<PAGE>
As filed with the Securities and Exchange Commission on May 11, 1999
Registration No. 333-73153
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 3
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
COPPER MOUNTAIN NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
Delaware 3661 33-0702004
(State or other jurisdiction Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
2470 Embarcadero Way
Palo Alto, CA 94303
(650) 858-8500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Richard S. Gilbert
President and Chief Executive Officer
Copper Mountain Networks, Inc.
2470 Embarcadero Way
Palo Alto, CA 94303
(650) 858-8500
(Name, Address, Including Zip Code, And Telephone Number, Including Area Code,
Of Agent For Service)
Copies To:
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<S> <C>
Frederick T. Muto, Esq. Larry W. Sonsini, Esq.
Lance W. Bridges, Esq. James N. Strawbridge, Esq.
Cooley Godward LLP Don S. Williams, Esq.
4365 Executive Drive, Suite 1100 Wilson Sonsini Goodrich & Rosati,
San Diego, CA 92121 Professional Corporation
(619) 550-6000 650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) of the Securities Act, please check the following box
and list the Securities Act registration serial number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Securities Amount to be Offering Price Offering Registration
To be Registered Registered per Share Price(1)(2) Fee
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<S> <C> <C> <C> <C>
Common Stock ($.001 par value)............. 4,600,000 $18.00 $82,800,000 $23,019(3)
</TABLE>
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(1) Includes shares that the Underwriters will have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(c) promulgated under the Securities Act.
(3) $17,904 has been previously paid.
---------------
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 the registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to
said Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued May 11, 1999
4,000,000 Shares
[LOGO OF COPPER MOUNTAIN]
COMMON STOCK
-----------
Copper Mountain Networks, Inc. is offering 4,000,000 shares of its common
stock. This is our initial public offering. We anticipate that the initial
public offering price will be between $16 and $18 per share.
-----------
We have applied to list the common stock on the Nasdaq National Market under
the symbol "CMTN."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 6.
-----------
PRICE $ A SHARE
-----------
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<CAPTION>
Underwriting Proceeds to
Price to Discounts and Copper
Public Commissions Mountain
-------- ------------- -----------
<S> <C> <C> <C>
Per Share............................. $ $ $
Total................................. $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Copper Mountain has granted the underwriters the right to purchase up to an
additional 600,000 shares to cover any over-allotments. Morgan Stanley & Co.
Incorporated expects to deliver the shares of common stock to purchasers on
, 1999.
-----------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
, 1999
<PAGE>
[INSIDE FRONT COVER PAGE]
PHOTOGRAPHS, DESCRIPTIONS AND CAPTIONS
1. Top Caption: Copper Mountain Networks is a Leading Supplier of DSL
Communications Products
2. Top: Color photo of CopperEdge DSL access concentrator, one of our
products. Caption: CopperEdge DSL Access Concentrators. CopperEdge DSL
Access Concentrators enable Competitive Local Exchange Carriers (CLECs),
Incumbent Local Exchange Carriers (ILECs), Internet service providers and
multi-tenant unit service providers to deploy high-speed Internet and
remote LAN access services at competitive rates using ordinary copper
telephone wiring. CopperEdge allows DSL users to access network services at
speeds ranging from 128 kbps to 1.544 Mbps.
3. Center: Color photo of CopperRocket DSL access device, one of our products.
Caption: CopperRocket DSL Devices. CopperRocket customer premise equipment
(CPE) is used by teleworkers, small and medium businesses and other DSL
users. The CopperRocket provides high-performance, always-on, dedicated
Internet and LAN access. Users improve productivity while obtaining more
affordable telecommunications costs. Multiple speeds from 128 kbps to 1.544
Mbps fit today's budget and bandwidth needs.
4. Bottom: Color photo of a computer monitor. Caption: CopperView Network
Management Tools. CopperView network management tools allow carriers to
easily configure, diagnose and monitor their DSL networks end-to-end from
one site, match service offerings to the budget and bandwidth needs of each
customer and--with the touch of a button--migrate a user to a higher-speed
service in real time.
<PAGE>
[INTERIOR FOLD-OUT OF FRONT COVER PAGE]
IMAGES, DIAGRAM, DIAGRAM DESCRIPTIONS AND CAPTIONS
1. Left side: Captions describing four key benefits of Copper Mountain's
solution:
. Support for Business Applications: Our products enable
telecommunications service providers to deliver business services
such as high-speed Internet access, corporate networking,
teleworking and remote PBX extension.
. Full Coverage DSL: Our SDSL and IDSL-based products allow our
telecommunications service provider customers the flexibility and
range to reach their targeted customers.
. Multi-Vendor CPE Interoperability: We have partnered with third-
party DSL CPE manufacturers through the CopperCompatible(TM) program
to develop a broad line of modems, routers and other innovative CPE
which are compatible with our CopperEdge DSL Access Concentrators.
. Trouble-Free Operations: Our products are designed to reduce
installation and support requirements for our customers while
allowing large scale central-office based deployment of DSL
solutions with a zero-installation "plug and play" DSL CPE that
eliminates complex configuration issues for the end user.
2. Center: Diagram of a communications network of a metropolitan CLEC's DSL
deployment with a CLEC metro office, multiple ILEC central offices with
CopperEdge DSL access concentrators, multi-tenant building with a
CopperEdge DSL access concentrator, and multiple small office, home office
and residential subscribers with access devices and corporate, Internet
service provider and Internet data services. Caption: CLEC Metropolitan DSL
Network Enabled by Copper Mountain Networks.
3. Right side: Color logos of the following customers of Copper Mountain:
NorthPoint Communications, Inc.; UUNET, a subsidiary of MCI WorldCom, Inc.;
ICG Communications, Inc.; Rhythms NetConnections Inc.; InterAccess; JATO
Communications Corporation; Pacific Crest Networks, Inc.; and OnSite Access
LLC. Caption: Copper Mountain's CLEC Customers Deploy DSL Nationwide.
2
<PAGE>
TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 4
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Operating
Results................................................................. 24
</TABLE>
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<CAPTION>
Page
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Business................................................................... 34
Management................................................................. 46
Certain Transactions....................................................... 55
Principal Stockholders..................................................... 57
Description of Capital Stock............................................... 60
Shares Eligible for Future Sale............................................ 62
Underwriters............................................................... 64
Legal Matters.............................................................. 66
Experts.................................................................... 66
Additional Information..................................................... 66
Index to Financial Statements.............................................. F-1
</TABLE>
We are a Delaware corporation. Our principal executive offices are located
at 2470 Embarcadero Way, Palo Alto, California 94303, and our telephone number
is (650) 858-8500. Our fiscal year ends on December 31. We maintain a
worldwide web site at www.coppermountain.com. The reference to our worldwide
web address does not constitute incorporation by reference of the information
contained at this site. CopperThrottle and the Copper Mountain logo are
registered trademarks of Copper Mountain. Copper Mountain, CopperEdge,
CopperView, CopperCompatible, CopperCraft and CopperRocket are unregistered
trademarks of Copper Mountain. All other brand names or trademarks appearing
in this prospectus are the property of their respective holders.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only
as of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.
Except as otherwise noted, all information in this prospectus assumes (1)
the conversion of all outstanding shares of our preferred stock into common
stock on a three-for-two basis upon the completion of this offering, and (2)
no exercise of the underwriters' over-allotment option. In addition, all
common share numbers and common per share data in this prospectus reflect a
three-for-two stock split effected on November 25, 1998.
Until , 1999 (25 days after commencement of this offering), all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information and
financial statements and notes appearing elsewhere in this prospectus. You
should carefully consider, among other things, the matters set forth in "Risk
Factors."
THE COMPANY
Copper Mountain is a leading supplier of high-speed digital subscriber line,
or DSL, based communications products. Our solutions enable telecommunications
service providers to provide high-speed, cost-effective connectivity over the
existing copper wire telephone infrastructure to the business, multi-tenant
unit and residential markets. We believe there is significant demand for high-
speed data access services, especially among business users who have found
current solutions to be inadequate or too expensive. Therefore, Copper Mountain
has initially focused on producing equipment that supports practical, large-
scale deployment of DSL services to businesses and their associated
teleworkers.
The emergence of electronic commerce, business usage of web-based
communications, remote access for teleworkers, applications hosting and other
services have generated enormous traffic for the existing communications
infrastructure. While there are a number of alternatives to deliver high-
bandwidth connectivity, we believe that none has the cost, performance and
coverage advantages of using the existing copper wire telephone infrastructure.
DSL is a technology that was developed to enable telecommunications service
providers to exploit this existing infrastructure to provide guaranteed,
dedicated bandwidth at a low cost to virtually all businesses and homes in the
United States.
Telecommunications service providers are seeking vendors that have
effectively incorporated DSL into communications equipment solutions enabling
them to offer cost-effective, full-coverage, high-bandwidth data access
services. Our flexible, scalable solution consists of the following products:
CopperEdge DSL access concentrators, CopperRocket DSL customer premise
equipment, and CopperView network management tools. Our products offer the
following benefits:
. Support for Business Applications. Our products enable
telecommunications service providers to deliver business services such
as high-speed Internet access, corporate networking, teleworking and
packet-based voice solutions.
. Full Coverage DSL. Our symmetric DSL and ISDN DSL-based products allow
our telecommunications service provider customers the flexibility and
range to reach their targeted customers.
. Multi-Vendor Customer Premise Equipment Interoperability. We have
partnered with third-party DSL customer premise equipment manufacturers
through our CopperCompatible program to develop a broad line of modems,
routers and other innovative customer premise equipment that is
compatible with our CopperEdge DSL access concentrators.
. Trouble Free Operations. Our products are designed to reduce
installation and support requirements for our customers while allowing
large scale central-office based deployment of DSL solutions with a
zero-installation "plug and play" DSL customer premise equipment that
eliminates complex configuration issues for the end user.
Our objective is to be the leading supplier of DSL solutions to
telecommunications service providers. We will focus on expanding our presence
in the business and multi-tenant building markets. In addition, we will address
the emerging opportunities we expect to develop in the residential market as
telecommunications service providers seek to offer DSL services to residential
subscribers seeking high-speed access. Our products are designed to support
future services and technology, and we are currently developing the capability
required to support additional services, such as virtual private networking and
voice-over-packet, as well as additional DSL variants, to meet evolving
telecommunications service provider and subscriber requirements. Finally, we
are working to drive interoperability of DSL technology to facilitate faster
and broader market acceptance.
We sell our products through a direct sales force and selected original
equipment manufacturers and distributors to telecommunications service
providers. As of March 31, 1999, we have sold over 1,300 CopperEdge DSL access
concentrators. We have also formed strategic relationships with Lucent
Technologies Inc. and 3Com Corporation to allow us to expand our distribution
and market presence. In addition, to facilitate faster and broader market
acceptance of our solutions, we have promoted a "CopperCompatible" program
through which we offer licenses of our DSL customer premise equipment
technology to other manufacturers of customer premise equipment. We were
incorporated in California in 1996 and reincorporated in Delaware in 1999. Our
principal executive offices are located at 2470 Embarcadero Way, Palo Alto,
California 94303, and our telephone number is (650) 858-8500.
4
<PAGE>
THE OFFERING
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<C> <S>
Common stock offered............................... 4,000,000 shares
Common stock to be outstanding after the offering.. 22,387,005 shares
Use of proceeds.................................... We intend to use the net
proceeds from the offering
for general corporate
purposes, including
working capital and
capital expenditures. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol............. CMTN
</TABLE>
The above information about the offering is based upon the number of shares
of common stock outstanding as of March 31, 1999. It excludes, as of March 31,
1999, (1) 6,585,372 shares of common stock reserved for issuance under our 1996
Equity Incentive Plan and 360,000 shares of common stock reserved for issuance
under our 1999 Non-Employee Directors' Stock Option Plan, of which 4,582,225
shares and 180,000 shares, respectively, were subject to outstanding options at
weighted average exercise prices of $2.22 per share and $12.00 per share,
respectively; (2) 355,706 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $2.08 per share;
and (3) 200,000 shares of common stock issuable upon exercise of outstanding
non-qualified stock options at a weighted average exercise price of $12.00 per
share. See "Description of Capital Stock," "Management--1996 Equity Incentive
Plan" and "Management--1999 Non-Employee Directors' Stock Option Plan."
SUMMARY FINANCIAL DATA
(in thousands, except per share amounts)
The "as adjusted" column in the Balance Sheet Data table below reflects our
sale of shares of common stock offered by this prospectus (at an assumed
initial public offering price of $17.00 per share) and the application of our
net proceeds from the offering, after deducting estimated underwriting
discounts and commissions and offering expenses payable by us, as described in
"Use of Proceeds."
<TABLE>
<CAPTION>
March 11, 1996 Three Months
(inception) Year Ended Ended
through December 31, March 31,
December 31, ----------------- ----------------
1996 1997 1998 1998 1999
-------------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue................ $ -- $ 211 $21,821 $ 317 $13,217
Gross profit (loss)........ -- (1,506) 9,421 100 6,833
Loss from operations....... (2,225) (11,187) (10,524) (3,367) (1,135)
Net loss................... (2,181) (11,016) (10,331) (3,287) (1,036)
Pro forma basic and diluted
net loss per share(1)..... $ (.62) $ (.06)
Shares used in computing
pro forma basic and
diluted net loss per
share(1).................. 16,668 17,544
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1999
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments......... $18,507 $80,997
Working capital........................................... 23,805 86,295
Total assets.............................................. 37,393 99,883
Long-term debt and capital lease obligations, less current
portion.................................................. 1,828 1,828
Total stockholders' equity................................ 27,585 90,075
</TABLE>
- --------
(1) Pro forma basic and diluted per share calculations reflect the conversion
upon the closing of the offering of all outstanding shares of preferred
stock into 15,334,824 shares of common stock.
5
<PAGE>
RISK FACTORS
This offering and an investment in our common stock involve a high degree of
risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to
any of these risks, and you may lose part or all of your investment.
Copper Mountain Has a History of Losses, Expects Future Losses and May Not
Achieve or Sustain Annual Profitability
Copper Mountain has had accumulated losses of $24.6 million since its
inception and may continue to incur net losses in the future. We anticipate
continuing to incur significant sales and marketing, product development and
general and administrative expenses and, as a result, we will need to generate
significantly higher revenues to achieve and sustain profitability on an
annual basis. Copper Mountain has incurred net losses of approximately $2.2
million for the period from inception through December 31, 1996, approximately
$11.0 million for fiscal year 1997 and approximately $10.3 million for fiscal
year 1998. As of December 31, 1998, we had an accumulated deficit of
approximately $23.5 million. Although our revenue has grown in recent
quarters, on a year to year basis, we cannot be certain that our revenue
growth will continue or increase in the future or that we will realize
sufficient revenues to achieve and sustain profitability.
Copper Mountain Derives Almost All of Its Revenues From a Small Number of
Customers and Copper Mountain's Revenues May Decline Significantly if Any
Major Customer Cancels or Delays a Purchase of Copper Mountain's DSL Products
Copper Mountain sells its products predominantly to competitive local
exchange carriers. Aggregate sales to our two largest customers accounted for
approximately 79% of our total net revenues for the twelve months ended
December 31, 1998. Sales to our most significant customers, NorthPoint
Communications, Inc. and Rhythms NetConnections, Inc., accounted for
approximately 61% and 18% of Copper Mountain's total revenues, respectively,
for the twelve months ended December 31, 1998. Accordingly, unless and until
we diversify and expand our customer base, our future success will
significantly depend upon the timing and size of future purchase orders, if
any, from our largest customers and, in particular:
. the product requirements of these customers,
. the financial and operational success of these customers, and
. the success of these customers' services deployed using our products.
The loss of any one of our major customers or the delay of significant
orders from such customers, even if only temporary, could among other things
reduce or delay our recognition of revenues, harm our reputation in the
industry, and reduce our ability to accurately predict cash-flow, and, as a
consequence, could materially adversely affect our business, financial
condition and results of operations.
ICG Communications, Inc., which was a significant customer in 1998, recently
signed an agreement to sell its digital subscriber line, or DSL, assets,
including those already deployed or scheduled for delivery, to NorthPoint
Communications and to designate NorthPoint Communications as its preferred DSL
provider. As a result, ICG Communications may reduce, or even eliminate, the
completion of its own DSL network, and consequently reduce or cease its
purchases of our products. For the twelve months ended December 31, 1998,
Copper Mountain's total revenues from ICG Communications accounted for
approximately 9% of its total revenues.
6
<PAGE>
Copper Mountain Has a Limited Operating History Upon Which to Base Your
Investment Decision
Copper Mountain has a very limited operating history. We were incorporated
in March 1996 and have generated only limited revenues. Due to our limited
operating history, it is difficult or impossible for us to predict future
results of operations and you should not expect future revenue growth to be
comparable to our recent revenue growth. In addition, we believe that
comparing different periods of our operating results is not meaningful, as you
should not rely on the results for any period as an indication of our future
performance. Investors in our common stock must consider our business and
prospects in light of the risks and difficulties typically encountered by
companies in their early stages of development, particularly those in rapidly
evolving markets such as the telecommunications equipment industry. Some of
the specific risks include whether we are able:
. to compete in the intensely competitive market for telecommunications
equipment;
. to expand our sales, support and distribution organization;
. to timely and effectively introduce new products and product
enhancements; and
. to expand our operational infrastructure.
We discuss these and other risks in more detail below.
A Number of Factors Could Cause Copper Mountain's Operating Results to
Fluctuate Significantly and Cause Its Stock Price to be Volatile
Copper Mountain's 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, many of which are outside of its control. If our quarterly
or annual operating results do not meet the expectations of securities
analysts and investors, the trading price of our common stock could
significantly decline. Some of the factors that could affect our quarterly or
annual operating results include:
. the timing and amount of, or cancellation or rescheduling of, orders for
our products and services, particularly large orders from our key
customers and original equipment manufacturers;
. our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions;
. announcements, new product introductions and reductions in price of
products offered by our competitors;
. a decrease in the average selling prices of our products;
. our ability to achieve cost reductions;
. our ability to obtain sufficient supplies of sole or limited source
components for our products;
. changes in the prices of our components;
. our ability to attain and maintain production volumes and quality levels
for our products;
. the mix of products sold and the mix of distribution channels through
which they are sold;
. fluctuations in demand for our products and services;
. costs relating to possible acquisitions and integration of technologies
or businesses; and
. telecommunications and DSL market conditions and economic conditions
generally.
Historically, our backlog at the beginning of each quarter has not been
equal to expected revenue for that quarter. Accordingly, we are dependent upon
obtaining orders in a quarter for shipment in that quarter to achieve our
revenue objectives. In addition, due in part to factors such as the timing of
product release dates, purchase
7
<PAGE>
orders and product availability, significant volume shipments of products
could occur at the end of our fiscal quarter. Failure to ship products by the
end of a quarter may adversely affect our operating results. Furthermore, our
customers may delay delivery schedules or cancel their orders without notice.
Due to these and other factors, quarterly revenues, expenses and results of
operations could vary significantly in the future, and period-to-period
comparisons should not be relied upon as indications of future performance.
Copper Mountain Sells the Majority of Its Products to Emerging
Telecommunications Service Providers That May Reduce or Discontinue Their
Purchase of Copper Mountain's Products At Any Time
The customers of Copper Mountain's products to date have predominantly been
telecommunications service providers. The market for the services provided by
telecommunications service providers who compete against traditional telephone
companies has only begun to emerge since the passage of the Telecommunications
Act of 1996 (the "Telecom Act"), and many of these service providers are still
building their infrastructure and rolling out their services. These
telecommunications service providers require substantial capital for the
development, construction and expansion of their networks and the introduction
of their services. Financing may not be available to emerging
telecommunications service providers on favorable terms, if at all. The
inability of our current or potential emerging telecommunications service
provider customers to acquire and keep customers, to successfully raise needed
funds, or to respond to any other trends such as price reductions for their
services or diminished demand for telecommunications services generally, could
adversely affect their operating results or cause them to reduce their capital
spending programs. If our customers are forced to defer or curtail their
capital spending programs, our sales to those telecommunication service
providers may be adversely affected, which would have a material adverse
effect on our business, financial condition and results of operations. In
addition, many of the industries in which telecommunications service providers
operate have recently experienced consolidation. The loss of one or more of
our telecommunications service provider customers, through industry
consolidation or otherwise, could reduce or eliminate our sales to such a
customer and consequently have a material adverse effect on our business,
financial condition and results of operations.
If DSL Technology and Copper Mountain's DSL Product Offerings Are Not Accepted
by Telecommunications Service Providers, Copper Mountain May Not Be Able to
Sustain or Grow Its Business
Copper Mountain's future success is substantially dependent upon whether DSL
technology gains widespread market acceptance by telecommunications service
providers, of which there are a limited number, and end users of their
services. We have invested substantial resources in the development of DSL
technology, and all of our products are based on DSL technology.
Telecommunications service providers are continuously evaluating alternative
high-speed data access technologies and may, at any time, adopt technologies
other than the DSL technologies offered by Copper Mountain. Even if
telecommunications service providers adopt policies favoring full-scale
implementation of DSL technology, they may not choose to purchase our DSL
product offerings. In addition, we have limited ability to influence or
control decisions made by telecommunications service providers. In the event
that the telecommunications service providers to whom we market our products
adopt technologies other than the DSL technologies offered by Copper Mountain
or choose not to purchase Copper Mountain's DSL product offerings, we may not
be able to sustain or grow our business.
Unless Copper Mountain Is Able to Keep Pace With the Rapidly Changing Product
Requirements of Its Customers, It Will Not Be Able to Sustain or Grow Its
Business
The telecommunications and data communications markets are characterized by
rapid technological advances, evolving industry standards, changes in end-user
requirements, frequent new product introductions and evolving offerings by
telecommunications service providers. We believe our future success will
depend, in part, on our ability to anticipate or adapt to such changes and to
offer, on a timely basis, services that meet customer demands. Our inability
to develop on a timely basis new products or enhancements to existing
products, or the failure of such new products or enhancements to achieve
market acceptance, could materially adversely affect our business, financial
condition and results of operations.
8
<PAGE>
Copper Mountain's Product Cycles Tend to be Short and Copper Mountain May
Incur Substantial Non-Recoverable Expenses or Devote Significant Resources to
Sales That Do Not Occur When Anticipated
In the rapidly changing technology environment in which we operate, product
cycles tend to be short. Therefore, the resources we devote to product sales
and marketing may not generate revenues for us and from time to time we may
need to write-off excess and obsolete inventory. In the past, we have
experienced such write-offs attributed to the obsolescence of certain printed
circuit boards. The Company recorded charges totaling $897,000 and $504,000
for the years ended December 31, 1997 and 1998, respectively, to take into
consideration excess inventory levels and obsolete inventory. We also recorded
charges for purchase commitments related to obsolete inventory not yet
received by December 31, 1997 of approximately $582,000. If we incur
substantial sales, marketing and inventory expenses in the future that we are
not able to recover, and we are not able to compensate for such expenses, it
could have a material adverse effect on our business, financial condition and
results of operations.
Copper Mountain's Ability to Sustain or Grow Its Business May Be Harmed if It
Is Unable to Develop and Maintain Certain Strategic Relationships with Third
Parties to Market and Sell Copper Mountain's Products
Copper Mountain's success will be substantially dependent upon its strategic
partnerships, including its recently signed original equipment manufacturer
agreements with Lucent Technologies Inc. and 3Com Corporation under which we
have agreed to manufacture, co-brand and/or sell our products to Lucent and
3Com. The amount and timing of resources which our strategic partners devote
to our business is not within our control. Our strategic partners may not
perform their obligations as expected. Agreements with our strategic partners
are relatively new, and we cannot be certain that any revenue will be derived
from strategic arrangements. If any of our strategic partners breaches or
terminates its agreement or fails to perform its obligations under its
agreement, we may not be able to sustain or grow our business. In the event
that these relationships are terminated, we may not be able to continue to
maintain or develop strategic relationships or to replace strategic partners.
In addition, any strategic agreements we enter into in the future may not be
successful.
In January 1999, shortly after we entered into our original equipment
manufacturer agreement with Lucent, Lucent announced an agreement to acquire
Ascend Communications, Inc., a competitor of ours which offers a competing DSL
solution. As a result, Lucent may seek to reduce the marketing and/or sales of
our products in favor of competitive products manufactured by Ascend. For a
further discussion of our strategic relationships with Lucent and 3Com please
refer to "Business--Strategic Relationships and Interoperability
Partnerships."
Intense Competition in the Market for Telecommunications Equipment Could
Prevent Copper Mountain From Increasing or Sustaining Revenue and Prevent
Copper Mountain From Achieving or Sustaining Annual Profitability
The market for telecommunications equipment is highly competitive. We
compete directly with the following companies: Cisco Systems, Inc., Ascend
(acquisition by Lucent pending), Alcatel S.A., Diamond Lane Communications
Corporation (acquisition by Nokia Corporation pending) and Paradyne
Corporation. We also compete with other DSL equipment providers. If we are
unable to compete effectively in the market for DSL telecommunications
equipment, our revenue and future profitability could be materially adversely
affected. Many of our current and potential competitors have significantly
greater selling and marketing, technical, manufacturing, financial, and other
resources, including vendor-sponsored lease financing programs. Moreover, our
competitors may foresee the course of market developments more accurately than
we do and could in the future develop new technologies that compete with our
products or even render our products obsolete. Although we believe we
presently have certain technological and other advantages over our
competitors, realizing and maintaining such advantages will require a
continued high level of investment in research and development, marketing and
customer service and support. Due to the rapidly evolving markets in which we
compete, additional competitors with significant market presence and financial
resources, including other large telecommunications equipment manufacturers,
may enter those markets, thereby further intensifying competition.
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We may not have sufficient resources to continue to make the investments or
achieve the technological advances necessary to compete successfully with
existing competitors or new competitors. Also, to the extent we introduce new
product offerings intended to capitalize on the anticipated trend toward broad
deployment of DSL services, including DSL services targeted at residential
subscribers seeking high-speed access to public communications networks, we
will encounter new competitors such as coaxial cable and wireless equipment
vendors. Even if we are successful in competing in the business DSL market, we
may not be able to compete successfully in the market for residential
subscribers.
Future Consolidation in the Telecommunications Equipment Industry May Increase
Competition That Could Harm Copper Mountain's Business
The markets in which Copper Mountain competes are characterized by
increasing consolidation both within the data communications sector and by
companies combining or acquiring data communications assets and assets for
delivering voice-related services, as exemplified by the recently announced
acquisitions of Ascend by Lucent and Diamond Lane by Nokia. We cannot predict
with certainty how industry consolidation will affect our competitors. We may
not be able to compete successfully in an increasingly consolidated industry.
Increased competition and consolidation in our industry could require that we
reduce the prices of our products and result in our loss of market share,
which would materially adversely affect our business, financial condition and
results of operations. Additionally, because we are now, and may in the future
be, dependent on certain strategic relationships with third parties in our
industry, any consolidation involving these parties could reduce the demand
for our products and otherwise harm our business prospects.
Copper Mountain May Experience Difficulties in the Introduction of New
Products That Could Result in Copper Mountain having to Incur Significant
Unexpected Expenses or Delay the Launch of New Products
Copper Mountain intends to continue to invest in product and technology
development. The development of new or enhanced products is a complex and
uncertain process requiring the accurate anticipation of technological and
market trends. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent our development, introduction or
marketing of new products and enhancements. The introduction of new or
enhanced products also requires that we manage the transition from older
products in order to minimize disruption in customer ordering patterns and
ensure that adequate supplies of new products can be delivered to meet
anticipated customer demand. In the future, we expect to develop certain new
products, such as new DSL Access Concentrators, line cards for different DSL
variants and new types of customer premise equipment. We may not successfully
develop, introduce or manage the transition of these new products.
Furthermore, products such as those we currently offer may contain undetected
or unresolved errors when they are first introduced or as new versions are
released. Despite testing, errors may be found in new products or upgrades
after commencement of commercial shipments. These errors could result in:
. delays in or loss of market acceptance and sales;
. diversion of development resources;
. injury to our reputation; and
. increased service and warranty costs.
Any of these could materially adversely affect our business, financial
condition and results of operations.
Copper Mountain Is Dependent on Widespread Market Acceptance of Its Products
Widespread market acceptance of Copper Mountain's products is critical to
its future success. Factors that may affect the market acceptance of our
products include market acceptance of DSL technology in particular, the
performance, price and total cost of ownership of our products, the
availability and price of competing
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products and technologies and the success and development of our resellers,
original equipment manufacturers and field sales channels. Many of these
factors are beyond our control. The introduction of new and enhanced products
may cause certain customers to defer or return orders for existing products.
Although we maintain reserves against such returns, such resources may not be
adequate. We cannot be certain that we will not experience delays in product
development in the future. Failure of our existing or future products to
maintain and achieve meaningful levels of market acceptance would materially
adversely affect our business, financial condition and results of operations.
Because Substantially All of Copper Mountain's Revenue is Derived From Sales
of a Small Number of Products Its Future Operating Results Will Be Dependent
on Sales of These Products
Copper Mountain currently derives substantially all of its revenues from its
product family of DSL solutions and expects that this concentration will
continue in the foreseeable future. The market may not continue to demand our
current products, and we may not be successful in marketing any new or
enhanced products. Any reduction in the demand for our current products or our
failure to successfully develop or market and introduce new or enhanced
products could materially adversely affect our operating results and cause the
price of our common stock to decline. Factors that could affect sales of our
current or new or enhanced products include:
. the demand for DSL solutions;
. our successful development, introduction and market acceptance of new
and enhanced products that address customer requirements;
. product introductions or announcements by our competitors;
. price competition in our industry and between DSL and competing
technologies; and
. technological change.
Copper Mountain's Limited Ability to Protect Its Intellectual Property May
Adversely Affect Its Ability to Compete
Copper Mountain's success and ability to compete is dependent in part upon
its proprietary technology. 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. We rely on a combination of copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect our proprietary rights. We presently have no patents,
although we have one patent application pending which we intend to pursue but
which is not central to our current business. Despite our efforts to protect
our proprietary rights, existing copyright, trademark and trade secret laws
afford only limited protection. In addition, the laws of certain 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 protect our proprietary rights
against unauthorized third-party copying or use. Furthermore, policing the
unauthorized use of our products is difficult. Litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our future operating
results.
If Copper Mountain Loses Key Personnel It May Not Be Able to Successfully
Operate Its Business
Copper Mountain's success depends to a significant degree upon the continued
contributions of the principal members of its sales, engineering and
management personnel, many of whom perform important management functions and
would be difficult to replace. Specifically, we believe that our future
success is highly dependent on our senior management, and in particular on
Richard S. Gilbert, President and Chief Executive Officer; Joseph
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Markee, Chief Technology Officer; Steven Hunt, Vice President of Engineering;
and Michael Kelly, Vice President of Sales. Except for agreements with Mr.
Gilbert, Mr. Markee and Mr. Hunt, we do not have employment contracts with our
key personnel. In any event, employment contracts would not prevent key
personnel from terminating their employment with Copper Mountain. The loss of
the services of any key personnel, particularly senior management and
engineers, could materially adversely affect our business, financial condition
and results of operations.
If Copper Mountain is Unable to Retain and Hire Additional Qualified Personnel
As Necessary, It May Not Be Able to Successfully Achieve Its Objectives
Copper Mountain has experienced growth in revenues and expansion of its
operations which have placed significant demands on its management,
engineering staff and facilities. We have recently hired additional
engineering, sales, marketing, customer support and accounting personnel.
Continued growth will also require us to hire more engineering, sales and
administrative personnel. We may not be able to attract and retain the
necessary personnel to accomplish our business objectives and we may
experience constraints that will adversely affect our ability to satisfy
customer demand in a timely fashion or to support our customers and
operations. We have at times experienced, and continue to experience,
difficulty in recruiting qualified personnel. Recruiting qualified personnel
is an intensely competitive and time-consuming process.
In addition, companies in the telecommunications industry whose employees
accept positions with competitors frequently claim that such competitors have
engaged in unfair hiring practices. We received one such notice from another
company and, although to date this notice has not resulted in litigation, we
may receive other notices in the future as we seek to hire qualified personnel
and such notices may result in material litigation. We could incur substantial
costs in defending ourselves against any such litigation, regardless of the
merits or outcome of such litigation.
Failure to Manage the Growth of Copper Mountain's Operations Will Adversely
Affect Its Business
Copper Mountain has rapidly and significantly expanded its operations and
anticipates that further significant expansion will be required to address
potential growth in its client base and market opportunities if it is
successful in implementing its business strategy.We may not be able to
implement management information and control systems in an efficient and
timely manner, and our current or planned personnel, systems, procedures and
controls may not be adequate to support our future operations. If we are
unable to manage growth effectively, our business, financial condition and
results of operations will be materially adversely affected. During 1998, we
increased the number of employees from 56 to 111 and during the first three
months of 1999 we added 43 additional employees. This expansion is placing a
significant strain on our managerial, operational and financial resources.
Most of our existing senior management personnel joined us within the last 18
months, including a number of key managerial, technical and operations
personnel who we have not yet fully integrated. We expect to add additional
key personnel in the near future, including direct sales and marketing
personnel. To manage the expected growth of our operations and personnel, we
will be required to:
. improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
. install new management information systems; and
. train, motivate and manage our sales and marketing, engineering,
technical and customer support employees.
We operate our business from facilities in Palo Alto, California and San
Diego, California. We face challenges related to effectively and efficiently
coordinating our operations between these facilities. If we are unsuccessful
in meeting these challenges, our business and operating results may be
adversely affected. Moreover, we currently fully occupy our existing
facilities in San Diego, and we have secured a new facility to replace them.
To the extent we are unsuccessful in our efforts to build-out and move into
larger facilities in San Diego, our ability to add new personnel and expand
our operations in San Diego will be adversely affected.
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We may not be able to complete this move in a timely or cost effective manner,
and there may be disruptions related to such move that could materially
adversely affect our business, financial condition and results of operations.
Copper Mountain's Dependence on Sole and Single Source Suppliers Exposes It to
Supply Interruption
Although Copper Mountain generally uses standard parts and components for
its products, many key components are purchased from sole or single source
vendors for which alternative sources are not currently available. The
inability to obtain sufficient quantities of these components may in the
future result in delays or reductions in product shipments which could
materially adversely affect our business, financial condition and results of
operations. We presently purchase three key components from vendors for which
there are currently no substitutes: a semiconductor chip, a power supply and a
system control module. We are evaluating alternate source vendors for each of
these key components, but any alternate vendors may not meet our quality
standards for component vendors. In the event of a reduction or interruption
of supply of any such components, as much as six months could be required
before we would begin receiving adequate supplies from alternative suppliers,
if any. It is possible that a source may not be available for us or be in a
position to satisfy our production requirements at acceptable prices and on a
timely basis, if at all.
In addition, the manufacture of certain of these single or sole source
components is extremely complex, and our reliance on the suppliers of these
components exposes us to potential production difficulties and quality
variations, which could negatively impact cost and timely delivery of our
products. Any significant interruption in the supply, or degradation in the
quality, of any component could have a material adverse effect on our
business, financial condition and results of operations.
Copper Mountain's Dependence on Independent Manufacturers Could Result in
Product Delivery Delays
Copper Mountain currently uses a small number of independent manufacturers
to provide certain printed circuit boards, chassis and subassemblies and, in
certain cases, to complete final assembly and testing of our products. Our
reliance on independent manufacturers involves a number of risks, including
the absence of adequate capacity, the unavailability of or interruptions in
access to certain process technologies and reduced control over delivery
schedules, manufacturing yields and costs. We have historically subcontracted
substantially all of our manufacturing to one company, SMS Technology, located
in San Diego, California. We recently entered into a letter of intent with
Flextronics International Ltd., located in San Jose, California and expect to
have a formal agreement in place by April 30, 1999. Under the letter of
intent, Flextronics will be our main source of independent manufacturing. The
transition from SMS Technology to Flextronics may result in delays,
interruptions or quality problems, and we may not effectively manage the
transition. If our manufacturers are unable or unwilling to continue
manufacturing our components in required volumes, we will have to identify
acceptable alternative manufacturers, which could take in excess of six
months. It is possible that a source may not be available to us when needed or
be in a position to satisfy our production requirements at acceptable prices
and on a timely basis, if at all. Any significant interruption in supply would
result in the allocation of products to customers, which in turn could have a
material adverse effect on our business, financial condition and results of
operations. Moreover, since all of our final assembly and tests are performed
in one location, any fire or other disaster at our assembly facility would
have a material adverse effect on our business, financial condition and
results of operations.
Copper Mountain's Customers May Demand Preferential Terms or Delay Copper
Mountain's Sales Cycle, Which May Result in Operating Losses for Copper
Mountain
Copper Mountain's customers tend to be significantly larger than Copper
Mountain and are able to exert a high degree of influence over Copper
Mountain. They have sufficient bargaining power to demand low prices and other
terms and conditions that may materially adversely affect our business,
financial condition and results of operations. In addition, prior to selling
our products to such customers, we must typically undergo lengthy product
approval processes, often taking up to one year. Accordingly, we are
continually submitting successive
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versions of our products as well as new products to our customers for
approval. The length of the approval process can vary and is affected by a
number of factors, including customer priorities, customer budgets and
regulatory issues affecting telecommunication service providers. Delays in the
product approval process could materially adversely affect our business,
financial condition and results of operations. While we have been successful
in the past in obtaining product approvals from our customers, such approvals
and the ensuing sales of such products may not continue to occur. Delays can
also be caused by late deliveries by other vendors, changes in implementation
priorities and slower than anticipated growth in demand for the services that
our products support. A delay in, or cancellation of, the sale of our products
could result in operating losses and cause our results of operations to vary
significantly from quarter to quarter.
Changes to Regulations Affecting the Telecommunications Industry Could Reduce
Demand for Copper Mountain's Products or Adversely Affect Its Results of
Operations
Any changes to legal requirements relating to the telecommunications
industry, including the adoption of new regulations by federal or state
regulatory authorities under current laws or any legal challenges to existing
laws or regulations relating to the telecommunications industry could have a
material adverse effect upon the market for Copper Mountain's products.
Moreover, our distributors or telecommunications service provider customers
may require, or we may otherwise deem it necessary or advisable, that we
modify our products to address actual or anticipated changes in the regulatory
environment. Our inability to modify our products or address any regulatory
changes could have a material adverse effect on our business, financial
condition or results of operations. For additional background on recent
legislation affecting the telecommunications industry please refer to
"Business--Industry Background."
Copper Mountain May Not Be Able to Obtain Additional Capital to Fund Its
Operations When Needed
Copper Mountain expects to use the net proceeds of this offering primarily
to continue investments in product development, to expand sales and marketing
activities and to make capital expenditures. We believe that such proceeds,
together with our existing capital resources, will be sufficient to meet our
capital requirements for at least the next twelve months. However, our capital
requirements depend on several factors, including the rate of market
acceptance of our products, the ability to expand our client base, the growth
of sales and marketing and other factors. If capital requirements vary
materially from those currently planned, we may require additional financing
sooner than anticipated. If additional funds are raised through the issuance
of equity securities, the percentage ownership of our stockholders will be
reduced, stockholders may experience additional dilution, or such equity
securities may have rights, preferences or privileges senior to those of the
holders of our common stock. If additional funds are raised through the
issuance of debt securities, such securities would have rights, preferences
and privileges senior to holders of common stock and the term of such debt
could impose restrictions on our operations. Additional financing may not be
available when needed on terms favorable to us or at all. If adequate funds
are not available or are not available on acceptable terms, we may be unable
to develop or enhance our services, take advantage of future opportunities or
respond to competitive pressures, which could materially adversely affect our
business, financial condition or results of operations.
Claims Against Copper Mountain Alleging Its Infringement of a Third Party's
Intellectual Property Could Result in Significant Expense to Copper Mountain
and Result in Its Loss of Significant Rights
The telecommunications 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 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 have a material adverse effect on our business, financial condition
or results of operations. In addition, in our agreements, we agree to
indemnify our customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties. As the
number of entrants in our market increases and the functionality of our
products is enhanced and overlaps with the products of other
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companies, we may become subject to claims of infringement or misappropriation
of the intellectual property rights of others. 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 have a material adverse effect upon our operating results. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to us, if at all. Legal action claiming patent infringement may be
commenced against us. We cannot assure you that we would prevail in such
litigation given the complex technical issues and inherent uncertainties in
patent litigation. 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, financial condition and results of operations would be materially
adversely affected.
Copper Mountain's Failure to Comply with Regulations and Evolving Industry
Standards Could Delay Its Introduction of New Products
The market for Copper Mountain's products is characterized by the need to
meet a significant number of communications regulations and standards, some of
which are evolving as new technologies are deployed. In order to meet the
requirements of our customers, our products may be required to comply with
various regulations including those promulgated by the Federal Communications
Commission, or FCC, and standards established by Underwriters Laboratories and
Bell Communications Research. Failure of our products to comply, or delays in
compliance, with the various existing and evolving industry regulations and
standards could delay the introduction of our products. Moreover, enactment by
federal, state or foreign governments of new laws or regulations, changes in
the interpretation of existing laws or regulations or a reversal of the trend
toward deregulation in the telecommunications industry could have a material
adverse effect on our customers, and thereby materially adversely affect our
business, financial condition and results of operations.
If Copper Mountain or Its Key Suppliers Fail to Be Year 2000 Compliant, Copper
Mountain's Business May Be Severely Disrupted and Its Results of Operations
May Be Materially Adversely Affected
As is true for most companies, the Year 2000 problem creates a risk for
Copper Mountain. If systems do not correctly recognize date information when
the year changes to 2000, there could be an adverse impact on our operations.
The risk exists primarily in four areas:
. potential warranty or other claims from our customers, which may result
in significant expense to Copper Mountain;
. failures of systems we use to run our business, which could disrupt our
business operations;
. systems used by our suppliers, which could delay or affect the quality
of our manufacturing of products; and
. the potential for failures of our products, particularly our central
office-based systems, due to Year 2000 problems associated with products
manufactured by other equipment vendors used in conjunction with our
products, which may require that we replace any such products and
potentially incur significant unexpected expenses.
We are currently evaluating our exposure in all of these areas.
We are in the process of conducting a comprehensive inventory and evaluation
of the information systems used to run our business. Systems which are
identified as non-compliant will be upgraded or replaced. For the Year 2000
non-compliance issues identified to date, the cost of remediation is not
expected to be material to our operating results. However, if implementation
of replacement systems is delayed, or if significant new non-compliance issues
are identified, our business, financial condition or results of operations
could be materially adversely affected.
We intend to contact our critical suppliers and contract manufacturers to
determine whether their operations and the products and services they provide
are Year 2000 compliant. Where practicable, we will attempt to
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mitigate our risks with respect to the failure of our suppliers and contract
manufacturers to be prepared for any Year 2000 problems. However, such
failures remain a possibility and could have a material adverse impact on our
business, financial condition or results of operations.
Although we believe our products are Year 2000 compliant, because all
customer situations cannot be anticipated, we may see an increase in warranty
and other claims as a result of the Year 2000 transition. In addition,
litigation regarding Year 2000 compliance issues is expected to escalate. For
these reasons, the impact of customer claims could have a material adverse
impact on our business, financial condition or results of operations.
If Copper Mountain's Products Contain Defects, Copper Mountain May Be Subject
to Significant Liability Claims from Its Customers and the End-Users of Its
Products and Incur Significant Unexpected Expenses and Lost Sales
Copper Mountain's products have in the past contained, and may in the future
contain, undetected or unresolved errors when first introduced or as new
versions are released. Despite extensive testing, errors, defects or failures
may be found in our current or future products or enhancements after
commencement of commercial shipments. If this happens, we may experience delay
in or loss of market acceptance and sales, product returns, diversion of
development resources, injury to our reputation or increased service and
warranty costs, any of which could have a material adverse effect on our
business, financial condition and results of operations. Moreover, because our
products are designed to provide critical communications services, we may
receive significant liability claims. Our agreements with customers typically
contain provisions intended to limit our exposure to liability claims. These
limitations may not, however, preclude all potential claims resulting from a
defect in one of our products. Although we maintain product liability
insurance covering certain damages arising from implementation and use of our
products, our insurance may not cover any claims sought against us. Liability
claims could require us to spend significant time and money in litigation or
to pay significant damages. As a result, any such claims, whether or not
successful could seriously damage our reputation and our business.
Copper Mountain May Engage in Future Acquisitions That Dilute Its
Stockholders, Cause It to Incur Debt and Assume Contingent Liabilities
As part of Copper Mountain's business strategy, we expect to review
acquisition prospects that would complement our current product offerings,
augment our market coverage or enhance our technical capabilities, or that may
otherwise offer growth opportunities. While we have no current agreements or
negotiations underway with respect to any such acquisitions, we may acquire
businesses, products or technologies in the future. In the event of such
future acquisitions, we could:
. issue equity securities which would dilute current stockholders'
percentage ownership;
. incur substantial debt; or
. assume contingent liabilities.
Such actions by us could materially adversely affect our results of
operations and/or the price of our common stock. Acquisitions also entail
numerous risks, including:
. difficulties in assimilating acquired operations, technologies or
products;
. unanticipated costs associated with the acquisition could materially
adversely affect our results of operations;
. diversion of management's attention from other business concerns;
. adverse effects on existing business relationships with suppliers and
customers;
. risks of entering markets in which we have no or limited prior
experience; and
. potential loss of key employees of acquired organizations.
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We may not be able to successfully integrate any businesses, products,
technologies or personnel that we might acquire in the future, and our failure
to do so could have a material adverse effect on our business, financial
condition and results of operations.
Control by Existing Stockholders May Limit Your Ability to Influence the
Outcome of Director Elections and Other Matters Requiring Stockholder Approval
Upon completion of this offering, Copper Mountain's executive officers,
directors and principal stockholders and their affiliates will own 10,197,372
shares or approximately 45.6% of the outstanding shares of common stock (44.4%
if the underwriters' over-allotment option is exercised in full). These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election 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 a material adverse effect on the market price of the common stock
or prevent our stockholders from realizing a premium over the market prices
for their shares of common stock. For information about the ownership of
common stock by our executive officers, directors and principal stockholders
please refer to "Principal Stockholders."
Copper Mountain's Stock Price May Be Volatile and You May Not Be Able to
Resell Shares at or Above the Offering Price
There has previously not been a public market for Copper Mountain's common
stock. We cannot predict the extent to which investor interest in Copper
Mountain will lead to the development of a trading market or how liquid that
market might become. The initial public offering price for the shares 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. The trading price of our common stock could be subject to wide
fluctuations in response to factors such as:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new products or services offered by us or our competitors;
. changes in financial estimates by securities analysts;
. announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments by us or our competitors;
. additions or departures of key personnel;
. sales of common stock; and
. other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the Nasdaq National Market and
technology companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the
operating performance of such companies. The trading prices of many technology
companies' stocks are at or near historical highs and these trading prices and
multiples are substantially above historical levels. These trading prices and
multiples may not be sustained. These broad market and industry factors may
materially 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 instituted against such companies. Such
litigation, if instituted, could result in substantial costs and a diversion
of management's attention and resources, which would materially adversely
affect our business, financial condition and results of operations.
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Substantial Future Sales of Copper Mountain's Common Stock in the Public
Market Could Cause Its Stock Price to Fall
Sales of a large number of shares of Copper Mountain's common stock in the
public market after this offering or the perception that such sales could
occur could cause the market price of its common stock to drop. Upon
completion of this offering, we will have approximately 22,387,005 shares of
common stock outstanding, of which approximately 4,000,000 shares
(approximately 4,600,000 shares if the underwriters' over-allotment option is
exercised in full) will be freely transferable without restriction or
registration under the Securities Act of 1933, unless such shares are held by
our affiliates, as that term is defined in Rule 144 under the Securities Act.
The officers and directors and all of our existing stockholders have agreed
with Morgan Stanley & Co. Incorporated or have otherwise agreed with us not to
sell or otherwise dispose of any of their shares for 180 days after the date
of this prospectus. However, Morgan Stanley & Co. Incorporated may, in its
sole discretion, at any time without notice, release all or any portion of the
shares subject to lock-up agreements. Sales of common stock by existing
stockholders in the public market, or the availability of such shares for
sale, could adversely affect the market price of the common stock.
In addition, as soon as practicable after the date of this prospectus, we
intend to file a registration statement on Form S-8 with the Securities and
Exchange Commission covering the 7,445,372 shares of common stock reserved for
issuance under our 1996 Equity Incentive Plan, 1999 Non-Employee Directors'
Stock Option Plan and 1999 Employee Stock Purchase Plan and for options issued
outside such plans. On the date 180 days after the effective date of this
offering, at least 1,475,555 shares will be subject to immediately exercisable
options (based on options outstanding on March 31, 1999). Sales of a large
number of shares could have an adverse effect on the market price for our
common stock.
After this offering, the holders of 15,690,530 shares of common stock
(including shares issuable upon exercise of warrants) will have certain rights
with respect to registration of such shares for sale to the public. If such
holders, by exercising their registration rights, cause a large number of
securities to be registered and sold in the public market, such sales could
have an adverse effect on the market price for our common stock. If we were to
include in a company-initiated registration shares held by such holders
pursuant to the exercise of their registration rights, such sales may have an
adverse effect on our ability to raise needed capital.
Certain Provisions in Copper Mountain's Corporate Charter and Bylaws May
Discourage Take-Over Attempts and Thus Depress the Market Price of Our Stock
Provisions in Copper Mountain's certificate of incorporation, as amended and
restated upon the closing of this offering, may have the effect of delaying or
preventing a change of control or changes in its management. These provisions
include:
. the right of the board of directors to elect a director to fill a
vacancy created by the expansion of the board of directors;
. the ability of the board of directors to alter our bylaws without
getting stockholder approval;
. the ability of the board of directors to issue, without stockholder
approval, up to 5,000,000 shares of preferred stock with terms set by
the board of directors; and
. the requirement that at least 10% of the outstanding shares are needed
to call a special meeting of stockholders.
Each of these provisions could discourage potential take-over attempts and
could adversely affect the market price of our common stock.
18
<PAGE>
Copper Mountain Has No Specific Plan for Any Significant Portion of Proceeds
and Its Investment of the Net Proceeds May Not Yield a Favorable Return
Copper Mountain currently has no specific plans for any significant portion
of the net proceeds of the offering. As a consequence, our management will
have the discretion to allocate the net proceeds of this offering to uses the
stockholders may not deem desirable. We may not be able to invest these
proceeds to yield a significant return. Substantially all of the proceeds of
the offering will be invested in short-term, interest-bearing, investment
grade securities for an indefinite period of time.
The Purchasers in the Offering Will Immediately Experience Substantial
Dilution in Net Tangible Book Value
Because Copper Mountain's common stock has in the past been sold at prices
substantially less than the initial public offering price that you will pay,
you will suffer immediate dilution of $12.98 per share in pro forma net
tangible book value. The exercise of outstanding options and warrants may
result in further dilution. See "Dilution."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risks Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform such
statements to actual results or to changes in our expectations.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by Copper Mountain from the sale of
4,000,000 shares of common stock in this offering are estimated to be
$62,490,000 ($71,976,000 if the underwriters exercise their over-allotment
option in full), at an assumed initial public offering price of $17.00 and
after deducting underwriting discounts and commissions and estimated offering
expenses of $750,000 payable by Copper Mountain.
We expect to use the net proceeds for general corporate purposes, including
working capital and other corporate purposes, such as expansion of sales and
marketing activities and our overall operations. The amounts we actually
expend for such working capital and other purposes may vary significantly and
will depend on a number of factors, including the amount of our future
revenues and the other factors described under "Risk Factors." Accordingly,
our management will retain broad discretion in the allocation of the net
proceeds of this offering. A portion of the net proceeds may also be used to
acquire or invest in complimentary businesses, technologies, product lines or
products. We have no current plans, agreements or commitments with respect to
any such acquisition, and we are not currently engaged in any negotiations
with respect to any such transaction. Pending such uses, the net proceeds of
this offering will be invested in short term, interest-bearing, investment
grade securities.
DIVIDEND POLICY
We have never declared nor paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. In addition, our loan and security
agreement with a commercial bank prohibits the payment of dividends. Any
future determination to pay cash dividends will be at the discretion of the
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, general business condition and such other
factors as the board of directors may deem relevant.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect the conversion upon the closing of the
offering of all outstanding shares of preferred stock into 15,334,824
shares of common stock; and
. on a pro forma basis as adjusted to reflect the sale of the common stock
offered hereby at an assumed initial public offering price of $17.00 per
share and the receipt of the net proceeds therefrom, after deducting the
estimated expenses, underwriting discounts and commissions payable by
Copper Mountain.
This information should be read in conjunction with our financial statements
and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Long-term debt, less current portion(1)........ $ 1,828 $ 1,828 $ 1,828
Stockholders' equity:
Convertible preferred stock, no par value,
10,602,464 shares authorized, 10,223,230
shares issued and outstanding actual; $.001
par value, 5,000,000 shares authorized, no
shares issued and outstanding pro forma and
pro forma as adjusted....................... 44,502 -- --
Common stock, $.001 par value,
29,397,536 shares authorized, 3,052,181
shares issued and outstanding actual,
18,387,005 shares issued and outstanding pro
forma; 100,000,000 shares authorized,
22,387,005 shares issued and outstanding pro
forma as adjusted(2)........................ 3 18 22
Notes receivable from stockholders........... (41) (41) (41)
Paid-in capital.............................. 15,988 60,475 122,961
Deferred compensation........................ (8,303) (8,303) (8,303)
Accumulated deficit.......................... (24,564) (24,564) (24,564)
-------- -------- --------
Total stockholders' equity................. 27,585 27,585 90,075
-------- -------- --------
Total capitalization..................... $ 29,413 $ 29,413 $ 91,903
======== ======== ========
</TABLE>
- --------
(1) See Notes 3 and 4 of Notes to Financial Statements.
(2) Excludes: (1) 6,585,372 shares of common stock reserved for issuance under
our 1996 Equity Incentive Plan and 360,000 shares of common stock reserved
for issuance under our 1999 Non-Employee Directors' Stock Option Plan, of
which 4,582,225 shares and 180,000 shares, respectively, were subject to
outstanding options at weighted average exercise prices of $2.22 per share
and $12.00 per share, respectively; and (2) 355,706 shares of common stock
issuable upon exercise of outstanding warrants at a weighted average
exercise price of $2.08 per share; and (3) 200,000 shares of common stock
issuable upon exercise of outstanding non-qualified stock options at a
weighted average exercise price of $12.00 per share. See "Description of
Capital Stock," "Management--1996 Equity Incentive Plan" and "Management--
1999 Non-Employee Directors' Stock Option Plan."
21
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was approximately
$27.5 million or $1.50 per share of common stock. Pro forma net tangible book
value represents the amount of total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding, assuming
conversion of all outstanding shares of preferred stock into common stock.
Without taking into account any other changes in the net tangible book value
after March 31, 1999, other than to give effect to our sale of the 4,000,000
shares of common stock offered hereby at an assumed initial public offering
price of $17.00 per share, and our receipt of the estimated net proceeds
therefrom, our as adjusted pro forma net tangible book value as of March 31,
1999 would have been approximately $90.0 million or $4.02 per share. This
represents an immediate increase in net tangible book value of $2.52 per share
to existing stockholders and an immediate dilution of $12.98 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $17.00
Pro forma net tangible book value per share before this
offering....................................................... $1.50
Increase per share attributable to new investors................ 2.52
-----
As adjusted pro forma net tangible book value per share after this
offering......................................................... 4.02
------
Dilution per share to new investors............................... $12.98
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the differences between existing stockholders and the new investors with
respect to the number of shares of common stock purchased from Copper
Mountain, the total consideration paid and the average price per share paid,
before deducting the underwriting discounts and commissions and estimated
offering expenses payable by Copper Mountain.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 18,387,005 82.1% $ 45,739,000 40.2% $ 2.49
New investors................. 4,000,000 17.9 68,000,000 59.8 17.00
---------- ----- ------------ -----
Total....................... 22,387,005 100.0% $113,739,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants outstanding as of March 31, 1999. As of March 31, 1999, there were
options outstanding to purchase a total of 4,962,225 shares of common stock
with a weighted average exercise price of $2.97 per share and warrants
outstanding to purchase a total of 355,706 shares of common stock with a
weighted average exercise price of $2.08 per share. To the extent that any of
these options or warrants are exercised, there will be further dilution to new
investors.
22
<PAGE>
SELECTED FINANCIAL DATA
In the table below, we provide you with our summary historical financial
data. We have prepared this information using our financial statements for the
period March 11, 1996 (inception) to December 31, 1996, the years ended
December 31, 1997 and 1998, and the three month periods ended March 31, 1998
and 1999. The financial statements for the period March 11, 1996 (inception)
to December 31, 1996 and the years ended December 31, 1997 and 1998 have been
audited by Ernst & Young LLP, independent auditors. The financial statements
for the three-month periods ended March 31, 1998 and 1999 have not been
audited.
When you read this summary historical financial data, it is important that
you read along with it the historical financial statements and related notes
included in this prospectus.
<TABLE>
<CAPTION>
Period from
March 11, 1996
(inception) through Year Ended Three Months Ended
December 31, December 31, March 31,
------------------- ------------------ --------------------
1996 1997 1998 1998 1999
------------------- -------- -------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue............. $ -- $ 211 $ 21,821 $ 317 $ 13,217
Cost of revenue......... -- 1,717 12,400 217 6,384
------- -------- -------- --------- ---------
Gross profit (loss)..... -- (1,506) 9,421 100 6,833
Operating expenses:
Research and
development.......... 1,483 4,753 7,225 1,773 2,564
Sales and marketing... -- 1,510 5,363 724 2,581
General and
administrative....... 553 1,928 3,428 535 1,130
Amortization of
deferred stock
compensation......... 189 1,490 3,929 435 1,693
------- -------- -------- --------- ---------
Total operating
expenses........... 2,225 9,681 19,945 3,467 7,968
------- -------- -------- --------- ---------
Loss from operations.... (2,225) (11,187) (10,524) (3,367) (1,135)
Interest income......... 47 268 406 113 202
Interest expense........ (3) (97) (213) (33) (55)
------- -------- -------- --------- ---------
Loss before income
taxes.................. (2,181) (11,016) (10,331) (3,287) (988)
Provision for income
taxes.................. -- -- -- -- 48
------- -------- -------- --------- ---------
Net loss................ $(2,181) $(11,016) $(10,331) $ (3,287) $ (1,036)
======= ======== ======== ========= =========
Basic and diluted net
loss per share(1)...... $(11.67) $ (15.62) $ (7.75) $ (3.08) $ (.47)
======= ======== ======== ========= =========
Shares used to compute
basic and diluted net
loss per share(1)...... 187 705 1,333 1,068 2,209
======= ======== ======== ========= =========
Pro forma basic and
diluted net loss per
share(2)............... $ (.62) $ (.06)
======== =========
Shares used in computing
pro forma basic and
diluted net loss per
share(2)............... 16,668 17,544
======== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- ---------
1996 1997 1998 1999
------ ------- ------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments................................. $3,406 $ 9,517 $18,529 $18,507
Working capital.............................. 366 7,653 24,326 23,805
Total assets................................. 4,056 12,332 36,209 37,393
Long-term debt and capital lease obligation,
less current portion........................ 262 735 1,965 1,828
Total stockholders' equity................... 750 9,069 26,843 27,585
</TABLE>
- --------
(1) See Note 1 of Notes to the Financial Statements for a description of the
computation of basic and diluted net loss per share and the number of
shares used to compute basic and diluted net loss per share.
(2) Pro forma per share calculations reflect the conversion upon the closing
of the offering of all outstanding shares of preferred stock into
15,334,824 shares of common stock.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
Overview
From Copper Mountain's inception in March 1996 through December 1997, its
operating activities related primarily to developing, building and testing
prototype products; building its technical support infrastructure; commencing
the staffing of its marketing, sales and customer service organizations; and
establishing relationships with its customers. We commenced shipments of our
CopperEdge product family in September 1997, including our initial line cards
and our CopperRocket DSL customer premise equipment, or DSL CPE. Since
inception, we have incurred significant losses and as of March 31, 1999, we
had an accumulated deficit of $24.6 million.
Our revenue is generated primarily from sales of our central office based
equipment: our CopperEdge 200 DSL access concentrators, or CE200, the related
wide area network cards, line cards and, to a lesser extent, from sales of our
DSL CPE. Additionally, we plan to sell network management software which
provides monitoring and management capabilities for the CE200, revenues from
which have not been material to date. For the year ended December 31, 1998,
sales to our two largest customers accounted for approximately 79% of our
revenue, of which sales to NorthPoint Communications, Inc. accounted for
approximately 61% of our revenue and sales to Rhythms NetConnections Inc.,
accounted for approximately 18% of our revenue. This concentration of revenue
has continued during the three months ended March 31, 1999, with NorthPoint
and Rhythms accounting for approximately 36% and 48% of our revenue,
respectively, during the quarter. While the level of sales to any specific
customer is anticipated to vary from period to period, we expect that we will
continue to have significant customer concentration for the foreseeable
future.
We market and sell our products directly to telecommunications service
providers and, to a lesser extent, through strategic original equipment
manufacturers and distributors. We generally recognize revenue from product
sales upon shipment if collection of the resulting receivable is probable and
product returns are reasonably estimated. No revenue is recognized on products
shipped on a trial basis. Estimated sales returns, based on historical
experience by product, are recorded at the time the product revenue is
recognized. To date, we have not generated any revenues from international
sources.
We expect our gross margin to be affected by many factors including
competitive pricing pressures, fluctuations in manufacturing volumes, costs of
components and sub-assemblies, the mix of products or system configurations
sold and the volume and timing of sales of follow-on line cards for CE200
systems shipped in prior periods. Additionally, our gross margin may fluctuate
due to changes in our mix of distribution channels. Currently we derive the
majority of our revenue from sales made directly to telecommunications service
providers. With the recent strategic original equipment manufacturer
agreements with Lucent Technologies Inc. and 3Com Corporation, we expect to
generate increasing original equipment manufacturer revenue in the future. A
significant increase in our original equipment manufacturer revenue, while not
certain, could further impact or reduce our gross margin.
To date, gross margin on sales of our CE200 and related wide area network
and line cards, typically sold as a combined system, has been higher than
gross margin on sales of DSL CPE. Furthermore, combined systems are not
generally fully populated (i.e., eight line cards per system which can support
up to 192 subscribers) when sold. When our customers add more subscribers than
are supported in the initial configuration, we expect that these customers
will purchase additional line cards from us to increase subscriber capacity.
The sale of additional line cards generates higher gross margin than the
initial sale of combined systems. Gross margin on our DSL CPE is expected to
decline in the future and we expect to face pricing competition which may
result in lower average selling prices for these products as other suppliers
of Copper Mountain compatible CPE enter the market. As the telecommunications
service providers that purchase our products make their services broadly
available to their customers, we expect our product mix to continue to shift
more heavily toward sales of line cards. We expect gross margin for our CE200
systems and follow-on line cards to improve due to lower component costs and
improved costs from our subcontractors as our revenue from these products
increases. However, we cannot be sure that we will achieve or maintain the
revenue volumes required for these increases in gross margin.
24
<PAGE>
We outsource most of our manufacturing and supply chain management
operations, and we conduct manufacturing engineering, quality assurance,
program management, documentation control and product repairs at our
manufacturing facility in San Diego, California. Accordingly, a significant
portion of our cost of revenue consists of payments to our current contract
manufacturer, SMS Technologies, Inc. We expect to transition to a new
independent manufacturer, Flextronics International Ltd., during the second
quarter of 1999. We selected Flextronics as our new manufacturing partner with
the goal of lowering per unit product costs as a result of manufacturing
economies of scale. However, we cannot assure you when or if such cost
reductions will occur. The failure to obtain such cost reductions could
materially adversely affect our gross margins and operating results.
Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees and prototype expenses related to
the design, development and testing of our products and enhancement of our
network management software. We expense all research and development expenses
as incurred. We believe that continued investment in research and development
is critical to attaining our strategic product and cost-reduction objectives
and, as a result, we expect these expenses to increase in absolute dollars in
the future.
Sales and marketing expenses consist of salaries, commissions and related
expenses for personnel engaged in marketing, sales and field service support
functions, as well as trade shows and promotional expenses. We intend to
invest in marketing, selling and promotional programs, and therefore we expect
expenses related to these programs to continue to increase substantially in
absolute dollars in the future. In addition, we expect to substantially expand
our field sales operations and customer support organizations, which would
also result in an increase in sales and marketing expenses.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, human resources, and administrative
personnel, recruiting expenses, professional fees and other general corporate
expenses. We expect general and administrative expenses to increase in
absolute dollars as we add personnel and incur additional costs related to the
growth of our business and operation as a public company.
Amortization of deferred stock compensation resulted from the granting of
stock options to employees with exercise prices per share determined to be
below the deemed fair values per share for financial reporting purposes of our
common stock at dates of grant. The deferred compensation is being amortized
to expense in accordance with FASB Interpretation No. 28 over the vesting
period of the individual options, generally four years. We recorded total
deferred stock compensation of $1,813,000, $2,429,000, $11,128,000 and
$234,000 in 1996, 1997, 1998 and the three months ended March 31, 1999,
respectively, and amortized $189,000, $1,490,000, $3,929,000 and $1,693,000 in
1996, 1997, 1998 and the three months ended March 31, 1999, respectively,
leaving approximately $8,303,000 to be amortized in future periods.
Despite growing revenues, we have not been profitable on a fiscal-year
basis, and we may continue to incur net losses. In addition to the customer
concentration we have experienced, we also have a lengthy sales cycle for our
products, and there is often a significant delay between the time we incur
expenses and the time we realize the related revenue. To the extent that
future revenues do not increase significantly in the same periods in which
operating expenses increase, our operating results would be adversely
affected. On March 31, 1999 we entered into a lease for a new facility in San
Diego, California which expires in July 2005. As a result, we expect to
combine our two offices in San Diego in this new facility which we expect will
provide us room for future expansion.
25
<PAGE>
Quarterly Operating Results
The following tables present unaudited quarterly operating results, in
dollars and as a percentage of net revenue, for the five quarters ended March
31, 1999. We believe this information reflects all adjustments (consisting
only of normal 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 for any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net revenue................ $ 317 $ 1,281 $ 5,556 $14,667 $13,217
Cost of revenue............ 217 795 3,359 8,029 6,384
-------- ------- ------- ------- -------
Gross profit............... 100 486 2,197 6,638 6,833
Operating expenses:
Research and development.. 1,773 1,788 1,765 1,899 2,564
Sales and marketing....... 724 954 1,377 2,308 2,581
General and
administrative........... 535 721 971 1,201 1,130
Amortization of deferred
stock compensation....... 435 568 1,294 1,632 1,693
-------- ------- ------- ------- -------
Total operating
expenses................ 3,467 4,031 5,407 7,040 7,968
-------- ------- ------- ------- -------
Loss from operations....... (3,367) (3,545) (3,210) (402) (1,135)
Interest income............ 113 62 18 213 202
Interest expense........... (33) (62) (65) (53) (55)
-------- ------- ------- ------- -------
Loss before income taxes... (3,287) (3,545) (3,257) (242) (988)
Provision for income
taxes..................... -- -- -- -- 48
-------- ------- ------- ------- -------
Net loss................... $ (3,287) $(3,545) $(3,257) $ (242) $(1,036)
======== ======= ======= ======= =======
<CAPTION>
As a Percentage of Net Revenue
----------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenue................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue............ 68.5 62.1 60.5 54.7 48.3
-------- ------- ------- ------- -------
Gross profit............... 31.5 37.9 39.5 45.3 51.7
Operating expenses:
Research and development.. 559.3 139.6 31.7 12.9 19.4
Sales and marketing....... 228.4 74.4 24.8 15.8 19.5
General and
administrative........... 168.8 56.3 17.5 8.2 8.5
Amortization of deferred
stock compensation....... 137.2 44.3 23.3 11.1 12.8
-------- ------- ------- ------- -------
Total operating
expenses................ 1,093.7 314.6 97.3 48.0 60.2
-------- ------- ------- ------- -------
Loss from operations....... (1,062.2) (276.7) (57.8) (2.7) (8.5)
Interest income............ 35.7 4.8 0.3 1.5 1.5
Interest expense........... (10.4) (4.8) (1.2) (0.4) (0.4)
-------- ------- ------- ------- -------
Loss before income taxes... (1,036.9) (276.7) (58.7) (1.6) (7.4)
Provision for income
taxes..................... -- -- -- -- 0.4
-------- ------- ------- ------- -------
Net loss................... (1,036.9)% (276.7)% (58.7)% (1.6)% (7.8)%
======== ======= ======= ======= =======
</TABLE>
26
<PAGE>
Five Quarters Ended March 31, 1999
Net Revenue. Our revenue increased in each of the three quarters ended
December 31, 1998. Revenue in the quarter ended March 31, 1999 was $1.5
million less than in the quarter ended December 31, 1998 primarily due to a
decline in our shipments to NorthPoint which were partially offset by an
increase in our shipments to Rhythms. The increase in revenue in each of the
prior three quarters reflected the commercial acceptance of our CE200, the
successive release of various DSL line cards for the CE200 systems, release of
our DSL CPE, investments made in our marketing and direct sales organization
and the increased commercial acceptance of DSL technology.
Gross Profit. Our gross profit increased in each of the four quarters ended
March 31, 1999. The increases were due to operating efficiencies including
favorable product mix, decreased unit costs and improved overhead absorption.
We include warranty reserves, which are accrued monthly under our warranty
policy, in our cost of revenue figures. These warranty reserves are taken in
connection with the repair and replacement of certain products.
Research and Development. Our research and development expenses increased in
each of the four quarters ended March 31, 1999 except for the quarter ended
September 30, 1998 where expenses decreased slightly because of temporary
reductions in expenses for prototype material. These expenses have generally
increased because of increases in our personnel costs, quality and technical
support expenses, depreciation expense and costs of outside services. Expenses
for prototype materials fluctuated, on a quarter to quarter basis, due to the
timing of commercial releases of our products, and we may also continue to
experience fluctuations in prototype material expenses in the future. Research
and development expenses as a percentage of revenue declined in each of the
three quarters ended December 31, 1998 due to increases in our net revenue in
each such quarter. Research and development expenses as a percentage of
revenue increased in the quarter ended March 31, 1999 compared to the prior
quarter due to a substantial increase in the expenses and a reduction in net
revenue.
Sales and Marketing. Our sales and marketing expenses increased in each of
the four quarters ended March 31, 1999 due to general increases in personnel
costs, sales commissions, public relations expenses, and other variable
marketing expenses. Additionally, we have continued to increase our co-
marketing efforts and expenditures with vendors supplying Copper Mountain
compatible DSL CPE, strategic original equipment manufacturers and customers.
We expect these expenses, including costs of trade show participation, costs
of sponsorship of industry forums and expenses for prototype products, to
continue to increase in the future. Sales and marketing expenses as a
percentage of revenue declined in each of the three quarters ended December
31, 1998 due to increases in our net revenue in each such quarter. Sales and
marketing expense as a percentage of revenue increased in the quarter ended
March 31, 1999 as compared to the prior quarter due to an increase in these
expenses and a reduction of net revenue.
General and Administrative. Our general and administrative costs increased
in each of the three quarters ended December 31, 1998 due to increased
personnel and facilities related expenses. The decrease in our general and
administrative expenses in the quarter ended March 31, 1999 was due to lower
expenses for bonuses and relocation of employees. General and administrative
expenses as a percentage of revenue declined in each of the three quarters
ended December 31, 1998 due to increases in our net revenue in each such
quarter. General and administrative expense as a percentage of revenue
increased in the quarter ended March 31, 1999 as compared to the prior quarter
due to a reduction of net revenue and an increase in these expenses.
Interest Income (Expense). Our quarterly interest income fluctuated over the
last four quarters due to changes in our cash balances related to the timing
of the sale of our series D preferred stock in October 1998. Our quarterly
interest expense has also fluctuated over the last four quarters, due
primarily to varying interest expenses associated with our line of credit.
Provision for Income Taxes. The Company had not recorded any provision for
income taxes except for the quarter ended March 31, 1999 which is based on an
estimate of the effective tax rate for the entire fiscal year 1999.
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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, many of which are outside of our control. Because of these and other
factors, our quarterly revenues, expenses and results of operations could vary
significantly in the future, and period-to-period comparisons should not be
relied upon as indications of future performance. We may not be able to
increase our revenues in future periods or be able to sustain our existing
level of revenues or our rate of revenue growth on a quarterly or annual
basis. In addition, our annual or quarterly operating results may not meet the
expectations of securities analysts and investors. If this happens, the
trading price of our common stock could significantly decline.
Results of Operations
The following table sets forth, as a percentage of total revenues, certain
statement of operations data for the periods indicated.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
---------------- ----------------------
1997 1998 1998 1999
-------- ----- ---------- ---------
<S> <C> <C> <C> <C>
Net revenue.......................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue...................... 813.7 56.8 68.5 48.3
-------- ----- ---------- -------
Gross profit (loss).................. (713.7) 43.2 31.5 51.7
Operating expenses:
Research and development........... 2,252.6 33.1 559.3 19.4
Sales and marketing................ 715.6 24.6 228.4 19.5
General and administrative......... 913.8 15.7 168.8 8.5
Amortization of deferred stock
compensation...................... 706.2 18.0 137.2 12.8
-------- ----- ---------- -------
Total operating expenses......... 4,588.2 91.4 1,093.7 60.2
-------- ----- ---------- -------
Loss from operations................. (5,301.9) (48.2) (1,062.2) (8.5)
Interest income...................... 127.0 1.9 35.7 1.5
Interest expense..................... (46.0) (1.0) (10.4) (0.4)
-------- ----- ---------- -------
Loss before income taxes............. (5,220.9) (47.3) (1,036.9) (7.4)
Provision for income taxes........... -- -- -- 0.4
-------- ----- ---------- -------
Net loss............................. (5,220.9)% (47.3)% (1,036.9)% (7.8)%
======== ===== ========== =======
</TABLE>
Three Months Ended March 31, 1998 and 1999
Net Revenue. Net revenue increased from $317,000 for the three months ended
March 31, 1998 to $13.2 million in the three months ended March 31, 1999. This
increase was due to increased sales of our CE200 DSL access concentrators and
related DSL CPE. Sales to our two largest customers, NorthPoint and Rhythms,
increased from $279,000 and zero, respectively, for the three months ended
March 31, 1998 to $4.8 million and $6.4 million, respectively, for the three
months ended March 31, 1999. For each of the quarters ended March 31, 1998 and
1999, we generated no revenue from international sales.
Gross Profit. Our gross profit increased from $100,000 for the three months
ended March 31, 1998 to $6.8 million in the three months ended March 31, 1999.
This increase in gross profit occurred because the increase in net revenue for
the respective periods was greater than the increase in cost of revenue for
the respective periods. Gross margin percentages also increased on a year over
year basis, from 31.5% for the quarter ended March 31, 1998 to 51.7% for the
quarter ended March 31, 1999. This increase in gross profit was primarily due
to the increase in unit volumes, and to a lesser extent due to the decreased
unit costs associated with improved overhead absorption and a favorable
product mix.
Research and Development. Our research and development expenses increased
from $1.8 million for the quarter ended March 31, 1998 to $2.6 million for the
quarter ended March 31, 1999. This increase was due to an
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increase in personnel expenses related to more full-time engineering staff,
prototype materials expenses, quality and technical support costs,
depreciation and costs of other outside services. Research and development
expenses as a percentage of revenue decreased from 559.3% for the quarter
ended March 31, 1998 to 19.5% for the quarter ended March 31, 1999. This
decrease in research and development expense as a percentage of revenue was
primarily the result of an increase in our net revenue during the stated
periods.
Sales and Marketing. Our sales and marketing expenses increased from
$724,000 for the quarter ended March 31, 1998 to $2.6 million for the quarter
ended March 31, 1999. This increase was due to an increase in sales
commissions associated with higher net revenue, higher personnel expenses for
sales and marketing staff, trade show and other promotional expenses and
expenses for prototype products during the stated periods. Sales and marketing
expenses as a percentage of revenue decreased from 228.4% of revenue for the
quarter ended March 31, 1998 to 19.5% for the quarter ended March 31, 1999.
This decrease was principally the result of an increase in our net revenue.
General and Administrative. Our general and administrative expenses
increased from $535,000 for the quarter ended March 31, 1998 to $1.1 million
for the quarter ended March 31, 1999. This increase was due to increased
staffing for finance and accounting and management informations systems
personnel, an increase in legal expenses, and growth in recruiting and human
resources expenses. General and administrative expenses as a percentage of
revenue decreased from 168.8% for the quarter ended March 31, 1998 to 8.5% for
the quarter ended March 31, 1999. This decrease was primarily the result of an
increase in our net revenue.
Interest Income (Expense). Our interest income increased from $113,000 for
the quarter ended March 31, 1998 to $202,000 for the quarter ended March 31,
1999. This increase was due to higher average cash balances in the quarter
ended March 31, 1999 which are attributable to the our series D preferred
stock financing which was concluded in the quarter ended December 31, 1998.
Our interest expense increased from $33,000 for the quarter ended March 31,
1998 to $55,000 for the quarter ended March 31, 1999. This increase was due to
a greater utilization of equipment lease financing for the quarter ended March
31, 1999.
Provision for Income Taxes. We did not incur any provision for income taxes
for the quarter ended March 31, 1998, while our provision for the quarter
ended March 31, 1999 was $48,000. The provision for income taxes for the three
months ended March 31, 1999 is based on an estimate of the effective tax rate
for the entire 1999 fiscal year.
Years Ended December 31, 1997 and 1998
Net Revenue. Our revenue increased from $211,000 in 1997 to $21.8 million in
1998. This increase was primarily due to the successful transition from
development of our products to commencement of commercial operations and the
general release of our products. In 1998, we successfully introduced our 24
port SDSL line card, our 24 port IDSL line card, our frame relay-based wide
area networks card and our IDSL CPE.
Gross Profit (Loss). Our gross profit increased from a loss of $1.5 million
in 1997 to $9.4 million in 1998. The increase in gross profit was primarily
the result of the absorption of overhead associated with greater unit volumes
and increased economies of scale. As a result, our gross margin in 1998
improved substantially over 1997.
Research and Development. Our research and development expenses increased
from $4.8 million in 1997 to $7.2 million in 1998. This increase in our
research and development expenses was related to increases in personnel and
personnel related costs, prototype material expenses, contract development
expense and as well as expenses related to the completion and commercial
release of our initial products. We intend to increase expenditures in
research and development programs in future periods for the purpose of
enhancing current products, reducing the cost of current products and
developing new products.
Sales and Marketing. Our sales and marketing expenses increased from $1.5
million in 1997 to $5.4 million in 1998. This increase was primarily a result
of an increase in personnel and personnel-related costs,
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including increases in staffing for marketing program management, product
marketing, account management, customer support and direct sales as well as a
substantial increase in sales commissions. To a lesser extent, the increase
resulted from higher trade show and marketing communications expenses.
General and Administrative. Our general and administrative expenses
increased from $1.9 million in 1997 to $3.4 million in 1998. This increase is
a result of an increase in personnel costs for executive officers and support
staff, legal, accounting and consulting fees. The increase in our general and
administrative staffing, was required to support the growth in our operations,
commercial activities and customer base.
Interest Income (Expense). Net interest income increased by $22,000, from
$171,000 in 1997 to $193,000 in 1998. This increase reflects an increase in
interest income generated from higher average cash balances in 1998. The
increases in interest income were partially offset by lesser increases, from
1997 to 1998, in interest expense associated with our equipment loans and our
line of credit.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
sale of preferred equity securities and more recently through the use of loans
for the purchase of capital equipment. We have raised an aggregate of $44.5
million, net of offering expenses, through the sale of preferred stock
offerings.
At March 31, 1999, we had cash and cash equivalents of $8.5 million and
short-term investments of $10.0 million. We have a $4.0 million line of credit
agreement with a bank which allows us to borrow an amount equal to 80% of
eligible accounts receivable plus the lesser of 25% of our eligible inventory
or $500,000. There were no amounts outstanding under the line of credit at
March 31, 1999. In addition, we have secured equipment financing with three
lenders which terms allow us to borrow $3.7 million. As of March 31, 1999,
$2.7 million remained outstanding under these arrangements. See Notes 3 and 4
of Notes to Financial Statements.
Cash provided from operations for the three months ended March 31, 1999 was
$1.4 million. Cash provided from operations was primarily related to income
and depreciation. Cash used in operating activities for the periods ended
December 31, 1996, 1997 and 1998 was $1.5 million, $8.0 million and $14.3
million, respectively. The relative increase in cash used for operating
activities for the year ended December 31, 1997 compared to the prior period
was primarily due to an increase in net loss of $8.8 million which was
partially offset by an increase in accounts payable and other accruals. The
relative increase in cash used for operating activities for the year ended
December 31, 1998 compared to the prior year was primarily due to increases in
inventory, accounts receivable and other assets, as a result of the
introduction of and growth in demand for our products. This increase was
partially offset by increases in accounts payable and other accruals, as well
as a $685,000 decrease in the net loss.
Cash used in investing activities for the quarter ended March 31, 1999 was
$644,000. Cash used in investing activities for the periods ended December 31,
1996, 1997 and 1998 was $682,000, $1.5 million and $12.1 million,
respectively. The relative increase in cash used for investing activities for
the year ended December 31, 1997 compared to the prior period was primarily
due to an $833,000 increase in the purchase of computers and other equipment.
The relative increase in cash used for investing activities for the year ended
December 31, 1998 compared to the prior year was primarily due to the purchase
of $10.9 million in short term investments, which was partially offset by a
decrease in the amount of equipment purchased.
Cash provided from financing for the three months ended March 31, 1999 was
$61,000. Cash provided by financing activities for the periods ended December
31, 1996, 1997 and 1998 was $5.6 million, $15.6 million and $24.5 million,
respectively. The relative increase in cash provided by investing activities
for the year ended December 31, 1997 compared to the prior period was
primarily due to $15.2 million in net proceeds from our issuance of series B
and series C preferred stock. The relative increase in cash provided from
financing activities for the year ended December 31, 1998 compared to the
prior year was primarily due to $24.1 million in net proceeds from our
issuance of series D preferred stock.
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We have no material commitments other than obligations under our credit
facilities and operating and capital leases. See Notes 3, 4 and 6 of Notes to
Financial Statements. Our future capital requirements will depend upon many
factors, including the timing of research and product development efforts and
expansion of our marketing efforts. We expect to continue to expend
significant amounts on property and equipment related to the expansion of
facility infrastructure, computer equipment and for research and development
laboratory and test equipment to support on-going research and development
operations.
In future periods, we generally anticipate significant increases in working
capital on a period-to-period basis primarily as a result of planned increased
product revenue. In conjunction with the expected increase in revenue, we
expect higher relative levels of inventory and accounts receivable. While we
also expect an increase in accounts payable and other liabilities, we do not
expect that they will offset the increases in inventory and accounts
receivable.
We believe that our cash and cash equivalents balances, short-term
investments and funds available under our existing line of credit will be
sufficient to satisfy our cash requirements for at least the next 12 months.
Our management intends to invest our cash in excess of current operating
requirements in short-term, interest-bearing, investment-grade securities.
Interest Rate Risk
We are exposed to changes in interest rates primarily from our long-term
debt arrangements and, secondarily, our investments in certain held-to-
maturity securities. Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate changes. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially effect the fair value of
interest sensitive financial instruments at December 31, 1998.
Impact of Year 2000
Many computers, software, and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as
the year 2000 approaches, and are commonly referred to as the "Year 2000
Problem."
General Readiness Assessment. The Year 2000 Problem affects the computers,
software and other equipment that we use, operate or maintain for our
operations. As a result, we have formalized our Year 2000 compliance plan (the
"Plan"), to be implemented by a team of employees, led by our internal
information technology staff, responsible for monitoring the assessment and
remediation status of our Year 2000 projects and reporting such status to the
Audit Committee of our Board of Directors. This project team is currently
assessing 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 Copper Mountain's Software and Products. Beginning in 1998, we
began assessing the ability of our software and products to operate properly
in the year 2000. We believe that our current products are Year 2000
compliant. Additionally, as we design and develop new products, we subject
them to testing for Year 2000 compliance and the ability to distinguish
between various date formats. We expect to continue to test our software and
products for Year 2000 compliance and compliance when used with other standard
operating systems or computer platforms, including those developed by
companies such as Microsoft Corporation and Sun MicroSystems, Inc.
Assessment of Internal Infrastructure. We believe that we have identified
most of the major computers, software application, and related equipment used
in connection with our internal operations that will 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. We are currently
assessing the potential impact of the Year 2000 problem on such
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<PAGE>
applications and equipment. Upon completion of such evaluation, which we
expect to occur by the end of June 1999, we expect to commence the process of
modifying, upgrading, and replacing major systems that have been assessed as
adversely affected. We expect to complete this process before the occurrence
of any material disruption of our business.
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 are currently assessing the
potential effect and costs of remediating the Year 2000 Problem on our office
equipment and our facilities in San Diego, California and Palo Alto,
California.
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 1999.
This estimate is being monitored, and we will revise it as additional
information becomes available.
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. In addition, we have not deferred any material information technology
projects, nor equipment purchases, as a result of our Year 2000 Problem
activities.
Suppliers. As part of our Year 2000 plan, we intend to contact third-party
suppliers of components and our key subcontractors used in the delivery of our
products to identify and, to the extent possible, resolve issues involving the
Year 2000 Problem. However, we have limited or no control over the actions of
these third-party suppliers and subcontractors. Thus, while we expect that we
will be able to resolve any significant Year 2000 Problems with these third
parties, there can be no assurance that these suppliers will resolve any or
all Year 2000 Problems before the occurrence of a material disruption to the
operation of our business. Any failure of these third parties to timely
resolve Year 2000 Problems with their systems could have a material adverse
effect on our business, financial condition and results of operations.
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. 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 which Year 2000
Problem-related failures will occur 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 or performance, 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. We are currently developing contingency plans to be
implemented if our efforts to identify and correct Year 2000 Problems
affecting our internal systems are not effective. We expect to complete our
contingency plans by the end of June 1999. Depending on the systems affected,
these plans could include:
. accelerated replacement of affected equipment or software;
. short to medium-term use of backup equipment and software or other
redundant systems;
. increased work hours for our personnel or the hiring of additional
information technology staff; and
. the use of contract personnel to correct, on an accelerated basis, any
Year 2000 Problems that arise or to provide interim alternate solutions
for information system deficiencies.
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Our implementation of any of these contingency plans could have a material
adverse effect on our business, financial condition and results of 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.
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BUSINESS
Overview
Copper Mountain Networks supplies digital subscriber line, DSL,
communications products to telecommunications service providers allowing them
to effectively utilize the existing copper infrastructure to deliver high-
speed data access services to their customers. Copper Mountain Networks
designs, manufactures, sells and supports these products and believes the
demand for higher speed access solutions which are enabled by such products is
significant and will continue to grow as the Internet and corporate networking
applications become increasing pervasive.
Industry Background
Over the past few years, the volume of data traffic across public
communications networks has increased significantly due to the use of the
Internet as a communications and transaction medium. According to
International Data Corporation, the number of Internet users worldwide reached
approximately 69 million in 1997 and is forecasted to grow to approximately
320 million by 2002. International Data Corporation also estimates that the
value of goods and services sold worldwide through the Internet will increase
from $12 billion in 1997 to over $400 billion in 2002. In addition to
electronic commerce, business usage of web-based communications, remote access
for teleworkers, applications hosting and other services have generated
enormous traffic for the existing communications infrastructure. To meet this
demand, service providers have installed high-bandwidth fiber optic
transmission equipment, high-speed switches and core routers in backbone and
interoffice networks.
In contrast to these core networks, which support digital transmission
speeds exceeding 9 gigabits per second, or Gbps, most access networks, or
connections between subscribers and central offices, often called the "last
mile," are made through the copper infrastructure originally built to transmit
analog voice signals. In fact, over 140 million businesses and homes in the
United States are served by this copper infrastructure, and the worldwide
installed base of copper lines exceeds 700 million. We believe most business
and residential users have found narrowband access, using dial-up analog
modems with connection speeds that do not exceed 56.6 kilobits per second, or
Kbps, inadequate to meet their high-bandwidth requirements.
Until recently, local telephone companies such as the Regional Bell
Operating Companies and GTE Corporation, collectively the incumbent local
exchange carriers, or ILECs, were the exclusive operators of this last-mile,
copper wire-based infrastructure and primarily offered ISDN and T-1 services
to address the need for high-speed connectivity. These service offerings
enable symmetrical data transmission at rates up to 128 Kbps and 1.5 megabits
per second, or Mbps, respectively. ISDN, which requires the installation of
special equipment at each end of the copper access line, has achieved limited
success due to complexity and high cost of deployment. T-1 services provide 12
times the bandwidth of ISDN, but require expensive infrastructure modification
and investment. While there are various transmission media alternatives for
providing broadband connectivity, such as coaxial cable and wireless, we
believe none have the cost and coverage advantages of using the existing
copper infrastructure.
Digital Subscriber Line technology was developed to address the last-mile
bottleneck. While there are several variants of DSL implementations, they all
share several important advantages over traditional high-speed services
delivered over the copper infrastructure as well as cable and wireless
broadband alternatives.
. Guaranteed, Dedicated Bandwidth. DSL is a point-to-point technology that
allows for guaranteed levels of bandwidth. Because DSL connections are
dedicated to each user, DSL does not suffer from service degradation as
other subscribers are added to the system, and, in addition, allows a
higher level of security. Alternative broadcast solutions, such as cable
and wireless, are shared systems which suffer service degradation and
increase the risk of security breaches as additional users share
bandwidth.
. Low Cost. Because DSL uses the existing copper-based last-mile
connection, it can be significantly less expensive to deploy to
businesses and homes than other broadband solutions. In addition, recent
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advances in semiconductor technology and industry standardization have
made the widespread deployment of DSL increasingly economical to both
service providers and subscribers.
. Universal Coverage. Since virtually all businesses and homes in the
United States already have installed copper wire connections, DSL
technologies can be made immediately available to a large percentage of
potential customers. In addition, the leading variants of DSL can enable
data transmission up to and beyond 20,000 feet without requiring
repeaters.
Despite the advantages of deploying DSL over existing copper infrastructure,
ILECs historically have largely sought to protect their existing T-1 and ISDN
businesses. In the mid-1990's, however, the prospect of greater competition
from cable operators deploying cable modems to deliver high-bandwidth services
prompted the ILECs to accelerate their investments in those DSL technologies
that appeared most appropriate for residential subscribers. The ILECs promoted
a DSL variant called asymmetrical DSL, or ADSL, that permits one-way high-
bandwidth data transfer. Most DSL vendors focused on ADSL solutions for the
residential market because consumers typically download large quantities of
data-intensive content from the Internet, while the amount of data sent
upstream by consumers is typically limited. However, deployments of ADSL have
been limited because of its cost and a variety of technical issues.
More recently, DSL transmission technology has been embraced by a new set of
telecommunications service providers that emerged as a result of the
Telecommunications Reform Act of 1996. The Telecom Act redefined the
competitive landscape in the telecommunications industry by creating a legal
framework for new service providers to provide competing local
telecommunications services. The Telecom Act also eliminated a substantial
barrier to entry for these competitive local exchange carriers, or CLECs, by
allowing them to use the existing copper-based network infrastructure built by
the ILECs.
The realization of all of the objectives of the Telecom Act, however, is
still subject to certain uncertainties, including:
. legal proceedings that will further define rights and duties under the
Telecom Act;
. actions or inactions by telephone companies or other carriers that
affect the pace at which changes contemplated by the Telecom Act will
occur;
. resolution of questions concerning which parties will finance such
changes; and
. other regulatory, economic and political factors.
Since the implementation of the Telecom Act, some of the new CLECs have
focused on providing competitively priced, high-bandwidth connectivity for
business customers who typically had used T-1 lines from the ILECs to meet
their bandwidth needs or who used dial-up modems but are currently seeking
cost-effective broadband services. These CLECs are focused on providing DSL
solutions that meet the current needs of business subscribers and provide
flexibility for future services.
While many DSL equipment vendors focus on the needs of the residential
market, few focus on the unique needs of business subscribers. In particular,
CLECs are seeking equipment solutions that enable the deployment of cost-
effective, full-coverage, high-bandwidth data access services. Moreover, as
the demands of high-bandwidth users and technology mature, other
telecommunications service providers are also looking for vendors that can
effectively incorporate DSL into communications equipment solutions. Finally,
telecommunications service providers generally want their equipment providers
to support a variety of end-user devices. As the DSL market naturally evolves
from business to residential users, telecommunications service providers will
require equipment that enables them to provide high-speed services across
their subscriber base.
The Copper Mountain Solution
We provide broadband access solutions based on DSL technology to
telecommunication service providers. Our solutions enable CLECs, ILECs and
other telecommunications service providers to provide high-speed,
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cost-effective, last-mile connectivity over the existing copper wire telephone
infrastructure to the business, multiple tenant unit and residential markets.
Our DSL solutions provide the following key benefits:
Support for Business Applications. Our products enable CLECs, ILECs and
other telecommunications service providers to deliver business services such
as high-speed Internet access, corporate networking, teleworking and packet-
based voice solutions. We focused our initial service offerings on symmetrical
data transmission addressing the bi-directional bandwidth needs of business
users because relevant applications, such as e-mail, file transfer, web
hosting and corporate intranets, require subscribers to send as well as
receive data. Our CopperEdge DSL Access Concentrator provides multiple
networking models and advanced packet processing to meet the evolving needs of
business subscribers by enabling simultaneous support for Internet access,
Frame Relay, virtual private network and voice-over-packet services.
Full Coverage DSL. Our products allow our service provider customers the
flexibility to reach their targeted subscribers. Our symmetric DSL, or SDSL,
service offering delivers symmetrical bandwidth between 128 Kbps and 1.5 Mbps
to subscribers up to and beyond 20,000 feet from the central office. We also
offer ISDN-based DSL, or IDSL, which is the only variant of DSL that can reach
the approximately 17% of U.S. subscribers connected through existing remote
digital loop carriers without requiring an upgrade of these remote systems. In
addition to symmetrical bandwidth and long reach, our SDSL and IDSL products
are based on a communications protocol that is already widely deployed
throughout the access network ensuring compatibility with other network
elements. We intend to develop products, including new DSL implementations, to
enable our customers to deliver new services to subscribers.
Multi-Vendor CPE Interoperability. We have partnered with third-party DSL
customer premise equipment manufacturers through the CopperCompatible program
to develop a broad line of modems, routers and other innovative customer
premise equipment, or CPE, which are compatible with our CopperEdge DSL access
concentrators. This program delivers more innovation in CPE products to
address subscriber requirements than any single vendor could on its own, and
gives telecommunications service providers multiple sources of compatible CPE.
We provide CPE manufacturers with interoperability specifications and
intellectual property to assist their development, and we run a test
laboratory to certify the CopperCompatible status of their products. CPE
vendors which currently have or are developing CopperCompatible CPE include
3Com Corporation, ADC Kentrox, a subsidiary of ADC Telecommunications, Inc.,
Netopia, Inc., Cayman Systems, Inc., Escalate Networks, Inc., FlowPoint
Corporation and Ramp Networks, Inc., among others.
Trouble-Free Operations. Our products are designed to reduce installation
time and support requirements for our telecommunications service provider
customers. Our CopperEdge 200 DSL access concentrator is designed to meet the
stringent requirements of the telephone company central office environment.
Each concentrator supports full redundancy and is designed for easy support
and service. In addition, our products and management software are designed
for and proven in large-scale national deployments. Our initial service
implementations, SDSL and IDSL, are based on a mature protocol that is
spectrally compatible to existing ISDN and T-1 network elements which
minimizes potential interference within the central offices of host ILECs.
Finally, we have reduced CPE deployment complexity with a zero-installation
"plug-and-play" CPE procedure that eliminates end-user configuration, removes
the need to send a technician to the customer premise and provides centralized
management and control.
Strategy
Our objective is to be the leading supplier of DSL solutions to
telecommunications service providers. The key elements of our strategy
include:
Extend Position in the Business DSL Market. Since our inception, we have
focused on providing cost-effective solutions for telecommunications service
providers targeting business subscribers. Business users increasingly require
high-speed data services to conduct business, and non-DSL alternatives are
often expensive, complex and lack sufficient bi-directional bandwidth. We are
targeting telecommunications service providers
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focused on the business market, including well-financed CLECs and other
telecommunications service providers. To date, our major customers include
NorthPoint Communications, Inc., Rhythms NetConnections Inc., ICG
Communications, Inc. and UUNET, a subsidiary of MCI WorldCom, Inc. We will
continue to focus on supporting the requirements of our existing customers as
well as providing solutions to existing and new carriers that are focused on
business users.
Enhance Service Offerings. We intend to continue to add functionality and
services to increase the usefulness and performance of our products. We
believe that our core product offerings can be enhanced to offer better value
to service providers and business subscribers. Our products are designed to
support future services and technology. Currently, we are developing
additional quality of service capabilities to enable virtual private
networking and voice-over-packet services, such as remote PBX extension, to
meet evolving subscriber requirements. In addition, we are developing new
offerings with DSL technologies such as HDSL-2 and UADSL, and plan to enhance
our offerings as needed by subscribers and service providers.
Leverage Original Equipment Manufacturer and Development Relationships. We
have formed original equipment manufacturer relationships with Lucent
Technologies Inc. and 3Com. We expect these relationships to allow us to gain
greater distribution and market presence. Lucent has agreed to resell our
product line as a co-branded sale. Additionally, it is our hope that we will
work together to integrate our products with Lucent's complementary networking
products. Under the original equipment manufacturer and development agreement
with 3Com, they will offer our CPE products through their distribution
channels. We intend to leverage 3Com's broad distribution network in the
commercial and retail markets. We believe that our original equipment
manufacturer and development relationships will enhance our market position,
and we expect to continue to leverage these relationships and seek additional
collaborations.
Target Multi-Tenant Building Deployments Outside the Central Office. In
addition to deploying DSL equipment in ILEC central offices for our CLEC and
other telecommunications service provider customers, we have begun deploying
DSL concentrators in commercial office buildings and apartment and condominium
buildings. We believe that this market, known as the multi-tenant unit market,
will significantly expand the deployment of DSL technology. While we believe
that our current product offerings are well suited to this market, we are
developing new products that will allow carriers to reduce the cost of high-
speed data access to tenants in these types of properties. In addition, we are
working with service providers who are targeting multi-tenant property
managers to focus on this emerging market.
Drive Interoperability. We actively support the interoperability of DSL
technology to facilitate faster and broader market acceptance. We have formed
the CopperCompatible program through which we offer licenses of our DSL CPE
technology to a number of third-party manufacturers of CPE equipment. This
allows service providers easier deployment, as they can use a number of
different CPE products with our central office or multi-tenant equipment, and
gives subscribers the ability to choose their own premise equipment.
Additionally, interoperability enables our technology to be combined with
other networking products such as routers, access and aggregation devices.
Address Emerging Opportunities in Residential Market. We believe that with
the continued deployment of alternative data-based networks,
telecommunications service providers will seek to offer DSL-based services
beyond the core market for business subscribers. Specifically,
telecommunications service providers will target residential subscribers
seeking high-speed access to public communications networks. As this trend
toward broad deployment of DSL services evolves, we anticipate significant
opportunities for us to introduce new offerings that leverage both our
technology and our relationships with service providers. For example, we are
evaluating voice-over-packet and residential DSL alternatives.
Products
We provide end-to-end DSL solutions that enable service providers to deploy
high-bandwidth services over traditional copper wire telephone infrastructure.
Our product family is designed to offer telecommunication
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service providers flexibility in network implementation as well as a wide
range of subscriber equipment offerings. Telecommunications service providers
using our products can allow subscribers access to a full range of DSL
services at rates up to 25 times faster than using current 56.6 Kbps analog
modems. Our products are scalable to enable carriers to serve a small number
of end users in a particular region on a cost-effective basis as well as an
entire metropolitan area with a high-performance manageable solution. Our
products are designed to support a variety of service provider network
architectures, such as ATM and Frame Relay. Our solution consists of the
following product lines:
. CopperEdge DSL access concentrators: Telecommunications service
providers install CopperEdge products in ILEC central offices and multi-
tenant buildings to deliver services to potential end users. This
product line was introduced commercially in 1997.
. CopperRocket DSL CPE: Subscriber connection to the service provider
network is provided at the subscriber's premises with CopperRocket DSL
modems. In addition, we license our DSL CPE technology to third-party
vendors to create additional CPE that are compatible with our CopperEdge
DSL access concentrators. This product line was introduced commercially
in 1997.
. CopperView Network Management Software Tools: Our network management
tools enable telecommunications service providers to manage their Copper
Mountain DSL equipment as well as configure and provision subscriber
services. This product line was introduced commercially in 1998.
Because of the large scale deployment by our CLEC customers, DSL access
concentrators have accounted for substantially all of our revenue to date.
[A diagram containing pictures of the Company's CopperEdge, CopperRocket and
CopperView products depicting the locations and usage of these products within
the telecommunications infrastructure.]
CopperEdge DSL Access Concentrators
Our DSL access concentrator, the CopperEdge 200, or CE200, is a carrier-
class platform designed specifically for central office environments, and
meets or exceeds industry standards, and applicable regulatory requirements.
The CE200 can be deployed in ILEC central offices and multi-tenant buildings
and consists of a modular chassis containing power supplies, control system,
wide area network interface modules and DSL line cards. All line cards,
indicators and switches are accessible from the front of the system,
consistent with current telco industry practices. The following are
characteristics of the CE200:
. contains redundant power supplies that can be replaced without
interrupting power to the chassis to ensure high-availability for
subscriber services;
. supports a range of interfaces for wide area network connections;
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. supports multiple advanced networking models implemented in the control
system, which can be used concurrently including Frame Relay
Multiplexing, Frame Relay to ATM interworking, Layer 3 IP multiplexing
and Layer 2 Ethernet frame multiplexing.
. up to 8 line cards containing DSL interfaces which connect to the
subscriber DSL equipment.
SDSL Line Cards. Our SDSL line cards use technology that is already
widely deployed in access networks, enhancing the ability of
telecommunications service providers to deploy compatible solutions. Each
SDSL line card provides 24 ports, each of which can provide service to a
subscriber network at speeds between 160 Kbps and 1.544 Mbps over distances
between 22,000 feet and 9,100 feet, respectively.
IDSL Line Cards. For subscribers who can only be served over ISDN capable
copper lines we provide 24 port IDSL line cards. These line cards deliver
service at speeds between 64 Kbps and 144 Kbps up to a distance of 18,000
feet from the central office. The use of repeaters will increase the reach
to over 30,000 feet.
CopperRocket Customer Premise Equipment
The CopperRocket family of CPE products consists of SDSL and IDSL modems.
These CPE products can operate at multiple transmission speeds and distances
to satisfy the price and performance needs of each subscriber. The
CopperRocket is a "plug-and-play" device. Unlike ISDN modems, there are no
hardware switches, configuration parameters or end-user software to configure.
Copper Mountain's ZIP! feature enables the CopperRocket to identify itself to
a CopperEdge DSL access concentrator and automatically download all
configuration parameters to immediately begin full operation.
The CopperRocket operates over ordinary copper telephone wire and provides
dedicated, full-duplex throughput at multiple speeds to support network
activities like file transfers, intranet access and Internet Web browsing. The
CopperRocket's multi-speed DSL feature enables service providers to remotely
adjust line speed based upon subscriber requirements at no additional
investment by the service provider. In addition to offering our own CPE
products, we work with third-party providers to offer a broad range of
interoperable customer premise equipment through our CopperCompatible program.
CopperView Network Management Tools
Our CopperView suite of network management tools are used to configure and
manage our DSL solutions. This set of tools provides user interfaces necessary
to manage large, geographically separated DSL access concentrator networks,
individual concentrators and simple on-site or remote management. Because the
CopperEdge DSL access concentrator also manages CopperRocket modems by proxy,
CopperView allows carriers to manage their DSL networks end-to-end from one
site.
. The CopperView DSL Access Management System provides global management
of large networks of CopperEdge DSL access concentrators with a simple,
intuitive user interface.
. The CopperView Element Management System provides a graphical user
interface which allows precise configuration and management of a single
CopperEdge DSL access concentrator and its CPE.
. The CopperCraft text based interface provides a simple interface for on-
site technicians and for remote access to a DSL access concentrator.
Product Deployment
We sell our products for deployment into both central offices and multi-
tenant buildings. A particular telecommunications service provider may deploy
in either or both of these environments in order to reach its target market in
the most effective manner.
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Central Office-Based DSL Service Deployment. ILECs or CLECs may install our
CopperEdge DSL access concentrator product in a central office in order to
offer service to any telephone service subscriber served by that wiring center
(within the distance limitations of DSL service). The diagram below shows how
a CLEC can install a CopperEdge DSL access concentrator in a collocation cage
within the ILEC central office. Typically, the CLEC leases from the ILEC a
high-bandwidth trunk, usually a 45 Mbps DS-3 circuit, in order to connect the
DSL access concentrator to the CLEC's regional switching office. The CLEC then
requests from the ILEC an individual copper loop to a subscriber, for which
the CLEC pays a monthly fee. The copper loop is provisioned through the ILEC's
distribution facilities out to the subscriber premise. The CLEC then
provisions the wiring inside the subscriber premise and installs the CPE.
[A diagram depicting the telecommunications infrastructure, including a high
capacity trunk line that links the collocation cage in a ILEC's central office
to a CLEC's metropolitan office, and how these offices are linked to different
CPE through either copper wire telephone lines alone or through T-1 lines that
lead to copper wire telephone lines.]
CLECs or ILECs deploying DSL from central offices may elect do so in
selected central offices where the number of potential subscribers is highest,
or they may choose to cover a region by installing in all central offices in
that region. A CLEC may choose a regional deployment strategy or a nationwide
deployment strategy.
Multi-Tenant Building DSL Service Deployment. A telecommunications service
provider can deploy our CopperEdge DSL Access Concentrators into multi-tenant
buildings in order to provide Internet access and other data and voice
services to the tenants of that building. For a CLEC or an independent service
provider, multi-tenant building deployment can provide access to DSL
subscribers in a highly selective manner without the high costs of central
office collocation. Inside the building, the service provider can utilize the
existing telephone wiring to deliver high-bandwidth connections to each tenant
with no building re-wiring expense. A high-bandwidth leased circuit or
wireless transmitter on the roof connects the building to the service
provider's regional switching office or point of presence. Tenants in the
building can use a single, high-bandwidth connection from the building to the
service provider's switching office, providing good application performance at
a lower cost than the same bandwidth dedicated to a single subscriber.
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Customers
In 1998, sales to our top two customers represented approximately 79% of our
revenue. Of these customers, NorthPoint Communications accounted for
approximately 61% of our revenue and Rhythms NetConnections accounted for
approximately 18% of our revenue. This concentration of revenue has continued
during the three months ended March 31, 1999, with NorthPoint and Rhythms
NetConnections accounting for approximately 36% and 48%, of our revenue,
respectively, during the quarter. The loss of a significant customer could
have a material adverse effect on our business.
Case Studies
NorthPoint Communications. NorthPoint Communications is a CLEC that delivers
its NorthPoint DSLSM services to small and mid-sized businesses via wholesale
agreements with service providers nationwide. We have a close working
relationship with NorthPoint and believe that a high percentage of
NorthPoint's equipment purchases are attributable to our products. We recently
entered into an equipment purchase agreement with NorthPoint under which
NorthPoint will purchase certain products from us at specified prices for a
period of one year. NorthPoint has agreed to provide us with monthly forecasts
of its future purchases of our products and also has committed to make certain
minimum purchases of our equipment in each calendar quarter.
Rhythms NetConnections. Rhythms NetConnections is a provider of high-speed
local access networking solutions using DSL technology. Copper Mountain's
products enable Rhythms to offer both IDSL and SDSL services.
MCI WorldCom/UUNET. UUNET, an MCI WorldCom company and a global leader in
Internet communications solutions, selected Copper Mountain's end-to-end DSL
solution to deploy a new SDSL service. Now, Copper Mountain is in more than 50
of UUNET's central offices nationwide, helping to bring their 768 Kbps
dedicated DSL service to small and medium-sized businesses in the United
States.
Strategic Relationships and Interoperability Partnerships
We have established several strategic partnerships and licensing agreements
with leading CPE companies to facilitate the deployment of our products and
technology.
. Lucent. Under a recently signed original equipment manufacturer
agreement, Lucent will combine our DSL equipment with its NetCare(R)
installation, network management and customer support professional
services to create turnkey DSL solutions for CLECs. Lucent will co-brand
and market our DSL equipment for a period of up to four years. We have
agreed to manufacture, co-brand and sell our products to Lucent and to
provide Lucent with training, installation and technical support for
these products. Lucent also plans to offer the new DSL equipment in
combination with some of its existing data networking, switching and
access products to enable service providers to create broader voice and
data network solutions that can evolve and grow with their business.
. 3Com. 3Com will market our DSL CPE for up to three years. Under this
agreement we have agreed to manufacture, co-brand and sell our products
to 3Com and to collaborate on future development projects. Additionally,
this agreement calls for both companies to co-market their DSL products.
Moreover, 3Com may request to manufacture its own DSL CPE products. Both
parties have agreed to use good faith efforts to effect such
manufacturing license.
We have established several CPE licensing relationships with certain vendors
through our CopperCompatible interoperability program in order to promote the
interoperability of our CopperEdge DSL Access Concentrators with such
equipment. Under this interoperability program, licensees are allowed access
to our technology which can be used in the design of their CPE. These CPE
licensing relationships have been established with ADC Kentrox, Netopia,
Cayman Systems, Escalate Networks, FlowPoint Corporation and Ramp Networks,
among others.
. ADC Kentrox. ADC Kentrox, a leading provider of managed frame relay data
service units and channel service units, is developing and will be
introducing an SDSL version of their newest
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innovation, the ServicePoint(TM) service delivery unit. The
ServicePoint(TM) service delivery unit will enable subscribers to use
their pre-existing, non-SDSL routers with our telecommunications service
provider customers' SDSL service. The ServicePoint(TM) service delivery
unit also can be upgraded to provide ADC Kentrox's frame relay
performance and bandwidth usage monitoring, which would enable our
service provider customers to provide the most sophisticated level of
frame relay services, including service level agreements and traffic
management reports.
. Netopia. Through a development and co-marketing contract, Netopia, a
market leader in developing Internet/intranet communication tools,
licensed our DSL networking technology, including integrated DSL
management functionality, to provide business class customer premise
equipment for small-to-medium sized companies. Since June 1998, Netopia
has developed, announced and is shipping three products incorporating
our licensed technology, including an IDSL router and an SDSL router. In
addition, Netopia markets the CopperRocket SDSL modem under Netopia's
own brand name through an original equipment manufacturer reseller
agreement with Copper Mountain.
Sales and Marketing
We sell and market our products through a direct sales force. Additionally,
we have relationships with selected original equipment manufacturers and
distributors in order to expand our sales and distribution capabilities.
Direct Sales. Our direct sales responsibilities are divided into three North
American geographic regions: West, Central and East. Our sales effort is
directed by regional directors and sales managers who are responsible for
relationships with targeted customers. A key feature of our selling effort is
the relationships we establish at various levels in our customer's
organization. The sales management team for each customer is responsible for
maintaining contact with key individuals who have planning and policy
responsibility within the customer's organization. At the same time, our sales
engineers work with customers to sell our products at key levels throughout
the customer's organization. Direct sales accounted for approximately 98% of
our revenue in 1998.
Original Equipment Manufacturer Sales. We have established key original
equipment manufacturer relationships with leaders in the telecommunications
equipment and customer premise equipment markets. We intend to maintain a
limited number of relationships with key strategic original equipment
manufacturers who may offer products or have existing customer relationships
which may complement ours. In line with our strategy to offer our
telecommunications service provider customers and their subscribers a broad
line of CPE, we have entered into several original equipment manufacturer
relationships for our CopperRocket product line and a number of
interoperability partnerships with CPE providers. We receive sales revenues
from our original equipment manufacturer partners, but do not currently
receive royalty revenue from interoperability arrangements.
Marketing is structured along product and distribution channel lines for
each of our major product areas. For each major product area, we employ
dedicated product marketing and marketing program management specialists. The
corporate marketing staff coordinates activities among our various business
units and provides marketing support services, including marketing
communications, marketing research, trademark administration and other support
functions. Our marketing organization performs the following functions:
. develops specific marketing strategies for each product line;
. works with our direct sales force and Lucent to develop key account and
segmented market strategies; and
. defines the functions and features of our product and service offerings.
Marketing is responsible for sales support, contract negotiations, in-depth
product presentations, interfacing with operations, setting price levels to
achieve targeted margins, developing new services and business opportunities
and writing proposals in response to customer requests for information or
quotations.
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As of March 31, 1999, our sales and marketing organization included 29
individuals. We have offices in Palo Alto and San Diego, California.
Customer Service and Support
A high level of continuing service and support is critical to our objective
of developing long-term customer relationships. The majority of our service
and support activities are related to installation support and network
configuration issues. These services are provided by telephone and directly at
customer installations with resources from our customer support group based in
San Diego, California. To date, our revenues from on-site installation and
technical assistance have been immaterial.
We provide technical support for our products which have warranties of up to
12 months, both directly and through our selected service subcontractors. We
have a variety of comprehensive and flexible hardware and software maintenance
and support programs available for products no longer under warranty, with
services ranging from time and materials remote service support to 24-hour on-
site support, depending on our customer's preferences. We also offer various
training courses for our third-party resellers and telecommunications service
provider customers. To date, revenues attributable to customer service and
support services have been immaterial.
In June 1998, we engaged Lucent NetCare(R), Lucent's data communications
service organization, to provide field installation and maintenance support
for our products. Other than service and support provided by our personnel
located in San Diego, we do not intend to recruit and train our own direct
field service and support organization.
Research and Development
We believe that our future success depends on our ability to adapt to the
rapidly changing telecommunications environment, to maintain our significant
expertise in core technologies, and to continue meeting and anticipating our
customers' needs. We continually review and evaluate technological changes
affecting the telecommunications market and invest substantially in
applications-based research and development. We are committed to an ongoing
program of new product development that combines internal development efforts
with acquisitions, joint ventures and licensing or marketing arrangements
relating to new products and technologies from outside sources.
We have focused our recent research and development expenditures on
commercializing our DSL systems, including our CopperEdge solutions and
CopperRocket modems along with CopperView network management tools which
support these technologies. We believe that our extensive experience designing
and implementing high-quality network components has enabled us to develop
high-value integrated systems solutions. As a result of these development
efforts, we believe we have created an industry-leading platform for cost-
effective DSL delivery.
We are currently investing significant resources in network management
product enhancements, development of a new chassis for multi-tenant units,
development of line cards delivering UADSL and HDSL2, and enhancements to the
CopperEdge DSL access concentrators enabling packet-based voice traffic.
Competition
The telecommunications equipment industry is highly competitive, and we
believe that competition may increase substantially as the introduction of new
technologies, deployment of broadband networks and potential regulatory
changes create new opportunities for established and emerging companies in the
industry. In addition, a number of our competitors have significantly greater
financial and other resources than us to meet new competitive opportunities.
We compete directly with other providers of DSL access concentrators
including, Cisco Systems, Inc., Ascend Communications, Inc. (acquisition by
Lucent pending), Alcatel S.A., Diamond Lane
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<PAGE>
Communications Corporation (acquisition by Nokia Corporation pending) and
Paradyne Corporation, among others. In addition, DSL as a technology for
deploying broadband connections is competing with alternative technologies
including ISDN, T-1 and wireless solutions. To the extent we expand into the
residential market, we will compete against certain other companies, including
companies relying on coaxial cable infrastructure and cable modem technology.
The rapid technological developments within the telecommunications industry
have resulted in frequent changes to our group of competitors. The principal
competitive factors in our market include:
. brand recognition;
. key product features;
. system reliability and performance;
. price;
. ease of installation and use;
. technical support and customer service; and
. size and stability of operations.
We believe our success in competing with other manufacturers of
telecommunications products depends primarily on our engineering,
manufacturing and marketing skills, the price, quality and reliability of our
products and our delivery and service capabilities. We may face increasing
pricing pressures from current and future competitors in certain or all of the
markets for our products and services.
We believe that technological change, the increasing addition of voice,
video and other services to networks, continuing regulatory change and
industry consolidation or new entrants will continue to cause rapid evolution
in the competitive environment of the telecommunications equipment market, the
full scope and nature of which is difficult to predict. Increased competition
could result in price reductions, reduced margins and loss of market share by
us. We believe regulatory change in the industry may create new opportunities
for suppliers of telecommunications equipment; however, we expect that such
opportunities may attract increased competition from others as well. We also
believe that the rapid technological changes which characterize the data
communications industry will continue to make the markets in which we compete
attractive to new entrants. There can be no assurance that we will be able to
compete successfully with our existing or new competitors or that competitive
pressures faced by us will not materially and adversely affect our business,
financial condition and results of operations.
Manufacturing
Our manufacturing operations consist primarily of supporting prototype
development, materials planning and procurement, final assembly, testing and
quality control. We use several independent suppliers to provide certain
printed circuit boards, chassis and subassemblies. We have historically
subcontracted substantially all of our manufacturing to one company, SMS
Technology, located in San Diego, California. We recently entered into a
letter of intent with Flextronics International Ltd. located in San Jose,
California and expect to have a formal agreement in place by April 30, 1999.
Under the letter of intent, Flextronics will be the sole source of contract
manufacturing for our products.
Our manufacturing process enables us to configure our products to meet a
wide variety of individual customer requirements. We have initiated the
process of seeking International Standard Organization 9002 registration for
quality assurance in production, installation and service. We plan to
strengthen manufacturing capability both in our existing facilities and
through expansion of activities with independent suppliers and manufacturers.
Our future growth will require an extension of existing internal and external
manufacturing resources, hiring of additional technical personnel, improved
coordination of supplier relationships with our inventory ordering and
management practices, and expansion of information systems to accommodate
planned growth across these areas.
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We use a combination of standard parts and components, which are generally
available from more than one vendor, and three key components that are
purchased from sole or single source vendors for which alternative sources are
not currently available: a semi-conductor chip, a power supply and a system
control module. If supply of these key components should cease, we would be
required to redesign our products. We are evaluating alternate source vendors
for each of these key components but these vendors may not meet our quality
standards for component vendors. While we work closely with some well-
established vendors, we have no supply commitments from our vendors and we
generally purchase components on a purchase order basis, as opposed to
entering into long term procurement agreements with vendors. To date, we have
generally been able to obtain adequate supplies in a timely manner from
vendors or, when necessary, to meet production needs from alternative vendors.
We believe that, in most cases, alternative supplies of standard parts and
components can be identified if current vendors are unable to fulfill our
needs. However, delays or failure to identify an alternate vendor, if
required, or a reduction or interruption in supply, or a significant increase
in the price of components would materially and adversely affect our business,
financial condition and results of operations and could impact customer
relationships.
Intellectual Property
We rely on a combination of copyright, trademark, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
our trade secrets and know-how. We presently have no patents, although we do
have one patent application pending which we intend to pursue but which is not
central to our business. Although we employ a variety of intellectual property
in the development and manufacturing of our products, we believe that none of
such intellectual property is individually critical to our current operations.
Taken as a whole, we believe our intellectual property rights are significant
and that the loss of all or a substantial portion of such rights could have a
material adverse effect on our results of operations. There can be no
assurance that our intellectual property protection measures will be
sufficient to prevent misappropriation of our technology. In addition, the
laws of many foreign countries do not protect our intellectual properties to
the same extent as the laws of the United States. From time to time, we may
desire or be required to renew or to obtain licenses from others in order to
further develop and market commercially viable products effectively. There can
be no assurance that any necessary licenses will be available on reasonable
terms.
Properties
We lease an approximately 11,000 square foot facility in Palo Alto,
California for executive offices and for administrative, sales and marketing
purposes. The lease for this facility expires in April 2001. We also lease an
approximately 17,000 square foot facility in San Diego, California, which
serves as our principal engineering and product development facility as well
as for executive offices. The current lease for this facility expires in
October 2001. In addition, we lease an approximately 11,000 square foot
facility in San Diego, California which is used primarily for manufacturing.
The lease for this facility expires in August 2003. On March 31, 1999 we
entered into a lease for a new facility in San Diego which expires in July
2005. As a result, we intend to combine our existing San Diego offices into
this new larger facility in order to accommodate our growth.
Employees
As of March 31, 1999 we employed approximately 154 full-time employees,
including 29 in sales and marketing, 23 in manufacturing, 70 in engineering,
23 in finance and administration and 9 in customer service. All of our
employees are located in the United States. None of our employees is
represented by collective bargaining agreements, and management considers
relations with its employees to be good.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of Copper Mountain, the positions held
by them and their ages as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Richard S. Gilbert...... 46 President, Chief Executive Officer and Director
John A. Creelman........ 42 Vice President of Finance, Chief Financial Officer and Secretary
Joseph D. Markee........ 45 Chief Technical Officer and Chairman of the Board of Directors
Mark Handzel............ 43 Vice President of Quality and Customer Support
Steven Hunt............. 41 Vice President of Engineering
Michael Kelly........... 48 Vice President of Sales
Bryan Long.............. 40 Vice President of Marketing
Michael Staiger......... 34 Vice President of Business Development
Joseph Harrington....... 49 Vice President of Operations
Diana Helfrich.......... 38 Vice President of Marketing Communications
Robert L. Bailey........ 41 Director
Tench Coxe(1)........... 41 Director
Roger Evans(1).......... 53 Director
Richard H. Kimball(2)... 42 Director
Raymond V. Thomas....... 56 Director
Andrew W. Verhalen(2)... 42 Director
</TABLE>
- --------
(1) Member of compensation committee
(2) Member of audit committee
Richard S. Gilbert has served as President and Chief Executive Officer of
Copper Mountain since April 1998, and as a director of Copper Mountain since
August 1998. From July 1992 to April 1998, he worked for ADC
Telecommunications Inc., most recently as Senior Vice President and,
concurrently, as President and General Manager of its subsidiary, ADC Kentrox,
a provider of high-speed access equipment for global networks. Mr. Gilbert
holds an MS in Computer Science from Stanford University and a BA in
Mathematics from the University of California at Berkeley.
John A. Creelman has served as Vice President of Finance and Chief Financial
Officer of Copper Mountain since March 1998 and as Secretary of Copper
Mountain since February 1999. From July 1997 to March 1998, he worked as a
Financial Consultant to DataWorks Corporation, a developer of Enterprise
Resource Planning software. From July 1995 to May 1997, he served as Vice
President Finance and Chief Financial Officer of ESI Software, Inc., a
provider of Internet authoring software and services. From July 1994 to June
1995 he served as Financial Controller at Western Digital Corporation, a
manufacturer of hard disk drives. From February 1992 to June 1994, he served
as Director of Finance at MTI Technology Corporation, a manufacturer of high-
end storage systems. Mr. Creelman holds an MBA and a BA in Social Sciences
from the University of California at Irvine.
Joseph D. Markee co-founded Copper Mountain in March 1996 and has served as
Chief Technical Officer of Copper Mountain since December 1998 and as Chairman
of the board of directors since inception. From Copper Mountain's inception in
March 1996 to April 1998, he served as its President and Chief Executive
Officer and from inception to February 1999, he served as Secretary of Copper
Mountain. In June 1987, he co-founded Primary Access, a remote access server
company acquired by 3Com Corporation. From June 1987 to January 1996, he
served as Vice President of Operations and Vice President of Support of 3Com
Primary Access. Mr. Markee holds a BS in Electrical Engineering from the
University of California at Davis.
Mark Handzel co-founded Copper Mountain in March 1996 and has served as Vice
President of Quality and Customer Support since May 1998. From March 1996 to
May 1998, he served as Vice President of Product
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Management of Copper Mountain. From June 1994 to March 1996, he served as
Director of Marketing and Sales at Orckit Communications, a manufacturer of
advanced DSL modems. From May 1993 to June 1994, he served as Vice President
of Product Development at Coral Systems, a provider of software products for
the wireless telecommunications industry. Mr. Handzel holds an MBA from the
University of California at Irvine, a MS in Computer Science from the
University of California at Los Angeles and a BA in Computer Science from the
State University of New York at Potsdam.
Steven Hunt has served as Vice President of Engineering of Copper Mountain
since August 1996. From June 1980 to August 1996, he held various positions
with AT&T Bell Laboratories, most recently as Department Head of the
Internetworking Technology Department of Paradyne Corporation, which was then
a subsidiary of AT&T. Paradyne is a provider of internetworking product
definition, development and support. While at Paradyne, Mr. Hunt was
responsible for the development of broadband DSL products. Mr. Hunt holds an
MSEE from Stanford University and a BSEE from Drexel University.
Michael Kelly has served as Vice President of Sales of Copper Mountain since
April 1997. From November 1995 to March 1997, he served as Vice President of
Sales at Ramp/Trancell Networks, a developer of small business network
solutions. From September 1994 to October 1995, he served as Vice President of
Sales at CoroNet Systems, a developer of network management software. From
January 1994 to September 1994, Mr. Kelly served as Vice President of Sales at
Brixton Systems, a developer of software. Mr. Kelly holds an MS in Computer
Science from George Washington University, and a BA in General Studies from
the University of Maryland.
Bryan Long has served as Vice President of Marketing of Copper Mountain
since May 1998. From June 1997 to May 1998, he founded and served as marketing
consultant for the Apheta Group, a marketing consultant company. From January
1997 to June 1997, he served as Vice President, Marketing and Customer Support
of Verilink, Inc., a supplier of wide-area network access products. From July
1996 to December 1996, he served as Director, Global Alliance Business
Development of Cisco Systems Inc., a manufacturer of networking products. From
May 1991 until its acquisition by Cisco Systems, Inc. in July 1996, he served
in various positions at StrataCom, Inc., a developer of networking products,
most recently serving as Director, Business Development and previously serving
as Director of Marketing, Channel Development and Product Line Director,
Enterprise Networks. Mr. Long holds an MS in Management from the Massachusetts
Institute of Technology, and a BA in Mathematics from the University of
Colorado.
Michael Staiger has served as Vice President of Business Development of
Copper Mountain since June 1998. From June 1996 to June 1998, he worked at
Shiva Corporation, a provider of direct-dial business access solutions,
serving most recently as Vice President of Business Development and previously
as Senior Director of Business Development. From its inception in August 1993
until its acquisition by Shiva Corporation in June 1996, he served as a co-
founder and Vice President of Business Development of AirSoft, Inc., a
developer of remote access software. Mr. Staiger holds an MBA from the
University of Chicago Graduate School of Business and a BA in English from the
University of Michigan.
Joseph Harrington has served as Vice President of Operations of Copper
Mountain since October 1998. From February 1996 to October 1998, he served as
Director of Operations of the Corollary Division of Intel Corporation, a
manufacturer of symmetric multi-processing computers and network
communications equipment. From June 1995 to February 1996, Mr. Harrington
served as Director of Production of the Symtak Division of Aetrium, Inc., a
manufacturer of handlers and test equipment for the integrated circuit
industry. From September 1992 to August 1994, he served as Manufacturing
Manager of IDT/Alston, a manufacturer of magnetic tape units and digital
emulation systems for the telecommunications industry.
