Agent shall promptly notify each Lender of the unreimbursed amount together with accrued interest thereon, and each Lender agrees to purchase, and it shall be deemed to have purchased, a participation in such Letter of Credit or Letter of Credit Agreement and such indebtedness in an amount equal to its Pro Rata Share of the unpaid amount together with unpaid interest thereon. Upon one (1) Business Day's notice from the Agent, each Lender shall deliver to the Agent an amount equal to 18 its respective participation in same day funds, at the place and on the date and by the time notified by the Agent. The obligation of each Lender to deliver to the Agent an amount equal to its respective participation pursuant to the foregoing sentence shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or the failure to satisfy any condition set forth in Article III of this Agreement. As soon as is practicable following the close of each month after the Closing Date and in any event within fifteen (15) days thereafter, the Borrower will submit to the Agent a borrowing base certificate in the form of EXHIBIT 2.1.0 or on such other form as the Agent may from time to time prescribe, which certificate shall contain information reasonably adequate to identify accounts receivable which the Borrower wishes to include in Eligible Receivables and/or Foreign Receivables. During the continuance of a Default or Event of Default, the Borrower shall also, if the Agent so requests, accompany such information with assignments of accounts in form and substance satisfactory to the Agent which assignments shall give the Agent full power to collect, compromise or otherwise deal with the assigned accounts as the sole owner thereof (provided that prior to an Event of Default, the Agent agrees to take no action with respect to the foregoing assignments). Concurrently with each of such reports, and immediately if material in amount, the Borrower shall notify the Agent of each return or adjustment, rejection, repossession or loss, theft or damage of or to merchandise represented by Eligible Receivables and/or Foreign Receivables or any other collateral for any Indebtedness of the Borrower to the Agent and of any credit, adjustment or dispute arising in connection with the goods or services represented by Eligible Receivables and/or Foreign Receivables. All payments on Eligible Receivables and/or Foreign Receivables and all adjustments and credits with respect thereto, whether unilateral, negotiated or otherwise, shall be immediately reflected in the Net Outstanding Amount of Eligible Receivables and/or the Net Outstanding Amount of Foreign Receivables. Section 2.1.1. TERM LOANS. Each of the Lenders severally agrees, subject to the terms and conditions of this Agreement, to make a Term Loan to the Borrower in the amount of its respective Pro Rata Share of $10,800,000. Borrower shall pay on the last day of each calendar quarter ending on or in between the dates set forth below the amount of the Term Loans set forth immediately opposite such dates below:
Quarterly Payments ------------------ Repayment Dates Amount --------------- ------ April 30, 2001 $ 275,375 July 31, 2001 $ 275,375 October 31, 2001 $ 275,375 January 31, 2002 $ 275,375 April 30, 2002 $ 826,125 July 31, 2002 $ 826,125 October 31, 2002 $ 826,125 January 31, 2003 $ 826,125 April 30, 2003 $1,652,250 July 31, 2003 $1,652,250 October 31, 2003 $1,652,250 19 Term Loan greater of $1,652,250 and Repayment Date entire outstanding principal amount of the Term Loan
Section 2.2. INTEREST AND FEES ON THE LOANS. Section 2.2.1. INTEREST. Interest shall accrue and be paid currently on the Loans at Effective Prime or the Libor Rate for each of the Loans' Interest Periods in accordance with the Borrower's Interest Rate Elections for the Loans subject to and in accordance with the terms and conditions of this Agreement and the Note(s); provided that if a Default or an Event of Default exists and is continuing, no Interest Rate Election electing the Libor Rate shall be effective and any Loan or portion thereof with respect to which any such Interest Rate Election would otherwise have beer! effective shall bear interest at Effective Prime or the Libor Rate, as applicable plus, so long as an Event of Default exists and is continuing, two percent (2.00%); all of the foregoing being applicable until such Default or Event of Default is cured or waived and an Interest Rate Election electing the Libor Rate for such Loan or portion thereof which is effective in accordance with this Agreement is submitted to the Agent; and provided further that the Borrower shall submit Interest Rate Elections so that on any date on which under SECTION 2.1.1 a regularly scheduled payment of principal of the Term Loans is to be made, at least the amount of the Term Loans to be so repaid is bearing interest at Effective Prime and/or such payment date is an Interest Adjustment Date for outstanding Libor Loans in such amount of the Term Loans. Upon the occurrence and during the continuance of any Event of Default, each Prime Rate Loan shall bear interest, payable on demand, at a floating interest rate per annum equal to two percent (2.0%) above Effective Prime and each Libor Loan shall bear interest at the Libor Rate plus two percent(2.0%) per annum. The Borrower shall pay such interest to the Agent for the pro rata account of each Lender in arrears on the Loans (including without limitation Libor Loans) outstanding from time to time after the Closing Date, such payments to be made, with respect to Libor Loans with Interest Periods of three months or less on each Interest Adjustment Date for such Loans, and with respect to Libor Loans with Interest Periods of more than three months and with respect to Prime Rate Loans, quarterly on the last Business Day of each calendar quarter of each year commencing December 31, 1998. In the event no Interest Rate Election has been made by the Borrower with respect to any Loan or Advance (or an Interest Rate Election shall have expired without an effective substitute Interest Rate Election), Effective Prime shall be the rate applicable to such Loan or Advance. All provisions of each Note and any other agreements between the Borrower and the Lenders are expressly subject to the condition that in no event, whether by reason of acceleration of maturity of the Indebtedness evidenced by any Note or otherwise, shall the amount paid or agreed to be paid to the Lenders which is deemed interest under applicable law exceed the maximum permitted rate of interest under applicable law (the "Maximum Permitted Rate"), which shall mean the law in effect on the date of this Agreement, except that if there is a change in such law which results in a higher Maximum Permitted Rate, then each Note shall be governed by such amended law from and after its effective date. In the event that fulfillment of any provision of any Note, or this Agreement or any document, instrument or agreement providing security for any Note results in the rate of interest charged under any Note being in excess of the Maximum Permitted Rate, the obligation to be fulfilled shall automatically be reduced to eliminate such excess. If, notwithstanding the foregoing, any Lender receives an amount which under applicable law 20 would cause the interest rate under any Note to exceed the Maximum Permitted Rate, the portion thereof which would be excessive shall automatically be deemed a prepayment of and be applied to the unpaid principal balance of such Note to the extent of then outstanding Prime Rate Loans and not a payment of interest and to the extent said excessive portion exceeds the outstanding principal amount of Prime Rate Loans, said excessive portion shall be repaid to the Borrower. Section 2.2.2. FEES. On the last Business Day of each April, July, October and January commencing January 31, 1999 and continuing through the Revolving Credit Repayment Date, the Borrower shall pay to the Agent for the pro rata account of each Lender, a fee in an amount equal to .625% per annum of the amount, if any, by which the average actual daily (on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed) amount of the Revolving Credit Loan Commitment for the quarterly period just ended (or in the case of the first such payment, the period from the Closing Date to the date such payment is due) exceeds the sum of (x) the average of the actual daily outstanding principal balances of the Revolving Credit Loans PLUS (y) the average of the actual daily aggregate amount of the outstanding stated amount of any Letters of Credit or Letter of Credit Agreements, and any unreimbursed amounts thereunder; provided, however, that if at any time after the receipt by the Agent of (x) the quarterly financial statements for the Borrower's October 31, 1998 fiscal quarter together with pro forma adjustments reflecting the Related Transactions and the Loans and (y) the Borrower's quarterly financial statements for each subsequent Borrower fiscal quarter provided to the Agent by the Borrower pursuant to SECTION 5.3.3 hereof, the ratio of (a) total Indebtedness for Borrowed Money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of the most recently ended fiscal quarter of the Borrower to (b) EBITDA, (i) is less than or equal to 1.5:1.0 and greater than .5:1.0 and if and so long as no Event of Default or Default exists and is continuing, the Borrower shall pay to the Agent for the pro rata account of each Lender a fee in an amount equal to .50% per annum of the amount, if any, by which the average actual daily (on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed) amount of the Revolving Credit Loan Commitment for the quarterly period just ended (or in the case of the first such payment, the period from the Closing Date to the date such payment is due) exceeds the sum of (x) the average of the actual daily outstanding principal balances of the Revolving Credit Loans PLUS (y) the average of the actual daily aggregate amount of the outstanding stated amount of any Letters of Credit or Letter of Credit Agreements, and any unreimbursed amounts thereunder; or (ii) is less than or equal to .5:1.0 and if and so long as no Event of Default or Default exists and is continuing, the Borrower shall pay to the Agent for the pro rata account of each Lender a fee in an amount equal to .375% per annum of the amount, if any, by which the average actual daily (on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed) amount of the Revolving Credit Loan Commitment for tile quarterly period just ended (or in the case of the first such payment, the period from the Closing Date to the date such payment is due) exceeds the sum of (x) the average of the actual daily outstanding principal balances of the Revolving Credit Loans PLUS (y) the average of the actual daily aggregate amount of the outstanding stated amount of any Letters of Credit or Letter of Credit Agreements, and any unreimbursed amounts thereunder (the "Unused Fees"). In addition, the Borrower shall pay to the Agent for its own account certain fees as specified in the Side Letter. Section 2.2.3. INCREASED COSTS - CAPITAL. If, after the date hereof, any Lender shall have reasonably determined in good faith that the adoption after the date hereof of any applicable 21 law, governmental rule, regulation or order regarding capital adequacy of banks or bank holding companies, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender or such Lender's holding company with any policy, guideline, directive or request regarding capital adequacy (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or such Lender's holding company as a consequence of the obligations hereunder of such Lender to a level below that which such Lender could have achieved but for such adoption, change or compliance (taking into consideration the policies of such Lender or such Lender's holding company with respect to capital adequacy immediately before such adoption, change or compliance and assuming that the capital of such Lender or such Lender's holding company was fully utilized prior to such adoption, change or compliance) by an amount reasonably deemed in good faith by such Lender to be material, then such Lender shall notify the Agent and the Borrower thereof and the Borrower shall pay to the Agent for the account of such Lender from time to time as specified by such Lender such additional amounts as shall be sufficient to compensate such Lender for such reduced return, each such payment to be made by the Borrower within five (5) Business Days after each demand by such Lender; provided that the liability of the Borrower to pay such costs shall only accrue with respect to costs accruing from and after the 180th day prior to the date of each such demand. A certificate in reasonable detail of one of the officers of such Lender describing the event giving rise to such reduction and setting forth the amount to be paid to such Lender hereunder and a computation of such amount shall accompany any such demand and shall, in the absence of manifest error, be conclusive. In determining such amount, such Lender shall act reasonably in good faith and will use any reasonable averaging and attribution methods. If the Borrower shall, as a result of the requirements of this SECTION 2.2.3, above, be required to pay any Lender the additional costs referred to above and the Borrower, in its sole discretion, shall deem such additional amounts to be material, the Borrower shall have the right to substitute another bank reasonably satisfactory to the Agent for such Lender which has certified the additional costs to the Borrower, and the Agent shall use reasonable efforts at no cost to the Agent to assist the Borrower to locate such substitute bank. Any such substitution shall take place in accordance with SECTION 9.11 and shall otherwise be on terms and conditions reasonably satisfactory to the Agent, and until such time as such substitution shall be consummated, the Borrower shall continue to pay such additional costs. Upon any such substitution, the Borrower shall pay or cause to be paid to the Lender that is being replaced, all principal, interest (to the date of such substitution) and other amounts owing hereunder to such Lender and such Lender will be released from liability hereunder. Section 2.3. NOTATIONS. At the time of (i) the making of each Advance evidenced by any Note, (ii) each change in the interest rate under any Note effected as a result of an Interest Rate Election, and (iii) each payment or prepayment of any Note, each Lender may enter upon its records an appropriate notation evidencing (a) such Lender's Pro Rata Share of the Loans and (b) the interest rate and Interest Adjustment Date applicable thereto or (c) such payment or prepayment (voluntary or involuntary) of principal and (d) in the case of payments or prepayments (voluntary or involuntary) of principal, the portion of the applicable Loan which was paid or prepaid. No failure to make any such notation shall affect the Borrower's unconditional obligations to repay the Loans and all interest, fees and other sums due in 22 connection with this Agreement and/or any Note in full, nor shall any such failure, standing alone, constitute grounds for disproving a payment of principal by the Borrower. However, in the absence of manifest error, such notations and each Lender's records containing such notations shall constitute presumptive evidence of the facts stated therein, including, without limitation, the outstanding amount of such Lender's Pro Rata Share of the Loans and all amounts due and owing to such Lender at any time. Any such notations and such Lender's records containing such notations may be introduced in evidence in any judicial or administrative proceeding relating to this Agreement, the Loans or any Note. Section 2.4. COMPUTATION OF INTEREST. Interest due under this Agreement and any Note shall be computed on the basis of a year of 360 days for the actual number of days elapsed for Libor Loans and on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed for Prime Rate Loans. Section 2.5. TIME OF PAYMENTS AND PREPAYMENTS IN IMMEDIATELY AVAILABLE FUNDS. Section 2.5.1. TIME. All payments and prepayments of principal, fees, interest and any other amounts owed from time to time under this Agreement and/or under each Note shall be made to the Agent for the pro rata account of each Lender at the address referred to in SECTION 9.6 in Dollars and in immediately available funds prior to 1:00 o'clock P.M. on the Business Day that such payment is due, provided that the Borrower hereby authorizes and instructs the Agent to charge against the Borrower's accounts with the Agent on each date on which a payment is due hereunder and/or under any Note and on any subsequent date if and to the extent any such payment is not made when due an amount up to the principal, interest and fees due and payable to the Lenders, the Agent or any Lender hereunder and/or under any Note and such charge shall be deemed payment hereunder and under the Note(s) in question to the extent that immediately available funds are then in such accounts. The Agent shall use reasonable efforts in accordance with the Agent's customary procedures to give subsequent notice of any such charge to the Borrower, but the failure to give such notice shall not affect the validity of any such charge. To the extent that immediately available funds are then in such accounts, the failure of the Agent to charge any such account or the failure of the Agent to charge any such account prior to 1:00 o'clock P.M. shall not be basis for an Event of Default under SECTION 6.1.1 and any amount due on the Loans on such date shall be deemed paid; provided that the Agent shall have the right to charge any such account on any subsequent date for such unpaid payment and an Event of Default shall exist if sufficient immediately available funds are not in such accounts on the date the Agent so charges such account after the expiration of any applicable notice or cure period. In the event of any charge against the Borrower's accounts by the Agent pursuant to the immediately preceding sentence, the Agent shall use reasonable efforts to provide notice to the Borrower of such charge in accordance with the Agent's customary procedures, but the failure to provide such notice shall not in any way be a basis for any liability of the Agent nor shall such failure adversely affect the validity and effectiveness of any such action by the Agent. Any such payment or prepayment which is received by the Agent in Dollars and in immediately available funds after 1 o'clock P.M. on a Business Day shall be deemed received for all purposes of this Agreement on the next succeeding Business Day unless the failure by Agent to receive such funds prior to 1 o'clock P.M. is due to Agent's failure to charge the account of Borrower prior to 1 o'clock P.M., except that solely for the purpose of determining whether a Default or Event of Default has occurred 23 under SECTION 6.1.1, any such payment or prepayment, if received by the Agent prior to the close of the Agent's business on a Business Day, shall be deemed received on such Business Day. All payments of principal, interest, fees and any other amounts which are owing to any or all of the Lenders or the Agent hereunder and/or under any of the Notes that are received by the Agent in immediately available Dollars prior to 1:00 o'clock P.M. on any Business Day shall, to the extent owing to the Lenders other than the Agent, be sent by wire transfer by the Agent to any such other Lenders (in each case, without deduction for any claim, defense or offset of any type) before 3:00 o'clock P.M. on the same Business Day. Each such wire transfer shall be addressed to each Lender in accordance with the wire instructions set forth in EXHIBIT 1.9 hereto. The amount of each payment wired by the Agent to each such Lender shall be such amount as shall be necessary to provide such Lender with its Pro Rata Share of such payment (without consideration or use of any contra accounts of any Lender), or with such other amount as may be owing to such Lender in accordance with this Agreement (in each case, without deduction for any claim, defense or offset of any type). Each such wire transfer shall be sent by the Agent only after the Agent has received immediately available Dollars from or on behalf of the Borrower and each such wire transfer shall provide each Lender receiving same with immediately available Dollars on receipt by such Lender. Any such payments of immediately available Dollars received by the Agent after 1:00 o'clock P.M. and before 3:00 o'clock P.M. on any Business Day shall be forwarded in the same manner by the Agent to such Lender(s) as soon as practicable on said Business Day, and if any such payments of immediately available Dollars are received by the Agent after 3:00 o'clock P.M. on a Business Day, the Agent shall so forward same to such Lender(s) before 10:00 o'clock A.M. on the immediately succeeding Business Day. Section 2.5.2. SETOFF, ETC. Regardless of the adequacy of any collateral for any of the Obligations, upon the occurrence and during the continuance of any Event of Default, each Lender is hereby authorized at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower), to set off and apply any and all deposits (general or special, time or demand, provisional or final (other than employee payroll)) at any time held and any other Indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the Obligations of the Borrower irrespective of whether or not such Lender shall have made any demand under this Agreement or any Note and although such obligations may be unmatured. Each such Lender agrees to promptly notify the Borrower and the Agent after any such setoff and application; provided that the failure to give such notice shall not affect the validity of such setoff and application. Promptly following any notice of setoff received by the Agent from a Lender pursuant to the foregoing, the Agent shall notify each other Lender thereof. The rights of each Lender under this SECTION 2.5.2 are in addition to all other rights and remedies (including, without limitation, other rights of setoff) which such Lender may have and are subject to SECTION 9.12. Section 2.5.3. UNCONDITIONAL OBLIGATIONS AND NO DEDUCTIONS. Section 2.5.3.1. The Borrower's obligation to make all payments provided for in this Agreement and the other Financing Documents shall be unconditional. Each such payment shall be made without deduction for any claim, defense or offset of any type, including without limitation any withholdings and other deductions on account of income or other taxes and regardless of whether any claims, defenses or offsets of any type exist. 24 Section 2.5.3.2. (a) Any and all payments by the Borrower to or for the account of any Lender or the Agent hereunder or under any other Financing Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender (or its applicable lending office) or the Agent (as the case may be) is organized or any political subdivision thereof, other than to the extent such income or franchise tax is imposed solely as a result of the activities of the Agent or a Lender pursuant to or in respect of this Agreement or any of the other Financing Documents (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable under this Agreement or any other Financing Document to any Lender or the Agent,(i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.5.3.2) such Lender or the Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.6 hereof, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under this Agreement or any other Financing Document or from the execution or delivery of, or otherwise with respect to, this Agreement or any other Financing Document (hereinafter referred to as "Other Taxes"). (c) The Borrower agrees to indemnify each Lender and the Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 2.5.3.2) paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. (d) Each Lender organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Lender listed on the signature pages hereof and on or prior to the date on which it becomes a Lender in the case of each other Lender, and from time to time thereafter if requested in writing by the Borrower or the Agent (but only so long as such Lender remains lawfully able to do so), shall provide the Borrower and the Agent with (i) a properly completed Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States, (ii) a properly completed Internal Revenue Service Form W-8 or W-9, as appropriate, or any successor form 25 prescribed by the Internal Revenue Service, certifying that such Lender is exempt from United States backup withholding, and (iii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Internal Revenue Code), certifying that such Lender is entitled to an exemption from or a reduced rate of tax on payments pursuant to this Agreement or any of the other Financing Documents. (e) For any period with respect to which a Lender has failed to provide the Borrower and the Agent with the appropriate form pursuant to Section 2.5.3.2(d) hereof (unless such failure is due to a change in treaty, law, or regulation occurring subsequent to the date on which a form originally was required to be provided), such Lender shall not be entitled to indemnification under Section 2.5.3.2(a) or 2.5.3.2(b) hereof with respect to Taxes imposed by the United States-, provided, however, that should a Lender, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Lender shall reasonably request and at such Lender's cost to assist such Lender to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Lender pursuant to this Section 2.5.3.2, then such Lender will agree to use reasonable efforts to change the jurisdiction of its applicable lending office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Lender, is not otherwise disadvantageous to such Lender. (g) Within thirty (30) days after the date of any payment of Taxes or Other Taxes, the Borrower shall furnish to the Agent the original or a certified copy of a receipt evidencing such payment. (h) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.5.3.2 shall survive until the third anniversary of the later of the Revolving Credit Repayment Date and final repayment of all amounts due Agent and any Lender in connection with this Agreement. (i) If the Borrower makes any additional payment to any Lender pursuant to this Section 2.5.3.2 in respect of any Taxes, and such Lender determines that it has received (i) a refund of such Taxes, or (ii) a credit against, relief or remission for, or a reduction in the amount of, any tax or other governmental charge as a result of any deduction or credit for any Taxes with respect to which it has received payments under this Section 2.5.3.2, such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Borrower such amount as shall be reasonably determined in good faith by such Lender to be solely attributable to the deduction or withholding of such Taxes. If such Lender later determines in good faith that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 2.5.3.2(i), the Borrower shall upon demand of such Lender promptly repay the amount of such overpayment. Nothing in this Section 2.5.3.2(i) shall be construed as requiring such Lender to conduct its business or to arrange or alter in any respect its 26 tax or financial affairs so that it is entitled to receive such a refund, credit or reduction or as allowing any Person to inspect any records, including tax returns, of such Lender. Section 2.6. PREPAYMENT AND CERTAIN PAYMENTS. Section 2.6.1. MANDATORY PAYMENTS. Section 2.6.1.1. In addition to each other principal payment required hereunder, the outstanding principal balances of the Term Loans shall be repaid on the Term Loan Repayment Date and the outstanding principal balances of the Revolving Credit Loans shall be repaid on the Revolving Credit Repayment Date. Section 2.6.1.2. [Intentionally omitted.] Section 2.6.1.3. In the event that the Borrower or any Subsidiary is entitled to receive, collectively, proceeds from any casualty insurance policies maintained by any of them on account of any interest of the Borrower and/or any Subsidiary in any property, which proceeds are in an aggregate amount in excess of an amount equal to 10% of Borrower's plant, property and equipment as reflected on the most recent Borrower financial statement submitted to the Agent pursuant to SECTION 5.3.2 and 5.3.3 with respect to any occurrence or related series of occurrences in any 12-month period, such proceeds shall be received by the Agent and, to the extent that such proceeds result from a casualty to property of the Borrower and/or any Subsidiary, so long as no Default or Event of Default exists and is continuing and the Borrower elects to repair, replace or restore such property, such proceeds shall be released to the Borrower subject to reasonable procedures and conditions established by the Agent to the extent necessary to so repair, replace or restore such property within 5 months (or as soon as reasonably practicable if such restoration, replacement or repair is not susceptible to being completed within 5 months) from the date of receipt of such proceeds by the Agent and to the extent such proceeds are not so used or do not result from such a casualty, the Borrower shall make a prepayment of the Term Loans for the accounts of the Lenders in accordance with their Pro Rata Shares upon written notice from the Agent. All such payments shall be applied to the principal installments of the Term Loans in the inverse order of their maturities. Section 2.6.1.4. In the event that the Borrower and/or any Subsidiary sells, assigns or otherwise transfers title to any asset other than in the ordinary course of its business for net cash proceeds in the aggregate since the Closing Date in excess of an amount equal to 10% of Borrowees plant, property and equipment as reflected on the most recent Borrower financial statement submitted to the Agent pursuant to SECTION 5.3.2 and 5.3.3, the Borrower and/or such Subsidiary shall remit 100% of the net cash proceeds of such sale, assignment or other transfer to the Agent for the accounts of the Lenders in accordance with their Pro Rata Shares to be applied to the principal installments of the Term Loans in the inverse order of their maturities within 10 Business Days of the date of Borrower's or any Subsidiary's receipt of such net cash proceeds; provided, however, that Borrower may sell any of its assets which are obsolete, worn-out or no longer used or useful in Borrower's business and Borrower may use the proceeds of such sale to purchase other assets which is useful or necessary in the operation of Borrower's business. 27 Section 2.6.1.5. [Intentionally omitted.] Section 2.6.1.6. If at any time the aggregate principal amount of the Revolving Credit Loans plus the aggregate stated amount of outstanding Letters of Credit and Letter of Credit Agreements and any unreimbursed amounts thereunder shall exceed the Revolving Credit Loan Formula Amount, the Borrower shall immediately pay to the Agent in immediately available Dollars the amount of such excess. Section 2.6.2. VOLUNTARY PREPAYMENTS. All or any portion of the unpaid principal balance of the Loans (other than portions of any Loans constituting Libor Loans) may be prepaid at any time, without premium or penalty, by giving the Agent at least 3 days' prior written notice of such prepayment and by a payment to the Agent for the accounts of the Lenders in accordance with their Pro Rata Shares of such prepayment in immediately available Dollars by the Borrower; provided that each such partial payment or prepayment of principal of the Loans shall be in a principal amount of at least $100,000 or an integral multiple of $50,000 in excess thereof and provided further that each such prepayment of the Term Loans shall be applied to the principal installments of the Term Loans in the order of their maturities. Section 2.6.3. PREPAYMENT OF LIBOR LOANS. Notwithstanding anything to the contrary contained in any Note or in any other agreement executed in connection herewith or therewith, the Borrower shall be permitted to prepay any portion of the Loans constituting Libor Loans only in accordance with Section 2.9 hereof Section 2.6.4. PERMANENT REDUCTION OF COMMITMENT. At the Borrower's option the Commitment and the Revolving Credit Loan Commitment may be permanently and irrevocably reduced in whole or in part by an amount of at least $100,000 and to the extent in excess thereof in integral multiples of $50,000 at any time; provided that (i) the Borrower gives the Agent written notice of the exercise of such option at least three (3) Business Days prior to the effective date thereof, (ii) the aggregate outstanding balance of the Loans, if any, does not exceed the Commitment and the aggregate outstanding balance of the Revolving Credit Loans together with the aggregate amount of the outstanding stated amount of any Letters of Credit or Letter of Credit Agreements, and any unreimbursed amounts thereunder, if any, does not exceed the Revolving Credit Loan Commitment, both as so reduced in any such case on the effective date of such reduction and (iii) the Borrower is not, and after giving effect to such reduction, would not be in violation of SECTION 2.6.3. Any such reduction shall concurrently reduce the Dollar amount of each Lender's Pro Rata Share of the Commitment and the Revolving Credit Loan Commitment. Section 2.7. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day other than a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of fees, if any, and interest under this Agreement and under such Note. Section 2.8. USE OF PROCEEDS. The Borrower shall use the proceeds of the Loans to repay outstanding Indebtedness, to repurchase a portion of its capital stock from the Old Stockholders, to pay costs incurred by the Borrower in connection with the closing of the Loans, 28 including without limitation, the Facility Fee and other fees payable pursuant to the Side Letter and costs incurred in connection with the Related Transactions, for Borrower's working capital needs, for permitted Capital Expenditures and for Investments permitted by SECTION 5.2.12. Section 2.9. SPECIAL LIBOR LOAN PROVISIONS. The Libor Loans shall be subject to and governed by the following terms and conditions: Section 2.9.1. REQUESTS. Each Request accompanied by an Interest Rate Election selecting the Libor Rate must be received by the Agent in accordance with the definition of Interest Rate Election. Section 2.9.2. LIBOR LOANS UNAVAILABLE. Notwithstanding any other provision of this Agreement, if, prior to or on the date on which all or any portion of the Loans is to be made as or converted into a Libor Loan, any of the Lenders (or the Agent with respect to (ii) below) shall reasonably determine in good faith (which determination shall be conclusive and binding on the Borrower), that (i) Dollar deposits in the relevant amounts and for the relevant Interest Period are not offered to such Lender in the London interbank market, (ii) by reason of circumstances affecting the London interbank market, adequate and reasonable means do not exist for ascertaining the Adjusted Libor Rate, or (iii) the Adjusted Libor Rate shall no longer represent the effective cost to such Lender for Dollar deposits in the London interbank market for reasons other than the fact, standing alone, that the Adjusted Libor Rate is based on an averaging of rates determined in good faith by the Agent and that such Lender's rate may exceed such average, such Lender may elect not to accept any Interest Rate Election electing a Libor Loan and such Lender shall notify the Agent by telephone or telex thereof, stating in reasonable detail the reasons therefor, not later than the close of business on the second Business Day prior to the date on which such Libor Loan is to be made. The Agent shall promptly give notice of such determination and the reason therefor to the Borrower, and all or such portion of the Loans, as the case may be, which are subject to any of Section 2.9.2 (i), (ii) through (iii) as a result of such Lender's determination in good faith shaft be made as or converted into, as the case may be, Prime Rate Loans and such Lender shall have no further obligation to make Libor Loans, until further written notice to the contrary is given by the Agent to the Borrower. If such circumstances subsequently change so that such Lender shall no longer be so affected, such Lendees obligation to make or maintain its Pro Rata Share of all or any portion of the Loans as Libor Loans shall be reinstated when such Lender obtains actual knowledge of such change of circumstances and promptly after obtaining such actual knowledge such Lender shall forward written notice thereof to the Agent. After receipt of such notice, the Agent shall promptly forward written notice thereof to the Borrower. Upon or after receipt by the Borrower of such written notice, the Borrower may submit an Interest Rate Election in accordance with this Agreement electing an Interest Period ending no later than the Interest Adjustment Date for the then current Interest Period for the other Lenders' Pro Rata Shares of Libor Loans and electing the Libor Rate for such Lenders' or Lender's Pro Rata Share(s) of the Loans as to which such 29 Lender's or Lenders' obligation(s) to make or maintain its or their Pro Rata Share(s) of the Loans as Libor Loans was suspended and such Pro Rata Share(s) shall be converted to Libor Loans in accordance with this Agreement. During any period throughout which any of the Lenders has or have no obligation to make or maintain its or their Pro Rata Share(s) of the Loans as Libor Loans, no Interest Rate Elections electing the Libor Rate shall be effective with regard to the Loans to the extent of the Pro Rata Share(s) of such Lender(s), but shall be effective as to the other Lenders. Section 2.9.3. SEE LIBOR LENDING UNLAWFUL. In the event that any change in applicable laws or regulations (including the introduction of any new applicable law or regulation) or in the interpretation thereof (whether or not having the force of law) by any governmental or other regulatory authority charged with the administration thereof, shall make it unlawful for any of the Lenders to make or continue to maintain its Pro Rata Share of all or any portion of the Loans as Libor Loans, each such Lender shall promptly notify the Agent by telephone or telex thereof, and of the reasons therefor, and the obligation of such Lender to make or maintain its Pro Rata Share of the Loans or such portion thereof as Libor Loans shall, upon the happening of such event, terminate and the Agent shall, by telephonic notice to the Borrower, declare that such obligation has so terminated with respect to such Lender, and such Pro Rata Share of the Loans or any portion thereof to the extent then maintained as Libor Loans, shall, on the last day on which such Lender can lawfully continue to maintain such Pro Rata Share of the Loans or any portion thereof as Libor Loans, automatically convert into Prime Rate Loans without additional cost to the Borrower. If circumstances subsequently change so that such Lender shall no longer be so affected, such Lender's obligation to make or maintain its Pro Rata Share of all or any portion of the Loans as Libor Loans shall be reinstated when such Lender obtains actual knowledge of such change of circumstances, and promptly after obtaining such actual knowledge such Lender shall forward written notice thereof to the Agent. After receipt of such notice, the Agent shall promptly forward written notice thereof to the Borrower. Upon or after receipt by the Borrower of such written notice, the Borrower may submit an Interest Rate Election in accordance with this Agreement electing an Interest Period ending no later than the Interest Adjustment Date for the then current Interest Period for the other Lenders' Pro Rata Shares of Libor Loans and electing the Libor Rate for such Lenders' or Lender's Pro Rata Share(s) of the Loans as to which such Lender's or Lenders' obligation(s) to make or maintain its or their Pro Rata Share(s) of the Loans as Libor Loans was suspended and such Pro Rata Share(s) shall be converted to Libor Loans in accordance with this Agreement. During any period throughout which any of the Lenders has or have no obligation to make )r maintain its or their Pro Rata Share(s) of the Loans as Libor Loans, no Interest Rate Elections electing the Libor Rate shall be effective with regard to the Loans to the extent of the Pro Rata Share(s) of such Lender(s), but shall be effective as to the other Lenders. Section 2.9.4. ADDITIONAL COSTS ON LIBOR LOANS. The Borrower further agrees to pay to the Agent for the account of the applicable Lender or Lenders such amounts as will compensate any of the Lenders for any increase in the cost to such Lender of making or maintaining (or of its obligation to make or maintain) all or any portion of its Pro Rata Share of the Loans as Libor Loans and for any reduction in the amount of any sum receivable by such Lender under this Agreement in respect of making or maintaining all or any portion of such Lender's Pro Rata Share of the Loans as Libor Loans, in either case, from time to time by reason of: 30 (i) any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, such Lender, under or pursuant to any law, treaty, rule, regulation (including, without limitation, any Regulations of the Board of Governors of the Federal Reserve System) or requirement in effect on or after the date hereof, any interpretation thereof by any governmental authority charged with administration thereof or by any central bank or other fiscal or monetary authority or other authority, or any requirement imposed by any central bank or such other authority whether or not having the force of law; or (ii) any change in (including the introduction of any new) applicable law, treaty, rule, regulation or requirement or in the interpretation thereof by any official authority, or the imposition of any requirement of any central bank, whether or not having the force of law, which shall subject such Lender to any tax (other than taxes on net income imposed on such Lender), levy, impost, charge, fee, duty, deduction or withholding of any kind whatsoever or change the taxation of such Lender with respect to making or maintaining all or any portion of its Pro Rata Share of the Loans as Libor Loans and the interest thereon (other than any change which affects, and to the extent that it affects, the taxation of net income of such Lender); provided, that with respect to any withholding the foregoing shall not apply to any withholding tax described in sections 1441, 1442 or 3406 of the Code, or any succeeding provision of any legislation that amends, supplements or replaces any such section, or to any tax, levy, impost, duty, charge, fee, deduction or withholding that results from any noncompliance by a Lender with any federal, state or foreign law or from any failure by a Lender to file or furnish any report, return, statement or form the filing or furnishing of which would not have an adverse effect on such Lender and would eliminate such tax, impost, duty, deduction or withholding; In any such event, such Lender shall promptly notify the Agent thereof, and of the reasons therefore and the Agent shall promptly notify the Borrower thereof in writing stating in reasonable detail the reasons provided to the Agent by such Lender therefor and the additional amounts required to fully compensate such Lender for such increased or new cost or reduced amount as reasonably determined in good faith by such Lender. Such additional amounts shall be payable on each date on which interest is to be paid hereunder or, if there is no outstanding principal amount under any of the Notes, within 10 Business Days after the Borrower's receipt of said notice. Such Lender's certificate as to any such increased or new cost or reduced amount (including calculations, in reasonable detail, showing how such Lender computed such cost or reduction) shall be submitted by the Agent to the Borrower and shall, in the absence of manifest error, be conclusive. In determining any such amount, the Lender(s) may use any reasonable averaging and attribution methods. Notwithstanding anything to the contrary set forth above, the Borrower shall not be obligated to pay any amounts pursuant to this SECTION 2.9.4 as a result of any requirement or change referenced above with respect to any period prior to the one hundred and eightieth (180th) day prior to the date on which the Borrower is first notified thereof (other than any amounts which relate to any such requirement or change which is adopted with retroactive effect in which case the Borrower shall be obligated to pay all such amounts accrued from the date as of which such requirement or change is retroactively effective) unless the failure to give such notice within such one hundred and eighty (180) day period resulted from reasonable circumstances beyond such Lender's reasonable control. 31 Section 2.9.5. Sect LIBOR FUNDING LOSSES. In the event any of the Lenders shall incur any loss or expense (including, without limitation, any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund or maintain all or any portion of the Loans as Libor Loans) as a result of. (i) payment or prepayment by the Borrower of all or any portion of any Libor Loan on a date other than the Interest Adjustment Date for such Libor Loan, for any reason; provided, however that this clause shall not be deemed to grant the Borrower any right to convert a Libor Loan to a Prime Rate Loan prior to the end of any Interest Period or to imply such right; (ii) conversion of all or any portion of any Libor Loan on a day other than the last day of an Interest Period applicable to such Loan to a Prime Rate Loan for any reason including, without limitation, acceleration of the Loans upon or after an Event of Default, any Interest Rate Election or any other cause whether voluntary or involuntary and whether or not referred to or described in this Agreement, other than any such conversion resulting solely from application of SECTIONS 2.9.2 or 2.9.3 by any Lender; or (iii) any failure by the Borrower to borrow the Loans as Libor Loans on the date specified in any Interest Rate Election selecting the Libor Rate, other than any such failure resulting solely from application of SECTIONS 2.9.2 or 2.9.3 by any Lender-, such Lender shall promptly notify the Agent thereof, and of the reasons therefor. Upon the request of the Agent, the Borrower shall pay directly to the Agent for the account of such Lender such amount as will (in the reasonable determination in good faith of such Lender, which shall be correct in the absence of manifest error) reimburse such Lender for such loss or expense. Each Lender shall furnish to the Borrower, upon written request from the Borrower received by the Agent, a written statement setting forth the computation of -any such amounts payable to such Lender under this SECTION 2.9.5. Section 2.9.6. BANKING PRACTICES. Each Lender agrees that upon the occurrence of any of the events described in SECTIONS 2.2.3 and/or 2.9.2, 2.9.4 or 2.9.5, such Lender will exercise all reasonable efforts to take such reasonable actions at no expense to such Lender (other than reasonable expenses which are covered by the Borrower's advance deposit of funds with such Lender for such purpose, or if such Lender agrees, which the Borrower has agreed to pay or reimburse to such Lender in full upon demand), in accordance with such Lender's usual banking practices in such situations and subject to any statutory or regulatory requirements applicable to such Lender, as such Lender may take without the consent or participation of any other Person to, in the case of an event described in SECTIONS 2.2.3 and/or 2.9.4 or 2.9.5, mitigate the cost of such events to the Borrower and, in the case of an event described in SECTIONS 2.9.2(i), (ii) or (iii), to seek Dollar deposits in any other interbank Libor market in which such Lender regularly participates and in which the applicable determination(s) described in SECTIONS 2.9.2(i), (ii) or (iii), as the case may be, does not apply. Section 2.9.7. BORROWER'S OPTIONS ON UNAVAILABILITY OR INCREASED COST OF LIBOR. In the event of any conversion of all or any portion of any Lender's Pro Rata Share of any Libor Loans to a Prime Rate Loan for reasons beyond the Borrower's control or in the event that any 32 Lender's Pro Rata Share of all or any portion of the Libor Loans becomes subject, under SECTIONS 2.9.4 or 2.9.5, to additional costs, the Borrower shall have the option, subject to the other terms and conditions of this Agreement, to convert such Lender's Pro Rata Share to a Prime Rate Loan by making Interest Rate Elections for Interest Periods which (i) end on the Interest Adjustment Date for such Libor Loan or (ii) end on Business Days occurring prior to such Interest Adjustment Date, in which case, at the end of the last of such Interest Periods any such Libor Rate Loan shall automatically convert to a Prime Rate Loan and the Borrower shall have no further right to make an Interest Rate Election with respect to such Prime Rate Loan other than an Interest Rate Election which is effective on the Interest Adjustment Date for such Libor Loan. The Borrower's options set forth in this SECTION 2.9.7 may be exercised, if and only if the Borrower pays, concurrently with delivery to the Agent of each such Interest Rate Election and thereafter in accordance with SECTIONS 2.9.4, 2.9.5 and 2.9.6 all amounts provided for therein to the Agent in accordance with this Agreement. If the Borrower shall, as a result of the requirements of SECTION 2.9.4 above, be required to pay any Lender the additional costs referred to therein, but not be required to pay such additional costs to the other Lender or Lenders and the Borrower, in its sole discretion, shall deem such additional amounts to be material or in the event that Libor Loans from a Lender are unavailable to the Borrower as a result solely of the provisions of Sections 2.9.2, 2.9.3 or 2.9.4, but are available from the other Lender or Lenders, the Borrower shall have the right to substitute another bank reasonably satisfactory to the Agent for such Lender which is entitled to such additional costs or which is relieved from making Libor Loans and the Agent shall use reasonable efforts (with all reasonable costs of such efforts by the Agent to be borne by the Borrower) to assist the Borrower to locate such substitute bank. Any such substitution shall take place in accordance with SECTION 9. 11 and otherwise be on terms and conditions reasonably satisfactory to the Agent, and until such time as such substitution shall be consummated, the Borrower shall continue to pay such additional costs and comply with the above-referenced Sections. Upon any such substitution, the Borrower shall pay or cause to be paid to the Lender that is being replaced, all principal, interest (to the date of such substitution) and other amounts owing hereunder to such Lender and such Lender will be released from liability hereunder. Section 2.9.8. ASSUMPTIONS CONCERNING FUNDING OF LIBOR LOANS. The calculation of all amounts payable to the Lenders under this SECTION 2.9 shall be made as though each Lender actually funded its relevant Libor Loans through the purchase of a deposit in the London interbank market bearing interest at the Libor Rate in an amount equal to that Libor Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such deposit from an offshore office of such Lender to a domestic office of such Lender in the United States of America- provided, however, that each Lender may fund each of its Libor Loans in any manner it sees fit and the foregoing assumption shall be utilized solely for the calculation of amounts payable under this SECTION 2.9. ARTICLE 3. CONDITIONS OF LENDING Section 3.1. CONDITIONS PRECEDENT TO THE COMMITMENT AND TO ALL LOANS. 33 Section 3.1.1. THE COMMITMENT AND INITIAL LOANS. The Commitment and the obligation of the Lenders to make the initial Advances of the Loans and/or to issue any Letter of Credit or Letter of Credit Agreement are subject to performance by the Borrower of all of its obligations under this Agreement and to the satisfaction of the conditions precedent that all legal matters incident to the transactions contemplated hereby or incidental to the Loans shall be reasonably satisfactory to counsel for the Agent and that the Agent shall have received on or before the Closing Date all of the following, each dated the Closing Date or another date reasonably acceptable to the Agent and each to be in form and substance reasonably satisfactory to the Agent or if any of the following is not a deliverable, the satisfaction of such condition in form and substance reasonably satisfactory to the Agent: Section 3.1.1.1. The Financing Documents, including, without limitation, those hereinafter set forth and the Borrower's and any Subsidiary's certificate of incorporation or other organizational documents. Section 3.1.1.2. Certificate of the secretary of the Borrower and each Subsidiary certifying as to the resolutions of the shareholders or board of directors of the Borrower and each Subsidiary authorizing and approving each of the Financing Documents to which the Borrower and each Subsidiary is a party and other matters contemplated hereby and certifying as to the names and signatures of the Authorized Representative(s) of the Borrower and each Subsidiary authorized to sign each Financing Document to be executed and delivered by or on behalf of the Borrower and each Subsidiary. The Agent and the Lenders may conclusively rely on each such certificate until the Agent shall receive a further certificate canceling or amending the prior certificate and submitting the signatures of the Authorized Representative(s) named in such further certificate. Section 3.1.1.3. Favorable opinions of Wilson, Sonsini, Goodrich & Rosati counsel for the Borrower, in form and substance reasonably satisfactory to the Agent. Section 3.1.1.4. An Officer's Certificate stating that: Section 3.1.1.4.1. The representations and warranties contained in SECTION 4 1 and/or contained in any of the Notes or Security Documents are correct on and as of the Closing Date as though made on and as of such date; and Section 3.1.1.4.2. No Default or Event of Default has occurred and is continuing, or would result from the making of the Loans. Section 3.1.1.5. Certificates of good standing or legal existence of the secretaries of state of the states of organization and qualification of and covering the Borrower and any Subsidiaries dated reasonably near the Closing Date. Section 3.1.1.6. Evidence that (i) the ownership interests in the Borrower are as set forth in EXHIBIT 1.1, (ii) the New Stockholders have invested the Equity in the Borrower on or prior to the Closing Date, as set forth on EXHIBIT 1.1 and (iii) that except for receipt and application of certain proceeds of the Loans, the Related Transactions have been completed in accordance with the Related Transaction Documents to the extent required or contemplated to be. completed on or prior to the Closing Date. 34 Section 3.1.1.7. A Request and an Interest Rate Election. Section 3.1.1.8. All documents, instruments and agreements necessary to terminate, cancel and discharge the documents, instruments and agreements evidencing or securing any and all existing Indebtedness of the Borrower and any Subsidiary and Liens securing such Indebtedness other than those listed in EXHIBIT 3.1.1.8. Section 3.1.1.9. Payment to the Agent and the Lenders of the fees specified in this Agreement or in the Side Letter as being payable on the Closing Date and all reasonable out-of-pocket costs and expenses incurred by the Agent and Fleet and billed to the Borrower in connection with the transactions contemplated hereby, including, but not limited to, reasonable outside legal expenses and any accounting fees, auditing fees, appraisal fees, and evidence that all other reasonable fees and costs payable by the Borrower in connection with the transactions contemplated by this Agreement and completed on the Closing Date have been paid in full. Section 3.1.1.10. An Officer's Certificate in the form of EXHIBIT 3.1.1.10, duly completed and reflecting, INTER ALIA, compliance by the Borrower as of the opening of business on the first Business Day after the Closing Date but based on the Borrower's financial information as of the last day of the Borrower's most recent fiscal quarter, adjusted to give effect to the Loans made on the Closing Date and completion of the Related Transactions to be completed on or prior to the Closing Date, with the financial covenants provided for herein. Section 3.1.1.11. Such other information about the Borrower and/or its Business Condition as the Lenders may reasonably request. Section 3.1.1.12. True copies of, and/or true copies of any revisions to, the financial statements, the Projections, the pro forma Closing Date financial statements giving effect to the Loans, the Equity to be received on or prior to the Closing Date and completion of the other Related Transactions contemplated or required to be completed on or prior to the Closing Date, and other information provided pursuant to SECTION 4.1.5. and certification by the Borrower of the Projections. Section 3.1.1.13. Certificates of fire, business interruption, liability and extended coverage insurance policies, each such policy to name the Agent as mortgagee and loss payee and, on all liability policies, as additional insured and a commitment for title insurance on Borrower's owned real estate in amount and on terms and conditions reasonably satisfactory to the Agent. Section 3.1.1.14. True descriptions of any pending or, to the Borrower's best knowledge, threatened litigation against or by Borrower or any Subsidiary. Section 3.1.1.15. Evidence that all necessary material third party consents have been obtained and all required filings with any governmental authority have been duly completed. Section 3.1.1.16. The financial statements described in SECTION 4.1.5 together with Borrower's audited financial statements for Borrower's fiscal year ending April 30, 35 1998 and any accountant's management letter issued in connection therewith together with the Borrowees pro forma Closing Date balance sheet. Such financial statements shall be accompanied by an Officer's Certificate of the chief financial officer of the Borrower to the effect that (i) the representations of the Borrower set forth in SECTION 4.1.14 are accurate as of the Closing Date and (ii) that no Material Adverse Effect has occurred since June 30, 1998 and no significant probability of such a Material Adverse Effect exists, except as set forth or reflected in the financial statements described in SECTION 4.1.5, or otherwise disclosed in writing and acceptable to the Agent. Section 3.1.1.17. True copies of the Equity Documents and all documents, instruments and agreements relating to the Borrower's capital structure and the Related Transaction Documents. Section 3.1.1.18. The fact that the representations and warranties of the Borrower contained in Article 4, INFRA and in each of the other Financing Documents are true and correct in all material respects on and as of the Closing Date except as altered hereafter by actions not prohibited hereunder. The Borrower's delivery of each Note to the Lenders and of each Request to the Agent shall be deemed to be a representation and warranty by the Borrower as of the date thereof to such effect. Section 3.1.1.19. That there has been no enactment of any law by any governmental authority having jurisdiction over the Agent or any Lender which would make it unlawful in any respect for such Lender to make the Loans and no Material Adverse Effect has occurred. Section 3.1.1.20. A completed Year 2000 questionnaire covering the Borrower and any Subsidiaries. Section 3.1.2. THE COMMITMENT AND THE LOANS. The Commitment and the obligation of each Lender to make or maintain its Pro Rata Share of any Advance or Loan and/or to issue any Letter of Credit or Letter of Credit Agreement are subject to performance by the Borrower of all its obligations under this Agreement and to the satisfaction of the following further conditions precedent: (a) The fact that, immediately prior to and upon the making of each Loan, no Event of Default or Default shall have occurred and be continuing; (b) The fact that the representations and warranties of the Borrower contained in Article 4, INFRA and in each of the other Financing Documents, are true and correct in all material respects on and as of the date of each Advance or Loan except that any representation or warranty which speaks as of a specific date shall be true and correct as of that date, all except as altered hereafter by actions consented to or not prohibited hereunder. The Borrower's delivery of the Notes to the Lenders and of each Request to the Agent shall be deemed to be a representation and warranty by the Borrower as of the date of such Advance or Loan as to the facts specified in SECTIONS 3.1.2(a) and (b); (c) Receipt by Agent on or prior to the Business Day specified in the definition of Interest Rate Election of a written Request stating the amount requested for the 36 Loan or Advance in question and an Interest Rate Election for such Loan or Advance, all signed by a duly authorized officer of the Borrower on behalf of the Borrower; (d) That there exists no law or regulation by any governmental authority having jurisdiction over the Agent or any of the Lenders which would make it unlawful in any respect for such Lender to make its Pro Rata Share of the Loan or Advance, including, without limitation, Regulations U, T and X of the Board of Governors of the Federal Reserve System and no Material Adverse Effect has occurred. ARTICLE 4. REPRESENTATIONS AND WARRANTEES Section 4.1. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower represents and warrants to the Agent and the Lenders that, after giving effect to the Loans and the application of the proceeds thereof (which representations and warranties shall survive the making of the Loans) as follows: Section 4.1.1. ORGANIZATION AND EXISTENCE. The Borrower and any Subsidiary is a corporation, duly organized, validly existing and in good standing under the laws of the state of its incorporation or organization and is duly qualified to do business in all jurisdictions in which such qualification is required, all as noted on EXHIBIT 4.1.1, except where failure to so qualify could not be reasonably expected to have a Material Adverse Effect, and has all requisite power and authority to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under the Financing Documents. Section 4.1.2. AUTHORIZATION AND ABSENCE OF DEFAULTS. Except as described on EXHIBIT 4.1.2, the execution, delivery to the Agent and/or the Lenders and performance by the Borrower and any Subsidiary of the Financing Documents and Related Transaction Documents have been duly authorized by all necessary corporate and governmental action and do not and will not (i) require any consent or approval of the shareholders or board of directors of the Borrower or any Subsidiary which has not been obtained, (ii) violate any provision of any law, rule, regulation (including, without limitation, Regulations U and X of the board of governors of the federal reserve system), order, writ, judgment, injunction, decree, determination or award presently in effect. having applicability to the Borrower and/or any Subsidiary and/or the articles of organization or by-laws, as applicable, of the Borrower and/or any Subsidiary, (iii) result in a breach of or constitute a default under any material indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower and/or any Subsidiary is or are a party or parties or by which it or they or a material portion of its or their properties may be bound or affected; or (iv) result in, or require, the creation or imposition of any Lien on any of the Borrower's and/or any Subsidiary's respective properties or revenues other than Liens granted to the Agent by any of the Financing Documents securing the Obligations, other than Permitted Encumbrances. The Borrower and any Subsidiary are in compliance with any such applicable law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, other agreement, lease or instrument, except where the failure to be in compliance could not be reasonably expected to have a Material Adverse Effect. 37 Section 4.1.3. ACQUISITION OF CONSENTS. Except as noted on EXHIBIT 4.1.3, no authorization, consent, approval, license, exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, other than those which have been obtained, is or will be necessary to the valid execution and delivery to the Agent and/or the Lenders or performance by the Borrower or any Subsidiary. of any Financing Documents or any of the Related Transaction Documents and each of the foregoing which has been, obtained is in full force and effect. Section 4.1.4. VALIDITY AND ENFORCEABILITY. Each of the Financing Documents when delivered hereunder will constitute the legal, valid and binding obligations of each of the Borrower and any Subsidiary which is or are a party thereto enforceable against the Borrower, and any Subsidiary which is or are a party thereto in accordance with their respective terms except as the enforceability thereof may be limited by the effect of general principles of equity and bankruptcy and similar laws affecting the rights and remedies of creditors generally. Section 4.1.5. FINANCIAL INFORMATION. The following information with respect to the Borrower has heretofore been furnished to the Agent: Section 4.1.5.1. Audited annual financial statements of the Borrower for the period ended April 30, 1998; and Section 4.1.5.1(A). Unaudited financial statements of the Borrower for the periods ended April 30, 1997, April 30, 1996 and September 30, 1998 Section 4.1.5.2. The Projections. Section 4.1.5.3. The pro forma financial statements of the Borrower as of the Closing Date provided pursuant to SECTION 3.1.1.12. Each of the financial statements referred to above in SECTIONS 4.1.5.1 and 4 1.5.1(A) was prepared in all material respects in accordance with GAAP (subject, in the case of interim statements, to the absence of footnotes and normal year-end adjustments) applied on a consistent basis, except as stated therein. To the best of the Borrower's knowledge, each of the financial statements referred to above in SECTIONS 4.1.5.1 and 4.1.5.3 fairly presents in all material respects the financial condition or pro forma financial condition, as the case may be, of the Person being reported on at such dates and is complete and correct in all material respects and no Material Adverse Effect has occurred since the date thereof The Projections were prepared by the Borrower in good faith, it being recognized that projections as to future results are not assertions of fact and that actual results for the periods cited therein may differ from the results projected therein. Section 4.1.6. NO LITIGATION. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower and/or any Subsidiary or any of their properties before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which if determined adversely to the Borrower and/or any Subsidiary would draw into question the legal existence of the Borrower and/or any such Subsidiary and/or the validity, authorization and/or enforceability of any of the Financing Documents and/or any provision thereof and/or could be reasonably 38 expected to have a Material Adverse Effect except those matters, if any, described on EXHIBIT 4.1.6 none of which, in Borrower's good faith opinion, will (i) have such Material Adverse Effect or (ii) draw into question (a) the legal existence of the Borrower and/or any such Subsidiary or (b) the validity, authorization and/or enforceability of any of the Financing Documents and/or any provision thereof. Section 4.1.7. REGULATION U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR Part 221), does not own and has no present intention of acquiring any such margin stock or a "margin security" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR, Part 207). None of the proceeds of the Loans will be used directly or indirectly by the Borrower for the purpose of purchasing or carrying, or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry, any such margin security or margin stock or for any other purpose which might constitute the transaction contemplated hereby a "purpose credit" within the meaning of said Regulation U, or cause this Agreement to violate any other regulation of the Board of Governors of the Federal Reserve System or the Securities and Exchange Act of 1934, as amended, or any rules or regulations promulgated under either said statute. Section 4.1.8. ABSENCE OF ADVERSE AGREEMENTS. Neither the Borrower nor any Subsidiary is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any corporate or partnership restriction which could be reasonably expected to have a Material Adverse Effect. Section 4.1.9. TAXES. The Borrower and each Subsidiary has filed all tax returns (federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, except for those taxes, if any, which are being contested in good faith and by appropriate proceedings, and for which proper reserve or other provision has been made in accordance with GAAP and except where any failure to file or pay could not be reasonably expected to have a Material Adverse Effect on the Borrower or any Subsidiary and except as described in EXHIBIT 4.1.9. Section 4.1.10. ERISA. Borrower and any Commonly Controlled Entity do not maintain or contribute to any Plan which is not in substantial compliance with ERISA, or any Single Employer Plan which has incurred any accumulated funding deficiency within the meaning of sections 412 and 418 of the Code, or which has applied for or obtained a waiver from the Internal Revenue Service of any minimum funding requirement under section 412 of the Code. Borrower and any Commonly Controlled Entity have not incurred any liability to the PBGC in connection with any Plan covering any employees of Borrower or any Commonly Controlled Entity in amount exceeding Fifty Thousand Dollars ($50,000) in the aggregate or ceased operations at any facility or withdrawn from any Plan in a manner which could subject any of them to liability under sections 4062(e), 4063 or 4064 of ERISA in amount exceeding Fifty Thousand Dollars ($50,000) in the aggregate, and know of no facts or circumstance which might give rise to any liability of Borrower or any Commonly Controlled Entity to the PBGC under Title IV of ERISA in amount exceeding Fifty Thousand Dollars ($50,000) in the aggregate. Borrower and any Commonly Controlled Entity have not incurred any withdrawal 39 liability in amount exceeding Fifty Thousand Dollars ($50,000) in the aggregate (including but not limited to any contingent or secondary withdrawal liability) within the meaning of sections 4201 and 4202 of ERISA, to any Multiemployer Plan, and no event has occurred, and there exists no condition or set of circumstances known to the Borrower, which presents a risk- of the occurrence of any withdrawal from or the partition, termination, reorganization or insolvency of any Multiemployer Plan which could result in any liability to a Multiemployer Plan in amount exceeding Fifty Thousand Dollars ($50,000) in the aggregate. Except for payments for which the minimum funding requirement has been waived under section 412 of the Code, full payment has been made of all amounts which Borrower and any Commonly Controlled Entity are required to have paid as contributions to any Plan under applicable law or under any plan or any agreement relating to any Plan to which Borrower or any Commonly controlled Entity is a party. Borrower and each Commonly Controlled Entity have made adequate provision for reserves to meet contributions that have not been made because they are not yet due under the terms of any Plan or related agreements. Neither Borrower nor any Commonly Controlled Entity has any knowledge, nor do any of them have any reason to believe, that any Reportable Event which could result in a liability or liabilities of Fifty Thousand Dollars ($50,000) or more in the aggregate has occurred with respect to any Plan. Section 4.1.11. OWNERSHIP OF PROPERTIES. Section 4.1.11.1. Except for Permitted Encumbrances, Borrower and any Subsidiary has good title to all of its properties and assets free and clear of all restrictions and Liens of any kind other than those which could not be reasonably expected to have a Material Adverse Effect or a material adverse effect on the validity, authorization and/or enforceability of the Financing Documents and/or any provision thereof. Section 4.1.11.2. EXHIBIT 4.1.11 accurately and completely lists the location of all real property owned or leased by Borrower or any Subsidiary. Borrower and each Subsidiary enjoys quiet possession under all material leases of real property to which it is a party as a lessee, and all of such leases are valid, subsisting and, to Borrower's knowledge, in full force and effect. Section 4.1.11.3. To Borrower's knowledge, except as specified in Exhibit 4.1.11, none of the real property occupied by Borrower or any Subsidiary is located within any federal, state or municipal flood plain zone. Section 4.1.11.4. Except as set forth in Exhibit 4.1.11, all of the material properties used in the conduct of the Borrower's and each Subsidiary's business (i) are in good repair, working order and condition (reasonable wear and tear excepted) and in Borrower's reasonable business judgment, reasonably suitable for use in the operation of Borrower's, and each Subsidiary's business; and (ii) to Borrower's knowledge are currently operated and maintained, in all material respects, in accordance with the requirements of applicable governmental authorities. 40 Section 4.1.12. ACCURACY OF REPRESENTATIONS AND WARRANTIES. None of Borrower's representations or warranties set forth in this Agreement or in any document or certificate furnished pursuant to this Agreement or in connection with the transactions contemplated hereby taken as a whole (excepting however for the purposes of this Section 4.1.12, any representation or warranty as to the Projections or the Budget without limiting or negating the representation set forth in the last sentence of Section 4.1.5) contains any untrue statement of a material fact or omits to state a material fact necessary to make any statement of fact contained herein or therein, in light of the circumstances under which it was made, not misleading; except that unless provided otherwise any such document or certificate which is dated speaks as of the date stated and not the present. Section 4.1.13. NO INVESTMENT COMPANY. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an `investment company' as such terms are defined in the Investment Company Act of 1940, as amended, which is required to register thereunder. Section 4.1.14. SOLVENCY, ETC. After giving effect to the consummation of each Loan outstanding and to be made under this Agreement as of the time this representation and warranty is given, the Borrower (a) will be able to pay its debts as they become due, (b) will have funds and capital sufficient to carry on its business and all businesses in which it is about to engage, and (c) will own property in the aggregate having a value both at fair valuation and at fair saleable value in the ordinary course of the Borrower's business greater than the amount required to pay its Indebtedness, including for this purpose unliquidated and disputed claims. The Borrower will not be rendered insolvent by the execution and delivery of this Agreement and the consummation of any transactions contemplated herein. Section 4.1.15. APPROVALS. Except as set forth in Exhibits 4.1.3, all material approvals required from all Persons including without limitation all governmental authorities with respect to the Financing Documents and the Related Transactions have been obtained, but excluding from this representation and warranty any such approvals required to be obtained by the Agent or the Lenders. Section 4.1.16. OWNERSHIP INTERESTS. As of the Closing Date the schedule of ownership interests in the Borrower and any Subsidiaries set forth in EXHIBIT 1.1 is true, accurate and complete and the Investments to be made for all ownership interests disclosed therein have in fact been fully paid in immediately available Dollars after giving effect to the closing of the Related Transactions. Section 4.1.17. LICENSES, REGISTRATIONS, COMPLIANCE WITH LAWS, ETC. Except as set forth on EXHIBIT 4.1.17, the Borrower maintains in full force and effect all permits, governmental licenses, registrations and approvals, material, in Borrower's reasonable business judgment, to carrying out of Borrowees and each of the Subsidiaries' businesses as presently conducted and as required by law or the rules and regulations of any federal, foreign governmental, state, county or local association, corporation or governmental agency, body, instrumentality or commission having jurisdiction over the Borrower or any of the Subsidiaries, including but not limited to the United States Environmental Protection Agency, the United States Department of Labor, the United States Occupational Safety and Health Administration, the United States Equal 41 Employment Opportunity Commission, the Federal Trade Commission and the United States Department of Justice and analogous and related state and foreign agencies. All reasonably necessary existing authorizations, licenses and permits are in full force and effect, are duly issued in the name of, or validly assigned to the Borrower or a Subsidiary and the Borrower or a Subsidiary has full power and authority to operate thereunder, except where the failure of such power and authority could not be reasonably expected to have a Material Adverse Effect. There is no material violation or material failure of compliance or, to Borrower's knowledge, allegation of such violation or failure of compliance on the part of the Borrower or any Subsidiary with any of the foregoing permits, licenses, registrations, approvals, rules or regulations and there is no action, proceeding or investigation pending or to the knowledge of the Borrower threatened nor has the Borrower or any Subsidiary received any notice of such which might result in the termination or suspension of any such permit, license, registration or approval which in any case could be reasonably expected to have a Material Adverse Effect. Section 4.1.18. PRINCIPAL PLACE OF BUSINESS; BOOKS AND RECORDS. The Borrower's chief executive offices are located at Borrowers addresses set forth in Section 9.6. All of the Borrower's books and records are kept at one or more of its addresses set forth in SECTION 9.6. Section 4.1.19. SUBSIDIARIES. The Borrower has only the Subsidiaries identified on EXHIBIT 1.1. Section 4.1.20. COPYRIGHT. To the best of Borrowees knowledge, except as set forth in EXHIBIT 4.1.20 the Borrower has not violated any of the provisions of the Copyright Act of 1976, 17 U.S.C. 101, ET SEQ. EXHIBIT 4.1.20 accurately and completely sets forth all registered copyrights and/or copyright applications held by the Borrower or any of the Subsidiaries and contains exceptions to the representations contained in this Section 4.1.20. To the best of Borrower's knowledge, no claim of infringement of a copyright by the Borrower has been made or threatened by any other Person. To the best of Borrowees knowledge, the Borrower has not allocated revenues in any manner inconsistent with the rules and regulations of the Copyright Office. Section 4.1.21. ENVIRONMENTAL COMPLIANCE. As of the Closing Date (and thereafter, where any of the following would be reasonably likely to result in any liability to the Borrower or any Subsidiary in an amount exceeding $ 100,000 in the aggregate for all such occurrences), neither the Borrower nor, to the knowledge of the Borrower, any other Person: Section 4.1.21.1. has ever caused, permitted, or suffered to exist any Hazardous Material to be spilled, placed, held, located or disposed of on, under, or about, any of the facilities owned, leased or used by the Borrower (the "Premises"), or from the Premises into the atmosphere, any body of water, any wetlands, or on any other real property, nor to Borrower's knowledge does any Hazardous Material exist on, under or about the Premises other than as disclosed on EXHIBIT 4.1.21, or in respect of Hazardous Material used or disposed of in compliance with law; Section 4.1.21.2. has any knowledge that any of the Premises has ever been used (whether by the Borrower or, to the knowledge of the Borrower, by any other Person) as a treatment, storage or disposal (whether permanent or temporary) site for any Hazardous 42 Waste as defined in 42 U. S. C. A. 6901, ET SEQ. (the Resource Conservation and Recovery Act); and Section 4.1.21.3. has any knowledge of any notice of violation, Lien or other notice issued by any governmental agency with respect to the environmental condition of the Premises or any other property occupied by the Borrower, or any other property which was included in the property description of the Premises or such other real property occupied by the Borrower within the preceding three years except as disclosed to the Agent. Section 4.1.22. MATERIAL AGREEMENTS, ETC. EXHIBIT 4.1.22 and 4.1.17 attached hereto accurately and completely lists all material agreements to which the Borrower or any of the Subsidiaries are a party including without limitation all software licenses, and all material construction, engineering, consulting, employment, management, operating and related material agreements, if any, which art, presently in effect. All of the material agreements to which Borrower or any Subsidiary is a party, are legally valid, binding, and, to Borrower's knowledge, in full force and effect and neither the Borrower, any of the Subsidiaries nor, to Borrowees knowledge, any other parties thereto are in material default thereunder. Section 4.1.23. PATENTS, TRADEMARKS AND OTHER PROPERTY RIGHTS. EXHIBIT 4.1.23 attached hereto contains a complete and accurate schedule of all registered trademarks, registered copyrights and registered patents of the Borrower and/or any of the Subsidiaries, and pending applications therefor. Except as set forth in EXHIBIT 4.1.23, the Borrower and any Subsidiaries own, possess, or have licenses to use all the patents, trademarks, service marks, trade names, copyrights and non-governmental licenses, and all rights with respect to the foregoing, which in the Borrower's business judgment are necessary for the conduct of their respective businesses as now conducted, without, to the Borrower's knowledge any conflict with the rights of others with respect thereto or Borrower could obtain such intellectual property in a manner which could not be reasonably expected to have a Material Adverse Effect. Section 4.1.24. RELATED TRANSACTION DOCUMENTS. The Borrower has, on or prior to the date hereof, delivered to the Lenders true copies of the Related Transaction Documents, and each and every amendment or modification thereto existing as of the Closing Date. ARTICLE 5. COVENANTS OF THE BORROWER Section 5.1. AFFIRMATIVE COVENANTS OF THE BORROWER OTHER THAN REPORTING REQUIREMENTS. From the date hereof and thereafter for so long as there is Indebtedness of the Borrower to any Lender and/or the Agent under any of the Financing Documents or any part of the Commitment is in effect, the Borrower will, with respect to itself and, unless noted otherwise below, with respect to each of its Subsidiaries, ensure that each Subsidiary will, unless the Majority Lenders shall otherwise consent in writing: Section 5.1.1. PAYMENT OF TAXES, ETC. Pay and discharge all taxes and assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims for the same which, if unpaid, might become a Lien upon any of its properties, provided 43 that (unless and until foreclosure, restraint, sale or any similar proceeding is pending and is not stayed, discharged or bonded within 60 days after commencement) the Borrower shall not be required to pay, any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings and for which proper reserve or other provision has been made in accordance with GAAP, unless failure to pay could not reasonably be expected to result in a Material Adverse Effect. Section 5.1.2. MAINTENANCE OF INSURANCE. Maintain on the collateral under any of the Security Documents insurance against loss by fire, hazards included within the term "extended coverage", and such other hazards, casualties and contingencies as the Agent may from time to time reasonably require, in an amount equal to one hundred percent (100%) of the replacement cost of the collateral under any of the Security Documents and business interruption insurance in the amount of at least $4,000,000. All policies of such insurance and all renewals thereof shall be in form and substance acceptable to Agent, shall be made payable in case of loss to the Agent as loss payee as its interest may appear and mortgagee and shall contain an endorsement requiring thirty (30) days prior written notice to the Agent prior to cancellation or change in the coverage, scope or amount of any such policies. Borrower shall also keep in full force and effect a policy of public liability insurance against claims of bodily injury, death or property damage occurring in any building in which the limits of liability shall not be less than One Million Dollars ($1,000,000) per person and Two Million Dollars ($2,000,000) per accident, together with an excess liability policy in the amount of Two Million Dollars ($2,000,000) which shall be in addition to the limits above set forth. Borrower shall increase the limits of such liability insurance to such higher amounts as the Agent may from time to time reasonably require. Certificates of all such insurance shall be delivered to the Agent concurrently with the execution and delivery of this Agreement, and thereafter all renewal or replacement certificates shall be delivered to the Agent not less than thirty (30) days prior to the expiration date of the policy to be renewed or replaced, accompanied by evidence reasonably satisfactory to the Agent that all premiums payable with respect to such policies have been paid by Borrower. Borrower shall have the right of free choice in the selection of the agent or the insurer through or by which the insurance required hereunder is to be placed; provided, however, said insurer has at all times a general policyholder's rating of A or A+ in Best's latest rating guide. Furthermore, from and after the occurrence of an Event of Default, the Agent shall have the right and is hereby constituted and appointed the true and lawful attorney irrevocable of Borrower, in the name and stead of Borrower, but in the uncontrolled discretion of said attorney, (i) to adjust, sue for, compromise and collect any amounts due under such insurance policies in the event of loss and (ii) to give releases for any and all amounts received in settlement of losses under such policies; and the same shall, subject to Section 2.6.1.3 of this Agreement, at the option of the Agent, be applied, after first deducting the costs of collection, on account of any Indebtedness the payment of which is secured by any of the Financing Documents, whether or not then due, or, notwithstanding the claims of any subsequent lienor, be used or paid over to Borrower in accordance with reasonable procedures established by the Agent for use in repairing or replacing any damaged or destroyed collateral under any of the Security Documents. Section 5.1.3. PRESERVATION OF EXISTENCE, ETC. Preserve and maintain in full force and effect its legal existence, and all material rights, franchises and privileges in the jurisdiction of its organization, preserve and maintain all material licenses, governmental approvals, trademarks, patents, trade secrets, copyrights and trade names owned or possessed by it and 44 which are necessary or, in the reasonable business judgment of the Borrower, necessary or desirable in view of its business and operations or the ownership of its properties and qualify or remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or, in its reasonable business judgment, necessary or desirable in view of its business and operations and ownership of its properties except where the failure to so qualify could not be reasonably expected to have a Material Adverse Effect. Section 5.1.4. COMPLIANCE WITH LAWS, ETC. Comply with the requirements of all present and future applicable laws, rules, regulations and orders of any governmental authority having jurisdiction over it and/or its business including, without limitation, regulations of the United States Copyright Office and the Copyright Royalty Tribunal Office, except where the failure to comply could not be reasonably expected to have a Material Adverse Effect. Section 5.1.5. VISITATION RIGHTS. Permit, during normal business hours and upon the giving of reasonable notice, the Agent, the Lenders and any agents or representatives thereof, to examine and make copies of (at Borrower's cost and expense (excluding Agent's travel expense) and abstracts from the records and books of account of, and visit the properties of the Borrower and any Subsidiary to discuss the affairs, finances and accounts of the Borrower or any Subsidiary with any of their partners, officers or management level employees and/or any independent certified public accountant of the Borrower and/or any Subsidiary. Prior to the occurrence of a Default or an Event or Default, Agent agrees to limit any such examinations to no more than four (4) such examinations in any calendar year. Section 5.1.6. KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep adequate records and books of account, in which complete entries will be made so as to allow Borrower to prepare financial statements in accordance with GAAP and with applicable requirements of any governmental authority having jurisdiction over the Borrower and/or any Subsidiary in question, reflecting all material financial transactions. Section 5.1.7. MAINTENANCE OF PROPERTIES, ETC. Subject to SECTION 5.2.3, maintain and preserve all of its properties necessary or useful in the proper conduct of its business in its reasonable business judgment, in good working order and condition, ordinary wear and tear excepted, and in accordance with each of the Security Documents. Section 5.1.8. [Post-Closing Items. Complete in a timely fashion all actions required in the Post-Closing Letter.] Section 5.1.9. OTHER DOCUMENTS, ETC. Except as otherwise required by this Agreement, pay, perform and fulfill all of its material obligations and covenants under each document, instrument or agreement to which it is a party including, without limitation, the Related Transaction Documents; provided that so long as the Borrower or any Subsidiary is contesting any claimed default unless waived or cured by it or them under any of the foregoing by proper proceedings conducted in good faith and for which any proper reserve or other provision in accordance with and to the extent required by GAAP has been made, such default shall not be deemed a violation of this covenant. 45 Section 5.1.10. MINIMUM CONSOLIDATED NET WORTH. Maintain a Consolidated Net Worth in an amount not less than the sum of (i) eighty-five percent (85%) of Consolidated Net Worth as of the Closing Date plus (ii) seventy-five percent (75%) of Net Income for the period beginning as of the Closing Date without any reduction for losses, plus (iii) one hundred (100%) percent of the net proceeds of any offering or sale of an equity security of the Borrower or any Subsidiaries or the conversion to equity of any debt after the Closing Date, to be measured at each Borrower fiscal quarter end on a cumulative basis from the Closing Date. Section 5.1.11. MINIMUM DEBT SERVICE COVERAGE RATIO. Maintain a ratio of (i) EBITDA less, for the fiscal period over which EBITDA is measured, the sum of cash taxes paid and Capital Expenditures to (ii) the sum of Total Debt Service for the Borrower fiscal quarters ending January 31, 1999 and April 30, 1999, if Borrower's cash and Cash Equivalent Investments at such date in question exceed $3,000,000, 1.25: 1.00 and otherwise and thereafter of not less than 1.5O: 1.00 at each Borrower fiscal quarter end. Section 5.1.12. MAXIMUM RATIO OF TOTAL INDEBTEDNESS FOR BORROWED MONEY TO EBITDA. Maintain at the end of each fiscal quarter of the Borrower a ratio of (i) total Indebtedness for Borrowed Money of the Borrower and its Subsidiaries on a consolidated basis as of the last day of such fiscal quarter to (ii) EBITDA of not greater than 2.00: 1.00. Section 5.12(A). MINIMUM NET INCOME. Maintain Net Income of at least $1.00 for each period consisting of the most recent Borrower fiscal quarter and the three immediately preceding Borrower fiscal quarters and in any such four-quarter period have at least $1.00 of Net Income for at least two Borrower fiscal quarters. Section 5.1.13. OFFICER'S CERTIFICATES AND REQUESTS. Provide each Officer's Certificate required under this Agreement and each Request so that the statements contained therein are accurate and complete in all material respects. Section 5.1.14. DEPOSITORY. Use the Agent as a depository of Borrower's funds. Section 5.1.15. CHIEF EXECUTIVE OFFICER. Maintain Jerry S. Rawls as the president or chief executive officer of the Borrower and as the Person with principal executive, operating.. and management responsibility for the Borrower's business and Dr. Frank Levinson as principal technologist of the Borrower or, in each case, obtain a replacement of comparable experience and training in the Borrowees industry reasonably satisfactory to the Majority Lenders within one year of either such Person's ceasing to act in such capacity. Section 5.1.16. NOTICE OF PURCHASE OF REAL ESTATE AND LEASES. Promptly notify the Agent in the event that the Borrower shall purchase any real estate or enter into any lease of real estate material to the operation of the Borrower's business, supply the Agent with a copy of the related purchase agreement or of such lease, as the case may be, and if requested by the Agent, execute and deliver, or cause to be executed and delivered, to the Agent for the benefit of the Lenders a deed of trust, mortgage, assignment or other document, together with landlord consents, in the case of leased property, reasonably satisfactory in form and substance to the Agent, granting a valid first Lien (subject to any Liens permitted under SECTION 5.2. 1 hereto on such real property or leasehold as security for the Financing Documents. 46 Section 5.1.17. ADDITIONAL ASSURANCES. From time to time hereafter, execute and deliver or cause to be executed and delivered, such additional instruments, certificates and documents, and take all such actions, as the Agent shall reasonably request for the purpose of implementing or effectuating the provisions of the Financing Documents, and upon the exercise by the Agent of any power, right, privilege or remedy pursuant to the Financing Documents which requires any consent, approval, registration, qualification or authorization of any governmental authority or instrumentality, exercise and deliver all applications, certifications, instruments and other documents and papers that the Agent may be so required to obtain. Section 5.1.18. APPRAISALS. Permit the Agent and its agents, at any time and in the sole discretion of the Agent or at the request of the Majority Lenders, to conduct appraisals of the Borrower's business, the cost of which shall be borne by the Borrower, including without limitation a field audit of Borrower's accounts receivable by the Agent within 60 days after the Closing Date with results reasonably acceptable to the Agent. Unless a Default or an Event of Default shall have occurred and be continuing, Agent agrees to limit any such examinations to no more than the above-referenced audit of Borrower's accounts receivable and one (1) such examination in any calendar year at a cost to Borrower not to exceed $2,500 per examination. Section 5.1.19. ENVIRONMENTAL COMPLIANCE. Comply in all material respects with the requirements of all applicable federal, state, and local environmental laws; notify the Agent promptly in the event of any spill of Hazardous Material affecting the Premises occupied by the Borrower from time to time, which such spill would be reasonably expected to result in or cause a Material Adverse Effect; forward to the Agent promptly any written notices relating to such matters received from any governmental agency; and pay promptly when due any uncontested fine or assessment against the Premises. Section 5.1.20. REMEDIATION. In accordance with commercially reasonable practice in place for the jurisdiction where any such event occurs, immediately remediate in accordance with applicable law any Hazardous Material found on the Premises in compliance with applicable laws and at the Borrower's expense, subject however, to the right of the Agent, at the Agent's option but at the Borrower's expense, to have an environmental engineer or other representative review the work being done. Section 5.1.21. SITE ASSESSMENTS. Promptly upon the request of the Agent, based upon the Agent's reasonable belief that a material Hazardous Material or other environmental problem exists with respect to any Premises, provide the Agent with a Phase I environmental site assessment report and, if Agent finds a reasonable basis for further assessment in such Phase I assessment, a Phase II environmental site assessment report, or an update of any existing report, all in scope, form and content and performed by such company as may be reasonably satisfactory to the Agent. Section 5.1.22. KEY-MAN INSURANCE. The Borrower shall obtain at commercially reasonable rates within thirty (3 0) days of the Closing Date and maintain in force, until canceled or modified with the written consent of the Majority Lenders, an insurance policy on the lives of each of Jerry S. Rawls and Frank Levinson, each in the amount of $1,000,000 naming the Borrower as holder and beneficiary. The obligations of the Borrower pursuant to this Section 5.1.22 shall terminate upon the consummation of a Qualified Initial Public Offering. 47 Section 5.1.23. TRADEMARKS, COPYRIGHTS, ETC. Concurrently with the acquisition of any registered trademark, tradename, copyright, patent or service mark grant a first priority perfected Lien thereon to the Agent pursuant to documents in form and substance reasonably satisfactory to the Agent. Section 5.2. NEGATIVE COVENANTS OF THE BORROWER. From the date hereof and thereafter for so long as there is Indebtedness of the Borrower to any Lender and/or the Agent under any of the Financing Documents or any part of the Commitment is in effect, the Borrower will not, with respect to itself and, unless noted otherwise below, with respect to each of the Subsidiaries, will ensure that each, such Subsidiary will not, without the prior written consent of the Majority Lenders: Section 5.2.1. LIENS, ETC. Create, incur, assume or suffer to exist any Lien of any nature, upon or with respect to any of its properties, now owned or hereafter acquired, or assign as collateral or otherwise convey as collateral, any right to receive income, except that the foregoing restrictions shall not apply to any Liens: Section 5.2.1.1. For taxes, assessments or governmental charges or levies on property I if the same shall not at the time be delinquent or thereafter can be paid without penalty or interest, or (if foreclosure, distraint, sale or other similar proceedings shall not have been commenced or if commenced not stayed, bonded or discharged within 60 days after commencement) are being contested in good faith and by appropriate proceedings diligently conducted and for which proper reserve or other provision has been made in accordance with and to the extent required by GAAP; Section 5.2.1.2. Imposed by law (or pursuant to customary ordinary course contracts), such as landlords', carriers', warehousemen's and mechanics' liens, bankers' set off rights and other similar Liens arising in the ordinary course of business for sums not yet due or being contested in good faith and by appropriate proceedings diligently conducted and for which proper reserve or other provision has been made in accordance with and to the extent required by GAAP; Section 5.2.1.3. Arising in the ordinary course of business out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation; Section 5.2.1.4. Arising from or upon any judgment or award, provided that such judgment or award is being contested in good faith by proper appeal proceedings and only so long as execution thereon shall be stayed; Section 5.2.1.5. Those set forth on EXHIBIT 1.8; Section 5.2.1.6. Those now or hereafter granted pursuant to the Security Documents or otherwise now or hereafter granted to the Agent for the benefit of the Lenders as collateral for the Loans and/or Borrower's other Obligations arising in connection with or under any of the Financing Documents; 48 Section 5.2.1.7. Deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases, statutory obligations, surety bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of the Borrower's or any Subsidiary's business; Section 5.2.1.8. Easements, rights of way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of business by the Borrower or any Subsidiary; Section 5.2.1.9. Liens securing Indebtedness permitted to exist under Section 5.2.8.3; provided that the Lien securing any such Indebtedness is limited to the item of property purchased or leased in each case and additions, attachments and accessions thereto and proceeds and replacements thereof, Section 5.2.1.10. UCC-I financing statements filed solely for notice or precautionary purposes by lessors under operating leases which do not secure Indebtedness and which are limited to the items of equipment leased pursuant to the lease in question- and Section 5.2.1.11. Liens on properties in respect of judgments or awards not constituting an Event of Default under Article VI. Section 5.2.1.12. Leases or subleases and licenses and sublicenses granted to others in the ordinary course of Borrower's business not interfering in any material respect with the business of Borrower and its Subsidiaries taken as a whole, and any interest or title of a lessor, licensor or under any lease or license. Section 5.2.1.13. Liens on assets (including the proceeds thereof and accessions thereto) that existed at the time such assets were acquired by Borrower or a Subsidiary (including liens on assets of any corporation that existed at the time it became or becomes a Subsidiary). Section 5.2.1.14. Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation or exportation of goods; and Section 5.2.1.15. Liens on insurance proceeds in favor of insurance companies solely to secure the payment of financed premiums. Section 5.2.2. ASSUMPTIONS, GUARANTIES, ETC, OF INDEBTEDNESS OF OTHER PERSONS. Assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligation or Indebtedness of any other Person, except: Section 5.2.2.1. Guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; 49 Section 5.2.2.2. Assumptions, guaranties, endorsements and contingent liabilities within the definition of Indebtedness and permitted by SECTION 5.2.8; and Section 5.2.2.3. Those set forth on EXHIBIT 5.2.2. Section 5.2.3. ACQUISITIONS, DISSOLUTION, ETC. Except for the consummation of the Related Transactions and any Qualified Initial Public Offering, acquire, in one or a series of transactions, all or any substantial portion of the assets or ownership interests in another Person, or dissolve, liquidate, wind up, merge or consolidate or combine with another Person or except as permitted by Section 2.6.1.4 hereof sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) any material assets, whether now owned or hereafter acquired, except as follows: (i) the Borrower may merge into a Delaware corporation newly formed by or on behalf of the Borrower having the same name as the Borrower and which owns all of and only the Borrower's assets and is liable only for the Borrower's liabilities, including without limitation the Obligations all as they exist immediately prior to such merger; provided, that the Borrower shall provide the Agent with at least thirty (30) days prior written notice of any such merger accompanied by such information relating thereto as may be requested by the Agent, together with the creation of such Liens and the execution of such UCC- I financing statements and amendments to the Security Documents as the Agent shall require in its reasonable discretion; (ii) the Borrower may sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transaction) material assets, whether now owned or hereafter acquired, or any of Borrower's or any Subsidiary's interest in real property to the extent that (a) such assets are replaced within ninety (90) days of any asset sale, assignment, lease or disposition with assets of like kind, usefulness and value, or (b) such dispositions (w) occur in the ordinary course of the Borrower's business, (x) consist of dispositions of investments permitted under Section 5.2.12, (y) consist of dispositions in connection with sale and leaseback transactions permitted under Section 5.2.6, or (z) consist of dispositions of receivables permitted under SECTION 5.2.7. and (iii) the Borrower may acquire the ownership interests or assets of another business entity (through a merger, consolidation, stock or asset purchase) engaged in a business permitted by Section 5.2.4 only if the consideration paid or payable by the Borrower or any Subsidiary solely consists of Borrowers or such Subsidiary's common stock, preferred stock or other equity interests and so long as the sum of the amount of such Indebtedness' in the aggregate outstanding at any time and the aggregate outstanding amount of Capitalized Lease Obligations and purchase money Indebtedness, all of the Borrower and any Subsidiaries, does not exceed $2,500,000, assumption by the Borrower of Indebtedness of such business entity outstanding prior to any such acquisition. Section 5.2.4. CHANGE IN NATURE OF BUSINESS. Engage in any business other than the business of the Borrower on the date hereof and lines of business incidental or reasonably related thereto. 50 Section 5.2.5. OWNERSHIP. Cause or permit the occurrence of any Change of Control. Section 5.2.6. LEASES; SALE AND LEASEBACK. Enter into (a) any sale and leaseback arrangement with any lender or investor other than (i) a sale-leaseback entered into within 90 days of the acquisition of the property if immediately after giving effect thereto, no Default or Event of Default shall exist, or (ii) if the lease-back is a Capitalized Lease Obligation and if immediately after giving effect thereto, no Default or Event of Default exists, (b) any lease treated as an operating lease under GAAP, but treated as a loan or financing for United States federal income tax purposes, or (c) any Capitalized Lease Obligations if the aggregate payment obligations of the Borrower thereunder exceed the remainder of $2,500,000 less the sum of the amount of Indebtedness assumed pursuant to SECTION 5.2.3 (III) and the aggregate amount of purchase money Indebtedness permitted under SECTION 5.2.8.3. Section 5.2.7. SALE OF ACCOUNTS, ETC. Sell, assign, discount or dispose in any way of any accounts receivable, promissory notes or trade acceptances held by the Borrower or any Subsidiary, with or without recourse, except in the ordinary course of the Borrower's or any Subsidiary's business. Section 5.2.8. INDEBTEDNESS. Incur, create, become or be liable directly or indirectly, in any manner with respect to or permit to exist any Indebtedness except: Section 5.2.8.1. Indebtedness under the Financing Documents; Section 5.2.8.2. Indebtedness with respect to trade payable obligations and other normal accruals and customer deposits in the ordinary course of business not yet due and payable in accordance with customary trade terms or with respect to which the Borrower or any Subsidiary is contesting in good faith the amount or validity thereof by appropriate proceedings and then only to the extent such person has set aside on its books adequate reserves therefor in accordance with and to the extent required by GAAP; Section 5.2.8.3. Indebtedness with respect to Capitalized Lease Obligations permitted under SECTION 5.2.6 and purchase money Indebtedness with respect to real or personal property in an aggregate amount outstanding at any time not to exceed the remainder of $2,500,000 less the sum of the amount of Indebtedness assumed pursuant to SECTION 5.2.3(iii) and Capitalized Lease Obligations described in SECTION 5.2.6; provided that the amount of any purchase money Indebtedness does not exceed 100% of the lesser of the cost or fair market value of the asset purchased with the proceeds of such Indebtedness; Section 5.2.8.4. Unsecured Indebtedness in an aggregate amount outstanding at any time not to exceed $250,000 plus any additional subordinated Indebtedness pursuant to the terms of subordination agreements and in an amount reasonably acceptable to Majority Lenders; Section 5.2.8.5. Indebtedness listed on EXHIBIT 3.1.1.8; Section 5.2.8.6. Indebtedness owing by the Borrower to any Subsidiary or by any Subsidiary to the Borrower or any other Subsidiary. 51 Section 5.2.8.7. Indebtedness permitted by SECTION 5.2.2. Section 5.2.8.8. Indebtedness outstanding as a refinancing of Indebtedness permitted under another clause of this SECTION 5.2.8 other than SECTIONS 5.2.8.2 or 5.2.8.8; provided that such Indebtedness as refinanced continues to qualify as permitted Indebtedness under the clause of this SECTION 5.2.8 under which the refinanced Indebtedness was permitted under this SECTION 5.2.8. Section 5.2.8.9. Indebtedness incurred by Borrower or any Subsidiary constituting interest rate or currency future, forward or swap contracts entered into for the purpose of hedging interest rate or currency fluctuation risk. Section 5.2.9. OTHER AGREEMENTS. Amend any of the terms or conditions of any of the Related Transaction Documents, its certificate of incorporation, if any, any subordination agreement or any indenture, agreement, document, note or other instrument evidencing, securing or relating to any other Indebtedness permitted under SECTION 5.2.8, in each case in a manner materially adverse to the Agent or any of the Lenders. Section 5.2.10. [INTENTIONALLY OMITTED.] Section 5.2.11. Dividends, Payments and Distributions. Except for the consummation of the Related Transactions, a Qualified Initial Public Offering, repurchases of capital stock solely with the proceeds of newly issued shares of capital stock (but only to the extent no Change of Control has occurred or occurs immediately thereafter) or any employee stock redemptions in the ordinary course of the Borrower's business pursuant to qualified or nonqualified employee stock plans, declare or pay any dividends or make any other distribution of cash or property or both to any of the Stockholders on account of such Stockholder's stock or use any of its assets for payment, purchase, conversion, redemption, defeasance, sinking fund payment, retention, acquisition or retirement of any beneficial interest in the Borrower or set aside or reserve assets for sinking or like funds for any of the foregoing purposes, make any other distribution by reduction of capital or otherwise in respect of any beneficial interest in the Borrower or permit any Subsidiary which is not a wholly-owned Subsidiary so to do; provided that the foregoing shall not apply to (i) any dividend or distribution payable solely in the common stock, preferred stock or other equity of the Borrower or (ii) any conversion of the Borrowers preferred stock or Indebtedness into common stock or other equity of the Borrower so long as Borrower makes no payment or distribution of cash or other property other than Borrower common stock, preferred stock or other equity of the Borrower in connection therewith. Section 5.2.12. INVESTMENTS IN OR TO OTHER PERSONS. Make or commit to make any Investment in or to any other Person (including, without limitation, any Subsidiary) other than (i) advances to employees for business expenses not to exceed $10,000 in the aggregate outstanding for any one employee and not to exceed $50,000 in the aggregate outstanding at any one time to all such employees, (ii) other employee loans extended after the Closing Date in amounts not to exceed $10,000 in the aggregate outstanding for any one employee and not to exceed $100,000 in the aggregate outstanding at any one time to all such employees except that 52 the Borrower shall be permitted to make loans of up to $500,000 in the aggregate outstanding at any time with terms. not to exceed one year to employees relocating to the Borrower for financing housing on an interim basis for such employees and their families, (iv) Cash Equivalent Investments, (v) Investments in accounts, contract rights and chattel paper (as defined in the Uniform Commercial Code) and notes receivable, arising or acquired in the ordinary course of business, (vi) Investments described on EXHIBIT 5.2.2 and (vii) establishment of a wholly-owned "Foreign International Sales Corporation" as defined in the Code or any other Subsidiary; provided that any such Subsidiaries' assets or Investment by the Borrower therein shall not exceed in the aggregate at any time 10% of Consolidated Net Worth. Section 5.2.13. TRANSACTIONS WITH AFFILIATES. Except as contemplated by the Equity Documents and Related Transaction Documents, engage in any transaction or enter into any agreement with an Affiliate, or in the case of Affiliates or Subsidiaries, with the Borrower or another Affiliate or Subsidiary, except, as permitted by any other provision of this Agreement and then only on an arm's length basis except as set forth on EXHIBIT 5.2.13. Section 5.2.14. CHANGE OF FISCAL YEAR. Change its fiscal year. Section 5.2.15. SUBORDINATION OF CLAIMS. Subordinate any present or future claim against or obligation of another Person, except as ordered in a bankruptcy or similar creditors, remedy proceeding of such other Person or pursuant to subordination agreements reasonably acceptable to the Majority Lenders. Section 5.2.16. COMPLIANCE WITH ERISA. With respect to Borrower and any Commonly Controlled Entity (a) withdraw from or cease to have an obligation to contribute to, any Multiemployer Plan so as to result in any material liability of the Borrower or any Commonly Controlled Entity to PBGC or to any Multiemployer Plan, (b) engage in any "prohibited transaction" (as defined in Section 4975 of the Code) involving any Plan which would result in a material liability of the Borrower or any Commonly Controlled Entity for an excise tax or civil penalty in connection therewith, (c) except for any deficiency caused by a waiver of the minimum funding requirement under sections 412 and/or 418 of the Code, as described above, incur or suffer to exist any material "accumulated funding deficiency" (as defined in section 302 of ERISA and section 412 of the Code) of the Borrower or any Commonly Controlled Entity, whether or not waived, involving any Single Employer Plan, (d) incur or suffer to exist any Reportable Event or the appointment of a trustee or institution of proceedings for appointment of a trustee for any Single Employer Plan if, in the case of a Reportable Event, such event continues unremedied for ten (10) days after notice of such Reportable Event pursuant to sections 4043(a), (c) or (d) of ERISA is given, if in the reasonable opinion of the Majority Lenders any of the foregoing is likely to result in a Material Adverse Effect, (e) permit the assets held under any Plan to be insufficient to protect all accrued benefits, (f) allow or suffer to exist any event or condition, which presents a material risk of incurring a material liability of the Borrower or any Commonly Controlled Entity to PBGC by reason of termination of any such Plan or (g) cause or permit any Plan maintained by Borrower and/or any Commonly Controlled Entity to be out of compliance with ERISA. For purposes of this SECTION 5.2.16 "material liability" shall be deemed to mean any liability of Fifty Thousand Dollars ($50,000) or more in the aggregate. 53 Section 5.2.17. [INTENTIONALLY OMITTED.] Section 5.2.18. HAZARDOUS WASTE. Become involved, or permit, to the extent reasonably possible after the exercise by the Borrower of reasonable due diligence and preventive efforts, any tenant of its real property to become involved, in any unlawful operations at such real property generating, storing, disposing, or handling Hazardous Material or any other activity that could lead to the imposition on the Borrower or the Agent or any Lender, or any such real property of any material liability or Lien under any environmental laws. Section 5.2.19. OTHER RESTRICTIONS ON LIENS. Enter into any agreement or otherwise agree to or grant any restriction substantially similar to the provisions of SECTION 5.2.1 hereof or which would otherwise have the effect of prohibiting, restricting, impeding or interfering with the creation subsequent to the Closing Date of additional Liens to secure the Obligations; provided that the foregoing shall not apply to (i) customary provisions in license or similar agreements that restrict the ability of the Borrower or its Subsidiaries to assign, transfer, license or sublicense any intellectual property subject to such license or agreement or (ii) negative pledge provisions in operating leases, capital leases or other equipment finance agreements; provided such negative pledge agreements restrict only Liens on the equipment subject to such lease or agreement together with any extensions, additions, replacements or proceeds of such equipment. Section 5.3. REPORTING REQUIREMENTS. From the date hereof and thereafter for so long as the Borrower is indebted to any Lender and/or the Agent under any of the Financing Documents, the Borrower will, unless the Majority Lenders shall otherwise consent in writing, furnish or cause to be furnished to the Agent for distribution to the Lenders: Section 5.3.1. Promptly upon acquiring knowledge of a Default or an Event of Default or Default, continuing on the date of such statement, the written statement of an Authorized Representative setting forth details of such Event of Default or Default and the actions which the Borrower has taken and proposes to take with respect thereto, Section 5.3.2. As soon as practicable after the end of each Borrower fiscal year and in any event within 90 days after the end of each such fiscal year, consolidated and consolidating balance sheets of the Borrower and any Subsidiaries as at the end of such year, and the related statements of income and cash flows or shareholders' equity of the Borrower and its Subsidiaries setting forth in each case the corresponding figures for the preceding fiscal year, such statements to be certified by a firm of independent certified public accountants selected by Borrower with a recognized national reputation, to be accompanied by a true copy of said auditors' management letter, if one was provided to the Borrower, and to contain a statement to the effect that such accountants have examined SECTIONS 5.1.10 through 5.1.13 and 5.2.17 and that no Default or Event of Default exists on account of Borrower's failure to have been in compliance therewith on the date of such statement, said accountants' examination of the financial statements to be conducted in accordance with GAAP, including but not limited to all such tests of the accounting records as are considered necessary in the circumstances by the independent certified public accountants preparing such statements; 54 Section 5.3.3. As soon as is practicable after the end of each fiscal quarter of each Borrower fiscal year and in any event within 45 days thereafter, consolidated balance sheets of the Borrower and any Subsidiaries as of the end of such period and the related statements of income and cash flows and shareholders' equity of the Borrower and any Subsidiaries, subject to changes resulting from year-end adjustments, together, subject to SECTION 5.3.7, with a comparison to the Budget for the applicable period, such balance sheets and statements to be prepared and certified by an Authorized Representative in an Officer's Certificate as having been prepared in accordance with GAAP except for footnotes and year-end adjustments, and to be in form reasonably satisfactory to the Agent; Section 5.3.4. Simultaneously with the furnishing of each of the year-end consolidated and consolidating financial statements of the Borrower and any Subsidiaries to be delivered pursuant to SECTION 5.3.2 and each of the consolidated quarterly statements of the Borrower and the Subsidiaries to be delivered pursuant to SECTION 5.3.3 an Officers Certificate of an Authorized Representative which shall contain a statement in the form of EXHIBIT 3.1.1.1O to the effect that no Event of Default or Default has occurred, without having been waived in writing, or if there shall have been an Event of Default not previously waived in writing pursuant to the provisions hereof, or a Default, such Officer's Certificate shall disclose the nature thereof and the actions the Borrower has taken and prepare to take with respect thereto. Each such Officer's Certificate shall also contain a calculation of and certify to the accuracy of the amounts required to be calculated in the financial covenants of the Borrower contained in this Agreement and described in EXHIBIT 3.1.1.10; Section 5.3.5. Promptly after the commencement thereof, notice of all material actions, suits and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the Borrower and/or any Subsidiary; Section 5.3.6. The borrowing base certificates required pursuant to SECTION 2.1 hereof and, within 15 days after preparation and receipt thereof by the Borrower, true copies of the Borrower's 1996 and 1997 audited financial statements; Section 5.3.7. On or before May 31 of each fiscal year of the Borrower, an updated proposed budget, prepared on a quarterly basis, and updated financial projections for the Borrower and any Subsidiaries on a consolidated basis (together, the "Budget") for such fiscal year, setting forth in detail reasonably satisfactory to the Agent the projected results of operations of the Borrower and any Subsidiaries on a consolidated quarterly basis, detailed Capital Expenditures plan and stating underlying assumptions and accompanied by a written statement of an Authorized Representative certifying as to the approval of such Budget by Borrower's board of directors, Section 5.3.8. Subject to the limitations set forth in SECTION 5.1.5, such other information respecting the Business Condition of the Borrower or any Subsidiaries as the Agent or any Lender may from time to time reasonably request; Section 5.3.9. Written notice of the fact and of the details of any material sale or transfer of any ownership interest in the Borrower or any Subsidiary given promptly after the 55 Borrower acquires knowledge thereof, provided, however, that this clause shall not be deemed to constitute or imply any consent to any such sale or transfer; Section 5.3.10. Prompt written notice of loss of the President, Chief Executive Officer, the Principal Technologist, the Treasurer, the Director of Marketing and/or the Director of Operations or any Material Adverse Effect and an explanation thereof and of the actions the Borrower and/or such Subsidiary propose to take with respect thereto; and Section 5.3.11. Written notice of the following events, as soon as possible and in any event within 15 days after the Borrower knows or has reason to know thereof. (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, or (ii) the institution of proceedings or the taking or expected taking of any other action by PBGC or the Borrower or any Commonly Controlled Entity to terminate, withdraw or partially withdraw from any Plan and, with respect to any Multiemployer Plan, the Reorganization (as defined in Section 4241 of ERISA) or Insolvency (as defined in Section 4245 of ERISA) of such Multiemployer Plan and in addition to such notice, deliver to the Agent whichever of the following may be applicable: (a) an Officer's Certificate setting forth details as to such Reportable Event and the action that the Borrower or Commonly Controlled Entity proposes to take with respect thereto, together with a copy of any notice of such Reportable Event that may be required to be filed with PBGC, or b) any notice delivered by PBGC evidencing its intent to institute such proceedings or any notice to PBGC that such Plan is to be terminated, as the case may be. ARTICLE 6. EVENTS OF DEFAULT Section 6.1. EVENTS OF DEFAULT. The Borrower shall be in default under each of the Financing Documents, upon the occurrence of any one or more of the following events (`Events of Default"): Section 6.1.1. If the Borrower shall fail to make due and punctual payment of any principal, fees, interest and/or other amounts payable under this Agreement as provided in any Note and/or in this Agreement when the same is due and payable except that it shall not be an Event of Default if any interest, fees and/or other amounts (excluding principal) is paid within 5 Business Days in the case of interest and fees or 30 Business Days for all such other amounts (other than principal), in all such cases after it is due and payable, whether at the due date thereof or at a date fixed for prepayment or if the Borrower shall fail to make any such payment of fees, interest, principal and/or any other amount under this Agreement and/or under any Note on the date when such payment becomes due and payable by acceleration; Section 6.1.2. To the extent not described in SECTION 6.1.3, if the Borrower or any Subsidiary shall make an assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall admit in writing its inability to pay its debts as they become due or shall file a voluntary petition in bankruptcy, or shall file any petition or answer seeking any reorganization, arrangement, composition, adjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy laws or other applicable federal, state or 56 other statute, law or regulation, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of it or of all or any substantial part of its properties, or if partnership or corporate action shall be taken for the purpose of effecting any of the foregoing; or Section 6.1.3. If (i) the Borrower or any Subsidiary shall be the subject of a bankruptcy proceeding, or (ii) any proceeding against any of them seeking any reorganization, arrangement, composition, adjustment, liquidation, dissolution, or similar relief under the present or any future federal bankruptcy law or other applicable federal, foreign state or other statute, law or regulation shall be commenced, or (iii) any trustee, receiver or liquidator of any of them or of all or any substantial part of any or all of their properties shall be appointed without their consent or acquiescence; provided that in any of the cases described above in this SECTION 6. 1.3, such proceeding or appointment shall not be an Event of Default if the Borrower or the Subsidiary in question shall cause such proceeding or appointment to be discharged, vacated, dismissed or stayed within ninety (90) days after commencement thereof, or Section 6.1.4. If final judgment or judgments aggregating more than $500,000 (after giving effect to the proceeds of any insurance coverage received by the Borrower, any Subsidiary or the Agent) shall be rendered against the Borrower or any Subsidiary and shall remain undischarged, unstayed or unpaid for an aggregate of sixty (60) days (whether or not consecutive) after entry thereof, or Section 6.1.5. If the Borrower or any Subsidiary shall default (after giving effect to any applicable notice or grace period) in the due and punctual payment of the principal of or interest on any Indebtedness exceeding in the aggregate $500,000 (other that, the Loans), or if any default shall have occurred and be continuing after any applicable notice or grace period under any mortgage, note or other agreement evidencing, securing or providing for the creation of such Indebtedness, which results in the acceleration of such Indebtedness or which permits, or with the giving of notice would permit, any holder or holders of any such Indebtedness to accelerate the stated maturity thereof, or Section 6.1.6. If there shall be a default in the performance of the Borrowees obligations under SECTION 5.1.3 (insofar as such Section requires the preservation of the corporate existence of the Borrower or any Subsidiary), any of SECTIONS 5.1.2, 5.1.10 through 5.1.13 or SECTION 5.2 of this Agreement; or Section 6.1.7. If there shall be any Default in the performance of any covenant or condition contained in this Agreement or in any of the other Financing Documents to be observed or performed pursuant to the terms hereof or any Financing Document, as the case may be, or to the extent such default would have a Material Adverse Effect, any failure by the Borrower to pay any amounts due under any indemnification obligation of the Borrower under any of the Related Transaction Documents, other than a covenant or condition referred to in any other subsection of this Section 6.1 and such Default shall continue unremedied or unwaived, (i) in the case of any covenant or condition contained in Section 5.3, for thirty (30) Business Days, or (ii) in the case of any other covenant or condition for which no other grace period is provided, for thirty (30) days, or (iii) in the case of any other covenant or condition for which another grace period is provided, for such grace period, or (iv) if any of the representations and warranties made or deemed made by the Borrower to the Agent and/or any Lender pursuant to any of the 57 Financing Documents proves to have been false or misleading in any material respect when made and such falseness or misleading representation or warranty would be reasonable likely to have a material adverse effect on the Agent or any Lender or their rights and remedies or a Material Adverse Effect; or Section 6.1.8. If there shall be any attachment of any deposits or other property of the Borrower and/or any Subsidiary in the possession of any Lender or any attachment of any other property of the Borrower and/or any Subsidiary in an amount exceeding in the aggregate $500,000, which shall not be discharged, vacated or stayed within sixty (60) days of the date of such attachment; or Section 6.1.9. Any certification of the financial statements, furnished to the Agent pursuant to SECTION 5.3.2, shall contain any qualification; provided, however, that such qualifications will not be deemed an Event of Default if in each case (i) such certification shall state that the examination of the financial statements covered thereby was conducted in accordance with generally accepted auditing standards, including but not limited to all such tests of the accounting records as are considered necessary in the circumstances by the independent certified public accountants preparing such statements, (ii) such financial statements were prepared in accordance with GAAP and (iii) since qualification does not involve the "going concern" status of the entity being reported upon. ARTICLE 7. REMEDIES OF LENDERS Upon the occurrence and during the continuance of any one or more of the Events of Default, the Agent, at the request of the Majority Lenders, shall, by written notice to the Borrower, declare the obligation of the Lenders to make or maintain the Loans to be terminated, whereupon the same and the Commitment shall forthwith terminate, and the Agent, at the request of the Majority Lenders, shall, by notice to the Borrower, declare the entire unpaid principal amount of each Note and all fees and interest accrued and unpaid thereon and/or under this Agreement, and/or any of the other Financing Documents and any and all other Indebtedness under this Agreement, each Note and/or any of the other Financing Documents to the Agent and/or any of the Lenders and/or to any holder of all or any portion of each Note to be forthwith due and payable, whereupon each Note, and all such accrued fees and interest and other such Indebtedness shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that upon the occurrence of an Event of Default under SECTIONS 6.1.2 or 6.1.3, all of the unpaid principal amount of each Note, all fees and interest accrued and unpaid thereon and/or under this Agreement and/or under any of the other Financing Documents and any and all other such Indebtedness of the Borrower to any of the Lenders and/or to any such holder shall thereupon be due and payable in full without any need for the Agent and/or any Lender to make any such declaration or take any action and the Lenders' obligations to make the Loans shall simultaneously terminate. The Agent shall, in accordance with the votes of the Majority Lenders, exercise all remedies on behalf of and for the account of each Lender and on behalf of its respective Pro Rata Share of the Loans, its Note and Indebtedness of the Borrower owing to it or any of the foregoing, including, without limitation, all remedies available under or 58 as a result of this Agreement, the Notes or any of the other Financing Documents or any other document, instrument or agreement now or hereafter securing any Note without any such exercise being deemed to modify in any way the fact that each Lender shall be deemed a separate creditor of the Borrower to the extent of its Note and Pro Rata Share of the Loans and any other amounts payable to such Lender under this Agreement and/or any of the other Financing Documents and the Agent shall be deemed a separate creditor of the Borrower to the extent of any amounts owed by the Borrower to the Agent. ARTICLE 8. AGENT Section 8.1. APPOINTMENT. The Agent is hereby appointed as Agent, hereunder and each Lender hereby authorizes the Agent to act under the Financing Documents as its Agent hereunder and thereunder, respectively. The Agent agrees to act as such upon the express conditions contained in this Article 8. The provisions of this Article 8 are solely for the benefit of the Agent, and, except as expressly provided in SECTION 8.6 neither the Borrower nor any third party shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and the other Financing Documents to which the Agent is a party, the Agent shall act solely as Agent of the Lenders and does not assume nor shall the Agent be deemed to have assumed any obligation towards or relationship of agency or trust with or for the Borrower, any of the Stockholders, any Affiliate or any Subsidiary. Section 8.2. POWERS: GENERAL IMMUNITY. Section 8.2.1. DUTIES SPECIFIED. Each Lender irrevocably authorizes the Agent to take such action on such Lender's behalf, including, without limitation, to execute and deliver the Financing Documents to which the Agent is a party and to exercise such powers hereunder and under the Financing Documents and other instruments and agreements referred to herein as are specifically delegated to the Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. The Agent shall have only those duties and responsibilities which are expressly specified in this Agreement or in any of the Financing Documents and may perform such duties by or through its agents or employees. The duties of the Agent shall be mechanical and administrative in nature; and the Agent shall not have by reason of this Agreement or any of the Financing Documents a fiduciary relationship in respect of any Lender; and nothing in this Agreement or any of the Security Documents, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or any of the Financing Documents or the other instruments and agreements referred to herein except as expressly set forth herein or therein. Section 8.2.2. NO RESPONSIBILITY FOR CERTAIN MATTERS. The Agent shall not be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of any of the Financing Documents or any other document, instrument or agreement now or hereafter executed in connection herewith or therewith, or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates 59 or any other documents in connection herewith or therewith by or on behalf of the Borrower, any of the Stockholders, and/or any Subsidiary to the Agent or any Lender, or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Default or Event of Default. Section 8.2.3. EXCULPATORY PROVISIONS. Neither the Agent nor any of its officers, directors, employees or agents shall be liable to any Lender for any action taken or omitted hereunder or under any of the Financing Documents, or in connection herewith or therewith unless caused by its or their gross negligence or willful misconduct. If the Agent shall request instructions from Lenders with respect to any action (including the failure to take an action) in connection with any of the Financing Documents, the Agent shall be entitled to refrain from taking such action unless and until the Agent, shall have received instructions from the Majority Lenders (or all of the Lenders if the action requires their consent). Without prejudice to the generality of the foregoing, (i) the Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for the Borrower, any of the Stockholders, and/or any Subsidiary), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action whatsoever against the Agent as a result of the Agent acting or (where so instructed) refraining from acting under any of the Financing Documents or the other instruments and agreements referred to herein in accordance with the instructions of the Majority Lenders (or all of the Lenders if the action requires their consent). The Agent shall be entitled to refrain from exercising any power, discretion or authority vested in it under any of the Financing Documents or the other instruments and agreements referred to herein unless and until it has obtained the instructions of the Majority Lenders (or all of the Lenders if the action requires their consent). Section 8.2.4. AGENT ENTITLED TO ACT AS LENDER. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, Fleet in its individual capacity as a Lender hereunder. With respect to its participation in the Loans and the Commitment, Fleet shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not performing the duties and functions delegated to it hereunder, and the term "Lender" or "Lenders" or any similar term shall, unless the context clearly otherwise indicates, include Fleet in its individual capacity. The Agent and its affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with the Borrower, any of the Stockholders, or any Affiliate or Subsidiary as if it were not performing the duties specified herein, and may accept fees and other consideration from the Borrower and/or any of such other Persons for services in connection with this Agreement and otherwise without having to account for the same to Lenders. Section 8.3. REPRESENTATIONS AND WARRANTIES: NO RESPONSIBILITY FOR APPRAISAL OF CREDITWORTHINESS. Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of the Borrower, the Stockholders and any Subsidiaries of any of them in connection with the making of the Loans hereunder and has made and shall continue to make its own appraisal of the creditworthiness of the Borrower, the 60 Stockholders and the Subsidiaries. The Agent shall not have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to. provide any Lender with any credit or other information with respect thereto whether coming into its possession before the making of any Loan or any time or times thereafter (except for information received by the Agent under SECTION 5.3 hereof which the Agent will promptly forward to the Lenders), and the Agent shall further not have any responsibility with respect to the accuracy of or the completeness of the information provided to any of the Lenders. Section 8.4. RIGHT TO INDEMNITY. Each Lender severally agrees to indemnify the Agent proportionately to its Pro Rata Share of the Loans, to the extent the Agent shall not have been reimbursed by or on behalf of the Borrower, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in performing its duties hereunder or in any way relating to or arising out of this Agreement and/or any of the other Financing Documents; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. If any indemnity furnished to the Agent for any purpose shall, in the opinion of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. Section 8.5. PAYEE OF NOTE TREATED AS OWNER. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Agent. Any request, authority or consent of any person or entity who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of that Note or of any Note or Notes issued in exchange for such Note. Section 8.6. RESIGNATION BY AGENT. Section 8.6.1. The Agent may resign from the performance of all its functions and duties under the Financing Documents at any time by giving 30 days' prior written notice to the Borrower and each of the Lenders. Such resignation shall take effect upon the acceptance by a successor Agent, of appointment pursuant to SECTIONS 8.6.2 and 8.6.3 below or as otherwise provided below. Section 8.6.2. Upon any such notice of resignation, the Majority Lenders shall appoint a successor Agent, who shall be a Lender and, so long as no Default or Event of Default exists and is continuing, who shall be reasonably satisfactory to the Borrower and is generally familiar and has lending experience with technology based industries and in any event shall be an incorporated bank or trust company with a combined surplus and undivided capital of at least Five Hundred Million Dollars ($500,000,000). Section 8.6.3. If a successor Agent shall not have been so appointed within said `30 day period, the resigning Agent, with the consent of the Borrower, which shall not be 61 unreasonably withheld or delayed, shall then appoint a successor Agent, who shall be a Lender and who shall serve as the Agent, until such time, if any, as the Majority Lenders, and so long as no Default or Event of Default exists and is continuing, with the consent of the Borrower, which shall not be unreasonably withheld or delayed, appoint a successor Agent as provided above. Section 8.6.4. If no successor Agent has been appointed pursuant to SECTIONS 8 6.2 or 8.6.3 by the 40th day after the date such notice of resignation was given by the resigning Agent, the resigning Agent's resignation shall become effective and the Majority Lenders shall thereafter perform all the duties of the resigning Agent under the Financing Documents including without limitation directing the Borrower on how to submit Requests and Interest Rate Elections and otherwise on administration of the Agent's duties under the Financing Documents and the Borrower shall comply therewith so long as such directions do not have an adverse effect on the Borrower or any Subsidiary until such time, if any, as the Majority Lenders, and so long as no Default or Event of Default exists and is continuing, with the consent of the Borrower, which shall not be unreasonably withheld or delayed, appoint a successor Agent, as provided above. Section 8.7. SUCCESSOR AGENT. Upon the acceptance of any appointment as the Agent hereunder by a successor Agent, that successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent, shall be discharged from its duties and obligations as the Agent under the Financing Documents. After any retiring Agent's resignation hereunder as the Agent the provisions of this Article 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under the Financing Documents. ARTICLE 9. MISCELLANEOUS Section 9.1. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. Section 9.1.1. Except to the extent prohibited by applicable law, the Borrower irrevocably: Section 9.1.1.1. agrees that any suit, action, or other legal proceeding arising out of any of the Financing Documents or any of the Loans may be brought in the courts of record of The Commonwealth of Massachusetts or the State of California or any other state(s) in which any of the Borrower's assets are located or the courts of the United States located in The Commonwealth of Massachusetts or the State of California or any other state(s) in which any of the Borrower's assets are located; Section 9.1.1.2. consents to the jurisdiction of each such court in any such suit, action or proceeding; and Section 9.1.1.3. waives any objection which it may have to the laying of venue of such suit, action or proceeding in any of such courts. For such time as any of the Indebtedness of the Borrower to any Lender and/or the Agent shall be unpaid in whole or in part and/or the Commitment is in effect, the Borrower irrevocably 62 designates the registered agent or agent for service of process of the Borrower as reflected in the records of the Secretary of State of California as its registered agent, and, in the absence thereof, the Secretary of State of California as its agent to accept and acknowledge on its behalf service of any and all process in any such suit, action or proceeding brought in any such court and agrees and consents that any such service of process upon such agent and written notice of such service to the Borrower by registered or certified mail shall be taken and held to be valid personal service upon the Borrower regardless of where the Borrower shall then be doing business and that any such service of process shall be of the same force and validity as if service were made upon it according to the laws governing the validity and requirements of such service in each such state and waives any claim of lack of personal service or other error by reason of any such service. Any notice, process, pleadings or other papers served upon the aforesaid designated agent shall, within three (3) Business Days after such service, be sent by the method provided therefor under Section 9 6 to the Borrower at its address set forth in this Agreement. EACH OF THE PARTIES HERETO HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF ANY DISPUTE BETWEEN THE BORROWER AND THE AGENT AND/OR THE LENDERS WITH RESPECT TO THE FINANCING DOCUMENTS AND/OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY. Section 9.2. RIGHTS AND REMEDIES CUMULATIVE. No right or remedy conferred upon or reserved to the Agent and/or the Lenders in any of the Financing Documents is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given under any of the Financing Documents or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy under any of the Financing Documents, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 9.3. DELAY OR OMISSION NOT WAIVER. No delay in exercising or failure to exercise by the Agent and/or the Lenders of any right or remedy accruing upon any Default or Event of Default shall impair any such right or remedy or constitute a waiver of any such Default or Event of Default or an acquiescence therein. Every right and remedy given by any of the Financing Documents or by law to the Agent and/or any of the Lenders may be exercised from time to time, and as often as may be deemed expedient, by the Agent and/or any of the Lenders. Section 9.4. WAIVER OF STAY OR EXTENSION LAWS. The Borrower covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of any of the Financing Documents; and the Borrower (to the extent that it may lawfully to do so) hereby expressly waives all benefit and advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Agent and/or any of the Lenders, but will suffer and permit the execution of every such power as though no such law had been enacted, except to the extent the Agent or any Lender is guilty of willful misconduct or gross negligence. Section 9.5. AMENDMENTS, ETC. No amendment, modification, termination, or waiver of any provision of any of the Financing Documents nor consent to any departure by the Borrower 63 therefrom shall in any event be effective unless the same shall be in a written notice given to the Borrower by the Agent and consented to in writing by the Majority Lenders (or by the Agent acting alone if any specific provision of this Agreement provides that the Agent, acting alone, may grant such amendment, modification, termination, waiver or departure) and the Agent shall give any such notice if the Majority Lenders so consent or direct the Agent to do so- provided, however, that any such amendment, modification, termination, waiver or consent shall require a written notice given to the Borrower by the Agent and consented to in writing by all of the Lenders if the effect thereof is to (i) change any of the provisions affecting the interest rate on the Loans, (ii) extend or modify the Commitment, (iii) discharge or release the Borrower from its obligation to repay all principal due under the Loans or release any collateral or guaranty for the Loans, (iv) change any Lender's Pro Rata Share of the Commitment or the Loans, (v) modify this SECTION 9.5, (vi) change the definition of Majority Lenders, (vii) extend any scheduled due date for payment of principal, interest or fees or (viii) permit the-Borrower to assign any of its rights under or interest in this Agreement, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Any amendment or modification of this Agreement must be signed by the Borrower, the Agent and at least all of the Lenders consenting thereto who shall then hold the Pro Rata Shares of the Loans required for such amendment or modification under this SECTION 9.5 and the Agent shall sign any such amendment if such Lenders so consent or direct the Agent to do so provided that any Lender dissenting therefrom shall be given an opportunity to sign any such amendment or modification. Any amendment of any of the Security Documents must be signed by each of the parties thereto. No notice to or demand on the Borrower and no consent, waiver or departure from the terms of this Agreement granted by the Agent and/or the Lenders in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 9.6. ADDRESSES FOR NOTICES, ETC. All notices, requests, demands and other communications provided for hereunder (other than those which, under the terms of this Agreement, may be given by telephone, which shall be effective when received verbally) shall be in writing (including telecopied communication) and mailed (provided that in the case of items referred to in the next-to-last sentence of SECTION 9.1 and the items set forth below as requiring a copy to legal counsel for the Borrower, the Agent or a Lender, such items shall be mailed by overnight courier for delivery the next Business Day), telecopied or delivered to the applicable party at the addresses indicated below: If to the Borrower: Finisar Corporation 274 Ferguson Drive Mountain View, California 94043 Attention: President Telecopy: (650) 6914010 64 With a copy to (if given pursuant to any of SECTIONS 5.3.1, 5.3.5, 5.3.9, and 5.3.10 and 5.3.11) : Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 Attn: Robert Claassen, Esq. Telecopy: (650) 493-6811 If to Fleet National Bank as the Agent and/or a Lender: Fleet National Bank Mailstop: MA OFD07A One Federal Street Boston, Massachusetts 02110 Attention: Mathew M. Glauninger, Senior Relationship Manager and Vice President Telecopy: (617) 346-0151 With a copy to (if given pursuant to any of Sections 5.3.1, 5.3.9, 5.3.10 and 5.3.11) Hinckley, Allen & Snyder 28 State Street Boston, Massachusetts 02109 Attention: Malcolm Farmer III, Esquire Telecopy: (617) 345-9020 If to any other Lender, to the address set forth on EXHIBIT 1.9. or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to the delivery with the terms of this Section. All such notices, requests, demands and other communications shall be effective when received. Requests, certificates, other items provided pursuant to Section 5.3 and other routine mailings or notices need not be accompanied by a copy to legal counsel for the Lenders or the Borrower. Section 9.7. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand the reasonable fees and out-of-pocket expenses of Messrs. Hinckley, Allen & Snyder, counsel for the Agent and of any local counsel retained by the Agent in connection with the preparation, execution, delivery, syndication and administration of the Financing Documents and the Loans and any subsequent amendments, waivers, or consents with respect thereto. The Borrower agrees to pay on demand all reasonable costs and expenses (including without limitation reasonable attorneys' fees) incurred by the Agent and/or any Lender, upon or after the occurrence and during the continuance of any Default or Event of Default, if any, in connection with the enforcement of any of the Financing Documents and any amendments, waivers, or consents with respect thereto. In addition, the Borrower shall pay on demand any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery of the Financing Documents, and agrees to save the Lenders and the Agent harmless 65 from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees, except those resulting from the Lenders' or Agent's gross negligence or willful misconduct. Section 9.8. PARTICIPATIONS. Subject to compliance with the proviso in the first sentence of SECTION 9.11, any Lender may sell participations in all or part of the Loans made by it and/or its Pro Rata Share of the Commitment or any other interest herein to a financial institution having at least $500,000,000 of assets, in which event the participant shall not have any rights under any of the Financing Documents (including, without limitation, any rights to vote on requested waivers of Defaults or Events of Default) (the participant's rights against such Lender in respect of that participation to be those set forth in the Agreement executed by such Lender in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder or thereunder shall be determined as if such Lender had not sold such participation. Such Lender may furnish any information concerning the Borrower and any Subsidiary in the possession of such Lender from time to time to participants (including prospective participants); provided that such Lender and any participant comply with the provision in SECTION 9.11.7 as if any such participant was a Substituted Lender. Section 9.9. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Agent and the Lenders and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein Without the prior written consent of the Agent and the Lenders. This Agreement and all covenants, representations and warranties made herein and/or in any of the other Financing Documents shall survive the making of the Loans, the execution and delivery of the Financing Documents and shall continue in effect so long as any amounts payable under or in connection with any of the Financing Documents or any other Indebtedness of the Borrower to the Agent and/or any Lender remains unpaid or the Commitment remains outstanding; provided, however, that SECTIONS 2.2 3 and 9.7 shall, except to the extent agreed to in a pay-off letter by the Agent and the Lenders in their complete discretion, survive and remain in full force and effect for 90 days following repayment in full of all amounts payable under or in connection with all of the Financing Documents and any other such Indebtedness and SECTION 9.13 shall survive and remain in full force and effect until expiration of the statute of limitations applicable to any matter on account of which indemnification is provided thereunder. Section 9.10. ACTUAL KNOWLEDGE. For purposes of this Agreement, neither the Agent nor any Lender shall be deemed to have actual knowledge of any fact or state of facts unless the senior loan officer or any other officer responsible for the Borrower's account established pursuant to this Agreement at the Agent or such Lender, shall, in fact, have actual knowledge of such fact or state of facts or unless written notice of such fact shall have been received by the Agent or such Lender in accordance with SECTION 9.6. Section 9.11. SUBSTITUTIONS AND ASSIGNMENTS. Upon the request of any Lender, the Agent and such Lender may assign all or any portion of its Pro Rata Share of the Commitment and the Loans to a Federal Reserve Bank or to any Affiliate of any such Lender and may, subject to the terms and conditions hereinafter set forth and, so long as no Default or Event of Default has occurred and is continuing, with the prior written consent of the Borrower, which consent shall not be unreasonably withheld or delayed, take the actions set forth below to substitute one 66 or more other financial institutions having at least $500,000,000 in assets (a "Substituted Lender") as a Lender or Lenders hereunder having an amount of the Loans as specified in the relevant Substitution Agreement executed in connection therewith; provided that no Lender, Selling Lender or Substituted Lender shall have a Pro Rata Share of the Commitment and the Loans in the aggregate of less than 10% and Fleet and/or its Affiliates shall retain for their own account at least 40% of the Term Loan and 40% of the Revolving Credit Loan Commitment. Section 9.11.1. In connection with any such substitution the Substituted Lender and the Agent shall enter into a Substitution Agreement in the form of EXHIBIT 9.11.1 hereto (a "Substitution Agreement") pursuant to which such Substituted Lender shall be substituted for the Lender requesting the substitution in question (any such Lender being hereinafter referred to as a "Selling Lender") to the extent of the reduction in the Selling Lender's portion of the Loans specified therein. In addition, such Substituted Lender shall assume such of the obligations of each Selling Lender under the Financing Documents as may be specified in such Substitution Agreement and this Agreement shall be amended by execution and delivery of each Substitution Agreement to include such Substituted Lender as a Lender for all purposes under the Financing Documents and to substitute for the then existing EXHIBIT 1.9 to this Agreement a new EXHIBIT 1.9 in the form of Schedule A to such Substitution Agreement setting forth the portion of the Loans belonging to each Lender following execution thereof Each Lender and the Borrower hereby appoint the Agent as Agent on its behalf to countersign and accept delivery of each Substitution Agreement and, to the extent applicable, the provisions of Article 8 hereof shall apply MUTATIS MUTANDIS with respect to such appointment and anything done or omitted to be done by the Agent in pursuance thereof Section 9.11.2. Without prejudice to any other provision of this Agreement, each Substituted Lender shall, by its execution of a Substitution Agreement, agree that neither the Agent nor any Lender is any way responsible for or makes any representation or warranty as to: (a) the accuracy and/or completeness of any information supplied to such Substituted Lender in connection therewith, (b) the financial condition, creditworthiness, affairs, status or nature of the Borrower, any of the Stockholders and/or any of the Subsidiaries or the observance by the Borrower, or any other party of any of its obligations under this Agreement or any of the other Financing Documents or (c) the legality, validity, effectiveness, adequacy or enforceability of any of the Financing Documents. Section 9.11.3. The Agent shall be entitled to rely on any Substitution Agreement delivered to it pursuant to this SECTION 9. 11 which is complete and regular on its face as to its contents and appears to be signed on behalf of the Substituted Lender which is a party thereto, and the Agent shall have no liability or responsibility to any party as a consequence of relying thereon and acting in accordance with and countersigning any such Substitution Agreement. The effective date of each Substitution Agreement shall be the date specified as such therein and each Lender prior to such effective date shall, for all purposes hereunder, be deemed to have and possess all of their respective rights and obligations hereunder up to 12:00 o'clock Noon on the effective date thereof Section 9.11.4. Upon delivery to the Agent of any Substitution Agreement pursuant to and in accordance with this SECTION 9.11 and acceptance thereof by the Agent (which delivery shall be evidenced and accepted exclusively and conclusively by the Agent's 67 countersignature thereon pursuant to the terms hereof without which such Substitution Agreement shall be ineffective): (i) except as provided hereunder and in SECTION 9.11.5, the respective rights of each Selling Lender and the Borrower against each other under the Financing Documents with respect to the portion of the Loans being assigned or delegated shall be terminated and each Selling Lender and the Borrower shall each be released from all further obligations to the other hereunder with respect thereto (all such rights and obligations to be so terminated or released being referred to in this SECTION 9. 11 as "Discharged Rights and Obligations"); and (ii) the Borrower and the Substituted Lender shall each acquire rights against each other and assume obligations towards each other which differ from the Discharged Rights and Obligations only in so far as the Borrower and the Substituted Lender have assumed and/or acquired the same in place of the Selling Lender in question; and (iii) the Agent, the Substituted Lender and the other Lenders shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had such Substituted Lender been an original party to this Agreement as a Lender possessing the Discharged Rights and Obligations acquired and/or assumed by it in consequence of the delivery of such Substitution Agreement to the Agent. Section 9.11.5. Discharged Rights and Obligations shall not include, and there shall be no termination or release pursuant to this SECTION 9.11 of (i).any rights or obligations arising pursuant to any of the Financing Documents in respect of the period or in respect of payments hereunder made during the period prior to the effective date of the relevant Substitution Agreement or, (ii) any rights or obligations relating to the payment of any amount which has fallen due and not been paid hereunder prior to such effective date or rights or obligations for the payment of interest, damages or other amounts becoming due hereunder as a result of such nonpayment. Section 9.11.6. With respect to any substitution of a Substituted Lender taking place after the Closing Date, the Borrower shall issue to such Substituted Lender and to such Selling Lender, new Notes reflecting the inclusion of such Substituted Lender as a Lender and the reduction in the respective Loans of such Selling Lender, such new Notes to be issued against receipt by the Borrower of the existing Notes of such Lender. The Selling Lender or the Substituted Lender shall pay to the Agent for its own account an assignment fee in the amount of $3,000 for each assignment hereunder, which shall be payable at or before the effective date of the assignment. Section 9.11.7. Each Lender may furnish to any financial institution having at least $500,000,000 in assets which such Lender proposes to make a Substituted Lender or to a Substituted Lender any information concerning such Lender, the Borrower, Stockholders and any Subsidiary in the possession of that Lender from time to time; provided that any Lender providing any confidential information about the Borrower, any of the Stockholders and/or any Subsidiary to any such financial institution shall first obtain such financial institutions written agreement to keep confidential any such confidential information. Section 9.12. PAYMENTS PRO RATA. The Agent agrees that promptly after its receipt of each payment from or on behalf of the Borrower in respect of any obligations of the Borrower hereunder it shall distribute such payment to the Lenders pro rata based upon their respective Pro Rata Shares, if any, of the obligations with respect to which such payment was received. Each of 68 the Lenders agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff under SECTION 2.5.2 or otherwise or bankers lien by counterclaim or cross action, by the enforcement of any right under the Financing Documents, or otherwise), which is applicable to the payment of the Obligations of a sum which with respect to the related sum or sums received by other Lenders is in a greater proportion than the total amount of such Obligation then owed and due to such Lender bears to the total amount of such Obligation then owed and due to all of the Lenders immediately prior to such receipt, except for any amounts received pursuant to SECTION 2.2.3, then such Lender receiving such excess payment shall purchase for cash without recourse or warranty from the other Lenders an interest in the Obligations of the Borrower to such Lenders in such amount as shall result in a proportional participation by all the Lenders in such amount; provided further, however, that if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. Section 9.13. INDEMNIFICATION. The Borrower irrevocably agrees to and does hereby indemnify and hold harmless Agent and each of the Lenders, their agents or employees and each Person, if any, who controls any of the Agent and the Lenders within the meaning of Section 15 of the Securities Act of 1933, as amended, and each and all and any of them (the "Indemnified Parties"), against any and all losses, claims, actions, causes of action, damages or liabilities (including any amount paid in settlement of any action, commenced or threatened and any amount described in SECTION 8 4 (collectively, the "Damages"), joint or several, to which they, or any of them, may become subject under statutory law or at common law, and to reimburse the Indemnified Parties for any legal or other out-of-pocket expenses reasonably incurred by it or them in connection with investigating, preparing for or defending against any of the Indemnified Parties, insofar as such losses, claims, damages, liabilities or actions arise out of or are related to any act or omission of the Borrower and/or any Subsidiary with respect to any of the Related Transactions, this Agreement, any of the Notes, any of Loans and/or any offering of securities by the Borrower and/or any Subsidiary after the date hereof and/or in connection with the Securities and Exchange Act of 1933 and/or failure to comply with any applicable federal, state or foreign governmental law, rule, regulation, order or decree, including without limitation, any Damages which arise out of or are based upon any untrue statement or alleged untrue statement of a material fact with respect to matters relative to any of the foregoing contained in any document distributed in connection therewith, or the omission or alleged omission to state in any of the foregoing a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, but excluding any Damages to the extent arising from or due to the gross negligence or willful misconduct of any of the Indemnified Parties. Promptly upon receipt of notice of the commencement of any action, or information as to any threatened action against any of the Indemnified Parties in respect of which indemnity or reimbursement may be sought from the Borrower on account of the agreement contained in this SECTION 9.13, notice shall be given to the Borrower in writing of the commencement or threatening thereof, together with a copy of all papers served, but the omission so to notify the Borrower of any such action shall not release the Borrower from-any liability which it may have to such Indemnified Parties unless, and only to the extent that, such omission materially prejudiced Borrower's ability to defend against such action. 69 In case any such action shall be brought against any of the Indemnified Parties, the Borrower shall be entitled to participate in (and, to the extent that it shall wish, to select counsel and to direct) the defense thereof at its own expense. Any of the Indemnified Parties shall have' the right to employ its or their own counsel in any case, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless the employment of such counsel shall have been authorized in writing by the Borrower in connection with the defense of such action or the Borrower shall not have employed counsel to have charge of the defense of such action or such Indemnified Party shall have received an opinion from an independent counsel that there may be defenses available to it which are different from or additional to those available to the Borrower (in which case the Borrower shall not have the right to direct the defense of such action on behalf of such Indemnified Party), in any of which events the same shall be borne by the Borrower. If any Indemnified Party settles any claim or action with respect to which the Borrower has agreed to indemnify such Indemnified Party pursuant to the terms hereof, the Borrower shall have no liability pursuant to this SECTION 9.13 to such Indemnified Party with respect to such claim or action unless the Borrower shall have consented in writing to the terms of such settlement. The provisions of SECTION 9.13 shall be effective only to the fullest extent permitted by law. Section 9.14. GOVERNING LAW. This Agreement and each Note shall be governed by, and construed in accordance with, the laws of The Commonwealth of Massachusetts without regard to such state's conflict of laws rules. Section 9.15. SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 9.16. HEADINGS. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 9.17. COUNTERPARTS. This Agreement may be executed and delivered in any number of counterparts each of which shall be deemed an original, and this Agreement shall be effective when at least one counterpart hereof has been executed by each of the parties hereto. 70 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument by their respective officers thereunto duly authorized, as of November ___, 1998. In the presence of: FINSAR CORPORATION /s/ Nancy Bouch By: /s/ Jerry S. Rawls - -------------------------------- ------------------------------ Nancy Bouch Name: Jerry S. Rawls Title: President In the presence of: FLEET NATIONAL BANK, as Agent and a Lender By: /s/ Matthew M. Glauninger - -------------------------------- ------------------------------ Name: Matthew M. Glauninger Title: Senior Relationship Manager and Vice President 71 EX-10.9 16 EXHIBIT 10.9 SECURITY AGREEMENT THIS AGREEMENT made as of November 4, 1998, by and between FINISAR CORPORATION, a California corporation with a principal place of business at 274 Ferguson Drive, Mountain View, California 94043 ("Debtor") and FLEET NATIONAL BANK, a national banking association organized under the laws of the United States having an office at One Federal Street, Mail Stop: MA OF DO7A, Boston, Massachusetts 02110, as Agent for itself and each of the other Lenders who are now or hereafter become parties to the hereinafter defined Loan Agreement ("Secured Party"). Capitalized terms used but not expressly defined herein shall have the meanings assigned thereto in said Loan Agreement. SECTION 1. RECITALS. (a) Secured Party, Debtor and the Lenders have entered into that certain Loan Agreement dated on or about the date hereof (as the same may be amended from time to time, the "Loan Agreement") pursuant to the terms of which Lenders have agreed to make loans to Debtor as set forth therein. SECTION 2. THE SECURITY INTERESTS. (a) In order to secure (i) payment and performance of all of the obligations of Debtor under the Loan Agreement, under the Notes and under the other Financing Documents, (ii) the performance of all of the obligations of Debtor to Secured Party contained herein, and (iii) the payment of all other future advances and other obligations of Debtor to Secured Party and/or the Lenders, including, without limitations, any future loans and advances made to Debtor by Secured Party and/or the Lenders prior to, during or following any (a) application by Debtor for or consent by Debtor to the appointment of a receiver, trustee or liquidator of Debtor's property, (b) admission by Debtor in writing of its inability to pay or failure generally to pay its respective debts as they mature, (c) general assignment by Debtor for the benefit of creditors, (d) adjudication of Debtor as bankrupt or (e) filing by Debtor of a voluntary petition in bankruptcy or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debts, dissolution or liquidation statute, or an answer admitting the material allegations of a petition filed against it in a proceeding under any such law (any of the foregoing shall hereinafter be referred to as a "Bankruptcy Event"), any interest accruing under the Notes and/or the Loan Agreement after the commencement of a Bankruptcy Event to the extent permitted by applicable law, and any and all other indebtedness, liabilities and obligations of Debtor to Secured Party and/or the Lenders of every kind and description, direct, indirect or contingent, now or hereafter existing, due or to become due (all of the foregoing being hereinafter called the "Obligations"), Debtor hereby grants to Secured Party for the benefit of the Lenders a continuing security interest in the following described fixtures and personal property (hereinafter collectively called the "Collateral"): All fixtures and all tangible and intangible personal property of Debtor, whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest, including, without limitations, (a) all equipment (including all machinery, tools and 1 furniture), inventory and goods (each as defined in the Uniform Commercial Code, if so defined therein); (b) all accounts, accounts receivable, other receivables, contract rights, chattel paper, and general intangibles (including, without limitations, trademarks, trademark registrations, trademark registration applications, servicemarks, servicemark registrations, servicemark registration applications, goodwill, tradenames, trade secrets, patents, patent applications, leases, licenses, permits, copyrights, copyright registrations, copyright registration applications, moral rights, any other proprietary rights, exclusionary rights or intellectual property and any renewals and extensions associated with any of the foregoing, as each of the foregoing may be secured under the laws now or hereafter in force and effect in the United States of America or any other jurisdiction) of Debtor (each as defined in the Uniform Commercial Code, if so defined therein); (c) all instruments, documents of title, policies and certificates of insurance, securities (whether certificated or uncertificated) and other investment property (as defined in the Uniform Commercial Code), bank deposits, deposit accounts, checking accounts and cash of Debtor, (d) all accessions, additions or improvements to, all replacements, substitutions and parts for, and all proceeds and products of, all of the foregoing and (e) all books, records and documents relating to any of the foregoing; provided, however, this definition of Collateral shall specifically exclude (i) equipment leased from or financed by third parties and (ii) non-assignable contract and license rights, all in accordance with the Loan Agreement. (b) All Collateral consisting of accounts receivable, contract rights, instruments, chattel paper and general intangibles (each as defined in the Uniform Commercial Code) of Debtor arising from the sale, delivery or provision of goods and/or services, including, without limitation, all documents, notes, drafts and acceptances, now owned by Debtor as well as any and all thereof that may be hereafter acquired by Debtor and in and to all returned or repossessed goods arising from or relating to any contract rights, accounts or other proceeds of any sale or other disposition of inventory, are sometimes hereinafter collectively called the "Customer Receivables". (c) The security interests granted pursuant to this SECTION 2 (the "Security Interests") are granted as security only and shall not subject Secured Party to, or transfer or in any way affect or modify, any obligation or liability of Debtor under any of the Collateral or any transaction which gave rise thereto. SECTION 3. DELIVERY OF PLEDGED SECURITIES, CHATTEL PAPER AND DATABASE. All securities including, without limitations, shares of stock and negotiable promissory notes, of Debtor, whether now owned or hereafter acquired by Debtor, shall be delivered to Secured Party by Debtor simultaneously with the delivery hereof or, with respect to after acquired securities, promptly after the same have been acquired by Debtor (which securities are hereinafter called the "Pledged Securities") shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed undated instruments of transfer or assignments in blank all in form and substance satisfactory to Secured Party. EXHIBIT A attached hereto and made a part hereof sets forth a complete description of all securities owned by Debtor on the date hereof. Secured Party may at any time or from time to time, at its sole discretion, require Debtor to cause any chattel paper included in the Customer Receivables to be delivered to Secured Party or any successor agent or representative designated by it for the purpose of causing a legend referring to 2 the Security Interests to be placed on such chattel paper and upon any ledgers or other records concerning the Customer Receivables. SECTION 4. FILING: FURTHER ASSURANCES. Debtor will, at its expense, execute, deliver, file and record (in such manner and form as Secured Party may reasonably require), or permit Secured Party to file and record, any financing statements, any carbon, photographic or other reproduction of a financing statement or this Security Agreement (which shall be sufficient as a financing statement hereunder), any specific assignments or other paper that may be reasonably necessary or desirable, or that Secured Party may reasonably request, in order to create, preserve, perfect or validate any Security Interest or to enable Secured Party to exercise and enforce its rights hereunder with respect to any of the Collateral. Debtor hereby irrevocably appoints Secured Party as Debtor's attorney-in-fact to execute in the name and behalf of Debtor such additional financing statements as Secured Party may reasonably request. SECTION 5. REPRESENTATIONS AND WARRANTIES OF DEBTOR. Debtor hereby represents and warrants to Secured Party that (a) Debtor is, or to the extent that certain of the Collateral is to be acquired after the date hereof, will be, the owner of the Collateral free from any adverse Lien except as permitted under the Loan Agreement; (b) except for financing statements relating to Liens against Debtor specifically described in and permitted by the Loan Agreement, no financing statement covering the Collateral is on file in any public office, other than the financing statements filed pursuant to this Security Agreement; (c) all information, representations and warranties contained in the Perfection Certificate attached hereto as EXHIBIT B and made a part hereof are true, accurate and complete in all material respects on the date hereof, and (d) there are no restrictions upon the voting rights or the transfer of all or any of the Pledged Securities (other than as may appear on the face of any certificate evidencing any of the Pledged Securities or as may be imposed by any state or local agency or government) and Debtor has the right to vote, pledge, grant the Security Interest in and otherwise transfer the Pledged Securities free of any encumbrances (other than applicable restrictions imposed by any state or local agency or government or Federal or state securities laws or regulations). SECTION 6. COVENANTS OF DEBTOR. Debtor hereby covenants and agrees with Secured Party that Debtor (a) will defend the Collateral against all claims and demands of all persons at any time claiming any interest therein other than that of Secured Party, other than in respect of Permitted Encumbrances; (b) will provide Secured Party with prompt written notice of (i) any change in the office where Debtor maintains its books and records pertaining to the Customer Receivables, and (ii) the movement or location of a material amount of Collateral to or at any address other than as set forth in EXHIBIT B attached hereto; (c) will immediately notify Secured Party of any event causing a substantial loss or diminution in the value of all or any material part of the Collateral and the amount or an estimate of the amount of such loss or diminution; (d) will have and maintain insurance at all times in accordance with the provisions of the Loan Agreement; (e) except in the ordinary course of business or as otherwise permitted under the Loan Agreement, will not sell or 3 offer to sell or otherwise assign transfer or dispose of the Collateral or any interest therein, without the prior written consent of Secured Party; (f) will keep the Collateral free from any adverse Lien (other than Liens permitted under the Loan Agreement); and (g) will not use the Collateral in violation of the Loan Agreement or this Agreement. SECTION 7. RECORDS RELATING TO COLLATERAL. Debtor will keep its records concerning the Collateral, including the Customer Receivables and all chattel paper included in the Customer Receivables, at the location(s) set forth in EXHIBIT B attached hereto or at such other place or places of business of which Secured Party shall have been notified in writing no less than ten (10) days in advance. Debtor will hold and preserve such records and chattel paper and will, to the extent provided in the Loan Agreement, (a) permit representatives of Secured Party at any time during normal business hours to examine and inspect the Collateral and to make abstracts from such records and chattel paper, and (b) furnish to Secured Party such information and reports regarding the Collateral as Secured Party may from time to time reasonably request. SECTION 8. RECORD OWNERSHIP OF PLEDGED SECURITIES. Upon the occurrence and during the continuance of an Event of Default, Secured Party may cause any or all of the Pledged Securities to be transferred of record into the name of Secured Party (or a designee of Secured Party) in a manner consistent with applicable law. SECTION 9. RIGHT TO RECEIVE DISTRIBUTIONS ON PLEDGED SECURITIES. Unless an Event of Default shall have occurred and be continuing, Debtor shall be entitled, from time to time, to collect and receive for its own use all dividends, interest and other payments and distributions made upon or with respect to the Pledged Securities, except: (i) dividends of stock; (ii) dividends payable in securities or other property (except cash dividends); (iii) other securities issued with respect to or in lieu of the Pledged Securities (whether upon conversion of the convertible securities included therein or through stock split, spin-off, split-off, reclassification, merger, consolidation, sale of assets, combination of shares or otherwise). All of the foregoing, together with all new, substituted or additional shares of capital stock, warrants, options or other rights, or other securities issued in addition to or in respect of all or any of the Pledged Securities shall be delivered to Secured Party hereunder as required by SECTION 3 hereof, to be held as Collateral pursuant to the terms hereof in the same manner as the Pledged Securities delivered to Secured Party on the date hereof. SECTION 10. RIGHT TO VOTE PLEDGED SECURITIES. Unless an Event of Default shall have occurred and be continuing, Debtor shall have the right, from time to time, to vote and to give consents, ratifications and waivers with respect to the 4 Pledged Securities and to exercise conversion rights with respect to the convertible securities included therein, and Secured Party shall, upon receiving a written request from Debtor accompanied by a certificate signed by Debtor's principal financial officer stating that no Event of Default has occurred, deliver to Debtor or as specified in such request such proxies, powers of attorney, consents, ratifications and waivers in respect of any Pledged Securities which are registered in Secured Party's name, and make such arrangements with respect to the conversion of convertible securities as shall be specified in Debtor's request, such arrangements to be in form and substance reasonably satisfactory to Secured Party. If an Event of Default shall have occurred and be continuing, and provided Secured Party elects to exercise the rights hereinafter set forth by notice to Debtor of such election, Secured Party shall have the right, to the extent permitted by law, and Debtor shall take all such action as may be necessary or reasonably appropriate to give effect to such right, to vote and to give consents, ratifications and waivers and take any other action with respect to all the Pledged Securities with the same force and effect as if Secured Party were the absolute and sole owner thereof. SECTION 11. GENERAL AUTHORITY. Debtor hereby irrevocably appoints Secured Party Debtor's lawful attorney, with full power of substitution, in the name of Debtor, for the sole use and benefit of Secured Party, its successors and assigns, but at Debtor's expense, to exercise, all or any of the following powers with respect to all or any of the Collateral during the existence and continuance of any Event of Default: (i) to demand, sue for, collect, receive and give acquittance for any and all monies due or to become due; (ii) to receive, take, endorse, assign and deliver all checks, notes, drafts, securities, documents and other negotiable and non-negotiable instruments and chattel paper taken or received by Secured Party; (iii) to settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto; (iv) to sell, transfer, assign or otherwise deal in or with the same or the proceeds or avails thereof or the related goods securing the Customer Receivables, as fully and effectually as if Secured Party were the absolute owner thereof; (v) to extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto; (vi) to discharge any taxes or Liens at any time placed thereon; and (vii) to execute any document or form, in the name of Debtor, which may be necessary or desirable in connection with any sale of Pledged Securities by Secured Party, including without limitation Form 144 promulgated by the Securities and Exchange Commission; 5 provided, that Secured Party shall give Debtor not less than ten (10) days' prior written notice of the time and place of any sale or other intended disposition of any of the Collateral. SECTION 12. EVENTS OF DEFAULT. Debtor shall be in default under this Security Agreement upon the occurrence of any Event of Default under the Loan Agreement. SECTION 13. REMEDIES UPON EVENT OF DEFAULT. If any Event of Default shall have occurred and be continuing, Secured Party may exercise all the rights and remedies of a secured party under the Uniform Commercial Code. Secured Party may require Debtor to assemble all or any part of the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient. Secured Party shall give Debtor ten (10) days' written notice of its intention to make any public or private sale or sale at a broker's board or on a securities exchange of the Collateral. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as Secured Party may determine. Secured Party shall not be obligated to make any such sale pursuant to any such notice. To the extent permitted by law, Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be adjourned. Secured Party, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the Security Interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. SECTION 14. APPLICATION OF COLLATERAL AND PROCEEDS. The proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied in the following order of priorities: (a) first, to pay the expenses of such sale or other realization, including reasonable attorneys' fees, and all expenses, liabilities and advances incurred or made by Secured Party in connection therewith, and any other unreimbursed expenses for which Secured Party may be reimbursed pursuant to SECTION 15; (b) second, to the payment of the Obligations in such order of priority as Secured Party, in its sole discretion, shall determine and (c) finally, to pay to Debtor, or its successors or assigns, or as a court of competent jurisdiction may direct, any surplus then remaining from such proceeds. SECTION 15. EXPENSES; SECURED PARTY'S LIEN. Debtor will forthwith upon demand pay to Secured Party: (a) the amount of any taxes which Secured Party may have been required to pay by reason of the Security Interests (including any applicable transfer and personal property taxes but excluding taxes in respect of Secured Party's income and profits) or to free any of the Collateral from any Lien thereon and (b) the amount of any and all reasonable costs and expenses, including the reasonable fees and disbursements of its counsel and of any agents not regularly in its employ, which Secured Party may incur in connection with (i) the collection or other disposition of any of the Collateral, 6 (ii) the exercise by Secured Party of any of the powers conferred upon it hereunder, (iii) any default on Debtor's part hereunder or (iv) any Bankruptcy Event. SECTION 16. TERMINATION OF SECURITY INTERESTS; RELEASE OF COLLATERAL. Upon the repayment and performance in full of all the Obligations and the expiration or termination of any obligations of Secured Party to advance funds to Debtor, or upon the sale of any Collateral which is permitted under the Loan Agreement or as otherwise consented to in writing by Secured Party, the Security Interests on such sold Collateral shall terminate and all rights to the Collateral shall revert to Debtor. Upon any such termination of the Security Interests or release of Collateral, Secured Party will execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. Notwithstanding the foregoing, this Security Agreement shall be reinstated if at any time any payment made or value received with respect to an Obligation is rescinded, invalidated, declared to be fraudulent or preferential, or set aside or is required to be repaid to a trustee, receiver or any other party under any case or proceeding, voluntary or involuntary, for the distribution, division or application of all or part of the assets of Debtor or the proceeds thereof whether such case or proceeding be for the liquidation, dissolution or winding up of Debtor or their respective businesses, a receivership, insolvency or bankruptcy case or proceeding, an assignment for the benefit of creditors or a proceeding by or against Debtor for relief under the federal Bankruptcy Code or any other bankruptcy, reorganization or insolvency law or any other law relating to the relief of debtors, readjustment of indebtedness, reorganization, arrangement, composition or extension or marshalling of assets or otherwise, all as though such payment had not been made or value received. SECTION 17. NOTICES. All notices, requests, demands and other communications provided for hereunder shall be in writing and mailed or telefaxed or delivered to the applicable party in the manner set forth in SECTION 9.6 of the Loan Agreement. SECTION 18. ADDITIONAL PROVISION REGARDING PLEDGED SECURITIES. With respect to any Pledged Securities which are delivered to the Secured Party pursuant to a separate pledge agreement, to the extent any provisions of that pledge agreement are inconsistent with the terms of this Security Agreement, the terms of that separate pledge agreement will govern. SECTION 19. MISCELLANEOUS. (a) No failure on the part of Secured Party to exercise, and no delay in exercising, and no course of dealing with respect to, any right, power or remedy under this Security Agreement shall operate as a waiver thereof, nor shall any single or partial exercise by Secured Party of any right, power or remedy under this Security Agreement preclude any other right, power or remedy. The remedies in this Security Agreement are cumulative and are not exclusive of any other remedies provided by law. Neither this Security Agreement nor any provision hereof may be changed, waived, discharged or terminated orally but only by a statement in 7 writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought; (b) This Security Agreement shall be construed in accordance with and governed by the laws of The Commonwealth of Massachusetts, except as otherwise required by mandatory provisions of law and except to the extent that remedies provided by the laws of any state other than The Commonwealth of Massachusetts with respect to Collateral located in any such other state are governed by the laws of said state; and (c) This Security Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same Security Agreement. SECTION 20. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. (a) Except to the extent prohibited by applicable law, Debtor irrevocably: (i) agrees that any suit, action, or other legal proceeding arising out of this Security Agreement or any of the Loans may be brought in the courts of record of The Commonwealth of Massachusetts or any other state(s) in which any of the Collateral is located or the courts of the United States located in The Commonwealth of Massachusetts or any other state(s) in which any of the Collateral is located; (ii) consents to the jurisdiction of each such court in any such suit, action or proceeding; and (iii) waives any objection which it may have to the laying of venue of such suit, action or proceeding in any of such courts. For such time as any of the Obligations of Debtor to Secured Party shall be unpaid in whole or in part and/or the Commitment is in effect, Debtor irrevocably designates the registered agent or agent for service of process of the Debtor as reflected on the records of the Secretary of State of California as its registered agent, and, in the absence thereof the Secretary of State of State of California, as its agent to accept and acknowledge on its behalf service of any and all process in any such suit, action or proceeding brought in any such court and agrees and consents that any such service of process upon such agent and written notice of such service to Debtor by registered or certified mail shall be taken and held to be valid personal service upon Debtor regardless of where Debtor shall then be doing business and that any such service of process shall be of the same force and validity as if service were made upon it according to the laws governing the validity and requirements of such service in each such state and waives any claim of lack of personal service or other error by reason of any such service. Any notice, process, pleadings or other papers served upon the aforesaid designated agent shall, within three (3) Business Days after such service, be sent by the method provided therefor under SECTION 9.6 of the Loan Agreement to the Debtor at its address set forth in the Loan Agreement. EACH OF THE PARTIES HERETO HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF ANY DISPUTE BETWEEN THE DEBTOR AND SECURED PARTY WITH RESPECT TO THE FINANCING DOCUMENTS AND/OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY. 8 SECTION 21. SEVERABILITY. If any provision hereof is invalid or unenforceable in any jurisdiction, the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of Secured Party. IN WITNESS WHEREOF, this Security Agreement has been executed by the parties hereto all as of the day and year first above written. FINISAR CORPORATION By: ------------------------------- Jerry S. Rawls, President FLEET NATIONAL BANK, as Agent for itself and the other Lenders By: ------------------------------- Matthew M. Glauninger Senior Relationship Manager and Vice President 9 EXHIBIT A SECURITIES OWNED BY DEBTOR None 10 EXHIBIT B PERFECTION CERTIFICATE The following information is being provided to Fleet National Bank, in its capacity as Agent and as Lender ("Fleet") in connection with a proposed loan to Finisar Corporation ("Borrower"). The information provided in this Perfection Certificate must be completed and forwarded to Fleet and its counsel, Hinckley, Allen & Snyder prior to the drafting of any loan documentation: 1. The exact legal name of Borrower is: FINISAR CORPORATION; and Borrower has not conducted business under any other corporate name except for those listed below: (a) Flix Op Corporation (b) ------------------------------ 2. Borrower's Tax ID Number is: 94-3038428. 3. Borrower uses in its business, or has used at any time during the last five years, and owns the following trade names: (a) Finisar Corporation (b) ------------------------------ 4. Borrower was formed as a corporation on April 16, 1987, under the laws of State of California and is in good standing under those laws. 5. FOR CORPORATIONS: The senior officers of Borrower are: (a) Frank Levinson, CEO (b) Jerry Rawls, President 6. FOR LIMITED PARTNERSHIPS: The general partner and all limited partners of Borrower are: (a) ------------------------------ (b) ------------------------------ 7. FOR LIMITED LIABILITY COMPANIES: The Managing Member and all of the other members of Borrower are: (a) ------------------------------ (b) ------------------------------ 11 8. Borrower is qualified to transact business in the following states: (a) California (b) ------------------------------ 9. The General Partner/Managing Member is qualified to transact business in the following states: (a) ------------------------------ (b) ------------------------------ 10. Borrower has places of business at: (a) 274 Ferguson Drive, Mountain View, CA (b) 582 Market Street, San Francisco, CA 11. Borrower maintains its records concerning the Collateral, including the Customer Receivables and all chattel paper included in Customer Receivables, at: (a) 274 Ferguson Drive, Mountain View, CA (b) 582 Market Street, San Francisco, CA 12. Borrower owns or has an interest in personal property located at: (a) 274 Ferguson Drive, Mountain View, CA (b) 582 Market Street, San Francisco, CA 13. Borrower owns or has an interest in real property located at (please note whether such interest is a fee or leased interest): (a) 274 Ferguson Drive, Mountain View, CA (leased) (b) 582 Market Street, San Francisco, CA (leased) 14. Borrower is the owner of the following securities: (a) ------------------------------ (b) ------------------------------ 12 15. Borrower is the registered owner of the following Copyrights: REGISTRATION NUMBER TITLE (a) (b) 16. Borrower is the registered owner of the following Patents (please include applications pending): REGISTRATION OR SERIAL NUMBER PATENT DESCRIPTION (a) Please see Attachment A (b) 17. Borrower is the registered owner of the following Trademarks (please include applications pending): TRADEMARK/SERVICEMARK REGISTRATION OR SERIAL NUMBER (a) Please see Attachment B (b) 18. Borrower is the owner of the following Contracts, Leases, Licenses and Permits: (a) Please see Attachment C (b) 19. EXISTING DEBT: (a) The Borrower is party to the following existing financing: (i) Loan from Cupertino National Bank and Trust for $1,000,000 dated July 16, 1997 (ii) Loan from Cupertino National Bank and Trust for $500,000 dated July 16, 1997 (b) The following financing statements naming Borrower as "Debtor" are on file: 13 LOCATION DATE FILE NUMBER COLLATERAL (c) The following mortgages/deeds of trust are of record naming Borrower as "Mortgagor/Grantor": (i) ------------------------------ (ii) ------------------------------ 20. The Borrower will be represented by the following counsel in connection with the above financing: GENERAL COUNSEL: Blair W. Stewart, Jr. Wilson Sonsini Goodrich & Rosati PC 650 Page Mill Road Palo Alto, CA 94304 Tel: (650) 493-9300 Fax: (650) 493-6811 21. The Borrower will be using the following Title Insurance Company and Surveyor: TITLE COMPANY: ------------------------------ ------------------------------ ------------------------------ Attn: ----------------------- Tel: ------------------------ Fax: ------------------------ SURVEYOR: ------------------------------ ------------------------------ ------------------------------ Attn: ----------------------- Tel: ------------------------ Fax: ------------------------ REPEAT ABOVE INFORMATION FOR ALL BORROWING SUBSIDIARIES 14 ATTACHMENT A The following is a list of patents owned or submitted by the Company.