Diana Helfrich has served as Vice President of Marketing Communications of
Copper Mountain since July 1997. From April 1996 to July 1997, she was the
principal of her own direct marketing and management consulting firm. From
November 1991 to March 1996, she served as President and Managing Director of
the
47
<PAGE>
Council on Education in Management, an employment law educator. Ms. Helfrich
holds an MBA from St. Mary's College and a BA in English Literature from the
University of California at Berkeley.
Robert L. Bailey has served as a director of Copper Mountain since March
1999. Mr. Bailey has served as President and Chief Executive Officer of PMC-
Sierra, Inc., formerly Sierra Semiconductor, a leading maker of high speed
internetworking semiconductor products since July 1997. From November 1993 to
July 1997, Mr. Bailey served as President and Chief Executive Officer of PMC-
Sierra Ltd, a predecessor of PMC-Sierra, Inc. Mr. Bailey holds a BSEE from the
University of Bridgeport in Connecticut and an MBA from the University of
Dallas in Texas.
Tench Coxe has served as a director of Copper Mountain since March 1996. Mr.
Coxe joined Sutter Hill Ventures, a venture capital firm, in October 1987 and
is currently a Managing Director of the General Partner of Sutter Hill
Ventures. Mr. Coxe currently serves as a director of Clarus Corporation, Edify
Corporation and NVIDIA Corporation and several privately-held companies. Mr.
Coxe holds an MBA from Harvard University and a BA in Economics from Dartmouth
College.
Roger Evans has served as a director of Copper Mountain since March 1996.
Mr. Evans joined Greylock Management Corporation in 1989 and is currently a
General Partner of Greylock Limited Partnership, Greylock Equity Limited
Partnership and Greylock IX Limited Partnership, each a venture capital firm.
Mr. Evans is a director of Ascend Communications and several privately-held
companies. Mr. Evans holds an MA in Economics from King's College, Cambridge.
Richard H. Kimball has served as a director of Copper Mountain since October
1998. Since 1995, Mr. Kimball has been a founding General Partner of
Technology Crossover Ventures II, L.P. ("Technology Crossover"), a venture
capital firm. Preceding Technology Crossover, Mr. Kimball spent more than ten
years at Montgomery Securities, where he was a Managing Director from 1991
until his departure. He also serves on the board of directors of several
privately-held technology companies. Mr. Kimball holds an MBA from the
University of Chicago and an AB in History from Dartmouth College.
Raymond V. Thomas has served as a director of Copper Mountain since March
1999. Mr. Thomas has served as Vice President, Finance and Chief Financial
Officer of HNC Software Inc., a software company, since February 1995 and as
secretary of HNC Software since May 1995. From May 1993 to February 1995, he
served as Executive Vice President and Chief Financial Officer of Golden
Systems Inc., a power supply manufacturer, and from September 1994 to February
1995 he also served as Chief Operating Officer of Golden Systems. Mr. Thomas
holds a BS degree in industrial management from Purdue University.
Andrew W. Verhalen has served as a director of Copper Mountain since
February 1999. Mr. Verhalen has been a partner of Matrix Partners, a venture
capital firm, since April 1992. He also serves on the board of directors of
several privately-held technology companies. Prior to Matrix Partners, Mr.
Verhalen held senior management positions at 3Com Corporation and Intel
Corporation. Mr. Verhalen holds BSEE, MEng and MBA degrees from Cornell
University.
Messrs. Markee and Handzel are brothers-in-law. There are no other family
relationships between any of the directors or executive officers of the
Company.
Committees of the Board of Directors
The board of directors has established an audit committee and a compensation
committee. The audit committee consists of Andrew W. Verhalen and Richard H.
Kimball. The audit committee makes recommendations to the board of directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by our independent auditors and
reviews and evaluates our audit and control functions.
48
<PAGE>
The compensation committee consists of Tench Coxe and Roger Evans. The
compensation committee makes recommendations regarding our 1996 Equity
Incentive Plan and makes decisions concerning salaries and incentive
compensation for our employees and consultants.
Director Compensation
Our directors do not currently receive any cash compensation for services on
the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at board of
directors and committee meetings. All directors are eligible to participate in
our 1996 Equity Incentive Plan. Non-employee directors are eligible to
participate in our 1999 Non-Employee Director's Plan.
Board-Compensation Committee Interlocks and Insider Participation
No executive officer serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
Executive Compensation
The following table sets forth summary information concerning compensation
awarded to, earned by, or accrued for services rendered to us in all
capacities during the fiscal year ended December 31, 1998 by our Chief
Executive Officer and four other most highly compensated executive officers.
The compensation described in this table does not include medical, group life
insurance or other benefits which are available generally to all our salaried
employees and certain perquisites and other personal benefits received which
do not exceed the lesser of $50,000 or 10% of any officer's salary and bonus
disclosed in this table.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------- ------------
Securities
Name and Principal Salary Bonus All Other Annual Underlying All Other
Position ($) ($) Compensation ($) Options (#) Compensation ($)
- ------------------ ------ -------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Richard S. Gilbert...... $185,358 $ 74,330 $ -- 844,645 $65,177(1)
President and Chief
Executive Officer
Michael Kelly........... 130,863 160,000 559,230(2) 150,000 --
Vice President of Sales
Joseph D. Markee........ 157,256 40,000 -- -- --
Chief Technical Officer
and Chairman of the
Board of Directors
Bryan Long.............. 99,840 90,000 -- 338,292 --
Vice President of
Marketing
Steven Hunt............. 138,572 30,000 -- 75,000 --
Vice President of
Engineering
</TABLE>
- --------
(1) Represents relocation expenses.
(2) Represents sales commissions.
49
<PAGE>
Stock Option Grants and Exercises in Last Fiscal Year
The following table sets forth certain information regarding options granted
to certain of our executive officers during the fiscal year ended December 31,
1998. The number of shares underlying options granted, and the exercise price
per share, have been adjusted to reflect the three-for-two stock split of our
common stock effective November 25, 1998.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------
Potential Realizable
Value at Assumed
Total Annual Rates of
Options Stock Appreciation
Shares Granted to for Option
Underlying Employees Exercise Term ($)
Options in Fiscal Price Per Expiration ---------------------
Name Granted (#) Year (%) Share ($) Date 5% 10%
- ---- ----------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard S. Gilbert...... 844,645 27.4% .32 06/11/08 $ 169,982 $ 430,767
Michael Kelly........... 150,000 4.9 .53 09/23/08 50,312 127,499
Bryan Long.............. 338,292 11.0 .32 06/11/08 68,080 172,528
Steven Hunt............. 75,000 2.4 .53 09/23/08 25,156 63,750
</TABLE>
Twenty-five percent of these options vest on the first anniversary of the
date of hire and the remainder vest in equal installments each month over the
three-year period following the first anniversary of the date of hire. Options
were granted at an exercise price equal to the fair market value of our common
stock, as determined by the board of directors on the date of grant. In making
this determination, the board considered a number of factors, including:
. our historical and prospective future revenue and profitability,
. our cash balance and rate of cash consumption,
. the development and size of the market for our products,
. the status of our financing activities,
. the stability and tenure of our management team, and
. the breadth of our product offerings.
The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the SEC. There can be no assurance provided to any
executive officer or any other holder of our securities that the actual stock
price appreciation over the option term will be at the assumed 5% and 10%
levels or at any other defined level.
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year-End Option Values
The following table sets forth certain information as of December 31, 1998
regarding options held by certain of our executive officers. There were no
stock appreciation rights outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options at
Shares December 31, 1998 (#) December 31, 1998 ($)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard S. Gilbert...... -- $ -- -- 844,645 $ -- $3,952,939
Michael Kelly........... -- -- 155,216 200,284 693,298 894,602
Bryan Long.............. -- -- -- 338,292 -- 1,583,207
Steven Hunt............. 15,000 19,000 160,000 200,000 714,667 893,333
</TABLE>
In the table above, the value of unexercised in-the-money options is based on
the fair market value of the Company's common stock, determined by the board
of directors as discussed above to be $5.00 per share on or
50
<PAGE>
about December 31, 1998, minus the per share exercise price multiplied by the
number of shares. The value realized for Mr. Hunt's option exercise is equal
to the fair market value of the purchased shares determined by the board as
described above, on the option exercise date, less the exercise price paid for
such shares.
1996 Equity Incentive Plan
In August 1996, the board of directors adopted our 1996 Equity Incentive
Plan (the "1996 Plan"). A total of 7,873,383 shares of common stock are
currently reserved for issuance pursuant to the 1996 Plan. In addition, the
1996 Plan provides for automatic annual increases in the number of shares
reserved for issuance thereunder (beginning in 2000) equal to the least of:
(i) 4% of Copper Mountain's outstanding shares on a fully diluted basis taking
into account stock options and warrants and (ii) a lesser amount determined by
the board of directors. The 1996 Plan provides for the grant of options to our
directors, officers, key employees, consultants and certain advisors.
The 1996 Plan permits the granting of options intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors), directors and consultants (including non-employee directors). In
addition, the 1996 Plan permits the granting of stock appreciation rights in
conjunction with or independently of options, as well as stock bonuses and
rights to purchase restricted stock. No person is eligible to be granted
options and SARs covering more than 500,000 shares of common stock in any
calendar year.
The 1996 Plan is administered by the board of directors or a committee
appointed by the board of directors. Subject to the limitations set forth in
the 1996 Plan, the board of directors has the authority to select the persons
to whom grants are to be made, to designate the number of shares to be covered
by each stock award, to determine whether an option is to be an incentive
stock option or a nonstatutory stock option, to establish vesting schedules,
to specify the option exercise price and the type of consideration to be paid
to us upon exercise and, subject to certain restrictions, to specify other
terms of stock awards.
The maximum term of options granted under the 1996 Plan is ten years. The
aggregate fair market value, determined at the time of grant, of the shares of
common stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year (under all such plans
of the Company and its affiliates) may not exceed $100,000, or the options or
portion thereof which exceed such limit (according to the order in which they
are granted) shall be treated as nonstatutory stock options. Incentive stock
options granted under the 1996 Plan generally are non-transferable.
Nonstatutory stock options are generally transferable. Options expire three
months after the termination of an optionee's service. In general, if an
optionee is permanently disabled or dies during his or her service, such
person's options may be exercised up to 12 months following such disability or
18 months following such death.
The exercise price of options granted under the 1996 Plan is determined by
the board of directors in accordance with the guidelines set forth in the 1996
Plan. The exercise price of an incentive stock option cannot be less than 100%
of the fair market value of the common stock on the date of the grant. The
exercise price of a nonstatutory stock option cannot be less than 85% of the
fair market value of the common stock on the date of grant. Options granted
under the 1996 Plan vest at the rate specified in the option agreement. The
exercise price of incentive stock options granted to any person who at the
time of grant owns stock representing more than 10% of the total combined
voting power of all classes of capital stock must be at least 110% of the fair
market value of such stock on the date of grant and the term of such incentive
stock options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the 1996
Plan shall be in such form and will contain such terms and conditions as the
board of directors deems appropriate. The purchase price under any restricted
stock purchase agreement will not be less than 85% of the fair market value of
the common stock on the date of grant. Stock bonuses and restricted stock
purchase agreements awarded under the 1996 Plan are generally transferable.
51
<PAGE>
Pursuant to the 1996 Plan, shares subject to stock awards that have expired
or otherwise terminated without having been exercised in full again become
available for grant, but exercised shares that we repurchase pursuant to a
right of repurchase will not again become available for grant.
Upon certain changes in control, all outstanding stock awards under the 1996
Plan must either be assumed or substituted by the surviving entity. In the
event the surviving entity does not assume or substitute such stock awards,
such stock awards will be terminated to the extent not exercised prior to such
change in control.
As of March 31, 1999, we had issued and outstanding options to purchase
4,582,225 shares of common stock under the 1996 Plan.
Non-Employee Directors' Stock Option Plan
In March 1999, we adopted our 1999 Non-Employee Directors' Stock Option Plan
to provide for the automatic grant of options to purchase shares of common
stock to our non-employee directors. The directors' plan is administered by
the board, unless the board delegates administration to a committee of at
least two disinterested directors.
A total of 360,000 shares of common stock has been reserved for issuance
under the directors' plan. Pursuant to the terms of the directors' plan:
. on the effective date of the Plan, each person who was then a non-
employee director was granted an option to purchase 30,000 shares of
common stock;
. each person who, after the effective date of the plan, for the first
time becomes a non-employee director automatically will be granted, upon
the date of his or her initial appointment or election to be a non-
employee director, a one-time option to purchase 30,000 shares of common
stock; and
. on the date of each annual meeting of our stockholders commencing with
the 2000 annual meeting of stockholders, each person who was initially
elected or appointed to be a non-employee director at least six months
prior to the date of such annual meeting automatically will be granted
an option to purchase 10,000 shares of common stock.
Options granted under the directors' plan shall be fully vested and
exercisable on the date of grant and must be exercised within five years from
the date they are granted. The exercise price of options under the directors'
plan will equal 100% of the fair market value of the common stock on the date
of grant. Options granted under the directors' plan are generally transferable
to family members and trusts under which the director or members of the
director's family are beneficiaries. Unless otherwise terminated by the board
of directors, the directors' plan automatically terminates when all of our
common stock reserved for issuance under the directors' plan has been issued.
As of the date hereof, options to purchase 180,000 shares of common stock have
been granted under the directors' plan.
Employee Stock Purchase Plan
In February 1999, we adopted the 1999 Employee Stock Purchase Plan. A total
of 300,000 shares of common stock has been reserved for issuance under the
purchase plan. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code.
Under the purchase plan, the board of directors may authorize participation by
eligible employees, including officers, in periodic offerings following the
commencement of the purchase plan. The initial offering under the purchase
plan will commence on the effective date of this offering and terminate on
July 31, 2000.
Unless otherwise determined by the board, employees are eligible to
participate in the purchase plan only if they are employed by us or one of our
subsidiaries designated by the board of directors for at least 20 hours per
week and are customarily employed for at least five months per calendar year.
Employees who participate in an offering may have up to 10% of their earnings
withheld pursuant to the purchase plan. The amount withheld is
52
<PAGE>
then used to purchase shares of common stock on specified dates determined by
the board of directors. The price of common stock purchased under the purchase
plan will be equal to 85% of the lower of the fair market value of the common
stock at the commencement date of each offering period or the relevant
purchase date. Employees may end their participation in the offering at any
time during the offering period, and participation ends automatically on
termination of employment.
In the event of a merger, reorganization, consolidation or liquidation, the
board of directors has discretion to provide that each right to purchase
common stock will be assumed or an equivalent right substituted by the
successor corporation or the board of directors may provide for all sums
collected by payroll deductions to be applied to purchase stock immediately
prior to such merger or other transaction. The board of directors has the
authority to amend or terminate the purchase plan, provided, however, that no
such action may adversely affect any outstanding rights to purchase common
stock.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan
commonly known as a 401(k) Plan. The 401(k) plan provides that each
participant may contribute up to 10% of his or her pre-tax gross compensation
(up to a statutorily prescribed annual limit of $10,000 in 1999). Employees
must be twenty-one years old to participate and are eligible on the first day
of the first quarter following commencement as an employee. All amounts
contributed by employee participants and earnings on these contributions are
fully vested at all times. Employee participants may elect to invest their
contributions in various established funds.
Employment Agreements
On July 26, 1996, we entered into an employment offer letter with Steven
Hunt, our Vice President, Engineering, pursuant to which Mr. Hunt's annual
compensation was initially set at $130,000. In addition, we granted Mr. Hunt
an option to purchase 300,000 shares of common stock. This option vests 25% on
the first anniversary of the date of hire with the remainder vesting monthly
over the following three years. Pursuant to his employment offer letter, in
the event Mr. Hunt's employment is terminated without cause, he will receive
severance compensation equal to three months salary.
On March 18, 1998, we entered into an employment agreement with Richard S.
Gilbert, our President and Chief Executive Officer. Mr. Gilbert's annual
compensation was initially set at a base salary of $200,000 and an on-target
bonus of $100,000 for the 1998 calendar year, prorated from April 6, 1998. In
addition, we granted Mr. Gilbert an option to purchase 844,645 shares of
common stock. This option vests 25% on the first anniversary of the date of
hire with the remainder vesting monthly over the following three years.
Pursuant to Mr. Gilbert's employment agreement, in the event Mr. Gilbert's
employment is terminated by us without cause or by Mr. Gilbert for good
reason, as defined in his option agreement, following the occurrence of a
change in control, as defined in his option agreement, the vesting of his
option accelerates such that one half of the unvested portion of the option
becomes immediately exercisable. Pursuant to Mr. Gilbert's employment
agreement, we reimbursed Mr. Gilbert for relocation expenses of $65,177, and
we loaned Mr. Gilbert $1 million pursuant to an interest-free promissory note
for the purchase of his principal residence in California. The principal
amount of such note is due on March 30, 2003. The note is secured by a second
trust deed on Mr. Gilbert's residence. Mr. Gilbert's obligation to repay the
note may be accelerated upon the occurrence of certain events, including the
termination of Mr. Gilbert's employment.
On March 12, 1999, we entered into an employment agreement with Joseph D.
Markee, our Chairman of the Board and Chief Technical Officer. Pursuant to the
terms of his agreement, if the board of directors removes him, elects someone
else as Chief Technical Officer, or assigns him to work outside San Diego
County, and he subsequently resigns, Mr. Markee is entitled to certain
severance benefits. These benefits include pay equal to six months of his base
salary and twelve months of accelerated vesting of his unvested stock options.
53
<PAGE>
Limitations on Directors' and Executive Officers' Liability and
Indemnification
Our bylaws provide that we shall indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to
the fullest extent permitted by Delaware law, except with respect to certain
proceedings initiated by such persons. We are also empowered under our bylaws
to enter into indemnification contracts with our directors and executive
officers and to purchase insurance on behalf of any person we are required or
permitted to indemnify. Pursuant to this provision, we have entered into
indemnification agreements with each of our directors and certain of our
executive officers.
In addition, our certificate of incorporation, as it will be amended and
restated upon the close of this offering, provides that our directors will not
be personally liable to us or our stockholders for monetary damages for any
breach of fiduciary duty as a director, except for liability
. for any breach of the director's duty of loyalty to us or our
stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. under Section 174 of the Delaware General Corporation Law or
. for any transaction from which the director derives an improper personal
benefit.
Our certificate of incorporation also provides that if the Delaware General
Corporation Law is amended after the approval by our stockholders of the
restated certificate to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of our
directors shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended. The provision does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
54
<PAGE>
CERTAIN TRANSACTIONS
The following is a description of transactions since inception (March 1996),
to which we have been a party, in which the amount involved in the transaction
exceeds $60,000 and in which any director, executive officer or holder of more
than 5% of our capital stock had or will have a direct or indirect material
interest other than compensation arrangements which are otherwise required to
be described under "Management."
In April 1996, we sold 2,723,000 shares of series A preferred stock in a
private placement at a purchase price of $1.00 per share, pursuant to a Series
A Preferred Stock Agreement dated April 10, 1996. See Note 5 of Notes to
Financial Statements for a description of the series A preferred stock. Upon
the closing of this offering, each share of series A preferred stock will
automatically convert into one and one-half shares of common stock. The
following directors and beneficial owners of more than 5% of our common stock
(assuming the conversion of all shares of preferred stock into common stock)
acquired beneficial ownership of series A preferred stock pursuant to the
Series A Preferred Stock Agreement.
<TABLE>
<CAPTION>
Directors / 5% Stockholders No. of Shares
- --------------------------- -------------
<S> <C>
Roger Evans/Greylock Equity Limited Partnership................... 1,250,000
Tench Coxe/Entities Affiliated with Sutter Hill Ventures.......... 1,250,000
Joseph D. Markee.................................................. 50,000
Tench Coxe........................................................ 42,350
</TABLE>
In January 1997, we sold 1,850,063 shares of series B preferred stock in a
private placement at a purchase price of $3.39 per share, pursuant to a Series
B Preferred Stock Agreement dated January 14, 1997. See Note 5 of Notes to
Financial Statements for a description of the series B preferred stock. Upon
the closing of this offering, each share of series B preferred stock will
automatically convert into one and one-half shares of common stock. The
following directors and beneficial owners of more than 5% of our common stock
(assuming the conversion of all shares of preferred stock into common stock)
acquired beneficial ownership of series B preferred stock pursuant to the
Series B Preferred Stock Agreement.
<TABLE>
<CAPTION>
Directors / 5% Stockholders No. of Shares
- --------------------------- -------------
<S> <C>
Andrew W. Verhalen/Entities Affiliated with Matrix Partners...... 739,725
Roger Evans/Greylock Equity Limited Partnership.................. 368,732
Tench Coxe/Entities Affiliated with Sutter Hill Ventures......... 368,731
Intel Corporation................................................ 294,802
Joseph D. Markee................................................. 50,000
Tench Coxe....................................................... 12,492
</TABLE>
In January 1997, in connection with the execution of an ATM Technology
Agreement with Intel Corporation, we issued Intel a warrant to purchase up to
147,401 shares of series B preferred stock at an exercise price of $3.39 per
share. This warrant expires on January 14, 2004. Upon the closing of this
offering this warrant will become exercisable for common stock at the rate of
one and one-half shares of common stock for each share of series B preferred
stock underlying the warrant.
In October 1997, we sold 2,422,361 shares of series C preferred stock in a
private placement at a purchase price of $4.75 per share, pursuant to a Series
C Preferred Stock Agreement, dated October 29, 1997. See Note 5 of Notes to
Financial Statements for a description of the series C preferred stock. Upon
the closing of this offering, each share of series C preferred stock will
automatically convert into one and one-half shares of common stock. The
following directors and beneficial owners of more than 5% of our common stock
(assuming the conversion of all shares of preferred stock into common stock)
acquired beneficial ownership of series C preferred stock pursuant to the
Series C Preferred Stock Agreement.
55
<PAGE>
<TABLE>
<CAPTION>
Directors / 5% Stockholders No. of Shares
- --------------------------- -------------
<S> <C>
Canaan Equity, L.P............................................... 736,843
Entities Affiliated with InterWest Partners VI, L.P.............. 736,843
Roger Evans/Greylock Equity Limited Partnership.................. 242,106
Tench Coxe/Entities Affiliated with Sutter Hill Ventures......... 242,106
Andrew W. Verhalen/Entities Affiliated with Matrix Partners...... 210,527
Intel Corporation................................................ 42,106
Tench Coxe....................................................... 8,059
</TABLE>
In October 1998, we sold 3,225,806 shares of series D preferred stock in a
private placement at a purchase price of $7.75 per share, pursuant to a Series
D Preferred Stock Agreement dated October 9, 1998. See Note 5 of Notes to
Financial Statements for a description of the series D preferred stock. Upon
the closing of this offering, each share of series D preferred stock will
automatically convert into one and one-half shares of common stock. The
following directors and beneficial owners of more than 5% of our common stock
(assuming the conversion of all shares of preferred stock into common stock)
acquired beneficial ownership of series D preferred stock pursuant to the
Series D Preferred Stock Agreement.
<TABLE>
<CAPTION>
Directors / 5% Stockholders No. of Shares
- --------------------------- -------------
<S> <C>
Richard H. Kimball/Entities Affiliated with Technology Crossover
Ventures....................................................... 774,194
Roger Evans/Greylock Equity Limited Partnership................. 147,805
Tench Coxe/Entities Affiliated with Sutter Hill Ventures........ 147,805
Intel Corporation............................................... 135,989
Andrew W. Verhalen/Entities Affiliated with Matrix Partners..... 75,478
Entities Affiliated with Canaan Equity, L.P..................... 58,527
Entities Affiliated with InterWest Partners VI, L.P............. 58,527
Tench Coxe/Wells Fargo Bank, Trustee SHV M/P/T FBO Tench Coxe... 4,918
Richard S. Gilbert.............................................. 1,422
</TABLE>
Pursuant to the Amended and Restated Investors' Rights Agreement between us
and certain of our stockholders, the underwriters have reserved for sale to
the holders of our series D preferred stock in this offering, an aggregate of
$2 million worth of shares of Copper Mountain common stock at the price per
share set forth on the cover page of this prospectus.
All of the securities referenced above were sold and purchased at prices
equal to the fair market value of the securities, as determined by our board
of directors, on the date of issuance.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 1999 and as adjusted
to reflect our sale of shares for
. each person who we know to own beneficially more than five percent of
the common stock,
. each of our directors,
. certain of our executive officers, and
. all directors and executive officers as a group.
Except as indicated, and subject to community property laws where applicable,
the persons named have sole voting and investment power with respect to all
shares shown as beneficially owned by them. Percentage of beneficial ownership
is based on 18,387,005 shares of common stock outstanding on an as-converted
basis as of March 31, 1999. This assumes no exercise of the underwriters'
over-allotment option. If the underwriters' over-allotment option is exercised
in full, we will sell up to an aggregate of 4,600,000 shares of common stock
and up to 22,987,005 shares of common stock will be outstanding after the
completion of this offering.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power and any shares as to which
the individual or entity has the right to acquire beneficial ownership within
60 days after March 31, 1999 through the exercise of any stock option or other
right. The inclusion herein of such shares, however, does not constitute an
admission that the named stockholder is a direct or indirect beneficial owner
of, or receives the economic benefit from, such shares.
Unless otherwise indicated in the table set forth below, each person or
entity named below has an address in care of Copper Mountain's principal
executive offices.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially Owned
Shares -------------------
Beneficially Prior to After
Name and Address of Beneficial Owner Owned Offering Offering
- ------------------------------------ ------------ --------- ---------
<S> <C> <C> <C>
Greylock Equity Limited Partnership(1).. 3,042,964 16.5% 13.6%
755 Page Mill Road, Suite A-100
Palo Alto, CA 94304
Roger Evans(2).......................... 3,042,964 16.5% 13.6%
Greylock Equity Limited Partnership
755 Page Mill Road, Suite A-100
Palo Alto, CA 94304
Entities Affiliated with................ 3,042,956 16.5% 13.6%
Sutter Hill Ventures(3)
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Tench Coxe(4)........................... 2,391,455 13.0% 10.7%
Sutter Hill Ventures
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Entities Affiliated with................ 1,568,594 8.5% 7.0%
Matrix Partners IV, L.P. (5)
2500 Sand Hill Road, Suite 113
Menlo Park, CA 94025
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially Owned
Shares ------------------
Beneficially Prior to After
Name and Address of Beneficial Owner Owned Offering Offering
- ------------------------------------- ------------ --------- ---------
<S> <C> <C> <C>
Andrew W. Verhalen(6)................... 1,568,594 8.5% 7.0%
Matrix Partners IV, L.P.
2500 Sand Hill Road, Suite 113
Menlo Park, CA 94025
Entities Affiliated with................ 1,193,054 6.5% 5.3%
InterWest Partners VI, L.P.(7)
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Cannan Equity, L.P...................... 1,193,054 6.5% 5.3%
2884 Sand Hill Road, Ste. 115
Menlo Park, CA 94025
Entities Affiliated with................ 1,191,290 6.5% 5.3%
Technology Crossover Ventures (8)
575 High Street, Suite 400
Palo Alto, CA 94301
Richard H. Kimball(9)................... 1,191,290 6.5% 5.3%
Technology Crossover Ventures II, L.P.
575 High Street, Suite 400
Palo Alto, CA 94301
Joseph D. Markee(10).................... 961,739 5.2% 4.3%
Intel Corporation(11)................... 930,446 5.1% 4.2%
2200 Mission College Boulevard
Santa Clara, CA 950520
Mark Handzel(12)........................ 781,635 4.3% 3.5%
Richard Gilbert(13)..................... 230,892 1.2% 1.0%
Steve Hunt(14).......................... 206,250 1.1% *
Mike Kelly(15).......................... 177,986 1.0% *
Raymond V. Thomas(16)................... 30,000 * *
Robert L. Bailey(17).................... 30,000 * *
All directors and officers as a group
(16 persons)(18)....................... 10,799,378 58.0% 47.7%
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
(1) Includes 30,000 shares issuable upon exercise of options held by Roger
Evans exercisable within 60 days of March 31, 1999. Mr. Evans, a director
of Copper Mountain, is a general partner of the general partner of
Greylock Equity Limited Partnership.
(2) Includes 3,012,964 shares held by Greylock Equity Limited Partnership and
30,000 shares issuable upon exercise of options held by Mr. Evans
exercisable within 60 days of March 31, 1999. Mr. Evans is a general
partner of the general partner of Greylock Equity Limited Partnership.
(3) Includes 101,728 shares held by or for the benefit of Tench Coxe, a
director of Copper Mountain and a managing director of the general
partner of Sutter Hill Ventures and 30,000 shares issuable upon exercise
of options held by Mr. Coxe exercisable within 60 days of March 31, 1999.
Mr. Coxe shares voting and investing power with four other managing
directors of the general partner of Sutter Hill Ventures. Also includes
624,911 shares held of record by the managing directors of the general
partner of Sutter Hill Ventures and their related family entities, and
26,590 shares held by other individuals associated with Sutter Hill
Ventures.
58
<PAGE>
(4) Includes 2,259,727 shares held by Sutter Hill Ventures, 7,377 shares held
in Mr. Coxe's Keogh account, and 30,000 shares issuable upon exercise of
options held by Mr. Coxe exercisable within 60 days of March 31, 1999.
Mr. Coxe is a managing director of the general partner of Sutter Hill
Ventures.
(5) Of the total shares indicated as beneficially owned, Matrix Partners IV,
L.P. owns 1,461,664 shares, which represent 8.0% and 6.5% of total shares
before and after this offering, respectively. Matrix IV Entrepreneurs
Fund, L.P. owns 76,930 shares which represent less than 1% of total
shares before and after this offering, respectively. Also includes 30,000
shares issuable upon exercise of options held by Mr. Verhalen exercisable
within 60 days of March 31, 1999. Mr. Verhalen, a director, is a general
partner of Matrix Partners IV, L.P.
(6) Includes 1,538,594 shares held by entities affiliated with Matrix
Partners IV, L.P. and 30,000 shares issuable upon exercise of options
held by Mr. Verhalen exercisable within 60 days of March 31, 1999. See
Note 5 above. Mr. Verhalen is a general partner of Matrix Partners IV,
L.P.
(7) Of the total shares indicated as beneficially owned, InterWest Partners
VI, L.P. owns 1,157,261 shares, which represent 6.3% and 5.2% of total
shares before and after this offering, respectively. InterWest Investors
VI, L.P. owns 35,793 shares which represent less than 1% of total shares
before and after this offering, respectively. InterWest Management
Partners VI, LLC is the general partner of both of these partnerships.
The managing directors of InterWest Management Partners VI, LLC are
deemed to beneficially own the shares held by InterWest Partners VI, L.P.
and InterWest Investors VI, L.P.
(8) Includes:
. 18,046 shares held by TCV II, V.O.F., which represent less than 1% of
total shares before and after this offering, respectively;
. 555,531 shares held by Technology Crossover Ventures II, L.P. which
represent 3.0% and 2.5% of total shares before and after this offering,
respectively;
. 427,099 shares held by TCV II (Q), L.P. which represent 2.3% and 1.9%
of total shares before and after this offering, respectively;
. 75,795 shares held by TCV II Strategic Partners, L.P. which represent
less than 1% of total shares before and after this offering,
respectively;
. 84,819 shares held by Technology Crossover Ventures II, C.V. which
represent less than 1% of total shares before and after this offering,
respectively; and
. 30,000 shares issuable upon exercise of options held by Mr. Kimball
exercisable within 60 days of March 31, 1999.
Mr. Kimball, a director of Copper Mountain, is a managing member of the
general partner of each of these entities.
(9) Includes 1,161,290 shares held by the entities listed in note 8 above and
30,000 shares issuable upon exercise of options exercisable within 60
days of March 31, 1999. Mr. Kimball is a managing member of the general
partner of these entities.
(10) Includes 28,437 shares of common stock held by Teresa L. Boley, Mr.
Markee's spouse, 5,000 shares issuable upon exercise of options
exercisable within 60 days of March 31, 1999, and 194,576 shares subject
to repurchase by Copper Mountain as of March 31, 1999.
(11) Includes 221,101 shares of common stock issuable upon the exercise of a
warrant.
(12) Includes 194,576 shares subject to repurchase by Copper Mountain as of
March 31, 1999, and 3,333 shares issuable upon exercise of options
exercisable within 60 days of March 31, 1999.
(13) Includes 228,759 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(14) Includes 18,750 shares of common stock issuable upon exercise of options
exercisable within 60 days of March 31, 1999.
(15) Includes 18,216 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(16) Includes 30,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(17) Includes 30,000 shares issuable upon exercise of options exercisable
within 60 days of March 31, 1999.
(18) Includes 602,006 shares subject to options exercisable within 60 days of
March 31, 1999.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, the authorized capital stock
consists of 100,000,000 shares of common stock, $.001 par value, and 5,000,000
shares of preferred stock, $.001 par value.
Common Stock
As of March 31, 1999, there were 18,387,005 shares of common stock
outstanding, after giving effect to the conversion of all outstanding shares
of preferred stock into 15,334,824 shares of common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common
stock are entitled to receive ratably such dividends as may be declared by the
board of directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of, holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of preferred stock.
Holders of common stock have no preemptive, conversion, subscription or other
rights. There are no redemption or sinking fund provisions applicable to the
common stock.
Preferred Stock
Upon the closing of this offering, all outstanding shares of preferred stock
will be converted at a rate of one and one half shares of common stock for
each share of preferred stock into an aggregate of 15,334,824 shares of common
stock. Following the conversion, our certificate of incorporation will be
amended and restated to delete all references to such shares of preferred
stock. Under the restated certificate, the board has the authority, without
further action by stockholders, to issue up to 5,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences, privileges,
qualifications and restrictions granted to or imposed upon such preferred
stock, including dividend rights, conversion rights, voting rights, rights and
terms of redemption, liquidation preference and sinking fund terms, any or all
of which may be greater than the rights of the common stock. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and reduce the likelihood that such holders will receive dividend
payments and payments upon liquidation. Such issuance could have the effect of
decreasing the market price of the common stock. The issuance of preferred
stock could have the effect of delaying, deterring or preventing a change in
control of Copper Mountain. We have no present plans to issue any shares of
preferred stock.
Warrants
In October 1996, in conjunction with the execution of an equipment financing
agreement, we issued ten-year warrants to purchase up to 10,000 shares and
40,000 shares of series A preferred stock at an exercise price of $1.00 per
share. In January 1997, in connection with the execution of a license
agreement with Intel, we issued a seven-year warrant to purchase up to 147,401
shares of series B preferred stock at an exercise price of $3.39 per share. In
October 1997 and in April 1998, in connection with the execution of an
equipment financing agreement, we issued ten-year warrants to purchase 8,421
and 6,316 shares of series C preferred stock at an exercise price of $4.75 per
share. In August 1998, in connection with the execution of a loan agreement,
we issued a five-year warrant to purchase up to 25,000 shares of series C
preferred stock at an exercise price of $4.75 per share.
Upon the closing of this offering, all warrants described herein will become
exercisable for common stock at the rate of one and one-half shares of common
stock for each share of preferred stock underlying the warrants.
Registration Rights
After this offering, the holders of 15,690,530 shares of common stock issued
upon conversion of our preferred stock, including shares issuable upon
exercise of warrants, or their permitted transferees, are entitled to
60
<PAGE>
certain rights with respect to the registration of such shares under the
Securities Act. If we propose to register any of its securities under the
Securities Act for its own account or the account of any of its stockholders
other than the holders of the registrable shares, holders of such registrable
shares are entitled, subject to certain limitations and conditions, to notice
of such registration and are, subject to certain conditions and limitations,
entitled to include registrable shares therein, provided, among other
conditions, that the underwriters of any such offering have the right to limit
the number of shares included in such registration. In addition, commencing
180 days after the effective date of the registration statement of which this
prospectus is a part, we may be required to prepare and file a registration
statement under the Securities Act at its expense if requested to do so by the
holders of at least 25% of the registrable shares, provided the reasonably
expected aggregate offering price will equal or exceed $5,000,000 including
underwriting discounts and commissions. We are required to use its best
efforts to effect such registration, subject to certain conditions and
limitations. We are not obligated to effect more than two of such stockholder-
initiated registrations. Further, holders of registrable securities may
require us to file additional registration statements on Form S-3, subject to
certain conditions and limitations.
We are required to bear substantially all costs incurred in connection with
any such registrations, other than underwriting discounts and commissions. The
foregoing registration rights could result in substantial future expenses and
adversely affect any future equity or debt offerings.
Delaware Anti-Takeover Law
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sale or other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock. The statute could have the
effect of delaying, deferring or preventing a change in control of Copper
Mountain.
Our restated certificate, which will become effective upon the effective
date of this offering, provides that any action required or permitted to be
taken by stockholders must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in writing. In
addition, our bylaws provide that special meetings of the stockholders may be
called only by the Chairman of the board of directors, the Chief Executive
Officer, by the board of directors pursuant to a resolution adopted by a
majority of the total number of authorized directors, or by the holders of 10%
of the outstanding voting stock. Our restated certificate also specifies that
the authorized number of directors may be changed only by resolution of the
board of directors and does not include a provision for cumulative voting for
directors. Under cumulative voting, a minority stockholder holding a
sufficient percentage of a class of shares may be able to ensure the election
of one or more directors. These and other provisions contained in the restated
certificate and our bylaws could delay or discourage certain types of
transactions involving an actual or potential change in control or its
management (including transactions in which stockholders might otherwise
receive a premium for their shares over then current prices) and may limit the
ability of stockholders to remove current management or approve transactions
that stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the
public market could adversely affect the market price of the common stock.
Upon completion of this offering, Copper Mountain will have outstanding
22,387,005 shares of common stock, assuming the issuance of 4,000,000 shares
of common stock offered hereby and no exercise of options after March 31,
1999. Of these shares, the 4,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act (whose sales would be subject
to certain limitations and restrictions described below).
We issued and sold the remaining 18,387,005 shares of common stock held by
existing stockholders in reliance on exemptions from the registration
requirements of the Securities Act. All of these shares will be subject to
"lock-up" agreements described below on the effective date of this offering.
Upon expiration of the lock-up agreements 180 days after the effective date of
this offering, all of these shares will become eligible for sale, subject in
most cases to the limitations of Rule 144. In addition, holders of stock
options could exercise such options and sell certain of the shares issued upon
exercise as described below.
<TABLE>
<CAPTION>
Shares
Days after Date of Eligible
this Prospectus for Sale Comment
------------------ ---------- ---------------------------------------------
<C> <C> <S>
Upon Effectiveness 4,000,000 Shares sold in this offering
180 days Lock-up released; saleable shares under Rules
18,387,005 144 and 701
</TABLE>
As of March 31, 1999, there were a total of 4,962,225 shares of common stock
subject to outstanding options under our stock option plans and outside our
stock option plans, 439,177 of which were vested. However, all of these shares
are subject to lock-up agreements. Immediately after the completion of this
offering, we intend to file registration statements on Form S-8 under the
Securities Act to register all of the shares of common stock issued or
reserved for future issuance under our stock option plans. On the date 180
days after the effective date of this offering, a total of 1,475,555 shares of
common stock subject to outstanding options will be vested. After the
effective date of the registration statement on Form S-8, shares purchased
upon exercise of options granted pursuant to the 1996 Equity Incentive Plan
and Employee Stock Purchase Plan generally would be available for resale in
the public market.
The officers, directors and stockholders of Copper Mountain have agreed not
to sell or otherwise dispose of any of their shares for a period of 180 days
after the date of this offering. Morgan Stanley & Co. Incorporated, however,
may in its sole discretion, at any time without notice, release all or any
portion of the shares subject to lock-up agreements.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of
Copper Mountain's common stock for at least one year would be entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of
(a) 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
(b) the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about Copper Mountain.
62
<PAGE>
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of Copper
Mountain's "affiliates," as defined in Rule 144, 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, including the holding period of any prior
owner other than an "affiliate," is entitled to sell such shares without
complying with the manner of sale, notice filing, volume limitation or notice
provisions of Rule 144. Therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion of this offering.
Rule 701
In general, under Rule 701, any Copper Mountain employee, director, officer,
consultant or advisor who purchases shares from Copper Mountain in connection
with a compensatory stock or option plan or other written agreement before the
effective date of the offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
Rule 701 applies to typical stock options granted by an issuer to employees
and certain consultants and advisers before it becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, along with the
shares acquired upon exercise of such options (including exercises after the
date of this prospectus). Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this prospectus, may be sold by
persons other than "affiliates" (as defined in Rule 144) subject only to the
manner of sale provisions of Rule 144 and by "affiliates" under Rule 144
without compliance with its one-year minimum holding period requirement.
63
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, BancBoston Robertson Stephens, Inc. and Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated are acting as
representatives, have severally agreed to purchase, and we have agreed to sell
to them an aggregate of 4,000,000 shares of common stock. The number of shares
of common stock that each underwriter has agreed to purchase is set forth
opposite its name below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
BancBoston Robertson Stephens, Inc.................................
Dain Rauscher Wessels..............................................
---------
Total............................................................ 4,000,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered hereby are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered hereby, other than those covered by the over-
allotment option described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering
price. Any underwriters may allow, and such dealers may reallow, a concession
not in excess of $ a share to other underwriters or to certain other
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives of the underwriters.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to
purchase up to an aggregate of 600,000 additional shares of common stock at
the public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of common stock offered hereby. To
the extent such option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage
of such additional shares of common stock as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares
of common stock set forth next to the names of all underwriters in the
preceding table. If the underwriter's over-allotment option is exercised in
full, the total price to public would be $ , the total underwriters'
discounts and commissions would be $ , and the total proceeds to us would be
$ .
We, the directors, officers, stockholders and certain optionholders of
Copper Mountain have each agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, during the
period ending 180 days after the date of this prospectus, we will not,
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 to purchase, lend or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock,
or (ii) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock, whether any such 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.
64
<PAGE>
The restrictions described in the previous paragraph do not apply to (a) the
sale to the underwriters of the shares of common stock under the underwriting
agreement, (b) the issuance by Copper Mountain of shares of common stock upon
the exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus which is described in this
prospectus, (c) transactions by any person other than Copper Mountain relating
to shares of common stock or other securities acquired in open market
transactions after the completion of the offering of the shares, or (d)
issuances of certain shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on the
date of this prospectus.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "CMTN."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering if the syndicate repurchases
previously distributed shares of common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
Of the 4,000,000 shares of common stock to be offered in this offering, the
underwriters have reserved for sale, at the price set forth on the cover page
of this prospectus, at the request of the Company, up to 200,000 shares of the
Company's common stock. As a result, the number of shares of common stock
available for sale to the general public will be reduced to the extent of
purchase of the reserved shares. The underwriters will offer to the general
public (on the same basis as the other shares to be sold in this offering) any
reserved shares that are not so purchased.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
Morgan Stanley & Co. Incorporated acted as the placement agent of our series
D preferred stock financing, and in connection with that placement, received a
fee for their services. In addition, entities affiliated with Morgan Stanley &
Co. Incorporated purchased an aggregate of 338,709 shares of our series D
preferred stock, and an affiliate of BancBoston Robertson Stephens, Inc.
purchased 58,065 shares of our series D preferred stock.
Pricing of the Offering
Prior to this offering, there has been no public market for our common
stock. Consequently, the public offering price for the shares of common stock
will be determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be our record of operations, our current financial
position and future prospects, the experience of our management, sales,
earnings and certain of our other financial and operating information in
recent periods, the price-earnings ratios, price-sales ratios, market prices
of securities and certain financial and operating information of companies
engaged in activities similar to ours. The estimated public offering price
range set forth on the cover page of this prospectus is subject to change as a
result of market conditions and other factors.
65
<PAGE>
LEGAL MATTERS
The legality of the shares of common stock offered hereby will be passed
upon for us by Cooley Godward llp, San Diego, California. Certain legal
matters will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California. As of the date of
this prospectus, certain partners and associates of Cooley Godward llp and
certain partners and associates of Wilson Sonsini Goodrich & Rosati
beneficially own an aggregate of approximately 60,943 and 15,790 shares of
common stock, respectively, through investment partnerships.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1997 and 1998 and for the period from March 11,
1996 (inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998, as set forth in their report. We've included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, with respect to the common stock offered hereby. As permitted
by the rules and regulations of the SEC, this prospectus, which is a part of
the Registration Statement, omits certain information, exhibits, schedules and
undertakings set forth in the registration statement. For further information
pertaining to Copper Mountain and the common stock offered hereby, reference
is made to such registration statement and the exhibits and schedules thereto.
Statements contained in this prospectus as to the contents or provisions of
any contract or other document referred to herein are not necessarily
complete, and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. A copy of the
registration statement may be inspected without charge at the office of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of all or any part of the registration
statement may be obtained from such offices upon the payment of the fees
prescribed by the SEC. In addition, registration statements and certain other
filings made with the SEC through its Electronic Data Gathering, Analysis and
Retrieval, or EDGAR, system are publicly available through the SEC's Web site
on the Internet's World Wide Web, located at http://www.sec.gov. The
registration statement, including all exhibits thereto and amendments thereof,
was filed with the SEC through EDGAR.
66
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Contents
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statement of Stockholders' Equity......................................... F-5
Statements of Cash Flows.................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Copper Mountain Networks, Inc.
We have audited the accompanying balance sheets of Copper Mountain Networks,
Inc. as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' equity and cash flows for the period March 11, 1996
(inception) to December 31, 1996 and for the years ended December 31, 1997 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Copper Mountain Networks,
Inc. at December 31, 1997 and 1998, and the results of its operations and its
cash flows for the period March 11, 1996 (inception) to December 31, 1996 and
for the years ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
San Diego, California
February 25, 1999,
except for the sixteenth paragraph of Note 5,
as to which the date is April 23, 1999,
and Note 10, as to which the date is
April 13, 1999
F-2
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------- March 31,
Pro Forma
Stockholder's
1997 1998 1999 Equity
------------ ------------ ------------ -------------
(unaudited) (unaudited)
Assets (Note 1)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $ 9,517,000 $ 7,631,000 $ 8,474,000
Short-term
investments........... -- 10,898,000 10,033,000
Accounts receivable.... 183,000 8,026,000 7,262,000
Inventory.............. 383,000 4,668,000 5,067,000
Other current assets... 98,000 476,000 915,000
------------ ------------ ------------
Total current assets.... 10,181,000 31,699,000 31,751,000
Property and equipment,
net.................... 1,905,000 3,214,000 4,239,000
Other assets............ 246,000 1,296,000 1,403,000
------------ ------------ ------------
Total assets............ $ 12,332,000 $ 36,209,000 $ 37,393,000
============ ============ ============
Liabilities and
stockholders' equity
Current liabilities:
Accounts payable....... $ 748,000 $ 4,371,000 $ 3,555,000
Accrued liabilities.... 1,435,000 2,219,000 3,493,000
Current portion of
obligations under
capital leases and
equipment notes
payable............... 345,000 783,000 898,000
------------ ------------ ------------
Total current
liabilities............ 2,528,000 7,373,000 7,946,000
Obligations under
capital leases and
equipment notes
payable, less current
portion................ 735,000 1,965,000 1,828,000
Other accrued........... -- 28,000 34,000
Stockholders' equity:
Convertible preferred
stock, no par value,
10,602,464 shares
authorized, 6,997,424,
10,223,230 and
10,223,230 shares
issued and outstanding
at December 31, 1997,
1998 and March 31,
1999 (unaudited),
respectively; $.001
par value, 5,000,000
shares authorized,
none issued and
outstanding in pro
forma (unaudited)
(liquidation
preference of
$45,508,000 at
December 31, 1998).... 20,425,000 44,502,000 44,502,000 $ --
Common stock, $.001 par
value, 29,397,536
shares authorized,
2,230,679, 2,516,873,
3,052,181 and
18,387,005 shares
issued and outstanding
at December 31, 1997,
1998, March 31, 1999
(unaudited), and pro
forma (unaudited),
respectively.......... 2,000 3,000 3,000 18,000
Notes receivable from
stockholders.......... (69,000) (41,000) (41,000) (41,000)
Paid-in capital........ 4,471,000 15,669,000 15,988,000 60,475,000
Deferred compensation.. (2,563,000) (9,762,000) (8,303,000) (8,303,000)
Accumulated deficit.... (13,197,000) (23,528,000) (24,564,000) (24,564,000)
------------ ------------ ------------ ------------
Total stockholders'
equity................. 9,069,000 26,843,000 27,585,000 $ 27,585,000
------------ ------------ ------------ ============
Total liabilities and
stockholders' equity... $ 12,332,000 $ 36,209,000 $ 37,393,000
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from March Year Ended Three Months Ended
11, 1996 December 31, March 31,
(inception) to -------------------------- ------------------------
December 31, 1996 1997 1998 1998 1999
----------------- ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue............. $ -- $ 211,000 $ 21,821,000 $ 317,000 $13,217,000
Cost of revenue......... -- 1,717,000 12,400,000 217,000 6,384,000
----------- ------------ ------------ ----------- -----------
Gross profit (loss)..... -- (1,506,000) 9,421,000 100,000 6,833,000
Operating expenses:
Research and
development.......... 1,483,000 4,753,000 7,225,000 1,773,000 2,564,000
Sales and marketing... -- 1,510,000 5,363,000 724,000 2,581,000
General and
administrative....... 553,000 1,928,000 3,428,000 535,000 1,130,000
Amortization of
deferred stock
compensation......... 189,000 1,490,000 3,929,000 435,000 1,693,000
----------- ------------ ------------ ----------- -----------
Total operating
expenses........... 2,225,000 9,681,000 19,945,000 3,467,000 7,968,000
----------- ------------ ------------ ----------- -----------
Loss from operations.... (2,225,000) (11,187,000) (10,524,000) (3,367,000) (1,135,000)
Interest income......... 47,000 268,000 406,000 113,000 202,000
Interest expense........ (3,000) (97,000) (213,000) (33,000) (55,000)
----------- ------------ ------------ ----------- -----------
Loss before income
taxes.................. (2,181,000) (11,016,000) (10,331,000) (3,287,000) (988,000)
Provision for income
taxes.................. -- -- -- -- 48,000
----------- ------------ ------------ ----------- -----------
Net loss................ $(2,181,000) $(11,016,000) $(10,331,000) $(3,287,000) $(1,036,000)
=========== ============ ============ =========== ===========
Basic and diluted net
loss per share......... $ (11.67) $ (15.62) $ (7.75) $ (3.08) $ (.47)
=========== ============ ============ =========== ===========
Shares used to compute
basic and diluted net
loss per share......... 186,938 705,236 1,333,036 1,068,260 2,208,833
=========== ============ ============ =========== ===========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (.62) $ (.06)
============ ===========
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 16,667,860 17,543,657
============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes
Preferred Stock Common Stock Receivable Total
---------------------- ----------------- From Paid-in Deferred Accumulated Stockholders'
Shares Amount Shares Amount Stockholders Capital Compensation Deficit Equity
---------- ----------- --------- ------ ------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock at
$0.03 per share
for notes
receivable..... -- $ -- 1,556,604 $2,000 $(42,000) $ 40,000 $ -- $ -- $ --
Issuance of
Series A
convertible
preferred stock
at $1.00 per
share for
cash........... 2,723,000 2,723,000 -- -- -- -- -- -- 2,723,000
Issuance of
Series A
convertible
preferred stock
warrants in
connection with
note payable... -- -- -- -- -- 18,000 -- -- 18,000
Issuance of
common stock at
$0.07 per share
for notes
receivable..... -- -- 408,000 -- (27,000) 27,000 -- -- --
Deferred
compensation
related to the
grant of stock
options........ -- -- -- -- -- 1,813,000 (1,813,000) -- --
Amortization
related to
deferred stock
compensation... -- -- -- -- -- -- 189,000 -- 189,000
Net loss........ -- -- -- -- -- -- -- (2,181,000) (2,181,000)
---------- ----------- --------- ------ -------- ----------- ----------- ------------ -----------
Balance at
December 31,
1996........... 2,723,000 2,723,000 1,964,604 2,000 (69,000) 1,898,000 (1,624,000) (2,181,000) 749,000
Issuance of
Series B
convertible
preferred stock
at $3.39 per
share for cash
and conversion
of convertible
bridge note
payable, net of
offering
expenses of
$76,000........ 1,850,063 6,196,000 -- -- -- -- -- -- 6,196,000
Issuance of
Series C
convertible
preferred stock
at $4.75 per
share for
cash........... 2,422,361 11,506,000 -- -- -- -- -- -- 11,506,000
Exercise of
options to
purchase common
stock.......... -- -- 238,437 -- -- 16,000 -- -- 16,000
Stock grants for
consulting
services....... 2,000 -- 27,638 -- -- 15,000 -- -- 15,000
Issuance of
warrants to
purchase
convertible
preferred stock
in connection
with technology
agreement,
notes payable,
and consulting
services....... -- -- -- -- -- 113,000 -- -- 113,000
Deferred
compensation
related to the
grant of stock
options........ -- -- -- -- -- 2,429,000 (2,429,000) -- --
Amortization
related to
deferred stock
compensation... -- -- -- -- -- -- 1,490,000 -- 1,490,000
Net loss........ -- -- -- -- -- -- -- (11,016,000) (11,016,000)
---------- ----------- --------- ------ -------- ----------- ----------- ------------ -----------
Balance at
December 31,
1997........... 6,997,424 20,425,000 2,230,679 2,000 (69,000) 4,471,000 (2,563,000) (13,197,000) 9,069,000
Exercise of
options to
purchase common
stock.......... -- -- 514,635 1,000 -- 60,000 -- -- 61,000
Stock grants for
consulting
services....... -- -- 9,560 -- -- 5,000 -- -- 5,000
Deferred
compensation
related to the
grant of stock
options........ -- -- -- -- -- 11,128,000 (11,128,000) -- --
Amortization
related to
deferred stock
compensation... -- -- -- -- -- -- 3,929,000 -- 3,929,000
Stock forfeited
by employee.... -- -- (238,001) -- 16,000 (16,000) -- -- --
Repayment of
stockholder
note........... -- -- -- -- 12,000 -- -- -- 12,000
Issuance of
Series C
convertible
preferred stock
warrants in
connection with
a financing
agreement...... -- -- -- -- -- 21,000 -- -- 21,000
Issuance of
Series D
convertible
preferred stock
at $7.75 per
share for cash,
net of offering
expenses of
$923,000....... 3,225,806 24,077,000 -- -- -- -- -- -- 24,077,000
Net loss........ -- -- -- -- -- -- -- (10,331,000) (10,331,000)
---------- ----------- --------- ------ -------- ----------- ----------- ------------ -----------
Balance at
December 31,
1998........... 10,223,230 44,502,000 2,516,873 3,000 (41,000) 15,669,000 (9,762,000) (23,528,000) 26,843,000
Exercise of
options to
purchase common
stock
(unaudited).... -- -- 534,933 -- -- 83,000 -- -- 83,000
Stock grants for
consulting
services
(unaudited).... -- -- 375 -- -- 2,000 -- -- 2,000
Deferred
compensation
related to the
grant of stock
options
(unaudited).... -- -- -- -- -- 234,000 (234,000) -- --
Amortization
related to
deferred stock
compensation
(unaudited).... -- -- -- -- -- -- 1,693,000 -- 1,693,000
Net loss
(unaudited).... -- -- -- -- -- -- -- (1,036,000) (1,036,000)
---------- ----------- --------- ------ -------- ----------- ----------- ------------ -----------
Balance at March
31, 1999
(unaudited).... 10,223,230 $44,502,000 3,052,181 $3,000 $(41,000) $15,988,000 $(8,303,000) $(24,564,000) $27,585,000
========== =========== ========= ====== ======== =========== =========== ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
March 11, 1996 Three Months ended
(inception) to Year ended December 31, March 31,
December 31, -------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(2,181,000) $(11,016,000) $(10,331,000) $(3,287,000) $ (1,036,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization......... 109,000 511,000 1,231,000 233,000 489,000
Noncash compensation.. 190,000 1,503,000 3,934,000 435,000 1,695,000
Changes in operating
assets and
liabilities:
Accounts receivable.. -- (183,000) (7,843,000) (142,000) 764,000
Inventory............ -- (383,000) (4,285,000) (466,000) (399,000)
Other current assets
and other assets.... (58,000) (155,000) (1,469,000) (194,000) (551,000)
Accounts payable and
accrued
liabilities......... 448,000 1,735,000 4,435,000 (567,000) 464,000
----------- ------------ ------------ ----------- ------------
Net cash provided by
(used in) operating
activities............. (1,492,000) (7,988,000) (14,328,000) (3,988,000) 1,426,000
Investing activities
Purchases of short-term
investments, net....... -- -- (10,898,000) -- 865,000
Purchases of property
and equipment.......... (682,000) (1,515,000) (1,171,000) -- (1,509,000)
----------- ------------ ------------ ----------- ------------
Net cash used for
investing activities... (682,000) (1,515,000) (12,069,000) -- (644,000)
Financing activities
Proceeds from issuance
of equipment notes
payable................ 367,000 615,000 921,000 566,000 82,000
Proceeds from
convertible bridge note
payable................ 2,500,000 -- -- -- --
Payments on capital
lease obligations...... -- (18,000) (293,000) (40,000) (33,000)
Payments on equipment
notes payable.......... (10,000) (201,000) (267,000) (70,000) (71,000)
Proceeds from issuance
of preferred stock..... 2,723,000 15,202,000 24,077,000 -- --
Proceeds from issuance
of common stock........ -- 16,000 73,000 12,000 83,000
----------- ------------ ------------ ----------- ------------
Net cash provided by
financing activities... 5,580,000 15,614,000 24,511,000 468,000 61,000
----------- ------------ ------------ ----------- ------------
Net increase (decrease)
in cash and cash
equivalents............ 3,406,000 6,111,000 (1,886,000) (3,520,000) 843,000
Cash and cash
equivalents at
beginning of the
period................. -- 3,406,000 9,517,000 9,517,000 7,631,000
----------- ------------ ------------ ----------- ------------
Cash and cash
equivalents at end of
the period............. $ 3,406,000 $ 9,517,000 $ 7,631,000 $ 5,997,000 $ 8,474,000
=========== ============ ============ =========== ============
Supplemental schedule of
investing and financing
activities:
Interest paid........... $ -- $ 74,000 $ 150,000 $ 21,000 $ 46,000
=========== ============ ============ =========== ============
Capital lease
obligations entered
into for equipment..... $ -- $ 327,000 $ 1,307,000 $ 832,000 $ --
=========== ============ ============ =========== ============
Conversion of
convertible bridge note
payable to preferred
stock.................. $ -- $ 2,500,000 $ -- $ -- $ --
=========== ============ ============ =========== ============
Stock issued (forfeited)
for notes receivable... $ 69,000 $ -- $ (16,000) $ (16,000) $ --
=========== ============ ============ =========== ============
Issuance of convertible
preferred stock
warrants............... $ 18,000 $ 113,000 $ 21,000 $ -- $ --
=========== ============ ============ =========== ============
Issuance of stock for
consulting services.... $ 1,000 $ 13,000 $ 5,000 $ -- $ 2,000
=========== ============ ============ =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information subsequent to December 31, 1998 and pertaining to March 31, 1999
and for the three months ended March 31, 1998 and 1999 is unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity
Copper Mountain Networks, Inc. (the "Company" or "Copper Mountain") was
incorporated in California on March 11, 1996, and is a supplier of high-speed
DSL-based communication solutions for the broadband access market. The
Company's solutions enable telecommunication service providers to provide high
speed, cost effective connectivity over the existing copper wire
infrastructure to the business, multiple tenant unit and residential markets.
During the period from March 11, 1996 to December 31, 1997, Copper Mountain
was a developmental stage company as defined in Financial Accounting Standards
Board Statement No. 7 "Development Stage Enterprises." Planned principal
operations commenced as of January 1, 1998 and, accordingly, Copper Mountain
is no longer considered a developmental stage company.
Management Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Interim Financial Data
The financial statements for the three months ended March 31, 1998 and 1999
are unaudited. The unaudited financial statements have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary to state fairly the financial information set forth
therein, in accordance with generally accepted accounting principles.
The results of operations for the interim period ended March 31, 1999 are
not necessarily indicative of the results which may be reported for any other
interim period or for the year ending December 31, 1999.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, money market funds, and other
highly liquid investments with maturities of three months or less when
purchased. The carrying value of these instruments approximates fair value.
The Company generally invests its excess cash in debt instruments of the U.S.
Treasury, government agencies and corporations with strong credit ratings.
Such investments are made in accordance with the Company's investment policy,
which establishes guidelines relative to diversification and maturities
designed to maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest
rates. The Company has not experienced any losses on its cash and cash
equivalents.
Fair Value of Financial Instruments
The carrying value of cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued liabilities, short-term bank
borrowings and notes payable approximates fair value.
F-7
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investments
At December 31, 1998, the Company held investments in investment grade debt
securities with various maturities through August 1999. Management determines
the appropriate classification of its investments in debt securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. The Company's total investments in these securities as of December 31,
1998 totaled $12,896,000. The Company has included $1,998,000 of these
securities in cash and cash equivalents, as of December 31, 1998, as they have
original maturities of less than 90 days. The remaining $10,898,000 as of
December 31, 1998 has been classified as short-term investments. The Company
has designated all of its investments as held to maturity.
Concentration of Credit Risk
The Company operates in one business segment, developing, marketing and
supporting advanced communications products which enable high-speed data
access to business, multi-tenant unit and residential users. The markets for
high-speed data access products are characterized by rapid technological
developments, frequent new product introductions, changes in end user
requirements and evolving industry standards. The Company's future success
will depend on its ability to develop, introduce and market enhancements to
its existing products, to introduce new products in a timely manner which meet
customer requirements and to respond to competitive pressures and
technological advances. Further, the emergence of new industry standards,
whether through adoption by official standards committees or widespread use by
telephone companies or other telecommunications service providers, could
require the Company to redesign its products.
A relatively small number of customers account for a significant percentage
of the Company's revenues. The Company expects that the sale of its products
to a limited number of customers may continue to account for a high percentage
of revenues for the foreseeable future. The Company's revenues for the year
ended December 31, 1998 include sales to two significant customers totaling
$13,227,000 and $3,995,000, respectively. The Company's four largest customers
(by revenues) generated approximately 95% of the Company's total revenues for
the year ended December 31, 1998.
The Company performs ongoing credit evaluations of its customers and
generally requires no collateral. The Company had significant accounts
receivable balances due from three customers individually representing 63%,
11% and 10% of total accounts receivable at December 31, 1998.
The Company from time to time maintains a substantial portion of its cash
and cash equivalents in money market accounts with one financial institution.
The Company invests its excess cash in debt instruments of the U.S. Treasury,
governmental agencies and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
Inventory
Inventory is stated at the lower of cost, principally standard costs, which
approximate actual costs on a first-in, first-out basis, or market. The
Company recorded charges to reduce the carrying costs of inventory totaling
$897,000 and $504,000 for the years ended December 31, 1997 and 1998,
respectively. The reduction in the value of the inventory was primarily due to
the discontinuance of certain product lines, which was the result of the
development and introduction of new products. For the year ended December 31,
1997 we also incurred a loss on purchase commitments totaling $582,000 to
purchase inventory used in the production of the discontinued product lines,
which had not yet been received by December 31, 1997. Such commitments are
included in accrued liabilities. All such reductions to inventory value and
losses on revenue commitments for the years ended December 31, 1997 and 1998
are included in cost of revenues.
F-8
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, ranging from three to seven years, using the
straight-line method.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment or, in some
cases, on customer receipt if collection of the resulting receivable is
probable and product returns can be reasonably estimated. Sales returns are
estimated based on historical experience and management's expectations and are
recorded at the time product revenue is recognized.
Revenue from service and support arrangements is recognized ratably as
services are performed. Annual service and support arrangements can be
purchased by customers for products no longer under warranty and are billed
quarterly.
The Company may extend limited stock rotation, product return and price
protection rights to certain distributors and resellers. The Company may not
be able to estimate product returns if the relationship with the distributor
is new or if there is limited historical basis to determine product returns.
Deferred revenue, which is included in accrued liabilities, represents the
margin on shipments of products to distributors or resellers that will be
recognized when the Company can reasonably estimate product returns.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
Software Costs
Software product development costs incurred from the time technological
feasibility is reached until the product is available for general release to
customers are capitalized and reported at the lower of cost or net realizable
value. Through December 31, 1998, no significant amounts were expended
subsequent to reaching technological feasibility.
Impairment of Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery
of the asset's carrying value unlikely. An impairment loss would be recognized
when the sum of the expected future undiscounted net cash flows is less than
the carrying amount of the asset. Should an impairment exist, the impairment
loss would be measured based on the excess of the carrying amount of the asset
over the asset's fair value or discounted estimates of future cash flows. The
Company has identified no such impairment losses. Substantially all of the
Company's long-lived assets are located in the United States.
Warranty Reserves
The Company provides limited warranties on certain of its products for
periods of up to one year. The Company recognizes warranty reserves when
products are shipped based upon an estimate of total warranty costs, and such
reserves are included in current liabilities.
Income Taxes
Deferred income taxes result primarily from temporary differences between
financial and tax reporting. Deferred tax assets and liabilities are
determined based on the difference between the financial statement bases
F-9
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
and the tax bases of assets and liabilities using enacted tax rates. A
valuation allowance is established to reduce a deferred tax asset to the
amount that is expected more likely than not to be realized.
The provision for income taxes for the three months ending March 31, 1999 is
based on an estimate of the effective tax rate for the entire year.
Stock Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss and net loss per share as if the fair value method had
been applied in measuring compensation expense (See Note 5). Options or stock
awards issued to non-employees are valued using the fair value method and
expensed over the period services are provided.
Net Loss Per Share and Pro Forma Stockholders' Equity
Historical basic and diluted net loss per share has been computed in
accordance with Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," using the weighted-average number of shares of common
stock outstanding during the period. Options, warrants, and preferred stock
were not included in the computation of diluted net loss per share because the
effect would be anti-dilutive.
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares from preferred stock that will
automatically convert upon the closing of the Company's initial public
offering (using the as-if-converted method). If the offering contemplated by
this Prospectus is consummated, all of the convertible preferred stock
outstanding as of the closing date will automatically be converted into an
aggregate of 15,334,824 shares of common stock based on the shares of
convertible preferred stock outstanding at December 31, 1998. Unaudited pro
forma stockholders' equity at December 31, 1998, as adjusted for the
conversion of the convertible preferred stock, is disclosed on the balance
sheet.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
98, common shares issued in each of the periods presented for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No such shares have been
issued.
A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share attributable to common shareholders
is as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31, March 31,
-------------------------- -----------------------
1996 1997 1998 1998 1999
------- ------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average shares
outstanding................ 186,938 705,236 1,333,036 1,068,260 2,208,833
Adjustment to reflect the
assumed conversion of
outstanding preferred
stock...................... -- -- 15,334,824 -- 15,334,824
------- ------- ---------- --------- ----------
Shares used in computing pro
forma basic and diluted net
loss per common share...... 186,938 705,236 16,667,860 1,068,260 17,543,657
======= ======= ========== ========= ==========
</TABLE>
Dilutive securities include options, warrants, preferred stock as if
converted and restricted stock subject to vesting. Potentially dilutive
securities totaling 6,933,441, 13,812,858 and 20,442,440 for the years ended
December 31, 1996, 1997 and 1998, respectively, and 13,826,375 and 21,169,739
for the three month periods ended March 31, 1998 and 1999, respectively, were
excluded from historical basic and diluted earnings per share because of their
anti-dilutive effect.
F-10
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Recapitalization
In November 1998, the Company filed a Certificate of Amendment to its
Articles of Incorporation to effect a three for two forward stock split of all
outstanding shares of common stock and stock options. The Amended and Restated
Certificate of Incorporation increases the authorized stock of the Company
such that the Company is authorized to issue 10,602,464 shares of no par value
preferred stock, and 29,397,536 shares of no par value common stock. The
conversion ratio of the Company's preferred stock is automatically modified to
reflect this common stock split. All common shares, common stock options and
related per share data in the accompanying financial statements have been
adjusted retroactively to give effect to the stock split.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires that all components
of comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. There was no difference
between the Company's net loss and its total comprehensive loss for the years
ended December 31, 1996, 1997 and 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs, which are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company has adopted the provisions of SOP 98-1 during
the three months ended March 31, 1999 with no material effect.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"(SOP
98-5). This standard requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The Company has
adopted the provisions of SOP 98-5 during the three months ended March 31,
1999 with no material effect.
F-11
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Composition of Certain Balance Sheet Captions
<TABLE>
<CAPTION>
December 31,
----------------------- March 31,
1997 1998 1999
---------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Inventory:
Raw materials.......................... $ 332,000 $ 2,582,000 $2,636,000
Work in process........................ -- 790,000 1,178,000
Finished goods......................... 51,000 1,296,000 1,253,000
---------- ----------- ----------
$ 383,000 $ 4,668,000 $5,067,000
========== =========== ==========
Property and Equipment:
Laboratory equipment and software...... $ 868,000 $ 2,265,000 $3,258,000
Computer equipment and software........ 1,296,000 1,885,000 2,291,000
Office furniture and equipment......... 360,000 840,000 950,000
---------- ----------- ----------
2,524,000 4,990,000 6,499,000
Less accumulated depreciation and
amortization............................ (619,000) (1,776,000) (2,260,000)
---------- ----------- ----------
$1,905,000 $ 3,214,000 $4,239,000
========== =========== ==========
Accrued Liabilities:
Accrued compensation................... $ 294,000 $ 621,000 $946,000
Accrued vacation....................... 278,000 493,000 408,000
Accrued warranty....................... 2,000 418,000 685,000
Accrued purchase commitments........... 582,000 -- --
Other.................................. 279,000 687,000 1,454,000
---------- ----------- ----------
$1,435,000 $ 2,219,000 $3,493,000
========== =========== ==========
</TABLE>
3. Short-Term Bank Borrowings
In August 1998, the Company entered into a $4,000,000 line of credit
agreement with a bank which allows it to borrow an amount equal to 80% of
eligible accounts receivable plus the lesser of 25% of the Company's eligible
inventory or $500,000. Interest accrues at the bank's prime rate plus .25%
(8.0% at December 31, 1998). The credit agreement includes covenants, which,
among other things, require the Company to maintain stated net worth amounts
plus specific liquidity and long-term solvency ratios. The line of credit
expires on August 13, 1999. Amounts borrowed are secured by substantially all
of the Company's assets. There were no borrowings outstanding as of December
31, 1998.
In connection with this financing agreement, the Company granted warrants to
the bank to purchase an aggregate of 25,000 shares of Series C convertible
preferred stock at $4.75 per share. The warrants are exercisable for five
years from the date of issuance. The estimated fair value of the warrants was
approximately $21,000, which has been capitalized as debt issuance costs and
is being amortized over the life of the financing agreement.
4. Notes Payable
In August 1998, the Company entered into an equipment line of credit with a
bank that allows the Company to borrow up to $1,000,000 for the purchase of
equipment. All borrowings under the equipment line must be made before August
14, 1999, at which time all unpaid principal under such loan will be converted
into a fully amortizing loan for a period of 36 months with a maturity date of
August 14, 2002. As of December 31, 1998 there was $921,000 outstanding under
the equipment line of credit.
F-12
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1996, the Company entered into an equipment financing agreement with a
bank and leasing company that allows the Company to borrow up to $1,000,000
for purchases of equipment. The notes are secured by the related equipment. As
of December 31, 1998 the full amount of funds available under the equipment
financing agreement was utilized.
In connection with the equipment financing agreement, the Company agreed to
make a final payment equal to 12.5% of the equipment financed at the end of
the amortization period. Additionally, the Company granted warrants to the
bank and leasing company to purchase an aggregate of 50,000 shares of Series A
convertible preferred stock at $1.00 per share. The warrants are exercisable
for the longer of ten years from the date of issuance or five years after an
initial public offering. The estimated fair value of the warrants was
approximately $18,000, which has been capitalized as debt issuance costs and
is being amortized over the life of the equipment financing agreement.
In December 1996, the Company received $2,500,000 in connection with a
convertible bridge note payable that accrued interest at 8.0% per annum.
During 1997, the note was converted into Series B convertible preferred stock
at a rate of $3.39 per share.
A summary of the notes payable is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1997 1998 1999
--------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Bank and leasing company installment loans,
with various maturity dates through
December 2000, total monthly payments of
$27,000 with interest rates ranging between
8.99% and 9.76%, collateralized by
equipment.................................. $ 771,000 $ 504,000 $ 508,000
Bank installment loan, with a maturity date
of August 2002, interest only payments
until August 1999 with a variable interest
rate at the bank prime rate plus 0.25%,
collateralized by equipment................ -- 921,000 1,000,000
--------- ---------- ----------
771,000 1,425,000 1,508,000
Less current portion........................ (267,000) (395,000) (497,000)
--------- ---------- ----------
$ 504,000 $1,030,000 $1,011,000
========= ========== ==========
</TABLE>
At December 31, 1998, future aggregate annual principal payments on the
notes payable are $395,000, $519,000, $307,000 and $204,000 for 1999, 2000,
2001 and 2002, respectively.
5. Stockholders' Equity
Convertible Preferred Stock
A summary of convertible preferred stock issued and outstanding at December
31, 1998 is as follows:
<TABLE>
<CAPTION>
Shares
Issued and Liquidation
Outstanding Preference
----------- -----------
<S> <C> <C>
Series A............................................. 2,723,000 $ 2,723,000
Series B............................................. 1,852,063 6,279,000
Series C............................................. 2,422,361 11,506,000
Series D............................................. 3,225,806 25,000,000
---------- -----------
10,223,230 $45,508,000
========== ===========
</TABLE>
F-13
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company has authorized for issuance 10,602,464 shares of preferred stock
of which 2,773,000, 1,999,464, 2,530,000 and 3,300,000 shares have been
authorized for Series A, Series B, Series C and Series D convertible preferred
stock, respectively. At the option of the holder, the outstanding shares of
Series A, Series B, Series C and Series D convertible preferred stock are
convertible into common shares, subject to adjustment for antidilution, on a
three-for-two basis. The preferred stockholders have voting rights equal to
the common shares they would own upon conversion.
The Series A and Series B convertible preferred stock will automatically
convert into common shares upon the earlier of the closing of an underwritten
public offering of common stock under the Securities Act of 1933 in which the
Company receives at least $5,000,000 in gross proceeds at a price of at least
$5.00 per share, or on the date specified by written consent or agreement of
the holders of 66 2/3% of the then outstanding shares of each of the Series A
and Series B convertible preferred stock.
The Series C convertible preferred stock will automatically convert into
common shares upon the earlier of the closing of an underwritten public
offering of common stock under the Securities Act of 1933 in which the Company
receives at least $10,000,000 in gross proceeds at a price of at least $9.50
per share, or on the date specified by written consent or agreement of the
holders of 66 2/3% of the then outstanding shares of Series C convertible
preferred stock.
The Series D convertible preferred stock will automatically convert into
common shares upon the earlier of the closing of an underwritten public
offering of common stock under the Securities Act of 1933 in which the Company
receives at least $20,000,000 in gross proceeds at a price of at least $12.00
per share if the closing of such public offering occurs on or before March 30,
2000, and at a per share issuance price of at least $15.50 per share if the
closing of such public offering occurs after March 30, 2000. Additionally, the
Series D convertible preferred stock will automatically convert on the date
specified by written consent or agreement of the holders of more than a
majority of the then outstanding shares of Series D convertible preferred
stock.
In the event of a liquidation of the Company, holders of Series A, Series B,
Series C and Series D convertible preferred stock are entitled to a
liquidation preference of $1.00, $3.39, $4.75 and $7.75 per share,
respectively, plus any declared but unpaid dividends on such shares. If upon
the occurrence of such event, the assets and funds thus distributed among the
holders of the convertible preferred stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amounts, the entire
assets and funds of the corporation legally available for distribution shall
be distributed ratably among the holders of the convertible preferred stock in
proportion to the aggregate liquidation preferences of the respective shares,
and ratably among the holders of that series in proportion to the amount of
such stock owned by each such holder. Any remaining assets of the Company are
to be distributed to the common stockholders.
The holders of Series A, Series B, Series C and Series D convertible
preferred stock are entitled to receive annual noncumulative dividends of
$.08, $.27, $.38 and $.62 per share, respectively, when, as and if declared by
the Board of Directors, prior and in preference to holders of common stock. As
of December 31, 1998, no dividends have been declared.
Common Stock
The Company has issued 1,964,604 shares of common stock to the founders of
the Company at prices ranging from $.03 to $.07 per share in exchange for
promissory notes bearing interest at rates ranging from 5.5% to 10% and
maturing March 12, 2000. The Company has the option to repurchase, at the
original issue price, unvested shares in the event of termination of
employment. In 1998, 238,001 unvested common shares were forfeited upon the
termination of one of the founders. Shares issued under these agreements
generally vest over four years. At December 31, 1998, 486,439 shares of common
stock are subject to repurchase by the Company.
F-14
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Options
In August 1996, the Company adopted the 1996 Equity Incentive Plan (the
"Plan") and reserved 2,190,720 shares of common stock for grants under the
Plan. The Company has amended the plan to reserve an additional 3,932,663
shares of common stock under the Plan. The Plan provides for the grant of
incentive and nonstatutory stock options, stock bonuses and rights to purchase
stock to employees, directors or consultants of the Company. The Plan provides
that incentive stock options will be granted only to employees at no less than
the fair value of the Company's common stock (no less than 85% of the fair
value for nonstatutory stock options), as determined by the Board of Directors
at the date of the grant. Options generally vest 25% one year from date of
grant and ratably each month thereafter for a period of 36 months, and are
exercisable up to ten years from date of grant.
Certain option grants under the Plan are subject to an early exercise
provision. Common shares obtained on early exercise of unvested options are
subject to repurchase by the Company at the original issue price and will vest
according to the respective option agreement. At December 31, 1998, 105,000
shares are subject to repurchase by the Company.
The purchase price under each stock purchase agreement resulting from stock
bonuses and purchase rights granted will be at no less than 85% of the fair
value of the Company's common stock on the award date. Shares of stock sold or
awarded under the Plan may be subject to repurchase by the Company.
All stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Granted................................................. 1,160,700 $ .07
Exercised............................................... -- --
Cancelled............................................... -- --
---------
Balance at December 31, 1996............................. 1,160,700 $ .07
Granted................................................. 1,069,725 $ .23
Exercised............................................... (238,437) $ .07
Cancelled............................................... (115,563) $ .07
---------
Balance at December 31, 1997............................. 1,876,425 $ .16
Granted................................................. 3,086,812 $ .66
Exercised............................................... (514,641) $ .12
Cancelled............................................... (183,125) $ .23
---------
Balance at December 31, 1998............................. 4,265,471 $ .52
Granted (unaudited)..................................... 1,232,500 $10.22
Exercised (unaudited)................................... (534,933) $ .16
Cancelled (unaudited)................................... (813) $ 1.25
---------
Balance at March 31, 1999 (unaudited).................... 4,962,225 $ 2.97
=========
</TABLE>
As of December 31, 1996, 1997, and 1998 there were 735,450, 614,734 and
630,139, options, respectively, exercisable at weighted average exercise
prices of $.07, $.08 and $.17, respectively.
F-15
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes all options outstanding and exercisable by
price range as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted Weighted
Range of Weighted Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
----------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.07 455,144 7.84 $ .07 291,241 $.07
$.23-$.32 2,950,827 9.20 $ .30 328,896 $.25
$.53-$1.33 712,500 9.77 $ .82 10,002 $.53
$5.00 147,000 9.96 $5.00 -- --
</TABLE>
The following table summarizes all options outstanding and exercisable by
price range as of March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted Weighted
Range of Weighted Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
----------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.07 195,138 7.61 $ .07 55,374 $ .07
$.23-$.32 2,688,340 9.02 $ .31 198,802 $ .29
$.53-$1.33 699,247 9.53 $ .83 5,001 $ .53
$5.00-$7.00 538,500 9.80 $ 6.45 -- --
$8.50-$12.00 841,000 8.55 $11.72 180,000 $12.00
</TABLE>
Stock Based Compensation
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" to account for their employee stock option plans. Under
APB No. 25, when the exercise price of the Company's employee stock options
equals the fair value price of the underlying stock on the date of grant, no
compensation expense is recognized in the Company's financial statements. In
previously issued financial statements the Company estimated the deemed fair
value of its common stock in connection with the accounting for stock options
granted during the three years ended December 31, 1998 and the three months
ended March 31, 1999, which resulted in the Company recording deferred
compensation of $1,117,000, with respect to certain options granted during
1998. During April 1999, in conjunction with the Company's initial public
offering registration statement, the Company revised the estimates of the
deemed fair value of its common stock at various dates and has recognized
additional deferred compensation of $1,813,000, $2,429,000 and $10,011,000
during the three years ended December 31, 1998, respectively and $234,000 for
the three months ended March 31, 1999. The deferred compensation is being
amortized to expense in accordance with FASB Interpretation No. 28 over the
vesting period of the individual options, generally four years.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net loss would have
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Net loss as reported.............. $(2,181,000) $(11,016,000) $(10,331,000)
Pro forma net loss under SFAS No.
123.............................. (2,185,000) (11,161,000) (10,844,000)
Pro forma basic and diluted net
loss under SFAS No. 123.......... $ (11.69) $ (15.83) $ (8.13)
</TABLE>
F-16
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions: no
dividend yield; risk free interest rate of 5.7% to 6.5%; and expected life for
the option of five years.
The weighted-average estimated fair value of employee stock options granted
during 1996, 1997 and 1998 was $.02, $.06 and $.16 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the vesting period.
Warrants
In January 1997, the Company entered into an agreement with a corporate
partner, whereby the two companies exchanged certain technology and services.
In addition, the Company issued a warrant to such corporate partner to
purchase 147,401 shares of Series B convertible preferred stock at a price of
$3.39 per share. The warrant is exercisable for four years following the date
of issuance. The estimated fair value of the warrant was $88,000, which has
been capitalized as an intangible asset and is being amortized over the two-
year term of the agreement.
Common Shares Reserved for Future Issuance
At December 31, 1998, common shares reserved for future issuance consist of
the following:
<TABLE>
<S> <C>
Conversion of convertible preferred stock......................... 15,334,824
Preferred stock warrants.......................................... 355,706
Shares reserved for future option exercises....................... 5,370,305
----------
21,060,835
==========
</TABLE>
6. Commitments
The Company leases its facilities under noncancelable operating leases
expiring in 2001. The leases contain renewal options and are subject to cost
increases. Included in the minimum payments under the noncancelable operating
leases for the year ending December 31, 1999 is $147,000 due from the sub-
lease of certain facilities. Rent expense totaled $69,000 $219,000 and
$501,000 for the period from March 11, 1996 (inception) to December 31, 1996
and for the years ended December 31, 1997 and 1998, respectively.
Future minimum payments under the noncancelable operating leases and
equipment under capital leases consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
---------- ----------
<S> <C> <C>
Year ending December 31,
1999................................................ $ 791,000 $ 471,000
2000................................................ 928,000 471,000
2001................................................ 568,000 443,000
2002................................................ 156,000 98,000
2003................................................ 106,000 --
---------- ----------
Total minimum lease payments.......................... $2,549,000 1,483,000
==========
Less amount representing interest..................... (160,000)
----------
Total present value of minimum payments............... 1,323,000
Less current portion.................................. (388,000)
----------
Non-current portion................................... $ 935,000
==========
</TABLE>
F-17
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During September 1997, the Company entered into a capital lease agreement,
which allows for the Company to borrow up to $1,750,000 to finance capital
expenditures. As of December 31, 1998, the Company has $116,000 available for
future borrowings under the capital lease agreement. Equipment held under the
capital leases totaled $327,000 and $1,743,000 and the related accumulated
amortization totaled $45,000 and $559,000 at December 31, 1997 and 1998,
respectively. The obligations under the capital leases are secured by the
related equipment.
In conjunction with the capital lease agreement, the Company issued a
warrant to the lessor to purchase 14,737 shares of Series C convertible
preferred stock at a price of $4.75 per share. The warrant is exercisable for
the longer of ten years from the date of issuance or five years after an
initial public offering. The estimated fair value of the warrant was $25,000,
which has been capitalized as debt issuance costs and is being amortized over
the life of the financing agreement.
7. Income Taxes
Significant components of the Company's deferred tax assets as of December
31, 1997 and 1998 are shown below. A valuation allowance of $7,781,000 has
been recorded at December 31, 1998 to offset the net deferred tax assets as
realization is uncertain.
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax liability:
Depreciation.................................... $ (21,000) $ (12,000)
Deferred tax assets:
Tax credit carryforwards........................ 571,000 1,185,000
Net operating loss carryforwards................ 4,000,000 5,757,000
Other, net...................................... 456,000 851,000
----------- -----------
Total deferred tax assets......................... 5,027,000 7,793,000
Valuation allowance............................... (5,006,000) (7,781,000)
----------- -----------
Net deferred tax assets........................... $ -- $ --
=========== ===========
</TABLE>
The Company had federal and California tax net operating loss carryforwards
at December 31, 1998 of approximately $14,368,000 and $15,168,000,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2011 and 2004, respectively, unless previously utilized. The Company
also has federal and California research tax credit carryforwards of
approximately $876,000 and $475,000, respectively, which will begin to expire
in 2011 unless previously utilized.
Pursuant to Internal Revenue Service Code Sections 382 and 383, use of the
Company's net operating loss carryforwards may be limited because of a
cumulative change in ownership of more than 50% which occurred in prior years.
However, the Company does not believe such limitations will have a material
impact on the Company's ability to use these carryforwards.
8. Employee Savings Plan
The Company has a 401(k) plan, which allows participating employees to
contribute up to 15% of their salary, subject to annual limits. The Board of
Directors may, at its sole discretion, approve Company contributions. No such
contributions have been approved or made.
F-18
<PAGE>
COPPER MOUNTAIN NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Related Party Transactions
At December 31, 1998, the Company had a note receivable from an officer with
a face value of $1,000,000 included in other assets. This note was issued in
connection with the officer's employment and relocation agreement. The note
bears no interest, is secured by the officer's residence and is due at the
earlier of March 30, 2003, or 15 days from the date the officer ceases to be
an employee of the Company.
10. Recent Events
In April 1999, the Company reincorporated as a Delaware corporation. The
authorized shares of the Company was set at 100,000,000 shares of common stock
($.001 par value) and 5,000,000 shares of preferred stock ($.001 par value).
Under the restated certificate, the board has the authority, without further
action by stockholders, to issue up to 5,000,000 shares of preferred stock in
one or more series and to fix the rights, preferences, privileges,
qualifications and restrictions granted to or imposed upon such preferred
stock. The issuance of preferred stock could adversely affect the voting power
of holders of common stock. All common share data in the accompanying
financial statements have been adjusted retroactively to give effect to the
reincorporation.
In February 1999, the Company adopted the 1999 Employee Stock Purchase Plan.
The purchase plan is intended to qualify under Section 423 of the Internal
Revenue Code. A total of 300,000 shares of common stock are reserved for
issuance under the purchase plan. The price of shares purchased under the
purchase plan is equal to 85% of the fair market value of the common stock on
the first or last day of the offering period, whichever is lower.
In March 1999, the Company entered into an operating lease for its San Diego
operations. The lease has a commencement date of June 1, 1999 with an initial
term of six years. The Company has one option to extend the lease term for a
period of five years. Initial future minimum lease payments total $1,356,000
per year.
In March 1999, the Company adopted the 1999 Non-Employee Directors' Stock
Option Plan to provide for the automatic grant of options to purchase shares
of common stock to non-employee directors. A total of 360,000 shares have been
reserved for issuance under this plan. As of March 31, 1999, 180,000 options
had been granted under this plan at a exercise price of $12.00 per share.
In March 1999, the Company amended the 1996 Equity Incentive Plan to reserve
for an additional 1,750,000 shares for future grants.
F-19
<PAGE>
[LOGO OF COPPER MOUNTAIN]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 15. Recent Sales Of Unregistered Securities
Since inception (March 11, 1996), the Registrant has sold and issued the
following unregistered securities:
(a) On April 10, 1996 the Registrant issued and sold 2,723,000 shares of
its Series A Preferred Stock to certain accredited investors for an
aggregate purchase price of $2,723,000. Upon the closing of this offering,
the shares of Series A Preferred Stock will automatically convert into
4,084,500 shares of common stock. The Registrant relied on the exemption
provided by Section 4(2) under the Act.
(b) On October 4, 1996, in connection with the execution of an equipment
financing agreement with Silicon Valley Bank ("SVB") and MMC/GATV
Partnership 1 ("MMC"), the Registrant issued to SVB and MMC warrants to
purchase up to 10,000 and 40,000 shares, respectively, of Series A
Preferred Stock. These two warrants have an exercise price of $1.00 per
share and expire on October 4, 2006. Upon the closing of this offering,
these warrants will become exercisable for common stock at the rate of one
and one-half shares of common stock for each share of preferred stock
underlying the warrants. The Registrant relied on the exemption provided by
Section 4(2) under the Act.
(c) On January 14, 1997, the Registrant issued and sold 1,832,365 shares
of Series B Preferred Stock to certain accredited investors for an
aggregate purchase price of $6,211,717. Upon the closing of this offering
the shares of Series B Preferred Stock will automatically convert into
2,748,545 shares of common stock. The Registrant relied on the exemption
provided by Section 4(2) under the Act.
(d) On January 14, 1997, in connection with the execution of the ATM
Technology Agreement between the Company and Intel Corporation ("Intel"),
the Company issued to Intel a warrant to purchase up to 147,401 shares of
Series B Preferred Stock at an exercise price of $3.39 per share. This
warrant expires on January 14, 2004. Upon the closing of this offering,
this warrant will become exercisable for common stock at the rate of one
and one-half shares of common stock for each share of preferred stock
underlying the warrant. The Registrant relied on the exemption provided by
Section 4(2) under the Act.
(e) On March 26, 1997, August 6, 1997 and October 1, 1997, respectively,
the Registrant issued and sold 2,000, 10,324 and 7,374 shares of its Series
B Preferred Stock to Gallagher PR, Mr. William Sahlman, and Mr. Nick
Lippis, respectively. The shares of Series B Preferred Stock acquired by
Gallagher PR were issued in exchange for services rendered to the
Registrant. The shares of Series B Preferred Stock acquired by Messrs.
Lippis and Sahlman were sold for an aggregate purchase price of $59,996.
Upon the closing of this offering the shares of Series B Preferred Stock
issued and sold to Gallagher PR and Messrs. Lippis and Sahlman will
automatically convert into 29,547 shares of common stock. The Registrant
relied on the exemption provided by Rule 701 under the Act in the case of
Gallagher PR and Section 4(2) under the Act in the case of Messrs. Lippis
and Sahlman.
(f) On October 29, 1997, the Registrant issued and sold 2,422,361 shares
of its Series C Preferred Stock to certain accredited investors for an
aggregate purchase price of $11,506,215. Upon the closing of this offering,
the shares of Series C Preferred Stock will automatically convert into
3,633,534 shares of common stock. The Registrant relied on the exemption
provided by Section 4(2) under the Act.
(g) On August 14, 1998, in connection with the execution of the Loan and
Security Agreement with SVB, the Company issued to SVB a warrant to
purchase up to 25,000 shares of Series C Preferred Stock at an exercise
price of $4.75 per share. Upon the closing of this offering, this warrant
will become exercisable for common stock at the rate of one and one-half
shares of common stock for each share of preferred stock underlying the
warrant. This warrant expires on August 14, 2003. The Registrant relied on
the exemption provided by Section 4(2) under the Act.
II-1
<PAGE>
(h) On October 29, 1997 and on April 27, 1998, in connection with the
execution of the Master Lease Agreement with Comdisco, Inc. ("Comdisco")
the Company issued to Comdisco warrants to purchase 8,421 and 6,316 shares
of Series C Preferred Stock at an exercise price of $4.75 per share. These
warrants expire on October 29, 2007 and on April 27, 2008. Upon the closing
of this offering, these warrants will become exercisable for common stock
at the rate of one and one-half shares of common stock for each share of
preferred stock underlying the warrants. The Registrant relied on the
exemption provided by Section 4(2) under the Act.
(i) On October 9, 1998, the Registrant issued and sold 3,225, 806 shares
of its Series D Preferred Stock to certain to certain accredited investors
for an aggregate purchase price of $24,999,997. Upon the closing of this
offering, the shares of Series D Preferred Stock will automatically convert
into 4,838,698 shares of common stock. The Registrant relied on the
exemption provided by Section 4(2) under the Act.
The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. All recipients had adequate access,
through employment or other relationships, to information about the
Registrant.
Item 16. Exhibits And Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Articles of Incorporation effective prior to reincorporation of the
Company in Delaware.*
3.2 Bylaws effective prior to reincorporation of the Company in
Delaware.*
3.3 Amended and Restated Certificate of Incorporation of the Company, as
filed with the Delaware Secretary of State on April 9, 1999.*
3.4 Form of Bylaws to become effective prior to effectiveness of this
Registration Statement.*
3.5 Restated Certificate of Incorporation, to be filed and become
effective upon the closing of this offering.*
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2 Specimen Stock Certificate.*
5.1 Opinion of Cooley Godward LLP.*
10.1 Amended and Restated 1996 Equity Incentive Plan (the "1996 Plan").*
10.2 Form of Stock Option Agreement pursuant to the 1996 Plan.*
10.3 1999 Employee Stock Purchase Plan and related offering documents.*
10.4 Employment Offer Letter between the Company and Steve Hunt, dated
July 31, 1996.*
10.5 Employment Offer Letter between the Company and Richard S. Gilbert,
dated March 22, 1998.*
10.6 Master Equipment Lease between the Company and Comdisco, Inc., dated
September 30, 1997.*
10.7 Loan and Security Agreement between the Company and Silicon Valley
Bank, dated August 14, 1998.*
10.8 Loan and Security Agreement between the Company and Silicon Valley
Bank and MMC/GATX Partnership No. 1, dated October 4, 1996.*
10.9 Office Lease between the Company and Public Storage Properties
XVIII, Inc., dated June 14, 1996.*
10.10 Office Lease between the Company and R.G. Harris & Company, dated
August 12, 1997.*
10.11 Office Sublease between the Company and Stuart Leeb and Associates,
dated May 1, 1998.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.12 Office Lease between the Company and Palomar Enterprises, Inc.,
dated July 20, 1998.*
10.13 Warrant Agreement between the Company and MMC/GATX Partnership No.
1, dated October 4, 1996.*
10.14 Warrant Agreement between the Company and Silicon Valley Bank, dated
October 4, 1996.*
10.15 Warrant Agreement between the Company and Comdisco, Inc., dated
October 29, 1997.*
10.16 Warrant Agreement between the Company and Comdisco, Inc., dated
April 27, 1998.*
10.17 Warrant Agreement between the Company and Silicon Valley Bank, dated
August 14, 1998.*
10.18 Amended and Restated Investors' Rights Agreement by and among the
Company and certain stockholders of the Company, dated October 9,
1998.*
10.19 Right of First Refusal and Co-Sale Agreement by and among the
Company and certain stockholders of the Company, dated October 9,
1998.*
10.20 Voting Agreement by and among the Company and certain stockholders
of the Company, dated October 9, 1998.*
10.21 Founder Stock Purchase Agreement between the Company and Joseph D.
Markee, dated March 11, 1996.*
10.22 First Amendment to Founder Stock Purchase Agreement between the
Company and Joseph D. Markee, dated June 12, 1998.*
10.23 Founder Stock Purchase Agreement between the Company and Mark
Handzel, dated March 11, 1996.*
10.24 First Amendment to Founder Stock Purchase Agreement between the
Company and Mark Handzel, dated January 27, 1999.*
+10.25 General Agreement for the Procurement of Products and Services and
the Licensing of Software between the Company and Lucent
Technologies Inc., dated November 17, 1998.
+10.26 OEM Purchase and Development Agreement between the Company an 3COM
Corporation, dated November 24, 1998.
+10.27 Development, Manufacturing and Supply Agreement between the Company
and Netopia, Inc., dated May 19, 1998.*
10.28 Employment Agreement between the Company and Joseph D. Markee, dated
March 12, 1999.*
10.29 Warrant Agreement between the Company and Intel Corporation, dated
January 14, 1997.*
10.30 1999 Non-Employee Directors' Stock Option Plan.*
10.31 Form of Nonqualified Stock Option for use with 1999 Non-Employee
Directors' Stock Option Plan.*
10.32 Form of Indemnification Agreement.*
+10.33 Equipment Purchase Agreement between the Company and NorthPoint
Communications, Inc. dated April 8, 1999.*
+10.34 Standard Full Service Gross Office Lease among the Company, Pacific
Sorrento Mesa Holdings, L.P., and Pacific Stonecrest Holdings,
L.P., dated March 31, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.*
24.1 Power of Attorney.*
27 Financial Data Schedule.*
</TABLE>
- --------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
* Previously filed.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts.
All other schedules are omitted because they are not required, are not
applicable or the information is included in our financial statements or notes
thereto.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
County of San Diego, State of California, on May 11, 1999.
By:
/s/ John A. Creelman
----------------------------------
John A. Creelman
Vice President of Finance,
Chief Financial Officer and
Secretary
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Richard S. Gilbert* President, Chief Executive May 11, 1999
____________________________________ Officer and Director
Richard S. Gilbert (Principal Executive
Officer)
/s/ John A. Creelman Vice President of Finance, May 11, 1999
____________________________________ Chief Financial Officer and
John A. Creelman Secretary (Principal
Financial and Accounting
Officer)
Joseph D. Markee* Chief Technical Officer and May 11, 1999
____________________________________ Chairman of the Board
Joseph D. Markee
Director
____________________________________
Robert L. Bailey
Tench Coxe* Director May 11, 1999
____________________________________
Tench Coxe
Roger Evans* Director May 11, 1999
____________________________________
Roger Evans
Richard H. Kimball* Director May 11, 1999
____________________________________
Richard H. Kimball
Director
____________________________________
Raymond V. Thomas
Andrew W. Verhalen* Director May 11, 1999
____________________________________
Andrew W. Verhalen
</TABLE>
*By:
/s/ John A. Creelman
---------------------------
John A. Creelman
Attorney-in-Fact
II-4
<PAGE>
Schedule II
COPPER MOUNTAIN NETWORKS, INC.
Valuation And Qualifying Accounts
<TABLE>
<CAPTION>
Additions
----------
Balance at Charged to Balance at
Beginning Costs and End of
Accrued Warranty of Year Expenses Deductions Year
- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997....... $ -- $ 2,000 $ -- $ 2,000
Year ended December 31, 1998....... 2,000 426,000 10,000 418,000
</TABLE>
NOTE: The Company had no activity in accrued warranty prior to 1997.
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Articles of Incorporation effective prior to reincorporation of the
Company in Delaware.*
3.2 Bylaws effective prior to reincorporation of the Company in Delaware.*
3.3 Amended and Restated Certificate of Incorporation of the Company, as
filed with the Delaware Secretary of State on April 9, 1999.*
3.4 Form of Bylaws to become effective prior to effectiveness of this
Registration Statement.*
3.5 Restated Certificate of Incorporation, to be filed and become
effective upon the closing of this offering.*
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2 Specimen Stock Certificate.*
5.1 Opinion of Cooley Godward LLP.*
10.1 Amended and Restated 1996 Equity Incentive Plan (the "1996 Plan").*
10.2 Form of Stock Option Agreement pursuant to the 1996 Plan.*
10.3 1999 Employee Stock Purchase Plan and related offering documents.*
10.4 Employment Offer Letter between the Company and Steve Hunt, dated July
31, 1996.*
10.5 Employment Offer Letter between the Company and Richard S. Gilbert,
dated March 22, 1998.*
10.6 Master Equipment Lease between the Company and Comdisco, Inc., dated
September 30, 1997.*
10.7 Loan and Security Agreement between the Company and Silicon Valley
Bank, dated August 14, 1998.*
10.8 Loan and Security Agreement between the Company and Silicon Valley
Bank and MMC/GATX Partnership No. 1, dated October 4, 1996.*
10.9 Office Lease between the Company and Public Storage Properties XVIII,
Inc., dated June 14, 1996.*
10.10 Office Lease between the Company and R.G. Harris & Company, dated
August 12, 1997.*
10.11 Office Sublease between the Company and Stuart Leeb and Associates,
dated May 1, 1998.*
10.12 Office Lease between the Company and Palomar Enterprises, Inc., dated
July 20, 1998.*
10.13 Warrant Agreement between the Company and MMC/GATX Partnership No. 1,
dated October 4, 1996.*
10.14 Warrant Agreement between the Company and Silicon Valley Bank, dated
October 4, 1996.*
10.15 Warrant Agreement between the Company and Comdisco, Inc., dated
October 29, 1997.*
10.16 Warrant Agreement between the Company and Comdisco, Inc., dated April
27, 1998.*
10.17 Warrant Agreement between the Company and Silicon Valley Bank, dated
August 14, 1998.*
10.18 Amended and Restated Investors' Rights Agreement by and among the
Company and certain stockholders of the Company, dated October 9,
1998.*
10.19 Right of First Refusal and Co-Sale Agreement by and among the Company
and certain stockholders of the Company, dated October 9, 1998.*
10.20 Voting Agreement by and among the Company and certain stockholders of
the Company, dated October 9, 1998.*
10.21 Founder Stock Purchase Agreement between the Company and Joseph D.
Markee, dated March 11, 1996.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.22 First Amendment to Founder Stock Purchase Agreement between the
Company and Joseph D. Markee, dated June 12, 1998.*
10.23 Founder Stock Purchase Agreement between the Company and Mark J.
Handzel, dated March 11, 1996.*
10.24 First Amendment to Founder Stock Purchase Agreement between the
Company and Mark J. Handzel, dated January 27, 1999.*
+10.25 General Agreement for the Procurement of Products and Services and the
Licensing of Software between the Company and Lucent Technologies
Inc., dated November 17, 1998.
+10.26 OEM Purchase and Development Agreement between the Company an 3COM
Corporation, dated November 24, 1998.
+10.27 Development, Manufacturing and Supply Agreement between the Company
and Netopia, Inc., dated May 19, 1998.*
10.28 Employment Agreement between the Company and Joseph D. Markee, dated
March 12, 1999.*
10.29 Warrant Agreement between the Company and Intel Corporation, dated
January 14, 1997.*
10.30 1999 Non-Employee Directors' Stock Option Plan.*
10.31 Form of Nonqualified Stock Option for use with 1999 Non-Employee
Directors' Stock Option Plan.*
10.32 Form of Indemnification Agreement.*
+10.33 Equipment Purchase Agreement between the Company and NorthPoint
Communications, Inc. dated April 8, 1999.*
+10.34 Standard Full Service Gross Office Lease among the Company, Pacific
Sorrento Mesa Holdings, L.P., and Pacific Stonecrest Holdings, L.P.,
dated March 31, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.*
24.1 Power of Attorney.*
27 Financial Data Schedule.*
</TABLE>
- --------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
* Previously filed.
<PAGE>
EXHIBIT 10.25
GENERAL AGREEMENT
FOR THE PROCUREMENT OF
PRODUCTS AND SERVICES
AND THE LICENSING OF SOFTWARE
BY AND BETWEEN
LUCENT TECHNOLOGIES INC.
AND
COPPER MOUNTAIN NETWORKS
CONTRACT NO. WR71980061
NOVEMBER 17, 1998
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. General Terms And Conditions................................ 1
1.1 Scope................................................. 1
1.2 Definitions........................................... 1
1.3 Term Of Agreement..................................... 2
1.4 Option To Extend...................................... 2
1.5 Market Rights......................................... 3
1.6 Continuing Availability And Discontinuance............ 3
1.7 Manufacturing Rights.................................. 4
1.8 [***]................................................. 5
2. Product Specific Terms And Conditions....................... 5
2.1 Price And Discounts................................... 5
2.2 Specifications........................................ 6
2.3 Product Documentation................................. 6
2.4 Packing............................................... 6
2.5 Technical Support..................................... 7
2.6 Training.............................................. 8
2.7 Insignia.............................................. 8
2.8 Marking............................................... 9
2.9 Installation And Cutover Assistance................... 9
2.10 Product Line Evolution................................ 10
2.11 Product Acceptance.................................... 10
2.12 Interfaces............................................ 11
2.13 Marketing Support..................................... 11
3. Orders And Payment.......................................... 12
3.1 Payment Terms......................................... 12
3.2 FOB................................................... 12
3.3 Purchase Orders....................................... 12
3.4 Forecasts............................................. 13
3.5 Changes To Purchase Orders............................ 13
3.6 Demand Pull Forecast and Ordering Procedures.......... 13
</TABLE>
i
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portion.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
3.7 Delivery Process & Shipping Interval................... 13
3.8 Variation In Quantity.................................. 14
3.9 Shipping............................................... 14
3.10 Invoicing.............................................. 14
3.11 Invoicing For Stock.................................... 14
3.12 Storage Of Paid-For-Stock.............................. 15
3.13 Monthly Shipment Reports............................... 15
3.14 Electronic Data Interchange (EDI)...................... 15
3.15 Bar Code Shipping And Receiving Labels................. 15
3.16 Title And Risk Of Loss................................. 15
3.17 Point of Sale Information.............................. 15
4. Quality And ISO 9000........................................ 16
4.1 Quality................................................ 16
4.2 Engineering Changes.................................... 16
4.3 Field Retrofit Orders (FRO)............................ 18
4.4 Epidemic Failures...................................... 18
5. Limited Warranty And Repairs................................ 18
5.1 Limited Warranty....................................... 18
5.2 Repairs Not Covered Under Warranty..................... 20
5.3 Repair Procedures...................................... 21
5.4 Warranty Tracking...................................... 21
5.5 Year 2000 Functionality................................ 21
6. Intellectual Property....................................... 22
6.1 Intellectual Property Rights........................... 22
6.2 Product Software License Grant......................... 22
6.3 Supplier's And Lucent's Information.................... 22
7. Other Terms And Conditions.................................. 22
7.1 Notices................................................ 22
7.2 Indemnity.............................................. 23
7.3 Identification......................................... 24
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
7.4 Compliance With Laws................................... 25
7.5 Force Majeure.......................................... 25
7.6 Assignment............................................. 25
7.7 Taxes.................................................. 25
7.8 Government Contract Provisions......................... 26
7.9 Impleader.............................................. 26
7.10 Registration And Radiation Standards................... 26
7.11 Toxic Substances And Product Hazards................... 26
7.12 Ozone Depleting Substances............................. 27
7.13 Heavy Metals And/Or CFC In Packaging................... 27
7.14 Chlorofluorocarbons.................................... 27
7.15 Insurance.............................................. 27
7.16 Choice Of Law.......................................... 28
7.17 Severability........................................... 28
7.18 Section Headings....................................... 29
7.19 Waiver................................................. 29
7.20 Dispute Resolution..................................... 29
7.21 Export Control......................................... 31
7.22 Records................................................ 31
7.23 Termination............................................ 31
7.24 Publicity.............................................. 32
7.25 Survival Of Obligations................................ 32
7.26 Limitation of Liability................................ 32
7.27 Steering Committee..................................... 32
7.28 Relationship of the Parties............................ 33
7.29 Counterparts........................................... 33
7.30 Entire Agreement....................................... 33
</TABLE>
iii
<PAGE>
LIST OF APPENDICES
Appendix 1 Pricing Terms
Appendix 2 Specifications
Appendix 3 Quality Requirements
Appendix 4 Change Control Process
Appendix 5 Demand Pull Procedures
Appendix 6 Non-Disclosure Agreement
Appendix 7 Warranty Eligibility System
1
<PAGE>
THIS AGREEMENT between LUCENT TECHNOLOGIES INC., with its principal offices
at 600 Mountain Avenue, Murray Hill, New Jersey 07974-0636 ("Lucent") and COPPER
MOUNTAIN NETWORKS, INC., with offices at 2470 Embarcadero Way, Palo Alto,
California 94303 ("Supplier") (hereinafter collectively the "Parties") is for
the anticipated future procurement of certain products and the license of
certain associated software, in accordance with the terms and conditions stated
in this Agreement and any attachments to this Agreement.
WHEREAS, Supplier desires to supply products, software and maintenance
services to Lucent;
WHEREAS, Lucent desires to procure products, software and maintenance
services from Supplier; and
WHEREAS, the Parties desire to combine Lucent's AnyMedia(TM) FAST solution
and Supplier's CopperEdge(TM) DSL Concentrator into an offer for the CLEC market
in the United States as well as for Multi-Tenant Units in the United States;
NOW, THEREFORE, in consideration of the promises and mutual covenants set
forth in this Agreement, the Parties agree to the terms and conditions set forth
herein below:
1. GENERAL TERMS AND CONDITIONS
1.1 SCOPE
Except as mutually agreed by the Parties in writing, this Agreement shall
apply only to transactions between Supplier and Lucent for the purchase and sale
of Product in the United States for the CLEC market and the Multi-Tenant Unit
market, each as hereinafter defined. Product shall be furnished by Supplier on
an as-ordered basis.
1.2 DEFINITIONS
1.2.1 "CLEC" means competitive local exchange carrier.
1.2.2 "COLLATERAL MATERIAL" means data sheets, application briefs,
presentation brochures and other advertising or promotional materials that are
distributed in the normal course of business to market the Product and that are
not designated as confidential by the Parties.
1.2.3 "DSLAM" means Digital Subscriber Line Access Multiplexer, an
acronym that is in general use in the telecommunications industry and which has
the meaning ascribed by that general use.
1.2.4 "FIRST SERVICE APPLICATION" (FSA) means a set of managed
activities administered by Lucent that validate the first deployment of new
Products. The FSA process is intended to assure that the first service
deployment is timely and meets or exceeds customers' expectations with respect
to quality, delivery, installation, testing, operations, maintenance and
acceptance.
1.
<PAGE>
1.2.5 "FIT" means the suitability or readiness of a product for a
particular application, including environmental extremes, marginal parameters,
physical and signal compatibility with interfacing systems and surroundings,
level of performance, safety margins, reliability, maintainability and
installability.
1.2.6 "FORM" means the weight, density, chemical or product
composition, size, shape, structure, appearance, protocol, pattern, composition,
configuration and marking/identification of product and software.
1.2.7 "FUNCTION" means the set tasks or purposes for which a product
is used by the customer, including all the tasks generally accepted for the
product and those specifically designated by the customer.
1.2.8 "INITIAL CUSTOMER APPLICATION" (ICA) means a controlled
process, administered by Lucent, intended to assure that new Products meet or
exceed Lucent's customers' expectations with respect to quality, delivery,
installation, testing, operations, maintenance, and acceptance.
1.2.9 "MULTI-TENANT UNIT" means a commercial building, residential
building, or hotel that requires a DSLAM within the structure to provide high
speed data services over the existing copper wiring.
1.2.10 "PRODUCT" as used in this Agreement shall mean Supplier's
CopperEdge DSL Concentrator hardware and software and other Supplier-proprietary
hardware and software listed and described in Appendix 2.
1.2.11 "SOURCE MATERIAL" means business and technical information and
other relevant materials which are not confidential and which Supplier will make
available to Lucent to support the development of Collateral Material.
1.2.12 "TECHNICAL INFORMATION" means written user manuals,
installation manuals, technical reference manuals, release notes and other
relevant technical materials.
1.3 TERM OF AGREEMENT
This Agreement shall be effective on the last date of signature below
(hereinafter the "Effective Date") and shall continue in effect for a term of
three (3) years (hereinafter the "Term"). Absent mutual written consent to the
contrary, the modification or termination of this Agreement shall not affect the
rights or obligations of either Party under any purchase order accepted by
Supplier before the effective date of such modification or termination.
1.4 OPTION TO EXTEND
Lucent shall have the right to extend the period specified in Section 1.3
for up to twelve (12) months by giving Supplier at least thirty (30) days prior
written notice. Within ten (10) days of the date of Lucent's notice to extend
the period, Supplier shall notify Lucent in writing whether Supplier proposes to
revise the price(s) under this Agreement. If the Parties fail to agree on the
revised price(s) within twenty (20) days after the date of Supplier's notice,
Lucent's notice
2.
<PAGE>
of extension shall be considered withdrawn and prices for outstanding orders or
orders placed during the term of this Agreement shall not be revised. Any
subsequent renewal will be upon mutual written agreement of the Parties.
1.5 MARKET RIGHTS
1.5.1 It is expressly understood and agreed that this Agreement
neither grants to Supplier an exclusive right or privilege to sell to Lucent any
or all products of the type described in the "Product" definition which Lucent
may require, nor requires the purchase of Product or any other products from
Supplier by Lucent. It is, therefore, understood that Lucent may contract with
other manufacturers and suppliers for the procurement of comparable products. In
addition, Lucent shall, at its sole discretion, decide the extent to which
Lucent will market, advertise, promote, support or otherwise assist in further
offerings of the Product.
1.5.2 Supplier agrees that purchases by Lucent under this Agreement
shall neither restrict the right of Lucent to cease purchasing nor require
Lucent to continue any level of such purchases.
1.6 CONTINUING AVAILABILITY AND DISCONTINUANCE
1.6.1 Supplier agrees to offer for sale to Lucent, during the term of
this Agreement, Product conforming to the Specifications (as defined in Section
2.2 below). Subject to Section 1.6.2 and Section 7.23.1, Supplier further agrees
to offer for sale to Lucent, during the term of this Agreement and until five
(5) years after the expiration of this Agreement unless otherwise mutually
agreed by the Parties, repair parts ("Parts") which are functionally equivalent
in Form and Fit to the Product covered by this Agreement. The price and terms
for the Parts shall be the price and terms set forth in Supplier's then current
agreement with Lucent for said Parts or, if no such agreement exists, the price
and terms shall be agreed upon by Lucent and Supplier. In the absence of any
such Agreement following good faith negotiations, Supplier shall not continue to
be obligated to sell Parts.
1.6.2 In the event that Supplier should discontinue manufacturing any
Product or Part, Supplier will provide Lucent:
(A) At least twelve (12) months prior notice of
discontinuance, and
(B) The opportunity to place an end of life purchase order,
which Supplier will accept during the notice period as set forth in (a); and
(C) Supplier will accept reasonable delivery schedules for
such Product or Part for delivery up to nine (9) months after the discontinuance
notice described in subsection (a) above. The Parties will agree on a mutually
acceptable delivery schedule, taking into account Lucent's needs to fulfill its
customers' requirements and Supplier's needs not to overburden its manufacturing
capacity.
3.
<PAGE>
1.7 MANUFACTURING RIGHTS
1.7.1 Supplier agrees to grant Lucent a non-exclusive manufacturing
license pursuant to a separate manufacturing license agreement between the
Parties as contemplated in Section 1.7.2 below in the event that:
(A) Supplier has materially defaulted in performance or
otherwise has failed to perform its obligations under:
(I) this Agreement and such default or failure to perform
has continued beyond the cure period provided in the Agreement (absent agreement
by the Parties to extend such cure period for a particular default or failure to
perform) following written notice thereof to Supplier from Lucent, or
(II) any agreement between Supplier and Lucent or its
customers for the maintenance or correction of the Products, and [***];
(B) Supplier has made an assignment for the benefit of
creditors, has admitted in writing its inability to pay debts as they mature or
has ceased operating in the normal course of business;
(C) A trustee or receiver of Supplier of any substantial part
of Supplier's assets has been appointed by any court;
(D) A proceeding has been commenced by any party against
Supplier under any one of the provisions of a bankruptcy code and:
(I) the proceeding has been pending for at least sixty
(60) days, or
(II) Supplier has consented, either expressly or by
operation of law, to be adjudged or decreed a bankrupt, or
(III) Supplier has been decreed or adjudged a bankrupt;
(E) A voluntary petition has been filed by Supplier under any
of the provisions of a bankruptcy code;
(F) Supplier is acquired by or merges with another
corporation, and such corporation (1) refuses to continue to sell Product to
Lucent at the prices in and under the terms and conditions of the then current
agreements between Supplier and Lucent and under the terms and conditions of any
general agreement between Supplier and Lucent; or (2) fails to enter into a
formal Assignment of Obligations document (so long as such document does not
contain terms different from the terms set forth in this Agreement) with Lucent
to assume all the rights and obligations of Supplier under the agreement then in
place between Supplier and Lucent; and
4.
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(G) Upon the conditions and for the purposes set forth in
Section 5.5.
1.7.2 The Parties shall enter into a manufacturing license agreement
within ninety (90) days after the Effective Date that is intended to grant
Lucent certain rights in Supplier's technology to enable Lucent to manufacture
Products or Parts in the event that the circumstances listed in Section 1.7.1
occur. The manufacturing license would be limited to (i) fulfilling the
requirements of Lucent's customers for Product and Parts where such customers
are Lucent's customers as of the time of exercise of the manufacturing license
rights, and (ii) making error corrections to the Products to meet the
Specifications. Lucent will inform Supplier of any error corrections it desires
to make and the Parties will discuss in good faith whether Supplier should make
such error corrections and whether Supplier will support the corrected Product
following correction; provided, however, that this sentence will not prohibit
Lucent from making the error corrections itself. The license grant would be
royalty-bearing at a rate to be agreed upon, subject to a royalty-fee waiver for
either an agreed upon time or amount to enable Lucent to recover its reasonable
costs incurred to exercise its manufacturing rights. Such manufacturing license
agreement shall also provide to Lucent the necessary Product documentation and
information, originated or developed by Supplier, that is required for Lucent to
exercise its manufacturing license.
1.8
[***]
2. PRODUCT SPECIFIC TERMS AND CONDITIONS
2.1 PRICE AND DISCOUNTS
2.1.1 Lucent's purchase price for Products is determined by
multiplying Supplier's list price times the applicable discount set forth in
Appendix 1, which is incorporated herein by reference. Supplier's current list
prices are set forth in Appendix 1, together with Lucent's discounts from list
prices. Supplier may revise its list prices at any time in its sole discretion;
provided, however, that it agrees to give Lucent thirty (30) days prior written
notice of such list price changes. Either Party may request a review of Lucent's
discounts at any time and the Parties will enter into good faith discussions to
review the discounts and make any mutually agreeable modifications. It is the
intent of the Parties that all prices support earning an acceptable return for
each Party and that such return will be at least as good as the return generated
by the initial prices.
2.1.2 Other miscellaneous pricing information is also included in
Appendix 1.
5.
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2.2 SPECIFICATIONS
2.2.1 Product to be supplied hereunder shall conform to the
descriptions, shape, performance and functions set forth in Appendix 2
("Specifications") or such other specifications as the Parties may agree to in
writing. Modifications to the Product or Specifications shall be made with the
mutual written consent of the Parties and in accordance with the Change Control
Process set forth in Appendix 4.
2.3 PRODUCT DOCUMENTATION
2.3.1 Subject to the terms and conditions of this Agreement, Supplier
will provide electronic master copies, [***], of the Source Materials,
Collateral Material and Technical Documentation as mutually agreed upon and in a
mutually agreed to format. These Source Materials, Collateral Material and
Technical Documentation may be reproduced, reformatted, modified and distributed
by Lucent, subject in each instance to Supplier's prior review and written
approval and, where applicable, subject to the confidentiality provisions set
forth in Section 6.3.
2.3.2 Within sixty (60) days after the Effective Date, Supplier will
develop a documentation plan, that will include, but not be limited to,
document/material description, scope/intent, availability date, and format to be
used to transmit to Lucent. In addition, the documentation plan will provide a
process for the Supplier to provide update(s) to Lucent.
2.3.3 Lucent agrees to reproduce Supplier's copyright notice
contained in any documentation reproduced without change by Lucent. For
documentation that is reformatted or modified by Lucent, Lucent shall have the
right to place only Lucent's own copyright notice on the reformatted or modified
documentation. It is the intent of the Parties that Lucent's copyright notice
shall be interpreted to protect the underlying copyright rights of Supplier to
the documentation to the extent such underlying rights are owned by Supplier. To
the extent that use of Lucent's notice without referencing Supplier's copyright
notice or other proprietary rights notice would adversely affect Supplier's
intellectual property rights, the Parties will agree upon mutually acceptable
proprietary rights notices. Supplier will correct promptly, by providing
replacement or updates, any defects in documentation which Supplier becomes
aware of and/or about which Lucent notifies Supplier, that may result in a
product service loss or could result in a safety hazard.
2.4 PACKING
2.4.1 Product shall be duly packaged and marked in accordance with
industry standards and requirements under applicable laws and government
regulations including, but not limited to any such laws and regulations relating
to safety, health and the environment; provided, however, that if Supplier
packages Product as specified by Lucent, including without limitation Section
2.4.3 hereof, such packaging shall be deemed to comply with the foregoing
requirements.
2.4.2 Supplier will package Product individually or as integrated
assemblies (except for small parts, such as screws) with appropriate protective
material to guarantee safe arrival (e.g., plug-in boards should be in static
controlled packaging and/or padded cartons). Bulk
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packaging of Product and Parts is acceptable if agreed to by both Parties. Each
box will contain Product or Parts ordered under a single purchase order, but
multiple boxes may be placed in a larger container. Supplier will, when so
requested by Lucent and without additional charge, provide and affix to each
Product packaging, bar code labels as Lucent will specify.
2.4.3 Product will be packed by Supplier in accordance with Lucent
Specification PKG-91NJ1045, April 1, 1998, a copy of which Supplier has in its
possession.
2.5 TECHNICAL SUPPORT
2.5.1 Lucent will be the primary interface to all customers and will
provide Tier 1 and Tier 2 technical customer support. A Tier 1 support person
has a working knowledge of the Product and technology as well as an
understanding of the network in order to resolve common and or known problems.
"Tier 2" means the second level of technical customer support to which Tier 1
escalates issues that cannot be resolved at Tier 1.
2.5.2 Supplier will provide Lucent Tier 3 technical support. "Tier 3"
means technical support that addresses issues escalated from Tier 2 when either
the source of the issue cannot be identified or the issue is identified and must
be addressed by the manufacturer of the Product. Tier 3 technical support will
be provided twenty-four (24) hours a day, seven (7) days a week via telephone to
Lucent's Tier 2 support personnel [***]. Supplier's response time shall be
within [***] on Monday through Friday, 9 am - 6 pm (Pacific Time), and within
[***] at all other times. Supplier will provide emergency on-site twenty-four
(24) hour technical assistance at Lucent's request and at rates to be mutually
agreed upon by the Parties. Six (6) months after the Effective Date and every
six (6) months thereafter, Supplier may request a review of Lucent's Tier 3
support requests that Supplier believes (i) do not fit into Tier 3 or (ii) are
otherwise excessive given the volume of Product purchases made by Lucent. Upon
such a request for review, the Parties will discuss in good faith appropriate
resolution of Supplier's concerns, such as, by way of example only, compensation
to Supplier and/or changes to the Parties' support processes.
2.5.3 Within sixty (60) days after the Effective Date, Lucent's and
Supplier's technical support groups shall establish a technical support plan in
support of the implementation of this Section, which shall include, but is not
limited to, the following items:
(A) Roles and responsibilities of Tier 1, Tier 2 and Tier 3
support persons;
(B) Procedure for seamless Tier 3 escalation including the
mechanics of how Tier 2 will contact Tier 3;
(C) Procedure for developing and implementing corrective
action plans with the goal to minimize customer impact from Lucent customer
network outages due to Product-related problems; such plans should address
short-term workarounds and long-term solutions in accordance with the terms and
conditions of this Agreement;
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(D) Procedure for Tier 2 to enter product change requests as
contemplated in Section 4.2 hereof; and
(E) A clear definition of terms.
2.5.4 Lucent may request ongoing technical support, including field
service and assistance and technical support in the development of specific
customer proposals, provided, however, that the availability or performance of
this technical support service shall not be construed as altering or affecting
Supplier's obligations as set forth in Section 5 (Limited Warranty) or elsewhere
provided for in this Agreement.
2.6 TRAINING
2.6.1 Supplier will provide an electronic master copy of
instructional Source Material, [***], that can be used by Lucent to
generate customer-training materials. Supplier will also provide two (2) train-
the-trainer courses, on terms and at a location and schedule to be agreed, for
Lucent's personnel at a level mutually agreed upon with the mutual objective of
the Parties that Lucent will be able to effectively market and support
Supplier's Product. Additional courses will be made available to Lucent at
Supplier's then current rates. The training will include, but not be limited to,
the Product's features, target markets and selling strategies, as well as
technical aspects of the Product to enable Lucent to properly configure
Supplier's Product to operate with Lucent's products and provide technical
support.
2.6.2 After the Effective Date and before Supplier delivers the
train-the-trainer courses to Lucent, Supplier acknowledges that Lucent may not
be prepared to provide any requested training to Lucent's customers. Therefore,
Supplier will assist Lucent in providing customer training until the delivery of
the first train-the-trainer course referenced in Section 2.6.1 above. The
Parties agree that if Supplier considers the amount of training support it
provides pursuant to this Section 2.6.2 to be excessive, the Parties will review
the training schedule and mutually agree to terms and conditions under which
further training support will be provided to satisfy any remaining obligations
of this Section 2.6.2.
2.6.3 Within sixty (60) days after the Effective Date, Supplier will
develop a training plan that will include, but not be limited to, course
descriptions, a course development process requiring Lucent's approval of
courses, a course schedule and a process for providing course updates outside
the standard schedule.
2.7 INSIGNIA
2.7.1 Upon Lucent's written request, "Insignia," including certain
trademarks, trade names, insignia, symbols, decorative designs, or packaging
designs of Lucent will be properly affixed by Supplier to the Product furnished
or its packaging. Such Insignia will not be affixed, used, or otherwise
displayed on the Product furnished or in connection with the Product without
written approval of Lucent. The manner in which such Insignia will be affixed
must be approved in writing by Lucent in accordance with standards established
by Lucent as applicable. Lucent shall retain all right, title and interest in
any and all packaging designs, finished artwork, and separations Lucent
furnishes to Supplier. This Section does not reduce or modify Supplier's
obligations under Sections 6.3 and 7.3.
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2.8 MARKING
2.8.1 The Parties currently intend for the Product to be co-branded.
Within forty-five (45) days after the Effective Date, Supplier will provide
Lucent with a proposal on co-branding. This proposal will be subject to Lucent's
written approval and needs to incorporate the applicable provisions of this
Agreement.
2.8.2 All Product furnished under this Agreement shall be marked for
identification purposes in accordance with the Specifications and as follows:
(A) with Supplier vendor code, model/serial number;
(B) with month and year of manufacture;
(C) markings in accordance with the requirements outlined in
Lucent Specifications KS-23490 and KS-22002, as amended from time to time, which
Supplier has in its possession;
(D) Common Language Equipment Identification (CLEI) Note:
Common Language and CLEI are trademarks of Bell Communications Research; Lucent
Apparatus code, serial, or model numbers;
(E) Warranty Eligibility System (WES) tracking information;
and
(F) Underwriters Laboratories and Federal Communications
Commission markings as appropriate.
(G) In addition, Supplier agrees to add any other
identification that might be requested in writing by Lucent. Charges, if any for
such additional identification marking shall be as agreed upon by Supplier and
Lucent prior to the implementation of any change. This Section does not reduce
or modify Supplier's obligations under Section 2.7, Insignia.