PATENT PATENT FILING COUNTRY STATUS ------ NO. DATE ------- ------ ------ ------ Integrated Coupler/Connector 4,881,789 05/26/88 USA Issued 11/21/89 2x2 Optical Bypass Switch 4,927,225 05/30/89 USA Issued 05/22/90 Semiconductor Laser Diode Controller and 5,019,769 09/14/90 USA Issued 05/28/91 Laser "" 654825 Australia Issued 07/31/91 "" Japan-requested exam 07/13/98 "" 54811 European Community - issued 09/17/97; validated in UK, France & Germany System for Scheduling of Indexed and 5,404,505 11/01/91 USA Issued 04/04/95 Requested Database Information on Demand "" 654885 Australia Issued 07/31/91 "" Canada Filed "" European Community - requested examiner 5-95 Multi-Mode High Speed Network Switch for 5,566,171 03/15/95 USA Issued 01/15/96 Node-to-Node Communication High Speed Local Area Network 5,604,735 05/12/95 USA Issued 02/18/97 Multi-Protocol Dual Fiber Link Laser Diode Abandoned Controller CIP Multi-Protocol Dual Fiber Link Laser 09/05/97 USA Pending Diode Controller Light Mixing Device with Fiber Optic Output 5,271,079 USA Issued 12/14/93 Method and Apparatus for Simulating a Laser 5,247,532 09/21/93 USA Issued 09/21/93 Diode in a Fiber Optic Transmitter
15 ATTACHMENT B
TRADEMARK REG. NO. FILING DATE COUNTRY STATUS Finisar 1,819,741 03/26/93 Intn'l Class 9 Issued 02/08/94
16 ATTACHMENT C (1) The Company is party to the following real property leases and subleases: (a) Building Lease for 274 Ferguson Drive, Mountain View, CA, dated April 30, 1997 between the Company and DM Group VIII and DM Group VIII-E for a period beginning June 1, 1997 and ending May 31, 2002. (b) Individual Grant Deed for 3812 Brittany Lane, Glendale, CA, dated June 6, 1995 between the Company and Mr. and Mrs. Jan Lipson. (2) The following licenses have been granted by the Company for use of its intellectual property. The Company is party to a license and supply agreement with Methode Electronics regarding certain of the Company's products. Many of the Company's products have imbedded software and by selling such products, the Company implicitly grants a license to each purchaser to use the software. (3) The Company is party to the following contracts, agreements and transactions which involve obligations of, or payments to, the Company in excess of Fifty Thousand Dollars ($50,000): (a) Equipment Lease Agreement with Hewlett-Packard starting September 22, 1997 (b) Equipment Purchase Order with Hewlett-Packard dated August 28, 1997 (c) Purchase Order for Hewlett Packard dated June 3, 1998 (d) Purchase Order for Fermi National Accelerator Laboratory dated June 19, 1998 (e) Evaluation Agreement between Finisar and Anchor Communications, Inc. dated July 14, 1998 17 EX-10.10 17 EXHIBIT 10.10 SECURITY AGEEMENT RE: CONTRACTS, LEASES, LICENSES AND PERMITS THIS SECURITY AGREEMENT RE: CONTRACTS, LEASES, LICENSES AND PERMITS made as of November 4, 1998, by and between FINISAR CORPORATION, a California corporation with a principal place of business at 274 Ferguson Drive, Mountain View, California 94043 ("Assignor") and FLEET NATIONAL BANK, a national banking association organized under the laws of the United States having an office at One Federal Street, Mail Stop: MA OF DO7A, Boston, Massachusetts 02110, as Agent for itself and each of the other Lenders who are now or hereafter become parties to the hereinafter defined Loan Agreement ("Assignee"). WITNESSETH: 1. DEFINITIONS. Each reference in this Agreement to the following capitalized terms shall be deemed to have the following meanings and all other references to a capitalized term shall have the meaning assigned thereto in the Loan Agreement. (a) CONTRACTS, LEASES, LICENSES AND PERMITS. All contracts ("Contracts"), leases ("Leases"), licenses ("Licenses") and permits ("Permits") of Assignor together with all extensions, renewals, replacements and substitutions therefor. (b) LOAN AGREEMENT. That certain Loan Agreement dated on or about the date hereof as the same may be amended or restated from time to time, by and among Assignor, Assignee and the Lenders pursuant to which the Lenders have agreed, subject to the terms and conditions thereof, to make loans and credit facilities available to Assignor as more fully described in the Loan Agreement and Assignor has agreed, INTER ALIA, to execute and deliver this Agreement as partial security for such loans. (c) OBLIGATIONS. Payment and performance of all of the Obligations of Assignor under the Loan Agreement, under the Notes and under the other Financing Documents, (ii) the performance of all of the obligations of Assignor to Assignee contained herein, and (iii) the payment of all other future advances and other obligations of Assignor to Assignee and/or the other Lenders, including, without limitation, any future loans and advances made to Assignor by Assignee and/or the other Lenders prior to, during or following any bankruptcy, reorganization or insolvency of Assignor (a "Reorganization"), any interest accruing under the Notes and/or the Loan Agreement after the commencement of a Reorganization, and any and all other indebtedness, liabilities and obligations of Assignor to Assignee and/or the other Lenders of every kind and description, direct, indirect or contingent, now or hereafter existing, due or to become due. NOW, THEREFORE, in consideration of the Loan Agreement, the Loans pursuant thereto and other valuable consideration, the receipt of which is hereby acknowledged and as further security for payment and performance of the Obligations, Assignor hereby grants to Assignee, for the benefit of the Lenders, a security interest in all of Assignor's rights, title and benefits (but none of its obligations or liabilities) under, in and to each Contract, Lease, License and Permit which may be so granted, conveyed, transferred, assigned or set over without a violation of the terms thereof. 1 TO HAVE AND TO HOLD the same with all of the rights, privileges and appurtenances thereunto belonging unto Assignee (but none of its obligations or liabilities), its successors and assigns until such time as the Obligations have been paid and satisfied in full for the purpose of further and collaterally securing same. Assignor and Assignee agree that the following terms and conditions shall govern this Agreement: 2. ASSIGNOR'S REPRESENTATIONS AND COVENANTS. Assignor, for itself and for its successors and assigns, covenants and warrants as follows: (a) that each existing Contract, Lease, License and Permit is in full force and effect and that there is, to the knowledge of Assignor, no default on the part of any party thereto or grantor thereof; (b) that Assignor is the sole owner of its rights in the Contracts, Leases, Licenses and Permits; that each Contract, Lease, License and Permit is free from all Liens other than those created under the Security Documents and those permitted under the Loan Agreement; that, Assignor has full power and authority to grant a security interest in each such Contract, Lease, License and Permit in accordance herewith; that Assignor will warrant and defend each such Contract, Lease, License and Permit to Assignee against the lawful claims and demands of all persons, and that Assignor has not sold, assigned, transferred, mortgaged or pledged any such Contract, Lease, License or Permit or any interest therein, to any person, firm or corporation other than Assignee or otherwise in accordance with the Loan Agreement; (c) that Assignor will not assign, pledge or otherwise encumber any such Contract, Lease, License or Permit other than pursuant to the Permitted Encumbrances without the prior written consent of Assignee in each instance and then only subject to and in accordance with any conditions set forth in such written consent; (d) that Assignor will fulfill or cause to be fulfilled in all material respects all of the material terms, covenants and conditions on Assignor's part to be fulfilled under each Contract, Lease, License or Permit; and (e) that Assignor will, upon written request by Assignee, while this Agreement remains in force and effect, execute and deliver all such powers of attorney, instruments of pledge, and such other instruments or documents as Assignee may reasonably request at any time for the purpose of further securing Assignee's rights hereunder. 3. ASSIGNEE'S RIGHTS IN EVENT OF DEFAULT. 3.1 Assignor hereby constitutes and appoints Assignee irrevocably, and with full power of substitution and revocation, the true and lawful attorney, for and in the name, place and stead of Assignor, to exercise any and all rights and remedies of Assignor under each Contract, Lease, License and Permit and to perform any of the actions and rights provided by any of the Security Documents upon the occurrence of an Event of Default. Assignor hereby grants unto said attorney full power and authority following the occurrence and during the continuance of an Event of Default to do and perform each and every act whatsoever requisite to be done with 2 respect to any Contract, Lease, License or Permit, as fully to all intents and purposes as Assignor could do if personally present, hereby ratifying and confirming all that said attorney shall lawfully and reasonably do or cause to be done by virtue hereof; PROVIDED, HOWEVER, that any acts or omissions by Assignee after an Event of Default shall be at Assignee's discretion and shall not be or become the basis for any liability of Assignor to any Person. 3.2 Acceptance of this Agreement shall not constitute a satisfaction of all or any part of the Obligations except to the extent of funds actually received and applied by Assignee on account of the same. 3.3 The rights and powers of Assignee hereunder shall continue and remain in full force and effect until all Obligations, including any deficiency resulting from exercise of Assignee's remedies under any of the Security Documents, are paid or satisfied in full. Assignee shall not be liable to Assignor or anyone claiming under or through Assignor by reason of any act or omission by Assignee hereunder. 4. INDEMNIFICATION. 4.1 Assignor agrees to indemnify and hold harmless Assignee and each of the Lenders and their respective directors, officers, employees and agents (collectively the "Assignee Indemnified Parties") from and against any and all liability, loss, damage and expense, including reasonable attorneys' fees which any of the Assignee Indemnified Parties may or shall incur under or in connection with any Contract, Lease, License or Permit or by reason of any of the Obligations or actions taken or omitted by Assignee under any of the Obligations, including, without limitation any action or omission which Assignee in its discretion may take to protect its interest in any Contract, Lease, License or Permit and from and against any and all claims and demands whatsoever which may be asserted against Assignor and/or any of the Assignee Indemnified Parties by reason of any of the terms and conditions of any Contract, Lease, License or Permit. 4.2 If any Assignee Indemnified Party incurs any such actual liability, loss, damage or expense, the amount thereof, shall be paid by Assignor to Assignee within thirty (30) business days after demand therefor which demand shall include evidence reasonably establishing the incurrence of such liability, loss, damage or expense. In the event that Assignor fails to pay any such sums to Assignee within thirty (30) days after demand therefor, such sums shall thereafter (i.e. commencing on the 31st day after demand therefor) bear interest at the rate equal to 20% in excess of Effective Prime. 4.3 Nothing contained herein shall operate or be construed to obligate any Assignee Indemnified Party to perform any of the terms, covenants or conditions contained in any Contract, Lease, License or Permit, or to take any action to collect any payments or to impose any obligation on such party relating to any Contract, Lease, License or Permit. 5. EXERCISE OF REMEDIES. The rights and remedies of Assignee under this Agreement are cumulative and in addition to any other rights and remedies which Assignee shall have under or as a result of any other of the Obligations and may be exercised as often as Assignee deems such exercise to be desirable. Failure of Assignee to avail itself of any of the 3 terms, covenants and conditions of this Agreement for any period of time, or at any time or times, shall not constitute a waiver of any of its rights hereunder. 6. ASSIGNMENT BY ASSIGNEE. Assignee shall have the right to assign its interest in any Contract, Lease, License or Permit, subject to any transfer restrictions contained therein, to any subsequent agent with respect to the Loan Agreement and the Obligations thereunder. 7. TERMINATION. Upon final payment and satisfaction in full of the Obligations, as evidenced by recorded satisfactions or releases of the recorded Security Documents or otherwise as satisfactory to each of the Lenders, and of any sums which may be payable hereunder, or under any present or future agreement between Assignor and each of the Lenders, this Agreement shall be of no further force and effect and, in that event, upon Assignor's request and expense, Assignee agrees to execute and deliver to Assignor instruments evidencing the termination of this Agreement. 8. APPROVALS. Notwithstanding anything to the contrary contained herein, Assignee will not take any action pursuant to this Agreement which would constitute or result in any assignment of any Contract, Lease, License or Permit if such assignment would require, pursuant to the terms of such Contract, Lease, License or Permit the prior approval of the other party to such Contract, Lease, License or Permit, without first obtaining such approval. During the continuance of an Event of Default, Assignor agrees to take any action which Assignee may reasonably request in order to obtain and enjoy the full rights and benefits granted to Assignee and the Lenders by this Agreement and each other agreement, instrument and document delivered to Assignee or any of the Lenders in connection herewith or in any document evidencing or securing the Collateral, including specifically, at Assignee's own cost and expense, the use of its best efforts to assist in obtaining approval of the other party to such Contract, Lease, License or Permit for any action or transaction contemplated by this Agreement which is then required by such Contract, Lease, License or Permit. 9. NOTICES. All notices, requests, demands and other communications provided for hereunder shall be in writing and mailed or telefaxed or delivered to the applicable party in the manner set forth in SECTION 9.6 of the Loan Agreement. 10. MISCELLANEOUS. 10.1 This Agreement, except as set forth in Section 10.2 below, shall be construed and enforced in accordance with and governed by the laws of The Commonwealth of Massachusetts without regard to its conflict of law rules. 10.2 Notwithstanding the foregoing choice of law provision, the procedures governing the enforcement by Assignee of its foreclosure and other remedies against Assignor under any of the Contracts, Leases, Licenses and Permits shall be governed by the laws of the state in which the Contracts, Leases, Licenses and Permits in question are located. 10.3 The Assignor irrevocably: (a) agrees that any suit, action, or other legal proceeding arising out of this Agreement may be brought in the courts of record of The Commonwealth of Massachusetts 4 or any other State(s) in which the Contracts, Leases, Licenses, Permits and final closings are located or the courts of the United States located in The Commonwealth of Massachusetts or any other State(s) in which any of the Contracts, Leases, Licenses, Permits and Franchises are located. (b) consents to the jurisdiction of each such court in any such suit, action or proceeding; and (c) waives any objection which it may have to the laying of venue of such suit, action or proceeding in any of such courts. For such time as the Obligations shall be unpaid in whole or in part, Assignor irrevocably designates the registered agent or agent for service of process of Assignor as reflected in the records of the Secretary of State of California as its registered agent, and in the absence thereof, the Secretary of State of the State of California, as its agent to accept and acknowledge on its behalf service of any and all process in any such suit, action or proceeding brought in any such court and agrees and consents that any such service of process upon such agent and written notice of such service to Assignor by registered or certified mail shall be taken and held to be valid personal service upon Assignor regardless of where Assignor shall then be doing business and that any such service of process shall be of the same force and validity as if service were made upon it according to the laws governing the validity and requirements of such service in such state and waives any claim of lack of personal seizure or other error by reason of any such service. Any notice, process, pleadings or other papers served upon the aforesaid designated agent shall, within three (3) Business Days after such service, be sent by the method provided for in SECTION 9.6 of the Loan Agreement to Assignor at its address set forth in the Loan Agreement. EACH OF THE PARTIES HERETO HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF ANY DISPUTE BETWEEN ASSIGNOR AND ASSIGNEE WITH RESPECT TO THE FINANCING DOCUMENTS AND/OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREBY. 10.4 No amendment, cancellation or discharge of this Agreement shall be valid unless Assignee shall have consented thereto in writing. 10.5 In case any one or more of the provisions contained in this document shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this document shall be construed as if such invalid, illegal or unenforceable provision had never been included. 10.6 The terms, covenants, and conditions contained herein shall inure to the benefit of and shall be binding upon Assignee and Assignor and their respective successors and assigns. 10.7 The relative rights of Assignee and the Lenders are set forth in the Loan Agreement. 10.8 This Agreement may be executed in one or more counterparts, each of which shall be an original and all of which shall constitute but one and the same Assignment. 5 IN WITNESS WHEREOF, Assignor and Assignee have each caused this Agreement to be duly executed on their behalf by their respective duly authorized officers on the date first set forth above. FINISAR CORPORATION By: ------------------------------------ Jerry S. Rawls, President FLEET NATIONAL BANK, as Agent for itself and the other Lenders By: ------------------------------------ Mathew M. Glauninger Senior Relationship Manager Vice President 6 EX-10.11 18 EXHIBIT 10.11 THE HOBART BUILDING OFFICE LEASE FORM of the Building Owners and Managers Association of San Francisco Parties This Lease, made this 17th day of December, 1996, between Niantic Corporation, Landlord, and Finisar Corporation, Tenant. W I T N E S S E T H 1. PREMISES. Landlord hereby leases to Tenant and Tenant hereby hires from Landlord those certain premises approximately 468 rentable square feet (hereinafter called "premises") outlined in red on EXHIBIT A attached hereto commonly known as Suite 609-610 and by this reference made a part hereof, said premises being situated on the 6th floor of that certain building (hereinafter called "building") known as 582 Market Street, San Francisco, California. Said letting and hiring is upon and subject to the terms, covenants and conditions herein set forth and Tenant covenants as material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. 2. PURPOSE. The premises shall be used for general office purposes and for no other use or purpose without the prior written consent of Landlord. 3. TERM. The term of this Lease shall be for one (1) year, commencing on the 23rd day of December, 1996, and ending on the 22nd day of December, 1997 (the "Lease Term"). 4. POSSESSION. If Landlord, for any reason whatsoever, cannot deliver possession of the said premises to Tenant at the commencement of the term hereof, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, but in that event there shall be a proportionate reduction of rent covering the period between the commencement of the said term and the time when Landlord can deliver possession. If possession of the premises is not delivered to Tenant within six months from the scheduled commencement date, this Lease will terminate. Should Landlord tender possession of the premises to Tenant prior to the date specified for the commencement of the term, and Tenant accepts such prior tender, such prior occupancy shall be subject to all terms, covenants, and conditions of this Lease, including the payment of rent. 5. RENT. On or before the first day of each calendar month during the term hereof Tenant shall pay to Landlord, as minimum monthly rent for the premises, the sum of $663.00. The minimum monthly rent for any partial month shall be prorated at the rate of 1/30 of the minimum monthly rent per day. Said rent shall be paid by Tenant to Landlord, in advance without deduction or offset, in lawful money of the United States of America at Cushman & Wakefield, P.O. Box 45257, San Francisco, CA. 94145-0257, or to such other person or at such other place as Landlord may from time to time designate in writing. 1 6. RENTAL ADJUSTMENT. (a) In addition to the monthly rent provided for in Paragraph 5 hereof, Tenant shall pay to Landlord the sums set forth in the following subparagraphs. Tenant's percentage share as set forth below has been calculated by dividing the number of square feet of rentable area in the Premises by the number of square feet of rentable area in the building. In the event the rentable area of the building is changed, the Tenant's percentage share shall be appropriately adjusted. Rentable area shall be based upon the Building Owners and Managers Association International (BOMAI) standard method of floor measurement for office buildings. Tenant hereby approves and accepts Landlord's calculation of Tenant's current percentage share as set forth below. (b) TAX INCREASES AND ASSESSMENTS. Tenant shall pay to Landlord an amount equal to .50% of any increase in real property taxes and assessments or other fees or charges of whatsoever kind or character imposed by a governmental agency which may be levied on the land and building of which the premises are a part and personal property taxes levied on personal property of Landlord used in the operation of said land and building above the amount of such taxes levied and assessed for the fiscal tax year ending June 30, 1996, either by way of increase in the rate or in the assessed valuation of said land and building or by imposition of any such charges by ordinance or statute of any authority having jurisdiction. For the purposes of the subparagraph (a) real and personal property taxes shall include, without limitation, taxes of every kind and nature levied and assessed in lieu of or in substitution for existing or additional real or personal property taxes on said land and building as well as any form of assessment, license, fee, levy, penalty, or tax (other than inheritance or estate taxes), imposed by any authority having the direct or indirect power to tax, including any city, county, state, or federal government, or any school, agricultural, lighting, drainage, or other improvement district, as against any legal or equitable interest of Landlord in the premises or in the real property of which the premises are a part, or as against Landlord's right to rent or other income therefrom, or as against Landlord's business of leasing the premises, and including any and all charges and fees which may be imposed by the environmental protection agency or other similar governmental regulatory agency or authority. In addition, Tenant shall pay one hundred percent (100%) of any increase in taxes or assessments of whatsoever kind and nature (including, without limitation, all personal property taxes) caused by improvements or installations made by Tenant to the premises at any time during the term hereof. In the event said taxes or assessments are charged to or paid or payable by Landlord, Tenant forthwith upon demand therefore, shall reimburse Landlord for all amounts of such taxes or assessments chargeable against Tenant pursuant to this subparagraph (b) and paid by Landlord. (c) OPERATING EXPENSE INCREASES (1.) Tenant shall pay to Landlord, at the times hereinafter set forth, an amount equal to .50% of any increase in direct expenses paid or incurred by Landlord on account of the operation or maintenance of the building above such direct expenses paid or incurred by Landlord during the Base Year. "Base Year" as used in this subparagraph (b) shall mean the calendar year 1996. "Direct expenses" as used herein shall include all direct costs of operation and maintenance as determined by standard accounting practices as set forth in the Building Owners and Managers Association International (BOMAI) chart of accounts from time to time 2 and shall include the following by way of illustration but not limitation: the cost of contesting by appropriate proceeding the amount or the validity of any of the aforementioned taxes or fees; water and sewer charges; insurance premiums; license, permit and inspection fees; charges for heat, light power and steam; janitorial services; labor, supplies; materials, equipment and tools; and management fees. "Direct expenses" as used herein shall not include depreciation on the building or equipment therein, interest or real estate broker's commissions. (2.) The cost of capital improvements made by Lessor to the Building that reduce other operating expenses or that are required under any governmental law or regulation that was not applicable to the Building at the time of substantial shell completion, such cost or allocable portion thereof to be amortized over such reasonable period as Lessor shall determine together with interest on the unamortized balance at the rate that was paid by Lessor on funds borrowed for the purpose of constructing such capital improvements, or, if Lessor does not borrow such funds, would have been paid had Lessor borrowed funds for such purpose but in no event shall such interest rate exceed the maximum rate permitted by law; provided, however, that Operating Expenses shall not include costs of tenant improvements, real estate brokers' commissions, or interest and capital items other than those referred to in clause (2) above. There shall be deducted from Operating Expenses paid all amounts that have been included in Operating Expenses paid by any tenant, including Lessee, during the period for which Operating Expenses are being determined, on account of cost of repairs or extra services, for which such Tenant is directly responsible. Statement of the amount of direct expenses for the preceding calendar year and the amount of such increase payable by Tenant shall be determined or estimated by Landlord and shall be given to Tenant on such date as Landlord shall from time to time determine. All amounts payable by Tenant as shown on said statement shall be paid by Tenant within the time required by said statement. It during any such year Landlord shall revise its estimate of tenant's share of said expenses for said year, Landlord shall advise Tenant and commencing on the next date payment of additional charges are due, Tenant shall pay all additional charges based on such revised estimate for the portion of the year already elapsed and shall commence paying the additional charges based on such revised estimate for the remainder of such year. 7. SECURITY. Simultaneously with the execution of the lease, Tenant shall deposit with Landlord the sum of $1,326.00, of which sum $663.00 shall be payment of the first month's rent and the balance thereof, namely, $663.00 shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this lease. Provided that at the end of the term Tenant shall have delivered up the Premises to Landlord, broom clean, and in the same condition as at the commencement date, reasonable wear excepted, said sum held as security shall be returned to Tenant. No interest shall be payable thereon and Landlord shall not be required to keep said sum in a separate account. No security or guaranty which may now or hereafter be furnished Landlord for the payment of the rent herein reserved or for performance by Tenant of the other covenants or conditions of this Lease shall in any way be a bar or defense to any action in unlawful detainer, or for the recovery of the premises, or to any action which Landlord may at any time commence for a breach of any of the covenants or conditions of this Lease. 3 8. USES PROHIBITED. Tenant shall not do or permit anything to be done in or about the premises nor bring or keep anything therein which will in any way increase the rate of or affect any fire or other insurance upon the building or any of its contents or cause a cancellation of any insurance policy covering said building or contents. Tenant shall not do or permit anything to be done in or about the premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the building or injure or annoy them, or use or allow the premises to be used for any residential, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the premises. No cooking devices or other odor causing devices, loudspeakers or other similar device, system or apparatus which can be heard or experienced outside the premises shall, without the prior written approval of Landlord, be used in or at the premises. Tenant shall not commit or suffer to be committed any waste in or upon the premises. 9. COMPLIANCE WITH LAW. Tenant shall not use or permit anything to be done in or about the premises which will in any way conflict with any law, statute, ordinance or governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated. Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force and with the requirements or any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the condition, use of occupancy of the premises, excluding structural changes not related to or affected by Tenants improvements or acts. The judgement of any court of competent jurisdiction or the admission of Tenant in an action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statue, ordinance or governmental rule, regulation or requirement shall be conclusive of that fact as between Landlord and Tenant. 10. ALTERATIONS. Tenant shall not make or suffer to be made any alterations, additions or improvements to or of the premises or any part thereof without the written consent of Landlord first had and obtained. Any alterations, additions, or improvements to or of said premises, including without limitation any partitions, movable or otherwise, and all carpeting, shall at once become a part of the realty and belong to Landlord. Movable furniture, equipment and trade fixtures shall remain the property of Tenant. If Landlord consents to the making of any alterations, additions or improvements to the premises by Tenant, the same shall be made by Tenant at Tenant's sole cost and expense and any contractor or person selected by Tenant to make the same must first be approved of in writing by Landlord. Upon the expiration or sooner termination of the term Tenant, upon demand by Landlord, at Tenant's sole cost and expense, forthwith and with all due diligence shall remove any alterations, additions or improvements made by Tenant designated by Landlord to be removed, and Tenant, forthwith and with all due diligence, at its sole cost and expense, shall repair any damage to the premises caused by such removal. 11. REPAIR. By entry hereunder upon the commencement of the term hereof, Tenant accepts the premises as being in good, sanitary order, condition and repair. Tenant, at Tenant's sole cost and expense, shall keep the premises and every part thereof in good condition and repair, damage thereto by fire, earthquake, act of God or the elements not caused by Tenant's negligent or willful act excepted, Tenant hereby waiving all rights to make repairs at the expense of the Landlord as provided by law, statute or ordinance now or hereafter in effect. Upon the 4 expiration or sooner termination of the term hereof, Tenant shall surrender the premises to Landlord in the same condition as when received ordinary wear and tear and damage by fire, earthquake, act of God or the elements excepted, unless caused by Tenants negligent or willful act. It is specifically understood and agreed that Landlord has no obligation and has made no promises to alter, remodel, improve, repair, decorate or paint the premises or any part hereof and that no representations respecting the condition of the premises or the building have been made by Landlord to Tenant except as specifically set forth in EXHIBIT C - Construction Exhibit attached hereto. 12. ABANDONMENT. Tenant shall not vacate or abandon the premises at any time during the term hereof, and if Tenant shall abandon, vacate or surrender the premises or be dispossessed by process of law, or otherwise, any personal property belonging to Tenant and left on the premises shall be deemed to be abandoned, at the option of Landlord. 13. LIENS. Tenant shall keep the premises and the building and the land upon which the building is situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Tenant shall in the event of the filing of any such lien, post any bond required to release the premises therefrom. 14. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not mortgage, pledge, hypothecate or encumber this Lease or any interest therein. Tenant shall not assign this Lease or sublet or suffer any other person (the agents and servants of Tenant excepted) to occupy or use the premises, or any part thereof, or any right or privilege appurtenant thereto without the prior written consent of Landlord first had and obtained, which consent shall not be unreasonably withheld. Landlord's consent to one assignment, subleasing or occupancy shall not be deemed to be a consent to any subsequent assignment, subleasing or occupancy. (b) Provided further and notwithstanding anything hereinbefore set forth: In the event that at any time or from time to time during the term of this lease, Tenant desires to sublet all or any part of the Premises, Tenant shall notify the Landlord in writing (the "Sublet Notice") of the terms of the proposed subletting, and the area so proposed to be sublet and shall give Landlord the right to sublet from Tenant such space (the "Sublet Space") on the same terms as those contained in the Sublet Notice. Such option shall be exercisable by Landlord in writing for a period of 30 days after receipt of the Sublet Notice. If Landlord fails to exercise its option and Tenant desires to complete the proposed sublease, Tenant shall deliver an executed copy of such sublease to Landlord in order to obtain its consent as required in paragraph 14 (a) above. If Landlord consents to sublease, then such sublease shall be subject to and made upon the following terms: (i) any such sublease shall be subject to the terms of this Lease and the term thereof may not extend beyond the expiration of the term of this Lease; 5 (ii) 50% of the difference between all sums payable by subtenant and all rent due hereunder for the sublease premises during the term of the sublease, less Tenant's reasonable costs of subletting, shall be payable to Landlord as additional rent hereunder. (iii) no subtenant shall have a right to further sublease its premises. If Landlord fails to exercise such option, and Tenant fails to consummate a sublease with a third party within 60 days after the expiration of Landlord's option period on the same terms and conditions contained in the Sublet Notice, Tenant shall be required to deliver a new Sublet Notice to Landlord and comply with the terms and conditions set forth above before any further subletting shall be permitted. (c) Regardless of Landlord's consent, no subletting nor assignment shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay rent and perform other obligations of tenant under this lease. (d) In no event shall Tenant assign this Lease or sublet the premises or any portion thereof to any then existing or prospective tenant of said building. (e) Tenant shall pay Landlord's reasonable costs incurred in connection with Tenant's request to assign this lease or sublet the premises, regardless whether or not the Landlord consents to the proposed transfer. 15. INDEMNIFICATION OF LANDLORD. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury or damage to any person or property in or about the premises by or from any cause whatsoever and, without limiting the generality of the foregoing, whether caused by water leakage of any character from the roof, walls, basement or other portion of the premises of said building or any part thereof. Tenant shall hold Landlord harmless from and indemnify and defend Landlord against any and all claims or liability for any injury, or damage to any person or property whatsoever: (1) occurring in, on or about the premises or any part thereof, and (2) occurring in, on or about any facilities (including without prejudice to the generality of the term "facilities", elevator, stairways, passageways or hallways), the use of which Tenant may have in common with other tenants of the building, when such injury or damage shall be caused in part or in whole by the act, neglect, default or omission of any duty with respect to the same by Tenant, its agent, employees or invitees. 16. INSURANCE. Tenant agrees to keep in force during the term hereof, at Tenant's expense, public liability and property damage insurance with combined single limits in the amount of not less than one million dollars ($1,000,000.00). Said policy shall name Landlord as a additional insured, and shall insure Landlord's contingent liability as respects acts, or omissions of Tenant, shall be issued by an insurance company licensed to do business in the state where the premises are located; and shall provide that said insurance shall not be canceled or amended unless thirty (30) days prior written notice to Landlord is first given. Said policy or a certificate thereof shall be delivered to Landlord by Tenant prior to the commencement of the term and each renewal of such insurance. Tenant hereby waives all rights of subrogation against 6 Landlord to which any insurance carrier may at any time become entitled under any policy of insurance carried by Tenant. 17. UTILITIES. Landlord shall furnish to the premises, during reasonable hours of generally recognized business days, to be determined by Landlord, and subject to the rules and regulations of the building, water and electricity suitable for the use of the premises for general office purposes and heat required in Landlord's judgement for the comfortable use and occupation of the premises for such purposes, janitorial service, and elevator service. Landlord shall not be liable for, and Tenant shall not be entitled to any abatement or reduction of rent by reason of Landlord's failure to furnish any of the foregoing when such failure or delay is caused by accident, breakage, repairs, strikes, lockouts or other labor disturbances or labor disputes of any character, or is caused directly or indirectly by the limitation, curtailment, rationing or restrictions on use of water, electricity, gas or any other form of energy serving the premises or the building, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Landlord shall not be liable under any circumstances for loss of business or injury to property, however occurring, through or in connection with or incidental to failure to furnish any of the foregoing. Tenant shall pay and provide for all services and utilities not furnished by Landlord. Tenant will not, without the written consent of Landlord, use any apparatus or device in the premises which will in any way increase the amount of electricity, cooling capacity or water usually furnished or supplied for use of the premises for general office purposes or connect with electric current, except through existing electrical outlet in the premises, or water pipes, any apparatus or device for the purpose of using electric current or water. If Tenant shall require water or electric current in excess of that customarily furnished or supplied to their tenants of the building for use of their premises for general office purposes, Tenant shall first procure the consent of landlord, which Landlord may refuse, to the use thereof and Landlord may cause an electric current or water meter to be installed in the premises so as to measure the amount of excess electric current consumed, as shown by said meters, at the rates charged for such services by the local public utility furnishing the same, plus any additional expense incurred in keeping account of the excess electric current or water so consumed. 18. PERSONAL PROPERTY AND OTHER TAXES. Tenant shall pay, before delinquency, any and all taxes levied or assessed and which become payable during the term hereof upon Tenant's equipment, furniture, fixtures and other personal property located in the premises, including carpeting installed by Tenant even though said carpeting has become apart of the lease premises; and any and all taxes or increases therein levied or assessed on Landlord or Tenant by virtue of alterations, additions or improvements to the premises made by Tenant or Landlord at Tenant's request. In the event said taxes are charged to or paid or payable by Landlord, Tenant, forthwith upon demand therefore, shall reimburse landlord of all such taxes paid by Landlord. 19. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the rules and regulations printed on or annexed to this Lease and all modifications of and additions thereto applicable to all tenants of the building from time to time put into effect by Landlord of which Tenant shall have notice. Landlord shall not be responsible to Tenant for the nonperformance by any other tenant or occupant of the building of any of said rules and regulations. 7 20. HOLDING OVER. If Tenant holds possession of the premises after the term of this lease, Tenant shall, (at option of Landlord to be exercised by Landlord's giving written notice to Tenant and not otherwise) become a Tenant from month to month upon the terms and conditions herein specified, so far as applicable, at a monthly rental of one hundred fifty percent (150%) of the highest amount of minimum monthly rent paid during the lease term payable in advance, in lawful money, and shall continue to be such Tenant until thirty (30) days after Tenant shall have given to Landlord or Landlord shall have given to Tenant a written notice of intent to terminate such monthly tenancy. Unless landlord shall exercise the option hereby given him, Tenant shall be Tenant at sufferance only, whether or not Landlord shall accept any rent from Tenant while Tenant is so holding over. 21. SUBORDINATION. This Lease shall be subject and subordinate at all times to all ground or underlying leases which may now exist or hereafter be executed affecting the building and/or the land upon which the building is situated and to the lien of any mortgages or deeds of trust in any amount or amounts whatsoever now or hereafter place on or against any ground or underlying lease without the necessity of having further instruments on the part of tenant to effectuate such subordination. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver, upon demand, such further instruments evidencing such subordination of the Lease to such ground or underlying leases and to the lien of any such mortgages or deeds of trust as may be required by Landlord. Tenant hereby irrevocably appoints Landlord the attorney in fact of Tenant to execute and deliver any such instrument or instruments for or in the name of Tenant. In the event of termination any ground or underlying lease, or in the event of foreclosure or exercise of any power of sale under any mortgage or deed of trust superior to this Lease or to which this Lease is subject or subordinate, upon Tenant's attornment to the Lessor under such ground or underlying lease or to the purchaser at any foreclosure sale or sale pursuant to the exercise of any power of sale under any mortgage or deed of trust, this Lease shall not terminate and Tenant shall automatically be and become the Tenant of said Lessor under such ground or underlying lease or to said purchaser, whichever shall make demand therefore. 22. ENTRY BY LANDLORD. Landlord reserves and shall at any and all reasonable times have the right to enter the premises to inspect the same, to supply janitor service and any other service to be provided by Landlord to Tenant hereunder, to submit the premises to prospective purchasers or tenants, to post notices of nonresponsibility, and to alter, improve or repair the premises and any portion of the building without abatement of rent and may for the purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing the entrance to the premises shall not be blocked thereby and further providing that the business of tenant shall not be interfered with unreasonably. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy of quiet enjoyment of the premises, and other loss occasioned by such entry. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the premises excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the premises, and any entry to the premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the premises or an eviction of tenant from the premises or any portion thereof. 8 23. INSOLVENCY OR BANKRUPTCY. Either (a) the appointment of a receiver to take possession of all of the assets of Tenant, (b) an assignment by Tenant for the benefit of creditors, or (c) any action taken or suffered by Tenant under any insolvency, bankruptcy or reorganization act shall constitute a breach of this Lease by Tenant. Upon the happening of any such event this Lease shall terminate five (5) days after written notice of termination from Landlord to Tenant. In no event shall this Lease be assigned or assignable by reason of any voluntary or involuntary bankruptcy proceedings nor shall any rights or privileges hereunder be an asset of Tenant in any bankruptcy, insolvency or reorganization proceedings. 24. DEFAULT. In the event of any breach or default of Lease by Tenant, then Landlord, besides any other rights and remedies of Landlord at law or equity, shall have the right either to terminate Tenant's right to possession of the premises and thereby terminate this Lease or to have this Lease continue in full force and effect with Tenant at all times having the right to possession of the premises. Should Landlord elect to terminate Tenant's right to possession of the premises and terminate this Lease, the Landlord shall have the immediate right of entry and may remove all persons and property from the premises. Such property so removed may be stored in a public warehouse or elsewhere at the cost and for the account of Tenant. Upon such termination Landlord, in addition to any other rights and remedies (including rights and remedies under Subparagraphs (1) , (2) and (4) of Subdivision (a) of Section 1951.2 of the California Civil Code of any amendment thereto), shall be entitled to recover from Tenant the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Tenant proves could be reasonably avoided. The worth at the time of award of the amount referred to in subparagraphs (1) and (2) of Subdivision (a) of Section 1951.2 of the California Civil Code shall be computed by allowing interest at the maximum rate allowed by law. The work at the time of the award of the amount referred to in subparagraph (3) of Subdivision (a) Section 1951.2 of the California Civil Code shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus 1%. Any proof by Tenant of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the premises and in the same geographic vicinity and such two real estate brokers shall select a third licensed real estate broker and the three licensed real estate brokers so selected shall determine the amount of rental loss that could be reasonably avoided for the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. Should Landlord, following any breach or default of this Lease by Tenant, elect to keep this Lease in full force and effect, with Tenant retaining the right to possession of the premises (notwithstanding the fact the Tenant may have abandoned the leased premises), then Landlord, besides the rights and remedies specified in Section 1951.4 of the California Civil Code and all other rights and remedies Landlord may have at law or equity, shall have the right to enforce all of Landlord's rights and remedies under this Lease, including but not limited to the right to recover the installments of rent as they become due under this Lease. Notwithstanding any such election to have this Lease remain in full force and effect, Landlord may at any time thereafter elect to terminate Tenant's right to possession of said premises and thereby terminate this Lease 9 for any previous breach or default which remains uncured, or for any subsequent breach or default. 25. DAMAGE BY FIRE, ETC. If the premises are or the building is damaged by fire or other casualty which is covered by insurance, Landlord shall forthwith repair the same, provided such repairs can be made within sixty (60) working days from the date of such damage under the laws and regulations of the state, federal, county and municipal authorities having jurisdiction thereof, and this Lease shall remain in full force and effect during the making of such repairs, except that Tenant shall be entitled to apportionate reduction of rent while such repairs are being made if the damage was not attributable to tenant's negligent or willful act, such proportionate reduction to be based upon the full extent to which the making of such repairs shall interfere with the business carried on by Tenant in the premises. If such repairs are not covered by insurance or cannot be made within sixty (60) working days from the date of such damage, Landlord shall have the option either (1) to repair or restore such damage, this Lease continuing in full force and effect, but the rent to be proportionately reduced or (2) to give notice to Tenant at any time within thirty (30) working days after the date of such damage terminating this Lease as of a date to be specified in such notice, which date shall be not less than (30) nor more than sixty (60) working days after the giving of such notice. In the event of the giving of such notice of termination by either Landlord or Tenant, this Lease and all interest of Tenant in the premises shall terminate on the date so specified in such notice, and the rent, reduced by any proportionate reduction based upon the extent, if any, to which said damage interfered with the business carried on by Tenant in the premises, shall be paid up on date of such termination. Landlord shall not be liable for or be required to repair any injury or damage by fire or other cause to the property of Tenant, or to make repairs or replacements of any panelings, decorations, railings, floor coverings or any equipment or improvements installed on the premises by Tenant. Tenant hereby waives any provisions of law automatically terminating this Lease or otherwise contrary to the provisions of this paragraph in the event of damage to or destruction of the promises. 26. EMINENT DOMAIN. If all or any part of the premises shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, and such taking will substantially impair Tenant's use of the premises for more than 90 days, either party hereto shall have the right, at its option, to terminate this Lease. If all or any part of the building of which the premises are a part shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, Landlord may terminate this Lease. In either of such events, Landlord shall be entitled to and Tenant upon demand of Landlord shall assign to Landlord any rights of Tenant to any and all income, rent award, or any interest therein whatsoever which may be paid or made in connection with such public or quasi-public use or purpose, and Tenant shall have no claim against Landlord or the condemnor for the value of any unexpired term of this Lease. If a part of the premises shall be so taken or appropriated and neither party hereto shall elect to terminate this Lease, the rent thereafter to be paid shall be equitably reduced. 27. CLAUSES, PLATS AND RIDERS. Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof, and in the event of variation or discrepancy the duplicate original hereof, including such clauses, plats and riders, if any, held by Landlord shall control. 10 28. SALE BY LANDLORD. In the event of a sale or conveyance by Landlord of the building, the same shall operate to release Landlord from any future liability upon any of the covenants or conditions, express or implied, herein contained in favor of Tenant, and in such event Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease. If any security be given by Tenant to secure the faithful performance of all or any of the covenants of this Lease on the part of tenant, Landlord may transfer and/or deliver the security to the successor in interest of Landlord, and thereupon Landlord shall be discharged from any further liability in reference thereto. Except as set forth in this Paragraph 28, this Lease shall not be affected by any such sale or conveyance. 29. ESTOPPEL CERTIFICATES. At any time and from time to time, upon not more than ten (10) days prior request by Landlord, Tenant shall execute, acknowledge and deliver to Landlord a statement certifying the date of commencement of this Lease, stating that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and the date and nature of such modifications) and the dates to which the rent has been paid, and setting forth such other matters as may reasonably be requested by Landlord. Landlord and Tenant intend that any such statement delivered pursuant to this paragraph may be relied upon by any mortgagee or the beneficiary of any Deed of Trust or by any purchaser or prospective purchaser of the building. 30. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be kept or performed by tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money, other than rent, required to be paid by it hereunder or shall fail to perform any other act on its part be performed hereunder, and such failure shall continue for ten (10) days after notice thereof by Landlord, Landlord may, but shall not be obligated to, and without waiving and default of Tenant or releasing Tenant from any obligations of Tenant hereunder, make any such payment or perform any such other act on Tenant's part to be made or performed as in this Lease provided. All sums so paid by the Landlord and all necessary incidental costs, together with interest thereon at the rate of ten percent (10%) per annum from the day of such payment by the Landlord, shall be paid to Landlord forthwith on demand, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment thereof by Tenant as in the case of default by Tenant in payment of rent. 31. ATTORNEY FEES. If either Landlord or Tenant shall obtain legal counsel or bring an action against the other by reason of the breach of any covenant or warranty hereof, or otherwise arising out of this Lease, the unsuccessful party shall pay to the prevailing party reasonable attorney's fees, which shall be payable whether or not any action is prosecuted to judgement. The term "prevailing party" shall include, without limitation, a party who obtains legal counsel or brings an action against the other by reason of the other's breach or default and obtains substantially the relief sought, whether by compromise, settlement or judgement. 32. SURRENDER OF PREMISES. The voluntary or other surrender of this Lease by Tenant or mutual cancellation thereof shall not work a merger and, at the option of Landlord, shall terminate all or any existing subleases or subtenancies, or at the option of Landlord, may operate as an assignment to Landlord of any or all such subleases or subtenancies. 11 33. WAIVER. The waiver by Landlord or Tenant of performance of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 34. NOTICES. All notices and demands which may or are required to be given by either party to the other hereunder shall be in writing. All notices and demands by Landlord to Tenant shall be delivered personally or sent by United States certified or registered mail, postage prepaid, address to Tenant at the premises, or to such other place as Tenant may from time to time by like notice designate. All notices and demands by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, address to Landlord at Cushman & Wakefield, Attention: Lita Doctolero, The Hobart Building, 582 Market Street, Suite 1001, San Francisco, CA. 94104 or such other place as Landlord may from time to time by like notice designate. 35. NOTICE TO SURRENDER. At least ninety (90) days before the last day of the term hereof, Tenant shall give to Landlord a written notice of intention to surrender the premises on that date, but nothing contained herein or any failure to give such notice shall be construed as an extension of the term hereof or as consent of Landlord to any holding over by Tenant. 36. DEFINED TERMS AND MARGINAL HEADINGS. The words "Landlord" and "Tenant", as used herein shall include the plural as well as the singular. Words used in masculine gender include the feminine and neuter. If there be more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. The marginal headings and titles to the paragraphs of the Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 37. TIME AND APPLICABLE LAW. Time is of the essence of this Lease and each and all of its provisions. This Lease shall in all respects be governed by the laws of the state in which the premises are located. 38. SUCCESSORS. Subject to the provisions of Paragraph 14 hereof, the covenants and conditions herein contained shall be binding upon and inure to the benefits of the heirs, successors, executors, administrators and assigns of the parties hereto. 39. ENTIRE AGREEMENT. This Lease constitutes the entire agreement between Landlord and Tenant and no promises or representations, express or implied, either written or oral, not herein set forth shall be binding upon or inure to the benefit of Landlord or Tenant. This Lease shall not be modified by any oral agreement, either express or implied, and all modifications hereof shall be in writing and signed by both Landlord and Tenant. 40. LATE CHARGE. In the event Tenant shall fail to pay any rents or sums due hereunder on or before the due date herein provided, then and in that event the amount so due and unpaid shall bear a late charge equal to five percent (5%) of the amount due together with 12 interest accruing from the date due at the maximum interest rate permitted by law, which late charge and interest shall be payable forthwith upon demand. (The foregoing shall be in addition to any other right or remedy of Landlord.) 41. ADDITIONAL PROVISIONS. The exhibits and addenda listed below are incorporated by reference in this lease: 1. The Rules & Regulations for the Building attached to and made a part of this lease. 2. First Addendum to the Lease Agreement. 3. EXHIBIT A - Location of the Leased Premises. 4. EXHIBIT B - Building Owners and Managers Association International Chart of Accounts. 5. EXHIBIT C - Landlord's Construction Obligation. IN WITNESS WHEREOF Landlord and Tenant have executed this Lease the day and year first above written. NIANTIC CORPORATION FINISAR CORPORATION By: /s/ Russell Lyman /s/ Jerry Rawls - ------------------------------ ------------------------------ Russell Lyman Tenant Date: Date: ------------------------- ------------------------- See Your Attorney This Lease should be given to your attorney for review and approval before you sign it. BOMA makes no representation or recommendation concerning the legal effect, legal sufficiency, or tax consequences of this Lease. These are questions for your attorney. 13 RULES AND REGULATIONS FOR THE HOBART BUILDING ATTACHED TO AND MADE A PART OF THIS LEASE 1. Except as provided or required by Landlord in accordance with building standards, no sign, placard, picture advertisement, name or notice shall be inscribed, displayed, printed, painted or affixed by Tenant on or to any part of the building or exterior of the premises leased to tenants or to the door or doors thereof without the written consent of Landlord first obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice to and at the expense of Tenant. If picture frames, etc are permitted to be hung in leased premises, Tenant is responsible for hanging or installing them. 2. Except as provided or required by Landlord in accordance with building standards, no draperies, curtains, blinds, shades, screens or other devices shall be hung at or used in connection with any window or exterior door or doors of the premises. 3. The bulletin board or directory of the building shall be used primarily for display of the name and location of Tenants and Landlord reserves the right to exclude any other names therefrom, to limit the number of names associated with tenants to be placed thereon and to charge for names associated with tenants to be placed thereon at rates applicable to all tenants. 4. The sidewalks, halls, passages, exits, entrances, elevators and stairways of the building shall not be obstructed by tenants or used by them for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exits, entrances, elevators, stairways, balconies and roof of the building are not for the use of the general public and Landlord in all cases reserves the right to control the same and prevent access thereto by all persons whose presence, in the judgement of the Landlord, is or may he prejudicial to the safety, character, reputation or interest of the building and its tenants; provided however, that Landlord shall not prevent such access to persons with whom tenants deal in the ordinary course of business unless such persons are engaged in illegal activities. No person shall go upon the roof of the building unless expressly so authorized by Landlord. 