2.9 INSTALLATION AND CUTOVER ASSISTANCE
2.9.1 In the event Supplier is not installing the Product, and if
requested by Lucent and agreed by Supplier, Supplier agrees to make available at
the installation site, on rates and terms to be agreed, a field engineer(s) to
render installation and cut-over assistance as requested by Lucent and as
defined below.
2.9.2 Supplier will provide reasonable assistance, [***], to
support [***] Lucent-designated FSAs, annually, for each new release of
Product as determined by mutual agreement of the Parties. Such support shall not
exceed [***] person days per FSA, unless mutually agreed to by the Parties.
2.9.3 Supplier will provide reasonable assistance, [***], to
support [***] ICAs per year. Such support shall not exceed [***] person
days per ICA, unless mutually
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agreed to by the Parties. The Parties understand and acknowledge that they will
try to limit the number of ICA's to fewer than five per year and to limit
Supplier's involvement in such ICA's.
2.9.4 Additional Supplier FSA/ICA support will be mutually agreed to
and be at a cost as defined in Appendix 1 unless otherwise mutually agreed to in
writing.
2.10 PRODUCT LINE EVOLUTION
2.10.1 As set forth in Section 7.27, Supplier and Lucent shall have
periodic meetings (once per quarter or as often as mutually agreed to) to
discuss plans for product line evolution.
2.10.2 The Parties agree to keep abreast of major developments in the
telecommunications industry and to meet, from time to time in accordance with
Section 7.27, and to discuss any developments that might substantially affect
the production of Product under this Agreement.
2.11 PRODUCT ACCEPTANCE
2.11.1 The Product and any other new product offering by Supplier to
Lucent hereunder shall be subject to initial prototype acceptance testing by
Lucent in accordance with mutually acceptable criteria and procedures to be
proposed by Lucent promptly and agreed upon by Supplier. For the initial Product
covered by this Agreement, such agreement shall occur within sixty (60) days
following the Effective Date. If not otherwise set forth elsewhere, such
acceptance criteria and procedures will also include the Parties' agreement
regarding acceptable failure rates and reliability specifications (such failure
rates and reliability specifications to be initially proposed by Supplier) for
purposes of Section 4.4. For all new product offerings by Supplier or for
changes to the Product, such agreement shall be reached within a mutually
agreeable time frame consistent with the planned introduction date. If no
proposal is made within the applicable period by Lucent, the Product will be
deemed accepted upon delivery. After acceptance of the prototype for the Product
and for any new product that Lucent may choose to purchase from Supplier, all
subsequent deliveries of Products or new product offerings shall be deemed
accepted upon delivery. If, however, the Product has been modified pursuant to
Section 4.2, the modified Product will also be subject to the initial acceptance
testing procedures set forth in this Section 2.11 prior to manufacturing and
supply for Lucent in production quantities.
2.11.2 Supplier shall submit to a location designated by Lucent for
examination a mutually agreed to sample or prototype configuration of production
samples of the Product, modified Product, or new product offering (referred to
herein collectively as a "Sample") produced in a continuous run on permanent
production tooling.
2.11.3 Lucent shall evaluate Samples in accordance with the
Specifications and issue a written acceptance or rejection to Supplier within
forty-five (45) days after receipt of Samples. The failure by Lucent to reject
with cause within such time shall constitute acceptance. Any rejection shall
identify the failure to meet Specifications in reasonable detail sufficient to
allow Supplier to correct the deficiency.
10.
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2.11.4 If a Sample evaluated pursuant to this Section is rejected,
Supplier agrees to correct, at its expense, the failure to meet the
Specifications (referred to herein as "Defect") leading to such rejection and
resubmit a corrected Sample to Lucent within thirty (30) days after receipt of
notice from Lucent of such Defect or such longer period that the Parties
mutually agree in writing is necessary to rectify the Defect (referred to herein
as the "Corrective Period"). Lucent shall have thirty (30) days after Supplier
resubmits the corrected Sample to accept or reject in writing such Sample in
accordance with Section 2.11.1.
2.11.5 If the Defect in a rejected Sample is not corrected within the
Corrective Period or if a resubmitted Sample that is re-tested or re-evaluated
by Lucent during the thirty (30) day re-evaluation period is again rejected,
Lucent may at its option: (a) accept the sample as is; (b) afford Supplier one
or more correction extensions; or (c) terminate this Agreement without any cost
or charge to Lucent whatsoever if for the initial Product (but cannot terminate
the Agreement if for modifications to the Product or for follow-on products),
including costs or charges incurred by Supplier in procuring equipment, material
and special tooling to perform any part of this Agreement, loss of profits or
labor, and materials expended in the production of Samples.
2.11.6 If the Parties opt to perform the testing at Supplier's
facility, Supplier shall allow Lucent to send representative(s) to observe and
participate in the testing.
2.11.7 Except as set forth in this Section 2.11, or as mutually
agreed by the Parties, Supplier shall not make any shipments under this
Agreement prior to acceptance pursuant to this Section 2.11.
2.11.8 Lucent will return Samples to Supplier unless otherwise
mutually agreed to.
2.12 INTERFACES
2.12.1 Supplier agrees to provide Lucent with any publicly available
interface specification documentation and reasonable amounts of support to
resolve any questions Lucent's Tier 2 support personnel or Lucent's customers
may have regarding these interface specifications.
2.12.2 For a period of five (5) years after providing any Product
pursuant to this Agreement, Supplier shall, upon request, provide to Lucent upon
Lucent's reasonable request any applicable, publicly-available interface
specification documentation.
2.13 MARKETING SUPPORT
2.13.1 Upon Lucent's reasonable request, Supplier shall provide
Lucent, [***], marketing support in a manner and upon terms mutually
acceptable to the Parties. Examples of support may include consultation services
regarding marketing and systems support, marketing opportunity assessment,
solution design reviews and product availability and delivery assistance. In
addition, during the initial months of this Agreement, Supplier agrees to
provide appropriate sales support to Lucent's sales and marketing efforts in a
manner and upon terms mutually acceptable to the Parties.
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2.13.2 Based on information provided by Supplier under Section 2.3,
Product Documentation, Lucent will develop its own Collateral Material, customer
training manuals, price lists and sales presentations necessary for marketing
the Product, subject to the procedures set forth in Section 2.3.
3. ORDERS AND PAYMENT
3.1 PAYMENT TERMS
Invoices shall be paid net [***] from the date of delivery of the Product
to Lucent or receipt of the applicable invoice by Lucent, whichever occurs
later.
3.2 FOB
The Product shall be shipped F.O.B. Supplier's facility, 5744 Pacific
Center Boulevard, San Diego, California 92121, freight charges payable by Lucent
upon delivery.
3.3 PURCHASE ORDERS
3.3.1 Lucent will issue written purchase orders on a monthly basis
reflecting its orders and any changes to existing orders in accordance with the
change to purchase order provisions set forth in Section 3.5 below. Purchase
orders issued under this Agreement shall be sent to the following address:
TO SUPPLIER: 5744 Pacific Center Boulevard
San Diego, California 92121
Attention: Sales Administration
Phone: (619) 453-8799
Facsimile: (619) 452-0199
3.3.2 Supplier may change its address upon thirty (30) days
written notice to Lucent.
3.3.3 [***], at Lucent's option, subject to the reschedule and
forecast change schedule set forth in Section 3.5 below. Such purchase orders
shall specify: (a) a description of Product, inclusive of any
numerical/alphabetical identification referenced in Appendix 1, (b) the quantity
of Product ordered; (c) a preferred delivery date, (d) the applicable price, (e)
the location to which Product is to be shipped, and (f) the location to which
invoices should be sent for payment, if different from the address set forth in
this Agreement. Lucent's commitment to Supplier shall in no case exceed the
quantities specified on each spot purchase order. Purchase orders shall be
governed by the terms and conditions of this Agreement; any additional or
inconsistent terms contained in a purchase order or a Supplier sales
acknowledgment are hereby rejected.
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3.4 FORECASTS
Lucent will issue to Supplier an initial written estimate of annual (twelve (12)
calendar months) purchases. Additionally, Lucent will provide Supplier with a
written rolling estimate of purchases ("Forecast"). During the first six (6)
months after the Effective Date, such rolling estimate shall be provided to
Supplier monthly. Thereafter, the rolling estimate shall be provided weekly.
Such Forecast shall be issued solely for material planning purposes and shall
not be deemed a commitment by Lucent. Consistent with the foregoing, Supplier
will not be required to fulfill such Forecast. Supplier will, however, fulfill
Lucent purchase orders as set forth below.
3.5 CHANGES TO PURCHASE ORDERS
3.5.1 Lucent shall have the right to reschedule shipment of some
or all of the quantity of such spot purchase order or to reduce the spot
purchase order quantity in accordance with the schedule below:
<TABLE>
<CAPTION>
Number of Days Prior to Reschedule Allowable Reschedule or
or Forecast Change Forecast Change
<S> <C>
0-30 [***]
31-60 [***]
61-90 [***]
91 days or more [***]
</TABLE>
3.5.2 Any change requested by Lucent beyond the allowable decrease
shall be handled by Supplier on a commercially reasonable efforts basis.
3.6 DEMAND PULL FORECAST AND ORDERING PROCEDURES.
Within forty-five (45) days after the Effective Date, the Parties will
agree on "Demand Pull" delivery arrangements for the Product consistent with the
preliminary draft of such agreement currently attached hereto as Appendix 5.
When completed, the written agreement regarding "Demand Pull" delivery
arrangements will be attached hereto and incorporated herein as the revised
Appendix 5. Upon mutual written agreement between Lucent and Supplier, Lucent
shall have the right to implement such delivery arrangements by providing an
estimated purchase order for Products. The terms and conditions of demand pull
delivery, as stated in this Agreement, shall apply to any such delivery
arrangements as may be implemented after the demand pull arrangements become
effective. After such time, the spot purchase order procedures set forth above
shall no longer apply and the demand pull procedures to be set forth in Appendix
5 will govern the estimated purchase order.
3.7 DELIVERY PROCESS & SHIPPING INTERVAL
3.7.1 Delivery time means the interval from order receipt by
Supplier to Product shipment. During the period when Lucent is ordering Product
by means of the spot purchase order procedure set forth in Sections 3.3, 3.4 and
3.5 above, the Parties anticipate a [***]
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[***] delivery time. Supplier will use commercially reasonable efforts to reduce
the delivery time. For orders above the Company's forecast, Supplier will use
commercially reasonable efforts to deliver within the delivery time, as defined
in this Section, or as soon as possible, thereafter.
3.7.2 In the event that Supplier exceeds the above maximum
delivery time for reasons other than those provided for in Section 7.5 (Force
Majeure) then in addition to all other rights and remedies at law or equity or
otherwise, and without any liability or obligation of Lucent, Lucent shall have
the right to: (a) cancel such purchase order, or (b) extend such delivery date
to a later date, subject, however, to the right to cancel as in (a) preceding if
delivery is not made or performance is not completed on or before such extended
delivery date. If Lucent elects to extend such delivery date, Supplier may agree
to absorb the difference between the charges to ship normal transportation and
the charges to ship premium overnight.
3.8 VARIATION IN QUANTITY
Lucent assumes no liability for Product produced, processed or shipped in
excess of the amount specified in this Agreement or in an order issued pursuant
to this Agreement.
3.9 SHIPPING
Supplier shall: (1) ship the Product complete unless instructed otherwise;
(2) ship to the destination designated in the Agreement or purchase order; (3)
ship according to routing instructions given by Lucent; (4) place the Agreement
and order number on all subordinate documents; (5) enclose a packing list with
each shipment and, when more than one package is shipped, identify the package
containing the packing list; and (6) mark the Agreement and order number on all
packages and shipping papers. Adequate protective packing shall be furnished at
no additional charge. Shipping and routing instructions may be furnished or
altered by Lucent in writing.
3.10 INVOICING
Supplier shall (1) render invoices in duplicate, or as otherwise specified
in this Agreement, showing Agreement number, through routing and weight, (2)
render separate invoices for each shipment within three (3) days after shipment
and (3) mail invoices with copies of bills of lading and shipping notices to the
address shown on this Agreement or purchase order. If prepayment of
transportation charges is authorized, Supplier shall include the transportation
charges from the F.O.B. point to the destination as a separate item on the
invoice stating the name of the carrier used. No minimum billing charges are
permitted unless expressly authorized in the Agreement.
3.11 INVOICING FOR STOCK
If Lucent requests, for reasons other than covered by the Force Majeure
Section, that shipment be postponed beyond the date shown on a purchase order,
Supplier may invoice Lucent as of the original scheduled delivery date for
Product manufactured under this Agreement, if it has been inspected and approved
by Lucent's Product Management Organization or its authorized agent, within five
(5) working days after notification of postponement, (provided
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inspection has been specified in this Agreement or in a purchase order issued
under this Agreement). If inspection is not completed within five (5) working
days, Supplier may invoice Lucent in accordance with Section 3.10.
3.12 STORAGE OF PAID-FOR-STOCK
3.12.1 All Product invoiced to Lucent in accordance with Section
3.11 (Invoicing for Stock) shall be marked conspicuously as Lucent's property,
and safely stored by Supplier separately from any other material stocks, and
shall be shipped out as ordered by Lucent. Supplier assumes responsibility for
any loss or damage to such Product while stored by Supplier. Supplier agrees
upon request by Lucent, to execute and deliver to Lucent a bill of sale
evidencing conveyance of such Product, free from liens and encumbrances,
together with any other document such as a bailment agreement, warehouse
receipt, lease (on storage space), mortgage, deed of trust, or surety bond as
Lucent may deem necessary to secure title in such Product as against third
parties, all of which documents shall be in a form acceptable to Lucent.
3.12.2 Supplier agrees to store the Product without charge for
thirty (30) days. Subsequent storage charges shall be mutually agreed to by
Supplier and Lucent.
3.13 MONTHLY SHIPMENT REPORTS
Supplier agrees to render monthly shipment reports on or before the tenth
working day of the succeeding month containing the following information:
customer, shipment date, quantity and model number of units shipped.
3.14 ELECTRONIC DATA INTERCHANGE (EDI)
If requested by Lucent, Supplier shall use commercially reasonable efforts
to implement EDI at its sole expense.
3.15 BAR CODE SHIPPING AND RECEIVING LABELS
Supplier shall at its sole expense place Lucent's specified bar code labels
on all shipping packages and containers for the Product shipped under this
Agreement. Such bar code labels and the placement thereof shall meet the
requirements shown in the document "Bar Code Shipping Label - Profile Program
#801-001-107, May 30, 1997" which Supplier has in its possession. Lucent may
change such specification upon written notice to Supplier and Supplier shall
comply with such changes in a commercially reasonable time.
3.16 TITLE AND RISK OF LOSS
Title and risk of loss and damage to Product purchased by Lucent under this
Agreement shall vest in Lucent when the Product has been delivered at the FOB
point.
3.17 POINT OF SALE INFORMATION. Subject to Section 6.3, Lucent agrees to
provide Supplier written point of sales reports for purposes of Supplier
compensating Supplier's sales personnel. The Parties will agree within sixty
(60) days following the Effective Date on the format and frequency of such
reports.
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4. QUALITY AND ISO 9000
4.1 QUALITY
Commitment to quality is a primary requirement of this Agreement. Supplier
agrees to ensure continued quality improvement in the Product covered under in
this Agreement. Supplier will use commercially reasonable efforts to demonstrate
commitment to a quality improvement process by implementing and documenting a
quality system that meets the requirements under ISO 9001 and 9002 no later than
eighteen (18) months from the Effective Date. Upon Lucent's reasonable advance
written request, Supplier agrees to allow Lucent or Lucent's agent reasonably
acceptable to Supplier to conduct on-site reviews at the Supplier's hardware
manufacturing and software development facility(s) to verify compliance with
requirements outlined in Appendix 3 prior to ISO certification and no more than
once annually after certification (unless an epidemic failure has occurred under
Section 4.4, in which case Lucent may conduct on-site reviews as Lucent deems
reasonably necessary for one year after any such epidemic failure, unless
otherwise mutually agreed to). Supplier agrees to provide Lucent mutually-
acceptable quality data from time to time as the Parties deem appropriate.
Supplier also agrees to develop corrective action plans for any quality system
deficiencies that may be detected during these periodic on-site reviews, and
submit these to Lucent within thirty (30) days after receiving written notice of
the deficiency from Lucent. Further, Supplier agrees to implement any corrective
action plan within three (3) months after agreement upon a corrective action
plan, unless otherwise agreed by the Parties.
4.2 ENGINEERING CHANGES
4.2.1 Any change that Supplier proposes to the Product furnished
hereunder, or any firmware or software incorporated or embedded therein (except
for immaterial changes to software code), and the documentation related thereto
that would impact upon (a) reliability, (b) the Specifications, or (c) Form,
Fit, or Function requires the approval of Lucent, as outlined in the Engineering
Change Control Procedures, Appendix 4. Such approval shall not be unreasonably
withheld or delayed. Supplier shall forward such proposed change to Lucent at
the address in Section 7.1, at least thirty (30) calendar days prior to the
proposed effective date except for those cases where an extremely unsatisfactory
condition requires immediate action, in which case Supplier shall promptly
advise Lucent. Supplier shall at the time of notification, provide Lucent with
(a) a product change number, (b) a description of such change, (c) the reason
for such change, (d) a classification of such change in accordance with the
change classifications below, (e) a description of the impact of such change
upon (1) reliability, (2) the Specifications, and (3) Form, Fit or Function; (f)
the proposed price impact, if any, and (g) the proposed effective date for such
change and recommended implementation schedule therefor.
4.2.2 Any change in Product shall be classified into one of the
following two (2) classes:
"A" - Changes which are needed to correct inoperative electrical or
mechanical conditions, or extremely unsatisfactory operating maintenance
conditions, or conditions which result in safety hazards, and which are judged
severe enough to have to be made to all Product in
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process, stock or installed. Any conditional application criteria is to be
specified in the change notification document.
"B" - Changes which are sufficiently important to justify their
application to Product being manufactured (as soon as reasonably possible) or to
be implemented for Products going forward, and which may be recommended for
application to existing installations in the field. Examples of this class of
change may include, but are not limited to:
(A) Providing new features that directly affect subscriber
service;
(B) Providing design improvements which result in better
service capabilities, longer life or improved transmission margins;
(C) Providing changes in design which result in important cost
savings to Supplier or Lucent; and
(D) Conditions of a mandatory nature, for example, the
fulfillment of federal registration or future compatibility requirements, or for
conditions of sufficient importance to be intended for universal application.
Supplier shall propose the classification of all changes. The final
classification of any Product change proposed by Supplier will be by mutual
agreement between Supplier and Lucent. In the event Supplier and Lucent fail to
reach mutual agreement, either Party may move to Dispute Resolution as set forth
in Section 7.20.
4.2.3 For Class A changes, Supplier shall, pursuant to the
provisions of this Agreement governing repair or replacement of Product under
warranty, replace or modify, at no charge, all affected Product furnished
hereunder and documentation related thereto. Supplier shall supply relevant
documentation to Lucent for all Class A changes. Supplier shall propose a
schedule for the application of these changes at all equipment locations which
shall not exceed one (1) year from date of the change notice. This schedule
shall be mutually agreed upon by Lucent and Supplier.
4.2.4 For Class B changes, Supplier shall first notify Lucent of
the exact nature of the change. Details on the proposed implementation procedure
for Product which is being or will be manufactured shall be discussed with
Lucent. Lucent shall, at its option, determine if Product previously shipped
will be replaced or modified. Should such replacements or modifications be
deemed necessary, Supplier shall, pursuant to the provision of this Agreement
governing repair of Product not covered under warranty, make arrangements for
the necessary Product replacement or modification at prices and schedules to be
mutually agreed upon by Lucent and the Supplier prior to implementation.
Documentation related thereto shall be provided by Supplier as specified for
Class A above.
4.2.5 Lucent shall provide Supplier sixty (60) calendar days prior
written notice of all Engineering Changes that Lucent requests for incorporation
into the Product. Supplier shall have thirty (30) calendar days to reply to the
feasibility of the requested Engineering Changes. If not commercially feasible,
Supplier will inform Lucent of the reason(s). If commercially
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feasible, Supplier shall provide a quote on price to be paid by Lucent and
development schedule should Lucent request Supplier to implement such change(s).
4.3 FIELD RETROFIT ORDERS (FRO).
FROs are modifications to installed Product required to: meet safety
requirements, assure proper operation, and/or assure that the Product meets
Specifications. Supplier will, [***], provide Lucent with any parts and
instructions necessary to implement any FRO issued by Supplier during the term
of this Agreement, and thereafter as long as parts are made available under this
Agreement. Supplier will reimburse Lucent for Lucent's labor for each FRO
installed by Lucent, at a rate mutually agreed to in advance of action taken by
Lucent and Supplier.
4.4 EPIDEMIC FAILURES.
If the Products as delivered do not meet or exceed the failure rate and/or
reliability requirements set forth in the Specifications or such other written
document as the Parties may agree to regarding failure rates or reliability
requirements (such written document to be incorporated herein by reference),
Supplier shall (a) identify the cause and propose an engineering change and/or
field retrofit in accordance with the provisions of this Section 4, and (b)
within the warranty term, repair or replace the defective Product with
conforming Product in accordance with the repair and replacement provisions of
Section 5. The existence of any such epidemic failure shall be established from
Lucent's service records for the Product and by showing that the average failure
rate for the specified period of the monitored Product is not in conformance
with the applicable Specifications.
5. LIMITED WARRANTY AND REPAIRS
5.1 LIMITED WARRANTY
5.1.1 Supplier warrants to Lucent that Product furnished will be
new, free from material defects in design (except to the extent designed by
Lucent), material and workmanship, and will conform to and perform in accordance
with the Specifications, for [***] from the date of delivery to Lucent. [***].
Both Lucent and Supplier acknowledge that - due to, but not limited to, customer
requirements and competitive pressures - this standard warranty period may need
to be increased. On a case by case basis, the Parties will mutually agree to any
changes to the standard warranty period. The Parties agree to work together to
ensure rapid resolution to all proposed changes to the standard warranty period.
5.1.2 Supplier warrants that at the time of delivery to Lucent
such Product shall be free of any security interest or any other lien or any
other encumbrance whatsoever. All warranties shall survive inspection,
acceptance and payment in accordance with their terms.
5.1.3 Supplier warrants that during the warranty term set forth in
Section 5.1.1 any software that Supplier incorporates with or embeds in the
Product or that Supplier otherwise supplies for use in conjunction with the
Product shall be free from significant errors, will conform to and function in
accordance with the applicable Specifications, and the media conveying the
software shall be free from defects.
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5.1.4 Defective or non-conforming Product or software will, at
Supplier's option, either (i) be returned to Supplier for repair or replacement
in accordance with the RMA procedures defined and described in Section 5.3, or
(ii) be repaired or replaced by Supplier on customer's site. If software media
is defective, Supplier will promptly replace the defective media. Cost of
shipping with risk of in-transit loss and damage will be borne by the shipping
Party. Unless otherwise agreed upon by Supplier and Lucent, Supplier shall
complete repairs or error correction and ship the repaired Product or software
[***] of receipt of defective or non-conforming Product or software, or at
Supplier's option, ship replacement Product or software within [***] after
written notification is given Supplier by Lucent. If Product returned to
Supplier on customer's site for repair as provided for in this Section is
determined to be beyond repair, Supplier shall promptly so notify Lucent and,
unless otherwise agreed to in writing by Supplier and Lucent, ship replacement
Product without charge within [***] of such notification. If returned Product is
determined to be beyond repair due to improper handling, use, installation or
maintenance, Lucent will be notified and given the option to either scrap the
unit in place or purchase a replacement unit.
5.1.5 Replacement Product or software shall be warranted for the
balance of the warranty period as set forth in Section 5.1.1 or [***] after the
Product or software is returned to customer, whichever is later. Any Product or
software which is repaired, modified, or otherwise serviced by Supplier shall be
warranted as provided in this Section 5 [***] or [***] after the Product or
software is returned to customer, whichever is later (based upon the date
repair, modification or other service is completed and accepted by Lucent).
5.1.6 Supplier will notify Lucent as soon as possible after it
becomes aware of any actual or potential defects in the Product or software and
its ability to provide any of the services that may adversely affect: (I) the
operation or use of the Product or software by Lucent's customers, or (II) the
Supplier's ability to maintain/support the Product or software.
5.1.7 In addition, should Product which is subject to Part 15 of
the FCC Rules (as defined in Section 7.10), during use generate harmful
interference to radio communications, Supplier shall provide to Lucent
information relating to methods of suppressing such interference and pay the
cost of suppressing such interference or, at the option of Lucent, accept the
return of the Product and refund to Lucent the price paid for the Product less a
reasonable amount for depreciation, if applicable.
5.1.8 To the extent that Product furnished under this Agreement is
also subject to FCC Rules or similar rules or regulations of the country in
which the Product will be installed governing the use of the Product as a
component in a system, Lucent shall be responsible for compliance with the
applicable FCC Rules governing the system. Supplier shall fully cooperate with
Lucent by providing technical support and information, and, upon written request
from Lucent, shall modify Product to enable Lucent to ensure ongoing compliance
with the FCC
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Rules or similar rules or regulations of the country in which the Product will
be installed. Lucent agrees to pay any increase in Supplier's costs and/or
expenses resulting from Lucent's request to modify Product to enable Lucent to
comply with the FCC Rules or similar rules or regulations of the country in
which the Product will be installed.
5.1.9 EXCEPT FOR THE WARRANTIES EXPRESSLY SET FORTH IN THIS
AGREEMENT, SUPPLIER MAKES NO OTHER WARRANTIES REGARDING THE PRODUCT, ANY
SOFTWARE INCORPORATED THEREIN OR ANY SERVICES PROVIDED THEREWITH AND HEREBY
DISCLAIMS ANY AND ALL SUCH OTHER WARRANTIES, EXPRESS, IMPLIED OR STATUTORY,
INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
PARTICULAR PURPOSE, WHICH ARE ALL HEREBY EXCLUDED. The remedies set forth in
this Section 5 are Lucent's sole and exclusive remedies for breach of the
warranties set forth in this Section 5 and Supplier's sole and exclusive
obligation regarding any breach of such warranties.
5.2 REPAIRS NOT COVERED UNDER WARRANTY
5.2.1 In addition to repairs provided for in Section 5.1 and
subject to Section 5.3 hereof, Supplier agrees to provide repair service on all
Product ordered under this Agreement during the term of this Agreement. Product
to be repaired under this Section will be returned to a location designated by
Supplier, and unless otherwise agreed upon by Supplier and Lucent, Supplier
shall ship the repaired Product, or a replacement Product pursuant to Section
5.2.2, within [***] following return of the defective or non-conforming Product.
With the concurrence and scheduling of Lucent, repair may be made by Supplier on
site.
5.2.2 If Product is returned to Supplier for repair as provided
for in this Section and is determined to be beyond repair, Supplier shall so
notify Lucent. If requested by Lucent, Supplier will sell to Lucent a
replacement at the price set forth in Supplier's then current agreement with
Lucent for said Product or, if no such agreement exists, at a price agreed upon
by Supplier and Lucent. Further, if requested by Lucent, Supplier shall take the
necessary steps to dispose of the irreparable Product and pay to Lucent the
salvage value, if any, less all reasonable costs to the Supplier for the
disposal.
5.2.3 All transportation costs of in transit risk of loss and
damage to Product returned to Supplier for repair under this Section will be
borne by Lucent and all transportation costs of and in transit risk of loss and
damage to such repaired or replacement Product returned to Lucent will be borne
by Supplier.
5.2.4 Price schedules for repairs under this Section are listed in
Appendix 1.
5.2.5 Within sixty (60) days after the Effective Date, Lucent's
and Supplier's repair groups shall establish a repair plan in support of the
implementation of this Section, which shall include, but is not limited to, the
following items:
(A) the respective roles and responsibilities of the
Parties; and
(B) the Product flow to ensure timely return of repaired
Product or replacement of defective Product to a customer.
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5.3 REPAIR PROCEDURES
5.3.1 Lucent shall call Supplier for a Return Material
Authorization (RMA) number prior to the return of any Product. Lucent shall
furnish the following information with Product returned to Supplier for repair:
(a) Lucent's name and complete address; (b) name(s) and telephone number(s) of
Lucent's employee(s) to contact in case of questions about the Product to be
repaired; (c) ship-to address for return of repaired Product if different from
(a); (d) a complete list of Product returned including serial numbers; (e) the
nature of the defect or failure, if known; and (f) whether or not returned
Product is in warranty. The name and telephone number of the initial individual
to be contacted concerning any questions that may arise concerning repair is
Mark Handzel, Vice President of Customer Support and Quality, (619) 453-8799,
ext. 103. In returning any Product to Supplier, Lucent and customer shall use
functionally equivalent packaging to the original packaging provided by
Supplier.
5.3.2 Product repaired by Supplier shall have the repair
completion date identified in a permanent manner at a readily visible location
on the Product and the repaired Product shall be returned with a tag or other
papers describing the repairs which have been made.
5.3.3 All invoices originated by Supplier for repair services must
be clearly identified as such, and must contain or have attached: (1) a
reference to Lucent's RMA for these repair services, (2) a detailed description
of repairs made by Supplier and the need therefor, and (3) an itemized listing
of parts and labor charges, if any. Further, the provisions of Section 3.9 and
Section 3.10, other than provisions relating to transportation charges with
respect to Product repaired under warranty, shall apply to Supplier's return to
Lucent of repaired Product.
5.3.4 The Parties agree that No Trouble Found (NTF) conditions
test and evaluation time shall be the hourly rate for Repairs listed in Appendix
1. Supplier shall inform Lucent within forty eight (48) hours of the findings of
each NTF condition so that appropriate investigatory measures may be taken to
determine the root cause.
5.4 WARRANTY TRACKING
Supplier agrees to provide the necessary information via electronic file to
Lucent on a timely basis for input to Lucent's Warranty Eligibility System
(WES). See Appendix 7 for WES requirements.
5.5 YEAR 2000 FUNCTIONALITY
Supplier warrants that the Product will record, store, process and present
calendar dates falling on or after January 1, 2000, to the extent that the
Product actually does record, store, process or present calendar dates, in the
same manner and with the same functionality as it performed before January 1,
2000. The warranty under this Section 5.5 shall not apply to output, results,
errors, or abnormal terminations caused in whole or in part by (i) any use of
the Product in combination with any other product not created by Supplier, (ii)
errors not attributable to date-specific data, (iii) any modifications of the
Product made by a party other than Supplier, and (iv) any data provided to the
Product which does not specify the century or is incorrect or ambiguous.
Lucent's sole and exclusive remedy and Supplier's sole and exclusive obligation
for breach of the foregoing warranty shall be (i) Supplier's use of commercially
reasonable efforts to promptly
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correct or replace (in no more than sixty (60) days from receipt of notice) the
Product at no additional charge or fee to Lucent so that it complies with the
terms of the warranty contained in this Section 5.5, and (ii) should Supplier
fail to cure the breach of this warranty within such sixty (60) day period,
Lucent will be entitled to exercise its manufacturing license under Section 1.7
for the sole purpose of modifying the Product so that it does comply with this
warranty. This warranty shall be deemed to be a warranty for future performance
that shall continue through and including the year 2002, regardless of any
earlier termination of this Agreement.
6. INTELLECTUAL PROPERTY
6.1 INTELLECTUAL PROPERTY RIGHTS
The Parties acknowledge that, except as expressly set forth in this
Agreement, this Agreement shall not be deemed to have granted: (i) Supplier any
rights in or to Lucent's intellectual property, nor (ii) Lucent any rights in or
to Supplier's intellectual property. All rights not expressly granted herein are
reserved.
6.2 PRODUCT SOFTWARE LICENSE GRANT
Subject to the terms and conditions of this Agreement, Lucent shall have a
non-exclusive, [***], non-transferable license to distribute Supplier's
firmware and network management software used solely with or embedded in the
Product, in executable form only, in the United States solely as used with or
embedded in Product furnished to Lucent by Supplier under this Agreement in
order to enable Lucent's customers to use Supplier's firmware and network
management software used solely with or embedded in the Product. Lucent will not
itself, nor permit any of its licensees to, reverse compile or disassemble the
software, nor will Lucent reproduce the software for the purpose of furnishing
it to others or for any other purpose not expressly permitted by this Agreement.
6.3 SUPPLIER'S AND LUCENT'S INFORMATION
Confidentiality of information shall be governed by the Nondisclosure
Agreement between Lucent and Supplier effective August 24, 1998 and contained in
Appendix 6 of this Agreement, which is incorporated herein by reference and
which shall be coterminous with this Agreement, notwithstanding any provision
regarding term set forth therein.
7. OTHER TERMS AND CONDITIONS
7.1 NOTICES
Any notice, demand or other communication required, or which may be given
unless otherwise specifically provided for in this Agreement, shall be in
writing and shall be effective: five (5) days after mailed, if sent by
certified, postage prepaid U.S. mail; upon receipt of confirmation, if delivered
by confirmed facsimile; upon delivery, if delivered in person; or the day after
dispatch, if sent by an overnight courier service that provides the sender with
written record of delivery, and shall be addressed to the respective Parties as
follows:
To Lucent: Lucent Technologies Inc.
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67 Whippany Road, Room 1C-330
Whippany, New Jersey USA 07981-0903
Attention: Mynoon Doro
Director - Access Solutions Global Partnership
and Business Management
Voice: 973-386-6188
Facsimile: 973-386-5072
Fax Copies to: Lucent Technologies Inc.
283 King George Road, Building C
Warren, New Jersey, USA 07059
Attention: Corporate Counsel, Switching
and Access Solutions
Voice: 908-559-3279
Fax: 908-559-2176
To Supplier: Copper Mountain Networks, Inc.
2470 Embarcadero Way
Palo Alto, California 94303
Attention: Vice-President, Business Development
Voice: 650-858-8500, ext. 260
Fax: 650-858-8085
Fax Copies to: Copper Mountain Networks, Inc.
3931 Sorrento Valley Boulevard
San Diego, California 92121
Attention: Chief Financial Officer
Fax: 650- 453-9244
Cooley Godward LLP
3000 El Camino Real
Palo Alto, California 94306
Attention: Anthony Klein
Fax: 650-849-7400
The above addresses may be changed at any time by giving prior written notice as
above provided.
7.2 INDEMNITY
7.2.1 Supplier agrees to indemnify, defend and hold harmless Lucent,
its affiliates, customers, employees, successors and assigns (all referred to in
this Section 7.2 as "Lucent") from and against any losses, expenses, damages,
claims, fines, penalties and expenses (including reasonable attorney's fees)
that arise out of or result from any and all third party claims that the Product
infringes any U.S. patent, copyright, trademark or misappropriates any trade
secret right. The foregoing indemnity shall not apply to the extent that the
claim is based upon or arises out of the use of the Product: (i) in any manner
not specified in the applicable
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documentation or the Specifications; (ii) outside the scope of the license
grant; (iii) if the Product has been modified by Lucent or any third party; or
(iv) if an alleged patent infringement or trade secret violation arises from
Lucent combining (or allowing the combination of) the Product with any
equipment, devices or software not supplied or specified by Supplier, and such
equipment, devices, or software or the combination with the Product infringes
the patent rights or misappropriates the trade secrets of a third party or
causes injury to a third party, if but for such combining or allowing
combination of such equipment, devices or software with the Product, the
infringement or injury would not exist. THE FOREGOING INDEMNITY STATES THE SOLE
AND EXCLUSIVE REMEDY OF LUCENT AND THE ENTIRE LIABILITY AND OBLIGATION OF
SUPPLIER WITH RESPECT TO ANY CLAIMS OF INFRINGEMENT OR MISAPPROPRIATION OF ANY
INTELLECTUAL PROPERTY RIGHTS BY THE PRODUCT OR ANY PART THEREOF.
7.2.2 Supplier shall indemnify, defend and hold Lucent harmless from
and against any losses, expenses, damages, claims, fines, penalties and expenses
(including reasonable attorneys' fees) that arise out of or result from: (1)
injuries or death to persons or damage to property, including theft, in any way
arising out of or caused or alleged to have been caused by the work or services
performed by, or Product and software provided by, Supplier or Supplier's
subcontractors, consultants or other persons furnished by Supplier; (2)
assertions of Workers' Compensation or similar acts by persons furnished by
Supplier; or (3) violation of any law, ordinance, rule, regulation or order
caused by Supplier's work or services under this Agreement or by the Product or
software provided by Supplier.
7.2.3 Lucent shall indemnify, defend and hold Supplier harmless from
and against any losses, expenses, damages, claims, fines, penalties and expenses
(including reasonable attorneys' fees) that arise out of or result from: (1)
injuries or death to persons or damage to property, including theft, in any way
arising out of or caused or alleged to have been caused by the work or services
performed by, or any equipment or software provided by, Lucent or Lucent's
subcontractors, consultants or other persons furnished by Lucent; (2) assertions
of Workers' Compensation or similar acts by persons furnished by Lucent; or (3)
violation of any law, ordinance, rule, regulation or order caused by Lucent's
work or services under this Agreement or by the equipment or software provided
by Lucent.
7.2.4 A Party's obligations to indemnify, defend and hold harmless
under this Section 7.2 are contingent upon the indemnified Party providing the
indemnifying Party: (1) prompt written notice of the existence of a claim; (2)
sole control of the defense and settlement of such claim; and (3) assistance in
the defense or settlement of such claim at the indemnifying Party's reasonable
request and expense.
7.3 IDENTIFICATION
Supplier shall not, without Lucent's prior written consent, engage in
publicity related to this Agreement, or make public use of any Identification in
any circumstances related to this Agreement. "Identification" means any
semblance of any trade name, trademark, service mark, insignia, symbol, logo, or
any other designation or drawing of Lucent or its affiliates. Supplier shall
remove or obliterate any Identification prior to any use or disposition of any
Product rejected or not purchased by Lucent.
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7.4 COMPLIANCE WITH LAWS
Each Party shall comply at its own expense with all applicable laws,
ordinances, regulations and codes, (including any pertaining to the environment,
safety or health) including the identification and procurement of required
permits, certificates, licenses, insurance, approvals and inspections in
performance of this Agreement.
7.5 FORCE MAJEURE
Neither Party shall be held responsible for any delay or failure in
performance of any part of this Agreement to the extent such delay or failure is
caused by fire, flood, strike, civil, governmental or military authority, act of
God, or other similar causes beyond its control and without the fault or
negligence of the delayed or non-performing party or its subcontractors ("force
majeure conditions"). Supplier's liability for loss or damage to Lucent's
Product in Supplier's possession or control shall not be modified by this
Section. When a Party's delay or nonperformance continues for a period of at
least one hundred and eighty (180) days, the other Party may terminate, at no
charge, this Agreement or an order under the Agreement.
7.6 ASSIGNMENT
Neither Party shall assign any right or interest under this Agreement
(excepting solely for moneys due or to become due) without the prior written
consent of the other Party, such consent not to be reasonably withheld or
delayed. Notwithstanding the foregoing, either Party may assign this Agreement
to a successor in interest without obtaining such consent in the event of a
merger, acquisition, change of control, reorganization, or sale of all or
substantially all of the assets of the assignor. In such event, an assigning
Party will make a good faith effort, consistent with its business needs under
the circumstances, but is not required to, provide the non-assigning Party prior
notice of a proposed assignment. In the event that a Party enters into
discussions with a third party concerning a merger, acquisition, change of
control, reorganization or sale of assets as described above, such Party shall
ensure that confidential information disclosed to it by the other Party hereto
pursuant to Section 6.3 above is not disclosed to the third party; and
furthermore, upon closing of any such merger, acquisition, change of control,
reorganization or sale of assets, the assigning Party will notify the non-
assigning Party in writing of such assignment and the non-assigning Party will
be entitled to request and receive a prompt return of its confidential
information that has been disclosed pursuant to Section 6.3. Any attempted
assignment in violation of this Section 7.6 shall be null and void. Each Party
shall be responsible to the other Party for all performance or other activities
by any subcontractor or agent of such Party.
7.7 TAXES
Lucent shall reimburse Supplier only for the following tax payments with
respect to transactions under this Agreement unless Lucent advises Supplier that
an exemption applies: state and local sales and use taxes, as applicable. Taxes
payable by Lucent shall be billed as separate items on Supplier's invoices and
shall not be included in Supplier's prices. At Lucent's expense and subject to
Lucent's direction and control, Lucent shall have the right to have Supplier
contest any such taxes that Lucent deems improperly levied.
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7.8 GOVERNMENT CONTRACT PROVISIONS
The following provisions regarding equal opportunity, and all applicable
laws, rules, regulations and executive orders specifically related thereto,
including applicable provisions and clauses from the Federal Acquisition
Regulation and all supplements thereto, are incorporated in this Agreement as
they apply to services performed under specific U.S. Government contracts: 41
CFR 60-1.4, Equal Opportunity; 41 CFR 60-1.7, Reports and Other Required
Information; 41 CFR 60-1.8, Segregated Facilities; 41 CFR 60-250.4, Affirmative
Action for Disabled Veterans and Veterans of the Vietnam Era (if in excess of
$10,000); and 41 CFR 60-741.4, Affirmative Action for Disabled Workers (if in
excess of $2,500), wherein "contractor" and "subcontractor" mean "Supplier." The
Product is a "commercial item," as that term is defined at 48 C.F.R. 2.101 (Oct
1995), containing "commercial computer software" and "commercial computer
software documentation," as such terms are used in 48 C.F.R. 12.212 (Sep 1995)
and will be provided to the U.S. Government only as a commercial end item.
Consistent with 48 C.F.R. 12.212 and 48 C.F.R. 227.7202-1 through 227.7202-4
(Jun 1995), all U.S. Government end users acquire the software incorporated in
the Product with only those rights set forth herein.
7.9 IMPLEADER
Supplier shall not implead or bring an action against Lucent based on any
claim by any person for personal injury or death to an employee of Lucent for
which Lucent has previously paid or is obligated to pay worker's compensation
benefits to such employee or claimant and for which such employee or claimant
could not otherwise bring legal action against Lucent.
7.10 REGISTRATION AND RADIATION STANDARDS
When Product furnished under this Agreement is subject to Part 68, Part 15
or any other part of the Federal Communication Commission's Rules and
Regulations, as may be amended from time to time (hereinafter "FCC Rules"),
Supplier warrants that such Product complies with the registration,
certification, type-acceptance and/or verification standards of the FCC Rules
including, but not limited to, all labeling, customer instruction requirements,
and the suppression of radiation to specified levels. Supplier shall also
establish periodic on-going compliance re-testing and follow a Quality Control
Program, submitted to Lucent, to assure that Product shipped complies with the
applicable FCC Rules. Supplier agrees to indemnify and save Lucent harmless from
any liability, claims or demands (including the costs, expenses and reasonable
attorney's fees on account thereof) that may be made because of Supplier's
noncompliance with the applicable FCC Rules. Supplier agrees to defend Lucent,
at Lucent's request, against such liability, claim or demand; provided that
Lucent provides Supplier (i) prompt written notice of the existence of such
claim, (ii) sole control of the defense and settlement of such claim, and (iii)
assistance in the defense or settlement of such claim at Supplier's reasonable
request and at Supplier's reasonable expense.
7.11 TOXIC SUBSTANCES AND PRODUCT HAZARDS
Supplier hereby warrants to Lucent that, except as expressly stated
elsewhere in this Agreement, all Product furnished by Supplier as described in
this Agreement is not defined as a
26.
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hazardous or toxic substance or material under applicable federal, state or
local law, ordinance, rule, regulation or order, and presents no abnormal
hazards to persons or the environment.
7.12 OZONE DEPLETING SUBSTANCES
Supplier warrants and certifies that all products, including packaging and
packaging components, provided to Lucent under this Agreement have been
accurately labeled in accordance with the requirements of 40 CFR Part 82 -
entitled "Protection of Stratospheric Ozone, Subpart E - The Labeling of
Products Using Ozone Depleting Substances." Supplier agrees to indemnify, defend
and save harmless Lucent, its officers, directors and employees from and against
any losses, damages, claims, demands, suits, liabilities, fines, penalties, and
expenses (including reasonable attorneys' fees) that may be sustained by reason
of Supplier's non-compliance with such applicable law or the terms of this
warranty and certification; provided that Lucent provides Supplier (i) prompt
written notice of the existence of such claim, (ii) sole control of the defense
and settlement of such claim, and (iii) assistance in the defense or settlement
of such claim at Supplier's reasonable request and at Supplier's reasonable
expense.
7.13 HEAVY METALS AND/OR CFC IN PACKAGING
Supplier warrants to Lucent that no lead, cadmium, mercury or hexavalent
chromium has been intentionally added to any packaging or packaging component
(as defined under applicable laws) to be provided to Lucent under this Agreement
and that packaging materials were not manufactured using and do not contain
chlorofluorocarbons. Supplier further warrants to Lucent that the sum of the
concentration levels of lead, cadmium, mercury and hexavalent chromium in the
packaging or packaging components provided to Lucent under this Agreement do not
exceed 100 parts per million. Upon request, Supplier shall provide to Lucent
Certificates of Compliance certifying that the packaging and/or packaging
components provided under this Agreement are in compliance with the requirements
set forth above in this Section.
7.14 CHLOROFLUOROCARBONS
Supplier hereby warrants that it is aware of international agreements and
legislation in several nations, including the United States, which limit or ban
importation of any product containing or produced using chlorofluorocarbons
("CFCs") and certain chlorinated solvents. Supplier hereby warrants that the
Product will conform to all current and future requirements established pursuant
to such agreements, legislation and regulations and that the Product will be
able to be imported and used lawfully under all such agreements, legislation and
requirements. Supplier also warrants that it is currently reducing or, if
Supplier is not the manufacturer of the Product, is currently causing its
manufacturing vendor to reduce and will, in an expeditious manner, eliminate,
or, as applicable, have its manufacturing vendor eliminate the use of ODC's in
the manufacture of the Product.
7.15 INSURANCE
7.15.1 Supplier shall maintain during the term of this Agreement:
(1) Workers' Compensation insurance as prescribed by
the law of the state or nation in which the services are performed;
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(2) employer's liability insurance with limits of at
least [***] for each occurrence;
(3) automobile liability insurance if the use of motor
vehicles is required, with limits of at least [***] combined single limit for
bodily injury and property damage per occurrence;
(4) Commercial General Liability ("CGL") insurance,
ISO 1988 or later occurrence form of insurance, including Blanket Contractual
Liability and Broad Form Property Damage, with limits of at least [***] combined
single limit for bodily injury and property damage per occurrence; and
(5) if the furnishing to Lucent (by sale or otherwise)
of material or construction services is involved CGL insurance endorsed to
include products liability and completed operations coverage in the amount of
[***] per occurrence.
7.15.2 All CGL and automobile liability insurance shall designate
Lucent Technologies Inc., its affiliates, and its directors, officers and
employees as additional insureds. All such insurance must be primary and non-
contributory and required to respond and pay prior to any other insurance or
self-insurance available. Any other coverage available to Lucent shall apply on
an excess basis. Supplier agrees that Supplier, Supplier's insurer(s) and anyone
claiming by, through, under or in Supplier's behalf shall have no claim, right
of action or right of subrogation against Lucent and its customers based on any
loss or liability insured against under the foregoing insurance. Supplier shall
furnish prior to the start of work certificates or adequate proof of the
foregoing insurance, including, if specifically requested by Lucent,
endorsements and policies. Lucent shall be notified in writing at least thirty
(30) days prior to cancellation of or any change in the policy. Insurance
companies providing coverage under this Agreement must be rated by A-M Best with
at least an A-rating.
7.15.3 To the extent practicable under the circumstances, Supplier
will endeavor in good faith to require its subcontractors working on Lucent
projects to maintain the types of insurance in the amounts set forth in Section
7.15.1. Also, to the extent practicable under the circumstances, Supplier will
endeavor in good faith to obtain from such subcontractors certificates of the
insurance actually maintained by such subcontractors so that Lucent may review
such certificates if Lucent so requests.
7.16 CHOICE OF LAW
This Agreement and all transactions under it shall be governed by the laws
of the State of New Jersey excluding its choice of laws rules and excluding the
Convention for the International Sale of Goods.
7.17 SEVERABILITY
If any of the provisions of this Agreement shall be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate or
render unenforceable the entire Agreement, but rather the entire Agreement shall
be construed as if not containing the particular invalid or
28.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
unenforceable provision or provisions, and the rights and obligations of
Supplier and Lucent shall be construed and enforced accordingly.
7.18 SECTION HEADINGS
The headings of the Sections in this Agreement are inserted for convenience
only and are not intended to affect the meaning or interpretation of this
Agreement.
7.19 WAIVER
The failure of either Party at any time to enforce any right or remedy
available to it under this Agreement or otherwise with respect to any breach or
failure by the other Party shall not be construed to be a waiver of such right
or remedy with respect to any other breach or failure by the other Party.
7.20 DISPUTE RESOLUTION
(A) The following procedures shall apply to any dispute or
disagreement between the Parties or any of their Related Parties (i.e., such
Party's wholly owned subsidiaries, and the respective divisions, heirs,
successors and assigns of such Party and its wholly owned subsidiaries) arising
out of this Agreement.
(B) First:
(I) either Party may give written notification of such
dispute or disagreement to the other Party and
(II) the Parties shall communicate with each other promptly
with a view to resolving such dispute or disagreement within twenty-one (21)
days (or such extended period as the Parties agree is appropriate in any case)
after such written notification is given.
(C) The giving of any notice regarding any dispute or
disagreement under this Section 7.20 shall toll the running of all applicable
statutes of limitation until the later of (i) ninety (90) days following the
giving of such notice or (ii) thirty (30) days following the termination of
discussions between the Parties concerning such dispute or disagreement.
(D) Second, if at the end of the twenty-one (21) day period
referenced in Section 7.20(b) (as it may be extended) such dispute or
disagreement has not been resolved to the satisfaction of both Parties, either
Party may request in writing that such dispute or disagreement be the subject of
non-binding mediation. Following such request, the Parties shall endeavor in
good faith promptly to identify a single person (who shall be a person with
experience and good reputation) who shall assist the Parties in discussing such
dispute or disagreement and in attempting to reach a mutually acceptable
business resolution. Such mediation process shall terminate not later than
thirty (30) days following the request therefor (or such extended or shorter
period as the Parties agree is appropriate). All applicable statutes of
limitation shall be tolled during the period of mediation.
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(E) Third, if at the end of the thirty (30) day period
referenced in Section 7.20(d) (as it may be extended or shortened) such dispute
or disagreement has not been resolved to the satisfaction of both Parties,
either Party (the "complainant") may commence binding arbitration by giving the
other Party (the "respondent") notice in writing (the "initiating notice")
setting forth in reasonable detail the nature of its claim and the relief
requested stating that the complainant is invoking the procedures set forth in
this Section 7.20 (e) and (f) and naming the complainant's representative on the
Arbitration Panel (as defined below). Within twenty-one (21) days of receipt of
an initiating notice, the respondent shall give the complainant notice in
writing (the "response") setting forth in reasonable detail: (i) the basis of
its response to the claim; (ii) the nature of any counterclaim it has against
the complainant arising from the same set of facts and circumstances that gave
rise to the original claim; (iii) any other counterclaim that Party wishes to
bring at that time (although the Party has no obligation to bring such
counterclaims at that time); (iv) the relief requested; and (v) naming the
respondent's representative on the Arbitration Panel. The two representatives
shall select a third person who is mutually acceptable to them. If the
representatives fail to make such selection within twenty-one (21) days, the
complainant and the respondent shall each replace its representative with a new
representative and the new representatives shall be subject to the preceding
sentence and this sentence. Once a third person is selected, such person
together with the representatives of the complainant and the respondent shall
form the Arbitration Panel. The date upon which the Arbitration Panel is formed
shall be the "Commencement Date."
(F) The Arbitration Panel shall conduct proceedings to determine
the merits under applicable law of the claims set forth in the initiating notice
and the response. The proceedings shall be administered by JAMS/Endispute in
accordance with its Comprehensive Arbitration Rules and Procedures in effect as
of the Effective Date, subject to the following additional rules:
(I) the proceedings shall take place in New York City;
(II) the Arbitration Panel (including, if necessary, any
replacement(s) to the Arbitration Panel) shall be selected as set forth in
Section 7.20(e);
(III) the available relief shall include damages,
injunctive relief and equitable relief to the extent allowed under the
applicable law, this Agreement and any other agreement between the Parties;
(IV) the Parties shall attempt in good faith promptly to
agree on the nature and extent of any discovery in connection with the
arbitration, provided that, in the absence of such agreement, discovery shall be
governed by JAMS/Endispute's Comprehensive Arbitration Rules and Procedures. In
addition, the applicable law with respect to privilege and other protections
from disclosure, including the work product doctrine shall apply;
(V) the final decision of the Arbitration Panel (the
"Award") shall be issued within six months of the Commencement Date (the date of
issuance of the Award being the "Award Date") and must be joined by at least two
members of the Arbitration Panel;
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(VI) each Party to the proceedings shall pay its own costs
in connection with the proceedings, including the costs and expenses of its
representative on the Arbitration Panel, and the Parties shall share equally the
other costs of the proceedings, including the fees of the third member of the
Arbitration Panel, except that the prevailing Party shall be entitled to recover
its attorneys' fees incurred in prosecution thereof.
(G) In accordance with the Federal Arbitration Act, 9 U.S.C.
(S)1 et seq., the Award shall be final and binding and judgment thereon may be
entered by any state or federal court having jurisdiction thereof.
(H) Nothing in this Section 7.20 shall be construed to preclude
either Party from seeking injunctive relief in a court of competent jurisdiction
to prevent imminent irreparable harm. The dispute resolution procedures set
forth herein shall be stayed pending disposition of any application for such
relief. The Parties agree that a court of competent jurisdiction may consider
the merits of any claim that is subject to the dispute resolution procedures set
forth herein to the extent necessary to resolve any permissible application for
injunctive relief.
7.21 EXPORT CONTROL
Neither Party shall use, distribute, transfer or transmit any Products,
software or Technical Information (even if incorporated into other products)
provided under this Agreement except in compliance with U.S. export laws and
regulations (the "Export Laws"). Neither Party shall directly or indirectly,
export or re-export the following items to any country which is in the then
current list of prohibited countries specified in the applicable Export Laws:
(a) software or technical data disclosed or provided to one Party by the other
or its subsidiaries or affiliates; or (b) the direct product of such software or
technical data. Each Party agrees to promptly inform Lucent in writing of any
written authorization issued by the U.S. Department of Commerce office of export
licensing to export or re-export any such items referenced in (a) or (b).
Supplier also will not, without the prior written consent of Lucent, export or
re-export, directly or indirectly, any technical data or software furnished
hereunder from the country in which Lucent first provided the technical data or
software to Supplier hereunder, except to the United States. The obligations
stated above in this clause will survive the expiration, cancellation, or
termination of this Agreement or any other related agreement.
7.22 RECORDS
Supplier shall maintain complete and accurate records of all amounts
billable to and payments made by Lucent hereunder, in accordance with generally
accepted accounting practices. Supplier shall retain such records for a period
of three (3) years from the date of invoice for the final shipment of Products
covered by this Agreement. Supplier agrees to provide supporting documentation
concerning any disputed amount or invoice to Lucent within thirty (30) days
after Lucent provides written notice of the dispute to Supplier.
7.23 TERMINATION
7.23.1 Lucent may terminate this Agreement for convenience by giving
Supplier ninety (90) days prior written notice. In such event, notwithstanding
any other provision herein
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to the contrary, any supply or support obligations stated to survive expiration
or termination of the Agreement shall also terminate, except that the following
obligations shall survive termination for convenience as follows: (i) Supplier
shall fulfill existing purchase orders accepted by Supplier prior to the
effective date of termination, as set forth in Section 1.3; and (ii) Supplier
shall fulfill its warranty obligations to Lucent for delivered Product under
Section 5 in existence as of the effective date of termination.
7.23.2 Either Party may terminate this Agreement upon ninety (90)
days prior written notice if the other Party shall be in material default of any
of the terms, conditions or covenants of this Agreement unless the defaulting
Party cures the breach during the notice period.
7.24 PUBLICITY
Promptly following the Effective Date, Lucent shall issue a mutually-
acceptable press release announcing this transaction. The Parties' goal is to
make such press release within two (2) weeks following the Effective Date.
Supplier may also make a similar, mutually-acceptable press release announcing
this transaction. Supplier and Lucent may not make press or other public
announcements or releases relating to this Agreement without the prior written
approval of the other Party. Such approval will not be unreasonably withheld or
delayed.
7.25 SURVIVAL OF OBLIGATIONS
Sections 1.2, 1.6, 2.2, 2.4, 2.5, 2.7, 2.8, 2.12, 3.1, 3.7, 3.8, 3.9, 3.14,
3.15, 4.4, 5.1, 5.3, 5.4, 5.5 (in accordance with its terms), 6.1, 6.3, 7.1,
7.25, 7.26, 7.28, 7.29, and 7.30 shall survive any termination or expiration of
this Agreement for the earlier of a period of five (5) years or such time as all
outstanding Lucent obligations regarding the Product to its existing customer
base for Products are met. In addition, Section 7.2 and Section 7.20 shall
survive any expiration or termination of the Agreement indefinitely.
7.26 LIMITATION OF LIABILITY.
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY LOST
PROFITS, CONSEQUENTIAL DAMAGES, INCIDENTAL DAMAGES OR SPECIAL DAMAGES,
REGARDLESS OF CAUSE OF ACTION, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. EACH PARTY ACKNOWLEDGES THAT THIS LIMITATION OF
LIABILITY IS AN ESSENTIAL ELEMENT OF THE BARGAIN OF THE PARTIES AND THAT IN ITS
ABSENCE THE ECONOMIC TERMS OF THIS AGREEMENT WOULD BE SUBSTANTIALLY DIFFERENT.
7.27 STEERING COMMITTEE. The Parties agree to establish a steering
committee comprised of at least two (2) representatives from each Party, but in
all events an equal number from each Party. The steering committee's activities
are contemplated to include, but are not limited to, the following: issue
resolution, Agreement management, customer bid issues, sales tracking reports,
risk manufacturing builds, Product support strategies, pricing, training,
marketing strategies, implementation and tracking of support plans and other
customer or business issues that the steering committee deems reasonably
appropriate. These activities are
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not limited exclusively to the steering committee and may be discussed by other
representatives of the Parties as appropriate. The steering committee will meet
quarterly unless the Parties otherwise mutually agree.
7.28 RELATIONSHIP OF THE PARTIES.
The relationship of the Parties under this Agreement shall be and at all
times remain one of independent contractors and not principal and agent,
employer and employee, franchisor and franchisee, partners or joint venturers.
Neither Party shall have the authority to assume or create obligations on behalf
of the other Party. Each Party shall employ its own personnel and contractors
and shall be solely responsible for their acts and be responsible for payment
of all unemployment, Social Security, and other payroll taxes, including
contributions required by law.
7.29 COUNTERPARTS.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which shall constitute one and the same
instrument.
7.30 ENTIRE AGREEMENT
This Agreement, including all appendices attached hereto, shall constitute
the entire agreement between the Parties with respect to the subject matter of
this Agreement and shall not be modified or rescinded, except by a writing
signed by Supplier and Lucent. Printed provisions on the reverse side of
Lucent's purchase orders (except as specified otherwise in this Agreement) and
all contradictory or additional provisions on Supplier's forms shall be deemed
deleted and of no force or effect. Estimates or forecasts furnished by Lucent
shall not constitute commitments. The provisions of this Agreement supersede all
contemporaneous oral agreements and all prior oral and written communications
and understandings of the Parties with respect to the subject matter of this
Agreement.
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IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed by its duly authorized representatives on the respective dates entered
below
COPPER MOUNTAIN NETWORKS, INC. LUCENT TECHNOLOGIES INC.
By: /s/ MICHAEL O. STAIGER By: /s/ HERBERT J. IMBORNONI
------------------------------ ---------------------------
Name: Michael O. Staiger Name: Herbert J. Imbornoni
---------------------------- -------------------------
Title: Vice President Title: Purchasing Manager
--------------------------- ------------------------
Date: 11/17/98 Date: November 17, 1998
---------------------------- -------------------------
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APPENDIX 1
PRICING TERMS
Standard Systems Current Standard Systems are described in Schedule A.
Additional Standard Systems will be created in response to
customer needs.
Standard System and
Line Module Pricing First [***] [***] discount off Supplier list price
Next [***] [***] discount off Supplier list price
Thereafter [***] discount off Supplier list price
Parts Pricing First [***] [***] discount off Supplier list price
Next [***] [***] discount off Supplier list price
Thereafter [***] discount off Supplier list price
All of the above volume break points refer to Lucent's
cumulative net purchasing volume since contract inception.
Supplier List Prices Current Supplier list prices appear in Schedule B.
A-1.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
SCHEDULE A
STANDARD SYSTEM CONFIGURATIONS
STANDARD SYSTEM 1
1 CE200 Chassis
1 System Control Module
1 Buffer Card
1 DS3 Frame Relay Module
2 Power Supplies
2 LC4 24-port SDS Line Modules
STANDARD SYSTEM 2
1 CE200 Chassis
1 System Control Module
1 Buffer Card
1 DS3 Frame Relay Module
2 Power Supplies
8 LC4 24-port SDSL Line Modules
STANDARD SYSTEM 3
1 CE200 Chassis
1 System Control Module
1 Buffer Card
1 DS3 Frame Relay Module
2 Power Supplies
2 LC4 24-port SDSL Line Modules
1 LC5 24-port IDSL Line Module
STANDARD SYSTEM 4
1 CE200 Chassis
1 System Control Module
1 Buffer Card
1 DS3 Frame Relay Module
2 Power Supplies
6 LC4 24-port SDSL Line Modules
2 LC5 24-port IDSL Line Modules
SCHEDULE A-1.
<PAGE>
SCHEDULE B
SUPPLIER LIST PRICES
OCTOBER 1, 1998
Standard Systems
Standard System 1 [***]
Standard System 2 [***]
Standard System 3 [***]
Standard System 4 [***]
LINE MODULES
LC4 24-port SDSL Line Module [***]
LC5 24-port IDSL Line Module [***]
PARTS
Chassis
CE200 Chassis (including 1 Buffer Card, [***]
1 System Control Module and 1 Power
Supply)
Chassis Components
Buffer Card [***]
System Control Module [***]
Power Supply [***]
WAN Interfaces
V.35 WAN Module (2 port) [***]
HSSI WAN Module [***]
DS-3 Frame Module [***]
Modems
CR201 SDSL Modem [***]
CR201 IDSL Modem [***]
Additional FSA/ICA Support [***]
Repairs Not Covered by Warranty [***]
1
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
No Trouble Found [***]
If repairs are conducted at a location other than a Supplier facility, then
reasonable travel time and expenses will be included. The minimum service
charge will be for [***] of work, regardless of time actually worked.
2
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
APPENDIX 2
1. CopperEdge 200 Fast Packet DSL Concentrators shall conform to the
description, shape, performance and functions set forth in the Supplier's
CopperEdge 200 Installation and Operation Guide, a copy of which has been
provided to Lucent.
2. CopperView EMS Element Management Systems shall conform to the description,
shape, performance and functions set forth in the Supplier's CopperView EMS
Installation and Operation Guide, a copy of which has been provided to
Lucent.
3. Copper Rocket Model 201 SDSLs shall conform to the description, shape,
performance and functions set forth in the Supplier's CopperRocket 201 SDSL
Installation and Operating Guide, a copy of which has been provided to
Lucent.
4. Copper Rocket Model 201 IDSLs shall conform to the description, shape,
performance and functions set forth in the Supplier's CopperRocket 201 IDSL
Installation and Operating Guide, a copy of which has been provided to
Lucent.
<PAGE>
Agreement No. ___________
Page 1 of 5
Appendix 3
Appendix 3 Quality
QUALITY
(A) Supplier commits to ensure that all manufacturing, and design operations,
including any key sub-contractor, or contract manufacturing suppliers,
which contribute to the design, development, production, delivery and
service of material are ISO 9000 registered by an accredited Registrar
pursuant to Section _____ QUALITY.
(B) Supplier commits to having a continuous improvement program in place which
will allow it to attain and maintain "acceptable" ratings (or equivalent)
on all quality system elements per Supplier Capability Assessment (SCA), or
other type of Company assessment, as periodically performed by Company. An
"acceptable" element is defined as one where the quality system meets the
"general intent" of the quality system element and is fully implemented to
maintain the quality system and product quality. No significant
deficiencies encountered that would jeopardize the quality system, and
product quality and/or reliability.
(C) Supplier commits to establish quality control (qc) verification points
throughout the manufacturing process. These verification points should be
located in-process as well as after PRODUCT has completed all manufacturing
operations. The scope of these qc verification points shall be to validate,
through visual and mechanical inspections and tests, and with the use of
statistically valid sampling plans, that PRODUCT conforms to Supplier's
manufacturing, product and process specifications, standards of acceptable
workmanship, as well as other specification's which may be provided by
Company. Company reserves the right to review these qc points and make
suggestions for improvement. Supplier commits to address these suggestions
through the implementation of appropriate corrective actions.
(D) Supplier commits to establish an end of the line Quality Assurance product
audit. The focus of this audit shall be to replicate user application of
PRODUCT as specified by Company's customer. Test and examination of PRODUCT
under the quality audit shall be at a system level, and shall include but
is not limited to:
a) A system for continuous monitoring of all primary and ancillary
product functions and fault detection of the PRODUCT while under
this test.
Supplier shall continuously review customer return data to ensure that the
scope of the product quality assurance audit function includes the
requirement(s)/condition(s) under which the return failed.
Supplier shall perform a detailed failure mode analysis of all PRODUCT
found defective through the quality assurance audit in line with the
requirements and process outlined in paragraph F.
Supplier agrees to provide to Company on a monthly basis, results of the
quality assurance product audit in a format specified by Company.
(E) Supplier commits to establishing a program of tracking return rates. The
following is the suggested method for tracking, calculating, and tracking
customer returns. Company and supplier may mutually agree to modify this
method as appropriate. PRODUCT which has been in operation for any period
of time up to, and including one full year shall be considered part of this
tracking program. For the purpose of this section, the term "product" shall
be used to define the lowest replaceable unit (lru) of PRODUCT supplied to
Company.
For the purpose of calculating the return rate, the following definitions
apply:
Lucent Technologies Proprietary
<PAGE>
Agreement No. ___________
Page 2 of 5
Appendix 3
RTM(x) = The quantity of lru's which were manufactured in the Target
Month;(x) that have been returned during the period beginning the 4th month
after the Target Month and ending the 15th month from the Target Month.
PTM(x) = The total number of lru's in the Target Month;(x). All returns
will be included in the calculation of the return rate including, but not
limited to, failures, no trouble founds, and recalls. Failed safety devices
are excluded. A Target Quarter Return Rate (TQRR) is to be calculated using
the following equation:
TQRR = 10,000 x [[RTM(1)+RTM(2)+RTM(3)]/[PTM(1)+PTM(2)+PTM(3)]]
Where:
"(1)" refers to the first month of the Target Quarter
"(2)" refers to the second month of the Target Quarter
"(3)" refers to the third month of the Target Quarter
This calculation shall be made on a quarterly basis for the product
manufactured under this contract.
The Supplier agrees to update and report TQRR's on a quarterly basis to
Company, and to comply with the Annual Return Rate (ARR) requirement in
accordance with the following schedule:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Manufacture Year ARR Requirement Annual Measurement Due
- --------------------------------------------------------------------------------------
<S> <C> <C>
Jan xxxx- Dec xxxx 360 in 10,000 April, xxxx
- --------------------------------------------------------------------------------------
Jan xxxx Dec xxxx 240 in 10,000 April, xxxx
- --------------------------------------------------------------------------------------
</TABLE>
The ARR is 10,000 times the summation of the number of returns received for
the Target Months of the Manufacture Year divided by the summation of the
manufacturing populations for the Target Months of the Manufacture Year.
Supplier commits to provide to company on a monthly basis, the cumulative
year to date results of the ARR until the annual measurement requirement is
due.
(F) Supplier commits to establishing a system for tracking and analysis all
PRODUCT returned by Company to it, as well as any PRODUCT failures which
occur through the company's end of the line quality assurance audit. For
all PRODUCT in the above two categories, supplier shall perform a failure
mode analysis, which at a minimum will be down to the component level.
Component level failure modes will be recorded, and failed components found
defective will be accumulated for the purpose of determining repetitive
occurrences.
PRODUCT shall be considered defective if it fails to meet the warranty
specifications under this Agreement (including performance and appearance
Specifications) or if during customer testing, installation, or use, the
PRODUCT fails to operate as expected or specified.
If the analysis of a Company return is found to be within the
specifications of this agreement (i.e., a no trouble found condition), then
Supplier shall track these no trouble found conditions and notify Company
of said findings at a minimum of a monthly interval, so that appropriate
investigative measures may be taken to determine the root cause.
(G) If a Target Quarter Return Rate (TQRR) is found to exceed the applicable
ARR requirements specified in paragraph E, or repetitive occurrences are
observed with regard to
Lucent Technologies Proprietary
<PAGE>
Agreement No. ___________
Page 3 of 5
Appendix 3
component level failures then the supplier shall provide a written
Corrective Action Report to the Company, explaining in detail the nature of
the problem detected, and the step(s) Supplier proposes to correct the
problem. As part of the plan to correct the problem, it is agreed that the
Supplier shall:
a) Incorporate the remedy in affected PRODUCT.
b) Ship all subsequent PRODUCT incorporating the required modification
correcting the problem at no additional charge to Company; and
c) Repair and/or replace previously shipped PRODUCT that may contain
the same problem trend. In the event that Company incurs costs due
to such repair and/or replacement, including but not limited to
labor and shipping costs, Supplier shall reimburse Company for such
costs. Supplier shall bear shipping costs and risk of in transit
loss and damage for such repaired and/or replaced PRODUCT when
shipped from supplier to Company or customer..
Supplier and Company shall mutually agree in writing as to the
implementation schedule of the corrective action plan. Supplier agrees to
use its best efforts to implement the plan in accordance with the agreed
upon schedule. It is also agreed that the Company shall be entitled to
postpone at no charge to Company, further deliveries of orders until such
time as the remedy is implemented consistent with this Section.
(H) As part of a program of continuous improvement, Supplier agrees to
establish annually, improvement goals for a series of key quality
objectives. These goals should include, but are not limited to a) customer
return rates as specified in Section E, b) Quality Assurance product
quality audit defect rates, c) final system test yields. Supplier agrees to
track these goals on a monthly basis, and to commit the resources necessary
for the attainment of these goals.
Lucent Technologies Proprietary
<PAGE>
Agreement No. ___________
Page 4 of 5
Appendix 3
(I) The following paragraph summarizes the requirements for providing data
and information to Company as per paragraphs A through H.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Ref. Data Required Frequency Company's
Par. # Recipient
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A Corrective Action As dictated by Assessment Lead Assessor
Response to Assessment
- -----------------------------------------------------------------------------------------------
B ISO Registration copies When requested by Company To be specified by
Company
- -----------------------------------------------------------------------------------------------
C Corrective Action As dictated by the audit To be specified by
response to company's Company
audit of QC practices
- -----------------------------------------------------------------------------------------------
D Quality Assurance Results Monthly Company's quality QA
contact
- -----------------------------------------------------------------------------------------------
E Monthly Return Rate data Quarterly Company's quality QA
contact
- -----------------------------------------------------------------------------------------------
E Annual Return Rate Monthly Company's quality QA
Summary Results contact
- -----------------------------------------------------------------------------------------------
F "No trouble founds" Monthly Company's quality QA
summary data on customer contact
returns
- -----------------------------------------------------------------------------------------------
G Corrective Action Report As dictated by Supplier's Company's quality QA
data on repetitive contact
component level failure
mode analysis (FMA) on
customer returns
- -----------------------------------------------------------------------------------------------
G Corrective Action Report If return rates exceed Company's quality QA
pre-established thresholds contact
per paragraph E
- -----------------------------------------------------------------------------------------------
H Quality Improvement Goals Annually Company's quality QA
contact
- -----------------------------------------------------------------------------------------------
</TABLE>
(J) In the event that the Supplier 1) exceeds the Annual Return Rate
------------------------------
established in Section E by more than 50% during any period of three months or
---
more, then Company may 1a) develop and implement such remedy for already
purchased PRODUCT defined under the Corrective Action Plan, the cost of which
will be borne by the Supplier; and/or 2a) cancel or postpone other orders and/or
terminate this Agreement subject to the provisions of the TERMINATION Section.
Supplier reserves the right, as a substitution for 1a) to 2a) above, to instruct
Company to return all PRODUCT that is affected by the problem for full refund,
payable by Supplier to Company within thirty (30) days after receipt of returned
PRODUCT (with risk of loss or in-transit damage to be borne by Supplier).
In the event that Supplier fails to complete and issue Corrective Action Reports
as required in Section G, Company may put Supplier on notice that continued non-
compliance for more than 30
Lucent Technologies Proprietary
<PAGE>
Agreement No. ___________
Page 5 of 5
Appendix 3
days could result in cancellation or postponement of orders and/or terminate
this Agreement subject to the provisions of the TERMINATION Section.
Lucent Technologies Proprietary
<PAGE>
Agreement No. GA10097
Page 1 of 2
Appendix 4
APPENDIX 4
ENGINEERING CHANGE CONTROL PROCEDURES
Supplier agrees to perform and administer all "Product Changes" in accordance
with Bell Communications Research document GR 209 CORE, Issue 2, January 1996,
titled "Generic Requirements for Product Change Notices", which is incorporated
herein by reference.
Supplier may make changes to PRODUCT, modify drawings, or make changes to
manufacturing specifications, provided the changes, modifications, or
substitutions DO NOT have an impact on the performance, reliability, form, fit,
or function of the PRODUCT without prior notification to Company. Supplier
shall maintain written records of all such changes, and make these records
available for Company's review upon request.
For such changes or modifications which DO have an impact on performance,
reliability, form, fit, or function, Supplier shall identify each such change or
modification in accordance with the classifications contained in the above Bell
Communications Research document via a Product Change Notification (PCN) form.
The Company shall immediately acknowledge receipt of the PCN to the
address/contact as stated on the PCN form and shall have thirty (30) calendar
days to advise Supplier if the proposed change or modification is unacceptable.
If Company notifies Supplier as required herein, that the proposed change or
modification is unacceptable, Supplier shall not implement such change or
modification. Company may reject any PRODUCT offered by Supplier which has been
changed or modified in a manner unacceptable to Company.
If Company has not notified Supplier that the change or modification is
unacceptable within thirty (30) calendar days following issuance of the Change
Notification, Supplier shall implement the change or modification as described
in the Change Notification.
If during the review of a proposed Product Change Notification, which has a
classification of either A or AC, issued by Supplier during the Warranty period
of the affected PRODUCT, the Company determines that implementation of the
PRODUCT CHANGE will cause the Company to incur "unreasonable expenses" such as,
but not limited to, expenses resulting from escorting Supplier's personnel to
numerous Company locations containing affected PRODUCT or repeated product
changes to the same item of PRODUCT within a one (1) year time period, the
Company shall so notify Supplier, in writing, prior to the implementation of
such PRODUCT CHANGE.
Upon such notification, the Company and Supplier shall jointly determine the
implementation procedure which will utilize the Supplier's and/or Company's
personnel in the most cost effective manner.
<PAGE>
Agreement No. GA10097
Page 2 of 2
Appendix 4
If Supplier and the Company conclude the agreed to implementation procedure will
probably cause the Company to incur "unreasonable expenses", the Company and
Supplier shall jointly determine the likely extent of such expenses and agree,
in writing, to a "not to exceed" estimate for such expenses. In no event shall
such estimate exceed the Company's purchase price for the PRODUCT to be changed.
The Company shall track and record all such expenses associated with the PRODUCT
CHANGE. Upon completion of its efforts, the Company shall submit to Supplier,
for reimbursement by Supplier, an invoice of the Company's "unreasonable
expenses" within forty-five (45) calendar days after the Company's receipt of
such invoice.
Issuing a Class A or AC product Change Notification shall not constitute an
agreement to provide such a change, but shall be construed as a recommendation
by the Supplier that the change is absolutely necessary.
<PAGE>
Appendix 5
DEMAND PULL PROCEDURES [DRAFT]
(A) For Product items mutually agreed upon by Lucent and Supplier, Lucent shall
issue an annual order during the term of this Agreement which will state
Lucent's estimated annual purchases for such Product (the "EAU order"). Each
week Lucent shall provide Supplier with a fifty-two (52) week forecast for each
such Product (the "Forecast"). Supplier shall reference the EAU order number on
its shipping and invoicing documents. Said EAU order and Forecast shall be for
planning purposes only and, except to the extent set forth in paragraph D below,
shall not be deemed a commitment to purchase or supply the amount set forth in
the EAU order or Forecast.
(B) Supplier shall maintain (1) an inventory of Supplier-inspected finished
Product equivalent to weeks _______________ of the then current Forecast and (2)
Product work in process and raw materials in the aggregate sufficient to
manufacture such Product equivalent to weeks ______________ or the appropriate
number as determined by Supplier and Lucent by the then current Forecast.
(C) Supplier shall review the weekly Forecast and make adjustments to Supplier's
inspected inventory, work in process and raw materials and components based upon
increases/decreases in the Forecast.
(D) Lucent's commitment for the Product shall be limited to: (1) the quantities
set forth in the "Supplier Action" column of the Forecast and (2) the inspected
inventory, work in process and raw materials as set forth in paragraph B above.
Lucent's liability for the items in this paragraph D(2) shall be limited to:
(a) For inspected inventory (not useable in Supplier's other operations or
salable to Supplier's other customers within ____ weeks following receipt of
notice from Lucent): the unit prices set forth in this Agreement;
(b) For raw materials: Supplier's purchase price of such raw materials (that
cannot be returned or are not usable in Supplier's other operations or salable
to Supplier's other customers within ____ weeks following receipt of notice from
Lucent); note: Lucent and Supplier should identify these raw materials and
associated costs as much as is possible upfront.
(c) For work in process: the actual costs incurred by Supplier in procuring
and manufacturing Product (not usable in Supplier's other operations or salable
to Supplier's other customers within ____ weeks following receipt of notice from
Lucent); less
(d) Any salvage value thereof.
If requested, Supplier agrees to substantiate such costs with proof reasonably
satisfactory to Lucent.
1
<PAGE>
(E) Termination - Lucent may at any time, and without cause, terminate any or
all EAU orders, in whole or in part, upon written notification to Supplier. Upon
receipt of such notice, Supplier shall immediately stop work as specified in the
notice to Supplier.
Lucent's liability to Supplier with respect to such termination shall be limited
to the commitments set forth in paragraph D above. Upon such termination, the
parties shall meet promptly to determine the inspected, finished Product, work
in process and raw material for which Lucent is responsible as set forth above.
Supplier shall ship the inspected finished Product (to the extent not already in
transit) and raw materials to Lucent pursuant to shipping schedules agreed upon
by the Parties. As to the work in process, Supplier shall, at Lucent's option,
ship it to Lucent pursuant to shipping schedules agreed upon by the Parties or
scrap it.
2
<PAGE>
Appendix 6: Non-Disclosure Agreement
<PAGE>
NON-DISCLOSURE AGREEMENT
THIS AGREEMENT, effective as of August 24, 1998 is by and between LUCENT
TECHNOLOGIES INC., a Delaware corporation, with principal offices located at 600
Mountain Avenue, Murray Hill, New Jersey 07974, on behalf of itself and its
affiliates ("Lucent"), and COPPER MOUNTAIN NETWORKS, INC., a California
corporation, with offices located at 2470 Embarcadero Way, Palo Alto, CA 94303
("Copper Mountain") (hereinafter collectively the "Parties").
WHEREAS, the Parties, for their mutual benefit, desire to disclose to one
another certain specifications, designs, plans, drawings, software, data,
prototypes or other business, technical, and/or marketing plans and strategies,
pricing information, customer information or other business and technical
information pertaining to Lucent's purchase of devices and associated services
from Copper Mountain (hereinafter "INFORMATION"), which INFORMATION is
proprietary to the disclosing Party.
NOW, THEREFORE, the Parties agree as follows:
1. INFORMATION disclosed pursuant to this Agreement shall be used only for
the purpose of exploring, evaluating and implementing a potential OEM
relationship between the Parties, which relationship shall be
formalized in separate written agreements.
2. This Agreement is effective from the date first written above
("Effective Date") and shall continue in effect for a period of three
(3) year (the "Term") unless terminated earlier in writing by either
Party. This period may be extended or terminated earlier upon mutual
written agreement of the Parties. This Agreement applies to INFORMATION
disclosed by the Parties during the Term of the Agreement and such
INFORMATION shall be subject to the confidentiality obligations set
forth in this Agreement for three (3) years commencing on the date of
disclosure.
3. The receiving Party shall hold the INFORMATION in confidence, shall use
the INFORMATION only for the purpose set forth in Section 1 above,
shall reproduce the INFORMATION only to the extent necessary for the
above purpose and shall not disclose the INFORMATION to any third party
without the prior written approval of the other Party. The receiving
Party may, however, disclose the INFORMATION to its employees,
consultants and contractors (including, without limitation, its legal
counsel and accountants) with a need to know; provided, that the
receiving Party binds those employees, consultants and contractors to
terms at least as
<PAGE>
- 2 -
restrictive as those stated herein, advises those employees,
consultants and contractors of their confidentiality obligations, and
indemnifies the disclosing Party for any breach of those obligations.
4. INFORMATION shall be subject to the restrictions of paragraphs 1 and
3, if it is in writing or other tangible form, only if clearly marked
as "confidential," "proprietary" or "restricted" when disclosed to the
receiving Party or, if not in tangible form, its proprietary nature
must first be announced; and it must be summarized in writing, with a
copy of the writing being furnished to the receiving Party within
thirty (30) days of the disclosure of intangible information.
5. These restrictions on the use or disclosure of INFORMATION shall not
apply to any INFORMATION:
a. which is independently developed by or for the receiving
Party or its affiliated company; or
b. which is lawfully received free of restriction from
another source; or
c. after it has become generally available to the public
without breach of this Agreement by the receiving Party or
its affiliated company; or
d. which at the time of disclosure to the receiving Party can
be demonstrated to have been known to that Party or its
affiliated company free of restriction;
e. which the disclosing Party agrees in writing is free of
such restrictions; or
f. which the receiving Party is required to disclose under
applicable laws, rules and regulations, provided that the
receiving Party shall first notify the disclosing Party of
such required disclosure and afford the disclosing Party
the opportunity to seek a protective order relating to
such disclosure.
6. Each Party shall protect the INFORMATION disclosed to it by the other
Party with at least the same degree of care as it normally exercises
to protect its own proprietary information of a similar nature.
7. Information, other than confidential INFORMATION identified and
furnished as provided above, shall not be subject to any restriction
<PAGE>
- 3 -
by the disclosing Party as to the receiving Party's disclosure or use
thereof.
8. No license to a Party, under any trademark, patent, copyright, mask
work protection right or any other intellectual property right, is
either granted or implied by the conveying of INFORMATION to that
Party. None of the INFORMATION which may be disclosed or exchanged by
the Parties shall constitute any representation, warranty, assurance,
guarantee or inducement by either Party to the other of any kind, and,
in particular, with respect to the non-infringement of trademarks,
patents, copyrights, mask work protection rights or any other
intellectual property rights, or other rights of third persons or of
either Party.
9. Neither this Agreement nor the disclosure or receipt of INFORMATION
shall constitute or imply any promise or intention to make any purchase
of products or services or to make any equity investment by either
Party or its affiliated companies or any commitment by either Party or
its affiliated companies with respect to the present or future
marketing of any product or service.
10. All INFORMATION shall remain the property of the disclosing Party and
shall be returned upon written request or upon the receiving Party's
determination that it no longer has a need for such INFORMATION. The
receiving Party may, however, retain one copy of all written materials
returned to provide an archive record of the disclosure; provided that
such archival copy may not be used for any other purpose and shall
remain subject to the terms and conditions of this Agreement.
11. All INFORMATION in written form shall be furnished only to the
following representatives, or successor representatives that have been
designated in writing:
Lucent Technologies Inc.
Name: Linda Manchester
------------------------------------
Title: Director
------------------------------------
Address: 67 Whippany Road
------------------------------------
Whippany
------------------------------------
New Jersey 07981
------------------------------------
<PAGE>
- 4 -
Telephone: (973) 386
------------------------------------
Copper Mountain Networks, Inc.
Name: Michael Staiger
------------------------------------
Title: Vice President, Business Development
------------------------------------
Address: 2470 Embarcadero Way
------------------------------------
Palo Alto, CA 94303
------------------------------------
Telephone: (650) 858-8500
------------------------------------
12. This Agreement shall be governed by the laws of the State of New York,
USA, applicable to contracts entered into and to be wholly performed
within said state, without reference to choice or conflict of law rules
otherwise applicable.
13. If any provision of the Agreement is held by a court or other
adjudicatory body to be unenforceable, such provision will be severed
from this Agreement, and the balance of the Agreement will remain in
full force and effect.
14. If a dispute arises with respect to this Agreement, the Parties agree
to make a good faith effort to resolve the dispute through negotiations
between themselves. If not thus resolved, either Party may refer the
dispute to a sole arbitrator selected jointly by the Parties or to the
American Arbitration Association ("AAA") for arbitration. The
arbitration shall be governed by the United States Arbitration Act and
judgment on the award may be entered by any court having jurisdiction.
The arbitrator shall not limit, expand or modify the terms of the
Agreement nor award damages in excess of compensatory damages, and each
Party waives any claim to such excess damages. A request by a Party to
a court for interim protection shall not affect either Party's
obligation hereunder to arbitrate. Each party shall bear its own
expenses and an equal share of all cost and fees of the arbitration.
Any arbitrator selected shall be competent in the legal and technical
aspects of the subject matter of this Agreement. The content and result
of arbitration shall be held in confidence by all participants, each of
whom will be bound by an appropriate confidentiality agreement.
15. This Agreement constitutes the entire understanding between the Parties
hereto regarding the INFORMATION and merges all prior discussions
between them relating thereto. No amendment or modification of this
Agreement shall
<PAGE>
- 5 -
be valid or binding on the Parties unless made in writing and signed on behalf
of each of the Parties by their respective duly authorized officers or
representatives.
IN WITNESS WHEREOF, the parties have executed the Agreement on the
respective dates entered below.
LUCENT TECHNOLOGIES INC. COPPER MOUNTAIN
NETWORKS, INC.
By: /s/ LINDA C. MANCHESTER By: /s/ MICHAEL STAIGER
----------------------- ------------------------
(Signature) (Signature)
Linda Manchester Michael Staiger
----------------------- ------------------------
(Typed Name) (Typed Name)
Director Vice President, Business
Development
----------------------- ------------------------
(Title) (Title)
11/12/98 11/12/98
----------------------- ------------------------
(Date Signed) (Date Signed)
<PAGE>
Agreement No. GA10097
Page 1 of 8
Appendix 7
Warranty Eligibility System (WES)
Transaction
The Warranty Eligibility System (WES) tracks a serialized product from
manufacturing to the customer and provides up-to-date information about the
product's warranty status. In order to accomplish this, WES receives data from
entities whose functions affect an item's warrantability.
At the end of the manufacturing, shipping, or repair processes, information
about an item will be sent to WES for inclusion on the Warranty Database. This
file can be sent to WES using
1) UNIX file transfer at,
/usr/spool/uucppublic/receive/wes/origsystem/WESXXNNNN
where origsystem is the UNIX machine originating the file XX is a location
code entry in the location table and NNNN is the sequence number on the
header record.
2) or by placing the formatted file on a floppy disk and mailing the disk
directly to the WES group at:
Lucent Technologies
Westwood of Lisle
Attn.: L. Fitzgerald
2443 Warrenville Rd.
Lisle, IL 60532
Batch files received for processing by WES must be processed by a Header Record
as attached. Following the Data Records must be a Trailer Record also attached.
The Header and Trailer Records are interrogated by WES and messages are returned
to the sending location indicating the status of each file transmitted to WES.
These files should be sent at least once a week, depending on volume, in order
to keep the database current. That data needs to be formatted as shown on the
following page.
HEADER RECORD
<TABLE>
<CAPTION>
COLUMN FIELD SIZE FIELD CONTENT COMMENTS
- ------ ----------- ------------- --------
<S> <C> <C> <C>
1-5 (05) Transaction Code &&HDR
6 (01) Blank
7-14 (08) Source of Input Job Name of Feeder
15 (01) Blank
16-19 (04) Transmission Sequence Zero Filled
Number Right Justified
20 (01) Blank
21-26 (06) Time HHMMSS
27 (01) Blank
</TABLE>
Lucent Technologies Proprietary
<PAGE>
Agreement No. GA10097
Page 2 of 8
Appendix 7
<TABLE>
<S> <C> <C> <C>
28-33 (06) Date MMDDYY
34-123 (90) Blank
124-125 (02) Originating Location Location that
Originates this
Transaction
</TABLE>
ALL ALPHA REPRESENTATION SHOULD BE CAPITALIZED
TRAILER RECORD
<TABLE>
<CAPTION>
COLUMN FIELD SIZE FIELD CONTENT COMMENTS
- ------ ----------- ------------- --------
<S> <C> <C> <C>
1-5 (05) Transaction Code &&TLR
6 (01) Blank
7-12 (06) Record Count
13-125 (113) Blank
</TABLE>
ALL ALPHA REPRESENTATION SHOULD BE CAPITALIZED
ADD TRANSACTION FORMAT
<TABLE>
<CAPTION>
COLUMN FIELD SIZE FIELD CONTENT COMMENTS
- ------ ---------- ------------- --------
<S> <C> <C> <C>
1) 1 (01) Transaction Code A
2) 2-13 (12) Item Serial Number
3) 14-23 (10) Order Number AT&T Order
Number
24-38 (15) Blank
4) 39-44 (06) Manufacture Ship Date MMDDYY
5) 45-56 (12) Blank
6) 57-61 (05) Product Line Left Justified
7) 62-86 (25) Product Identification
Number
87-123 (37) Blank
</TABLE>
Lucent Technologies Proprietary
<PAGE>
Agreement No. GA10097
Page 3 of 8
Appendix 7
<TABLE>
<S> <C> <C> <C>
8) 124-125 (02) Originating Location Location that
Originated
Transaction
</TABLE>
ALL ALPHA REPRESENTATION SHOULD BE CAPITALIZED
1) One digit code representing the transaction to be performed by WES, i.e. A
= Add, R = Repair, etc.
2) The twleve (12) digit number assigned to each unique product manufactured.
Includes a two or three digit manufacturing number (vendor code) as described in
KS-23490.
Example - 12 Digit Serial Number with a two (2) digit manufacturing id
number 9T
2 Characters last two digits of the year
2 Characters manufacturing identification number (vendor code)
2 Characters month (01 to 12) or fiscal week (21 to 72)
6 Characters sequential serial number
i.e. First Product Manufactured in March of 1997 = 979T03000001
Example - 12 Digit Serial Number with a three (3) digit manufacturing id
number of A0J
2 Characters last two digits of the year
2 Characters manufacturing identification number (vendor code)
2 Characters month (01 to 12) or fiscal week (21 to 72)
1 Character last digit of the manufacturing id number (vendor code)
5 Characters sequential serial number
ie. First Product Manufactured in March of 1997 = 97A003J00001.
3) The identifier of an order placed by a customer.
4) The date an item was shipped from manufacturing. The format is MMDDYY.
5) The item serial number of the equipment that the current item is embedded
in.
6) A five character identifier used to distinguish product for determining
warranty, which is assigned by the product manager in agreement with WES.
7) The product identification number assigned by the product manager which
consists of the comcode. Left justified.
8) Location which originates the transaction.
SES TRANSACTION FORMAT
<TABLE>
<CAPTION>
COLUMN FIELD SIZE FIELD CONTENT COMMENTS
- ------ ---------- ------------- --------
<S> <C> <C> <C>
1) 1 (01) Transaction Code C
2) 2-13 (12) Item Serial Number
3) 14-23 (10) Order Number SES Order
Number
24-38 (15) Blank
4) 39-44 (06) Ship Date MMDDYY
45 (01) Blank
</TABLE>
<PAGE>
Agreement No. GA10097
Page 4 of 8
Appendix 7
<TABLE>
<S> <C> <C> <C>
5) 46-51 (06) RMA Number (B-Spec)
6) 52-55 (04) Item Number (Main Item) Right Justified
w/leading zeros
56 (01) Blank
7) 57-61 (05) Product Line Left Justified
8) 62-86 (25) Product Identification
Number
87-123 (37) Blank
9) 124-125 (02) Originating Location Location that
Originated this
Transaction
</TABLE>
ALL ALPHA REPRESENTATION SHOULD BE CAPITALIZED
1) One digit code representing the transaction to be performed by WES, i.e. C
= SES Ship, A = Add, etc.
2) The number assigned to each unique product produced by factory. Includes a
two digit manufacturing identification number (assigned by the product manager
in agreement with WES) used in positions 3 and 4 of the 12 character serial
number as described in KS-23490.
3) The identifier of an order placed by a customer.
4) The date an item was shipped. The format is MMDDYY.
5) The returned material authorization item number.
6) Item number on the returned material authorization.
7) A five character identifier used to distinguish product for determining
warranty, which is assigned by the product manager in agreement with WES.
8) The product identification number assigned by the product manager which
consists of the comcode. Left justified.
9) Location which originates the transaction.
Lucent Technologies Proprietary
<PAGE>
Agreement No. GA10097
Page 5 of 8
Appendix 7
RGM TRANSACTION FORMAT
<TABLE>
<CAPTION>
COLUMN FIELD SIZE FIELD CONTENT COMMENTS
- ------ ---------- ------------- --------
<S> <C> <C> <C>
1) 1 (01) Transaction Code G
2) 2-13 (12) Item Serial Number
3) 14-23 (10) Order Number AT&T
Order Number
24-38 (15) Blank
4) 39-44 (06) Returned Date MMDDYY
45-123 (79) Blank
5) 124-125 (02) Originating Location Location that
Originated
Transaction
</TABLE>
ALL ALPHA REPRESENTATION SHOULD BE CAPITALIZED
1) One digit code representing the transaction to be performed by WES, i.e. A
= Add, G = RGM, etc.
2) The number assigned to each unique product produced by factory. Includes a
two digit manufacturing identification number (assigned by the product manager
in agreement with WES) used in positions 3 and 4 of the 12 character serial
number as described in KS-23490.
3) The identifier of an order placed by a customer.
4) The date an item was returned accompanied by a returned good memorandum or
an SES exchange.
5) Location which originates the transaction.
Lucent Technologies Proprietary
<PAGE>
Agreement No. GA10097
Page 6 of 8
Appendix 7
MMC SHIP TRANSACTION FORMAT
<TABLE>
<CAPTION>
COLUMN FIELD SIZE FIELD CONTENT COMMENTS
- ------ ---------- ------------- --------
<S> <C> <C> <C>
1) 1 (01) Transaction Code M
2) 2-13 (12) Item Serial Number
3) 14-23 (10) Order Number Number
24-38 (15) Blank
4) 39-44 (06) MMC Ship Date MMDDYY
45-61 (17) Blank
5) 62-86 (25) Product Identification Left Justified
Number
6) 87-91 (05) Product Line
92-123 (32) Blank
7) 124-125 (02) Originating Location Location that
Originated
Transaction
</TABLE>
ALL ALPHA REPRESENTATION SHOULD BE CAPITALIZED
1) One digit code representing the transaction to be performed by WES, i.e. A
= Add, R = Repair, M = MMC Ship, etc.
2) The number assigned to each unique product produced by factory. Includes a
two digit manufacturing identification number (assigned by the product manager
in agreement with WES) used in positions 3 and 4 of the 12 character serial
number as described in KS-23490.
3) The identifier of an order placed by a customer.
4) The date an item was shipped from the MDC or Service center.
5) The product identification number assigned by product manager which consists
of the comcode. Left justified.
6) Up to five character code used to distinguish product for determining
warranty, which is assigned by the product manager in agreement with WES.
7) Location which originates the transaction.
REPAIR TRANSACTION FORMAT
<TABLE>
<CAPTION>
COLUMN FIELD SIZE FIELD CONTENT COMMENTS
- ------ ---------- ------------- --------
<S> <C> <C> <C>
1) 1 (01) Transaction Code R
2) 2-13 (12) Item Serial Number
3) 14-23 (10) Repair Order Number
4) 24-38 (15) Customer Repair Order
Number
5) 39-44 (06) Repair Date MMDDYY
</TABLE>
Lucent Technologies Proprietary
<PAGE>
Agreement No. GA10097
Page 7 of 8
Appendix 7
<TABLE>
<CAPTION>
<S> <C> <C> <C>
45-56 (12) Cust. Order Number
(overflow)
57-61 (05) Product Line Left Justified
7) 62-86 (25) Product Identification
Number
8) 87-101 (15) Circuit Pack Code
or Microcode
9) 102-113 (12) Circuit Pack Series
or Issue of Microcode
114-116 (03) Blank
10) 117 (01) Repair Code
11) 118-119 (02) Manufacturing Location *
12) 120-123 (04) Manufacturing Date
13) 124-125 (02) Originating Location
</TABLE>
ALL ALPHA REPRESENTATION SHOULD BE CAPITALIZED
* Location of manufacture required for 00LL00SSSSSS Item Serial Numbers.
LL is the location code for the site affixing the label
SSSSSS is the next serial number to be assigned by the location.
This format is only valid when the item was not previously bar-coded.
1) One digit code representing the transaction to be performed by WES, i.e. A
= Add, R = Repair, etc.
2) The number assigned to each unique product produced by factory. Includes a
two digit manufacturing identification number (assigned by the product manager
in agreement with WES) used in positions 3 and 4 of the 12 character serial
number as described in KS-23490.
3) This is the order number the item was repair under, not the one it was
initially order under.
4) The customer's identifier for their repair order.
5) Date the item was repaired.
6) A five character used to distinguish product for determining warranty, which
is assigned by the product manager in agreement with WES.
7) The product identification number assigned by product manager which consists
of the comcode. Left justified.
8) Apparatus code assigned for identification of product at cpcode level.
9) Production level of the cpcode.
10) The code that indicates what type of action was taken by repair
organization to satisfy the customer's repair order. The possible values are:
A = not repairable
K = no trouble found
R = trouble found (repairable)
11) Two digit code indicating place of manufacture.
12) Date of manufacture. MMYY
Lucent Technologies Proprietary
<PAGE>
Agreement No. GS10097
Page 8 of 8
Appendix 7
13) Location which originates the transaction.
SUBSTITUTE TRANSACTION FORMAT
<TABLE>
<CAPTION>
COLUMN FIELD SIZE FIELD CONTENT COMMENTS
- ------ ---------- ------------- --------
<S> <C> <C> <C>
1) 1 (01) Transaction Code S
2) 2-13 (12) Replaced Item Serial No.
3) 14-23 (10) Repair Order No.
4) 24-38 (15) Customer Order No.
5) 39-44 (06) Substitute Date MMDDYY
6) 45-56 (12) Replacing Item Serial No.
7) 57-61 (05) Product Line Product Line
Left Justified
8) 62-86 (25) Product Identification
87-98 (12) Cust. Order No. (overflow)
99-123 (25) Blank
9) 124-125 (02) Originating Location Location that Originated Transaction
</TABLE>
ALL ALPHA REPRESENTATION SHOULD BE CAPITALIZED
1) One digit code representing the transaction to be performed by WES, i.e. A
= Add, R = Repair, S = Substitute, etc.
2) Serial number of product returned by customer or installer. Format same as
item serial number.
3) Required if item is to be added to database.
4) The customer's identifier for their repair order.
5) Data substitution was made.
6) Item serial number of product the repair organization returned to a
customer, product withdrawn from an installation pool and added to an order,
item sent in by customer on a spares exchange. Format same as item serial
number.
7) A five character used to distinguish product for determining warranty, which
is assigned by the product manager in agreement with WES.
8) Replacing serial number's product identification number assigned by product
manager which consists of the comcode. Left justified.
9) Location which originates the transaction.
Lucent Technologies Proprietary
<PAGE>
EXHIBIT 10.26
OEM PURCHASE AND DEVELOPMENT AGREEMENT
BETWEEN
3COM CORPORATION
AND
COPPER MOUNTAIN NETWORKS, INC.
THIS OEM PURCHASE AND DEVELOPMENT AGREEMENT ("Agreement") is entered
into effective as of November 24, 1998 ("Effective Date") between 3COM
CORPORATION ("3Com"), a Delaware corporation located at 5400 Bayfront Plaza,
Santa Clara, CA 95052-8145, and COPPER MOUNTAIN NETWORKS, INC. ("Seller"), a
California corporation located at 2470 Embarcadero Way, Palo Alto, CA 94303
RECITALS
WHEREAS, Seller has developed certain proprietary symmetric digital
subscriber line ("SDSL") technology and products and ISDN digital subscriber
line ("ISDL") technology and products;
WHEREAS, 3Com desires to develop a small office/home office router
product that operates with Seller's digital subscriber line ("DSL") networking
system (the "Device");
WHEREAS, to enable 3Com to optimize the Device for performance with
Seller's proprietary DSL networking system, Seller desires to disclose to 3Com,
and 3Com desires to receive from Seller, certain DSL interoperability
specifications (the "DSL Specifications");
WHEREAS, to achieve the development of the Device, the parties desire
to engage in certain joint development work and technology licenses as set forth
in this Agreement;
WHEREAS, the parties desire to engage in certain joint marketing
efforts to achieve commercial success for the Device; and
WHEREAS, 3Com also desires to purchase and resell on a value-added,
private-label basis, Seller's Copper Rocket/TM/ Model 201 SDSL and IDSL customer
premises equipment product(s) (the "CR201").
NOW, THEREFORE, in consideration of the mutual promises contained
herein the parties agree as follows:
1.
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
TERMS AND CONDITIONS
1. DEFINITIONS.
1.1 "3COM BRANDED CR201" means CR201 units that have been rebranded by
or for 3Com.
1.2 "3COM KNOW-HOW" means the proprietary techniques, inventions,
practices, methods, knowledge, designs, skill and experience relating to
customer premises equipment ("CPE") and networking systems which 3Com discloses
to Seller under this Agreement.
1.3 "3COM PATENTS" means patents related to the subject matter of this
Agreement issued as of the Effective Date and the patents to issue after the
Effective Date on patent applications entitled to a filing date on or before the
Effective Date related to the subject matter of this Agreement, including
without limitation all foreign counterparts, all substitutions, extensions,
reissues, renewals, divisions, continuations and continuations in part relating
to such patents and their foreign counterparts, and which are owned or
controlled by 3Com (where "controlled" means licensed by 3Com with a royalty-
free right to grant sublicenses).
1.4 "3COM TECHNOLOGY" means (i) the inventions, designs, discoveries
and processes claimed in the 3Com Patents and (ii) the 3Com Know-How.
1.5 "DEVICE SOFTWARE" means certain Seller DSL software, including but
not limited to Seller's pre-activation signaling software and internal control
protocol software, configured to run in the Device in a polled (i.e., non-
interrupt driven) mode on a Motorola 68LC302 processor.
1.6 "IMPROVEMENTS" means any improvements, discoveries, developments,
modifications or derivative works, whether or not patentable.
1.7 "INTELLECTUAL PROPERTY RIGHTS" means all current and future trade
secrets, copyrights, patents and other patent rights, trademark rights, service
mark rights, mask work rights and any and all other intellectual property or
proprietary rights now known or hereafter recognized in any jurisdiction.
1.8 "PRODUCTS" means the CR201 or the 3Com Branded CR201, as
applicable, including such updates or enhancements to the CR201 or the 3Com
Branded CR201 that the parties may agree upon and implement pursuant to Section
14.
1.9 "PRODUCT SOFTWARE" means certain Seller DSL firmware that is
embedded in the Products.
1.10 "SELLER KNOW-HOW" means the proprietary techniques, inventions,
practices, methods, knowledge, designs, skill and experience relating to the
modification of CPE to comply with the DSL Specifications or the operation of
Seller's proprietary DSL networking systems which Seller discloses to 3Com under
this Agreement.
1.11 "SELLER PATENTS" means patents issued as of the Effective Date
related to the subject matter of this Agreement and the patents to issue after
the Effective Date on patent
2.
<PAGE>
applications entitled to a filing date on or before the Effective Date related
to the subject matter of this Agreement, including without limitation all
foreign counterparts, all substitutions, extensions, reissues, renewals,
divisions, continuations and continuations in part relating to such patents and
their foreign counterparts, and which are owned or controlled by Seller (where
"controlled" means licensed by Seller with a royalty-free right to grant
sublicenses).
1.12 "SELLER SOFTWARE" means the Device Software and the Product
Software.
1.13 "SELLER TECHNOLOGY" means (i) the inventions, designs, discoveries
and processes claimed in the Seller Patents and (ii) the Seller Know-How.
1.14 "SPECIFICATIONS" means specifications for the Products to be agreed
upon by the parties and to be attached hereto as Exhibit B (Product
Specifications).
1.15 "TESTING CRITERIA" means the test criteria and procedures mutually
agreed upon by the parties to ensure the Device's compatibility with the DSL
Specifications. The Testing Criteria will be set forth in Schedule A to Exhibit
D attached hereto.
2. DEVELOPMENT OF THE DEVICE. 3Com shall design the [***] as set forth in
Exhibit D attached hereto.
3. PURCHASE OF PRODUCTS; SUPPORT SERVICES.
3.1 PURCHASE OF PRODUCTS. Seller agrees to sell the Products to 3Com
and to accept purchase orders for the Products from 3Com under the terms and
conditions of this Agreement. It is expressly understood that 3Com has no
obligation to purchase any, or any minimum number of, Products hereunder.
Further, nothing in this Agreement shall prevent 3Com from manufacturing or
procuring from other sources like or comparable products.
3.2 DOCUMENTATION LICENSE. Subject to the terms and conditions of this
Agreement, Seller hereby grants 3Com, a nonexclusive, nontransferable,
worldwide, fully-paid and royalty-free license to use, reproduce, modify, create
derivative works based on, support, demonstrate and distribute through single or
multiple tiers of distribution all end user documentation, including all
subsequent updates or enhancements thereto or replacements therefor, delivered
as part of or together with the Products or otherwise provided under this
Agreement. Any modifications or derivative works are subject to Seller's
technical approval prior to demonstration or distribution.
3.3 SUPPORT SERVICES. Training and support services for the Products
shall be provided as set forth in Exhibit C attached hereto.
3.4 TRADEMARK RIGHTS. 3Com requests and Seller agrees to provide
certain markings and identification, which includes the trademark(s) and/or
trade name of 3Com, on the Products ordered and delivered to 3Com. 3Com
acknowledges that initial Product production runs may not have 3Com branding,
but the parties anticipate that the Product units sold to 3Com will display 3Com
trademarks by approximately January 2, 1999. Such markings and identification
3.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
shall be strictly in accordance with the requirements of 3Com as set forth in
3Com's Trademark Guidelines, as provided to Seller and as may be updated from
time to time by 3Com. Seller is not authorized to use the trademark(s) and trade
names of 3Com on any products, other than Products ordered by and delivered to
3Com, or for any other purpose. Seller is hereby granted a limited trademark
license with respect to the 3Com trademarks set out in the above-mentioned
markings and identification, solely for the above-mentioned use. All other use
is prohibited. This license shall terminate on the earlier of termination of
this Agreement or failure of Seller to maintain the quality requirements set out
in this Agreement. Seller shall obtain no rights to or interest of any kind in
any 3Com trademarks or trade names other than the limited right to use set out
above.
3.5 INDEMNIFICATION. 3Com shall indemnify and hold Seller harmless from
and against any and all damages, costs and expenses (including without
limitation reasonable attorneys' and expert witness fees) incurred by Seller in
connection with any action, suit, proceeding, demand, assessment or judgment
arising out of or related to any claims by third parties based on any
infringement by the 3Com trademarks, logos or trade names of any trademark, logo
or trade name of any other person or entity; provided that (i) Seller promptly
notifies 3Com of such action, claim or proceeding; (ii) 3Com shall have the sole
right to compromise, settle or defend any such action, claim or proceeding;
provided, however, that 3Com shall not compromise or settle any such action,
claim, or proceeding in a manner that does not unconditionally release Seller
without Seller's prior written consent; and (iii) Seller provides 3Com
reasonable assistance at 3Com's request and expense in the defense of such
action, claim or proceeding.
4. ORDER FORECAST.
3Com shall provide Seller with a nine (9) month non-binding, forward-
looking rolling forecast and update such forecast on a monthly basis. Seller
shall use such forecast for internal material planning requirements only. Such
forecast does not represent any commitment by 3Com to purchase Products.
Further, Seller shall view all forecasts as Confidential Information in
accordance with Section 21 below.
5. PURCHASE ORDERS.
5.1 LEADTIME. Seller agrees to supply Products to 3Com within fifty-six
(56) calendar days leadtime. Seller will make good faith, commercially
reasonable efforts to reduce this leadtime. Seller will notify 3Com immediately
upon any changes in leadtime.
5.2 PURCHASE ORDERS. Purchases shall be initiated by 3Com's written or
electronically dispatched purchase orders referencing the quantity, the Product,
applicable price, shipping instructions and requested in house delivery dates.
All purchase orders for Products placed by 3Com hereunder shall be governed by
the terms and conditions of this Agreement. In the event of a conflict between
the provisions of this Agreement and the terms and conditions of 3Com's purchase
order or Seller's acknowledgment or other written communications, the provisions
of this Agreement shall prevail and any such conflicting terms or conditions are
hereby rejected.
4.
<PAGE>
5.3 ISSUANCE AND ACCEPTANCE. Seller shall notify 3Com of acceptance of
purchase order by telephone or facsimile (and promptly confirm in writing)
within five (5) business days after receipt of 3Com's purchase order. Failure of
Seller to confirm or respond to 3Com's purchase order within five (5) business
days shall constitute acceptance. The parties anticipate approximately a six (6)
to eight (8) week delivery cycle from purchase order to fulfillment. All orders
are subject to acceptance in writing by Seller and shall not be binding until
acceptance. If orders for the Product units exceed Seller's inventory, Seller
shall allocate available inventory on a basis Seller, in its reasonable
discretion, deems equitable. In such event, Seller will use good faith efforts
to allocate supply of Products to 3Com on a pro-rata basis, taking into account
3Com's current and historical purchase history for the Product compared against
Seller's total current and historical sales of Products. If Seller cannot
allocate to 3Com such pro-rata share in such circumstances, the parties shall
discuss in good faith a mutually acceptable course of action. Seller shall use
reasonable efforts to fill orders promptly, but shall not be liable for any
damage to 3Com or any third party for failure to fill any orders, or for any
delay in delivery or error in filling any orders. Notwithstanding any prior
acceptance by Seller of a purchase order for Product units, Seller shall not be
obligated to ship Product units if 3Com is in breach of this Agreement at the
time of scheduled shipment.
5.4 CHANGE ORDERS. Change orders shall be provided by written or
electronically dispatched notice from 3Com. Seller shall notify 3Com of
acceptance of change order by telephone or facsimile (and promptly confirm in
writing) within two (2) business days after receipt of 3Com's change order or
change order request. Failure of Seller to confirm or respond to 3Com's change
order within two (2) business days shall constitute acceptance.
5.4.1 CANCELLATION. 3Com may cancel without liability any
purchase order upon written notice to Seller within forty-five (45) days from
the date such purchase order was accepted by Seller. Notwithstanding the
foregoing, if Seller incurs substantial liability (as determined by Seller in
its reasonable, good faith judgment) as a result of such cancellation or a
series of cancellations because of the materials and work in process costs
incurred by Seller to meet such purchase order(s), and Seller and 3Com cannot
reasonably use such materials and work in process within a reasonable time
frame, the parties agree to discuss in good faith a mutually acceptable plan to
limit such liability in future and to compensate Seller for the materials and
work in process costs it has incurred as a result of such cancellation or
cancellations.
5.4.2 RESCHEDULING. 3Com shall be entitled to reschedule
delivery of Products or quantities of Product scheduled for a particular
delivery at any time for a particular purchase order; provided, however, that
3Com cannot reschedule a delivery of Products beyond ninety (90) days from the
original delivery date. Seller shall accommodate a request to expedite the ship
date, if reasonably able to do so.
6. DELIVERY TERMS.
6.1 DELIVERY POINT. All shipments shall be F.C.A. origin (Seller's U.S.
shipping dock). Title and risk of loss shall pass to 3Com upon Seller's tender
of delivery to the common carrier or 3Com's designee.
5.
<PAGE>
6.2 SHIPPING. All shipments are freight collect. Seller may ship
partial orders provided Seller notifies 3Com and 3Com agrees prior to shipment.
3Com's purchase order shall specify the carrier or means of transportation or
routing, and Seller will comply with 3Com's instructions. If 3Com fails to
provide shipping instructions, Seller shall select the best available carrier,
on a commercially reasonable basis.
6.3 PACKING INSTRUCTIONS. All Products shall be packaged and prepared
for shipment in a manner which (i) follows 3Com's packaging and routing
guidelines, a copy of which will be provided to Seller, (ii) follows good
commercial practice, (iii) is acceptable to common carriers for shipment and
(iv) is adequate to ensure safe arrival. Seller shall mark the outside of each
shrink wrapped pallet with the applicable 3Com part numbers and any necessary
lifting and handling information. Each shipment shall be accompanied by a
packing slip which will include 3Com's part numbers, purchase order number,
Seller's part number and the quantity shipped.
6.4 RESPONSIBILITY FOR EXPORT LICENSING. Subject to all the rules and
regulations stated in Section 17, Seller agrees, upon 3Com's request, to deliver
Products to 3Com's freight forwarder for export from the country of origin.
Subject to the terms of this Agreement, 3Com will be responsible for obtaining
the appropriate licenses or permits necessary to export Products from the
country of origin. Seller shall furnish 3Com or 3Com's designee with the
information necessary for 3Com to timely obtain all required export and import
documentation.
6.5 DELIVERY SCHEDULE. Delivery shall be pursuant to the schedule set
forth in 3Com's purchase order or as otherwise agreed upon by the parties.
Seller shall immediately notify 3Com in writing of any anticipated delay in
meeting the delivery schedule, stating the reasons for the delay. If Seller's
delivery fails to meet the committed delivery schedule, then Seller, upon 3Com's
request, shall expedite the routing at Seller's expense, however, if Seller's
delivery fails to meet the schedule by in excess of twenty (20) days, then 3Com,
at its sole option and without penalty or any additional expense, may (i)
require Seller to expedite the routing by the fastest available commercial
carrier; (ii) reschedule the delivery; or (iii) cancel the delivery in whole or
in part.
6.6 EARLY DELIVERY. Seller shall not deliver any Products prior to the
scheduled delivery date, without 3Com's written consent, and 3Com may return
early or excess shipments to Seller at Seller's sole risk and expense.
6.7 IN-STOCK MINIMUM. Seller agrees to use commercially reasonable
efforts to carry in "safety stock" a minimum of two weeks supply (as set forth
on the latest monthly forecast) of completed units of each of the Products to
accommodate any unforeseen or expedited demand on the part of 3Com.
6.8 COUNTRY OF MANUFACTURER. Seller represents and warrants that the
Product is manufactured in the United States. Seller shall promptly advise 3Com
at least ninety (90) days prior to a change in or addition to any such
manufacturing locations.
6.9 COMMODITY CLASSIFICATION. Seller shall provide 3Com with a copy of
the Commodity Classification for the Products or, if this is not available,
Seller shall provide 3Com with the ECCN that was used by Seller for self-
certification. A copy of the Commodity
6.
<PAGE>
Classification is required for any Product containing security or encryption
technology. In addition, Seller shall advise 3Com as to the License Exception,
if applicable, pursuant to which the Product may be exported.
7. PRICING; TAXES.
7.1 PRICES. The prices charged by Seller for the Products shall be
those set forth as Exhibit A, less the applicable discount, if any, stated in
Exhibit A. All prices are F.C.A. origin (Seller's shipping dock). Prices are
exclusive of costs of transportation, insurance, taxes, customs, duties,
landing, storage and handling fees, and/or documents or certificates required
for exportation or importation, which will be separately itemized and billed to
3Com in accordance with the billing and payment provisions of this Agreement.
7.2 QUARTERLY PRICE REVIEWS. Seller and 3Com agree to meet each 3Com
fiscal quarter (3Com's fiscal year is June through May) and review prices of
each Product. [***]
7.3 PRICE CHANGES. [***]
7.4 TAXES AND DUTIES. The prices for the Products are exclusive of all
taxes. 3Com shall pay all import duties, customs fees, sales (unless an
exemption certificate is furnished by 3Com to Seller), use, and value added
taxes (except for taxes imposed on Seller's net income) with respect to any
products sold or licensed and any services rendered to 3Com in respect of this
Agreement. Such taxes, when applicable, will appear as separate items on
Seller's invoice. If applicable law requires 3Com to withhold any taxes levied
by the United States on payments to be made pursuant to this Agreement
("Withholding Tax"), 3Com shall be entitled to deduct such Withholding Tax from
the payments due Seller hereunder. If Seller is eligible to take advantage of
the reduced Withholding Tax provided for by an applicable United States tax
treaty then in force, Seller shall furnish 3Com with all appropriate forms,
documents and paperwork required under the treaty to obtain such reduced
Withholding Tax, including a completed US Internal Revenue Service (IRS) Form
1001, Certificate of Reduced Withholding, otherwise 3Com will apply the non-
treaty withholding tax rate on applicable payments.
7.5 LICENSE FEES. In consideration for the licenses granted to it under
this Agreement, [***] to [***] of [***] of [***] for the [***]. For purposes
hereof, [***] means the [***] from the [***] all [***] in a [***] within [***]
the end of [***] and send to Seller a report detailing the number of [***] the
[***] to which the [***] set forth above applies, the rates at which [***] the
[***] of [***,] and all additional details necessary to show how these amounts
were determined. 3Com will provide Seller with a written quarterly report,
whether or not any [***].
7.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
7.6 WAIVER OF PAYMENT OBLIGATION. Notwithstanding Section 7.5 above, if
3Com fulfills the marketing commitments set forth in Exhibit E attached hereto,
[***] will [***] so long as 3Com [***].
7.7 LATE PAYMENT. Any payment not made within fifteen (15) days after
it is due shall bear interest at a rate equal to one and one half percent (1
1/2%) per month or the highest rate permitted by applicable law, whichever is
less, on the unpaid amounts from time to time outstanding from the date on which
portions of such amounts became due and owing until payment thereof in full.
7.8 NO SET-OFF. Except as set forth in Section 7.6 above, no part of
any amount payable to Seller hereunder may be reduced due to any counterclaim,
set-off, adjustment or other right which 3Com may have against Seller.
7.9 MOST FAVORED CUSTOMER PRICING. [***]
8. AUDIT.
8.1 RECORDS. 3Com shall keep complete and accurate records pertaining
to the sale of the Devices. Such records will be maintained for a three (3) year
period following the year in which any such payments were made hereunder.
8.2 AUDIT REQUEST. Seller will have the right to engage, at its own
expense, an independent auditor reasonably acceptable to 3Com, to examine 3Com's
records from time to time as may be necessary, but no more than once every six
(6) calendar months, to determine, with respect to any calendar year, the
correctness of any report or payment made under this Agreement. Such audit shall
be conducted upon at least five (5) days advance written notice and shall be
conducted during 3Com's normal business hours. If any such audit reveals an
underpayment of more than five percent (5%) of the correct amount of royalties
due hereunder, such audit will be at the expense of 3Com. If any audit conducted
on behalf of Seller shall show that 3Com underpaid the royalties due to Seller
under the licenses herein as to the period subject to the audit, then 3Com shall
immediately pay to Seller any such deficiency with interest thereon at a rate
equal to the lower of one and a half percent per month or the highest rate
allowed by law from the date due until paid or at such lower rate as shall be
the maximum rate permitted by law.
9. INVOICING AND PAYMENT.
Subject to acceptance of Products as provided in Section 10, invoices shall
be due and payable forty-five (45) days after the date of actual receipt of the
Products or Seller's invoice, whichever is later.
10. ACCEPTANCE; QUALITY ASSURANCE.
8.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
10.1 ACCEPTANCE. The Product and any change to the Product pursuant to
Section 14 are subject to an initial acceptance test procedure by 3Com at 3Com's
facility before final acceptance as set forth in this Section 10.1. If the
Product delivered hereunder fails to conform to the Specifications or with the
parties' agreed-upon testing and acceptance criteria, 3Com shall notify Seller
of such failure, the parties will promptly discuss means to resolve any such
failure, and Seller shall have up to thirty (30) days (or such longer period as
the parties may agree) to deliver to 3Com conforming Products. If Seller fails
to deliver conforming Products within such thirty (30) day period, absent
separate agreement, 3Com shall have the right, without liability, to either
cancel purchase orders for that Product and any other Products, the acceptance
of which is impractical in 3Com's reasonable opinion as a result of Seller's
failure to meet the Specifications, or require expedited shipping of the
conforming Products at Seller's sole cost. After initial acceptance of a Product
or a modified Product, further deliveries of such Product shall be deemed
accepted upon delivery.
10.2 3COM TESTING. Seller acknowledges that 3Com will conduct period
testing of Product deliveries, likely by testing sample units within a lot
delivery. Should such sample testing reveal a likelihood of more than a minimal
number of failures of the Products delivered to comply with the limited warranty
set forth in Section 18.1, 3Com may return the entire Product lot delivered to
3Com pursuant to the RMA procedures set forth in this Agreement for further
testing by Seller.
10.3 INSPECTION RIGHTS. 3Com shall have the right to perform vendor
qualifications and/or on-site source inspections at Seller's manufacturing
facilities and Seller shall reasonably cooperate with 3Com in that regard. If an
inspection or test is made on Seller's premises, Seller shall provide 3Com's
inspectors with reasonable facilities and assistance at no additional charge.
3Com may conduct such inspections no more frequently than once a calendar
quarter unless an epidemic failure as described in Section 10.5 has occurred.
3Com must provide advance written notice of a desire to conduct an inspection of
at least five (5) days prior to the beginning of such inspection. Such
inspection shall be conducted only during normal business hours and in
compliance with all Seller's safety and security requirements.
10.4 ISO 9002 COMPLIANT SUPPLIER. Seller represents that Seller will
obtain ISO 9002 compliance within eighteen (18) months after the Effective Date.
Should Seller lose the ISO 9002 registration thereafter, Seller will notify 3Com
immediately. Seller will then use commercially reasonable measures to obtain
reregistration within sixty (60) days. The parties acknowledge that Seller may
subcontract manufacture of Products to a subcontractor and that such
subcontractor is likely to be ISO 9002 registered.
10.5 EPIDEMIC FAILURE. "Epidemic Failure" shall mean (i) a failure of
more than five percent (5%) of three (3) consecutive deliveries to conform to
the warranty in Section 18.1 or a failure of four (4) out of six (6) deliveries
to conform to the warranty in Section 18.1, or (ii) a failure of more than three
and a half percent (3.5%) of total deployed 3Com Branded CR201s in any six (6)
month rolling period. In the case of an Epidemic Failure, Seller's obligations
shall be, within ten (10) business days, to propose an action plan to fix the
failure of any affected Products and to implement this action plan upon 3Com's
acceptance thereof. If the action plan is not acceptable to 3Com in its
reasonable, good faith judgment, 3Com can require Seller to repair or replace,
at Seller's option, the affected Products. The repair or replacement shall be
done at
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mutually agreed-upon location(s); provided, however, that costs of repair or
replacement together with the shipping, transportation and other costs of
gathering and redistributing the Products shall be borne by Seller. In addition
to bearing the costs associated therewith, if requested by 3Com, Seller shall
support and provide at Seller's expense a sufficient number of Products to
permit the field exchange or "hot swap" of Products at customer sites. The
parties agree to make all reasonable efforts to complete the repair or
replacement of all of the affected Products within twenty (20) business days
after written notice of Epidemic Failure by 3Com to Seller. Seller also agrees
that 3Com will be supported with accelerated shipments of replacement Product to
cover 3Com's supply requirements.
11. COMPLIANCE WITH SPECIFICATIONS.
All Products delivered hereunder shall comply in all material respects with
the Specifications to be agreed upon by the parties and attached hereto as
Exhibit B.
12. REGULATORY AGENCY COMPLIANCE.
All Products delivered hereunder, shall comply in all material respects
with the regulatory agency requirements to be agreed upon by the parties and
listed in Exhibit B, Product Specifications (e.g., Product Safety,
Electromagnetic Compatibility and Telecommunications). Seller, at its sole
expense, will obtain all required agency certifications and approvals for the
Products. Seller will further ensure that the Product remain compliant with
those regulatory agency requirements. 3Com agrees to work with Seller in
obtaining these certifications and approvals, and will supply 3Com Model numbers
to Seller whenever appropriate. Prior to shipment of production units, Seller
will submit to 3Com sufficient proof of the certifications and approvals.
13. COMPLIANCE WITH ENVIRONMENTAL LAWS.
Seller represents and warrants to 3Com that upon and after the Effective
Date of this Agreement, Seller will not provide any Product to 3Com which has
come into physical contact with: (i) a Class I substance, as defined in Section
611 of the Federal Clean Air Act (the "Act"), during any portion of the
manufacturing process; or (ii) a Class II substance, as defined in the Act and
Title 40, Code of Federal Regulations, Section 82 (the "Code"), during any
portion of the manufacturing process, where there has been a determination by
the U.S. Environmental Protection Agency that there is a substitute product or
manufacturing process for such Product which does not rely on the use of such
Class II substance, that reduces overall risk to human health and the
environment, and that is currently or potentially available, in accordance with
the Code.
Seller further represents and warrants that 3Com shall not be subjected to
any warning or labeling requirements regarding a Class I substance or a Class II
substance pursuant to the Act or any regulation promulgated under the Act, as a
result of any Product provided by Seller to 3Com under this Agreement.
Without limitation to the foregoing, Seller represents and warrants that in
all respects, the manufacture and sale of the Products comply and will
throughout the term of this Agreement comply with all applicable environmental
laws, regulations and other regulatory requirements.
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If Seller discovers a breach of any of the representations and warranties
in this Section 12, it shall immediately notify 3Com of such breach in writing,
explaining the circumstances constituting the breach and identifying the
Product(s) involved. Further, Seller shall defend, indemnify and hold harmless
3Com and its officers, directors, employees, agents, representatives, successors
and assigns from any liabilities, losses, demands, claims or judgments arising
from and third party claims regarding the breach of any of Seller's
representations set forth in this Section 13; provided that 3Com provides Seller
(i) prompt written notice of the existence of such claims; (ii) sole control
over the defense and settlement of any such claim; and (iii) assistance in the
defense or settlement of any such claim upon seller's reasonable request and at
Seller's reasonable expense.
14. PRODUCT CHANGES.
14.1 UPDATES AND PRODUCT ENHANCEMENTS. The parties acknowledge that they
intend that the 3Com Branded CR201 will be kept current with the CR201, and that
modifications, enhancements or improvements that Seller makes to the CR201 will
also be made available to the 3Com Branded CR201 pursuant to the procedures set
forth in this Section 14.
14.2 ENGINEERING CHANGE. In the event that 3Com finds or becomes aware
of a situation which in its opinion necessitates or would benefit from an
engineering change in any of the Products, 3Com shall suggest such proposed
engineering change to Seller and Seller and 3Com agree to work with each other
in good faith to determine whether such change will be made and if so will work
with each other on the implementation of such change. Seller agrees to work with
3Com in good faith to upgrade or alter the Product to changing market
requirements.