5. Tenants shall not alter any lock nor install any new or additional locks or any bolts on any interior or exterior door of any premises leased to tenant. 6. The doors, windows, light fixtures and any lights or skylights that reflect or admit light into halls or other places of the building shall not be covered or obstructed. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown or placed therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose employees or invitees, cause such expense. 1 7. Tenants shall not mark, drive nails, screw or drill into the walls, woodwork or plaster or in any way deface the building or any premises leased to supporting partitions pictures, paintings and other similar solely decorative items. 8. Furniture, freight or equipment of every kind shall be moved into or out of the building only at such times and in such manner as Landlord shall designate. Landlord may prescribe and limit the weight, size and position of all equipment to be used by tenants, other than standard office desks, chairs and tables and portable office machines. Safes and other heavy equipment shall, if considered necessary by landlord, stand on wood strips of such thickness as Landlord deems necessary to distribute properly the weight thereof. All damage to the building or premises occupied by tenants caused by moving or maintaining any property of a tenant shall be repaired at the expense of such tenant. 9. No tenant shall employ any person, other than the janitor provided by Landlord, for the purposes of cleaning the premises occupied by such tenant unless otherwise agreed to by Landlord. Except with the written consent of Landlord no person shall be permitted to enter the building for the purpose of cleaning the same. Tenants shall not cause any unnecessary labor by carelessness or indifference in the preservation of good order and cleanliness. Landlord shall not be responsible to any tenant for loss of property on the premises, however occurring, or for any damage to the property of any tenant caused by the employees or independent contractors of Landlord or by any other person. Janitor service will not be furnished when rooms are occupied during the regular hours when janitor service is provided. Window cleaning shall be done only at the regular and customary times determined by Landlord for such services. 10. No tenant shall sweep or throw or permit to be swept or thrown any dirt or other substance into any of the corridors halls or elevators or out of the doors or stairways of the building; use or keep or permit to be used or kept any foul or noxious gas or substance; permit or suffer the premises occupied by such tenant to be occupied or used in a manner offensive or objectionable to Landlord or other tenants by reason of noise, odors or vibrations, interfere in any way with other tenants or persons having business in the building; or bring or keep or permit to be brought or kept in the building any animal life form, other than human, except seeing-eye dogs when in the company of their masters. 11. No cooking shall be done or permitted by tenants in their respective premises, nor shall premises occupied by tenants be used for the storage or merchandise, washing cloths, lodging, or any improper, objectionable or immoral purposes. 12. No tenant shall use or keep in the building any kerosene, gasoline or inflammable or combustible fluid or material or use any method of heating or air-conditioning other than such as is supplied by Landlord. 13. No boring or cutting for telephone or electric wires shall be allowed without the consent of Landlord and such wires permitted shall be introduced at the place and in the manner described by Landlord. The location of telephones, speakers, fire extinguisher and all other office equipment affixed to premises occupied by tenants shall be subject to the 2 approval of Landlord. Each tenant shall pay all expenses incurred in connection with the installation of its equipment, including any telephone and electricity distribution equipment. 14. Upon termination of occupancy of the building, each tenant shall deliver to Landlord all keys furnished by Landlord, and any reproductions thereof made by or at the direction of such tenant, and in the event of loss of any keys so furnished shall pay Landlord therefore. 15. No tenant shall affix any floor covering in any manner except as approved by the Landlord. The expense of repairing any damage caused by removal of any such floor covering shall be borne by the tenant by whom, or by whose contractors, employees or invitees, the damage shall have been caused. 16. No mail, furniture, packages, supplies, equipment, merchandise or deliveries of any kind will be received in the building or carried up or down in the elevators except between such hours and in such elevators as shall be designated by Landlord. 17. On Sundays and legal holidays and between the hours of 6:00 pm and 8:00 am access to the building may be refused unless the person seeking access is known to the person charged with responsibility for the safety and protection of the building and has a pass or is properly identified. In no case shall Landlord be liable for any loss or damage for any error with respect to the admission to or exclusion from the building of any person. In case of invasion, mob, riot, public excitement or other commotion and at such times as Landlord deems necessary for the safety and protection of the building, its tenants and all property located therein, Landlord may prohibit and prevent access to the building by all persons by any means Landlord deems appropriate. 18. Each tenant shall see that the exterior doors of its premises are closed and securely locked on Sundays and legal holidays and not later than 6:00 pm of each other day. Each tenant shall exercise extraordinary care and caution that all water faucets or water apparatus are entirely shut off each day before its premises are left unoccupied and that all electricity or gas shall likewise be carefully shut off so as to prevent waste or damage to Landlord or to other tenants of the building. 19. Landlord may exclude or expel from the building any person who, in the judgement of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the building. 20. The requirements of tenants will be attended to only upon application to Landlord at the office of the building. Employees of Landlord shall not perform any work outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord shall be required to admit any person (Tenant or otherwise) to any premises in the building. 21. No vending or food or beverage dispensing machine or machines of any description shall be installed, maintained or operated upon any premise in the building without the written permission of the Landlord. 3 22. Landlord, without notice and without liability to any tenant, at any time may change the name or the street address of the building. 23. The word "building" as used in these rules and regulations means the building of which a part of the premises are leased pursuant to the Lease to which these rules and regulations are attached. Each tenant shall be liable to Landlord and to each other tenant of the building for any loss, cost, expense, damage or liability, including attorneys fees, caused or occasioned by the failure of such first named tenant to comply with these rules, but Landlord shall have no liability for such failure or for failing or being unable to enforce compliance therewith by any tenant and such failure by Landlord or non-compliance by any other tenant shall not be a ground for termination of the Lease to which these rules and regulations are attached by the Tenant thereunder. 24. Carpet protector pads shall be used by all desk stations. 25. Per the San Francisco Fire Code, the use of extension cords and multiplug adaptors (e.g. cube adaptors, strip plugs or any other device which is not listed by a qualified nationally recognized electrical testing laboratory and/or does not comply with the Electrical Code) are prohibited in highrise buildings. The only type of multiplug device allowed is an Underwriters Laboratories listed power strip with either a circuit breaker feature or a surge protection feature. Extension cords cannot be used in conjunction with these power strips in any arrangement whatsoever. Failure to abide by this code can result in a Notice of Violation being issued and a fine being imposed. 26. Smoking is prohibited in the Building including restrooms, lobby area, hallways, stairwells, leased premises and any other area within the Building. Smoking is defined as inhaling, exhaling, holding, burning and/or carrying any lighted tobacco product of any kind. 27. No tools, dollies, ladders, or any other equipment is available to tenant or tenant's contractors for loan. 28. Landlord or its management agent does not provide services to repair tenant furniture or any other tenant possessions. 29. Any other furniture, or other large items abandoned in a suite or in any other part of the building will be disposed of at the expense of the tenant. If you are discarding furniture, large items, or an unusually large amount of refuse, notification to the Building Office is required. 30. No bicycle, motorcycle, or other vehicle, and no animals or birds shall be allowed in the office, halls, corridors, elevators, sidewalks, basement or any other part of the Building. 31. All work to be performed in the building must have prior approval from the Landlord. This includes but is not limited to installing, repairing, or other work on phones or phone lines, hiring of moving company to move furniture or other items in and/or out of the building and any type of construction work. 4 THE HOBART BUILDING 582 MARKET STREET SAN FRANCISCO, CALIFORNIA FIRST ADDENDUM TO THE LEASE AGREEMENT The First Addendum to the Lease Agreement made this 17th day of December, 1996 between Niantic Corporation, Landlord, and Finisar Corporation, Tenant, to the Office Lease Form dated this 17th day of December, 1996, attached hereto. 1. Pursuant to paragraph 6(b) Tax Increases and Assessments, Tenant's proportionate share of all tax increases and assessments shall be paid as additional rent. Statements of the amount of tax increases and assessments for the preceding calendar year on the amount of such increase payable by tenant shall be determined or estimated by Landlord and shall be given to Tenant on such date as Landlord shall from time to time determine. All amounts payable by Tenant as shown on said statement shall be paid by Tenant within the time required by said statement. If during any such year Landlord shall revise its estimate of Tenant's share of said expenses for said year, Landlord shall advise tenant and commencing on the next date payment of additional rent is due. Tenant shall pay all additional charges based on such revised estimate for the portion of the year already elapsed and shall commence paying the additional rent based on such revised estimate for the remainder of such year. 2. Pursuant to paragraph 6(c) Operating Expense increases shall specifically include, but not be limited to, heating, ventilation, air conditioning (HVAC) repairs and roof repairs. 3. (a) Hazardous Materials: Tenant agrees that during the term of this Lease, Tenant shall not be in violation of any Federal, State or Local law, ordinance or regulation relating to industrial hygiene, soil, water, or environmental conditions on, under or about the leased premises, but not limited to, the Environmental laws. (b) Tenant further agrees that during the term of this Lease, there shall be no use, presence, disposal, storage, generation, release, or threatened release of hazardous material on, from or under the Leased Premises. 4. Waiver of Subrogation. Landlord and Tenant release each other, and their respective authorized representatives, from any claims for damage to any person or to the Leased Premises and the Building and other improvements in which the Leased Premises are located, and to the fixtures, personal property, tenant improvements and alterations of either Landlord or Tenant, in or on the Leased premises and the Building and other improvements in which the Leased Premises are located, including loss of income, that are caused by or result from risks insured or required under the terms of this Lease to be insured against under any property insurance policies carried or to be carried by either of the parties. 1 5. Landlord's Exculpation. In the event of default, breach, or violation by Landlord (which term includes Landlord's partners, coventurers, co-tenants, officers, directors, employees, agents or representatives) of any Landlord obligations under this Lease, Landlord's liability to Tenant shall be limited to its ownership interest in the Leased Premises or its interest in the complex, if applicable) or the proceeds of a public sale of such interest pursuant to foreclosure of a judgement against Landlord. Landlord may, at its option, and among its other alternatives, relieve itself of all liability under this Lease by conveying the Leased Premises to Tenant. Notwithstanding any such conveyance, Tenant's leasehold and ownership interest shall not merge. Landlord shall not be personally liable for any deficiency beyond its interest in the Leased Premises. 6. Waiver of California Code Sections. Tenant waives (for itself and all persons claiming under Tenant) the provision of Civil Code Sections 1932 (2) and 1933 (4) with respect to the destruction of the Leased Premises Civil Code Sections 1941 and 1942 with respect to Landlord's repair duties Tenant's right to repair, Code of Civil Procedure Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Lease Premises by condemnation as herein defined, and any right to redemption or reinstatement of Tenant under any present or future case law or statutory provision (including Code of Civil Procedure Section 473 and 1179 and Civil Code Section 3275) in the event Tenant is dispossessed from the Leased Premises for any reason. This waiver applies to future statutes enacted in addition to or in substitution for the statutes specified herein. 7. Pursuant to paragraph 29, Estoppel Certificates. Failure to comply with this provision shall be a material breach of this Lease by tenant giving Landlord all rights and remedies under paragraph 24 hereof, as well as a right to damages caused by the loss of a loan or sale, which may result from such failure by Tenant. 8. Joint and Several Liability. Should Tenant consist of more than one person or entity, they shall be jointly and severally liable on this Lease. 9. Light, Air and View. The diminution of light, air or view by any structure which hereafter be erected whether or not by Landlord) shall not entitle Tenant to any reduction of rent, result in any liability of Landlord to Tenant, or in any other way effect this Lease or Tenant's obligation hereunder. 10. Substituted Premises. In the event the Leased premises consist of less than five thousand (5,000) square feet, Landlord shall have the right, at any time during the Term hereof, upon not less than ninety (90) days prior written notice to Tenant, to substitute for the Leased Premises such other space in the building as shall be substantially the same size as the Leased Premises ("the Substituted Premises"), provided that Landlord shall pay all expenses of tenant incidental to Tenant's relocation to the Substituted Premises and that Landlord shall improve the Substituted Premises for Tenant's use and occupancy at least to the same extent as the Leased Premises occupied by Tenant prior to such relocation. If tenant does not agree to such relocation then Tenant shall give notice of termination of 2 this Lease to Landlord within fifteen (15) days of the notice of relocation. Upon receipt of such notice to termination, Landlord shall have fifteen (15) days to rescind notice of relocation. If landlord not rescind the notice of relocation in writing to Tenant within such fifteen (15) day period, then the Lease will terminate on the date specified in notice of relocation. 11. Landlord shall have no responsibility for providing to Tenant any telephone equipment, including wiring, within the Premises or for providing telephone service or connections from the utility to the Premises, except as required by law. Tenant shall not alter, modify, add to or disturb any telephone wiring in the Premises or elsewhere in the Building without the Landlord's prior written consent. Tenant shall be liable to Landlord for any damage to the telephone wiring in the Building due to the act, negligent or otherwise, of Tenant or any employee, contractor or other agent of Tenant. Tenant shall have no access to the telephone closets within the Building, except in the manner and under procedures established by Landlord. Tenant shall promptly notify Landlord of any actual or suspected failure of telephone service to the Premises. All costs incurred by Landlord for the installation, maintenance, repair and replacement of telephone wiring within the Building shall be an Operating Expense, as otherwise defined in Section six (6) of this Lease, unless Landlord is reimbursed for such costs by other tenants of the Building. Landlord shall not be liable to Tenant and Tenant waives all claims against Landlord whatsoever, whether for personal injury, property damage, loss of use of the Premises, or otherwise, due to the interruption or failure of telephone services to the Premises. Tenant hereby holds Landlord harmless and agrees to indemnify, protect and defend Landlord from and against any liability for any damage, loss or expense due to any failure or interruption of telephone service to the premises for any reason. Tenant agrees to obtain loss of rental insurance adequate to cover any damage, loss or expense occasioned by the interruption of telephone service. 12. All other terms and conditions contained in the Lease shall remain in full force and effect. 3 EXHIBIT B THE HOBART BUILDING 582 MARKET STREET SAN FRANCISCO, CALIFORNIA Lessor's operating costs shall include the operating expenses of the building and its basement. The expense categories shall include, but are not limited to, those listed below and are shown only by example. The wages and salaries of all employees engaged in the operating and maintenance of the building, including Employer's Social Security taxes and other taxes which may be levied on such wages and salaries; All janitorial and office supplies and materials used in the operation and maintenance of the building; The cost of water and power, heating and lighting for the building; The cost of all maintenance and service agreements on equipment, including security, window cleaning, elevator maintenance and management contract; Insurance premiums and; All taxes and assessments, and governmental charges, either Federal, State, County or Municipal, which are levied on or charged against real estate, street lights, personal property or rents, or in the right or privilege of leasing real estate or collecting rents therefrom, and any other taxes and assessments attributable to the building or its operation, excluding, however, Federal & State income taxes. 1 EXHIBIT C THE HOBART BUILDING 582 MARKET STREET SAN FRANCISCO, CALIFORNIA Specifications for Tenant Improvements included in the Lease for Suite 609 and 610 at the Hobart Building, 1. Install building standard carpet in Suite 610, to closely match existing carpet in Suite 609. 1 FIRST AMENDMENT TO THE LEASE AGREEMENT PERTAINING TO OFFICE SPACE 582 MARKET STREET, SAN FRANCISCO, CA This First Amendment to the Office Lease Form dated December 17, 1996 attached hereto and made a part hereof, is made by and between Finisar Corporation, Tenant, and Niantic Corporation, Landlord as of this __ day of October, 1998, under the following terms sand conditions: 1. PREMISES Suites 609/610, comprised of 468 Rentable Square Feet (RSF) 2. TERM The amended Lease Term for the premises shall commence November 1, 1998, and shall terminate October 31, 1999. 3. RENT Paragraph 5, Rent, shall be amended to provide for the following rental amounts due: November 9, 1998 - October 31, 1999 $858.00 4. OTHER PROVISIONS All other terms and conditions of the Office Lease Form dated December 17, 1996 between Finisar Corporation, Tenant, and Niantic Corporation, Landlord, are to remain in full force and effect. LANDLORD TENANT NIANTIC CORPORATION FINISAR CORPORATION By: /s/ Russell Lyman By: /s/ Jerry Rawls ---------------------------- ---------------------------- Russell Lyman, Vice President Jerry Rawls, President and Assistant Secretary Date: Date: 10/28/98 ---------------------------- ---------------------------- EX-10.12 19 EXHIBIT 10.12 COMMERCIAL LEASE FERGUSON OAKS BUSINESS PARK MOUNTAIN VIEW, CALIFORNIA 1. PARTIES. THIS LEASE is made and entered into as of the 3rd day of April 1997, by and between DM GROUP VIII, a California limited partnership, and DM Group VIII-E, a California limited partnership (hereinafter collectively called "Landlord"), and Finisar Corporation, a California corporation, having a mailing address of 274 Ferguson Drive, Mountain View, California 94043 (hereinafter called "Tenant"). 2. PREMISES. Landlord leases to Tenant and Tenant leases from Landlord those certain premises consisting of a freestanding, single story research and development building containing approximately 20,140 square feet of space, located at 274 Ferguson Drive, Mountain View, California (the "Premises"), for the term, at the rental rate, and upon all of the terms, covenants, and conditions set forth in this Lease. The Premises are described on EXHIBIT A, which Exhibit is attached hereto and is incorporated herein. The Premises are a portion of, and are incorporated in, a unified planned development of three (3) research and development buildings and associates common areas, commonly known as the Ferguson Oaks Business Park (the "Project"). The legal description of the real property comprising the Project is attached hereto as EXHIBIT B, which Exhibit is attached hereto and incorporated herein. In addition to the exclusive use of the Premises, Tenant shall also have the right to non-exclusive use of all Common Areas (as that term is hereinafter defined in Paragraph 6(e), below) in the Project designated by Landlord for use by tenants of the Project, in accordance with and subject to the provisions of this lease. This Lease is subject to the following: (a) All those documents and matters of record, known or recorded as of the Commencement Date (as defined below), including the effect thereof, including but not limited to any covenants, conditions, restrictions, easements, mortgages, deeds of trust, and rights of way; (b) General and special taxes not delinquent; and (c) The effect of any zoning and building codes of the City of Mountain View, County of Santa Clara, or State of California. 3. USE. (a) PERMITTED USE. Tenant shall use the Premises for general office, engineering, research, and production of Tenant's products and equipment, for the education and training of Tenant's clients and employees, and all other uses related or incidental thereto. (b) USES PROHIBITED. Tenant agrees that no portion of the Premises shall be used: 1 (i) in any manner inconsistent with, contrary to, or in violation of the requirements of any laws, rules, regulations, or ordinances, of any local, regional, state or federal governmental authority now in force, or which may hereafter be in force, or which violates the terms or conditions of any covenants, easements, or restrictions of record binding on the Project or the Property; (ii) in any manner which shall present a danger or hazard to the premises or the Project, or any other tenant or user thereof-, or which violate the requirements of any applicable fire insurance underwriter or rating bureau; (iii) for any trade, service, activity or purpose which is excessively obnoxious or offensive, or be a nuisance by reason of unsightliness or excess emission of odors, dust, fumes, smoke, liquid waste, noise, glare, vibration, radiation or other similar condition; (iv) in any manner which will increase the existing rate of any insurance upon the Premises or the Project, or cause a cancellation of such insurance, or which will interfere with other tenants at the Project; (v) for any unlawful purpose. (c) FLOOR LOADS. Tenant shall not place a load upon the Premises exceeding the floor load per square foot area which it was designed to carry. Landlord reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Landlord's reasonable judgment, to absorb and prevent vibration, noise and annoyance. 4. TERM. (a) PRIMARY TERM. The term of this lease ("the Primary Term") shall begin on the first day of June, 1997 (the "Commencement Date") and, unless sooner terminated in accordance with the provisions of this Lease, extend until the 31st day of May, 2002 (the "Termination Date"). The first full monthly installment of Base Rent shall be due on the Commencement Date. 5. ACCEPTANCE OF PREMISES AND TENANT IMPROVEMENT ALLOWANCE. (a) PREMISES. Landlord shall deliver the existing improvements to the Tenant with the current floor plan and finishes. (b) LANDLORD'S LIMITED WARRANTY. Landlord warrants that the HVAC for the area defined in EXHIBIT C shall be, as of the Commencement Date, and shall remain, for a period of sixty (60) days after the Commencement Date (the "Warranty Period") in a state of good condition, order, and repair. If, during the Warranty Period, Landlord is notified in writing that any of the equipment are in a state of disrepair, Landlord, at its sole and exclusive cost and expense, shall, at its option, replace, restore, or repair said equipment. The cost of repair, restoration, or replacement shall be Landlord's sole obligation pursuant to this Warranty, and Landlord shall under no circumstances be liable, to Tenant or to any third party, for any other 2 damages including, without limitation, for any incidental or consequential damages including, without limitation, damages for loss of use or loss of profits. (c) Landlord shall have no obligation with respect to the construction, improvement, alteration, or modification of the Premises. Tenant has had the opportunity to fully inspect the Premises and accepts the condition of the Premises in an "AS-IS" condition as of the date hereof Tenant shall be responsible for performing any and all tenant improvement work at the Premises at Tenant's expense in accordance with the provisions of Paragraph 10, below. Neither Landlord nor Landlord's agents have made any representations, warranties or promises with respect to the physical condition of the Premises, the land upon which it is erected, or the Premises, or any matter or thing affecting or related to the Premises, except as is set forth in this Lease. 6. RENT. Tenant shall pay to Landlord, without offset, deduction (except as provided herein), notice, or demand, the following items as rent ("Rent") for the Premises: (a) BASE RENT. Tenant shall pay to Landlord as base rent ("Base Rent") during the Primary Term hereof the sum of One Million, Seven Hundred Fifty-Four Thousand, One Hundred Dollars ($1,754,100) payable as follows: June 1, 1997 - May 31, 1998 $26,998 per month June 1, 1998 - May 31, 1999 $28,067 per month June 1, 1999 - May 31, 2000 $29,190 per month June 1, 2000 - May 31, 2001 $30,358 per month June 1, 2001 - May 31, 2002 $31,572 per month All rental payments shall be payable in advance, on or before the first day of each and every calendar month during the term hereof, in advance, and the first rental payment shall be due on the Commencement Date. Rent shall be paid to Landlord in lawful money of the United States of America at the address set forth in Paragraph 25, below, for the giving of notices. (b) REAL ESTATE TAXES. Tenant shall pay to Landlord, as Additional Rent, the real estate taxes and assessments ("Real Estate Taxes") levied against the Premises paid by Landlord. Real Estate Taxes shall include all real property taxes and assessments levied against the Premises by any governmental or quasi-governmental authority, including any taxes, assessments, surcharges, or service or other fees of a nature not presently in effect which shall hereafter be levied on the Project as a result of the use, ownership or operation of the Project or for any other reason, whether in lieu of or in addition to any current real estate taxes and assessments; provided, however, that any taxes which shall be levied on the rentals of the Building shall be determined as if the Building were Landlord's only property and provided further, that in no event shall the term Real Estate Taxes include any federal, state or local income taxes levied or assessed on landlord, unless such taxes are a specific substitute for real property taxes; such term shall, however, include gross taxes on rental and expenses incurred by Landlord for tax consultants and in contesting the amount or validity of any Real Estate Taxes. Assessments shall include any and all so-called special assessments, license tax, business license 3 fee, business license tax, commercial rental tax, levy, charge or tax imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, water, drainage other improvement or special district thereof, against the Project, or any part thereof, or against any legal or equitable interest of Landlord therein. For the purposes of this Lease, any special assessment shall be deemed payable in such number of installments as if actually paid. Landlord shall give Tenant written notice of the amount of Tenant's liability for payment of taxes and assessments hereunder on or before sixty (60) days prior to the delinquency date for payment of such taxes and assessments. Tenant shall pay to Landlord the amount of Tenant's liability hereunder for taxes and assessments within fifteen (15) days of Tenant's receipt of such written notice. Landlord shall pay the Real Estate Taxes and assessments levied against the Premises prior to delinquency and shall, at Tenant's written request, send Tenant proof that the Real Estate Taxes and assessments have been paid. Landlord may estimate the annual Real Estate Taxes liability of Tenant and based on Landlord's written estimate, Tenant shall pay to Landlord in the same manner as the Common Area Expenses described in Paragraph 6(g), This Real Estate Tax impound shall be reconciled on an annual basis. (c) LANDLORD'S INSURANCE. Tenant shall pay to Landlord, as Additional Rent, any amounts paid by Landlord for insurance premiums under Paragraph 14(a), below, and Tenant's Pro Rata Share (as hereinafter defined) of amounts paid by Landlord for insurance premiums under Paragraph 14(b), below. Tenant shall pay such amounts to Landlord within fifteen (15) days of Landlord's written request for same, which request shall set forth the kind and amount of insurance and the premium (or allocated portion of premium) therefor. Based on Landlord's written estimate of the annual insurance liability of Tenant, Tenant shall pay to Landlord in the same manner as the Common Area Expenses described in Paragraph 6(g). This insurance impound shall be reconciled on an annual basis. (d) Property Repairs and Reimbursement. Except for those repairs, restorations, and replacements which are herein stated to be the sole responsibility of, and to be made at the sole and exclusive expense of, the Landlord, Tenant shall pay to Landlord, as Additional Rent, any amounts paid or incurred by Landlord for the repair, maintenance, restoration, or replacement of any portion of the Premises. Notwithstanding the foregoing, if the useful life of any such restoration or replacement exceeds the term of this Lease (inclusive of any options to extend this Lease), such as repairs to the structural portion of the Premises made by Landlord pursuant to Paragraph 11(a), below, Tenant shall reimburse Landlord as Additional Rent only for Tenant's proportionate share of such repairs, restoration or replacement. As used in this Paragraph, Tenant's proportionate share shall be equal to the total cost of such repairs, restoration or replacement, multiplied by a fraction, the numerator of which shall be the number of months remaining in the term of this Lease (inclusive of any options to extend this Lease) at the time of such repair, restoration or replacement, and the denominator of which shall be the useful life of the system repaired, restored or replaced. Tenant shall pay to Landlord monthly, in advance, as Additional Rent, an amount equal to the cost of such repairs, restoration or replacement divided by the number of months then remaining under this Lease (inclusive of any options to extend this Lease). 4 (e) COMMON AREAS; COMMON AREA MAINTENANCE EXPENSES. The term "Common Areas" , as used herein, means all areas or facilities outside the Premises and within the exterior boundaries of the Project that are provided and designated by Landlord from time to time for general non-exclusive use and convenience of Tenant and of other tenants of the Project. Common Areas include, without limitation, parking areas, pedestrian walkways, landscaped areas, sidewalks, service corridors, trash enclosures, loading areas, and roads. Tenant shall have a non-exclusive right to use the Common Areas. Landlord shall maintain reasonable rules and regulations applicable to all tenants concerning the maintenance, management, use, and operation of the Common Areas. Tenant shall pay to Landlord, as Additional Rent, Tenant's Pro Rata Share (as hereinafter defined) of the Common Area Maintenance Expenses. "Common Area Maintenance Expenses" shall mean all expenses of any kind or nature which are necessary, ordinary or customarily incurred with respect to the operation, repair, maintenance, or replacement of the Common Areas of the Project as determined in accordance with generally accepted accounting principles and shall include, but not be limited to, all sums expended in connection within the Common Areas for all general operation, maintenance, replacement, and repairs, repainting, restriping or resurfacing of parking areas, cleaning, sweeping and janitorial services; sidewalks, curbs, and signs in the Project, sprinkler systems, planting and landscaping; fighting and other utilities; directional signs and other markers and bumpers; maintenance and repair of any lighting systems, storm drainage systems, and any other utility systems; costs of improvements made by Landlord to the Common Areas as mandated by any governmental authority, the cost of any improvements to bring the Common Areas into compliance with those requirements of ADA which are required by changes in existing laws or regulations, and amounts paid to a third party, firm, or corporation (which may be related to landlord) for the management of the Project. Landlord may cause any or all of said services to be provided by an independent contractor or contractors. (f) TENANT'S PRO RATA SHARE. Tenant's Pro Rata Share, for the purposes of this Lease, shall be a fraction, the numerator of which is the total square footage of the Premises and the denominator of which is the total square footage in all of the buildings at the Project and is equal to 24.1%. Tenant acknowledges that Landlord has not made any representation that the Common Area Maintenance Expenses, Taxes, or Insurance will equal any specific amount or will remain constant during the term. (g) PAYMENT OF COMMON AREA MAINTENANCE EXPENSES. Tenant shall pay to Landlord, as Additional Rent, Tenant's Pro Rata Share of Common Area Maintenance Expenses, Real Estate Taxes and Insurance in the following manner: (i) Beginning with the Commencement Date, but subject to adjustment as provided herein, Tenant shall pay to Landlord on the first day of each calendar month of the term of this Lease an amount estimated by Landlord to be a monthly installment of Tenant's Pro Rata Share of such Common Area Maintenance Expenses. At any time, Landlord may adjust the estimated monthly charge, based on Landlord's experience, costs incurred to the date of such adjustment, and costs that Landlord reasonably anticipates to be incur-red in the future. 5 (ii) Within one hundred twenty (120) days following the end of each calendar year, or, at the termination of Lease, within one hundred twenty (120) days following such termination, Landlord shall furnish Tenant a statement covering the calendar year just expired (the "Statement"), showing the total of such charges, the amount of Tenant's Pro Rata Share thereof for such calendar year, and the payments actually paid by Tenant during such period. If Tenant's Pro Rata Share of such charges exceeds payments made by Tenant, Tenant shall pay Landlord the deficiency within thirty (30) days after receipt of such Statement. If the estimated payments made exceed Tenant's Pro Rata Share thereof, Landlord shall credit the excess against any amounts then owing or thereafter becoming due from Tenant to Landlord. In any Lease Year which is not a full calendar year, a proportionate reduction shall be made in Tenant's Pro Rata Share of Common Area Maintenance Expenses. Tenant's liability for Common Area Maintenance Expenses shall survive the expiration or earlier termination of this Lease for a period of one (1) year. (iii) Tenant shall have the right, at its own expense and at a reasonable time (after written notice to Landlord) within thirty (30) days after receipt of the Statement to audit Landlord's books relevant to the Tenant's Pro Rata share of Common Area Maintenance Expenses, Real Estate Taxes, and Insurance due hereunder. In the event Tenant does not audit Landlord's books and deliver the results thereof to Landlord within said 30-day period, the terms and amounts set forth in the Statement from Landlord to Tenant shall be deemed conclusive and final and Tenant shall have no further right to adjustment. In the event Tenant's examination reveals that an error has been made in Landlord's determination of Tenant's Pro Rata share of such charges, and Landlord agrees with such determination, then the amount of such adjustment shall be payable by Landlord or Tenant, to the other party as the case may be in accordance with subparagraph (ii) hereof In the event Tenant's examination reveals an error has been made in Landlord's determination of Tenant's Pro Rata share, and Landlord disagrees with the results thereof, Landlord shall have thirty (30) days to obtain an audit from an accountant of its choice to determine Tenant's Pro Rata share of such charges. In the event Landlord's accountant and Tenant's accountant are unable to reconcile their audits, both accountants shall mutually agree upon a third accountant, whose determination of Tenant's Pro Rata share of the charges shall be conclusive. (However, regardless of the third accountant's determination, Tenant's Pro Rata share shall in no event be more than Landlord's accountant's determination or less than Tenant's accountant's determination). In the event the amount of error by Landlord is determined by said third accountant to be five percent (5%) more, the reasonable costs of the third audit made pursuant to this subparagraph shall be paid by Landlord. In the event the amount of error by Landlord is determined to be less than five percent (5%), the reasonable costs of the third audit made pursuant to this subparagraph shall be paid by Tenant. (h) LATE CHARGE. Tenant hereby acknowledges that late payment by Tenant to Landlord of Base Rent, Additional Rent, or other sums due hereunder will cause Landlord to incur costs which will be difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Landlord by terms of any mortgage or trust deed encumbering the Project. Accordingly, except as expressly stated hereinafter, if any installment of Base Rent, Additional Rent, or any other sum due from Tenant shall not be received by Landlord within five (5) business days after said amount is due, Tenant shall pay to Landlord on demand a late charge of five percent (5%) of such overdue amount. All such charges shall be deemed Additional Rent hereunder. 6 7. SERVICES. (a) SERVICES AVAILABLE AT THE PREMISES. The Premises are currently served by water, sewer, gas, electric, and telephone utilities. (b) SERVICE INTERRUPTION. Landlord shall not be liable for failure to provide any required services. Services may be discontinued due to accident, repairs, strikes, acts of God, or any other event beyond the reasonable control of Landlord. In such event, Landlord shall not be liable for such failure or discontinuance, nor shall such failure or discontinuance be construed as a constructive eviction of Tenant or cause an abatement of Rent. (c) PAYMENT BY TENANT. Tenant shall pay, prior to delinquency and directly to the applicable supplier, for all services and utilities supplied to the Premises and separately metered, together with any taxes thereon. If any services are not separately metered to Tenant, Tenant shall pay Tenant's Pro Rata Share of all charges jointly metered with other space in the Project. Tenant shall arrange and pay for its own telephone service, fire monitoring systems and other services provided directly to premises. 8. PERSONAL PROPERTY TAXES. Tenant shall pay, as Additional Rent, before delinquency, any taxes upon Tenant's leasehold improvements, equipment, furniture, fixtures, and any other personal property located in the Premises. In the event any such personal property shall be assessed and taxed with the real property, Tenant shall pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant of a statement in writing setting forth the amount of such taxes applicable to Tenant's personal property. 9. COMPLIANCE WITH LAWS. Tenant will comply at all times, and be responsible for the compliance by its employees, assigns, agents, subcontractors and any others acting for it, with all applicable federal, state and local laws, regulations, permits, license, certificates and any approvals of any type relative to any and all of the operations or activities Tenant or others under Tenant's control will conduct at or upon the Premises. Tenant shall immediately notify Landlord of any reports made to any environmental agency arising in connection with the operations to be performed at the Premises, as well as any complaints, notices, warnings or asserted violations which relate to the Premises communicated to Tenant, its employees, assigns, agents, subcontractors, or any others acting for it, by any governmental agency. Tenant shall promptly supply Landlord with copies of all such reports, complaints, notices, warnings or asserted violations. Tenant further warrants and agrees that no substance regarded as hazardous under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 USC Section 9601 et seq., will be stored or treated, nor will any hazardous substance be released or disposed of, on, under or about the Premises or the Property, except for such hazardous materials that are used or produced in the ordinary course of Tenant's business, provided that such hazardous materials shall be used, stored, handled, and disposed of in strict conformity to the regulations and requirements governing such activities. At all times during the Term and upon the earlier of the expiration or 7 termination of the Term, Tenant agrees to keep and maintain the Premises and the Property free of contamination from any substances regarded as hazardous under CERCLA. After prior notice to the Landlord, Tenant shall have the right to contest by appropriate legal proceedings (in the name of Tenant) at Tenant's sole cost and expense and with counsel of Tenant's own choosing, the validity of any law, ordinance, order, rule, regulations, or requirement with which, by the terms of this Lease, Tenant is obligated to comply. If by the terms of any such law, ordinance, order, rules, regulation, or requirement, compliance therewith may be legally held in abeyance without incurring any lien or charge or record against the Premises, and without subjecting Landlord to any fines, penalties, or any other liability for failure to comply therewith. Tenant may postpone compliance until the final determination of any such proceedings, provided that all proceedings shall be prosecuted with due diligence. If upon final determination Tenant is required to so comply then Tenant will promptly comply and pay the cost of such compliance even if such determination is made after the end of the term of this Lease. 10. TENANT'S REPAIRS AND ALTERATIONS. (a) REPAIRS. Subject to the provisions of Paragraph 5(b) (relating to Landlord's repairs during Landlord's Warranty Period), Paragraph 6(e) (relating to compliance with ADA), Paragraph 11 (relating to Landlord's repair obligations), Paragraph 18 (relating to the partial or total destruction of the Premises) and Paragraph 19 (relating to the condemnation of all or a portion of the Premises), Tenant shall, at Tenant's sole cost and expense, keep and maintain the Premises and every part thereof, as well as all equipment serving only the Premises, in good order, condition, and repair, (whether or not the need for any such repairs occurs as a result of Tenant's use, any prior use, the elements or the age of the Premises), and shall keep and maintain the Premises in full compliance with all applicable laws, rules, regulations, ordinances, and directives of all local, regional, state, and federal governmental authorities. Tenant's repair obligations as set forth herein shall include, without limiting the generality of the foregoing, all equipment within or serving only the Premises such as plumbing, heating, air conditioning, and ventilating equipment, electrical lighting facilities, fire sprinklers, alarm systems, interior walls, interior ceilings, floors, windows, doors, plate glass, roof membranes, and skylights. Tenant's obligations hereunder shall include restorations, replacements, or renewals, if necessary, in order to keep and maintain the Premises in good order, condition, and state of repair; provided, however, that Tenant's obligations to repair and to maintain plumbing, heating, air conditioning, and ventilating equipment, electrical lighting facilities, roofing membrane, fire sprinklers, and alarm systems shall extend only to the routine repair and maintenance thereof. In addition to Tenant's obligation to maintain the Premises, all damage or injury to any other portion of the Project, including both the Common Area and other lease spaces, caused by omission, neglect, or improper conduct of Tenant, its employees, agents, subtenants, assignees or invitees shall be repaired promptly by Tenant at its sole cost and expense, to the reasonable satisfaction of Landlord. In connection with Tenant's performance of its obligations under this Paragraph, Landlord shall make available to Tenant, and if necessary, shall assign to Tenant, any warranties held by Landlord on any equipment on the Premises. (b) In order to discharge its obligations under Paragraph 10(a), above, Tenant, at its election, may utilize its own personnel to perform routine maintenance upon the following 8 equipment and improvements located on the Premises, if any: (i) heating, air conditioning, and ventilation equipment; (ii) boiler, fired or unfired pressure vessels; (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection; and (iv) roof membrane and drain maintenance. Tenant shall at all times keep and maintain accurate and complete records of Tenant's maintenance schedules, procedures, and repairs undertaken by Tenant under this Paragraph, and shall deliver copies of same to Landlord on an annual basis or upon Landlord's request. (c) ALTERATIONS. Tenant shall pay all costs of construction done by it or caused to be done by it on the Premises as permitted by this Lease. Tenant shall not make any alterations, in, on, under, or about the Premises without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed. Any alterations that Tenant shall desire to make shall be presented to Landlord in written form with proposed detailed plans, not less than twenty (20) days prior to the date that work on the alterations is to commence. All consents given by Landlord shall be conditioned upon all of the following: (i) Prior to commencement of any alteration, Tenant, at Tenant's sole expense, shall obtain all applicable building and other permits that may from time to time be required by any government authority having jurisdiction, (ii) Tenant shall furnish a copy of all such permits, together with one (1) copy of the plans, specifications, and contract for such alteration, and the name of Tenant's general contractor, to Landlord at least twenty (20) days prior to the commencement of work. (iii) Tenant shall comply with all conditions of such permits in a prompt and expeditious manner. (iv) Prior to the commencement of work Tenant shall deliver to Landlord insurance certificates evidencing that all contractors and subcontractors performing the alterations or any part thereof each have adequate worker's compensation, builder's risk, and comprehensive general liability insurance, the latter with a combined single limit of not less than One Million Dollars ($1,000,000). Landlord and Landlord's agent shall be named as an additional insured on all such policies of comprehensive general liability insurance. (v) All alterations shall be completed with due diligence in compliance with the plans and specifications and working drawings. All alterations shall comply with all applicable laws, rules, regulations, ordinances, and directives of all local, regional, state, and federal governmental authorities. (vi) The alterations shall be performed in a manner that will not interfere with the quiet enjoyment of the other tenants in the Project. (vii) Tenant shall notify Landlord of the names and addresses of the persons supplying labor and materials in connection with the alterations so that Landlord may give notice that it shall not be subject for any lien for Tenant's work, in accordance with California's mechanics' lien statutes. Landlord shall have the right to keep posted on the Premises notice to such persons in accordance with such statute. 9 (viii) Within forty-five (45) days after completion of the alterations, Tenant shall furnish Landlord with the as-built plans and specifications therefor. (d) OWNERSHIP OF ALTERATIONS AND IMPROVEMENTS. Subject to Landlord's right to require their removal or to become the owner thereof as hereinafter provided in this Paragraph 10(d), all alterations and improvements made to the Premises by Tenant shall be the property of and owned by Tenant, but considered a part of the Premises. Landlord shall, at the time Tenant requests the right to make an alteration or improvement, elect in writing to Tenant to be the owner of all or any specified portion of the Tenant-owned alterations and improvements. Unless otherwise elected by Landlord as hereinafter set forth, all alterations and improvements shall, at the expiration or earlier termination of this Lease, become the property of Landlord and remain upon and be surrendered by Tenant with the Premises. (e) MECHANICS' LIENS. Tenant shall pay or cause to be paid when due all costs for work done by or on behalf of Tenant or caused to be done by or on behalf of Tenant on the Premises of a character which will or may result in liens against Landlord's interest in the Premises or the Project. Tenant will keep the same free and clear of all mechanics' liens and other liens on account of work done for or on behalf ' of Tenant or persons claiming under Tenant. Tenant hereby agrees to indemnify, defend and save Landlord harmless of and from all liability, loss, damages, costs or expenses, including attorneys' fees, incurred in connection with any claims of any nature whatsoever for work performed for, or materials or supplies furnished to Tenant, including lien claims of laborers, materialmen or others. Should any such liens be filed or recorded against the Premises or the Project with respect to work done for or materials supplied to or on behalf of Tenant or should any action affecting the title thereto be commenced, Tenant shall cause such liens to be released of record within twenty (20) days after notice thereof If Tenant desires to contest any such claim of line, Tenant shall nonetheless cause such lien to be released of record by the posting of adequate security with a court of competent jurisdiction as may be provided by California's mechanics' lien statutes. If Tenant shall be delinquent in paying any charge for which such a mechanics' lien or suit to foreclose such a lien has been recorded or filed and shall not have caused the lien to be released as aforesaid, Landlord may at its discretion pay such lien or claim and any costs associated therewith, and the amount so paid, together with interest thereon at the Interest Rate and reasonable attorneys' fees incurred in connection therewith, shall be immediately due from Tenant to Landlord as Additional Rent. 11. LANDLORD REPAIRS. (a) Subject to the provisions of Paragraph 18 and 19, below, Landlord shall repair and maintain the structural portions of the Premises and the Common Areas in good order, condition and state of repair. As used herein, the term "Structural portion of the Premises" shall mean only the roof joists (excluding skylights and roofing membrane), bearing and exterior walls (excluding doors and windows), foundations, and subflooring. In addition, subject to the provisions of Paragraph 12, below, Landlord shall repair the Premises when such repairs are required due to damage caused by (i) the omission, neglect, or improper conduct of Landlord, its employees, or its agents; or (ii) due to Landlord's failure to perform its obligations under this Paragraph 11. 10 (b) In connection with its obligation to repair and maintain the Common Areas, Landlord shall repair, restripe, and resurface the parking area when necessary, except that Landlord shall not be obligated to restripe the parking area more than once each three (3) years, or resurface the parking area more than once each seven (7) years. (c) There shall be no abatement of rent and no liability of Landlord to Tenant or to third parties by reason of any injury to, or interference with, Tenant's business arising from the making of any repairs, alterations or improvements required to be made by Landlord under this Paragraph. Landlord's obligation to make repairs under this Paragraph 11 is a covenant independent of any other covenant set forth in this Lease. 12. TENANT'S INDEMNITY, WAIVER OF SUBROGATION. (a) The parties intend to assign the risk of loss whether resulting from negligence of the parties or otherwise, to the party who is obligated hereunder to cover the risk of such loss with insurance. Thus, the indemnity and waiver of subrogation provisions of this Lease have as their objective, so long as such objective is not in violation of public policy, the assignment of risk for a particular casualty to the party carrying the insurance for such risk, without respect to the causation thereof. (b) Neither party shall be liable to the other party for any damage to the physical property of the other party caused by fire or other perils insured against by such other party's fire and/or "all-risk" property insurance carried and maintained pursuant to the terms of this Lease, only to the extent that such insurance is valid and collectible. Each party shall cause each fire and/or "all-risk" property insurance policy obtained by it to provide that the insurer waives all rights of recovery by way of subrogation against either party in connection with any damage covered by such policy. If any such insurance policy cannot be obtained with a waiver of subrogation without payment of an additional premium charge above that charged by the insurance companies issuing such policies without waiver of subrogation, the party receiving the benefit shall elect to either forfeit the benefit or shall pay such additional premium to the insurance carrier requiring such additional premium. (c) Tenant, as a material part of the consideration to be rendered to Landlord, shall indemnify, defend, and save harmless Landlord from and against any and all liabilities, claims, penalties, forfeitures, and suits, and the costs and expenses incident thereto, including costs of defense, settlements, and reasonable attorney's fees, due to injury to any person or property arising out of or in any way connected with the condition or use of the Premises or Property, or the improvements or personal property therein or thereon, including without limitation any liability or injury to the person or property of Tenant, its agents, officers, employees, guests or invitees. By way of illustration and not of limitation, Tenant shall indemnify, save harmless, and defend Landlord from and against any and all liabilities, claims, penalties, forfeitures, and suits, and the costs and expenses incident thereto, including costs of defense, settlements, and reasonable attorney's fees, which Landlord may hereafter incur, become responsible for, or pay out as a result of death or bodily injury to any person, destruction or damage to any property, contamination of or adverse effects on the environment, or any violation of governmental laws, regulations, or orders, caused by (a) Tenant's failure to comply with any federal, state, or local law, (b) any negligent or willful act or claim under the 11 Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) attributable to Tenant's conduct, or (c) Tenant's breach of any provisions of this Lease. For purposes of this indemnity, any acts or omission (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Tenant whether performed by it or by employees, agents, assignees, subcontractors, or others acting for Tenant. Nothing contained herein shall absolve Landlord from any liability in connection with the willful or gross negligent acts or omissions of Landlord, its employees, agents, assignees, subcontractors, or others acting for Landlord. Tenant shall have no obligation to indemnify Landlord for the willful or gross negligent acts or omissions of Landlord, its employees, agents, assignees, subcontractors, or others acting for Landlord. The obligations of Tenant under this subparagraph arising by reason of any occurrence taking place during the Term of this Lease shall survive the expiration or earlier termination of this Lease. (d) Tenant shall assume all normal risk and liability incident to the use of the Premises upon the signing of this Lease. Tenant, as a material part of the consideration to be rendered to Landlord, hereby waives all claims against Landlord for damages to goods, wares, merchandise and loss of business in, upon or about the Premises and for injury to Tenant, its agents, employees, invitees or third persons in or about the Premises from any cause arising at any time, excluding the negligence or willful misconduct of the Landlord. 13. LANDLORD'S INDEMNITY. Landlord shall indemnify, defend, and save harmless Tenant from and against any and all liabilities, claims, penalties, forfeitures, and suits, and the costs and expenses incident thereto, including costs of defense, arising out of Landlord's gross negligence or willful misconduct. In addition, Landlord shall indemnify, protect, and save Tenant harmless from any and all damages, losses, liabilities, obligations, penalties, claims, litigation, or demands which may at any time be imposed upon, incurred by, or asserted against Tenant and which arise out of the failure of the Premises to comply with applicable environmental laws and regulations as of the date of this Lease. 