14.3 ENGINEERING CHANGE ORDERS. Should Seller materially change,
improve, or add any enhancements or updates to the Products at any time, Seller
shall provide reasonable prior written notice to 3Com of any such material
change, improvement, enhancement or update that affects the form, fit or
function of any Product or related product or any changes to Seller's part
number for the Product prior to its implementation. 3Com shall respond to the
requested changes within twenty-one (21) days or the change will be deemed
accepted. 3Com's response time may be reduced by mutual agreement if the change
improves safety or reliability.
14.4 REJECTION OF CHANGE ORDERS. 3Com shall not unreasonably withhold
acceptance of a proposed change; it may however reject a proposed change for
good cause. If 3Com does reject a proposed change, the parties will discuss in
good faith alternatives to such rejection. Upon rejection of any proposed
change, 3Com shall be entitled to (i) terminate in whole or in part, any
affected Product remaining undelivered under accepted Releases or require
delivery by Seller of some or all of such unchanged Product and (ii) place a
last-time purchase for the unchanged Product for delivery in amounts requested
by 3Com over a six-month period following such implementation.
14.5 UNAUTHORIZED CHANGES. If an ECO is implemented without the written
approval of 3Com, Seller shall be liable for repair and/or rework of all product
affected, including to, but not limited to, product in transit, product in
FGI/Finished Good Inventory, and any product located with a reseller or at an
end user location.
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15. JOINT MARKETING AND SALES.
15.1 JOINT MARKETING. Seller and 3Com will jointly announce and promote
the Product and Device through joint marketing activities. These activities may
include joint press releases, trade shows, appendices, dissemination of product
brochures through each party's channels, and such other activities that the
parties agree to conduct. The parties will conduct appropriate training to
ensure quality marketing and will meet periodically to update and improve their
joint marketing efforts.
15.2 JOINT SALES ACTIVITIES. Where appropriate, the parties will work
together on sales efforts to potential Product and Device customers, regardless
of which party was the originating party. The parties will conduct appropriate
training to ensure quality sales efforts and will meet periodically to improve
joint sales efforts.
15.3 MARKETING COMMITMENTS. The parties agree to undertake the marketing
activities described in Exhibit I attached hereto.
16. LICENSE GRANTS; OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS.
16.1 DSL SPECIFICATIONS. Subject to the terms and conditions of this
Agreement, 3Com shall use the DSL Specifications solely for the purposes
specified in this Agreement, including without limitation Exhibit D attached
hereto. 3Com shall not use the DSL Specifications for any purpose not specified
in this Agreement, including, without limitation, using the DSL Specifications
(a) to add features to CPE in order to operate with the central office device of
any third party DSL networking system, or (b) to send Seller's Internal Control
Protocol messages to the central office device of any third party DSL networking
system. 3Com shall not distribute, disclose or publicly display the DSL
Specifications. This Section 16.1 does not prevent 3Com from designing the
Device so that the Device also operates with third party DSL networking systems.
16.2 SELLER LICENSE GRANT. Subject to the terms and conditions of this
Agreement, Seller grants to 3Com a non-exclusive, non-transferable, royalty-
bearing license, without the right of sublicense, to make, have made, use,
import, offer to sell and sell the Device through one or more tiers of
distribution.
16.3 DEVICE SOFTWARE LICENSE GRANT. Subject to the terms and conditions
of this Agreement, Seller grants to 3Com a non-exclusive, royalty-free, non-
transferable license, without right of sublicense except to Device manufacturers
for 3Com and 3Com OEMs, to reproduce the Device Software to incorporate the
Device Software into the Device and to distribute the Device Software in a
machine-executable form only and only as incorporated in the Device. Should 3Com
desire to port the Device Software for use on a different processor, 3Com shall
notify Seller and the parties will discuss in good faith the terms upon which
the Device Software will be ported. To the extent permissible by applicable law,
3Com shall not itself, or permit others to, reverse compile, reverse engineer or
otherwise disassemble the Device Software. To the extent permissible by
applicable law, no rights to copy, prepare derivative works or to publicly
perform or display any Device Software are granted to 3Com or end users
hereunder.
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16.4 PRODUCT SOFTWARE LICENSE. Subject to the terms and conditions of
this Agreement, Seller grants to 3Com during the term of this Agreement a
nonexclusive, nontransferable, royalty-free license to distribute through 3Com's
sales channels any Product Software incorporated or embedded in the Products
solely as incorporated in firmware format therein, and to permit end users of
the Products to use the Product Software solely as incorporated in the Products,
subject in each instance to an enforceable end user license with terms and
conditions no less protective of Seller's proprietary interests in such Product
Software as set forth in this Agreement. To the extent permissible by applicable
law, 3Com shall not itself, or permit others to, reverse compile, reverse
engineer or otherwise disassemble the Product Software. To the extent
permissible by applicable law, no rights to copy, prepare derivative works or to
publicly perform or display any Product Software are granted to 3Com or end
users hereunder.
16.5 LICENSE RESTRICTIONS. In addition to the license restrictions set
forth above, 3Com shall not use the Seller Technology or the Seller Software to
develop CPE or to add features to CPE in order to allow such CPE (i) to operate
with any third party DSLAM (as defined in Exhibit D) or third party networking
system or (ii) to send Seller's Internal Control Protocol messages via any third
party DSL networking system. Any rights to or under Seller's Intellectual
Property Rights, Seller Technology or Seller Software not expressly granted in
this Agreement are expressly reserved. This Section 16.5 does not prevent 3Com
from designing the Device so that the Device also operates with third party DSL
networking systems.
16.6 3COM LICENSE GRANT. Subject to the terms and conditions of this
Agreement, 3Com grants to Seller a non-exclusive, non-transferable, royalty-free
license, without the right of sublicense, to assist in the development effort
regarding the Device as set forth in Exhibit D and to provide the support
described in Exhibit C. All other rights not expressly granted in this Agreement
are reserved.
16.7 INTEROPERABILITY MARKING. Upon successful completion of
interoperability testing in accordance with Exhibit D, Seller (a) will provide
to 3Com an interoperability logo for use in 3Com's marketing materials in
accordance with Seller's then-current trademark use guidelines, and (b) will
include 3Com's name and the name of the Device on a list of interoperable CPE
which will be provided to Seller's customers and posted on Seller's web site.
3Com will display the interoperability logo on each Device and Product and the
packaging of each Device and Product and on all associated printed and marketing
materials, including but not limited to product brochures and on 3Com's world
wide web site in all web pages that pertain to the Device.
16.8 INTELLECTUAL PROPERTY MARKINGS. In addition, 3Com will comply with
Seller's reasonable instructions regarding the marking of the Device and
accompanying packaging and documentation with a notice reflecting Seller's
ownership of the Seller Technology.
16.9 TRADEMARKS. Subject to the terms and conditions set forth in the
Agreement and solely for the purposes hereof, 3Com will have a non-transferable,
non-exclusive license, without right of sublicense, to place the Seller
trademarks and logos ("Marks") on the Devices and in documentation and packaging
as required in Sections 16.7 and 16.8. Such Marks shall be prominent and the
placement and sizing shall be subject to mutual agreement of the parties. In no
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event may 3Com alter or remove any Marks unless such removal is approved in
advance in writing by Seller. Except for the right to use the Marks as set forth
in this Section 16.9, nothing contained in this Agreement shall be construed to
grant 3Com any right, title or interest in or to the Marks. 3Com acknowledges
Seller's exclusive ownership of the Marks. 3Com agrees not to take any action
inconsistent with such ownership and further agrees to take, at Seller's
reasonable expense, any action which Seller reasonably requests to establish and
preserve Seller's exclusive rights in and to its Marks. 3Com shall not adopt,
use or attempt to register any trademarks or trade names that are confusingly
similar to the Marks or in such a way as to create combination marks with the
Marks. 3Com will maintain a high quality standard in producing and marketing
Devices. 3Com shall promptly provide Seller with samples of all materials,
including the Devices, that use the Marks for Seller's quality control purposes.
If, in Seller's reasonable discretion 3Com's use of the Marks does not meet
Seller's then-current trademark usage policy, Seller may, at its option, require
3Com to revise such material and re-submit it under this Section 16.9 prior to
shipment, display, or release of further Devices or materials bearing or
containing such Mark.
16.10 INTELLECTUAL PROPERTY RIGHTS OWNERSHIP. For any joint conception,
invention and development of technology, the parties agree that all Intellectual
Property Rights conceived, created, made, or first fixed in a tangible medium of
expression during the term of this Agreement shall be as follows: (i) Seller's
Intellectual Property Rights when accomplished by Seller personnel, unless such
invention is an Improvement to the 3Com Technology, which Improvement and any
Intellectual Property Rights therein Seller agrees to assign to 3Com except as
set forth in subsection (iii) below; (ii) 3Com Intellectual Property Rights when
accomplished by 3Com personnel pursuant to this Agreement, unless such invention
is an Improvement to the Seller Technology, the Product or the Seller Software,
which Improvement and any Intellectual Property Rights therein 3Com agrees to
assign to Seller except as set forth in subsection (iii) below; and (iii) owned
jointly by the parties (if not an Improvement to the 3Com Technology or the
Seller Technology, the Product or the Seller Software, or if an indivisible
Improvement to both the 3Com Technology and the Seller Technology), without
right of accounting, when accomplished jointly by 3Com and Seller personnel
("Joint Intellectual Property"). Seller and 3Com agree that throughout the term
of this Agreement they shall cooperate reasonably and in good faith to decide
jointly the manner in which their respective interests in Joint Intellectual
Property shall be perfected and enforced. Specifically, Seller and 3Com shall
jointly decide: (i) the subject matter for which patent applications and
applications for copyright registrations will be prepared; (ii) the resources to
be utilized in the preparation and prosecution of such applications; (iii) the
parties' rights to review and/or approve such applications and other papers
prior to filling in, or submission to, the patent, copyright and trademark
offices in the United States; (iv) the allocation of expenses incurred in the
preparation, prosecution and maintenance of patent applications, patents, and
copyright registrations and the like; (v) matters regarding the enforcement,
through litigation, licensing or otherwise of the Joint Intellectual Property
against third parties; and (vi) the manner in which revenue resulting from
enforcement of Joint Intellectual Property will be shared between Seller and
3Com. Should a party choose not to participate in securing or protecting an
element of Joint Intellectual Property (by notifying the other party in writing
to such effect), the other party may secure or protect its claims to such Joint
Intellectual Property and shall be entitled to reap the benefit of its efforts
without accounting to the other party, including without limitation retaining
the full amount of any settlement or damage award from a third party.
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16.11 INFRINGEMENT BY THIRD PARTIES. If either party learns of any
possible infringement or misappropriation of the other party's Intellectual
Property Rights related to the Products and Devices, it shall immediately give
notice thereof to the other party. Each party agrees to cooperate with the
infringed party's reasonable efforts to seek legal remedies for such
infringements and misappropriations.
16.12 ALTERATION OF THE PRODUCT. All modifications to the Product shall
be done through Seller or with Seller's prior written consent. All modifications
requested by 3Com will be related to the enabling of the 3Com Branded CR201 and
will be addressed in accordance with Section 14 above. No modifications will be
made that would result in a violation of the license restrictions set forth in
Section 16.5.
17. EXPORT LAW COMPLIANCE; COMMODITY CLASSIFICATION.
17.1 Neither party will export or reexport, directly or indirectly, the
Devices, Products or technical data acquired under this Agreement or the "direct
product" of software programs or such technical data to any country for which
the United States Government or any agency thereof, at the time of export,
requires an export license or other governmental approval, without first
obtaining such license or approval. The term "direct product" as used herein
means the immediate product (including processes and services) produced directly
by the use of the technical data or software programs. Both parties will
cooperate, to effect compliance with all applicable import and/or export
regulations. In addition, the parties agree to comply with all applicable local
country import and/or export laws or regulations in the country(ies) of
procurement, production and/or end destination of the Product. Both parties
understand that the foregoing obligations are legal requirements and agree that
they shall survive any term or termination of this Agreement.
18. WARRANTY.
18.1 LIMITED PRODUCT WARRANTY.
18.1.1 LIMITED WARRANTY. Seller warrants that all Products
(including associated firmware) sold by Seller to 3Com under the terms of this
Agreement will be materially free from defects in workmanship and materials and
substantially conform to the Specifications under normal use and service for a
period of twenty-seven (27) months after delivery to 3Com. If any Product or
part thereof contains a material defect in materials or workmanship, or
otherwise fails to conform to the Specifications, during the warranty period,
Seller shall at its expense correct any such defect by repairing such defective
Product or part or, at Seller's option, by delivering to 3Com an equivalent
Product or part replacing such defective Product or part. Seller shall waive any
expedite charges to 3Com in order to effect earliest reasonable replacement of
such defective Product(s).
18.1.2 RETURN OF PRODUCTS. 3Com will promptly notify Seller in
writing of any nonconforming Product. Such notification shall include serial
numbers and reason for nonconformance. Nonconforming Products will be repaired
or replaced as specified in Exhibit C.
18.2 WARRANTIES EXCLUSIVE. THE FOREGOING WARRANTIES, TERMS OR CONDITIONS
ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES,
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TERMS OR CONDITIONS, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW,
STATUTORY OR OTHERWISE, INCLUDING WARRANTIES, TERMS OR CONDITIONS OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
18.3 WARRANTY EXCLUSIONS. SELLER SHALL NOT BE LIABLE UNDER ANY WARRANTY
IF ITS TESTING AND EXAMINATION DISCLOSES THAT THE ALLEGED DEFECT IN THE PRODUCT
DOES NOT EXIST OR WAS CAUSED BY 3COM'S OR ITS END USER'S MISUSE, NEGLECT,
IMPROPER INSTALLATION OR TESTING, UNAUTHORIZED ATTEMPTS TO REPAIR, OR BY
ACCIDENT, FIRE, LIGHTNING OR OTHER HAZARD.
18.4 "AS IS." The DSL Specifications, the Device Software and the Seller
Technology are provided to 3Com "AS IS," without any warranty of any kind.
WITHOUT LIMITING THE FOREGOING, SELLER MAKE NO WARRANTIES, EXPRESS OR IMPLIED,
BY OPERATION OF LAW OR OTHERWISE, INCLUDING WITHOUT LIMITATION ANY IMPLIED
WARRANTIES OF TITLE, NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR INTENDED
USE OR ANY IMPLIED WARRANTIES ARISING OUT OF COURSE OF PERFORMANCE, COURSE OF
DEALING, USAGE OR TRADE. NO REPRESENTATION OR OTHER AFFIRMATION OF FACT,
INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING THE SUITABILITY FOR USE, OR
PERFORMANCE OF EQUIPMENT OR DEVICES THAT COMPLY WITH THE DSL SPECIFICATIONS,
WHETHER MADE BY SELLER OR OTHERWISE, SHALL BE DEEMED TO BE A WARRANTY FOR ANY
PURPOSE OR GIVE RISE TO ANY LIABILITY OF SELLER.
18.5 NO WARRANTY PASS THROUGH. 3Com will not pass through to its
customers or any other third party any warranties made by Seller hereunder and
will expressly indicate to its customers that they must look solely to 3Com in
connection with any problems, warranty claims or other matters concerning the
Product and the Device.
19. INDEMNIFICATION; INSURANCE.
19.1 INFRINGEMENT INDEMNITY.
(A) Seller shall indemnify, defend and hold 3Com harmless from
and against any and all liabilities, losses, damages, fees, costs and expenses,
including without limitation reasonable attorneys' fees, incurred by 3Com
resulting from a third party claim, suit, action or proceeding (a "Claim")
alleging that the DSL Specifications, the Seller Technology, the Seller Software
or the Product infringes a third party U.S. patent or copyright or
misappropriates any third party's trade secrets; provided that 3Com (i) promptly
notifies Seller in writing of such Claim; (ii) provides Seller sole control of
the defense or settlement of such Claim; and (iii) provides Seller assistance at
Seller's request and reasonable expense. 3Com may participate in the defense or
settlement of the Claim at its own expense. If a final injunction is obtained
against 3Com for use of the Seller Software, the Product, the Seller Know-how or
the DSL Specifications, or if Seller reasonably believes that such injunction is
likely, Seller will, at its option and its expense, either (i) procure for 3Com
the right to continue using such Seller
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Software, the Product, the Seller Know-How, the DSL Specifications or the
infringing portions of the Seller Technology, or (ii) modify the Seller
Software, the Product, the Seller Know-how or the DSL Specifications or the
infringing portions thereof so that they become non-infringing. If in Seller's
opinion either of the above is not commercially feasible, 3Com shall promptly
cease selling Devices or Products, as applicable, and Seller shall refund to
3Com an amount equal to the royalties paid by 3Com for the infringing Seller
Technology or amounts paid for the infringing Product units, depreciated on a
five-year straight line basis, calculated backwards from the date of infringing
event (i.e., payments made on the day of the infringing event would be refunded
fully, and payments made five (5) years prior to the event would not be refunded
at all, with a linear decrease in-between). Seller will have no liability or
obligation to indemnify for any claim arising from (i) the combination of Seller
Technology, the Seller Software, the Device or the Product with 3Com or third
party materials or intellectual property, unless it is determined by a court of
competent jurisdiction that the Seller Technology is the infringing element of
such Claim; (ii) the modification or translation of Seller Technology, the
Seller Software, the Device or the Product or any portion of the Seller
Technology; (iii) any use by 3Com of the Seller Technology after 3Com becomes
aware that the Seller Technology, the Seller Software, the Device or the Product
may be infringing; or (iv) any Improvements created by a party other than
Seller.
(B) 3Com shall indemnify, defend and hold Seller harmless from
and against any and all liabilities, losses, damages, fees, costs and expenses,
including without limitation reasonable attorneys' fees, incurred by Seller
resulting from a Claim that the manufacture, use or sale of the Device infringes
any patent, copyright or other proprietary rights of any third party or
misappropriates any trade secret of any third party; provided that such Claim is
not a Claim based solely on the DSL Specifications, the Seller Software, the
Product or the Seller Technology for which Seller indemnifies 3Com pursuant to
Section 19.1(a); and provided further that Seller (i) promptly notifies 3Com in
writing of such Claim; (ii) provides 3Com sole control of the defense or
settlement of such claim; and (iii) provides Seller assistance at Seller'
request and reasonable expense.
19.2 LIABILITY INDEMNITY. 3Com agrees to indemnify and hold Seller
harmless from and against any and all liabilities, losses, damages, costs, fees
and expenses, including without limitation reasonable attorneys' fees, and to
defend Seller against, any and all Claims resulting from or arising out of
3Com's acts or omissions to act arising from or related to the subject matter of
this Agreement, including but not limited to any liabilities, damages, or losses
whatsoever with respect to death or injury to any person and damage to any
property arising from the possession, manufacture, use, sale or administration
of the Devices or the Product by 3Com; provided that Seller (i) promptly
notifies 3Com in writing of such Claim; (ii) provides 3Com sole control of the
defense or settlement of such claim; and (iii) provides 3Com assistance at
3Com's request and reasonable expense.
19.3 ENTIRE LIABILITY. The foregoing provisions of this Section 19 state
the entire liability and obligations of each party and the exclusive remedy of
each party with respect to any alleged Intellectual Property Rights infringement
or misappropriation by the Device, the DSL Specifications, the Seller Software,
the Product, or the parties' respective know-how incorporated in the Device.
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19.4 INSURANCE. Seller shall carry and maintain liability insurance
coverage to satisfactorily cover its obligations under this Agreement. Upon
3Com's request, Seller shall provide 3Com with a Certificate of Insurance
evidencing such coverage.
20. LIMITATION OF LIABILITY.
EXCEPT FOR BREACHES OF SECTIONS 16 OR 21, IN NO EVENT, WHETHER BASED IN
CONTRACT OR TORT (INCLUDING WITHOUT LIMITATION NEGLIGENCE), SHALL EITHER PARTY
BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, INDIRECT OR SPECIAL DAMAGES OF ANY KIND
OR FOR LOSS OF PROFITS OR REVENUE OR LOSS OF BUSINESS ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR THE BREACH THEREOF, WHETHER OR NOT THE PARTY WAS ADVISED OF
THE POSSIBILITY OF SUCH DAMAGE. NOTHING HEREIN SHALL HAVE THE EFFECT OF LIMITING
OR EXCLUDING EITHER PARTY'S LIABILITY FOR DEATH OR PERSONAL INJURY CAUSED BY
NEGLIGENCE. EXCEPT FOR BREACHES OF SECTIONS 16 OR 21, IN NO EVENT SHALL EITHER
PARTY'S LIABILITY TO THE OTHER HEREUNDER EXCEED THE GREATER OF TWO MILLION
DOLLARS ($2,000,000) OR THE AMOUNTS PAID BY 3COM TO SELLER HEREUNDER. Each party
acknowledges and agrees that the foregoing limitations on liability are
essential elements of the basis of the bargain between the parties and that in
the absence of such limitations the material and economic terms of this
Agreement would be substantially different.
21. CONFIDENTIALITY.
21.1 CONFIDENTIAL INFORMATION. Information that is transmitted by one
party to the other in connection with the performance or implementation of this
Agreement and, if in written form, is marked "confidential" or with a similar
legend by the disclosing party before being furnished to the other, or if
disclosed orally or visually is identified as such prior to disclosure and
summarized, in writing, by the disclosing party to the receiving party within
thirty (30) days shall be deemed to be confidential information of the
disclosing party. Each party agrees that it shall use the same degree of care
and means that it utilizes to protect its own information of a similar nature,
but in any event not less than reasonable care and means, to prevent the
unauthorized use or the disclosure of such confidential information to third
parties. The confidential information may be disclosed only to employees or
contractors of a recipient with a "need to know" who are instructed and agree
not to disclose the confidential information and not to use the confidential
information for any purpose, except as set forth herein. Recipient shall have
appropriate written agreements with any such employees or contractors sufficient
to allow the recipient to comply with the provisions of this Agreement. Each of
the parties further agrees to make no use of such confidential information
except as expressly permitted by this Agreement.
Each party agrees that it shall use the same degree of care and means that
it utilizes to protect its own information of a similar nature, but in any event
not less than reasonable care and means, to prevent the unauthorized use or the
disclosure of such confidential information to third parties. The confidential
information may be disclosed only to employees or contractors of a recipient
with a "need to know" who are instructed and agree not to disclose the
confidential information and not to use the confidential information for any
purpose, except as set forth
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herein. Recipient shall have appropriate written agreements with any such
employees or contractors sufficient to allow recipient to comply with the
provisions of this Agreement.
21.2 EXCEPTIONS. The confidential information of a party shall not
include and the foregoing obligation shall not apply to data or information
which: (i) was in the public domain at the time it was disclosed or falls within
the public domain, except through the fault of the receiving party; (ii) was
known to the receiving party at the time of disclosure without an obligation of
confidentiality; (iii) was disclosed after written approval of the disclosing
party; (iv) becomes known to the receiving party from a source other than the
disclosing party without breach of this Agreement by the receiving party; (v) is
furnished to a third party by the disclosing party without an obligation of
confidentiality; or (vi) was independently developed by the receiving party
without the benefit of confidential information received from the disclosing
party. Nothing in this Agreement shall prevent the receiving party from
disclosing confidential information to the extent the receiving party is legally
compelled to do so by any governmental investigative or judicial agency pursuant
to proceedings over which such agency has jurisdiction; provided, however, that
prior to any such disclosure, the receiving party shall (a) assert the
confidential nature of the confidential information to the agency; (b)
immediately notify the disclosing party in writing of the agency's order or
request to disclose; and (c) cooperate fully with the disclosing party in
protecting against any such disclosure and/or obtaining a protective order
narrowing the scope of the compelled disclosure and protecting its
confidentiality.
22. PUBLICITY.
Seller shall not disclose, advertise, or publish the existence or the terms
or conditions of this Agreement, financial or otherwise, without the prior
written consent of 3Com.
23. FEDERAL ACQUISITION REGULATIONS.
In furnishing the Products hereunder, Seller agrees to comply with all
applicable Federal Acquisition Regulations (FARs) and related laws, rules,
regulations and executive orders in connection with its activities under this
Agreement, including, without limitation, the following FAR clauses: 52.222-26 -
Equal Opportunity, 52.222-35 - Affirmative Action for Special Disabled and
Vietnam Era Veterans and 52.222-36 - Affirmative Action for Handicapped Workers.
The Product is a "commercial item," as that term is defined at 48 C.F.R. 2.101
(Oct 1995), containing "commercial computer software" and "commercial computer
software documentation," as such terms are used in 48 C.F.R. 12.212 (Sep 1995)
and will be provided to the U.S. Government only as a commercial end item.
Consistent with 48 C.F.R. 12.212 and 48 C.F.R. 227.7202-1 through 227.7202-4
(Jun 1995), all U.S. Government end users acquire the Product Software
incorporated in the Product with only those rights set forth herein. Similar
restrictions will also be imposed on any licenses of Device Software to U.S.
Government End Users.
24. TERM AND TERMINATION.
24.1 TERM. This Agreement shall commence on the Effective Date and shall
continue for three (3) years thereafter, unless otherwise specified herein or
unless terminated sooner under the provisions set forth herein. Thereafter, this
Agreement shall automatically be renewed for
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successive one (1) year terms, unless one party requests in writing at least
ninety (90) days prior to the expiration of the then current term, that this
Agreement not be so renewed.
24.2 TERMINATION FOR CAUSE. With the exception of the continuing
obligations, as set forth in Section 24.3, herein, either party shall have the
right to terminate this Agreement for cause as a result of:
24.2.1 The failure of the other party to perform any material
term or condition of this Agreement and to remedy such failure within sixty (60)
days after written notice of such failure given by the non-defaulting party; or
24.2.2 The filing by or against the other party of a petition
for liquidation under the U.S. Bankruptcy Code or corresponding laws or
procedures of any applicable jurisdiction; or
24.2.3 The filing by or against the other party of any other
proceeding concerning bankruptcy, insolvency, dissolution, cessation of
operations, or the like by the other party. If such proceeding is involuntary
and is contested in good faith, this Agreement shall terminate only after the
passage of one hundred twenty (120) days without the dismissal of such
proceedings; or
24.2.4 The voluntary or involuntary execution upon; the
assignment or conveyance to a liquidating agent, trustee, mortgages or assignee
of whatever description; or the making of any judicial levy against a
substantial percentage of the other party's assets, for the benefit of its
creditors; or
24.2.5 The appointment of a receiver, keeper, liquidator or
custodian of whatever sort of description, for all or a substantial portion of
the other party's assets; or
24.2.6 The termination, dissolution, insolvency or failure in
business of the other party, the distribution of a substantial portion of its
assets, or its cessation to continue all or substantially all of its business
affairs.
24.3 RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION.
(A) PAYMENT. The termination or expiration of this Agreement
shall in no way relieve either party from its obligations to pay the other any
sums accrued hereunder prior to such termination or expiration.
(B) RETURN OF DOCUMENTATION AND CONFIDENTIAL INFORMATION. Upon
any termination of this Agreement, each party shall immediately return to the
other party all documentation, confidential information and any other tangible
items in its possession or under its control evidencing the know-how of the
other party.
(C) LICENSE TERMINATION. Except as set forth in this Section
24.3, upon any termination of this Agreement, all licenses granted by either
party under this Agreement shall terminate.
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(D) INVENTORY. Upon termination of this Agreement resulting from
a breach by Seller, 3Com shall be entitled to sell Devices manufactured prior to
the termination date hereof for a period of ninety (90) days following such
termination.
(E) ONGOING SUPPORT. Upon termination of this Agreement, 3Com
shall be entitled to provide reasonable support to customers; provided, however,
that such support shall not include any updates or upgrades to the Devices other
than minor error corrections or repairs.
(F) SURVIVAL. Except as set forth in the applicable section,
Sections 1, 3.3 (solely as set forth in Exhibit C), 7 (except Section 7.9), 8,
9, 16.10, 18.3, 18.4, 18.5, 20, 21, 24 and 26 shall survive any termination or
expiration of the Agreement for a period of five (5) years, notwithstanding the
foregoing, Section 21 shall survive for a period of fifteen (15) years following
termination or expiration of the Agreement for purposes of protecting the
confidentiality of the source code of the Seller Software and for any design
documents related to the Product or the Device.
25. MANUFACTURING RIGHTS.
25.1 MANUFACTURING LICENSE OPTION. 3Com may request to manufacture the
3Com Branded Product units instead of purchasing such units from Seller. In such
event, the parties agree to discuss in good faith the terms of such
manufacturing license. The failure to reach such agreement shall not constitute
a breach of the Agreement.
26. GENERAL.
26.1 RELATIONSHIP OF THE PARTIES. Each of the parties shall at all times
during the term of this Agreement act as, and shall represent itself to be, an
independent contractor, and not an agent or employee of the other.
26.2 ENTIRE AGREEMENT. This Agreement and Exhibits hereto are intended
as the complete, final and exclusive statement of the terms of the agreement
between the parties regarding the subject matter hereof and supersedes any and
all other prior or contemporaneous agreements or understandings, whether written
or oral, between them relating to the subject matter hereof. This Agreement may
not be modified except in writing executed by both parties. The terms and
conditions of this Agreement shall prevail notwithstanding any conflict with the
terms and conditions of any purchase order, acknowledgment or other instrument
submitted by 3Com or Seller.
26.3 FORCE MAJEURE. Neither party shall be liable to the other for any
alleged loss or damages resulting from failure to perform due to acts of God,
natural disasters, acts of civil or military authority, government priorities,
fire, floods, epidemics, quarantine, energy crises, war or riots. Each party
shall promptly notify the other party of such event. If Seller is unable to
deliver in accordance with agreed delivery schedule, 3Com may either (i) extend
the time of performance, or (ii) cancel the uncompleted portion of the purchase
order at no cost to 3Com.
26.4 NOTICES. Except for purchase orders and acknowledgments which may
be sent by normal carrier, all notices and communications hereunder are required
to be sent to the address
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or facsimile number stated below (or such other address or facsimile number as
subsequently notified in writing to the other party): (i) by facsimile with
confirmation of transmission, (ii) personal same or next day delivery or (iii)
sent by commercial overnight courier with written verification of delivery. All
notices so given shall be deemed given upon the earlier of receipt or three (3)
days after dispatch.
Any notices sent to 3Com hereunder should be sent to:
3Com Corporation
4 Technology Drive
Westborough, MA 01581
Attn.: Al Brisard
Fax No. (508) 366-2214
with a copy to:
3Com Corporation
Legal Department
3800 Golf Road
Rolling Meadows, IL 60008
Attn.: Director of xDSL Legal Services
Fax No. (847) 262-0186
Any notices sent to Seller hereunder should be sent to:
Copper Mountain Networks, Inc.
2470 Embarcadero Way
Palo Alto, California 94303
Attention: Vice-President, Business Development
Voice: 650-858-8500, ext. 260
Fax: 650-858-8085
Fax Copies to: Copper Mountain Networks, Inc.
3931 Sorrento Valley Boulevard
San Diego, California 92121
Attention: Chief Financial Officer
Fax: 650- 453-9244
Cooley Godward LLP
3000 El Camino Real
Palo Alto, California 94306
Attention: Anthony Klein
Fax: 650-849-7400
26.5 WAIVER. A waiver of any default hereunder or of any of the terms
and conditions of this Agreement shall not be deemed to be a continuing waiver
or a waiver of any other default or of any other term or condition, but shall
apply solely to the instance to which such waiver is directed. The exercise of
any right or remedy provided in this Agreement shall be without
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prejudice to the right to exercise any other right or remedy provided by law or
equity, except as expressly limited by this Agreement.
26.6 SEVERABILITY. In the event any provision of this Agreement is found
to be invalid, illegal or unenforceable, the validity, legality and
enforceability of any of the remaining provisions shall not in any way be
affected or impaired.
26.7 PRESS RELEASE. Promptly following, but in no event later than two
(2) weeks from, the Effective Date, the parties shall issue a mutually
acceptable joint press release announcing this transaction.
26.8 ASSIGNMENT. Neither party may assign or transfer this Agreement,
whether in whole or part, or any of its rights or obligations under this
Agreement without the prior written consent of the other, except that either
party may transfer all its rights and obligations to a successor in interest
upon a merger, reorganization, change of control, acquisition or sale of all or
substantially all its assets. Any attempted assignment without such written
consent shall be null and void.
26.9 PHOTOCOPY OF ORIGINAL. Neither party shall object to the use of a
photocopy of the original of this Agreement for the purpose of making any
required or allowed public filings.
26.10 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH, AND ALL DISPUTES HEREUNDER SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF
CALIFORNIA, EXCEPT ITS CONFLICT OF LAW RULES. THE PARTIES HEREBY AGREE THAT THE
SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR SANTA CLARA COUNTY AND/OR THE
UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SHALL HAVE
JURISDICTION AND VENUE OVER ANY CONTROVERSIES, PROCEEDINGS, OR DISPUTES IN
CONNECTION WITH THIS AGREEMENT. THE PARTIES EXCLUDE IN ITS ENTIRETY THE
APPLICATION TO THIS AGREEMENT OF THE UNITED NATIONS CONVENTION ON CONTRACTS FOR
THE INTERNATIONAL SALE OF GOODS.
26.11 ATTORNEY'S FEES. In any action to enforce this Agreement, the
prevailing party shall be awarded all arbitration costs or courts costs and
reasonable attorneys' fees incurred, including such costs and attorneys' fees
incurred in enforcing and collecting any judgment.
26.12 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
26.13 CHOICE OF LANGUAGE. The original of this Agreement has been written
in English and the governing language of this Agreement shall be English.
26.14 LIST OF EXHIBITS:
Exhibit A Product List and Prices
Exhibit B Product Specifications
Exhibit C Support Services
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Exhibit D [***]
Exhibit E Marketing Commitments
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives effective as of the date first
above written.
3COM CORPORATION COPPER MOUNTAIN NETWORKS, INC.
By: /s/ BRIAN GALLAHER By: /s/ MICHAEL STAIGER
----------------------------- ---------------------------------
Printed Name: Brian Gallaher Printed Name: Michael O. Staiger
------------------- -----------------------
Title: VP & GM DSL Division Title: Vice President
-------------------------- ------------------------------
Date: 11/24/98 Date: 11/24/98
--------------------------- -------------------------------
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EXHIBIT A
PRODUCT LIST AND PRICES
DESCRIPTION OF PRODUCTS
CR201
3Com Branded CR201
PRODUCT PRICE*
CR201 [***]
3Com Branded CR201 [***]
*This applies for both SDSL and IDSL versions of the Product.
The parties will endeavor in good faith to drive down the transfer pricing to
3Com to approximately [***] per unit by February 1, 1999. The parties will meet
frequently in the interim to discuss means by which the transfer price may be
reduced.
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respect to the omitted portions.
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EXHIBIT B
PRODUCT SPECIFICATIONS
[To be agreed upon by the mutual consent of the parties within thirty (30) days
following the Effective Date.]
26.
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EXHIBIT C
SUPPORT SERVICES
1. TECHNICAL SUPPORT AND CONSULTING FOR CUSTOMERS. 3Com will be [***] and for
providing [***] to customers. For [***] issues in which the [***] or [***] does
not [***] with the [***] or the [***] are not being received by the [***] or the
[***], Seller will agree to provide [***] to 3Com on mutually agreeable terms to
3Com in providing [***] and [***] to customers for [***]. The Parties agree to
conduct a [***] at either party's reasonable request. Should the parties so
decide, they may modify the [***] and responsibilities to maximize the
efficiency of the provision of [***].
2. DEFINITIONS.
AUTHORIZED CALLER. "Authorized Caller" means a person or persons designated
by 3Com as the technical/engineering support interface for the Products.
DESIGNATED SUPPORT ENGINEER. "Designated Support Engineer" means a person
or persons designated by Seller as the technical/engineering support interface
for the Products.
END USER. "End User" means a company or organization that uses 3Com
products in the operation of their business.
ERROR. "Error" means a defect in the Product which is reproducible and
which causes such Product not to function substantially in conformance with the
Specifications, end user documentation, or other related documentation,
including without limitation any functional specifications or other engineering
documentation for the Product, or commonly accepted operating principles as
defined by industry standards. Errors are classified according to the Problem
severity.
INCIDENT. "Incident" means a situation which necessitates an End User to
contact 3Com for assistance.
PROBLEM. "Problem" means any error, or any actual or perceived failure or
functional impairment that causes reduced functionality to the Product. Problems
are assigned a classification at the time of 3Com's initial contact with Seller.
Problem classifications may be changed based upon new information or customer
situation. Problems are classified by 3Com according to Severity level, based
upon Technical and/or Customer Sensitivity as follows:
SEVERITY 1: TECHNICAL: Production network failure which results in a
critical impact to business operations. No viable workaround is known. Customer
Sensitivity: Customer account is in jeopardy, and there is risk of losing
business.
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SEVERITY 2: TECHNICAL: Critical production network service
interruption or degradation creating difficulty in the execution of a network
function which results in a critical impact to business operations. Customer
acceptable workaround is available. Customer Sensitivity: There is potential
risk of losing actual or future business.
SEVERITY 3: TECHNICAL: Significant system problems which prevent some
network functions from meeting the production specifications or cause particular
features or functionality to be inoperative. Some business operations are
impaired, but the network continues to function. Customer acceptable workaround
is available. Customer Sensitivity: The problem is impacting the customer's day
to day business; there is no risk of losing business.
SEVERITY 4: TECHNICAL: Enhancement requests for hardware, software,
manuals or electronic services. Customer Sensitivity: The problem is not
currently impacting the customer's day to day business, but may in the future;
there is no risk of losing business.
REPAIR. "Repair" means the repair or replacement of a Product or part.
SOFTWARE PATCH. "Software Patch" refers to executable software created and
made available to correct an Error or malfunction identified in a specific
version of software.
SOFTWARE UPDATE. "Software Update" means a formal software release (i)
which provides functionality enhancements, reliability enhancements, and other
modifications to the Product software or (ii) that is a maintenance release that
corrects deficiencies and/or bugs affecting performance to the published
specifications.
TECHNICAL SUPPORT LEVELS. "Level" means a certain class of service provided
to authorized resellers and end users. Definitions are as follows:
LEVEL ONE: First call support on all customer calls; technical support
staff answers technical inquiries regarding Products, and provides problem
diagnostics services for identifying Problems and generic application faults,
analysis, and where possible, Problem resolution.
LEVEL TWO: Specialist level technical support; technical
support/escalation staff performs Problem isolation and replication, lab
simulations and interoperability testing, provides remote diagnostics
capabilities and on-site troubleshooting, if required, and implements a solution
for a Problem that is not the result of a Product Error. In the case of a
Product Error, the technical staff is able to identify the source of the Error,
create a reproducible test case, and document the details of the Error for
escalation to Seller.
LEVEL THREE: Backup engineering and technical support; staff isolates
a Problem/ Error and implements a solution, including, but not limited to, a
Product change.
WORKAROUND. A "Workaround" is a feasible change in operating procedures
whereby an end user can avoid any deleterious effects of an Error.
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3. TECHNICAL SUPPORT SERVICES.
3.1 SUPPORT SERVICES. 3Com shall provide [***]. Seller shall provide [***]
and shall make [***]. Seller will provide such [***] commencing as of the
Effective Date, during Seller's normal business hours (weekdays, 8am - 6pm
Pacific Time), excluding public holidays, at no charge to 3Com. 3Com may request
that Seller provide [***] at rates to be agreed upon by the parties. 3Com's
[***] will have direct access to [***], as well as to Seller's [***].
[***] will be the primary [***] between 3Com's and Seller's [***].
3Com will provide a list of [***]. Seller will provide a list of [***]. These
lists will be reviewed quarterly and updated as required. 3Com will be permitted
to register up to [***].
3Com shall reasonably attempt to resolve [***] for the Products prior
to contacting Seller. Seller will not contact or provide [***] to 3Com's
customers with respect to the Products pursuant to this Agreement without 3Com's
prior approval. Seller will provide an [***]. If unable to resolve, 3Com and
Seller will agree, in good faith, what additional information and/or
documentation will be required for resolution. Seller shall work with 3Com in
attempting to reproduce any such problem. Problem resolution shall be managed in
accordance with Section 3.3 hereof.
3.2 EMERGENCY TECHNICAL SUPPORT. Except as set forth in Section 10.5 of
the Agreement (Epidemic Failure), and in this Exhibit C (Support Services),
Seller shall have no responsibility for providing [***] directly to 3Com's
authorized resellers and end users. However, for [***] deemed by 3Com to require
[***] that would be significantly facilitated by Seller's [***] and such [***]
is requested by 3Com, Seller agrees to use its reasonable best efforts to
provide such [***]. 3Com will attempt to manage the [***], such that Seller's
[***] to the customer and shall reimburse Seller for its time at mutually
agreeable and reasonable rates, plus other reasonable expenses approved in
advance by 3Com. In situations where the site visit was precipitated by a known
(but unresolved) or acknowledged Seller problem, 3Com will not reimburse Seller
for [***].
3.3 PROBLEM RESOLUTION/ERROR CORRECTION. 3Com and Seller shall promptly
agree in good faith to any information and/or documentation which may be
required to permit Seller to identify and [***] including but not limited to
Errors. Seller agrees to respond to identified [***].
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SEVERITY 1. Seller shall use its reasonable best efforts to resolve or
reduce the [***] of receipt of notice of such Error. At 3Com's written
request, Seller shall provide its [***] and regular status updates. A
proposed final resolution shall be identified in the action plan. 3Com
and Seller problem managers shall [***].
SEVERITY 2. Seller shall use its reasonable best efforts to resolve or
reduce the [***] of receipt of notice of such Error. At 3Com's written
request, Seller shall provide an [***] and regular status updates. 3Com and
Seller problem managers shall [***]. A final proposed resolution shall be
identified in the action plan.
SEVERITY 3. Seller shall use reasonable efforts to acknowledge the
Problem within [***] of receipt of notice. Seller shall provide a proposed
final resolution within [***], whichever is sooner.
SEVERITY 4. Seller shall use commercially reasonable efforts to
acknowledge the Problem within [***] of receipt of notice. A proposed final
resolution will be determined and scheduled through mutual agreement
between 3Com and Seller Engineering and Marketing management.
The prescribed correction periods above may be extended as mutually agreed,
e.g., if resolution of problem requires timely hardware certification or test,
or if resolution represents significant risk to the essential functions.
3.4 PROBLEM STATUS. Seller shall provide 3Com, as a common business
practice, a [***] by which 3Com may receive a [***] and/or resolved. This [***]
shall contain known [***].
3.5 SUPPORT TOOLS. At [***] to 3Com, Seller shall provide [***] necessary
to [***] and [***] in Problem identification, isolation and resolution.
Seller shall also provide the following additional support tools, if
available: (i) [***]. Seller shall further promptly provide to 3Com when
available, all modifications or other revisions to such support tools.
3.6 SUPPORT EVALUATION. From time to time following acceptance by 3Com of
the Products, but no less frequently than [***] from each party will meet to
[***] regarding, the [***] provided to 3Com under this Agreement.
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4. HARDWARE SUPPORT SERVICES.
4.1 REPAIR SERVICES. Subject to the end of life purchase option
provisions set forth below, 3Com shall have the right to [***] purposes as
applicable during the term of this Agreement, and thereafter for a period of
[***] of the affected Product hereunder, notwithstanding the expiration of this
Agreement. Such purchases shall be governed by the applicable terms and
conditions set forth herein. Seller may fulfill its [***] obligations under this
Exhibit C with alternative replacement product, provided such product is
compatible and equivalent in form, fit and function. The prices charged during
the term for such spare parts shall be at the lowest prices then charged by
Seller to any other customer for similar quantities and similar volume
commitments of the same or comparable items under substantially similar terms
and conditions. After expiration, prices shall be Seller's then-standard prices.
4.2 END OF LIFE LAST BUY PURCHASE OPTION. Seller's obligation to
provide replacement Products under this Exhibit C is limited as follows. If
Seller notifies 3Com in writing that Seller will no longer manufacture the
Product, then Seller will provide 3Com a [***] to place for delivery during such
period a [***] under Section 18 of the Agreement.
4.3 INVENTORY MANAGEMENT REQUIREMENTS. Seller will provide [***] for
the Products. The data shall include [***]. Seller will also provide the [***].
This data will provided within [***] after Effective Date.
4.4 TEST AND REPAIR PROCEDURES. At [***] to 3Com, Seller shall provide
[***] necessary to enable 3Com [***].
4.5 PRODUCT REPAIRS. Subject to Section 18 of the Agreement, Seller
will [***] and forward the same back to 3Com. Seller will [***] in accordance
with the Specifications. Subject to the terms and conditions of this Agreement,
if Seller provides [***], Seller shall charge rates as specified in [***]. As
set forth in Section 18, this statement excludes Product which has been [***].
3Com reserves the option to perform [***] designated by 3Com. In the event 3Com
exercises the option to perform [***] Seller shall provide all required [***]
subject to the [***] to be entered into by the parties.
4.6 RETURN MATERIAL AUTHORIZATION (RMA). Seller shall provide 3Com
with RMA procedures. The following procedure shall apply to Seller's Repair of
Products.
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(i) MANAGEMENT. Seller will use commercially reasonable efforts
to provide 3Com with an RMA number within [***] after receipt of request. 3Com
Repair RMA returns of Products will be managed through a 3Com Repair center.
3Com shall notify Seller if it opens more than [***] such Repair centers. Seller
will provide [***] to manage 3Com returns. 3Com shall return Product to Seller's
closest geographic Repair center.
(ii) TURN-AROUND TIME. Seller will Repair the defective Product
and forward the same back to 3Com within [***] after receipt.
(iii) REPORTING. Seller will provide a [***], including [***].
Upon special request, Seller will provide inventory status within [***].
(iv) SHIPPING CHARGES. 3Com will [***] on Products shipped to
Seller for Repair. Seller will [***] on Products returned to 3Com.
(v) PACKAGING REQUIREMENTS. Seller and 3Com will [***] a Repair
shipping process prior to FCS/First Customer Ship of a Product by 3Com that
satisfies packaging requirements for both parties. On all Products returned to
3Com, Seller will [***].
4.7 DEAD ON ARRIVAL. Subject to Section 18 of the Agreement, in the
event that a Product completely fails to function within the first forty-eight
(48) hours of installation (dead on arrival or DOA), Seller agrees to replace
the failed Product with a new Product and will ship to 3Com replacement units
within [***]. Such Product will be identified as DOA at the time of the RMA
request, and will be [***].
4.8 NO PROBLEM FOUND (NPF). Seller shall provide statistics on Product
NPF returns on a [***]. In the event that more than [***] of the Products
returned within a [***] are NPF, both parties agree to [***].
5. TRAINING SERVICES.
5.1 TECHNICAL TRAINING. During the term of this Agreement, Seller
shall, [***] provide 3Com with [***] engaged in the technical support and
training of the Product. Training will be conducted at 3Com's facilities in
Santa Clara, California or such other mutually agreeable facility.
Each training course shall commence on a mutually agreed upon date. Such
training shall cover in detail, [***]. Seller shall provide a reasonable
quantity of appropriate Product units as training aids. When such classes are
conducted at 3Com's facilities, 3Com shall provide other required equipment as
training aides. Seller shall provide copies of the student training
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guide, and all other necessary materials to each trainee and to 3Com. 3Com may
[***].
Upon the release of each new Product or new version of existing Product
with substantial functional changes, Seller shall provide to 3Com, [***].
Seller shall [***] throughout the term of this Agreement at Seller's
[***]. If conducted at other than 3Com's Santa Clara facility or Seller's
facility, 3Com shall [***] during the period of such training. Seller shall
[***] related to such training. Seller shall [***] which [***] and shall include
copies of all [***] therefor. [***]
5.2 TRAINING COURSES AND MATERIALS. During the term of this Agreement,
Seller shall provide 3Com with [***] of all [***] to provide training in
connection with the Products. Training shall include, but is not limited to,
[***]. Seller shall provide [***]. Seller shall further provide copies of all
[***] as they become available. Subject to the terms and conditions of this
Agreement, Seller hereby grants 3Com a [***].
6. TERM OF SERVICES.
Seller agrees to provide [***] during the term of the Agreement (including
any renewals thereof), and thereafter, following the date of the last unit of
Product delivered (Final Delivery Date). [***] will be provided as defined in
Section 4.1 of this Exhibit C. [***] as defined in Section 3 of this Exhibit C,
will be provided during the [***,] regardless of an earlier termination or
expiration of the Agreement.
33.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
EXHIBIT D
DEVELOPMENT OF THE DEVICE
1. JOINT DEVELOPMENT.
1.1 DEVELOPMENT PROGRAM. [***] in accordance with the [***] including
without limitation performing the tasks described in Schedule A to this Exhibit
D. Seller will [***] to such [***] in the manner described in Schedule A and in
Section 3 below. Each Party will bear its own costs incurred by it to accomplish
its responsibility in the [***].
1.2 PROJECT MANAGERS. Each Party shall [***] a [***] and [***] with the
other Party with respect to the [***] of the [***]. The parties' respective
project managers shall participate in project review meetings as mutually
agreed. Either party may change its project manager from time to time upon
notice to the other party.
2. TESTING.
2.1 ACCEPTANCE AND COMPATIBILITY TESTING. Upon completion of [***], the
parties will conduct product quality and DSL Specification conformance testing
in accordance with the Testing Criteria.
2.2 OTHER TESTING. 3Com will be responsible for obtaining or performing
all necessary government regulatory compliance testing and other testing and
certification necessary for the Device.
2.3 SELLER EQUIPMENT FOR TESTING. In addition to performing DSL
Specification conformance testing and such other testing responsibilities as the
parties may decide to allocate to Seller, Seller will provide 3Com with a DSL
access multiplexer ("DSLAM") with both SDSL and ISDL capability in a mutually
acceptable configuration at no charge to be utilized for the sole purpose of
testing [***] and for ongoing interoperability testing thereafter. This unit
will be kept current with the latest software and hardware as released by Seller
for beta and general availability. 3Com shall make no modifications to the DSLAM
or use it for any other purpose than the testing contemplated in this Section
2.3 for the Device or any other device or equipment upon which the parties
mutually agree. Upon expiration or termination of this Agreement for any reason,
3Com shall return the DSLAM to Seller.
3. MODIFICATIONS AND FUTURE DEVELOPMENTS.
3.1 CHANGES TO THE DSL SPECIFICATIONS. During the term hereof, changes
in telecommunications regulations or in DSL technology may require changes to
the DSL Specifications and therefore the Device. Should regulatory or other
changes affect the DSL Specifications, Seller shall notify 3Com of such changes,
or 3Com may propose such changes to
34.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
Seller. Any modification to the Device that could affect Seller-compatibility is
subject to approval by both parties. Seller and 3Com shall work together in
accordance with the procedures set forth in this Agreement to develop updated
Devices that conform to the modified DSL Specifications. 3Com agrees not to make
any modifications to the Devices that will affect the ability of the Devices to
operate in accordance with the DSL Specifications without Seller's prior written
consent.
3.2 FOLLOW-ON DEVELOPMENT WORK. The parties may undertake [***] for
[***] that [***] the [***]. The terms for such [***] will be determined at the
time by mutual agreement.
35.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
SCHEDULE A TO EXHIBIT D
DEVELOPMENT PROGRAM AND DEVICE SPECIFICATIONS
DSL SPECIFICATIONS
to be attached as Attachment A-1
TESTING CRITERIA
to be attached as Attachment A-2
SELLER RESPONSIBILITIES:
1. [***]
2. [***]
3. [***]
4. [***]
5. [***]
3COM RESPONSIBILITIES.
1. [***]
2. [***]
3. [***]
4. [***]
5. [***]
PORTING
[***]
36.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
EXHIBIT E
MARKETING COMMITMENTS
JOINT PR ACTIVITIES
1. In addition to the joint press release provided for in Section 26.7
of the Agreement, 3Com will issue a press release announcing the general
availability of the Device and 3Com will make available one or more marketing
personnel to take part with Seller marketing personnel in joint briefings of
industry analysts and editors.
2. During the term of the Agreement, all Press Release announcements
regarding the CR201 or the Device will include the following sentence in the
main body of the press release prior to the general "About 3Com" section:
"Copper Mountain Networks, Inc., has verified that the [3Com
product name] provides "CopperCompatible/TM/" interoperability
with Copper Mountain DSL equipment."
VAR CHANNEL ACTIVITIES
1. [***]
2. [***]
WWW ACTIVITIES
1. 3Com will create WWW pages to describe the Product and the Device.
On the 3Com WWW home page, 3Com will add an xDSL entry to the "Select a Product
Category" pull-down menu directing users to the pages which describe the Product
and the Device.
2. [***]
37.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
TRADE SHOW/DEMO ACTIVITIES
1. 3Com will provide Seller with samples of the 3Com Branded CR201 and
Devices and permission to display or demo each in Seller trade show booths, demo
suites, and at the Seller corporate demo room housed in Seller's offices. Seller
will not discuss or show 3Com in a negative manner when undertaking such
activities.
2. [***] At 3Com's option, Seller will make available personnel to
help staff this demo on a part-time basis. Seller acknowledges that the Seller
DSLAM does not have to be displayed or in public view at any such booth.
MISCELLANEOUS
1. 3Com will permit Seller to display 3Com Branded CR201 and Device
product descriptions and images in Seller promotional literature and on the
Seller WWW site, identified as 3Com products compatible with Seller DSLAMs.
38.
[***] = Certain information on this page has been omitted and filed separately
with the Commission. Confidential treatment has been requested with
respect to the omitted portions.
<PAGE>
EXHIBIT 10.34
STANDARD FULL SERVICE GROSS OFFICE LEASE
BETWEEN
PACIFIC SORRENTO MESA HOLDINGS, L.P.,
A CALIFORNIA LIMITED PARTNERSHIP, AND
PACIFIC STONECREST HOLDINGS, L.P.,
A CALIFORNIA LIMITED PARTNERSHIP, AS TENANTS IN COMMON
AS LANDLORD
AND
COPPER MOUNTAIN NETWORKS, INC., A CALIFORNIA CORPORATION
AS TENANT
[_] LANDLORD'S ORIGINAL
[_] TENANT'S ORIGINAL
[_] TENANT'S FILE COPY (Discard upon full
execution of Tenant's original)
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
TABLE OF CONTENTS
Page
----
1. Agreement to Let...........................................................1
2. Principal Lease Provisions.................................................1
2.1. "Project"............................................................1
2.1.1. "Building"....................................................1
2.2. "Premises"...........................................................1
2.3. Rentable Area of the Premises........................................1
2.4. "Initial Lease Term".................................................1
2.4.1. "Lease Commencement Date".....................................1
2.4.2. "Initial Expiration Date".....................................1
2.4.3. Extension Rights..............................................1
2.5. "Rentable Area," "Rentable Square Feet," "Rentable Square Footage,"
"Usable Area," "Usable Square Feet," and "Usable Square Footage".....1
2.6. "Basic Monthly Rent".................................................1
2.6.1. "Rent Commencement Date"......................................1
2.7. "Security Deposit"...................................................1
2.8. "Base Year"..........................................................1
2.9. Guarantor............................................................1
2.10. Address for Landlord.................................................1
2.11. Addresses for Tenant.................................................2
2.12. Permitted Uses By Tenant.............................................2
2.13. Building Standard Operating Hours and Days...........................2
2.14. Permitted Trade Name.................................................2
2.15. Participating Brokers................................................2
2.16. Amounts Payable upon Lease Execution.................................2
3. Term.......................................................................2
4. Delivery of Possession.....................................................2
5. Use of Premises and Common Areas...........................................2
5.1. Permitted Use of Premises............................................2
5.2. Compliance With Laws.................................................2
5.3. Condition During Periods of Non-Use; Recapture.......................3
5.4. Use of Common Areas..................................................3
5.5. General Covenants and Limitations on Use.............................3
6. Security Deposit...........................................................3
7. Rent.......................................................................4
8. Additional Rent............................................................4
8.1. Additional Rent; Rent................................................4
8.2. Definitions..........................................................4
8.2.1. Base Year....................................................4
8.2.2. Building's Operating Costs...................................4
8.2.3. Building's Pro Rata Share....................................5
8.2.4. Direct Expenses..............................................5
8.2.5. Expense Year.................................................5
8.2.6. Operating Expenses...........................................5
8.2.7. Project Operating Costs......................................5
8.2.8. Tenant's Share...............................................5
8.3. Adjustment of Operating Expenses.....................................5
8.3.1. Gross Up Adjustment When Building Is Less Than Fully
Occupied.....................................................5
8.3.2. Adjustment When Landlord Does Not Furnish a Service to All
Tenants......................................................6
8.3.3. Common Areas.................................................6
8.4. Tax Expenses.........................................................6
8.4.1. Definition of Taxes and Tax Expenses.........................6
8.4.2. Adjustment of Taxes..........................................6
8.5. Calculation and Payment of Additional Rent...........................6
8.5.1. Calculation of Excess........................................6
8.5.2. Statement/Payment of Direct Expenses.........................6
8.6. Landlord's Books and Records.........................................7
9. Utilities and Services.....................................................7
9.1. Heating and Air Conditioning.........................................7
9.2. Electricity..........................................................7
9.3. Water................................................................7
9.4. Janitorial Service...................................................7
9.5. Over-Standard Tenant Use.............................................7
9.6. Conduit and Wiring...................................................7
9.7. Utilities Generally..................................................7
10. Maintenance................................................................8
10.1. Tenant's Duties......................................................8
10.2. Landlord's Duties....................................................8
i
Landlord___________Tenant___________
<PAGE>
11. Parking....................................................................8
12. Signs......................................................................8
13. Rules, Regulations, and Covenants..........................................9
14. Early Access Insurance.....................................................9
15. Plate-Glass Insurance......................................................9
16. Public Liability and Property Damage Insurance.............................9
17. Fire and Extended Coverage Insurance.......................................9
18. Business Interruption Insurance............................................9
19. Insurance Generally........................................................9
20. Waiver of Subrogation.....................................................10
21. Landlord's Insurance......................................................10
22. Taxes.....................................................................10
22.1. Personal Property Taxes............................................10
22.2. Real Property Taxes Imposed Upon the Premises......................10
23. Alterations...............................................................10
24. Surrender of Premises and Holding Over....................................11
25. Default...................................................................11
26. Landlord's Remedies.......................................................12
26.1. Continuation of Lease..............................................12
26.2. Rent from Reletting................................................12
26.3. Termination of Tenant's Right to Possession........................12
26.4. Landlord's Right to Cure Default...................................12
26.5. Enforcement of Costs...............................................12
27. Interest and Late Charges.................................................12
28. Payment of Rent by Cashier's Check........................................13
29. Destruction...............................................................13
30. Condemnation..............................................................13
31. Assignment and Other Transfers............................................14
32. Common Areas; Continued Development of Project............................15
33. Relocation................................................................15
34. Access by Landlord........................................................15
35. Landlord's Reserved Rights................................................15
36. Indemnity and Exemption of Landlord from Liability........................15
37. Hazardous Substances......................................................16
38. Prohibition Against Asbestos-Containing Materials.........................17
39. Security Measures.........................................................17
40. Subordination and Attornment..............................................17
41. Estoppel Certificate......................................................18
42. Waiver....................................................................18
43. Brokers...................................................................18
44. Easements.................................................................18
45. Limitations on Landlord's Liability.......................................18
46. Sale or Transfer of Premises..............................................18
47. Quitclaim Deed............................................................19
48. No Merger.................................................................19
49. Confidentiality...........................................................19
50. Miscellaneous.............................................................19
ii
Landlord___________Tenant___________
<PAGE>
STANDARD FULL SERVICE GROSS OFFICE LEASE
This Standard Full Service Gross Office Lease ("Lease") is made, for
reference purposes only, this 31st day of March, 1999, between AMERICAN ASSETS,
INC., As Agent For PACIFIC SORRENTO MESA HOLDINGS, L.P., a California limited
partnership, and PACIFIC STONECREST HOLDINGS, L.P., a California limited
partnership, as tenants in common (together, "Landlord"), and COPPER MOUNTAIN
NETWORKS, INC., a California corporation ("Tenant"), who agree as follows:
1. Agreement to Let. Landlord hereby leases to Tenant, and Tenant hereby
----------------
leases from Landlord, upon all the terms, provisions, and conditions contained
in this Agreement, those certain premises described in Paragraph 2.2, below (the
"Premises"), consisting of a portion of that certain building described in
Paragraph 2.1.1 below (the "Building"), which is a part of the Project (as
defined in Paragraph 2.1, below), along with the non-exclusive right to use, in
common with Landlord, Landlord's invitees and licensees, and the other users of
space within the Project, those portions of the Project intended for use by the
tenants of the Project in common including, without limitation, the landscaped
areas, passageways, walkways, hallways, parking areas, and driveways (the
"Common Areas"). This Lease confers no rights, however, to the roof, exterior
walls, or utility raceways of the Building nor rights to any other building (if
any) in the Project, nor with regard to either the subsurface of the land below
the ground level of the Project or with regard to the air space above the
ceiling of the Premises; provided, however, that Tenant shall have the limited
right to access systems and equipment exclusively serving the Premises (for
which Tenant has maintenance and repair responsibilities pursuant to Paragraph
10.1 below) that may be located on the roof, in exterior or demising walls, in
utility raceways, airspace or in any other portion of the Building or Project
for the sole purpose of maintaining, repairing and replacing the same.
2. Principal Lease Provisions. The following are the Principal Lease
--------------------------
Provisions of this Lease. Other portions of this Lease explain and define the
Principal Lease Provisions in more detail and should be read in conjunction with
this Paragraph. In the event of any conflict between the Principal Lease
Provisions and the other portions of this Lease, the Principal Lease Provisions
shall control. (Terms shown in quotations are defined terms used elsewhere in
this Lease).
2.1. "Project": To be determined (see Exhibit "A").
-----------
2.1.1. "Building": 10145 Pacific Heights Blvd., San Diego,
California (see Exhibit "A" and Addendum No. 1).
----------- --------------
2.2. "Premises": Entire Second and Third Floors and Approximately
11,422 Rentable Square Feet on the First Floor (see Exhibit "B").
- ------ -----------
2.3. Rentable Area of the Premises: Approximately 60,942 Rentable
------
Square Feet of space.
2.4. "Initial Lease Term": Six years (estimated, subject to Exhibit
-------
"C") (beginning as of the Lease Commencement Date).
- ---
2.4.1. "Lease Commencement Date": June 1, 1999 (estimated date;
------------
see Exhibit "C").
-----------
2.4.2. "Initial Expiration Date": July 31, 2005 (estimated date;
-------------
see Exhibit "C" and Addendum No. 1) (the Initial Expiration Date stated herein,
----------- --------------
even if adjusted pursuant to Exhibit "C", shall always be the last day of a
-----------
calendar month).
2.4.3. Extension Rights: Yes [X] No [_] (subject to the terms and
conditions of the attached Addendum No. 1).
--------------
2.5. "Rentable Area," "Rentable Square Feet," "Rentable Square
Footage," "Usable Area," "Usable Square Feet," and "Usable Square Footage" will
be calculated under the American National Standard Method for Measuring Floor
Area in Office Buildings, ANSI Z65.1C1996 (revised and adopted June 7, 1996) or
successor standard(s), adopted by the Building Owners and Managers Association
International (BOMA).
2.6. "Basic Monthly Rent": [***] (subject to
-----
adjustment as provided in attached Addendum No. 1). Basic Monthly Rent shall
--------------
always be due on or before the first day of each month when due.
2.6.1. "Rent Commencement Date": See Exhibit "C" and Addendum
----------- --------
No. 1.
- -----
2.7. "Security Deposit": [***]. Tenant's Security Deposit does
-----
not constitute last month's rent. Last month's rent must be separately paid by
- ---
Tenant on or before the first day of the last month of the Lease Term.