14. INSURANCE. (a) Subject to Paragraph 14(e), at all times during the term of this Lease and any extensions thereof, Landlord shall obtain and maintain insurance insuring the Premises and the Property against damage or destruction of the Premises, the Property, and Project, including without limitation fire, "all-risk", earthquake, flood, rent loss, boiler and machinery, plate glass insurance, and change of condition coverage, in an amount not less than the full replacement value thereof. (b) Landlord shall obtain and maintain during the term of this Lease a policy of comprehensive general liability insurance protecting Landlord and Landlord's agent against claims for bodily injury, personal injury, and property damage based upon, involving, or arising out of the ownership, use, occupancy or maintenance of the Premises, the Property, and the Project. Such insurance shall have a combined single limit of not less than One Million Dollars ($1,000,000) per occurrence. (c) Tenant shall procure and maintain at its own cost at all times during the term of this Lease and any extensions hereof, fire, hazard and extended coverage insurance on 12 Tenant's property and the contents of the Premises in an amount not less than full replacement value thereof, worker's compensation insurance for all of Tenant's employees at the Premises, and comprehensive general liability insurance, including coverage for bodily injury, property damage, personal injury (employee and contractual liability exclusions deleted), products and completed operations, contractual liability, owner's protective liability, and broad form property damage with a combined single limit per occurrence of not less than One Million Dollars ($1,000,000). (d) All insurance policies required to be carried by Tenant hereunder shall conform to the following requirements: (i) The insurer in each case shall carry a designation in "Best's Insurance Reports" acceptable to Landlord in its reasonable discretion; (ii) The insurer shall be qualified to do business in the State of California; (iii) Tenant's policy shaft name Landlord and its agents as an additional insured on its comprehensive general liability policy and, at Landlord's request, Tenant's property insurance policy shall carry a lender's loss payee endorsement in favor of Landlord's lender; (iv) Certificates thereof evidencing the coverages required herein shall be delivered to Landlord at the commencement of the Term and shall remain in effect throughout the Term. At least thirty (30) days prior to the expiration of such policies, a replacement certificate thereof shall be deposited with Landlord; (v) These policies shall require that Landlord be notified in writing by the insurer at least thirty (30) days prior to any cancellation or expiration of such policy, or any reduction in the amounts of insurance carried; (vi) Each policy shall be primary, not contributing with, and not in excess of coverage which Landlord may carry; (vii) All liability insurance required to be carried by Tenant hereunder shall carry a standard cross-liability endorsement. (viii) If Tenant obtains any comprehensive general liability insurance policy on a claims-made basis, Tenant shall provide continuous liability coverage for claims arising during the entire term of this Lease, regardless of when such claims are made, either by obtaining an endorsement providing for an unlimited extended reporting period in the event such policy is canceled or not renewed for any reason whatsoever or by obtaining new coverage with a retroactive date the same as or earlier than the expiration with a retroactive date the same as or earlier than the expiration date of the canceled or expired policy. (e) All insurance policies required to be carried by Landlord hereunder shall conform to the following requirements: 13 (i) The insurer in each case shall carry a designation in "Best's Insurance Reports" acceptable to Tenant in its reasonable discretion; (ii) The insurer shall be qualified to do business in the State of California; (iii) Landlord's policy shall name Tenant as an additional insured on its comprehensive general liability policy; (iv) Certificates thereof evidencing the coverages required herein shall be delivered to Tenant at the commencement of the Term and shall remain in effect throughout the Term. At least thirty (30) days prior to the expiration of such policies, a replacement certificate thereof shall be deposited ,with Tenant; (v) These policies shall require that Tenant be notified in writing by the insurer at least thirty (30) days prior to any cancellation or expiration of such policy, or any reduction in the amounts of insurance carried; (vi) Each policy shall be primary, not contributing with, and not in excess of coverage which Tenant may carry; (vii) All liability insurance required to be carried by Landlord hereunder shall carry a standard cross-liability endorsement. (viii) If Landlord obtains any comprehensive general liability insurance policy on a claims-made basis, Landlord shall provide continuous liability coverage for claims arising during the entire term of this Lease, regardless of when such claims are made, either by obtaining an endorsement providing for an unlimited extended reporting period in the event such policy is canceled or not renewed for any reason whatsoever or by obtaining new coverage with a retroactive date the same as or earlier than the expiration date of the canceled or expired policy. 15. COMMON AREAS AND PARKING. The Common Areas of the Project shall be at all times under Landlord's exclusive control. Landlord reserves the right to change the entrances, exits, traffic lanes and the boundaries and locations of parking areas, as long as Tenant's business is not materially disrupted. Landlord shall keep Common Areas in clean and orderly condition. All vehicles of Tenant, its agents, employees and invitees shall be parked only in designated parking areas in the Common Areas of the Project. 16. ENTRY BY LANDLORD. Landlord reserves the right to enter the Premises to inspect the same, to submit the Premises to prospective purchasers, insurance representatives, Landlord's agents (and associated parties), or lenders and, within the last nine (9) months of the Lease Term, to prospective tenants, to post notices of nonresponsibility, to hereby waive any claim for damages to Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. Landlord shall have the right to use any and all means which Landlord may deem proper to gain entry to the Premises in the event of an emergency, without any liability to Tenant. Any entry to the Premises by Landlord in accordance with the provisions of this Paragraph shall not be construed to be a forcible or unlawful entry into the Premises, or an eviction of Tenant from the Premises. 14 17. ASSIGNMENT AND SUBLETTING. (a) Tenant (but not Tenant's assignee) may assign or sublet this Lease with the consent of Landlord, but only if the following terms and conditions are met and fulfilled: (i) Tenant shall give Landlord not less than twenty (20) days prior written notice of Tenant's intention to assign or to sublet this Lease. Such notice shall set forth: the name of the assignee or sublessee (along with a description and recent financial statements of assignee or sublessee); the date that the assignment or sublease is to be effective; and the use to which the assignee or sublessee intends to put the Premises, and shall contain a copy of the proposed instrument of assignment or sublease. (ii) The instrument of assignment or the sublease shall be in writing. (iii) Tenant's assignee shall assume the obligations of Tenant under this Lease. (iv) The assignment or sublease, and Landlord's acceptance thereof, shall not relieve Tenant of its primary obligation for the faithful performance of all of the covenants, terms, and conditions hereof on Tenant's part to be performed, including the obligation for payment of rent when due hereunder. Tenant's right to assignment or to sublease shall apply solely to Tenant, and Tenant's assignee or sublessee shall have no right to further assign or to sublet this lease or any portion thereof without Landlord's prior written consent, which consent Landlord may grant or withhold at its sole and absolute discretion. (b) No interest of Tenant in this Lease shall be assignable by operation of law. Each of the following acts shall be considered an involuntary assignment: (i) The corporate dissolution of Tenant; (ii) If Tenant becomes bankrupt or insolvent, makes an assignment for the benefit of creditors, or institutes a proceeding under the Bankruptcy Act in which Tenant is the bankrupt; (iii) If a writ of attachment or execution is levied on this Lease; (iv) If, in any action or proceeding to which Tenant is a party, a receive is appointed with authority to take possession of the Premises; or (v) The foreclosure by any person holding a security interest in this Lease. An involuntary assignment shall be voidable and, at Landlord's election, shall constitute an Event of Default by Tenant, thereupon giving rise to the remedies contained in this Paragraph. 15 (c) In the event of any subassignment, sub-sublease, or involuntary assignment without the prior written consent of Landlord, Landlord may either; (i) immediately terminate this Lease; or (ii) on ten (10) days written notice to Tenant, elect to continue this Lease in full force and effect, and accept performance from such subtenant, involuntary assignee, or subassignee; in such event, such subtenant, involuntary assignee, or subassignee shall execute documents setting forth the provisions of Paragraph 17(b) above; and the subtenant, involuntary assignee, or subassignee shall have no right to exercise any option in this Lease. (d) Landlord may accept any rent or performance of Tenant's obligations from any person other than Tenant. Neither a delay in such approval or disapproval, nor an acceptance of rent or other performance, shall constitute a waiver or estoppel of Landlord's right to exercise the remedies herein set forth. (e) The Landlord, as consideration in connection with such transfer, assignment, or subletting, shall be entitled to receive sixty percent (60%) of all consideration (the excess and/or differential of the rent payable to Landlord and rent, additional rent, and any other consideration paid by Sublessee or Assignee to Tenant) payable in connection therewith, including without limitation, any additional rent or other charges or any lump sum settlement. In connection with such transfer, Landlord reserves the right to make modifications to the other provisions of the Lease, including the cancellation of any options to extend the term of this Lease, as Landlord deems advisable. 18. DAMAGE BY CASUALTY. (a) DEFINITIONS: (i) "Partial Damage to the Premises" shall mean damage or destruction to the Premises, other than alterations and improvements owned by Tenant, which can be repaired within one hundred twenty (120) days of the date of the casualty, and the repair cost of which damage or destruction is less than sixty percent (60%) of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land upon which the Premises are situated. (ii) "Total Destruction of the Premises" shall mean damage or destruction to the Premises, other than alterations and improvements owned by Tenant, the repair cost of which damage or destruction is greater than sixty percent (60%) of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land upon which the Premises are situated. (iii) "Insured Loss" shall mean damage or destruction to the Premises, other than alterations and improvements owned by Tenant, which was caused by an event for which either party maintained insurance, and for which insurance proceeds are available to Landlord and not retained and otherwise applied by Landlord's Lender. 16 (iv) "Landlord's Lender" shall mean any lender who holds a mortgage or deed of trust against the Premises as security for a loan made to Landlord. (v) "Replacement Cost" shall mean the cost to repair or to rebuild the Premises at the time of the occurrence to their condition immediately prior thereto, including demolition, debris removal, and upgrading required by the operation of applicable building codes, ordinances, or laws, and without deduction for depreciation. (b) PARTIAL DAMAGE. If there is a Partial Damage to the Premises which is an Insured Loss, then Landlord shall utilize the insurance proceeds therefrom to rebuild the Premises (other than Tenant's alterations and improvements) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that is Landlord's repairs are not completed within one hundred twenty (120) days from the date of the damage or destruction which period shall be extended by the number of days lost in the event of labor strikes, acts of God, or any other similar causes beyond the control of Landlord, then Tenant may, by written notice to Landlord, terminate this Lease. If there is a Partial Damage to the Premises which is not an Insured Loss, then Landlord shall either: (i) rebuild the Premises (other than Tenant's alterations and improvements) as soon as reasonably possible at Landlord's sole expense (except if the damage or destruction is caused by the negligence or willful misconduct of Tenant, in which case, if the loss is not an Insured Loss, Tenant shall pay to rebuild the Premises in accordance with Paragraph 18(f) below) and this Lease shall continue in full force and effect; provided, however, that if Landlord's repairs are not completed within one hundred twenty (120) days from the date of the damage or destruction, which period shall be extended by the number of days lost in the event of labor strikes, acts of God, or any other similar causes beyond the control of Landlord, then Tenant may, by written notice to Landlord, terminate this Lease; or (ii) give Tenant written notice not more than thirty (30) days from the date of the damage or destruction, electing to terminate this Lease not more than sixty (60) days from the date of such notice. (c) TOTAL DAMAGE. If there is a Total Destruction of the Premises, whether or not such Total Destruction is an Insured Loss, then Landlord , by written notice to Tenant within thirty (30) days of the casualty, may terminate this Lease, which termination shall be effective not more than sixty (60) days from the date of such notice. If this Lease is not terminated, then Landlord shall rebuild the Premises (other than Tenant's alterations and improvements), using any available insurance proceeds, as soon as reasonably possible at Landlord's sole expense (except if the damage or destruction is caused by the negligence or willful misconduct of Tenant, in which case, if the loss is not an Insured Loss, Tenant shall pay to rebuild the Premises in accordance with Paragraph 18(f) below) and this Lease shall continue in full force and effect. (d) DAMAGE NEAR END OF TERM. Notwithstanding the foregoing provisions, in the event of a Partial Destruction of the Premises or a Total Destruction of the Premises during 17 the last four (4) months of the term of this Lease, then either party may elect to terminate this Lease by written notice to the other party given within seven (7) days of the date of the casualty. If no such written notice is given, then the foregoing provisions shall apply. (e) ABATEMENT OF RENT. In the event of a Partial Destruction of the Premises, from the date of the casualty until repairs are effected or this Lease is terminated pursuant to the terms hereof, Base Rent and Additional Rent shall be abated in proportion to the degree to which Tenant's use of the Premises is impaired; but all of the other terms, covenants, and conditions of the Lease shall remain in full force and effect. In the event of a Total Destruction of the Premises, from the date of the casualty until repairs are effected or this Lease is terminated pursuant to the terms hereof, Base Rent and Additional Rent shall be totally abated. (f) DAMAGE DUE TO TENANT'S NEGLIGENCE OR WILLFUL MISCONDUCT. If the damage to or destruction of the Premises is due to Tenant's gross negligence or willful misconduct, there shall be no abatement of Base Rent or Additional Rent, and (i) if the loss is an Insured Loss, Tenant shall, upon demand, pay to Landlord an amount equal to the applicable deductible under Landlord's policy of insurance; or (ii) if the loss is not an Insured Loss, then Tenant, at its sole cost and expense, shall promptly repair and rebuild the Premises. (g) WAIVE STATUTES. Landlord and Tenant agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of the Lease land hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 19. EMINENT DOMAIN AND CONDEMNATION. (a) TOTAL OR SUBSTANTIAL CONDEMNATION. If at any time during the term of this Lease the whole of the Premises shall be taken for any public or quasipublic use, under any statute, or by right of eminent domain, except as provided in subparagraph (c) hereof, this Lease shall terminate on the date of such taking and the Base Rent and Additional Rent shall be apportioned as of the date of the taking. If less than all but more than twenty-five percent (25%) of the Premises shall be so taken, either party may, by written notice to the other party within sixty (60) consecutive days after such taking, terminate this Lease. If either party so exercises its option to terminate, then this Lease and the term hereof shall end on the date specified in the notice and both Base Rent and Additional Rent shall be apportioned and paid to the date of such taking. (b) PARTIAL CONDEMNATION. If less than all of the Premises shall be taken and unless either party has exercised its option to terminate pursuant to subparagraph (a) hereof, this lease shall be unaffected, except the Tenant shall be entitled to a pro rata abatement of Base Rent and Additional Rent in the proportion that the floor area of the Premises so taken bears to the area of the Premises demised hereunder immediately prior to such taking. (c) TEMPORARY TAKING. If the use or occupancy of the whole or more than twenty-five percent (25%) of the Premises is temporarily taken for a public or quasi-public use for a period less than the balance of the term, the Tenant shall have the option to terminate this Lease on the date of the taking. If this lease remains in effect the Tenant shall be entitled to an 18 abatement of Rent and Additional Rent proportionate to the area of the Premises taken, or, at its option, receive that portion of the award for such taking which represents compensation for the value of the Tenant's leasehold estate for the original term or any exercised extension thereof demised hereunder in which case Tenant shall continue to pay in full the Rent and Additional Rent when due. (d) DAMAGES. The Landlord shall be entitled to receive the entire award or awards in any condemnation proceeding without deduction therefrom for any estate vested in the Tenant and the Tenant shall receive no part of such award or awards from the Landlord or in the proceedings except as otherwise expressly provided in this Paragraph. Subject to the foregoing, the Tenant hereby assigns to the Landlord any and all of its right, title, and interest in or to such award or awards or any part thereof. (e) TENANT'S IMPROVEMENTS. In the event of a taking of any of Tenant's improvements or alterations, the Tenant shall be entitled to receive out of the award, or, if allowed by law, to appear, claim, prove, and receive in the condemnation proceedings (i) the unamortized value over the term of this Lease of the Tenant's improvements and alterations to the Premises, depreciated as allowed by law or otherwise proven from the date of installation thereof to the date of the taking, minus the amount of Landlord's allowance, if any, provided the same shall have been installed by or at the Tenant's expense but regardless of whether the improvements and alterations might be considered part of the Premises or real property or shall be or become the property of the Landlord under the terms of this Lease; (ii) the value of the Tenant's fixtures, minus the amount of Landlord's allowance, if any; (iii) the cost of moving to new premises; and (iv) special awards or allowances provided by law to tenants in the event their premises are taken by eminent domain. (f) RESTORATION OF PREMISES. If there is a taking hereunder and this Lease is continued, the Landlord shall, at its expense, and upon receipt of any award or awards deemed sufficient by an independent architect selected by Landlord and approved by Tenant for the purpose, proceed with reasonable diligence to repair, alter, and restore the Premises as a complete architectural unit of substantially the same proportionate usefulness, design, and construction existing immediately prior to the date of taking, except that the Landlord may elect to reconstruct the interior of the Premises either in accordance with the original specification or in accordance with single line control drawings and specifications furnished by Tenant. If Landlord agrees to so rebuild the Premises in accordance with Tenant's specifications, then no later than thirty (30) days before commencement of such repair and reconstruction, the Tenant shall pay to the Landlord a sum equal to the difference between an independent architect of Landlord's estimate of (i) the cost to be incurred by the Landlord to complete reconstruction of the Premises in accordance with Tenant's specifications, and (ii) the cost that the independent architect estimates would have been incurred had Landlord reconstructed the Premises in accordance with the original construction drawings and specifications applicable to the Premises (as such improvements may have been altered by Landlord during the term prior to the taking) to the extent that such improvements have been constructed for the Tenant by the Landlord, at the Landlord's expense, prior to and during the term hereof, provided, however, that Landlord shall pay the difference between the actual cost incurred by Landlord to complete reconstruction in accordance with Tenant's specifications and the sum paid by Tenant pursuant hereto within fifteen (15) days after completion of such reconstruction and delivery of the Premises to Tenant. 19 (g) TRANSFER IN LIEU. Taking by condemnation or eminent domain hereunder shall include the exercise of any similar governmental power and any sale, transfer, or other disposition of the Premises in lieu of or under threat of condemnation. 20. DEFAULT BY TENANT. (a) EVENT OF DEFAULT DEFINED. The following events (herein referred to as an "Event of Default") shall constitute a default by Tenant hereunder: (i) Tenant's failure to pay (without notice) when due the Base Rent, Additional Rent, or any other sums payable hereunder within five (5) business days of when it is due; or (ii) Tenant's neglect or failure to perform or observe any of the other covenants herein contained on Tenant's part to be performed or observed and Tenant's failure to remedy the same within thirty (30) days after Landlord shall have mailed to Tenant written notice specifying such neglect or failure, or such further period as Tenant may reasonably require so long as Tenant commences to cure such default within such thirty (30) day cure period and diligently proceeds to effectuate such cure thereafter; or (iii) Tenant shall violate the provisions of Paragraph 17 with respect to involuntary assignment, or Tenant's assignee or sublessee shall violate the provisions of said Paragraph regarding further assignment or subletting. (b) REMEDIES. Upon an Event of Default by Tenant, Landlord may at any time thereafter, in its sole discretion, without limiting Landlord in the exercise of a right or remedy which Landlord may have by reason of such default or breach, elect to pursue one or more of the following remedies, which are cumulative and in addition to any remedies now or later allowed by law: (i) Landlord may continue this Lease in full force and effect, and the Lease will continue in effect as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect rent when due. During the period Tenant is in default, Landlord can enter the Premises and relet them, or any part of them, to third parties for Tenant's account. Tenant shall be liable immediately to Landlord for all reasonable costs and expenses incurred by Landlord in mitigation of damages as required by law. Reletting can be for a period shorter or longer than the remaining term of this Lease. Tenant shall pay to Landlord the rent due under this Lease on the dates the rent is due, less the rent Landlord receives from reletting. No act by Landlord allowed by this Paragraph shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. After Tenant's default and for as long as Landlord does not terminate Tenant's right to possession of the Premises, Tenant shall have the right to assign or, with Landlord's consent, sublet the Premises, but Tenant shall not be released from liability therefrom. Landlord's consent to a subletting shall not be unreasonably withheld. If Landlord elects to relet the Premises as provided in this Paragraph, rent that Landlord receives from reletting shall be applied to the payment of-. 20 (A) First, any indebtedness from Tenant to Landlord other than rent due from Tenant; (B) Second, all reasonable costs, including any costs and expenses incurred in preparing the Premises for reletting, incurred by Landlord in mitigation of damages as required by law; (C) Third, rent due and unpaid under this Lease. After deducting the payments referred to in this Paragraph, any sums remaining from the rent that Landlord receives from reletting shall be held by Landlord and applied in payment of future rent as rent becomes due under this Lease. In no event shall Landlord be entitled to any excess rent received by Landlord. If, on the date rent is due under this Lease, the rent received from the reletting is less than the rent due on that date, Tenant shall pay to Landlord, in addition to the remaining rent due, all costs, including for maintenance, Landlord incurred in reletting that remain after applying the rent received from the reletting as provided in this Paragraph. (ii) Landlord can terminate Tenant's right to possession of the Premises at any -time. No act by Landlord other than giving notice to Tenant shall terminate this Lease. Acts of maintenance or efforts to relet the Premises shall not constitute a termination of Tenant's right to possession. On termination, Landlord shall have the right to recover from Tenant: (A) The worth, at the time of the award, of the unpaid rent that had been earned at the time of the termination of the Lease-, (B) The worth, at the time of the award, of the amount by which the unpaid rent that would have been earned after the date of termination of this Lease until the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; (C) The worth, at the time of the award, of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; and (D) Any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. As used in subparagraphs (A) and (B) above, the "worth at the time of the award" is to be computed by allowing interest at the maximum rate an individual can charge. As used in subparagraph (C) above, the "worth at the time of the award" is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). (iii) Landlord, at any time after an Event of Default, can cure the default at Tenant's cost. If Landlord at any time, by reason of a breach of this Lease by Tenant, pays any sum or does any act that requires the payment of any sum, the sum paid by Landlord shall be due immediately from Tenant to Landlord, together with interest thereon at the 21 maximum rate an individual can charge from the date the sum is paid by Landlord until reimbursed by Tenant. The sum, together with interest thereon, shall be Additional Rent. (iv) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the State of California. 21. LANDLORD'S BREACH, TENANT'S REMEDIES. Landlord shall be in default of this Lease if Landlord fails or refuses to perform any provision of this Lease that it is obligated to perform if the failure to perform is not cured within thirty (30) days after notice of the default has been given by Tenant to Landlord. If the default cannot reasonably be cured within thirty (30) days, Landlord shall not be in default of this Lease if Landlord commences to cure the default within the thirty (30) day period and diligently and in good faith continues to cure the default. Tenant, at any time after the Landlord commits a default, and as its sole remedy therefor, can cure the default at Landlord's cost. If Tenant at any time, by reason of Landlord's default, pays any sum or does any act that requires the payment of any sum, the sum paid by Tenant shall be due immediately from Landlord to Tenant, together with interest thereon at the maximum rate an individual can charge from the date the sum is paid by Tenant until reimbursed by Landlord. If Landlord fails to reimburse Tenant as required by this Paragraph, Tenant shall have the right to withhold from future rent due the sum Tenant has paid until Tenant is reimbursed in full for the sum and interest on it. 22. SUBORDINATION, NON-DISTURBANCE, AND ATTORNMENT. This Lease is subordinate to any mortgage or deed of trust now placed on the Project and to any renewal, modification, consolidation, replacement or extension of such mortgage or deed of trust. This clause shall be self-operative, and no further instrument of subordination shall be required. Within five (5) days after written request by Landlord, Tenant shall execute any documents which may be desirable to confirm the subordination of this Lease. Landlord is hereby irrevocably appointed agent and attorney-in-fact of Tenant to execute all such subordination instruments in the event Tenant fails to execute said instruments within fifteen (15) days after notice from Landlord demanding the execution thereof At the request of Tenant, Landlord shall request a subordination, attornment, and non-disturbance agreement from the lender, although Landlord makes no representation that such subordination, attornment, and non-disturbance agreement can be obtained. 23. SIGNS AND ADVERTISING. Tenant shall have the right, at its sole cost and expense, to place a sign on the Project monument/directional signage, as designated by Landlord. Tenant shall place no signs on the roof of the Premises. Tenant shall place no sign on the exterior of the Premises without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed. 24. BROKERS. Landlord and Tenant represents that they have dealt only with Pacific Equity Partners, LLC ("Broker") in the negotiation of this Lease. Tenant and Landlord acknowledge and agree that the Broker acted as a Transaction Broker, defined as a broker assisting the Landlord or Tenant and/or both throughout this real estate transaction with communication, advice, negotiation, contracting and closing without being an agent or advocate for any of the parties. The parties to a transaction are not legally responsible for the actions of a Transaction Broker and a Transaction Broker does not owe those parties the duties of an agent. 22 However, a Transaction Broker does owe the parties a number of statutory obligations and responsibilities, including using reasonable skill and care in the performance of any oral or written agreement. A Transaction Broker must also make the same disclosures as agents about adverse material facts concerning a property or a buyer's financial ability to perform the terms of a transaction and whether the buyer intends to occupy the property. No written agreement is required. 25. NOTICES. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or by overnight courier service), or may be sent by regular, certified, or registered mail or by United State Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served or delivered in a manner specified in this Paragraph 25. The addresses for delivery of notice herein shall be: To Landlord at: Drever Partners, Inc. Four Embarcadero Center Suite 1810 San Francisco, CA 94111 Attn: Richard Kalish With Copies to: McIntosh Properties 3000 Sand Hill Road Building 2, Suite 100 Menlo Park, CA 94025 Attn: Chip McIntosh With Copies to: Pacific Equity Partners, LLC Two North Cascade Avenue Suite 760 Colorado Springs, CO 80903-1614 Attn: Gary L. Christensen To Tenant: Finisar Corporation 274 Ferguson Drive Mountain View, CA 94043 Attn: Jerry Rawls Either party may by written notice to the other specify a different address for notice purposes. Hand-delivered notices shall be deemed given when actually received by Landlord or Tenant. Any notice sent be registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, and if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United State Postage Service or representative of the overnight courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered on telephone 23 confirmation of receipt of the transmission thereof. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 26. ESTOPPEL STATEMENT. Tenant shall within five (5) days of Landlord's written request therefor execute, acknowledge and deliver to Landlord or Landlord's designee a statement in writing including the following information (but not limited to) (a) certifying that this Lease constitutes the entire agreement between Landlord and Tenant and is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modification(s); (b) the dates to which the rent and other charges hereunder have been paid, and the amount of any security deposited with Landlord; (c) that the Premises have been completed on or before the date of such letter and that all conditions precedent to this lease taking effect have been carried out (or specifying in what way they have not); (d) that Tenant has accepted possession, that the term has commenced, that the Tenant is occupying the Premises, and that Tenant knows of no default under this Lease by Landlord and that to the best of Tenant's knowledge there are no defaults or offsets which Tenant has against enforcement of this Lease by Landlord; (e) the actual Commencement Date and expiration date of the term of this Lease; and (f) that the Premises are open for business. Any such Estoppel Certificate may be conclusively relied upon by Landlord and any prospective purchaser or encumbrance of the Premises or Project. In the event that such Estoppel Certificate is not so delivered by Tenant as required herein within ten (10) days of Landlord's request therefor, Tenant will be conclusively deemed for all purposes to have signed and to be bound by such Estoppel Certificate in a form which, inter alia, (i) states that the Lease has not been modified; (ii) states that all conditions precedent to the Lease taking effect have been carried out; and (iii) states that Tenant knows of no default under the Lease. 27. ATTORNEY'S FEES. (a) If either party becomes a party to any litigation concerning this Lease, the Premises, or the Project, by reason of any act or omission of the other party or its authorized representatives, the party that causes the other party to become involved in the litigation shall be liable to that party for reasonable attorney's fees, court costs, investigation expenses , discovery costs and costs of appeal incurred by it in the litigation. (b) If either party commences an action against the other party arising out of or in connection with this Lease, the prevailing party shall be entitled to have and recover from the losing party, reasonable attorney's fees, costs of suit, investigation costs and discovery costs, including costs of appeal. (c) Should it be necessary for either party to employ legal counsel to enforce any of the provisions herein contained, the non-prevailing party shall pay all attorney's fees and court costs reasonably incurred thereby. (d) Each party's obligations under this Paragraph shall survive the expiration of the term or any earlier termination of this Lease. This Paragraph is intended to supplement (and not to limit) other provisions of this Lease pertaining to indemnities and/or attorney's fees. 24 28. SURRENDER OF PREMISES; HOLDING OVER. (a) Upon expiration or earlier termination of this Lease, Tenant shall surrender to Landlord the Premises and all of Tenant's improvements and alterations thereon in good operating order, condition, and state of repair, clean and free of debris (except for ordinary wear and tear occurring after Tenant's last necessary maintenance, and subject to the provisions of Paragraph 18, relating to the destruction or partial destruction of the Premises), except for alterations and improvements that Tenant is required to remove by written election of the Landlord pursuant to Paragraph 10(e), above. Tenant shall remove all of its personal property and trade fixtures from the Premises prior to the expiration or earlier termination of this Lease. Tenant shall perform at its sole cost and expense all restoration made necessary by its removal of alterations and improvements, personal property, and trade fixtures. Landlord may elect to retain or to dispose of in any manner any alterations or improvements that Tenant is required to remove pursuant to Paragraph 10(e) above, or Tenant's trade fixtures or personal property that Tenant does not remove from the Premises on expiration or earlier termination of this Lease by giving at least ten (10) days written notice to Tenant. Title to any such alterations, improvements, trade fixtures, or personal property that Landlord elects to retain or to dispose of on expiration of the aforesaid ten (10) day period shall vest in Landlord. Tenant waives all claims against Landlord and Landlord's agents for any damage to Tenant resulting from Landlord's retention or disposition of any such alterations, improvements, trade fixtures, and/or personal property, and Tenant shall be liable to Landlord for Landlord's costs and expenses for storing, removing, and disposing of same, and for the cost of restoring the Premises thereafter to the condition required by subparagraph (a), above. (b) Tenant has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. If Tenant, with Landlord's written consent, remains in possession of the Premises after the expiration or earlier termination of this Lease, such consensual possession shall be deemed to be a month-to-month tenancy terminable on thirty (30) days written notice given at any time by either party. During such month-to-month tenancy, all of the terms and conditions of this Lease shall remain in full force and effect, except (i) the Base Rent during the holdover period shall be one hundred fifty percent (150%) of the Base Rent in force during the month immediately preceding the expiration or earlier termination of the Lease, and (ii) any option or options set forth in the Lease to extend the term thereof shall not be exercisable during any such holdover period, but shall lapse upon the expiration date or date of the earlier termination of the Lease. 29. NO WASTE. Tenant shall commit no waste upon the Premises or the Project. 30. NO WAIVER. The waiver by Landlord of any breach of any Lease provision shall not be deemed to be a permanent waiver of such Lease provision or a waiver of any subsequent breach of the same or any other term, covenant or condition therein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any provision of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. The consent or approval by either party to or of any act by the 25 other party of a nature requiring consent or approval shall not be deemed to waive or render unnecessary consent to approval of any subsequent similar act. 31. EFFECT OF LANDLORD'S CONVEYANCE. If, during the Term of this Lease, Landlord shall assign or sell, in whole or in part, its interest in the Project of which the Premises forms a part, or the Premises, all of which is hereby permitted and which Landlord shall be allowed to advertise for at any time, then from and after the effective date of the sale or conveyance, Landlord shall be released and discharged from any and all obligations and responsibilities under this Lease or arising out of any act, occurrence or omission relating to the Project or Premises which occurs after the consummation of such sale, exchange, or assignment, except those already accrued; provided, however, that if the purchaser or assignee expressly assumes in writing all of Landlord's liabilities under this Lease, whensoever accrued, then Landlord shall be released and discharged from any and all obligations and responsibilities under this Lease, whensoever accrued. If any security be given by Tenant to secure the faithful transfer and/or deliver the security, as such, to the purchaser or assignee and thereupon Landlord shall be discharged from any further liability in reference thereto. Landlord shall give immediate notice of such sale and/or assignment of Lease to Tenant upon its occurrence. 32. AUTHORITY TO EXECUTE LEASE. Tenant is a duly formed corporation in the state of California, and each individual executing this Lease on behalf of Tenant represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of Tenant in accordance with a duly adopted Corporate Resolution of Tenant, in accordance with the bylaws of the Tenant, and certifying that Tenant is duly organized under the laws of its State of formation, and that this Lease is binding upon the Tenant in accordance with its terms. Tenant shall furnish with the executed lease a copy of the Corporate Resolution. 33. MORTGAGE PROTECTION. Tenant shall give Landlord's lender, by registered mail, a copy of any notice of default service upon Landlord, provided that prior to such notice Tenant has been notified, in writing (by way of notice of assignment of rents and leases, or otherwise), of the identity and address of Landlord's Lender. 34. TIME OF THE ESSENCE. Time is of the essence of this Lease with respect to each and every Paragraph thereof 35. COVENANT OF QUIET POSSESSION. Upon Tenant paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant shall have quiet possession of the Premises for the entire term hereof, subject to all the provisions of this Lease. 36. GENERAL PROVISIONS. (a) The captions in the margins and the headings of the several Paragraphs of this Lease are for convenience only and are not a part of this Lease and do not in any way limit or amplify the terms and provisions of this Lease. (b) Whenever the singular number is used in this Lease and when required by the context, the same shall include the plural, the plural shall include the singular, and the masculine gender shall include the feminine and neuter genders, and the word "person" shall 26 include corporation, limited liability company, partnership, firm or association. References in this Lease to terms such as "herein", "hereof', and "hereunder" shall be construed to reference any applicable provisions contained within the entire Lease. (c) This Lease contains all of the agreements of the parties hereto with respect to any matter, covered or mentioned in this Lease, and no prior to contemporaneous agreements or understandings, whether written or oral, pertaining to any such matters shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their permitted successors in interest. (d) Except as otherwise expressly stated, each payment required to be made by Tenant shall be in addition to and not in substitution for other payments to be made by Tenant. (e) The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof (f) The preparation and submission of a draft of this Lease by either party to the other shall not constitute an offer nor shall either party be bound to any terms of this Lease or the entirety of the Lease itself until both parties have fully executed a final document and an original signature document has been received by both parties. Until such time as described in the previous sentence, either party is free to terminate negotiations with no obligations to the other. This Lease may be fully executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (g) Under the terms of this Lease, numerous charges are and may be due from Tenant to Landlord including, without limitation, Common Area Costs, Real Estate Taxes, insurance reimbursement and other items of a similar nature including advances made by Landlord in respect of Tenant's default at Landlord's option. If, at any time during the Term, there is a bona fide dispute between the parties as to the amount due for any of such charges claimed by Landlord to be due, the undisputed amount demanded by Landlord shall be paid by Tenant until the resolution of the dispute between the parties by litigation, agreement or otherwise. (h) It is understood and agreed that the remedies herein given to either party shall be cumulative, and the exercise of any one remedy by either party shall not be to the exclusion of any right to exercise any other remedy. (i) This Lease shall be construed and enforced in accordance with the laws of the State of California. Venue and jurisdiction shall be proper in State Court in Santa Clara County, and/or in Federal Court in the Northern District of California. (j) Neither this Lease nor any memorandum or recitation of its terms shall be recorded without the prior written consent of Landlord. (k) Nothing contained herein shall be deemed or construed by anyone as creating the relationship of principal and agent, partnership, or joint venture between the parties hereto. 27 (l) Subject to the limitations of Paragraph 17, above, the covenants, agreements and obligations herein contained shall extend to, bind and inure to the benefit not only of the parties hereto but their respective personal representatives, heirs, successors and assigns. (m) Whenever a period of time is herein provided for either party to do or perform any act or thing, that party shall not be liable or responsible for any delays, and applicable periods for performance shall be extended accordingly, due to strikes, lockouts, riots, acts of God, shortages of labor or materials, restrictions, laws or regulations, or any other cause or causes, whether similar or dissimilar to those enumerated, beyond its reasonable control. The provisions of this Subparagraph shall not operate to excuse Tenant from prompt payment of Base Rent, Additional Rent or other monetary payments required by the terms of this Lease. (n) Landlord shall have the right to grant any easements on, over, under and above the Premises for such purposes as Landlord determines, provided that such easements will not materially interfere with Tenant's then-current or projected use of the Premises. (o) No provision of this Lease shall be construed against or interpreted to the disadvantage of any party by any court or other governmental or judicial authority by reason of such party having or being deemed to have drafted, devised or imposed such provision. (p) Unless specifically set forth therein to the contrary, when reference is made to "Landlord's consent" or "Landlord's prior written consent", said consent shall be granted or denied in Landlord's sole discretion. (q) At any time during this Lease, Landlord may require financial statements of Tenant (and any sub-tenant and/or assignee) for a designated period of time. Tenant shall furnish Landlord the requested information within fifteen (15) days of request. 28 IN WITNESS WHEREOF, the parties have executed this Lease, to be effective as of the 30 day of May, 97. LANDLORD: DM GROUP, VIII, a California limited partnership, by /s/ Maxwell Bruce Drever ------------------------------------ Maxwell Bruce Drever General Partner /s/ Arthur T. McIntosh ------------------------------------ Arthur T. McIntosh General Partner Drever, McIntosh & Company, Inc., a California corporation, general partner, by /s/ Maxwell Bruce Drever ------------------------------------ Maxwell Bruce Drever President DM GROUP VIII-E, a California limited partnership, by /s/ Maxwell Bruce Drever ------------------------------------ Maxwell Bruce Drever General Partner /s/ Arthur T. McIntosh, III ------------------------------------ Arthur T. McIntosh, III General Partner Drever, McIntosh & Company, Inc., a California corporation, general partner, by /s/ Maxwell Bruce Drever ------------------------------------ Maxwell Bruce Drever President 29 TENANT: FINISAR CORPORATION, a California corporation, by /s/ Jerry S. Rawls --------------------------------- Its: President ---------------------------- --------------------------------- Its: ---------------------------- 30 EX-10.13 20 EXHIBIT 10.13 LEASE AGREEMENT BY AND BETWEEN AETNA LIFE INSURANCE COMPANY, A CONNECTICUT CORPORATION AS LANDLORD AND FINISAR CORPORATION A CALIFORNIA CORPORATION AS TENANT DATED MAY 26, 1999 TABLE OF CONTENTS
Page ---- 1. Demise...................................................................................................1 2. Premises.................................................................................................1 3. Term.....................................................................................................2 4. Rent.....................................................................................................3 5. Utility Expenses.........................................................................................8 6. Late Charge..............................................................................................8 7. Security Deposit.........................................................................................9 8. Possession...............................................................................................9 9. Use Of Premises.........................................................................................10 10. Acceptance Of Premises..................................................................................11 11. Surrender...............................................................................................12 12. Alterations And Additions...............................................................................12 13. Maintenance And Repairs Of Premises.....................................................................14 14. Landlord's Insurance....................................................................................15 15. Tenant's Insurance......................................................................................15 16. Indemnification.........................................................................................17 17. Subrogation.............................................................................................17 18. Signs...................................................................................................17 19. Free From Liens.........................................................................................18 20. Entry By Landlord.......................................................................................18 21. Destruction And Damage..................................................................................18 22. Condemnation............................................................................................21 23. Assignment And Subletting...............................................................................22 i 24. Tenant's Default........................................................................................24 25. Landlord's Remedies.....................................................................................26 26. Landlord's Right To Perform Tenant's Obligations........................................................29 27. Attorney's Fees.........................................................................................29 28. Taxes...................................................................................................30 29. Effect Of Conveyance....................................................................................30 30. Tenant's Estoppel Certificate...........................................................................30 31. Subordination...........................................................................................30 32. Environmental Covenants.................................................................................31 33. Notices.................................................................................................34 34. Waiver..................................................................................................34 35. Holding Over............................................................................................34 36. Successors And Assigns..................................................................................35 37. Time....................................................................................................35 38. Brokers.................................................................................................35 39. Limitation Of Liability.................................................................................35 40. Financial Statements....................................................................................35 41. Rules And Regulations...................................................................................35 42. Mortgagee Protection....................................................................................36 43. Entire Agreement........................................................................................36 44. Interest................................................................................................36 45. Construction............................................................................................36 46. Representations And Warranties Of Tenant................................................................36 ii 47. Security................................................................................................37 48. Jury Trial Waiver.......................................................................................37 49. Option To Renew.........................................................................................38 50. Option To Expand Premises...............................................................................39 51. Satellite Dish..........................................................................................40
iii EXHIBIT A Diagram of the Premises A-1 Diagram indicating Location of Exclusive Parking Spaces B Tenant Improvements B-1 Preliminary Plans B-2 Final Plans and Specifications for Tenant Improvements C Commencement and Expiration Date Memorandum D Rules and Regulations E Sign Criteria F Hazardous Materials Disclosure Certificate G Tenant Improvements Loan Amortization Memorandum H Diagram of the Expansion Space iv LEASE AGREEMENT This Lease Agreement is made and entered into by and between Landlord and Tenant on the Lease Date. The defined terms used in this Lease which are defined in the Basic Lease Information attached to this Lease Agreement ("BASIC LEASE INFORMATION") shall have the meaning and definition given them in the Basic Lease Information. The Basic Lease Information, the exhibits, the addendum or addenda described in the Basic Lease Information, and this Lease Agreement are and shall be construed as a single instrument and are referred to herein as the "LEASE". 1. DEMISE. In consideration for the rents and all other charges and payments payable by Tenant, and for the agreements, terms and conditions to be performed by Tenant in this Lease, Landlord does hereby lease to Tenant, and Tenant does hereby hire and take from Landlord, the Premises described below (the "PREMISES"), upon the agreements, terms and conditions of this Lease for the Term hereinafter stated. 2. PREMISES. (a) The Premises demised by this Lease is located in that certain building (the "Building") specified in the Basic Lease Information, which Building is located in that certain real estate development (the "PROJECT") specified in the Basic Lease Information. The Premises has the address and contains the square footage specified in the Basic Lease Information. The approximate location and dimensions of the Premises are depicted on EXHIBIT A, which is attached hereto and incorporated herein by this reference; provided, however, that any statement of square footage set forth in this Lease. or that may have been used in calculating any of the economic terms hereof, is an approximation which Landlord and Tenant agree is reasonable and, except as expressly set forth in Paragraph 4(c)(3) below, no economic terms based thereon shall be subject to revision whether or not the actual square footage is more or less. Tenant shall have the non-exclusive right (in common with the other tenants, Landlord and any other person granted use by Landlord) to use the Common Areas (as hereinafter defined), except that, with respect to parking, Tenant shall have only a license to use the number of exclusive and designated parking spaces (the "EXCLUSIVE PARKING SPACES") and non-exclusive and undesignated parking spaces set forth in the Basic Lease Information in the Project's parking areas (the "PARKING AREAS"); provided, however, that Landlord shall not be required to enforce Tenant's right to use such parking spaces; and, provided further, that the number of parking spaces allocated to Tenant hereunder shall be reduced on a proportionate basis in the event any of the parking spaces in the Parking Areas are taken or otherwise eliminated as a result of any Condemnation (as hereinafter defined) or casualty event affecting such Parking Areas. Tenant's Exclusive Parking Spaces shall be located in the area shown on EXHIBIT A-1 hereto. No easement for light or air is incorporated in the Premises. For purposes of this Lease, the term "COMMON AREAS" shall mean all areas and facilities outside the Premises and within the exterior boundary line of the Project that are provided and designated by Landlord for the non-exclusive use of Landlord, Tenant and other tenants of the Project and their respective employees, guests and invitees. 1 (b) The Premises demised by this Lease shall include the Tenant Improvements (as that term is defined in the tenant improvement work agreement attached hereto as EXHIBIT B) to be constructed by Landlord within the interior of the Premises. Landlord shall construct the Tenant Improvements on the terms and conditions set forth in EXHIBIT B. Landlord and Tenant agree to and shall be bound by the terms and conditions of EXHIBIT B. (c) Landlord has the right, in its sole discretion, from time to time, to: (i) make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, ingress, egress, direction of driveways, entrances, corridors and walkways; provided, however, that the number of parking spaces allocated to Tenant hereunder shall be subject to reduction only as provided in Paragraph 2(a) above; (ii) close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (iii) add additional buildings and improvements to the Common Areas or remove existing buildings or improvements therefrom; (iv) use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project or any portion thereof; and (v) do and perform any other acts or make any other changes in, to or with respect to the Common Areas and the Project as Landlord may, in its sole discretion, deem to be appropriate. Landlord will use reasonable efforts to minimize interference with the conduct of Tenant's business in the Premises in performing any of the foregoing actions. 3. TERM. The term of this Lease (the "TERM") shall be for the period of months specified in the Basic Lease Information, commencing on the earliest to occur of the following dates (the "COMMENCEMENT DATE"): (a) The date the Tenant Improvements are approved by the appropriate governmental agency as being in accordance with its building code and the building permit issued for such improvements, as evidenced by the issuance of a final building inspection approval; or (b) The date Landlord's architect and general contractor have both certified in writing to Tenant that the Tenant Improvements have been substantially completed in accordance with the plans and specifications therefor; or (c) The date Tenant commences occupancy of the Premises; provided, however, that Tenant shall not be deemed to have commenced occupancy of the Premises for purposes of this Paragraph 3(c) if Tenant enters upon the Premises prior to the Commencement Date solely for the purpose of installing telephone cabling and furniture in accordance with Paragraph 8(b) below. In the event the actual Commencement Date, as determined pursuant to the foregoing, is a date other than the Estimated Commencement Date specified in the Basic Lease Information, then Landlord and Tenant shall promptly execute a Commencement and Expiration Date Memorandum in the form attached hereto as EXHIBIT C, wherein the parties shall specify the Commencement Date, the date on which the Term expires (the "EXPIRATION DATE") and the date on which Tenant is to commence paying Rent. 2 4. RENT. (a) BASE RENT. (1) Commencing on the Rent Commencement Date (as hereinafter defined), Tenant shall pay to Landlord, in advance on the first day of each month, without further notice or demand and without offset, rebate, credit (except as specified in Paragraph 4(a)(2) below) or deduction for any reason whatsoever, the monthly installments of rent specified in the Basic Lease Information (the "BASE RENT"). As used herein, "RENT COMMENCEMENT DATE" means the earlier of (i) the Commencement Date, or (ii) the date that is ninety (90) days after the date of this Lease. Tenant acknowledges and agrees that Rent shall be payable hereunder commencing on the Rent Commencement Date, irrespective of whether or not the Tenant Improvements have been completed and the Term has commenced by such date. (2) Notwithstanding anything to the contrary contained in this Lease, Tenant shall be entitled to a credit against the monthly Base Rent payable pursuant to Paragraph 4(a)(1) above in the amounts set forth below: MONTHS BASE RENT CREDIT 1-12 $295.20 13-24 304.43 25-36 313.65 37-48 322.88 49-60 332.10 61-72 341.33 73-84 350.55 (3) Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Rent and first monthly installment of estimated Additional Rent (as hereinafter defined) specified in the Basic Lease Information to be applied toward Base Rent and Additional Rent for the month of the Term specified in the Basic Lease Information. (b) ADDITIONAL RENT. This Lease is intended to be a triple-net Lease with respect to Landlord; and subject to Paragraph 13(b) below, the Base Rent owing hereunder is (1) to be paid by Tenant absolutely net of all costs and expenses relating to Landlord's ownership and operation of the Project and the Building, and (2) not to be reduced, offset or diminished, directly or indirectly, by any cost, charge or expense payable hereunder by Tenant or by others in connection with the Premises, the Building and/or the Project or any part thereof. The provisions of this Paragraph 4(b) for the payment of Tenant's Proportionate Share(s) of Expenses (as hereinafter defined) are intended to pass on to Tenant its share of all such costs and expenses. In addition to the Base Rent, commencing on the Rent Commencement Date, Tenant shall pay to Landlord, in accordance with this Paragraph 4, Tenant's Proportionate Share(s) of all costs and expenses paid or incurred by Landlord in connection with the ownership, operation, 3 maintenance, management and repair of the Premises, the Building and/or the Project or any part thereof (collectively, the "EXPENSES"), including, without limitation, all the following items (the "ADDITIONAL RENT"): (1) TAXES AND ASSESSMENTS. All real estate taxes and assessments, which shall include any form of tax, assessment, fee, license fee, business license fee, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is (i) determined by the area of the Premises, the Building and/or the Project or any part thereof, or the Rent and other sums payable hereunder by Tenant or by other tenants, including, but not limited to, any gross income or excise tax levied by any of the foregoing authorities with respect to receipt of Rent and/or other sums due under this Lease; (ii) upon any legal or equitable interest of Landlord in the Premises, the Building and/or the Project or any part thereof; (iii) upon this transaction or any document to which Tenant is a party creating or transferring any interest in the Premises, the Building and/or the Project; (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Premises, the Building and/or the Project, whether or not now customary or within the contemplation of the parties; or (v) surcharged against the parking area. Tenant and Landlord acknowledge that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges due to any cause whatsoever are to be included within the definition of real property taxes for purposes of this Lease. "TAXES AND ASSESSMENTS" shall also include legal and consultants' fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce taxes, Landlord specifically reserving the right, but not the obligation, to contest by appropriate legal proceedings the amount or validity of any taxes. (2) INSURANCE. All insurance premiums for the Building and/or the Project or any part thereof, including premiums for "all risk" fire and extended coverage insurance, commercial general liability insurance, rent loss or abatement insurance, earthquake insurance, flood or surface water coverage, and other insurance as Landlord deems necessary in its sole discretion, and any deductibles paid under policies of any such insurance (provided, however, that Tenant shall not be responsible for any deductible under any policy of earthquake insurance in excess of five percent (5%) of the then replacement cost of the Project, per occurrence). (3) UTILITIES. The cost of all Utilities (as hereinafter defined) serving the Premises, the Building and the Project that are not separately metered to Tenant, any assessments or charges for Utilities or similar purposes included within any tax bill for the Building or the Project, including without limitation, entitlement fees, allocation unit fees, and/or any similar fees or charges and any penalties (if a result of Tenant's delinquency) related thereto, and any amounts, taxes, charges, surcharges, assessments or impositions levied, assessed or imposed upon the Premises, the Building or the Project or any part thereof, or upon Tenant's use 4 and occupancy thereof, as a result of any rationing of Utility services or restriction on Utility use affecting the Premises, the Building and/or the Project, as contemplated in Paragraph 5 below (collectively, "UTILITY EXPENSES"). (4) COMMON AREA EXPENSES. All costs to operate, maintain, repair, replace, supervise, insure and administer the Common Areas, including supplies, materials, labor and equipment used in or related to the operation and maintenance of the Common Areas, including parking areas (including, without limitation, all costs of resurfacing and restriping parking areas), signs and directories on the Building and/or the Project, landscaping (including maintenance contracts and fees payable to landscaping consultants), amenities, sprinkler systems, sidewalks, walkways, driveways, curbs, lighting systems and security services, if any, provided by Landlord for the Common Areas, and any charges, assessments, costs or fees levied by any association or entity of which the Project or any part thereof is a member or to which the Project or any part thereof is subject. (5) PARKING CHARGES. Any parking charges or other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated by any governmental authority or insurer in connection with the use or occupancy of the Building or the Project. (6) MAINTENANCE AND REPAIR COSTS. Except for costs which are the responsibility of Landlord pursuant to Paragraph 13(b) below, all costs to maintain, repair, and replace the Premises, the Building and/or the Project or any part thereof, including without limitation, (i) all costs paid under maintenance, management and service agreements such as contracts for janitorial, security and refuse removal, (ii) all costs to maintain, repair and replace the roof coverings of the Building or the Project or any part thereof, (iii) all costs to maintain, repair and replace the heating, ventilating, air conditioning, plumbing, sewer, drainage, electrical, fire protection, life safety and security systems and other mechanical and electrical systems and equipment serving the Premises, the Building and/or the Project or any part thereof (collectively, the "SYSTEMS"). (7) LIFE SAFETY COSTS. All costs to install, maintain, repair and replace all life safety systems, including, without limitation, all fire alarm systems, serving the Premises, the Building and/or the Project or any part thereof (including all maintenance contracts and fees payable to life safety consultants) whether such systems are or shall be required by Landlord's insurance carriers, Laws (as hereinafter defined) or otherwise. (8) MANAGEMENT AND ADMINISTRATION. All costs for management and administration of the Premises, the Building and/or the Project or any part thereof, including, without limitation, a Property Management Fee (as hereinafter defined), accounting, auditing, billing, postage, Salaries and Benefits (as hereinafter defined), payroll taxes and legal and accounting costs (specifically excluding, however, legal fees incurred in connection with lease negotiations with tenants, disputes with tenants, the sale or refinancing of the Building and the construction of additional improvements on the Project) and fees for licenses and permits related to the ownership and operation of the Project. For purposes of this Paragraph 4(b)(8), the following terms shall have the following meanings: 5 (A) "MANAGEMENT FEE" means the actual property management fee paid by Landlord to the property manager of the Project; provided, however, that if the property manager shall at any time hereafter be an Affiliate (as hereinafter defined) of Landlord, then the Management Fee shall not exceed the management fees customarily paid by institutional owners and advisors (collectively, "INSTITUTIONAL OWNERS") to institutional property managers for properties similar to and in the vicinity of the Project. (B) "SALARIES AND BENEFITS" means the salaries and benefits for clerical and supervisory employees involved in the management of the Project, whether such employees are located on the Project or off-site; provided, however, that if the property manager shall at any time hereafter be an Affiliate of Landlord, then the Salaries and Benefits shall not exceed the salaries and benefits customarily charged by Institutional Owners to tenants under triple-net leases of buildings similar to and in the vicinity of the Project; and, provided further, that so long as Aetna Life Insurance Company is the Landlord hereunder, Tenant shall not be responsible for the payment of any Salaries and Benefits. (C) "AFFILIATE" means an entity that controls, is controlled by or is under common control with, Landlord; and a party shall be deemed to "control" another party for purposes of the aforesaid definition only if the first party owns more than fifty percent (50%) of the stock or other beneficial interests of the second party. Notwithstanding anything in this Paragraph 4(b) to the contrary, with respect to all sums payable by Tenant as Additional Rent under this Paragraph 4(b) for the replacement of any item or the construction of any new item in connection with the physical operation of the Premises, the Building or the Project (i.e., HVAC, roof membrane or coverings and parking area) which is a capital item the replacement of which would be capitalized under Landlord's commercial real estate accounting practices, Tenant shall be required to pay only the pro rata share of the cost of the item falling due within the Term (including any Renewal Term) based upon the amortization of the same over the useful life of such item, as reasonably determined by Landlord. (c) PAYMENT OF ADDITIONAL RENT. (1) Upon commencement of this Lease, Landlord shall submit to Tenant an estimate of monthly Additional Rent for the period between the Commencement Date and the following December 31 and Tenant shall pay such estimated Additional Rent on a monthly basis, in advance, on the first day of each month. Tenant shall continue to make said monthly payments until notified by Landlord of a change therein. If at any time or times Landlord determines that the amounts payable under Paragraph 4(b) for the current year will vary from Landlord's estimate given to Tenant, Landlord, by notice to Tenant, may revise the estimate for such year, and subsequent payments by Tenant for such year shall be based upon such revised estimate. By May 1 of each calendar year, Landlord shall endeavor to provide to Tenant a statement showing the actual Additional Rent due to Landlord for the prior calendar year, to be prorated during the first year from the Commencement Date. If the total of the monthly payments of Additional Rent that Tenant has made for the prior calendar year is less than the actual Additional Rent chargeable to Tenant for such prior calendar year, then Tenant shall pay the difference in a lump sum within ten (10) days after receipt of such statement from 6 Landlord. Any overpayment by Tenant of Additional Rent for the prior calendar year shall be credited towards the Additional Rent next due. (2) Landlord's then-current annual operating and capital budgets for the Building and the Project or the pertinent part thereof shall be used for purposes of calculating Tenant's monthly payment of estimated Additional Rent for the current year, subject to adjustment as provided above. Landlord shall make the final determination of Additional Rent for the year in which this Lease terminates as soon as possible after termination of such year. Even though the Term has expired and Tenant has vacated the Premises, Tenant shall remain liable for payment of any amount due to Landlord in excess of the estimated Additional Rent previously paid by Tenant, and, conversely, Landlord shall promptly return to Tenant any overpayment. Failure of Landlord to submit statements as called for herein shall not be deemed a waiver of Tenant's obligation to pay Additional Rent as herein provided. (3) With respect to Expenses which Landlord allocates to the Building, Tenant's "PROPORTIONATE SHARE" shall be the percentage set forth in the Basic Lease Information as Tenant's Proportionate Share of the Building, as adjusted by Landlord from time to time for a remeasurement of or changes in the physical size of the Premises or the Building, whether such changes in size are due to an addition to or a sale or conveyance of a portion of the Building or otherwise. With respect to Expenses which Landlord allocates to the Project as a whole or to only a portion of the Project, Tenant's "PROPORTIONATE SHARE" shall be, with respect to Expenses which Landlord allocates to the Project as a whole, the percentage set forth in the Basic Lease Information as Tenant's Proportionate Share of the Project and, with respect to Expenses which Landlord allocates to only a portion of the Project, a percentage calculated by Landlord from time to time in its sole discretion and furnished to Tenant in writing, in either case as adjusted by Landlord from time to time for a remeasurement of or changes in the physical size of the Premises or the Project, whether such changes in size are due to an addition to or a sale or conveyance of a portion of the Project or otherwise. Notwithstanding the foregoing, Landlord may equitably adjust Tenant's Proportionate Share(s) for all or part of any item of expense or cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only the Premises or only a portion of the Building and/or the Project or that varies with the occupancy of the Building and/or the Project. Without limiting the generality of the foregoing, Tenant understands and agrees that Landlord shall have the right to adjust Tenant's Proportionate Share(s) of any Utility Expenses based upon Tenant's use of the Utilities or similar services as reasonably estimated and determined by Landlord based upon factors such as size of the Premises and intensity of use of such Utilities by Tenant such that Tenant shall pay the portion of such charges reasonably consistent with Tenant's use of such Utilities and similar services. If Tenant disputes any such estimate or determination of Utility Expenses, then Tenant shall either pay the estimated amount or cause the Premises to be separately metered at Tenant's sole expense. (d) GENERAL PAYMENT TERMS. The Base Rent, Additional Rent and all other sums payable by Tenant to Landlord hereunder, including, without limitation, payments of principal and interest on the Tenant Improvements Loan (as defined in EXHIBIT B hereto), any late charges assessed pursuant to Paragraph 6 below and any interest assessed pursuant to Paragraph 45 below, are referred to as the "RENT". All Rent shall be paid without deduction, offset or abatement in lawful money of the United States of America. Checks are to be made 7 payable to Aetna Life Insurance Company and shall be mailed to: Moffett Park Properties, Department #66268, El Monte, California 91735-6268 or to such other person or place as Landlord may, from time to time, designate to Tenant in writing. The Rent for any fractional part of a calendar month at the commencement or termination of the Lease term shall be a prorated amount of the Rent for a full calendar month based upon a thirty (30) day month. 5. UTILITY EXPENSES. (a) Tenant shall pay the cost of all water, sewer use, sewer discharge fees and permit costs and sewer connection fees, gas, heat, electricity, refuse pick-up, janitorial service, telephone and all materials and services or other utilities (collectively, "UTILITIES") billed or metered separately to the Premises and/or Tenant, together with all taxes, assessments, charges and penalties added to or included within such cost. Tenant acknowledges that the Premises, the Building and/or the Project may become subject to the rationing of Utility services or restrictions on Utility use as required by a public utility company, governmental agency or other similar entity having jurisdiction thereof. Tenant acknowledges and agrees that its tenancy and occupancy hereunder shall be subject to such rationing or restrictions as may be imposed upon Landlord, Tenant, the Premises, the Building and/or the Project, and Tenant shall in no event be excused or relieved from any covenant or obligation to be kept or performed by Tenant by reason of any such rationing or restrictions. Tenant agrees to comply with energy conservation programs implemented by Landlord by reason of rationing, restrictions or Laws. (b) Landlord shall not be liable for any loss, injury or damage to property caused by or resulting from any variation, interruption, or failure of Utilities due to any cause whatsoever, or from failure to make any repairs or perform any maintenance. No temporary interruption or failure of such services incident to the making of repairs, alterations, improvements, or due to accident, strike, or conditions or other events shall be deemed an eviction of Tenant or relieve Tenant from any of its obligations hereunder. In no event shall Landlord be liable to Tenant for any damage to the Premises or for any loss, damage or injury to any property therein or thereon occasioned by bursting, rupture, leakage or overflow of any plumbing or other pipes (including, without limitation, water, steam, and/or refrigerant lines), sprinklers, tanks, drains, drinking fountains or washstands, or other similar cause in, above, upon or about the Premises, the Building, or the Project. 6. LATE CHARGE. Notwithstanding any other provision of this Lease, Tenant hereby acknowledges that late payment to Landlord of Rent, or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. If any Rent or other sums due from Tenant are not received by Landlord or by Landlord's designated agent within five (5) days after their due date, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount, plus any costs and attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. Landlord and Tenant hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of Tenant's late payment and shall not be construed as a penalty. Landlord's acceptance of such late charges shall not constitute a waiver of Tenant's default with respect to such overdue amount or estop Landlord from exercising any of the other rights and remedies granted under this Lease. 8 INITIALS: LANDLORD _________ TENANT _______ 7. SECURITY DEPOSIT. Concurrently with Tenant's execution of the Lease, Tenant shall deposit with Landlord the Security Deposit specified in the Basic Lease Information as security for the full and faithful performance of each and every term, covenant and condition of this Lease. Landlord may use, apply or retain the whole or any part of the Security Deposit as may be reasonably necessary (a) to remedy Tenant's default in the payment of any Rent, (b) to repair damage to the Premises caused by Tenant, (c) to clean the Premises upon termination of this Lease, (d) to reimburse Landlord for the payment of any amount which Landlord may reasonably spend or be required to spend by reason of Tenant's default, or (e) to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. Should Tenant faithfully and fully comply with all of the terms, covenants and conditions of this Lease, within thirty (30) days following the expiration of the Term, the Security Deposit or any balance thereof shall be returned to Tenant or, at the option of Landlord, to the last assignee of Tenant's interest in this Lease. Landlord shall not be required to keep the Security Deposit separate from its general funds and Tenant shall not be entitled to any interest on such deposit. If Landlord so uses or applies all or any portion of said deposit, within five (5) days after written demand therefor Tenant shall deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the full extent of the above amount, and Tenant's failure to do so shall be a default under this Lease. In the event Landlord transfers its interest in this Lease, Landlord shall transfer the then remaining amount of the Security Deposit to Landlord's successor in interest, and thereafter Landlord shall have no further liability to Tenant with respect to such Security Deposit. 8. POSSESSION. (a) TENANT'S RIGHT OF POSSESSION. Subject to Paragraphs 8(b) and 8(c), Tenant shall be entitled to possession of the Premises upon commencement of the Term. (b) EARLY OCCUPANCY. Notwithstanding anything to the contrary contained herein, Tenant shall have the right to enter upon the Premises at times acceptable to Landlord during the fifteen (15) day period prior to the Commencement Date for the sole purpose of installing Tenant's telephone cabling and furniture, provided that Tenant shall not interfere with the construction and installation of the Tenant Improvements nor conduct its business in the Premises during such period, and provided further, that such entry shall be subject to all of the terms and conditions of this Lease, excluding only the obligation to pay Rent. (c) DELAY IN DELIVERING POSSESSION. If for any reason whatsoever, Landlord cannot deliver possession of the Premises to Tenant on or before the Estimated Commencement Date, this Lease shall not be void or voidable, nor shall Landlord, or Landlord's agents, advisors, employees, partners, shareholders, directors, invitees or independent contractors (collectively, "LANDLORD'S AGENTS"), be liable to Tenant for any loss or damage resulting therefrom. Tenant shall not be liable for Rent until Landlord delivers possession of the Premises to Tenant. The Expiration Date shall be extended by the same number of days that Tenant's possession of the Premises was delayed beyond the Estimated Commencement Date. 9 9. USE OF PREMISES. (a) PERMITTED USE. The use of the Premises by Tenant and Tenant's agents, advisors, employees, partners, shareholders, directors, invitees and independent contractors (collectively, "TENANT'S AGENTS") shall be solely for the Permitted Use specified in the Basic Lease Information and for no other use. Tenant shall not permit any objectionable or unpleasant odor, smoke, dust, gas, noise or vibration to emanate from or near the Premises. The Premises shall not be used to create any nuisance or trespass, for any illegal purpose, for any purpose not permitted by Laws, for any purpose that would invalidate the insurance or increase the premiums for insurance on the Premises, the Building or the Project or for any purpose or in any manner that would interfere with other tenants' use or occupancy of the Project. If any of Tenant's office machines or equipment disturb any other tenant in the Building, then Tenant shall provide adequate insulation or take such other action as may be necessary to eliminate the noise or disturbance. Tenant agrees to pay to Landlord, as Additional Rent, any increases in premiums on policies resulting from Tenant's Permitted Use or any other use or action by Tenant or Tenant's Agents which increases Landlord's premiums or requires additional coverage by Landlord to insure the Premises. Tenant agrees not to overload the floor(s) of the Building. (b) COMPLIANCE WITH GOVERNMENTAL REGULATIONS AND PRIVATE RESTRICTIONS. Tenant and Tenant's Agents shall, at Tenant's expense, faithfully observe and comply with (1) all municipal, state and federal laws, statutes, codes, rules, regulations, ordinances, requirements, and orders (collectively, "LAWS"), now in force or which may hereafter be in force pertaining to the Premises or Tenant's use of the Premises, the Building or the Project, including without limitation, any Laws requiring installation of fire sprinkler systems, seismic reinforcement and related alterations, and removal of asbestos, whether substantial in cost or otherwise, provided, however, that except as provided in Paragraph 9(c) below, Tenant shall not be required to make or, except as provided in Paragraph 4 above, pay for, structural changes to the Premises or the Building not related to Tenant's specific use of the Premises unless the requirement for such changes is imposed as a result of any improvements or additions made or proposed to be made at Tenant's request; (2) all recorded covenants, conditions and restrictions affecting the Project ("PRIVATE RESTRICTIONS") now in force or which may hereafter be in force; and (3) any and all rules and regulations set forth in EXHIBIT D and any other rules and regulations now or hereafter promulgated by Landlord related to parking or the operation of the Premises, the Building and/or the Project (collectively, the "RULES AND REGULATIONS"). The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such Laws or Private Restrictions, shall be conclusive of that fact as between Landlord and Tenant. (c) COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT. Landlord and Tenant hereby agree and acknowledge that the Premises, the Building and/or the Project may be subject to, among other Laws, the requirements of the Americans with Disabilities Act, a federal law codified at 42 U.S.C. 12101 ET SEQ., including, but not limited to Title III thereof, and all regulations and guidelines related thereto, together with any and all laws, rules, regulations, ordinances, codes and statutes now or hereafter enacted by local or state agencies having jurisdiction thereof, including all requirements of Title 24 of the State of California, as the same may be in effect on the date of this Lease and may be hereafter modified, amended or 10 supplemented (collectively, the "ADA"). Any Tenant Improvements to be constructed hereunder shall be in compliance with the requirements of the ADA, and all costs incurred for purposes of compliance therewith shall be a part of and included in the costs of the Tenant Improvements. Tenant shall be solely responsible for conducting its own independent investigation of this matter and for ensuring that the design of all Tenant Improvements strictly complies with all requirements of the ADA. Subject to reimbursement pursuant to Paragraph 4 above, if any barrier removal work or other work is required to the Building, the Common Areas or the Project under the ADA, then such work shall be the responsibility of Landlord; provided, if such work is required under the ADA as a result of Tenant's use of the Premises or any work or Alteration (as hereinafter defined) made to the Premises by or on behalf of Tenant, then such work shall be performed by Landlord at the sole cost and expense of Tenant. Except as otherwise expressly provided in this provision, Tenant shall be responsible at its sole cost and expense for fully and faithfully complying with all applicable requirements of the ADA, including without limitation, not discriminating against any disabled persons in the operation of Tenant's business in or about the Premises, and offering or otherwise providing auxiliary aids and services as, and when, required by the ADA. Within ten (10) days after receipt, Tenant shall advise Landlord in writing, and provide Landlord with copies of (as applicable), any notices alleging violation of the ADA relating to any portion of the Premises, the Building or the Project; any claims made or threatened orally or in writing regarding noncompliance with the ADA and relating to any portion of the Premises, the Building, or the Project; or any governmental or regulatory actions or investigations instituted or threatened regarding noncompliance with the ADA and relating to any portion of the Premises, the Building or the Project. Tenant shall and hereby agrees to protect, defend (with counsel acceptable to Landlord) and hold Landlord and Landlord's Agents harmless and indemnify Landlord and Landlord's Agents from and against all liabilities, damages, claims, losses, penalties, judgments, charges and expenses (including attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation including the enforcement of this provision) arising from or in any way related to, directly or indirectly, Tenant's or Tenant's Agents' violation or alleged violation of the ADA. Tenant agrees that the obligations of Tenant herein shall survive the expiration or earlier termination of this Lease. 10. ACCEPTANCE OF PREMISES. (a) By entry hereunder, Tenant accepts the Premises as suitable for Tenant's intended use and as being in good and sanitary operating order, condition and repair, AS IS, and without representation or warranty by Landlord as to the condition, use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. (b) Notwithstanding the terms of Paragraph 10(a) above, Landlord shall cause the mechanical, electrical and plumbing systems serving the Premises to be in good working order and the roof on the Building to be in good condition on the Commencement Date. Any claims by Tenant under the preceding sentence shall be made in writing not later than the thirtieth (30th) day after the Commencement Date. In the event Tenant fails to deliver a written claim to Landlord on or before such thirtieth (30th) day, then Landlord shall be conclusively deemed to have satisfied its obligations under this Paragraph 10(b). 11 11. SURRENDER. Tenant agrees that on the last day of the Term, or on the sooner termination of this Lease, Tenant shall surrender the Premises to Landlord (a) in good condition and repair (damage by acts of God, fire, and normal wear and tear excepted), but with all interior walls painted or cleaned so they appear painted, any carpets cleaned, all floors cleaned and waxed, all non-working light bulbs and ballasts replaced and all roll-up doors and plumbing fixtures in good condition and working order, and (b) otherwise in accordance with Paragraph 32(h). Normal wear and tear shall not include any damage or deterioration to the floors of the Premises arising from the use of forklifts in, on or about the Premises (including, without limitation, any marks or stains on any portion of the floors), and any damage or deterioration that would have been prevented by proper maintenance by Tenant, or Tenant otherwise performing all of its obligations under this Lease. On or before the expiration or sooner termination of this Lease, (i) Tenant shall remove all of Tenant's Property (as hereinafter defined) and Tenant's signage from the Premises, the Building and the Project and repair any damage caused by such removal, and (ii) Landlord may, by notice to Tenant given not later than ninety (90) days prior to the Expiration Date (except in the event of a termination of this Lease prior to the scheduled Expiration Date, in which event no advance notice shall be required), require Tenant at Tenant's expense to remove any or all Alterations and to repair any damage caused by such removal. Any of Tenant's Property not so removed by Tenant as required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord's retention and disposition of such property; provided, however, that Tenant shall remain liable to Landlord for all costs incurred in storing and disposing of such abandoned property of Tenant. All Tenant Improvements and Alterations except those which Landlord requires Tenant to remove shall remain in the Premises as the property of Landlord. If the Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in accordance with the provisions of this Paragraph 11 and Paragraph 32(h) below, Tenant shall continue to be responsible for the payment of Rent (as the same may be increased pursuant to Paragraph 35 below) until the Premises are so surrendered in accordance with said Paragraphs, and Tenant shall indemnify, defend and hold Landlord harmless from and against any and all loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant or prospective tenant founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of the Premises to any such succeeding tenant or prospective tenant, together with, in each case, actual attorneys' fees and costs. 12. ALTERATIONS AND ADDITIONS. (a) Tenant shall not make, or permit to be made, any alteration, addition or improvement (hereinafter referred to individually as an "ALTERATION" and collectively as the "ALTERATIONS") to the Premises or any part thereof without the prior written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, that Landlord shall have the right in its sole and absolute discretion to consent or to withhold its consent to any Alteration which affects the structural portions of the Premises, the Building or the Project or the Systems serving the Premises, the Building and/or the Project or any portion thereof (collectively, "STRUCTURAL ALTERATIONS"). Notwithstanding the foregoing, Tenant shall have the right to make Alterations (specifically excluding, however, Structural Alterations) to the Premises with prior notice to but without the consent of Landlord, provided that such Alterations are constructed and 12 performed in full compliance with the terms of Paragraphs 12(b) through (f) below and do not exceed Ten Thousand Dollars ($10,000) in cost on an individual basis or Twenty Thousand Dollars ($20,000) in the aggregate over the Term of this Lease (collectively, "PERMITTED ALTERATIONS"). (b) Any Alteration to the Premises shall be at Tenant's sole cost and expense, in compliance with all applicable Laws and all requirements requested by Landlord, including, without limitation, the requirements of any insurer providing coverage for the Premises or the Project or any part thereof, and in accordance with plans and specifications approved in writing by Landlord, and shall be constructed and installed by a contractor approved in writing by Landlord. As a further condition to giving consent, Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, a payment and performance bond in form acceptable to Landlord, in a principal amount not less than one and one-half times the estimated costs of such Alterations, to ensure Landlord against any liability for mechanic's and materialmen's liens and to ensure completion of work. Before Alterations may begin, valid building permits or other permits or licenses required must be furnished to Landlord, and, once the Alterations begin, Tenant will diligently and continuously pursue their completion. Landlord may monitor construction of the Alterations and Tenant shall reimburse Landlord for its costs (including, without limitation, the costs of any construction manager retained by Landlord) in reviewing plans and documents and in monitoring construction. Tenant shall maintain during the course of construction, at its sole cost and expense, builders' risk insurance for the amount of the completed value of the Alterations on an all-risk non-reporting form covering all improvements under construction, including building materials, and other insurance in amounts and against such risks as Landlord shall reasonably require in connection with the Alterations. In addition to and without limitation on the generality of the foregoing, Tenant shall ensure that its contractor(s) procure and maintain in full force and effect during the course of construction a "broad form" commercial general liability and property damage policy of insurance naming Landlord, Landlord's investment advisor and agent, Allegis Realty Investors LLC, Tenant and Landlord's lenders as additional insureds. The minimum limit of coverage of the aforesaid policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one accident or occurrence, and shall contain a Severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least One Million Dollars ($1,000,000.00). (c) All Alterations, including, but not limited to, heating, lighting, electrical, air conditioning, fixed partitioning, drapery, wall covering and paneling, built-in cabinet work and carpeting installations made by Tenant, together with all property that has become an integral part of the Premises or the Building, shall at once be and become the property of Landlord, and shall not be deemed trade fixtures or Tenant's Property. If requested by Landlord, Tenant will pay, prior to the commencement of construction, an amount determined by Landlord necessary to cover the costs of demolishing such Alterations and/or the cost of returning the Premises and the Building to its condition prior to such Alterations. (d) No private telephone systems and/or other related computer or telecommunications equipment or lines may be installed without Landlord's prior written 13 consent. If Landlord gives such consent, all equipment must be installed within the Premises and, at the request of Landlord made at any time prior to the expiration of the Term, removed upon the expiration or sooner termination of this Lease and the Premises restored to the same condition as before such installation. (e) Notwithstanding anything herein to the contrary, before installing any equipment or lights which generate an undue amount of heat in the Premises, or if Tenant plans to use any high-power usage equipment in the Premises, Tenant shall obtain the written permission of Landlord. Landlord may refuse to grant such permission unless Tenant agrees to pay the costs to Landlord for installation of supplementary air conditioning capacity or electrical systems necessitated by such equipment. (f) Tenant agrees not to proceed to make any Alterations, notwithstanding consent from Landlord to do so, until Tenant notifies Landlord in writing of the date Tenant desires to commence construction or installation of such Alterations and Landlord has approved such date in writing, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. 13. MAINTENANCE AND REPAIRS OF PREMISES. (a) MAINTENANCE BY TENANT. Throughout the Term, Tenant shall, at its sole expense, (1) keep and maintain in good order and condition the Premises, and repair and replace every part thereof, including glass, windows, window frames, window casements, skylights, interior and exterior doors, door frames and door closers; interior lighting (including, without limitation, light bulbs and ballasts), the plumbing and electrical systems exclusively serving the Premises, all communications systems serving the Premises, Tenant's signage, interior demising walls and partitions, equipment, interior painting and interior walls and floors, and the roll-up doors, ramps and dock equipment, including, without limitation, dock bumpers, dock plates, dock seals, dock levelers and dock lights located in or on the Premises (excepting only those portions of the Building or the Project to be maintained by Landlord, as provided in Paragraph 13(b) below), (2) furnish all expendables, including light bulbs, paper goods and soaps, used in the Premises, and (3) keep and maintain in good order and condition, repair and replace all of Tenant's security systems in or about or serving the Premises and, except to the extent that Landlord notifies Tenant in writing of its intention to arrange for such monitoring, cause the fire alarm systems serving the Premises to be monitored by a monitoring or protective services firm approved by Landlord in writing. Tenant shall not do nor shall Tenant allow Tenant's Agents to do anything to cause any damage, deterioration or unsightliness to the Premises, the Building or the Project. (b) MAINTENANCE BY LANDLORD. Subject to the provisions of Paragraphs 13(a), 21 and 22, and further subject to Tenant's obligation under Paragraph 4 to reimburse Landlord, in the form of Additional Rent, for Tenant's Proportionate Share(s) of the cost and expense of the following items, Landlord agrees to repair and maintain the following items: the roof coverings (provided that Tenant installs no additional air conditioning or other equipment on the roof that damages the roof coverings, in which event Tenant shall pay all costs resulting from the presence of such additional equipment); the Systems serving the Premises and the Building, 14 excluding the plumbing and electrical systems exclusively serving the Premises; and the Parking Areas, pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs, and lighting systems in the Common Areas. Subject to the provisions of Paragraphs 13(a), 21 and 22, Landlord, at its own cost and expense, agrees to repair and maintain the following items: the structural portions of the roof (specifically excluding the roof coverings), the foundation, the footings, the floor slab, and the load bearing walls and exterior walls of the Building (excluding any glass and any routine maintenance, including, without limitation, any painting, sealing, patching and waterproofing of such walls). Notwithstanding anything in this Paragraph 13 to the contrary, Landlord shall have the right to either repair or to require Tenant to repair any damage to any portion of the Premises, the Building and/or the Project caused by or created due to any act, omission, negligence or willful misconduct of Tenant or Tenant's Agents and to restore the Premises, the Building and/or the Project, as applicable, to the condition existing prior to the occurrence of such damage; provided, however, that in the event Landlord elects to perform such repair and restoration work, Tenant shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in connection therewith. Landlord's obligation hereunder to repair and maintain is subject to the condition precedent that Landlord shall have received written notice of the need for such repairs and maintenance and a reasonable time to perform such repair and maintenance. Tenant shall promptly report in writing to Landlord any defective condition known to it which Landlord is required to repair, and failure to so report such defects shall make Tenant responsible to Landlord for any liability incurred by Landlord by reason of such condition. (c) TENANT'S WAIVER OF RIGHTS. Tenant hereby expressly waives all rights to make repairs at the expense of Landlord or to terminate this Lease, as provided for in California Civil Code Sections 1941 and 1942, and 1932(l), respectively, and any similar or successor statute or law in effect or any amendment thereof during the Term. 14. LANDLORD'S INSURANCE. Landlord shall purchase and keep in force fire, extended coverage and "all risk" insurance covering the Building and the Project. Tenant shall, at its sole cost and expense, comply with any and all reasonable requirements pertaining to the Premises, the Building and the Project of any insurer necessary for the maintenance of reasonable fire and commercial general liability insurance, covering the Building and the Project. Landlord, at Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent will be paid in a timely manner to Landlord for a period of at least twelve (12) months if the Premises, the Building or the Project or any portion thereof are destroyed or rendered unusable or inaccessible by any cause insured against under this Lease. 15. TENANT'S INSURANCE. (a) COMMERCIAL GENERAL LIABILITY INSURANCE. Tenant shall, at Tenant's expense, secure and keep in force a "broad form" commercial general liability insurance and property damage policy covering the Premises, insuring Tenant, and naming Landlord, Landlord's investment advisors and agents from time to time, including, without limitation, Allegis Realty Investors LLC, and Landlord's lenders as additional insureds, against any liability arising out of the ownership, use, occupancy or maintenance of the Premises. The minimum limit of coverage of such policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in the 15 amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one accident or occurrence, shall include an extended liability endorsement providing contractual liability coverage (which shall include coverage for Tenant's indemnification obligations in this Lease), and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least Three Million Dollars ($3,000,000.00). Landlord may from time to time require reasonable increases in any such limits if Landlord believes that additional coverage is necessary or desirable. The limit of any insurance shall not limit the liability of Tenant hereunder. No policy maintained by Tenant under this Paragraph 15(a) shall contain a deductible greater than Two Thousand Five Hundred Dollars ($2,500.00). No policy shall be cancelable or subject to reduction of coverage without thirty (30) days prior written notice to Landlord, and loss payable clauses shall be subject to Landlord's approval. Such policies of insurance shall be issued as primary policies and not contributing with or in excess of coverage that Landlord may carry, by an insurance company authorized to do business in the State of California for the issuance of such type of insurance coverage and rated A:XIII or better in Best's Key Rating Guide. (b) PERSONAL PROPERTY INSURANCE. Tenant shall maintain in full force and effect on all of its personal property, furniture, furnishings, trade or business fixtures and equipment (collectively, "TENANT'S PROPERTY") on the Premises, a policy or policies of fire and extended coverage insurance with standard coverage endorsement to the extent of the full replacement cost thereof. No such policy shall contain a deductible greater than Two Thousand Five Hundred Dollars ($2,500.00). During the term of this Lease the proceeds from any such policy or policies of insurance shall be used for the repair or replacement of the fixtures and equipment so insured. Landlord shall have no interest in the insurance upon Tenant's equipment and fixtures and will sign all documents reasonably necessary in connection with the settlement of any claim or loss by Tenant. Landlord will not carry insurance on Tenant's possessions. (c) WORKER'S COMPENSATION INSURANCE; EMPLOYER'S LIABILITY INSURANCE. Tenant shall, at Tenant's expense, maintain in full force and effect worker's compensation insurance with not less than the minimum limits required by law, and employer's liability insurance with a minimum limit of coverage of One Million Dollars ($1,000,000). (d) EVIDENCE OF COVERAGE. Tenant shall deliver to Landlord certificates of insurance and true and complete copies of any and all endorsements required herein for all insurance required to be maintained by Tenant hereunder at the time of execution of this Lease by Tenant. Tenant shall, at least thirty (30) days prior to expiration of each policy, furnish Landlord with certificates of renewal or "binders" thereof. Each certificate shall expressly provide that such policies shall not be cancelable or otherwise subject to modification except after thirty (30) days prior written notice to Landlord and the other parties named as additional insureds as required in this Lease (except for cancellation for nonpayment of premium, in which event cancellation shall not take effect until at least ten (10) days notice has been given to Landlord). 16 16. INDEMNIFICATION. (a) OF LANDLORD. Tenant shall indemnify and hold harmless Landlord and Landlord's Agents against and from any and all claims, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorneys' fees) arising from (1) the use of the Premises, the Building or the Project by Tenant or Tenant's Agents, or from any activity done, permitted or suffered by Tenant or Tenant's Agents in or about the Premises, the Building or the Project, and (2) any act, neglect, fault, willful misconduct or omission of Tenant or Tenant's Agents, or from any breach or default in the terms of this Lease by Tenant or Tenant's Agents, and (3) any action or proceeding brought on account of any matter in items (1) or (2). If any action or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord, Tenant shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. As a material part of the consideration to Landlord, Tenant hereby releases Landlord and Landlord's Agents from responsibility for, waives its entire claim of recovery for and assumes all risk of (i) damage to property or injury to persons in or about the Premises, the Building or the Project from any cause whatsoever (except that which is caused by the gross negligence or willful misconduct of Landlord or Landlord's Agents or by the failure of Landlord to observe any of the terms and conditions of this Lease, if such failure has persisted for an unreasonable period of time after written notice of such failure), or (ii) loss resulting from business interruption or loss of income at the Premises. The obligations of Tenant under this Paragraph 16 shall survive any termination of this Lease. (b) NO IMPAIRMENT OF INSURANCE. The foregoing indemnity shall not relieve any insurance carrier of its obligations under any policies required to be carried by either party pursuant to this Lease, to the extent that such policies cover the peril or occurrence that results in the claim that is subject to the foregoing indemnity. 17. SUBROGATION. Landlord and Tenant hereby mutually waive any claim against the other and its Agents for any loss or damage to any of their property located on or about the Premises, the Building or the Project that is caused by or results from perils covered by property insurance carried by the respective parties, to the extent of the proceeds of such insurance actually received with respect to such loss or damage, whether or not due to the negligence of the other party or its Agents. Because the foregoing waivers will preclude the assignment of any claim by way of subrogation to an insurance company or any other person, each party now agrees to immediately give to its insurer written notice of the terms of these mutual waivers and shall have their insurance policies endorsed to prevent the invalidation of the insurance coverage because of these waivers. Nothing in this Paragraph 17 shall relieve a party of liability to the other for failure to carry insurance required by this Lease. 18. SIGNS. Tenant shall not place or permit to be placed in, upon, or about the Premises, the Building or the Project any exterior lights, decorations, balloons, flags, pennants, banners, advertisements or notices, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior the Premises without obtaining Landlord's prior written consent or without complying with Landlord's signage criteria specified on EXHIBIT E hereto, as the same may be modified by Landlord from time to time, and with all applicable Laws, and will not conduct, or permit to be conducted, any sale by auction on the Premises or otherwise on the Project. Subject to 17 complying with the terms of this Paragraph 18, Tenant shall have the right to place identification signage on the two (2) monument signs existing on the Project on the date of this Lease. Tenant shall remove any sign, advertisement or notice placed on the Premises, the Building or the Project by Tenant upon the expiration of the Term or sooner termination of this Lease, and Tenant shall repair any damage or injury to the Premises, the Building or the Project caused thereby, all at Tenant's expense. If any signs are not removed, or necessary repairs not made, Landlord shall have the right to remove the signs and repair any damage or injury to the Premises, the Building or the Project at Tenant's sole cost and expense. 19. FREE FROM LIENS. Tenant shall keep the Premises, the Building and the Project free from any liens arising out of any work performed, material furnished or obligations incurred by or for Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of any such lien, cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have in addition to all other remedies provided herein and by law the right but not the obligation to cause same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith (including, without limitation, attorneys' fees) shall be payable to Landlord by Tenant upon demand. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law or that Landlord shall deem proper for the protection of Landlord, the Premises, the Building and the Project, from mechanics' and materialmen's liens. Tenant shall give to Landlord at least five (5) business days' prior written notice of commencement of any repair or construction on the Premises. 20. ENTRY BY LANDLORD. Tenant shall permit Landlord and Landlord's Agents to enter into and upon the Premises at all reasonable times, upon reasonable notice (except in the case of an emergency, for which no notice shall be required), and subject to Tenant's reasonable security arrangements, for the purpose of inspecting the same or showing the Premises to prospective purchasers, lenders or tenants or to alter, improve, maintain and repair the Premises or the Building as required or permitted of Landlord under the terms hereof, or for any other business purpose, without any rebate of Rent and without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned (except for actual damages resulting from the sole active gross negligence or willful misconduct of Landlord); and Tenant shall permit Landlord to post notices of non-responsibility and ordinary "for sale" or "for lease" signs. No such entry shall be construed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises. Landlord may temporarily close entrances, doors, corridors, elevators or other facilities without liability to Tenant by reason of such closure in the case of an emergency and when Landlord otherwise deems such closure necessary. 21. DESTRUCTION AND DAMAGE. (a) If the Premises are damaged by fire or other perils covered by extended coverage insurance, Landlord shall, at Landlord's option: (1) In the event of total destruction (which shall mean destruction or damage in excess of thirty-three percent (33%) of the full insurable value thereof) of the 18 Premises, elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the date (the "CASUALTY DISCOVERY DATE") Landlord obtains actual knowledge of such destruction. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such total destruction. (2) In the event of a partial destruction (which shall mean destruction or damage to an extent not exceeding thirty-three percent (33%) of the full insurable value thereof) of the Premises for which Landlord will receive insurance proceeds sufficient to cover the cost to repair and restore such partial destruction and, if the damage thereto is such that the Premises may be substantially repaired or restored to its condition existing immediately prior to such damage or destruction within one hundred eighty (180) days from the Casualty Discovery Date, Landlord shall commence and proceed diligently with the work of repair and restoration, in which event the Lease shall continue in full force and effect. If such repair and restoration requires longer than one hundred eighty (180) days or if the insurance proceeds therefor (plus any amounts Tenant may elect or is obligated to contribute) are not sufficient to cover the cost of such repair and restoration, Landlord may elect either to so repair and restore, in which event the Lease shall continue in full force and effect, or not to repair or restore, in which event the Lease shall terminate. In either case, Landlord shall give written notice to Tenant of its intention within sixty (60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such partial destruction. (3) Notwithstanding anything to the contrary contained in this Paragraph, in the event of damage to the Premises occurring during the last twelve (12) months of the Term, Landlord and Tenant shall each have the right to terminate this Lease by written notice of such election given to the other party within thirty (30) days after the Casualty Discovery Date; provided, however, that Tenant shall have the right to terminate this Lease pursuant to this Paragraph 21(a)(3) only if Tenant's use and occupancy of the Premises are materially interfered with as a result of such damage. (b) If the Premises are damaged by any peril not covered by extended coverage insurance, and the cost to repair such damage exceeds any amount Tenant may agree to contribute, Landlord may elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date on which Tenant surrenders possession of the Premises to Landlord, except that if the damage to the Premises materially impairs Tenant's ability to continue its business operations in the Premises, then this Lease shall be deemed to have terminated as of the date such damage occurred. (c) Notwithstanding anything to the contrary in this Paragraph 22, Landlord shall have the option to terminate this Lease, exercisable by notice to Tenant within sixty (60) days after the Casualty Discovery Date, in each of the following instances: 19 (1) If more than thirty-three percent (33%) of the full insurable value of the Building or the Project is damaged or destroyed, regardless of whether or not the Premises are destroyed. (2) If the Building or the Project or any portion thereof is damaged or destroyed and the repair and restoration of such damage requires longer than one hundred eighty (180) days from the Casualty Discovery Date. (3) If the Building or the Project or any portion thereof is damaged or destroyed and the insurance proceeds therefor are not sufficient to cover the costs of repair and restoration. (4) If the Building or the Project or any portion thereof is damaged or destroyed during the last twelve (12) months of the Term. (d) If the Premises is damaged or destroyed to the extent that the Premises cannot be substantially repaired or restored by Landlord within one hundred eighty (180) days after the Casualty Discovery Date, Tenant may terminate this Lease immediately upon notice thereof to Landlord, which notice shall be given, if at all, not later than fifteen (15) days after Landlord notifies Tenant of Landlord's estimate of the period of time required to repair such damage or destruction. (e) In the event of repair and restoration as herein provided, the monthly installments of Base Rent shall be abated proportionately in the ratio which Tenant's use of the Premises is impaired during the period of such repair or restoration, but only to the extent of rental abatement insurance proceeds received by Landlord; provided, however, that Tenant shall not be entitled to such abatement to the extent that such damage or destruction resulted from the acts or inaction of Tenant or Tenant's Agents. Except as expressly provided in the immediately preceding sentence with respect to abatement of Base Rent, Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlord's Agents from responsibility for and waives its entire claim of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any damage to or destruction of the Premises, the Building or the Project or the repair or restoration thereof, including, without limitation, any cost, loss or expense resulting from any loss of use of the whole or any part of the Premises, the Building or the Project and/or any inconvenience or annoyance occasioned by such damage, repair or restoration. (f) If Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall repair or restore only the initial tenant improvements, if any, constructed by Landlord in the Premises pursuant to the terms of this Lease, substantially to their condition existing immediately prior to the occurrence of the damage or destruction; and Tenant shall promptly repair and restore, at Tenant's expense, Tenant's Alterations which were not constructed by Landlord. (g) Tenant hereby waives the provisions of California Civil Code Section 1932(2) and Section 1933(4) which permit termination of a lease upon destruction of the leased premises, and the provisions of any similar law now or hereinafter in effect, and the provisions of this Paragraph 22 shall govern exclusively in case of such destruction. 20 22. CONDEMNATION. (a) If twenty-five percent (25%) or more of either the Premises, the Building or the Project or the parking areas for the Building or the Project is taken for any public or quasi-public purpose by any lawful governmental power or authority, by exercise of the right of appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such taking (each such event being referred to as a "CONDEMNATION"), Landlord may, at its option, terminate this Lease as of the date title vests in the condemning party. If twenty-five percent (25%) or more of the Premises is taken and if the Premises remaining after such Condemnation and any repairs by Landlord would be untenantable for the conduct of Tenant's business operations, Tenant shall have the right to terminate this Lease as of the date title vests in the condemning party. If either party elects to terminate this Lease as provided herein, such election shall be made by written notice to the other party given within thirty (30) days after the nature and extent of such Condemnation have been finally determined. If neither Landlord nor Tenant elects to terminate this Lease to the extent permitted above, Landlord shall promptly proceed to restore the Premises, to the extent of any Condemnation award received by Landlord, to substantially the same condition as existed prior to such Condemnation, allowing for the reasonable effects of such Condemnation, and a proportionate abatement shall be made to the Base Rent corresponding to the time during which, and to the portion of the floor area of the Premises (adjusted for any increase thereto resulting from any reconstruction) of which, Tenant is deprived on account of such Condemnation and restoration, as reasonably determined by Landlord. Except as expressly provided in the immediately preceding sentence with respect to abatement of Base Rent, Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlord's Agents from responsibility for and waives its entire claim of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any Condemnation or the repair or restoration of the Premises, the Building or the Project or the parking areas for the Building or the Project following such Condemnation, including, without limitation, any cost, loss or expense resulting from any loss of use of the whole or any part of the Premises, the Building, the Project or the parking areas and/or any inconvenience or annoyance occasioned by such Condemnation, repair or restoration. The provisions of California Code of Civil Procedure Section 1265.130, which allows either party to petition the Superior Court to terminate the Lease in the event of a partial taking of the Premises, the Building or the Project or the parking areas for the Building or the Project, and any other applicable law now or hereafter enacted, are hereby waived by Tenant. (b) Landlord shall be entitled to any and all compensation, damages, income, rent, awards, or any interest therein whatsoever which may be paid or made in connection with any Condemnation, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease or otherwise; provided, however, that Tenant shall be entitled to receive any award separately allocated by the condemning authority to Tenant for Tenant's relocation expenses or the value of Tenant's Property (specifically excluding fixtures, Alterations and other components of the Premises which under this Lease or by law are or at the expiration of the Term will become the property of Landlord), provided that such award does not reduce any award otherwise allocable or payable to Landlord. 21 23. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not voluntarily or by operation of law, (1) mortgage, pledge, hypothecate or encumber this Lease or any interest herein, (2) assign or transfer this Lease or any interest herein, sublease the Premises or any part thereof, or any right or privilege appurtenant thereto, or allow any other person (the employees and invitees of Tenant excepted) to occupy or use the Premises, or any portion thereof, without first obtaining the written consent of Landlord, which consent shall not be withheld unreasonably provided that (i) Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder, and (ii) the proposed transfer is not an assignment or a sublease under a previous assignment or an existing sublease. When Tenant requests Landlord's consent to such assignment or subletting, it shall notify Landlord in writing of the name and address of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant and shall provide (A) a fully completed Hazardous Materials Disclosure Certificate for such assignee or subtenant in the form of EXHIBIT F hereto, and (B) current and prior financial statements for the proposed assignee or subtenant, which financial statements shall be audited to the extent available and shall in any event be prepared in accordance with generally accepted accounting principles. Tenant shall also provide Landlord with a copy of the proposed sublease or assignment agreement, including all material terms and conditions thereof. Except in the case of an assignment or sublease to a Tenant Affiliate (as hereinafter defined), Landlord shall have the option, to be exercised within thirty (30) days of receipt of the foregoing, to (1) terminate this Lease as of the commencement date stated in the proposed sublease or assignment, (2) sublease or take an assignment, as the case may be, from Tenant of the interest, or any portion thereof, in this Lease and/or the Premises that Tenant proposes to assign or sublease, on the same terms and conditions as stated in the proposed sublet or assignment agreement, (3) consent to the proposed assignment or sublease, or (4) refuse its consent to the proposed assignment or sublease, providing that such consent shall not be unreasonably withheld so long as Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder. In the event Landlord elects to terminate this Lease or sublease or take an assignment from Tenant of the interest, or portion thereof, in the Lease and/or the Premises that Tenant proposes to assign or sublease as provided in the foregoing clauses (1) and (2), respectively, then Landlord shall have the additional right to negotiate directly with Tenant's proposed assignee or subtenant and to enter into a direct lease or occupancy agreement with such party on such terms as shall be acceptable to Landlord in its sole and absolute discretion, and Tenant hereby waives any claims against Landlord related thereto, including, without limitation, any claims for any compensation or profit related to such lease or occupancy agreement. (b) Notwithstanding anything to the contrary contained in Paragraph 23(a) above, Tenant shall have the right with the consent of Landlord, which consent shall not be unreasonably withheld, to assign this Lease or to sublease the Premises or any part thereof to a Tenant Affiliate. In the event Tenant proposes to enter into an assignment or sublease with a Tenant Affiliate, then Tenant shall provide Landlord with the information required to be delivered pursuant to said Paragraph 23 (a). Landlord shall have the option, to be exercised within thirty (30) days of receipt of the foregoing, to (1) consent to the proposed assignment or sublease, or (2) refuse its consent to the proposed assignment or sublease, providing that such 22 consent shall not be unreasonably withheld. For purposes of this Paragraph 23, a "Tenant Affiliate" shall mean an entity that controls, is controlled by or is under common control with, Tenant; and a party shall be deemed to "control" another party for purposes of the aforesaid definition only if the first party owns more than fifty percent (50%) of the stock or other beneficial interests of the second party. (c) Without otherwise limiting the criteria upon which Landlord may withhold its consent under Paragraphs 23(a) and (b) above, Landlord shall be entitled to consider all reasonable criteria including, but not limited to, the following: (1) whether or not the proposed subtenant or assignee is engaged in a business which, and the use of the Premises will be in an manner which, is in keeping with the then character and nature of all other tenancies in the Project, (2) whether the use to be made of the Premises by the proposed subtenant or assignee will conflict with any so-called "exclusive" use then in favor of any other tenant of the Building or the Project, and whether such use would be prohibited by any other portion of this Lease, including, but not limited to, any rules and regulations then in effect, or under applicable Laws, and whether such use imposes a greater load upon the Premises and the Building and Project services then imposed by Tenant, (3) the business reputation of the proposed individuals who will be managing and operating the business operations of the assignee or subtenant, and the long-term financial and competitive business prospects of the proposed assignee or subtenant, and (4) the creditworthiness and financial stability of the proposed assignee or subtenant in light of the responsibilities involved. In any event, Landlord may withhold its consent to any assignment or sublease, if (i) the actual use proposed to be conducted in the Premises or portion thereof conflicts with the provisions of Paragraph 9(a) or (b) above or with any other lease which restricts the use to which any space in the Building or the Project may be put, or (ii) the proposed assignment or sublease requires alterations, improvements or additions to the Premises or portions thereof. (d) If Landlord approves an assignment or subletting as herein provided, Tenant shall pay to Landlord, as Additional Rent, seventy-five percent (75%) of the difference, if any, between (1) the Base Rent plus Additional Rent allocable to that part of the Premises affected by such assignment or sublease pursuant to the provisions of this Lease, and (2) the rent and any additional rent payable by the assignee or sublessee to Tenant, less reasonable and customary market-based leasing commissions, if any, incurred by Tenant in connection with such assignment or sublease. The assignment or sublease agreement, as the case may be, after approval by Landlord, shall not be amended without Landlord's prior written consent, and shall contain a provision directing the assignee or subtenant to pay the rent and other sums due thereunder directly to Landlord upon receiving written notice from Landlord that Tenant is in default under this Lease with respect to the payment of Rent. In the event that, notwithstanding the giving of such notice, Tenant collects any rent or other sums from the assignee or subtenant, then Tenant shall hold such sums in trust for the benefit of Landlord and shall immediately forward the same to Landlord. Landlord's collection of such rent and other sums shall not constitute an acceptance by Landlord of attornment by such assignee or subtenant. A consent to one assignment, subletting, occupation or use shall not be deemed to be a consent to any other or subsequent assignment, subletting, occupation or use, and consent to any assignment or subletting shall in no way relieve Tenant of any liability under this Lease. Any assignment or subletting without Landlord's consent shall be void, and shall, at the option of Landlord, constitute a Default under this Lease. 23 (e) Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of Tenant's obligations under this Lease shall at all times remain fully responsible and liable for the payment of the Rent and for compliance with all of Tenant's other obligations under this Lease (regardless of whether Landlord's approval has been obtained for any such assignment or subletting). (f) Tenant shall pay Landlord's reasonable fees (including, without limitation, the fees of Landlord's counsel), incurred in connection with Landlord's review and processing of documents regarding any proposed assignment or sublease. (g) Notwithstanding anything in this Lease to the contrary, in the event Landlord consents to an assignment or subletting by Tenant in accordance with the terms of this Paragraph 24, Tenant's assignee or subtenant shall have no right to further assign this Lease or any interest therein or thereunder or to further sublease all or any portion of the Premises. In furtherance of the foregoing, Tenant acknowledges and agrees on behalf of itself and any assignee or subtenant claiming under it (and any such assignee or subtenant by accepting such assignment or sublease shall be deemed to acknowledge and agree) that no sub-subleases or further assignments of this Lease shall be permitted at any time. (h) Tenant acknowledges and agrees that the restrictions, conditions and limitations imposed by this Paragraph 24 on Tenant's ability to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof, are, for the purposes of California Civil Code Section 1951.4, as amended from time to time, and for all other purposes, reasonable at the time that the Lease was entered into, and shall be deemed to be reasonable at the time that Tenant seeks to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof. 24. TENANT'S DEFAULT. The occurrence of any one of the following events shall constitute an event of default on the part of Tenant ("DEFAULT"): (a) The vacation or abandonment of the Premises by Tenant for a period of ten (10) consecutive days or any vacation or abandonment of the Premises by Tenant which would cause any insurance policy to be invalidated or otherwise lapse, or the failure of Tenant to continuously operate Tenant's business in the Premises, in each of the foregoing cases irrespective of whether or not Tenant is then in monetary default under this Lease. Tenant agrees to notice and service of notice as provided for in this Lease and waives any right to any other or further notice or service of notice which Tenant may have under any statute or law now or hereafter in effect; (b) Failure to pay any installment of Rent or any other monies due and payable hereunder, said failure continuing for a period of five (5) days after the same is due; (c) A general assignment by Tenant or any guarantor or surety of Tenant's obligations hereunder (collectively, "GUARANTOR") for the benefit of creditors; 24 (d) The filing of a voluntary petition in bankruptcy by Tenant or any Guarantor, the filing by Tenant or any Guarantor of a voluntary petition for an arrangement, the filing by or against Tenant or any Guarantor of a petition, voluntary or involuntary, for reorganization, or the filing of an involuntary petition by the creditors of Tenant or any Guarantor, said involuntary petition remaining undischarged for a period of sixty (60) days; (e) Receivership, attachment, or other judicial seizure of substantially all of Tenant's assets on the Premises, such attachment or other seizure remaining undismissed or undischarged for a period of sixty (60) days after the levy thereof; (f) Death or disability of Tenant or any Guarantor, if Tenant or such Guarantor is a natural person, or the failure by Tenant or any Guarantor to maintain its legal existence, if Tenant or such Guarantor is a corporation, partnership, limited liability company, trust or other legal entity; (g) Failure of Tenant to execute and deliver to Landlord any estoppel certificate, subordination agreement, or lease amendment within the time periods and in the manner required by Paragraphs 30 or 31 or 42, and/or failure by Tenant to deliver to Landlord any financial statement within the time period and in the manner required by Paragraph 40; (h) An assignment or sublease, or attempted assignment or sublease, of this Lease or the Premises by Tenant contrary to the provision of Paragraph 24, unless such assignment or sublease is expressly conditioned upon Tenant having received Landlord's consent thereto; (i) Failure of Tenant to restore the Security Deposit to the amount and within the time period provided in Paragraph 7 above; (j) Failure in the performance of any of Tenant's covenants, agreements or obligations hereunder (except those failures specified as events of Default in subparagraphs (b), (l) or (m) above or any other subparagraphs of this Paragraph 25, which shall be governed by such other Paragraphs), which failure continues for ten (10) days after written notice thereof from Landlord to Tenant, provided that, if Tenant has exercised reasonable diligence to cure such failure and such failure cannot be cured within such ten (10) day period despite reasonable diligence, Tenant shall not be in default under this subparagraph so long as Tenant thereafter diligently and continuously prosecutes the cure to completion and actually completes such cure within thirty (30) days after the giving of the aforesaid written notice; (k) Chronic delinquency by Tenant in the payment of Rent, or any other periodic payments required to be paid by Tenant under this Lease. "CHRONIC DELINQUENCY" shall mean failure by Tenant to pay Rent, or any other payments required to be paid by Tenant under this Lease within three (3) days after written notice thereof for any three months (consecutive or nonconsecutive) during any period of twelve (12) months. In the event of a Chronic delinquency, in addition to Landlord's other remedies for Default provided in this Lease, at Landlord's option, Landlord shall have the right to require that Rent be paid by Tenant quarterly, in advance; 25 (l) Chronic overuse by Tenant or Tenant's Agents of the number of undesignated parking spaces set forth in the Basic Lease Information. "CHRONIC OVERUSE" shall mean use by Tenant or Tenant's Agents of a number of parking spaces greater than the number of parking spaces set forth in the Basic Lease Information more than three (3) times during the Term after written notice by Landlord; (m) Any insurance required to be maintained by Tenant pursuant to this Lease shall be canceled or terminated or shall expire or be reduced or materially changed, except as permitted in this Lease; and (n) Any failure by Tenant to discharge any lien or encumbrance placed on the Project or any part thereof in violation of this Lease within ten (10) days after the date such lien or encumbrance is filed or recorded against the Project or any part thereof. Tenant agrees that any notice given by Landlord pursuant to Paragraph 25(j), (k) or (1) above shall satisfy the requirements for notice under California Code of Civil Procedure Section 1161, and Landlord shall not be required to give any additional notice in order to be entitled to commence an unlawful detainer proceeding. 25. LANDLORD'S REMEDIES. (a) TERMINATION. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: (1) the worth at the time of award of any unpaid Rent and any other sums due and payable which have been earned at the time of such termination; plus (2) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus (3) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (4) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course would be likely to result therefrom, including, without limitation, (A) any costs or expenses incurred by Landlord (1) in retaking possession of the Premises; (2) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering, remodeling or rehabilitating the Premises or any affected portions of the Building or the Project, including such actions undertaken in connection with the reletting or attempted reletting of the Premises to a new tenant or tenants; (3) for leasing commissions, advertising costs and other expenses of 26 reletting the Premises; or (4) in carrying the Premises, including taxes, insurance premiums, utilities and security precautions; (B) any unearned brokerage commissions paid in connection with this Lease; (C) reimbursement of any previously waived or abated Base Rent or Additional Rent or any free rent or reduced rental rate granted hereunder; and (D) any concession made or paid by Landlord to the benefit of Tenant in consideration of this Lease including, but not limited to, any moving allowances, contributions, payments or loans by Landlord for tenant improvements or build-out allowances (including without limitation, any unamortized portion of the Tenant Improvement Allowance (such Tenant Improvement Allowance to be amortized over the Term in the manner reasonably determined by Landlord), if any, and any outstanding balance (principal and accrued interest) of the Tenant Improvement Loan, if any), or assumptions by Landlord of any of Tenant's previous lease obligations; plus (5) such reasonable attorneys' fees incurred by Landlord as a result of a Default, and costs in the event suit is filed by Landlord to enforce such remedy; and plus (6) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. As used in subparagraphs (1) and (2) above, the "WORTH AT THE TIME OF AWARD" is computed by allowing interest at an annual rate equal to twelve percent (12%) per annum or the maximum rate permitted by law, whichever is less. As used in subparagraph (3) above, the "WORTH AT THE TIME OF AWARD" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other pertinent present or future Law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any Default of Tenant hereunder. (b) CONTINUATION OF LEASE. In the event of any Default by Tenant., then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's Default and abandonment and recover Rent as it becomes due, provided Tenant has the right to sublet or assign, subject only to reasonable limitations). In addition, Landlord shall not be liable in any way whatsoever for its failure or refusal to relet the Premises. For purposes of this Paragraph 26(b), the following acts by Landlord will not constitute the termination of Tenant's right to possession of the Premises: (1) Acts of maintenance or preservation or efforts to relet the Premises, including, but not limited to, alterations, remodeling, redecorating, repairs, replacements and/or painting as Landlord shall consider advisable for the purpose of reletting the Premises or any part thereof, or (2) The appointment of a receiver upon the initiative of Landlord to protect Landlord's interest under this Lease or in the Premises. (c) RE-ENTRY. In the event of any Default by Tenant, Landlord shall also have the right, with or without terminating this Lease, in compliance with applicable law, to re-enter 27 the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. (d) RELETTING. In the event of the abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in Paragraph 26(c) or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in Paragraph 26(a), Landlord may from time to time, without terminating this Lease, relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises in Landlord's sole discretion. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied in the following order: (1) to reasonable attorneys' fees incurred by Landlord as a result of a Default and costs in the event suit is filed by Landlord to enforce such remedies; (2) to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; (3) to the payment of any costs of such reletting; (4) to the payment of the costs of any alterations and repairs to the Premises; (5) to the payment of Rent due and unpaid hereunder; and (6) the residue, if any, shall be held by Landlord and applied in payment of future Rent and other sums payable by Tenant hereunder as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied to the payment of Rent hereunder, be less than the Rent payable during the month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. (e) TERMINATION. No re-entry or taking of possession of the Premises by Landlord pursuant to this Paragraph 26 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any Default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such Default. (f) CUMULATIVE REMEDIES. The remedies herein provided are not exclusive and Landlord shall have any and all other remedies provided herein or by law or in equity. (g) NO SURRENDER. No act or conduct of Landlord, whether consisting of the acceptance of the keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by Landlord of surrender by Tenant shall only flow from and must be evidenced by a written acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that such merger take place, but shall operate as an assignment to Landlord of any and all existing subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger terminating Tenant's estate under this Lease, and thereupon Landlord may terminate any 28 or all such subleases by notifying the sublessee of its election so to do within five (5) days after such surrender. 26. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS. (a) Without limiting the rights and remedies of Landlord contained in Paragraph 25 above, if Tenant shall be in Default in the performance of any of the terms, provisions, covenants or conditions to be performed or complied with by Tenant pursuant to this Lease, then Landlord may at Landlord's option, without any obligation to do so, and without notice to Tenant perform any such term, provision, covenant, or condition, or make any such payment and Landlord by reason of so doing shall not be liable or responsible for any loss or damage thereby sustained by Tenant or anyone holding under or through Tenant or any of Tenant's Agents. (b) Without limiting the rights of Landlord under Paragraph 26(a) above, Landlord shall have the right at Landlord's option, without any obligation to do so, to perform any of Tenant's covenants or obligations under this Lease without notice to Tenant in the case of an emergency, as determined by Landlord in its sole and absolute judgment, or if Landlord otherwise determines in its sole discretion that such performance is necessary or desirable for the proper management and operation of the Building or the Project or for the preservation of the rights and interests or safety of other tenants of the Building or the Project. (c) If Landlord performs any of Tenant's obligations hereunder in accordance with this Paragraph 26, the full amount of the cost and expense incurred or the payment so made or the amount of the loss so sustained shall immediately be owing by Tenant to Landlord, and Tenant shall promptly pay to Landlord upon demand, as Additional Rent, the full amount thereof with interest thereon from the date of payment by Landlord at the lower of (1) ten percent (10%) per annum, or (2) the highest rate permitted by applicable law. 27. ATTORNEY'S FEES. (a) If either party hereto fails to perform any of its obligations under this Lease or if any dispute arises between the parties hereto concerning the meaning or interpretation of any provision of this Lease, then the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party on account of such default and/or in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable attorneys' fees and disbursements. Any such attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Lease shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Lease and to survive and not be merged into any such judgment. (b) Without limiting the generality of Paragraph 27(a) above, if Landlord utilizes the services of an attorney for the purpose of collecting any Rent due and unpaid by Tenant or in connection with any other breach of this Lease by Tenant, Tenant agrees to pay Landlord actual attorneys' fees as determined by Landlord for such services, regardless of the fact that no legal action may be commenced or filed by Landlord. 29 28. TAXES. Tenant shall be liable for and shall pay, prior to delinquency, all taxes levied against Tenant's Property. If any Alteration installed by Tenant or any of Tenant's Property is assessed and taxed with the Project or Building, Tenant shall pay such taxes to Landlord within ten (10) days after delivery to Tenant of a statement therefor. 29. EFFECT OF CONVEYANCE. The term "LANDLORD" as used in this Lease means, from time to time, the then current owner of the Building or the Project containing the Premises, so that, in the event of any sale of the Building or the Project, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, that the purchaser of the Building or the Project has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. 30. TENANT'S ESTOPPEL CERTIFICATE. From time to time, upon written request of Landlord, Tenant shall execute, acknowledge and deliver to Landlord or its designee, a written certificate stating (a) the date this Lease was executed, the Commencement Date of the Term and the date the Term expires; (b) the date Tenant entered into occupancy of the Premises; (c) the amount of Rent and the date to which such Rent has been paid; (d) that this Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (or, if assigned, modified, supplemented or amended, specifying the date and terms of any agreement so affecting this Lease); (e) that this Lease represents the entire agreement between the parties with respect to Tenant's right to use and occupy the Premises (or specifying such other agreements, if any); (f) that all obligations under this Lease to be performed by Landlord as of the date of such certificate have been satisfied (or specifying those as to which Tenant claims that Landlord has yet to perform); (g) that all required contributions by Landlord to Tenant on account of Tenant's improvements have been received (or stating exceptions thereto); (h) that on such date there exist no defenses or offsets that Tenant has against the enforcement of this Lease by Landlord (or stating exceptions thereto); (i) that no Rent or other sum payable by Tenant hereunder has been paid more than one (1) month in advance (or stating exceptions thereto); (j) that security has been deposited with Landlord, stating the original amount thereof and any increases thereto; and (k) any other matters evidencing the status of this Lease that may be required either by a lender making a loan to Landlord to be secured by a deed of trust covering the Building or the Project or by a purchaser of the Building or the Project. Any such certificate delivered pursuant to this Paragraph 30 may be relied upon by a prospective purchaser of Landlord's interest or a mortgagee of Landlord's interest or assignee of any mortgage upon Landlord's interest in the Premises. If Tenant shall fail to provide such certificate within ten (10) days of receipt by Tenant of a written request by Landlord as herein provided, such failure shall, at Landlord's election, constitute a Default under this Lease, and Tenant shall be deemed to have given such certificate as above provided without modification and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee. 31. SUBORDINATION. Landlord shall have the right to cause this Lease to be and remain subject and subordinate to any and all mortgages, deeds of trust and ground leases, if any ("ENCUMBRANCES") that are now or may hereafter be executed covering the Premises, or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of 30 such advances, together with interest thereon and subject to all the terms and provisions thereof; provided only, that in the event of termination of any such ground lease or upon the foreclosure of any such mortgage or deed of trust, so long as Tenant is not in default, the holder thereof ("HOLDER") shall agree to recognize Tenant's rights under this Lease as long as Tenant shall pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10) days after Landlord's written request, Tenant shall execute, acknowledge and deliver any and all reasonable documents required by Landlord or the Holder to effectuate such subordination. If Tenant fails to do so, such failure shall constitute a Default by Tenant under this Lease. Notwithstanding anything to the contrary set forth in this Paragraph 31, Tenant hereby attorns and agrees to attorn to any person or entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance. 32. ENVIRONMENTAL COVENANTS. (a) Prior to executing this Lease, Tenant has completed, executed and delivered to Landlord a Hazardous Materials Disclosure Certificate ("INITIAL DISCLOSURE CERTIFICATE"), a fully completed copy of which is attached hereto as EXHIBIT F and incorporated herein by this reference. Tenant covenants, represents and warrants to Landlord that the information on the Initial Disclosure Certificate is true and correct and accurately describes the Hazardous Materials which will be, manufactured, treated, used or stored on or about the Premises by Tenant or Tenant's Agents. Tenant shall, on each anniversary of the Commencement Date and at such other times as Tenant desires to manufacture, treat, use or store on or about the Premises new or additional Hazardous Materials which were not listed on the Initial Disclosure Certificate, complete, execute and deliver to Landlord an updated Disclosure Certificate (each, an "UPDATED DISCLOSURE CERTIFICATE") describing Tenant's then current and proposed future uses of Hazardous Materials on or about the Premises, which Updated Disclosure Certificates shall be in the same format as that which is set forth in EXHIBIT F or in such updated format as Landlord may require from time to time. Tenant shall deliver an Updated Disclosure Certificate to Landlord not less than thirty (30) days prior to the date Tenant intends to commence the manufacture, treatment, use or storage of new or additional Hazardous Materials on or about the Premises, and Landlord shall have the right to approve or disapprove such new or additional Hazardous Materials in its sole and absolute discretion. Tenant shall make no use of Hazardous Materials on or about the Premises except as described in the Initial Disclosure Certificate or as otherwise approved by Landlord in writing in accordance with this Paragraph 32(a). (b) As used in this Lease, the term "HAZARDOUS MATERIALS" shall mean and include any substance that is or contains (1) any "hazardous substance" as now or hereafter defined in Section 10l(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. Section 9601 ET SEQ.) or any regulations promulgated under CERCLA; (2) any "hazardous waste" as now or hereafter defined in the Resource Conservation and Recovery Act, as amended ("RCRA") (42 U.S.C. Section 6901 ET SEQ.) or any regulations promulgated under RCRA; (3) any substance now or hereafter regulated by the Toxic Substances Control Act, as amended ("TSCA") (15 U.S.C. Section 2601 ET SEQ.) or any regulations promulgated under TSCA; (4) petroleum, petroleum by-products, gasoline, diesel fuel, or other petroleum hydrocarbons; (5) asbestos and asbestos-containing material, in any 31 form, whether friable or non-friable; (6) polychlorinated biphenyls; (7) lead and lead-containing materials; or (8) any additional substance, material or waste (A) the presence of which on or about the Premises (i) requires reporting, investigation or remediation under any Environmental Laws (as hereinafter defined), (ii) causes or threatens to cause a nuisance on the Premises or any adjacent area or property or poses or threatens to pose a hazard to the health or safety of persons on the Premises or any adjacent area or property, or (iii) which, if it emanated or migrated from the Premises, could constitute a trespass, or (B) which is now or is hereafter classified or considered to be hazardous or toxic under any Environmental Laws. (c) As used in this Lease, the term "ENVIRONMENTAL LAWS" shall mean and include (1) CERCLA, RCRA and TSCA; and (2) any other federal, state or local laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or hereinafter in effect relating to (A) pollution, (B) the protection or regulation of human health, natural resources or the environment, (C) the treatment, storage or disposal of Hazardous Materials, or (D) the emission, discharge, release or threatened release of Hazardous Materials into the environment. (d) Tenant agrees that during its use and occupancy of the Premises it will (1) not (A) permit Hazardous Materials to be present on or about the Premises except in a manner and quantity necessary for the ordinary performance of Tenant's business or (B) release, discharge or dispose of any Hazardous Materials on, in, at, under, or emanating from, the Premises, the Building or the Project; (2) comply with all Environmental Laws relating to the Premises and the use of Hazardous Materials on or about the Premises and not engage in or permit others to engage in any activity at the Premises in violation of any Environmental Laws; and (3) immediately notify Landlord of (A) any inquiry, test, investigation or enforcement proceeding by any governmental agency or authority against Tenant, Landlord or the Premises, Building or Project relating to any Hazardous Materials or under any Environmental Laws or (B) the occurrence of any event or existence of any condition that would cause a breach of any of the covenants set forth in this Paragraph 32. (e) If Tenant's use of Hazardous Materials on or about the Premises results in a release, discharge or disposal of Hazardous Materials on, in, at, under, or emanating from, the Premises, the Building or the Project, Tenant agrees to investigate, clean up, remove or remediate such Hazardous Materials in full compliance with (1) the requirements of (A) all Environmental Laws and (B) any governmental agency or authority responsible for the enforcement of any Environmental Laws; and (2) any additional requirements of Landlord that are reasonably necessary to protect the value of the Premises, the Building or the Project. (f) Upon reasonable notice to Tenant, Landlord may inspect the Premises and surrounding areas for the purpose of determining whether there exists on or about the Premises any Hazardous Material or other condition or activity that is in violation of the requirements of this Lease or of any Environmental Laws. Such inspections may include, but are not limited to, entering the Premises or adjacent property with drill rigs or other machinery for the purpose of obtaining laboratory samples. Landlord shall not be limited in the number of such inspections during the Term of this Lease. In the event (1) such inspections reveal the presence of any such Hazardous Material or other condition or activity in violation of the requirements of this Lease or of any Environmental Laws, or (2) Tenant or its Agents contribute or knowingly consent to the presence of any Hazardous Materials in, on, under, through or about the Premises, the Building 32 or the Project or exacerbate the condition of or the conditions caused by any Hazardous Materials in, on, under, through or about the Premises, the Building or the Project, Tenant shall reimburse Landlord for the cost of such inspections within ten (10) days of receipt of a written statement therefor. Tenant will supply to Landlord such historical and operational information regarding the Premises and surrounding areas as may be reasonably requested to facilitate any such inspection and will make available for meetings appropriate personnel having knowledge of such matters. Tenant agrees to give Landlord at least sixty (60) days' prior notice of its intention to vacate the Premises so that Landlord will have an opportunity to perform such an inspection prior to such vacation. The right granted to Landlord herein to perform inspections shall not create a duty on Landlord's part to inspect the Premises, or liability on the part of Landlord for Tenant's use, storage, treatment or disposal of Hazardous Materials, it being understood that Tenant shall be solely responsible for all liability in connection therewith. (g) Landlord shall have the right, but not the obligation, prior or subsequent to a Default, without in any way limiting Landlord's other rights and remedies under this Lease, to enter upon the Premises, or to take such other actions as it deems necessary or advisable, to investigate, clean up, remove or remediate any Hazardous Materials or contamination by Hazardous Materials present on, in, at, under, or emanating from, the Premises, the Building or the Project in violation of Tenant's obligations under this Lease or under any Environmental Laws. Notwithstanding any other provision of this Lease, Landlord shall also have the right, at its election, in its own name or as Tenant's agent, to negotiate, defend, approve and appeal, at Tenant's expense, any action taken or order issued by any governmental agency or authority with regard to any such Hazardous Materials or contamination by Hazardous Materials. All costs and expenses paid or incurred by Landlord in the exercise of the rights set forth in this Paragraph 32 shall be payable by Tenant upon demand. (h) Tenant shall surrender the Premises to Landlord upon the expiration or earlier termination of this Lease free of debris, waste or Hazardous Materials placed on, about or near the Premises by Tenant or Tenant's Agents, and in a condition which complies with all Environmental Laws and any additional requirements of Landlord that are reasonably necessary to protect the value of the Premises, the Building or the Project, including, without limitation, the obtaining of any closure permits or other governmental permits or approvals related to Tenant's use of Hazardous Materials in or about the Premises. Tenant's obligations and liabilities pursuant to the provisions of this Paragraph 32 shall survive the expiration or earlier termination of this Lease. If it is determined by Landlord that the condition of all or any portion of the Premises, the Building, and/or the Project is not in compliance with the provisions of this Lease with respect to Hazardous Materials, including, without limitation, all Environmental Laws, at the expiration or earlier termination of this Lease, then at Landlord's sole option, Landlord may require Tenant to hold over possession of the Premises until Tenant can surrender the Premises to Landlord in the condition in which the Premises existed as of the Commencement Date and prior to the appearance of such Hazardous Materials except for normal wear and tear, including, without limitation, the conduct or performance of any closures as required by any Environmental Laws. The burden of proof hereunder shall be upon Tenant. For purposes hereof, the term "NORMAL WEAR AND TEAR" shall not include any deterioration in the condition or diminution of the value of any portion of the Premises, the Building, and/or the Project in any manner whatsoever related to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant will be with 33 Landlord's consent, will not be terminable by Tenant in any event or circumstance and will otherwise be subject to the provisions of Paragraph 35 of this Lease. (i) Tenant agrees to indemnify and hold harmless Landlord from and against any and all claims, losses (including, without limitation, loss in value of the Premises, the Building or the Project, liabilities and expenses (including attorney's fees)) sustained by Landlord attributable to (1) any Hazardous Materials placed on or about the Premises, the Building or the Project by Tenant or Tenant's Agents, or (2) Tenant's breach of any provision of this Paragraph 32. (j) The provisions of this Paragraph 32 shall survive the expiration or earlier termination of this Lease. 33. NOTICES. All notices and demands which are required or may be permitted to be given to either party by the other hereunder shall be in writing and shall be sent by United States mail, postage prepaid, certified, or by personal delivery or overnight courier, addressed to the addressee at Tenant's Address or Landlord's Address as specified in the Basic Lease Information, or to such other place as either party may from time to time designate in a notice to the other party given as provided herein. Copies of all notices and demands given to Landlord shall additionally be sent to Landlord's property manager at the address specified in the Basic Lease Information or at such other address as Landlord may specify in writing from time to time. Notice shall be deemed given upon actual receipt (or attempted delivery if delivery is refused ), if personally delivered, or one (1) business day following deposit with a reputable overnight courier that provides a receipt, or on the third (3rd) day following deposit in the United States mail in the manner described above. 34. WAIVER. The waiver of any breach of any term, covenant or condition of this Lease shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No delay or omission in the exercise of any right or remedy of Landlord in regard to any Default by Tenant shall impair such a right or remedy or be construed as a waiver. Any waiver by Landlord of any Default must be in writing and shall not be a waiver of any other Default concerning the same or any other provisions of this Lease. 35. HOLDING OVER. Any holding over after the expiration of the Term, without the express written consent of Landlord, shall constitute a Default and, without limiting Landlord's remedies provided in this Lease, such holding over shall be construed to be a tenancy at sufferance, at a rental rate equal to the greater of one hundred fifty percent (150%) of the fair market rental value for the Premises as determined by Landlord or two hundred percent (200%) of the Base Rent last due in this Lease, plus Additional Rent, and shall otherwise be on the terms and conditions herein specified, so far as applicable; provided, however, in no event shall any renewal or expansion option or other similar right or option contained in this Lease be deemed applicable to any such tenancy at sufferance. If the Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in accordance with the provisions of 34 Paragraphs 11 and 32(h), Tenant shall indemnify, defend and hold Landlord harmless from and against any and all loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant or prospective tenant founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of the Premises to any such succeeding tenant or prospective tenant, together with, in each case, actual attorneys' fees and costs. 36. SUCCESSORS AND ASSIGNS. The terms, covenants and conditions of this Lease shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all of the parties hereto. If Tenant shall consist of more than one entity or person, the obligations of Tenant under this Lease shall be joint and several. 37. TIME. Time is of the essence of this Lease and each and every term, condition and provision herein. 38. BROKERS. Landlord and Tenant each represents and warrants to the other that neither it nor its officers or agents nor anyone acting on its behalf has dealt with any real estate broker except the Broker(s) specified in the Basic Lease Information in the negotiating or making of this Lease, and each party agrees to indemnify and hold harmless the other from any claim or claims, and costs and expenses, including attorneys' fees, incurred by the indemnified party in conjunction with any such claim or claims of any other broker or brokers to a commission in connection with this Lease as a result of the actions of the indemnifying party. 39. LIMITATION OF LIABILITY. Tenant agrees that, in the event of any default or breach by Landlord with respect to any of the terms of the Lease to be observed and performed by Landlord (1) Tenant shall look solely to the then-current landlord's interest in the Building for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord; (2) no other property or assets of Landlord, its partners, shareholders, officers, directors, employees, investment advisors, or any successor in interest of any of them (collectively, the "LANDLORD PARTIES") shall be subject to levy, execution or other enforcement. procedure for the satisfaction of Tenant's remedies; (3) no personal liability shall at any time be asserted or enforceable against the Landlord Parties; and (4) no judgment will be taken against the Landlord Parties. The provisions of this section shall apply only to the Landlord and the parties herein described, and shall not be for the benefit of any insurer nor any other third party. 40. FINANCIAL STATEMENTS. Within ten (10) days after Landlord's request, Tenant shall deliver to Landlord the then current financial statements of Tenant (including interim periods following the end of the last fiscal year for which annual statements are available), prepared or compiled by a certified public accountant, including a balance sheet and profit and loss statement for the most recent prior year. all prepared in accordance with generally accepted accounting principles consistently applied. 41. RULES AND REGULATIONS. Tenant agrees to comply with such reasonable rules and regulations as Landlord may adopt from time to time for the orderly and proper operation of the Building and the Project. Such rules may include but shall not be limited to the following: 35 (a) restriction of employee parking to a limited, designated area or areas; and (b) regulation of the removal, storage and disposal of Tenant's refuse and other rubbish at the sole cost and expense of Tenant. The then current rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the failure of any other person to observe and abide by any of said rules and regulations. Landlord's current rules and regulations are attached to this Lease as EXHIBIT D. 42. MORTGAGEE PROTECTION. Tenant agrees to give to any trust deed or mortgage holder ("HOLDER"), by registered mail, at the same time as it is given to Landlord, a copy of any notice of default given to Landlord, provided that prior to such notice Tenant has been notified, in writing (by way of notice of assignment of rents and leases, or otherwise), of the address of such Holder. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Holder shall have an additional twenty (20) days after expiration of such period, or after receipt of such notice from Tenant (if such notice to the Holder is required by this Paragraph 42), whichever shall last occur within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary if within such twenty (20) days, any Holder has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated. 43. ENTIRE AGREEMENT. This Lease, including the Exhibits and any Addenda attached hereto, which are hereby incorporated herein by this reference, contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein or therein, shall be of any force and effect. 44. INTEREST. Any installment of Rent and any other sum due from Tenant under this Lease which is not received by Landlord within ten (10) days from when the same is due shall bear interest from the date such payment was originally due under this Lease until paid at an annual rate equal to the maximum rate of interest permitted by law. Payment of such interest shall not excuse or cure any Default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred by Landlord in collection of such amounts. 45. CONSTRUCTION. This Lease shall be construed and interpreted in accordance with the laws of the State of California. The parties acknowledge and agree that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Lease, including the Exhibits and any Addenda attached hereto. All captions in this Lease are for reference only and shall not be used in the interpretation of this Lease. Whenever required by the context of this Lease, the singular shall include the plural, the masculine shall include the feminine, and vice versa. If any provision of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect. 46. REPRESENTATIONS AND WARRANTIES OF TENANT. Tenant hereby makes the following representations and warranties, each of which is material and being relied upon by 36 Landlord, is true in all respects as of the date of this Lease, and shall survive the expiration or termination of the Lease. (a) If Tenant is an entity, Tenant is duly organized, validly existing and in good standing under the laws of the state of its organization and the persons executing this Lease on behalf of Tenant have the full right and authority to execute this Lease on behalf of Tenant and to bind Tenant without the consent or approval of any other person or entity. Tenant has full power, capacity, authority and legal right to execute and deliver this Lease and to perform all of its obligations hereunder. This Lease is a legal, valid and binding obligation of Tenant, enforceable in accordance with its terms. (b) Tenant has not (1) made a general assignment for the benefit of creditors, (2) filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by any creditors, (3) suffered the appointment of a receiver to take possession of all or substantially all of its assets, (4) suffered the attachment or other judicial seizure of all or substantially all of its assets, (5) admitted in writing its inability to pay its debts as they come due, or (6) made an offer of settlement, extension or composition to its creditors generally. 47. SECURITY. (a) Tenant acknowledges and agrees that, while Landlord may engage security personnel to patrol the Building or the Project, Landlord is not providing any security services with respect to the Premises, the Building or the Project and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises, the Building or the Project. (b) Tenant hereby agrees to the exercise by Landlord and Landlord's Agents, within their sole discretion, of such security measures as, but not limited to, the evacuation of the Premises, the Building or the Project for cause, suspected cause or for drill purposes, the denial of any access to the Premises, the Building or the Project and other similarly related actions that it deems necessary to prevent any threat of property damage or bodily injury. The exercise of such security measures by Landlord and Landlord's Agents, and the resulting interruption of service and cessation of Tenant's business, if any, shall not be deemed an eviction or disturbance of Tenant's use and possession of the Premises, or any part thereof, or render Landlord or Landlord's Agents liable to Tenant for any resulting damages or relieve Tenant from Tenant's obligations under this Lease. 48. JURY TRIAL WAIVER. Tenant hereby waives any right to trial by jury with respect to any action or proceeding (i) brought by Landlord, Tenant or any other party, relating to (A) this Lease and/or any understandings or prior dealings between the parties hereto, or (B) the Premises, the Building or the Project or any part thereof, or (ii) to which Landlord is a party. Tenant hereby agrees that this Lease constitutes a written consent to waiver of trial by jury pursuant to the provisions of California Code of Civil Procedure Section 631, and Tenant does hereby constitute and appoint Landlord its true and lawful attorney-in-fact, which appointment is coupled with an interest, and Tenant does hereby authorize and empower Landlord, in the name, 37 place and stead of Tenant, to file this Lease with the clerk or judge of any court of competent jurisdiction as a statutory written consent to waiver of trial by jury. 49. OPTION TO RENEW. Tenant shall have one (1) option (the "RENEWAL OPTION") to extend the Term for a period of five (5) years beyond the Expiration Date (the "RENEWAL TERM"). The Renewal Option is personal to Tenant and may not be exercised by any sublessee or assignee, or by any other successor or assign of Tenant, excluding only a Tenant Affiliate to whom Tenant's entire right, title and interest under this Lease is assigned pursuant to Paragraph 23 above. The Renewal Option shall be effective only if Tenant is not in Default under this Lease, nor has any event occurred which with the giving of notice or the passage of time, or both, would constitute a Default hereunder, either at the time of exercise of the Renewal Option or the time of commencement of the Renewal Term. The Renewal Option must be exercised, if at all, by written notice (the "ELECTION NOTICE") from Tenant to Landlord given not more than twelve (12) months nor less than nine (9) months prior to the expiration of the initial Term. Except as hereinafter provided in this Paragraph 49, any such notice given by Tenant to Landlord shall be irrevocable. If Tenant fails to exercise the Renewal Option in a timely manner as provided for above, the Renewal Option shall be void. The Renewal Term shall be upon the same terms and conditions as the initial Term, except that the annual Base Rent during the Renewal Term shall be equal to the prevailing market rate for space in similarly situated buildings in the vicinity of the Building comparable to the Premises in location, size, condition, quality and type at the commencement of the Renewal Term. As used herein, the term "prevailing market rate" shall mean the base annual rental for such comparable space, taking into account any additional rental and all other payments and escalations payable hereunder and by tenants under leases of such comparable space. Landlord shall endeavor to notify Tenant in writing (such notice being hereinafter referred to as the "RENEWAL RATE NOTICE") of the prevailing market rate for the Renewal Term within thirty (30) days after Landlord's receipt of the Election Notice. Tenant shall have ten (10) days after receipt of the Renewal Rate Notice (the "RESPONSE PERIOD") to advise Landlord whether or not Tenant agrees with Landlord's determination of the prevailing market rate and, if Tenant disagrees with such determination, to discuss and negotiate such rate with Landlord. If Tenant agrees with Landlord's determination, or if during the Response Period the parties agree in writing on a different rental rate, then Landlord and Tenant shall promptly enter into an amendment to this Lease providing for the lease of the Premises by Tenant during the Renewal Term upon the terms stated in the Renewal Rate Notice or such other terms as may be agreed to by the parties during the Response Period, each in the exercise of its sole and absolute discretion. If Tenant disputes Landlord's determination of the prevailing market rate and if the parties fail to agree in writing on a different rental rate prior to the expiration of the Response Period, Tenant shall have the right to rescind its Election Notice in writing within the Response Period and neither party shall have any further rights or obligations under this Paragraph 49. If Tenant fails to provide Landlord with written notice of rescission prior to the expiration of the Response Period, then Tenant shall be deemed to have accepted Landlord's determination of the prevailing market rate (except to the extent that Landlord and Tenant have agreed in writing on a different rental rate as provided in this Paragraph 49). 38 50. OPTION TO EXPAND PREMISES. (a) Tenant shall have a one-time option (the "EXPANSION OPTION") to lease all, but not less than all, of the remaining space within the Building consisting of approximately twenty three thousand one hundred ninety-eight (23,198) square feet and shown on EXHIBIT H hereto (the "EXPANSION SPACE") upon the expiration or sooner termination of the Prior Expansion Space Lease (as hereinafter defined). The Expansion Option is personal to Tenant and may not be exercised by any sublessee or assignee, or by any other successor or assign of Tenant. excluding only a Tenant Affiliate to whom Tenant's entire right, title and interest under this Lease is assigned pursuant to Paragraph 23 above. The Expansion Option shall be effective only if Tenant is not in Default under this Lease, nor has any event occurred which with the giving of notice or the passage of time, or both, would constitute a Default hereunder, either at the time of exercise of the Expansion Option or on the Expansion Commencement Date (as hereinafter defined). Prior to or promptly following the expiration or sooner termination of the Prior Expansion Space Lease, Landlord shall notify Tenant in writing of the availability of the Expansion Space (such written notice being herein referred to as the "EXPANSION SPACE AVAILABILITY NOTICE"). Tenant shall thereafter have the right to exercise the Expansion Option by written notice (the "EXPANSION NOTICE") to Landlord given not later than ten (10) days after Tenant's receipt of the Expansion Space Availability Notice. Except as hereinafter provided in this Paragraph 50, any Expansion Notice given by Tenant to Landlord shall be irrevocable. As used herein, "PRIOR EXPANSION SPACE LEASE" means a lease to be hereafter entered into by Landlord with a third-party tenant covering the Expansion Space, which lease shall have a term not exceeding three years unless otherwise agreed by Tenant in writing. (b) In the event Tenant fails to exercise the Expansion Option in a timely manner as provided herein, the Expansion Option shall be null and void and of no further force or effect. If Tenant validly exercises the Expansion Option, then (1) Tenant's lease of the Expansion Space shall commence on a date (the "EXPANSION COMMENCEMENT DATE") specified by Landlord in writing, which date shall not be earlier than the expiration or sooner termination of the Prior Expansion Space Lease, (2) Tenant's lease of the Expansion Space shall be coterminous with the expiration or sooner termination of this Lease (including any Renewal Term), and (3) the Expansion Space shall be leased to Tenant upon the same terms and conditions as contained in this Lease, except that (A) the annual Base Rent payable with respect to the Expansion Space shall be determined in accordance with Paragraph 50(c) below, (B) Tenant's Proportionate Share shall be increased to one hundred percent (100%), and (C) except to the extent that Landlord agrees in the Expansion Rate Notice (as hereinafter defined) to provide a tenant improvement allowance or a tenant improvement loan to Tenant, the Expansion Space shall be delivered to Tenant in its "AS-IS" condition on the Expansion Commencement Date, Tenant acknowledging and agreeing that Landlord shall have no obligation to improve, remodel or otherwise alter the Expansion Space prior to or after the Expansion Commencement Date. (c) The annual Base Rent payable with respect to the Expansion Space shall be equal to an amount specified by Landlord in a written notice (the "EXPANSION RATE NOTICE") to Tenant given prior to the Expansion Commencement Date. Tenant shall have ten (10) days after receipt of the Expansion Rate Notice (the "EXPANSION RESPONSE PERIOD") to advise Landlord whether or not Tenant agrees to pay the Base Rent specified in the Expansion Rate 39 Notice. If Tenant agrees to pay such Base Rent, then Landlord and Tenant shall promptly enter into an amendment to this Lease providing for the lease of the Expansion Space by Tenant upon the terms stated in the Expansion Rate Notice. If Tenant does not agree to pay the Base Rent specified in the Expansion Rate Notice, Tenant shall have the right to rescind its Expansion Notice in writing within the Expansion Response Period and neither party shall have any further rights or obligations under this Paragraph 50. If Tenant fails to provide Landlord with written notice of rescission prior to the expiration of the Expansion Response Period, then Tenant shall be deemed to have agreed to pay the Base Rent specified in the Expansion Rate Notice. (d) In the event Tenant exercises or is deemed to have exercised the Expansion Option, then from and after the Expansion Commencement Date, the term "Premises," whenever used in this Lease, shall mean the original Premises demised under this Lease and the Expansion Space. 51. SATELLITE DISH. Subject to Landlord's prior written approval of the plans and specifications therefor (including, without limitation, the location, size, and color of the equipment), during the Term, Tenant may, at its sole cost and expense, construct and maintain a satellite dish on the roof of the Building (the "SATELLITE DISH"); provided, however, Landlord shall have the right to withhold its approval of the plans and specifications, in its sole and absolute discretion, if Landlord reasonably determines that the Satellite Dish will affect the structural integrity of the roof. Upon receipt of Landlord's prior written approval of the plans and specifications as set forth herein, Tenant shall erect the Satellite Dish in accordance with the approved plans and specifications, in a good and workmanlike manner, in accordance with all applicable Laws now in force or hereafter enacted and all other requirements of Landlord, and after Tenant has received all requisite approvals therefor (the "APPLICABLE REQUIREMENTS"), and in a manner so as not to interfere with the use of the Building or any adjacent building by any other tenant or occupant. Tenant shall at all times maintain the Satellite Dish in a good, clean and safe condition, in accordance with the Applicable Requirements, and in a manner so as not to interfere with the use of the Building or any adjacent building by any other tenant or occupant. Tenant shall have access to the roof only when accompanied by Landlord or the property manager of the Project. Upon the expiration or sooner termination of this Lease or Tenant's right to possession of the Premises, Tenant shall, at Tenant's sole cost and expense, promptly remove the Satellite Dish and repair any damage to the Building resulting therefrom. If Tenant fails to remove the Satellite Dish within fifteen (15) days following the expiration or sooner termination of this Lease or Tenant's right to possession of the Premises, Landlord may, at Tenant's expense, remove the Satellite Dish and perform the related restoration and repair work, and use, dispose of or take such other actions with respect to the Satellite Dish as Landlord may deem appropriate, all without compensation or payment to Tenant. Tenant shall defend, indemnify and hold harmless Landlord from all losses, claims, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, attorneys' fees) arising from or relating to the construction, installation, maintenance, use or removal of the Satellite Dish. The rights granted to Tenant pursuant to this paragraph may not be assigned. 40 Landlord and Tenant have executed and delivered this Lease as of the Lease Date specified in the Basic Lease Information. LANDLORD: TENANT: AETNA LIFE INSURANCE COMPANY, FINISAR CORPORATION, a Connecticut corporation a California corporation By: Allegis Realty Investors LLC Its Investment Advisor and Agent By: /s/ S.K. Workman ----------------------- Print Name: S.K. Workman --------------- Its: CFO ---------------------- By: /s/ Cynthia Stevenin --------------------------------- Cynthia Stevenin Vice President By: ----------------------- Print Name: --------------- Its: ---------------------- 41 EX-23.1 21 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated June 25, 1999 in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-87017) and related Prospectus of Finisar Corporation dated October 19, 1999. Our audits also included the financial statement schedule of Finisar Corporation listed in Item 16(b). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Palo Alto, California October 18, 1999 EX-27.1 22 EXHIBIT 27.1
5 1,000 YEAR YEAR 3-MOS APR-30-1998 APR-30-1999 APR-30-2000 MAY-01-1997 MAY-01-1998 MAY-01-1999 APR-30-1998 APR-30-1999 JUL-31-1999 722 5,044 5,404 0 0 0 2,804 6,921 7,969 (17) (265) (407) 2,731 5,236 6,959 6,628 18,177 21,137 1,290 3,080 3,630 (238) (598) (774) 7,761 20,955 24,459 898 5,166 7,130 0 0 0 0 26,260 26,260 0 0 0 95 3,909 4,073 6,351 (25,412) (24,023) 7,761 20,955 24,459 22,067 35,471 13,879 22,067 35,471 13,879 8,705 15,514 6,252 8,705 15,514 6,252 6,268 14,704 5,381 0 0 0 33 429 188 7,073 4,951 2,129 2,715 1,874 829 4,358 3,077 1,300 0 0 0 0 0 0 0 0 0 4,358 3,077 1,300 0.10 0.08 0.04 0.10 0.07 0.03
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