2.8. "Base Year": The calendar year of 1999.
----
2.9. Guarantor: N/A.
2.10. Address for Landlord: PACIFIC SORRENTO MESA HOLDINGS, L.P. and
PACIFIC STONECREST HOLDINGS, L.P.
c/o American Assets, Inc.
-------------------------
1
Pacific Tower Full Service Gross Office
Copper-Mountain-Lease: 08027.208 Landlord___________Tenant___________
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
11455 El Camino Real, Suite 200
-------------------------------
San Diego, CA 92130
--------------------
2.11. Addresses for Tenant: Legal Notice Address (following occupancy)
Copper Mountain Networks, Inc.
10145 Pacific Heights Blvd.
San Diego, CA 92121
Legal Notice Address (prior to occupancy)
Copper Mountain Networks, Inc.
3931 Sorrento Valley Blvd.
San Diego, CA 92121
2.12. Permitted Uses By Tenant: Office and research and development
-----------------------------------
and, with respect to the first floor only, light assembly, testing and shipping
- -------------------------------------------------------------------------------
("Permitted Use").
2.13. Building Standard Operating Hours and Days: Mondays through
Fridays from 7 a.m. through 7 p.m. and on Saturdays from 9 a.m. through 1 p.m.
2.14. Permitted Trade Name: Copper Mountain Networks, Inc.
2.15. Participating Brokers: [***].
-----
2.16. Amounts Payable upon Lease Execution: [***].
-----
3. Term. The term of this Lease ("Term") shall commence on the "Lease
----
Commencement Date", as defined in Paragraph 2.4.1, above, and shall expire on
the "Initial Expiration Date", as defined in Paragraph 2.4.2, above, subject to
(i) any modifications to such dates described in Exhibit "C" to this Lease, (ii)
any extension rights described in the Addendum to this Lease, and (iii) earlier
termination, as provided in this Lease. The term "Expiration Date", as used in
this Lease shall mean the Initial Expiration Date, any earlier date upon which
this Lease is terminated or if the Term is extended, then any extended Term
expiration date.
4. Delivery of Possession. On or before the Lease Commencement Date,
----------------------
Landlord, at its cost, shall have substantially completed the work, if any,
required to be completed by Landlord prior to the delivery of the Premises to
Tenant, as described in Exhibit "C" to this Lease (the "Landlord's Work"). For
-----------
purposes of this Paragraph, the term "substantially complete" shall mean
completed to such an extent that Tenant can commence its work, if any, to be
undertaken by Tenant, as described in Exhibit "C" to this Lease (the "Tenant's
-----------
Work"), without material delay or interference due to the completion of
Landlord's Work, or if no such Tenant's Work is to be undertaken, then such term
shall mean completed to such an extent that the Landlord's Work can be finally
completed within 30 days and without material interference to Tenant's occupancy
and use of the Premises. If possession of the Premises (including, without
limitation, substantial completion of the Landlord's Work, if any) is not
delivered to Tenant on or before the Lease Commencement Date stated in Paragraph
2.4.1, above, then Landlord shall not be liable for any damage caused by such
delay, and such delay shall neither affect the validity of this Lease, affect
Tenant's obligations under this Lease, nor extend the Term. Tenant's acceptance
of possession of the Premises shall constitute Tenant's acknowledgment that it
has inspected the Premises, that Tenant accepts the Premises in its then "as is"
condition. Except for any items set forth on a written "punch-list" of excepted
items delivered to Landlord upon the Lease Commencement Date, Tenant shall be
deemed to have (i) acknowledged that Landlord's Work has been substantially
completed, (ii) accepted the Premises in its then as-is condition with no right
to require Landlord to perform any additional work therein, except as set forth
on the punch list, and (iii) waived any express or implied warranties regarding
the condition of the Premises, including any implied warranties of fitness for a
particular purpose or merchantability. Notwithstanding anything to the contrary
contained herein, Landlord warrants that, to the best of Landlord's knowledge,
on the Rent Commencement Date: (a) the Premises shall comply with all laws,
codes, ordinances and other governmental requirements then applicable to the
Premises and the Building, and (b) the Premises, including the improvements and
equipment therein, shall be in first class condition and repair. If, as of the
Rent Commencement Date, the Premises shall fail in either of the following
respects and such failure adversely affects Tenant's use or enjoyment of the
Premises, then Landlord shall cure such failure at Landlord's sole cost: (A)
compliance with any law, code, ordinance or other governmental requirement then
applicable to the Premises and the Building (including without limitation the
ADA), or (B) the electrical, plumbing or HVAC systems of the Premises and
Building being in first class condition and repair. See Addendum No. 1.
--------------
5. Use of Premises and Common Areas.
--------------------------------
5.1. Permitted Use of Premises. Tenant may use the Premises for the
-------------------------
Permitted Use specified in Paragraph 2.12 and for no other use. Any change in
the Permitted Use (or any change in Tenant's trade name from the Permitted Trade
Name identified in Paragraph 2.14, above) shall require Landlord's prior written
consent, which consent may be granted or withheld in Landlord's reasonable
discretion.
5.2. Compliance With Laws. Tenant shall comply with all laws
--------------------
concerning the Premises and/or Tenant's use of the Premises, including without
limitation the obligation at Tenant's sole cost to alter, maintain, or restore
the Premises in compliance with all applicable laws, even if such laws are
enacted after the date of this Lease, even if compliance entails costs to Tenant
of a substantial nature and even if compliance requires structural
2
Pacific Tower Full Service Gross Office
Copper-Mountain-Lease: 08027.208 Landlord___________Tenant___________
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
alterations. Such obligation to comply with laws shall include without
limitation compliance with Title III of the Americans With Disabilities Act of
1990 (42 U.S.C. 12181 et seq.) (the "ADA"). If Tenant's specific use of the
Premises results in the need for modifications or alterations to any portion of
the Common Areas or the Project in order to comply with the ADA, then Tenant
shall additionally be responsible for the cost of such modifications and
alterations.
5.3. Condition During Periods of Non-Use; Recapture. During any period
----------------------------------------------
of time in which Tenant is not continuously using and occupying the Premises,
Tenant shall take such measures as may be necessary or desirable, in Landlord's
reasonable opinion, to secure the Premises from break-ins and use by
unauthorized persons, to minimize the appearance of non-use, and to otherwise
maintain the interior and exterior portions of Tenant's Premises, including all
windows and doors, in first class condition and consistent with the manner in
which the Premises were maintained during Tenant's occupancy.
5.4. Use of Common Areas. Tenant's use of the Common Areas shall at
-------------------
all times comply with the provisions of all reasonable rules and regulations
regarding such use as Landlord may from time to time adopt. In no event shall
the rights granted to Tenant to use the Common Areas include the right to store
any property in the Common Areas, whether temporarily or permanently. Any
property stored in the Common Areas by Tenant may be removed by Landlord and
disposed of, and the cost of such removal and disposal shall be payable by
Tenant upon demand. Additionally, in no event shall Tenant use any portion of
the Common Areas for loading, unloading, or parking, except in those areas
specifically designated by Landlord for such purposes, nor for any sidewalk sale
or similar commercial purpose.
5.5. General Covenants and Limitations on Use. Tenant shall not do,
----------------------------------------
bring, or keep anything in or about the Premises that will cause a cancellation
of any insurance covering the Premises. If the rate of any insurance carried by
Landlord is increased as a result of Tenant's use or Tenant's failure to
continuously use and occupy the Premises, Tenant shall pay to Landlord, within
ten days after Landlord delivers to Tenant a notice of such increase, the amount
of such increase. Furthermore, Tenant covenants and agrees that no noxious or
offensive activity shall be carried on, in or upon the Premises nor shall
anything be done or kept in the Premises which may be or become a public
nuisance or which may cause unreasonable disturbance or annoyance to others in
the Building, in the Project, or on adjacent or nearby property. To that end,
Tenant additionally covenants and agrees that no light shall be emitted from the
Premises which is unreasonably bright or causes unreasonable glare; no sounds
shall be emitted from the Premises which are unreasonably loud or annoying; and
no odor shall be emitted from the Premises which is or might be noxious or
offensive to others in the Building, on the Project, or on adjacent or near-by
property. Tenant shall not conduct or permit any "fire sale", public auction,
sidewalk sale, going out of business sale, or other such event in or about the
Premises. All unsightly equipment, objects, and conditions shall be kept
enclosed within the Premises and screened from view; no refuse, scraps, debris,
garbage, trash, bulk materials, or waste shall be kept, stored, or allowed to
accumulate except as may be properly enclosed within the Premises; the Premises
shall not be used for sleeping or washing clothes, nor shall the Premises be
used for cooking (unless the Permitted Use is as a restaurant) or the
preparation, manufacture, or mixing of anything that might emit any odor or
objectionable noises or lights onto the Project or nearby properties; and all
pipes, wires, poles, antennas, and other facilities for utilities or the
transmission or reception of audio or visual signals shall be kept and
maintained enclosed within the Premises. Tenant shall be solely responsible for
the timely removal of all refuse, scraps, debris, garbage, trash, bulk
materials, or waste from the Premises and the deposit thereof in the trash
containers or dumpsters located adjacent to the Building. Further, Tenant shall
not keep or permit to be kept any motorcycle, or other vehicle, nor any animal
(excluding seeing-eye dogs), bird, reptile, or other exotic creature in the
Premises. Neither Tenant nor Tenant's Invitees (as defined in Paragraph 6 below)
shall do anything that will cause damage or waste to the Project. Neither the
floor nor any other portion of the Premises shall be overloaded. No machinery,
apparatus, or other appliance shall be used or operated in or on the Premises
that will in any manner injure, vibrate, or shake all or any part of the
Project. In the event of any breach of this Paragraph 5 by Tenant or Tenant's
Invitees, Landlord, at its election, may pay the cost of correcting such breach
and Tenant shall immediately, upon demand, may pay the cost thereof, plus a
supervisory fee in the amount of ten percent (10%) of such cost. Notwithstanding
the foregoing or anything to the contrary contained in this Lease, Tenant shall
not be responsible for compliance with any laws, codes, ordinances or other
governmental directives where such compliance would require capital expenditures
and is not related specifically to Tenant's use and occupancy of the Premises.
For example, if any governmental authority should require the Building or the
Premises to be structurally strengthened against earthquake, or should require
the removal of asbestos from the Premises and such measures are imposed as a
general requirement applicable to all tenants rather than as a condition to
Tenant's specific use or occupancy of the Premises, such work shall be performed
by and at the sole cost of Landlord.
6. Security Deposit. Upon the execution of this Lease, Tenant shall deposit
----------------
with Landlord cash in the amount of the Security Deposit set forth in Paragraph
2.7, above (the "Security Deposit"), to secure the performance by Tenant of its
obligations under this Lease, including without limitation Tenant's obligations
(i) to pay Basic Monthly Rent, Additional Rent, and (if applicable) Percentage
Rent, (ii) to repair damages to the Premises and/or the Project caused by Tenant
or Tenant's agents, employees, contractors, licensees, and invitees
(collectively, "Tenant's Invitees"), (iii) to surrender the Premises in the
condition required by Paragraph 24, and (iv) to remedy any other defaults by
Tenant in the performance of any of its obligations under this Lease. If Tenant
commits any default under this Lease, Landlord may, at its election, use the
Security Deposit to cure such defaults, and to compensate Landlord for all
damage suffered by Landlord from such defaults, including, without limitation,
reasonable attorneys' fees and costs incurred by Landlord. Upon demand by
Landlord, Tenant shall promptly pay to Landlord a sum equal to any portion of
the Security Deposit so used by Landlord, in order to maintain the Security
Deposit in the amount set forth in Paragraph 2.7, above. Following the
Expiration Date or earlier termination of this Lease, and within 30 days
following Tenant's vacation of the Premises, Landlord shall deliver to Tenant,
at Tenant's last known address, any portion of the Security Deposit not used by
Landlord, as provided in this Paragraph.
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Landlord may commingle the Security Deposit with Landlord's other funds and
Landlord shall not pay interest on such Security Deposit to Tenant.
7. Rent. Tenant shall pay to Landlord as minimum monthly rent, without
----
deduction, setoff, prior notice, or demand, the Basic Monthly Rent described in
Paragraph 2.6, above (subject to adjustment as provided in the attached
Addendum), in advance, on or before the first day of each calendar month,
beginning on the Rent Commencement Date and thereafter throughout the Term. If
the Rent Commencement Date is other than the first day of a calendar month, then
the Basic Monthly Rent payable by Tenant for the first month of the Term
following the Rent Commencement Date (which first month shall be payable upon
execution of this Lease) shall be prorated on the basis of the actual number of
days during the Term occurring during the relevant month. Notwithstanding the
foregoing, if Landlord is delayed in completion of Landlord's Work due to any
act or omission by Tenant or its agents, employees, contractors, or
representatives, then in addition to the Basic Monthly Rent payable for the
first month of the Term following the Rent Commencement Date, Tenant shall
additionally pay to Landlord, upon the Rent Commencement Date, additional rent
(at the rate of one-thirtieth of the Basic Monthly Rent per day) for the number
of days of such delay. All "Rent" (which includes Basic Monthly Rent, and any
items designated as "Additional Rent" hereunder) shall be paid to Landlord at
the same address as notices are to be delivered to Landlord pursuant to
Paragraph 2.10, above. The Rentable Area of the Premises and the Building is, at
Landlord's election, subject to verification by Landlord's space planner or
architect. That verification shall be made in accordance with this Paragraph.
Tenant's space planner or architect may consult with Landlord's space planner or
architect regarding that verification. Verification of the Rentable Area of the
Premises shall be done, if at all, within 90 days of the Lease Commencement
Date. Verification of the Rentable Area of the Building may be accomplished
within such 90-day period or at any time thereafter that there is a change to
the Building necessitating such verification. If Landlord's space planner or
architect determines that the Rentable Area of the Premises or the Building is
different from that stated in this Lease, all Rent that is based on that
incorrect amount shall be modified in accordance with that determination. If
that determination is made, it shall be confirmed in writing by Landlord to
Tenant.
8. Additional Rent.
---------------
8.1. Additional Rent; Rent. In addition to paying the Basic Monthly
---------------------
Rent pursuant to Paragraphs 2.6 and 7 above, Tenant shall pay as additional rent
Tenant's Share of the annual Direct Expenses (as defined below) that are in
excess of the amount of Direct Expenses applicable to the Base Year (as defined
below). That additional rent, together with other amounts of any kind (other
than Basic Monthly Rent ) payable by Tenant to Landlord under the terms of this
Lease, shall be collectively referred to in this Lease as "Additional Rent."
Basic Monthly Rent and Additional Rent are collectively referred to in this
Lease as "Rent." Without limitation on other obligations of Tenant that survive
the expiration of the Lease Term, Tenant's obligations to pay the Additional
Rent provided for in this Paragraph will survive the expiration of the Lease
Term.
8.2. Definitions. The following definitions apply in this Paragraph
-----------
(and elsewhere in this Lease):
8.2.1. Base Year. "Base Year" means the period defined as such in
---------
the Summary of Basic Lease Information.
8.2.2. Building's Operating Costs. "Building's Operating Costs"
--------------------------
means all expenses, costs, and amounts of every kind or nature that Landlord
pays or incurs because of or in connection with the ownership, operation,
management, maintenance, or repair of the Building. Building's Operating Costs
include, without limitation, the following amounts paid or incurred
(collectively, "Operating Costs") relative to the Building (a) the cost of
supplying utilities to all portions of the Building, including without
limitation water, electricity, heating, ventilation, and air conditioning, (b)
janitorial costs and the cost of operating, managing, maintaining, and repairing
the Common Areas and all building systems, including without limitation utility,
mechanical, sanitary, storm drainage, and elevator systems, (c) the cost of
supplies and tools and of equipment, maintenance, and service contracts in
connection with those systems, (d) the cost of licenses, certificates, permits,
and inspections, (e) the cost of contesting the validity or applicability of any
government enactments that may affect the Operating Expenses (as defined below),
(f) costs incurred in connection with the implementation and operation of a
parking or transportation management program or similar program, (g) the cost of
insurance carried by Landlord pursuant to this Lease, in amounts reasonably
determined by Landlord and any deductibles or coinsurance amounts, (h) fees,
charges, and other costs including management fees (or amounts in lieu of such
fees), consulting fees, legal fees, and accounting fees of all persons engaged
by Landlord or otherwise reasonably incurred by Landlord in connection with the
operation, management, maintenance, and repair of the Building and the Project,
(i) the cost of parking area maintenance, repair, and restoration, including
resurfacing, repainting, restriping, and cleaning, (j) wages, salaries, and
other compensation and benefits of all persons engaged in the operation,
maintenance, or security of the Building and the Project plus employer's Social
Security taxes, unemployment taxes, insurance, and any other taxes imposed on
Landlord that may be levied on those wages, salaries, and other compensation and
benefits. If any of Landlord's employees provide services for more than one
project of Landlord, only the prorated portion of those employees' wages,
salaries, other compensation and benefits, and taxes reflecting the percentage
of their working time devoted to the Project shall be included in Building's
Operating Costs, (k) payments under any easement, license, operating agreement,
declaration, restrictive covenant, or instrument relating to the sharing of
costs, (l) amortization (including interest on the unamortized cost at a rate
equal to the floating commercial loan rate announced from time to time by Bank
of America as its reference rate plus two (2) percentage points per annum) of
the cost of acquiring or renting personal property used in the maintenance,
repair, and operation of the Building and/or the Project, (m) the cost of
capital improvements or other costs incurred that (1) are intended as a labor
saving device or to effect other economies in the maintenance or operation of
all or part of the Building and/or the Project, or (2) are required under any
government law or regulation but that were not required when permits for
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construction were obtained. All permitted capital expenditures shall be
amortized (including interest on the unamortized cost at the rate stated in
subparagraph (l)) over their useful life, as determined by generally accepted
accounting principles; but Building's Operating Costs will exclude the following
("Excluded Costs"): (i) depreciation, interest, and amortization on mortgages or
ground lease payments, (ii) legal fees incurred in negotiating and enforcing
tenant leases, (iii) real estate brokers' leasing commissions, (iv) initial
improvements or alterations to tenant spaces, (v) the cost of providing any
service directly to and paid directly by any tenant, if the cost of providing
such service would have otherwise been included in Building's Operating Costs,
(vi) any costs expressly excluded from Operating Expenses elsewhere in this
Lease, (vii) costs of any items for which Landlord is entitled to reimbursement
from insurance proceeds or a third party (such costs shall be excluded from
Operating Expenses in the year in which the reimbursement is received), but any
deductible amount under any insurance policy shall be included within Operating
Expenses, (viii) costs of capital improvements, except as specifically provided
in subsection (m) above, (ix) costs incurred for the benefit of a single tenant
(for example, tenant improvement costs to build-out a particular suite), (x)
costs incurred due to Landlord's breach of a lease, law, or ordinance, (xi)
repairs necessitated by the gross negligence or willful misconduct of Landlord,
(xii) the cost of earthquake or flood insurance, unless required by Landlord's
Lender and in such event an amount reasonably estimated by Landlord to
approximate the cost of such coverage as if such coverage been carried during
the Base Year shall be added to Direct Expenses for the Base Year, (xiii)
overhead profit increments paid to Landlord's subsidiaries or affiliates for
management or other services on or to the building or for supplies or other
materials to the extent that the cost of the services, supplies, or materials
exceeds the cost that would have been paid had the services, supplies, or
materials been provided by unaffiliated parties on a competitive basis, (xiv)
any compensation paid to clerks, attendants, or other persons in commercial
concessions operated by Landlord, (xv) advertising and promotional expenditures,
(xvi) costs of repairs and other work occasioned by fire, windstorm, or other
casualty covered by insurance, (xvii) management costs to the extent they exceed
5% of all gross rent collected, (xviii) costs for sculpture, paintings, or other
objects of art (nor insurance thereon or extraordinary security in connection
therewith), (xix) wages, salaries, or other compensation paid to any executive
employees above the grade of building manager, (xx) the cost of correcting any
building code or other violations which were violations prior to the
Commencement Date, and (xxi) the cost of containing, removing, or otherwise
remediating any contamination of the Property (including the underlying land and
ground water) by any toxic or hazardous materials (including, without
limitation, asbestos and "PCB's") where such contamination was not caused by
Tenant.
8.2.3. Building's Pro Rata Share. "Building's Pro Rata Share"
-------------------------
means a fraction, the numerator of which is the total aggregate Rentable Square
Feet in the Building, and the denominator of which is the total aggregate
Rentable Square Feet in all of the buildings in the Project for which
certificates of occupancy have been issued. The Building's Pro Rata Share will
be calculated as of January 1 of each calendar year; which calculation will
remain in effect (regardless of changes to the Project) until the following
January 1.
8.2.4. Direct Expenses. "Direct Expenses" means the sum of
---------------
Operating Expenses plus Tax Expenses (as such terms are defined below).
8.2.5. Expense Year. "Expense Year" means each calendar year in
------------
which any portion of the Lease Term falls, through and including the calendar
year in which the Lease Term expires.
8.2.6. Operating Expenses. "Operating Expenses" means the sum of
------------------
(i) all Building's Operating Costs, (ii) the Building's Pro Rata Share of the
Project Operating Costs, and (iii) any costs or expenses payable pursuant to the
provisions of any reciprocal easement and maintenance agreement (or similar
agreement) recorded against the Project either now or in the future including
any owner's association or similar fees, assessments or dues presently or
hereafter established for the Project.
8.2.7. Project Operating Costs. "Project Operating Costs" means
-----------------------
(i) all expenses, costs, and amounts of every kind or nature which are incurred
because of or in connection with the ownership, operation, management,
maintenance, or repair of the Common Areas, and (ii) all Taxes relating to or
assessed against the Common Areas. Project Operating Costs include all Operating
Expenses paid or incurred in connection with the Common Areas but excluding any
Building's Operating Costs and Excluded Costs (relative to the Project).
8.2.8. Tenant's Share. "Tenant's Share" means a percentage which
--------------
is calculated by multiplying the number of Rentable Square Feet of the Premises
by 100 and dividing the product by the total Rentable Square Feet in the
Building. If either the Premises or the Building are expanded or reduced,
Tenant's Share shall be appropriately adjusted. Tenant's Share for the Expense
Year in which that change occurs shall be determined on the basis of the number
of days during the Expense Year in which each such Tenant's Share was in effect.
8.3. Adjustment of Operating Expenses. Operating Expenses shall be
--------------------------------
adjusted as follows:
8.3.1. Gross Up Adjustment When Building Is Less Than Fully
----------------------------------------------------
Occupied. If the occupancy of the Building during any part of any Expense Year
- --------
(including the Base Year) is less than 95%, Landlord shall make an appropriate
adjustment of the variable components of Operating Expenses for that Expense
Year, as reasonably determined by Landlord using sound accounting and management
principles, to determine the amount of Operating Expenses that would have been
incurred had the Building been 95% occupied. This amount shall be considered to
have been the amount of Operating Expenses for that Expense Year. For purposes
of this Paragraph, "variable components" include only those component expenses
that are affected by variations in occupancy levels.
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8.3.2. Adjustment When Landlord Does Not Furnish a Service to
------------------------------------------------------
All Tenants. If, during any part of any Expense Year (including the Base Year),
- -----------
Landlord is not furnishing a particular service or work (the cost of which, if
furnished by Landlord, would be included in Operating Expenses) to a tenant
(other than Tenant) that has undertaken to perform such service or work in lieu
of receiving it from Landlord, Operating Expenses for that Expense Year shall be
considered to be increased by an amount equal to the additional Operating
Expenses that Landlord would reasonably have incurred during such period if
Landlord had furnished such service or work to that tenant.
8.3.3. Common Areas. Landlord may elect to reasonably partition
------------
the Common Areas of the Project such that the Project Operating Costs associated
with such partitioned Common Areas are allocated to particular buildings or
parcels within the Project.
8.4. Tax Expenses.
------------
8.4.1. Definition of Taxes and Tax Expenses. "Taxes" means the
------------------------------------
all federal, state, county, or local government or municipal taxes, fees,
charges, or other impositions of every kind or nature, whether general, special,
ordinary, or extraordinary. Taxes include taxes, fees, and charges such as real
property taxes, general and special assessments, transit taxes, leasehold taxes,
and taxes based on the receipt of rent (including gross receipts or sales taxes
applicable to the receipt of rent, unless required to be paid by Tenant);
personal property taxes imposed on the fixtures, machinery, equipment,
apparatus, systems, and equipment; appurtenances; furniture; and other personal
property used in connection with the Building and the Common Areas.
Notwithstanding the foregoing, the following shall be excluded from Taxes: (a)
all excess profits taxes, franchise taxes, gift taxes, capital stock taxes,
inheritance and succession taxes, estate taxes, federal, state, and local income
taxes, and other taxes applied or measured by Landlord's general or net income
(as opposed to rents, receipts, or income attributable to operations at the
Building), (b) any items included as Operating Expenses, and (c) personal
property taxes attributable to property owned or installed by or for other
tenants of the Building. "Tax Expenses" means the sum of all Taxes that are paid
or incurred by Landlord because of or in connection with the ownership, leasing,
and operation of the Building.
8.4.2. Adjustment of Taxes. For purposes of this Lease, Tax
-------------------
Expenses (and Taxes included in the definition of Project Operating Costs) shall
be calculated as if the tenant improvements in the Building were fully
constructed and the Project, the Building, and all tenant improvements in the
Building were fully assessed for real estate tax purposes. Landlord specifically
agrees that the gross receipts component of Tax Expenses for the Base Year and
each subsequent year shall be calculated as if the Building were one hundred
percent (100%) occupied with rent paying tenants. Accordingly, during the
portion of any Expense Year including the Base Year, Tax Expenses shall be
considered to be increased appropriately.
8.5. Calculation and Payment of Additional Rent. Tenant's Share of any
------------------------------------------
Direct Expenses for any Expense Year shall be calculated and paid as follows:
8.5.1. Calculation of Excess. If Tenant's Share of Direct
---------------------
Expenses for any Expense Year ending or beginning within the Lease Term exceeds
Tenant's Share of the amount of Direct Expenses applicable to the Base Year,
Tenant shall pay as Additional Rent to Landlord an amount equal to that excess
(the "Excess"), in the manner stated below.
8.5.2. Statement/Payment of Direct Expenses. Tenant shall pay to
------------------------------------
Landlord, on the first day of each calendar month during the Lease Term,
commencing with the first month of the calendar year immediately following the
Base Year, as Additional Rent, an amount ("Tenant's Monthly Payment") equal to
one-twelfth of Tenant's Share of the amount by which the Direct Expenses for
such calendar year exceed the Base Year Direct Expenses ("Increased Direct
Expenses"), as estimated by Landlord in the most recently delivered Estimated
Statement (as defined below). Landlord intends to deliver to Tenant, prior to
the commencement of each calendar year during the Lease Term, a written
statement ("Estimated Statement") setting forth Landlord's estimate of the
Direct Expenses and Increased Direct Expenses allocable to the ensuing calendar
year, and Tenant's Share of such Increased Direct Expenses. Landlord may, at its
option, during any calendar year, deliver to Tenant a revised Estimated
Statement, revising Landlord's estimate of the Direct Expenses and Increased
Direct Expenses, in accordance with Landlord's most current estimate. Within
approximately ninety (90) days after the end of each calendar year during the
Lease Term, Landlord intends to deliver to Tenant a written statement ("Actual
Statement") setting forth the actual Direct Expenses allocable to the preceding
calendar year or, in the case of the calendar year in which the Commencement
Date occurs, such Actual Statement will set forth the Base Year Direct Expenses.
Tenant's failure to object to Landlord regarding the contents of an Actual
Statement, in writing, within 60 days after delivery to Tenant of such Actual
Statement, shall constitute Tenant's absolute and final acceptance and approval
of the Actual Statement. If the sum of Tenant's Monthly Payments actually paid
by Tenant during any calendar year exceeds Tenant's Share of the actual
Increased Direct Expenses allocable to such calendar year, then such excess will
be credited against future Tenant's Monthly Payments, unless such calendar year
was the calendar year during which the Lease Expiration Date occurs (the "Last
Calendar Year"), in which event either (i) such excess shall be credited against
any monetary default of Tenant under this Lease, or (ii) if Tenant is not in
default under this Lease, then Landlord shall pay to Tenant such excess. If the
sum of Tenant's Monthly Payments actually paid by Tenant during any calendar
year is less than Tenant's Share of the actual Increased Direct Expenses
allocable to such calendar year, then Tenant shall, within ten days of delivery
of the Actual Statement, pay to Landlord the amount of such deficiency.
Landlord's delay in delivering any Estimated Statement or Actual Statement will
not release Tenant of its obligation to pay any Tenant's Monthly Payment or any
such excess upon receipt of the Estimated Statement or the Actual Statement, as
the case may be. The references in this Paragraph to the actual Increased Direct
Expenses allocable to a calendar year, shall include, if such calendar year is
the last calendar year of the
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Lease Term, the actual Increased Direct Expenses allocable to the portion of
such year prior to the Lease Expiration Date.
8.6. Landlord's Books and Records. If Tenant timely disputes the
----------------------------
amount of Additional Rent stated in an Actual Statement, Tenant may, upon at
least five business days notice to Landlord, request an opportunity to inspect
Landlord's records and supporting documentation regarding Additional Rent. Such
inspection shall be at Tenant's sole cost and expense and Landlord shall, at its
election, either provide copies of such records and supporting documentation to
Tenant or make such records and supporting documentation available to Tenant for
its inspection at Landlord's business office during normal business hours.
9. Utilities and Services. Subject to applicable government rules,
----------------------
regulations, and guidelines and the rules or actions of the public utility
furnishing the service, Landlord shall provide (as a Direct Expense) the
following utilities and services:
9.1. Heating and Air Conditioning. Landlord shall provide heating and
----------------------------
air conditioning when necessary for normal comfort for normal office use in the
Premises, as reasonably determined by Landlord, on Mondays through Fridays from
7 a.m. through 7 p.m. and on Saturdays from 9 a.m. through 1 p.m. except for the
dates of observation of New Year's Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, Christmas Day, and other locally or nationally recognized
holidays ("Normal Business Hours").
9.2. Electricity. Landlord shall provide wiring, outlets, and systems
-----------
sufficient to provide electrical current to the Premises for ordinary and
customary office uses. In addition to the foregoing, Landlord shall replace
lamps, starters, and ballasts for Building-standard lighting fixtures within the
Premises upon Tenant's request and at Landlord's expense. Tenant shall replace
lamps, starters, and ballasts for non-Building-standard lighting fixtures within
the Premises at Tenant's sole expense.
9.3. Water. Landlord shall provide city water from the regular
-----
Building outlets for ordinary and customary drinking, lavatory, and toilet
purposes.
9.4. Janitorial Service. Landlord shall provide five (5) day per week
------------------
ordinary and customary, basic janitorial services in and about the Premises
consistent with other first class office buildings in the vicinity of the
Building. Landlord shall not be required to provide janitorial services to
above-standard improvements installed in the Premises including but not limited
to metallic trim, wood floor covering, glass panels, interior windows, kitchens,
executive washrooms, or shower facilities. Any janitorial services required by
Tenant and provided by Landlord in excess of such ordinary and customary, basic
janitorial services shall be separately paid for by Tenant.
9.5. Over-Standard Tenant Use. Tenant shall not exceed the rated
------------------------
capacity of the Building electrical and other utility systems. In the event of
any damage to any Building systems caused by Tenant's use thereof in excess of
ordinary and customary usage for an office, Tenant shall be responsible for all
costs and expenses incurred by Landlord as a result of such over-use. In
addition, if Tenant requires any utilities or services described in this
Paragraph in excess of the standard levels being provided by Landlord, or during
hours other than Normal Business Hours, Landlord shall have the right to impose
reasonable restrictions on such usage and/or commercially reasonable charges
therefor. The cost for after hours heating and air conditioning is estimated to
be Twenty-Five Dollars ($25.00) per hour, subject to reasonable increase over
the Lease Term, including the Extension Term, if any.
9.6. Conduit and Wiring. Installation of all types of conduit and
------------------
wiring exclusively serving the Premises, including but not limited to
communications wiring, shall be subject to the requirements of Paragraph 23,
below, and the Landlord's approval of the location, manner of installation, and
the installing contractor. All such conduit and wiring shall, at Landlord's
option, become Landlord's property once installed. Upon termination of this
Lease, Landlord may elect to require Tenant to remove such conduit and wiring at
Tenant's expense and return the Premises and the Common Areas to their pre-
existing condition. If Landlord constructs new or additional utility facilities,
including without limitation wiring, plumbing, conduits, and/or mains, resulting
from Tenant's changed or increased utility requirements, Tenant shall on demand
promptly pay to Landlord the total cost of such items. Tenant shall not be
required to remove any conduit or wiring for which Tenant has obtained
Landlord's consent, unless Landlord has indicated at the time of granting such
consent, that such removal will be required at the end of the Lease Term.
9.7. Utilities Generally. Tenant agrees that Landlord shall not be
-------------------
liable for damages, by abatement of Rent or otherwise, for failure to furnish or
delay in furnishing any service (including telephone and telecommunication
services) or for diminution in the quality or quantity of any service when the
failure, delay, or diminution is entirely or partially caused by: (a) breakage,
repairs, replacements, or improvements which is corrected within two (2)
business days; (b) strike, lockout, or other labor trouble; (c) inability to
secure electricity, gas, water, or other fuel at the Building despite reasonable
efforts to do so; (d) accident or casualty; (e) act or default of Tenant or
other parties other than Landlord; or (f) any other cause beyond Landlord's
reasonable control. Such failure, delay, or diminution shall not be considered
to constitute an eviction or a disturbance of Tenant's use and possession of the
Premises or relieve Tenant from paying Rent or performing any of its obligations
under this Lease, except that Tenant shall be entitled to an equitable abatement
of Rent for the period of such failure, delay, or diminution to the extent such
failure, delay, or diminution is directly attributable to Landlord's negligence
or intentional misconduct and continues for more than two (2) business days
after delivery of written notice of such failure, delay or diminution from
Tenant to Landlord. Landlord shall not be liable under any circumstances for a
loss of or injury to property or for injury to or interference with Tenant's
business, including loss of profits through, in connection with, or incidental
to a failure to furnish any of the utilities or services under this Paragraph.
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Notwithstanding the foregoing, Landlord agrees to use reasonable efforts to
promptly correct any such interruption of utilities or services. If any
governmental authority having jurisdiction over the Project imposes mandatory
controls, or suggests voluntary guidelines applicable to the Project, relating
to the use or conservation of water, gas, electricity, power, or the reduction
of automobile emissions, Landlord, at its sole discretion, may comply with such
mandatory controls or voluntary guidelines and, accordingly, require Tenant to
so comply. Landlord shall not be liable for damages to persons or property for
any such reduction, nor shall such reduction in any way be construed as a
partial eviction of Tenant, cause an abatement of rent, or operate to release
Tenant from any of Tenant's obligations under this Lease.
10. Maintenance.
-----------
10.1. Tenant's Duties. Tenant shall at its sole cost maintain, repair,
---------------
replace, and repaint, all in first class condition, the interior of the Premises
and any damage to the Premises or the Project resulting from the acts or
omissions of Tenant or Tenant's Invitees, including, without limitation, any
damage to doors, windows, or the roof or damage relating to a roof penetration
caused by Tenant or Tenant's Invitees. Tenant shall maintain all communications
conduit and wiring exclusively serving the Premises, whether in the Premises or
not, regardless of the ownership of said conduit or wiring, subject to
Landlord's approval of Tenant's maintenance/repair contractor. If Tenant fails
to maintain, repair, replace, or repaint any portion of the Premises or the
Project as provided above then Landlord may, at its election, maintain, repair,
replace, or repaint any such portion of the Premises or the Project and Tenant
shall promptly reimburse Landlord for Landlord's actual cost thereof, plus a
supervisory fee in the amount of ten percent (10%) of Landlord's actual cost.
10.2. Landlord's Duties. Landlord shall, as a part of Direct Expenses,
-----------------
maintain, repair, replace, and repaint, all in good order and condition,
consistent with first-class office buildings in the vicinity of the Building,
the Common Areas and all portions of the interior and exterior of the Building,
except to the extent of Tenant's obligations as set forth in Paragraph 10.1,
above. Landlord's failure to perform its obligations set forth in the preceding
sentence will not release Tenant of its obligations under this Lease, including
without limitation Tenant's obligation to pay Rent. Tenant waives the provisions
of California Civil Code Section 1942 (or any successor statute), and any
similar principals of law with respect to Landlord's obligations for
tenantability of the Premises and Tenant's right to make repairs and deduct the
expense of such repairs from rent.
11. Parking. Subject to the remaining provisions of this Paragraph,
-------
Landlord grants to Tenant (for the benefit of Tenant and Tenant's Invitees) the
right to the non-exclusive use of the parking area within the boundaries of and
serving the Project (the "Parking Area"). Tenant's use of the Parking Area shall
be free of charge and subject to such rules as Landlord may, in its sole
discretion, adopt from time to time with respect to the Parking Area, including
without limitation (i) rules providing for the payment of charges or fees by
users of the Parking Area (excepting Tenant with respect to its allotted parking
for its employees and for its guests, which may require validation by Tenant,
provided such validation is at no cost to Tenant) in order to reimburse Landlord
for the expense of a parking attendant and/or an automated parking system or to
comply with local taxes or fees and in such event the charges or fees shall be
deemed Additional Rent, (ii) rules limiting tenants of the Project (including,
without limitation, Tenant) to the use of, or excluding the use of, certain
parking spaces or certain portions of the Parking Area, in order to maintain the
availability of accessible parking spaces for clients, guests, and invitees of
tenants of the Project, and (iii) rules limiting tenants of the Project
(including without limitation Tenant) to the use of a restricted number of
parking spaces or a restricted area. Notwithstanding anything to the contrary in
this Paragraph, Landlord may, at its election, construct improvements upon or
otherwise alter in any manner the Parking Area provided that Landlord makes
reasonable amounts of parking available (or reasonable amounts of parking will
remain available) to Tenant elsewhere on the Project, or within a reasonable
distance from the Project. Landlord reserves the right to grant certain tenants
in the Project the exclusive right to park in specified areas of the Parking
Area, to the exclusion of all other tenants. Tenant acknowledges that the
exercise of the rights reserved to Landlord under this Paragraph may result in a
decrease in the number of parking spaces available to Tenant and Tenant's
Invitees, and no such decrease shall affect Tenant's obligations under this
Paragraph or entitle Tenant to any abatement of Rent. Notwithstanding anything
to the contrary in this Lease, Landlord shall make available to Tenant, and
Tenant shall be entitled to use, no fewer than 3.5 parking spaces in the Project
per 1,000 Rentable Square Feet of space occupied by Tenant. See Addendum No. 1.
--------------
12. [***]
-----
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Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
Tenant's sole cost and expense, and in accordance with Paragraph 24, below,
install its primary Tenant identification sign in accordance with the sign
criteria for the Project. See Addendum No. 1.
--------------
13. Rules, Regulations, and Covenants. Tenant shall (and shall cause
---------------------------------
Tenant's Invitees to) observe faithfully and comply strictly with any reasonable
rules and regulations which Landlord may from time to time adopt for the Project
as well as any recorded covenants, conditions, or restrictions affecting the
Premises or the Project, whether now existing or hereafter adopted or amended
from time to time (all of the foregoing, collectively, "rules"). Landlord has no
duty or obligation to enforce any rule against any other tenant, and Landlord
will not be liable to Tenant for violation of any rule by any other tenant, or
any other tenant's agents, employees, officers, independent contractors,
customers, invitees, visitors, or licensees. Tenant acknowledges that Landlord
reserves the right, from time to time, to enter into leases or other agreements
by which Landlord agrees to restrict the use of all or any portion of the
Project (including the Premises) from certain uses. All such leases and other
agreements, whether now existing or entered into in the future, shall be binding
upon Tenant and in no event shall Tenant utilize the Premises for any use so
prohibited. Following a written request from Tenant, Landlord shall use
commercially reasonable efforts to enforce the rules and regulations against
other tenants of the Project if Landlord, in its reasonable discretion,
determines that a tenant is in violation of such rules and regulations.
14. Early Access Insurance. At any time prior to the Lease Commencement
----------------------
Date that Tenant is making any Alterations (as defined below) to the Premises or
performing any of the Tenant's work, (i) Tenant shall, unless such insurance is
carried by either Landlord or its contractor, at Tenant's sole cost, maintain
(a) "Builder's Risk" insurance with respect to the Premises, reasonably
satisfactory to Landlord, and (b) all of the insurance to be maintained by
Tenant during the Term, including without limitation public liability and
property damage insurance, fire and extended coverage insurance and special form
insurance, boiler and machinery insurance, and workers compensation insurance,
(ii) the provisions of the Paragraph in this Lease entitled "Indemnity and
Exemption of Landlord from Liability" shall be operative, and (iii) the
provisions of the Paragraph in this Lease entitled "Utilities and Services"
shall be operative. Any Alterations pursuant to this Paragraph shall be subject
to all the provisions of the Paragraph in this Lease entitled "Alterations".
Nothing in this Paragraph shall be construed as (a) requiring Tenant to carry
such insurance on the initial improvements to be performed by Landlord as
Landlord's Work pursuant to Exhibit "C", or (b) granting permission to
-----------
Tenant to enter the Premises, or to make any Alterations, prior to the Lease
Commencement Date and no such right shall exist unless specified in Exhibit "C".
-----------
15. Plate-Glass Insurance. Tenant shall at its sole cost maintain full
---------------------
coverage plate-glass insurance on the Premises, under which Landlord and any
lender holding a security interest in the Project ("Lender") shall be named as
additional insureds.
16. Public Liability and Property Damage Insurance. Tenant shall, at
----------------------------------------------
Tenant's sole cost, maintain public liability and property damage insurance (i)
with a combined single limit liability of not less than $2,000,000.00, (ii)
insuring (a) against all liability of Tenant and Tenant's Invitees arising out
of or in connection with Tenant's use or occupancy of the Premises, including,
without limitation, Tenant's use, maintenance, repair and replacement of systems
and equipment either contained within the Premises or in air spaces, walls, roof
areas, or other portions of the Building or Project and exclusively serving the
Premises, and (b) performance by Tenant of the indemnity provisions set forth in
this Lease, (iii) naming Landlord, its agent, and any Lender as additional
insureds, (iv) containing cross-liability endorsements, and (v) which includes
products liability insurance (if Tenant is to sell merchandise or other products
derived, assembled, or produced from the Premises). Not more frequently than
once every year, if, in the opinion of Landlord, the amount of such insurance at
that time is not adequate, then Tenant shall increase such insurance as
reasonably required by Landlord. Additionally, if Tenant sells or serves
alcoholic beverages from the Premises, Tenant shall obtain and maintain "dram
shop" coverage and such other insurance coverage as Landlord may designate from
time to time and in such amounts as Landlord deems reasonably appropriate.
17. Fire and Extended Coverage Insurance. Tenant shall, at Tenant's sole
------------------------------------
cost, maintain on Tenant's Alterations and Tenant's Personal Property (as
defined below) a policy of standard fire and extended coverage and special form
insurance, with vandalism and malicious mischief endorsements, coverage with
respect to increased costs due to building ordinances, demolition coverage,
boiler and machinery insurance, and sprinkler leakage coverage, in each case to
the extent of at least 100 percent of full replacement value, and issued in the
name of Tenant with Landlord, Landlord's lender and Landlord's designated agent
as additional insureds. Such "full replacement value" shall be determined by
Tenant or the company issuing such policy at the time the policy is initially
obtained. Not more frequently than once every two years, either Landlord or
Tenant may, at its election, notify the other that it elects to have the
replacement value redetermined by an insurance company. Such redetermination
shall be made promptly and in accordance with the rules and practices of the
Board of Fire Underwriters, or a like board recognized and generally accepted by
the insurance company, and Landlord and Tenant shall be promptly notified of the
results by the company. Such policy shall be promptly adjusted according to such
redetermination.
18. Business Interruption Insurance. Tenant shall obtain business
-------------------------------
interruption insurance in amounts sufficient to reimburse Tenant for direct or
indirect loss of earnings attributable to all perils commonly insured against by
prudent tenants or attributable to prevention of access to the Premises or to
the Project as a result of such perils.
19. Insurance Generally. If Tenant fails during the Term to maintain any
-------------------
insurance required to be maintained by Tenant under this Lease, then Landlord
may, at its election, arrange for any such insurance, and Tenant shall reimburse
Landlord for any premiums for any such insurance within five days after Tenant
receives a copy of the premium notice. If any such premiums are allocable to a
period, a portion of which occurs during the
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<PAGE>
Term and the remainder of which occurs before or after the Term, then such
premiums shall be apportioned between Landlord and Tenant based upon the number
of days during such period that occur during the Term and the number of days
that occur before or after the Term, such that Tenant pays for the premiums that
are allocable to the period during the Term. Insurance required to be maintained
by Tenant under this Lease (i) shall be issued as a primary policy by insurance
companies authorized to do business in the state in which the Premises are
located with a Best's Rating of at least "A+" and a Best's Financial Size
Category rating of at least "XV," as set forth in the most current edition of
"Best's Insurance Reports" (unless otherwise approved by Landlord), or such
higher rating as may be required by any Lender, (ii) shall name Landlord and any
Lender as additional named insureds, (iii) shall consist of "occurrence" based
coverage, without provision for subsequent conversion to "claims" based
coverage, (iv) shall not be cancelable or subject to reduction of coverage or
other modification except after 30-days' prior written notice to Landlord and
any Lender, and (v) shall not provide for a deductible or co-insurance provision
in excess of $5,000.00. Tenant shall, at least 30 days prior to the expiration
of each such policy, furnish Landlord with a renewal of or "binder" extending
such policy. Tenant shall promptly, upon request, deliver to Landlord copies of
such policy or policies or certificates evidencing the existence and amounts of
such insurance together with evidence of payment of premiums.
20. Waiver of Subrogation. Tenant releases Landlord and Landlord's guests,
---------------------
invitees, customers and licensees (collectively, "Landlord's Invitees") from all
claims for damage, loss, or injury to Tenant's Personal Property and to the
systems, equipment, fixtures and Alterations of Tenant in or on the Premises and
Project to the extent such damage, loss or injury is covered by any insurance
policies carried by Tenant and in force at the time of such damage. Tenant shall
cause all insurance policies obtained by it pursuant to this Lease to provide
(if such provision is generally commercially available) that the insurance
company waives all right of recovery by way of subrogation against Landlord in
connection with any damage, loss, or injury covered by such policy.
21. Landlord's Insurance. Landlord may, at its election, maintain any of
--------------------
the following insurance, in such amounts and with such limits as Landlord shall
determine in its reasonable discretion: (i) Public liability and property damage
insurance, and products liability insurance; (ii) Fire and extended coverage and
special form insurance, coverage with respect to increased costs due to building
ordinances, demolition coverage, and sprinkler leakage coverage; (iii) boiler
and machinery insurance; (iv) fidelity insurance; (v) Plate-glass insurance; and
(vi) rental interruption insurance. The premiums, costs, expenses, and
deductibles (or similar costs or charges) of and/or with respect to any such
insurance (all of the preceding, collectively, "Insurance Expenses") shall be
constitute Direct Expenses.
22. Taxes.
-----
22.1. Personal Property Taxes. Tenant shall pay before delinquency all
-----------------------
taxes, assessments, license fees, and other charges that are levied or assessed
against, or based upon the value of, Tenant's personal property installed or
located in or on the Premises including without limitation trade fixtures,
furnishings, equipment ,and inventory (collectively, "Tenant's Personal
Property"). On demand by Landlord, Tenant shall furnish Landlord with
satisfactory evidence of such payments. If any such taxes, assessments, license
fees, and/or other charges are levied against Landlord or Landlord's property,
or if the assessed value of the Premises is increased by the inclusion of a
value placed on Tenant's Personal Property, and if Landlord pays such taxes,
assessments, license fees, and/or other charges or any taxes based on the
increased assessments caused by Tenant's Personal Property, then Tenant, on
demand, shall immediately reimburse Landlord for the sum of such taxes,
assessments, license fees, and/or other charges so levied against Landlord, or
the proportion of taxes resulting from such increase in Landlord's assessment.
Landlord may, at its election, pay such taxes, assessments, license fees, and/or
other charges or such proportion, and receive such reimbursement, regardless of
the validity of the levy.
22.2. Real Property Taxes Imposed Upon the Premises. Tenant shall pay,
---------------------------------------------
at least ten days before delinquency, all real property or real estate taxes,
assessments, license fees, and other impositions, whether general, special,
ordinary, or extraordinary, and of every kind and nature, which may be
separately levied, assessed or imposed upon or with respect to the Premises. On
demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of
such payments. Landlord may, at its election, pay such taxes, assessments,
license fees, and/or other charges and Landlord shall receive immediate
reimbursement of the amounts so paid, regardless of the validity of the levy.
23. Alterations. Tenant shall not make any alterations, improvements,
-----------
additions, installations, or changes of any nature in or to the Premises (any of
the preceding, "Alterations") unless (i) Tenant first obtains Landlord's written
consent, (ii) Tenant complies with all conditions which may be imposed by
Landlord, including but not limited to Landlord's selection of specific
contractors or construction techniques and the requirements of the attached
Exhibit "C", and (iii) Tenant pays to Landlord the reasonable costs and expenses
- -----------
of Landlord for architectural, engineering, or other consultants which
reasonably may be incurred by Landlord in determining whether to approve any
such Alterations. At least 30 days prior to making any Alterations, Tenant shall
submit to Landlord, in written form, proposed detailed plans of such
Alterations. Tenant shall, prior to the commencement of any Alterations, at
Tenant's sole cost, (i) acquire (and deliver to Landlord a copy of) a permit
from appropriate governmental agencies to make such Alterations (any conditions
of which permit Tenant shall comply with, at Tenant's sole cost, in a prompt and
expeditious manner), (ii) provide Landlord with 10 days' prior written notice of
the date the installation of the Alterations is to commence, so that Landlord
can post and record an appropriate notice of non-responsibility, and (iii)
obtain (and deliver to Landlord proof of) reasonably adequate workers
compensation insurance with respect to any of Tenant's employees installing or
involved with such Alterations (which insurance Tenant shall maintain in force
until completion of the Alterations). All Alterations shall upon the expiration
or earlier termination of the Term become the property of Landlord. Tenant shall
pay all costs for Alterations and other construction done or caused to be done
by Tenant and Tenant shall keep the Premises free and
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<PAGE>
clear of all mechanics' and materialmen's liens resulting from or relating to
any Alterations or other construction. Tenant may, at its election, contest the
correctness or validity of any such lien provided that (a) immediately on demand
by Landlord, Tenant procures and records a lien release bond, issued by a
corporation satisfactory to Landlord and authorized to issue surety bonds in the
state in which the Premises are located, in an amount equal to 150 percent of
the amount of the claim of lien, which bond meets the requirements of California
Civil Code Section 3143 or any successor statute, and (b) Landlord may, at its
election, require Tenant to pay Landlord's attorneys' fees and costs incurred in
participating in such an action. Notwithstanding the provisions of Paragraph 23:
(a) Tenant shall be entitled to make Alterations in or to the Premises,
without the prior consent of Landlord, so long as each of the same (i) do not
exceed the sum of $5,000 in cost, (ii) do not affect any structural or exterior
portions of the Building or Premises, any Common Area, or other area outside of
the Premises, or (iii) do not adversely affect the Building electrical, plumbing
or HVAC systems or violate any term of this Lease. Notwithstanding that
Landlord's consent shall not be required, Tenant shall comply with the other
requirements of this Paragraph 23, including the requirement that Tenant give
Landlord advance written notice of such Alterations.
(b) Tenant shall not be required to remove any alterations, additions,
improvements or utility installations for which Tenant has obtained Landlord's
consent, unless Landlord has indicated at the time of granting such consent,
that such removal will be required at the end of the Lease term.
(c) Tenant shall be entitled to remove any Alterations at the expiration
or earlier termination of the Term provided Tenant repairs any damage caused by
such removal.
24. Surrender of Premises and Holding Over. On the Expiration Date or
--------------------------------------
earlier termination of this Lease, (i) Tenant shall surrender to Landlord the
Premises and all Alterations (except for Alterations that Tenant is obligated or
elects to remove as expressly set forth above) in the same condition received by
Tenant upon delivery by Landlord, ordinary wear and tear and damage due to
casualty not caused by Tenant or condemnation excepted, (ii) Tenant shall remove
all of Tenant's Personal Property and perform all repairs and restoration
required by the removal of any Alterations or Tenant's Personal Property, and
(iii) Tenant shall surrender to Landlord all keys to the Premises (including
without limitation any keys to any exterior or interior doors). Landlord may
elect to retain or dispose of in any manner any Alterations or Tenant's Personal
Property that Tenant does not remove from the Premises on the Expiration Date or
earlier termination of this Lease as required by this Lease by giving written
notice to Tenant. Any such Alterations or Tenant's Personal Property that
Landlord elects to retain or dispose of shall immediately upon notice to Tenant
vest in Landlord. Tenant waives all claims against Landlord for any damage to
Tenant resulting from Landlord's retention or disposition of any such
Alterations or Tenant's Personal Property. Tenant shall be liable to Landlord
for Landlord's costs for storing, removing, or disposing of any such Alterations
or Tenant's Personal Property. If Tenant fails to surrender the Premises to
Landlord on the Expiration Date or earlier termination of this Lease in the
condition required by this Paragraph, Tenant shall indemnify Landlord against
all liabilities, damages, losses, costs, expenses, attorneys' fees and claims
resulting from such failure, including without limitation any claim for damages
made by a succeeding tenant. If Tenant, with Landlord's consent, remains in
possession of the Premises after the Expiration Date or earlier termination of
this Lease, such possession by Tenant shall be deemed to be a month-to-month
tenancy terminable on 30-days' written notice given at any time by Landlord or
Tenant. During any such month-to-month tenancy, Tenant shall pay, as Basic
Monthly Rent, 125 percent of the Basic Monthly Rent in effect immediately prior
to the Expiration Date or earlier termination of this Lease, as the case may be.
All provisions of this Lease except for those pertaining to Term shall apply to
such month-to-month tenancy.
25. Default. The occurrence of any of the following shall constitute a
-------
material default and breach of this Lease by Tenant:
25.1. The abandoning of the Premises by Tenant.
25.2. Tenant's failure to make any payment of Basic Monthly Rent on
or before the first day of each calendar month or Tenant's failure to make any
payment of Rent other than Basic Monthly Rent, if Basic Monthly Rent or such
other Rent is not paid within two business days after written notice of
delinquency. No grace period prior to the imposition of a late charge pursuant
to Paragraph 27 below, shall extend the date when Rent is due and payable.
25.3. Tenant's failure to observe or perform any of the provisions of
this Lease to be observed or performed by Tenant, other than described in the
preceding two Paragraphs, where such failure shall continue for a period of ten
days after written notice of such failure from Landlord to Tenant; provided,
however, that any such notice shall be in lieu of, and not in addition to, any
notice required under applicable unlawful detainer statutes; and provided
further, however, that if the nature of Tenant's default is such that more than
ten days are required for its cure, then Tenant shall not be deemed to be in
default if Tenant commenced such cure within such ten-day period and thereafter
diligently prosecutes such cure to completion within 30 days after Landlord's
written notice.
25.4. Tenant's failure to deliver to Landlord, within 10 days after
Landlord's written request, any financial statement of Tenant (including without
limitation a current annual balance sheet and profit/loss statement of Tenant)
reasonably requested by Landlord, or if any financial statement given to
Landlord by Tenant, or by any assignee, subtenant, or guarantor of Tenant, is
materially false or evidences that Tenant's net worth is negative, and Tenant
fails to furnish to Landlord, within 10 days after written notice from Landlord
to Tenant, with cash as an additional security deposit in an amount equal to the
aggregate Rent payable under this Lease for the six full
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<PAGE>
calendar months immediately following such notice. See Paragraph 50.2 below for
limitations upon Tenant's obligation to provide financial statements.
25.5. The making by Tenant of any general arrangement or assignment
for the benefit of creditors; Tenant's becoming bankrupt, insolvent or a
"debtor" as defined in 11 U.S.C. Section 101, or any successor statute (unless,
in the case of a petition filed against Tenant, such petition is dismissed
within 60 days after its original filing); the institution of proceedings under
the bankruptcy or similar laws in which Tenant is the debtor or bankrupt; the
appointing of a trustee or receiver to take possession of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease
(unless possession is restored to Tenant within 60 days after such taking); the
attachment, execution, or judicial seizure of substantially all of Tenant's
assets located at the Premises or Tenant's interest in this Lease (unless such
attachment, execution, or judicial seizure is discharged within 60 days after
such attachment, execution, or judicial seizure); or, if Tenant is a partnership
or consists of more than one person or entity, any partners of the partnership
or any such other person or entity becoming bankrupt or insolvent or making a
general arrangement or assignment for the benefit of creditors.
26. Landlord's Remedies. Landlord shall have the following remedies if
-------------------
Tenant commits a default and/or breach under this Lease; these remedies are not
exclusive, but are cumulative and in addition to any remedies provided elsewhere
in this Lease, or now or later allowed by law.
26.1. Continuation of Lease. No act by Landlord (including without
---------------------
limitation the acts set forth in the succeeding sentence) shall terminate
Tenant's right to possession unless Landlord notifies Tenant in writing that
Landlord elects to terminate Tenant's right to possession. As long as Landlord
does not terminate Tenant's right to possession, Landlord may (i) continue this
Lease in effect, (ii) continue to collect Rent when due and enforce all the
other provisions of this Lease, (iii) enter the Premises and relet them, or any
part of them, to third parties for Tenant's account, for a period shorter or
longer than the remaining term of this Lease, and (iv) have a receiver appointed
to collect Rent and conduct Tenant's business. Tenant shall immediately pay to
Landlord all costs Landlord incurs in such reletting, including, without
limitation, brokers' commissions, attorneys' fees, advertising costs, and
expenses of remodeling the Premises for such reletting.
26.2. Rent from Reletting. If Landlord elects to relet all or any
-------------------
portion of the Premises as permitted above, rent that Landlord receives from
such reletting shall be applied to the payment of, in the following order and
priority, (i) any indebtedness from Tenant to Landlord other than Basic Monthly
Rent due from Tenant, (ii) all costs incurred by Landlord in such reletting, and
(iii) Basic Monthly Rent due and unpaid under this Lease. After applying such
payments as referred to above, any sum remaining from the rent Landlord receives
from such reletting shall be held by Landlord and applied in payment of future
Basic Monthly Rent as it becomes due under this Lease. In no event shall Tenant
be entitled to any excess rent received by Landlord unless and until all
obligations of Tenant under this Lease, including all future obligations, are
satisfied in full.
26.3. Termination of Tenant's Right to Possession. Landlord may
-------------------------------------------
terminate Tenant's right to possession of the Premises at any time, by notifying
Tenant in writing that Landlord elects to terminate Tenant's right to
possession. On termination of this Lease, Landlord has the right to recover from
Tenant (i) the worth at the time of the award of the unpaid Basic Monthly Rent
which had been earned at the time of such termination, (ii) the worth at the
time of the award of the amount by which the unpaid Basic Monthly Rent which
would have been earned after such termination until the time of award exceeds
the amount of such loss of Basic Monthly Rent that Tenant proves could have been
reasonably avoided, (iii) the worth at the time of the award of the amount by
which the unpaid Basic Monthly Rent for the balance of the Term after the time
of award (had there been no such termination) exceeds the amount of such loss of
Basic Monthly Rent that Tenant proves could be reasonably avoided, and (iv) any
other amount necessary to compensate Landlord for all detriment proximately
caused by Tenant's failure to perform Tenant's obligations under this Lease or
in the ordinary course of things would be likely to result therefrom. The "worth
at the time of the award" of the amounts referred to in Clauses (i) and (ii)
above is to be computed by allowing interest at the Default Rate, as set forth
below, or if no Default Rate is set forth, then at the maximum rate permitted by
applicable law. The "worth at the time of the award" of the amount referred to
in Clause (iii) above is to be computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one percent.
26.4. Landlord's Right to Cure Default. Landlord, at any time after
--------------------------------
Tenant commits a default or breach under this Lease, may cure such default or
breach at Tenant's sole cost. If Landlord at any time, by reason of Tenant's
default or breach, pays any sum or does any act that requires the payment of any
sum, such sum shall be due immediately from Tenant to Landlord at the time such
sum is paid, and shall be deemed Additional Rent under this Lease. If Tenant
fails to timely pay any amount due under this Paragraph, then (without curing
such default) interest at the Default Rate shall accrue (and be immediately
payable) on such overdue amount until it is paid.
26.5. Enforcement of Costs. All costs and expenses incurred by
--------------------
Landlord in connection with collecting any amounts and damages owing by Tenant
pursuant to the provisions of this Lease, or to enforce any provision of this
Lease, including reasonable attorneys' fees, whether or not any action is
commenced by Landlord, shall be paid by Tenant to Landlord upon demand. If
Tenant fails to timely pay any amount due under this Paragraph, then (without
curing such default) interest at the Default Rate shall accrue (and be
immediately payable) on such overdue amounts until it is paid.
27. Interest and Late Charges. Late payment by Tenant to Landlord of Rent
-------------------------
will cause Landlord to incur costs not contemplated by this Lease, the exact
amount of which would be impracticable or extremely difficult to fix. Such costs
include, without limitation, processing, collection and accounting charges, and
late charges that may be imposed on Landlord by the terms of any deed of trust
covering the Premises. Therefore, if any Rent is not
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received by Landlord within ten days of its due date, then, without any
requirement for notice to Tenant, Tenant shall pay to Landlord an additional sum
of ten percent (10%) of such overdue amount as a late charge. Such late charge
represents a fair and reasonable estimate of the costs that Landlord will incur
by reason of any late payment by Tenant, and therefore this Paragraph is
reasonable under the circumstances existing at the time this Lease is made.
Acceptance of such late charge by Landlord shall not constitute a waiver of
Tenant's default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies available to Landlord under this
Lease. In addition to the late charge payable by Tenant, as provided above, if
any such Rent is not paid within 30 days of the date such Rent was due, then
Tenant shall pay to Landlord interest on such overdue Rent at the rate of three
percent (3%) above the "reference rate" announced from time to time by Bank of
America, NT&SA (the "Default Rate"). Such interest shall additionally accrue and
be payable by Tenant relative to any other amounts payable by Tenant to Landlord
under the provisions of this Lease which are not paid when due (if such
reference rate ceases to be announced, then a comparable "prime rate" shall be
utilized, selected by Landlord).
28. Payment of Rent by Cashier's Check. If a late charge is payable under
----------------------------------
this Lease, whether or not collected, for two installments of Basic Monthly Rent
or other Rent due under this Lease during any one calendar year during the Term,
or if any payment made by Tenant in the form of a personal or business check is
returned by the bank it was drawn upon for whatever reason, including but not
limited to insufficient funds, then Landlord, at Landlord's option, may require
Tenant to submit future payments to Landlord in the form of a certified
cashier's check or money order. Tenant's obligation to provide payment in the
aforementioned manner shall continue in full force and effect until Landlord, in
its sole discretion, determines otherwise. Tenant further agrees to reimburse
Landlord, as additional Rent, Landlord's actual costs imposed by Landlord's bank
or financial institution arising from Tenant's returned check(s). These costs
shall be in addition to any late charges payable by Tenant pursuant to Paragraph
27 of this Lease.
29. Destruction. If the Project is totally or partially destroyed during
-----------
the Term, rendering the Premises totally or partially inaccessible or unusable,
then, subject to the remainder of this Paragraph, (i) Landlord shall restore the
Project to substantially the same condition as it was in immediately before such
destruction, (ii) Landlord shall not be required to restore Tenant's Alterations
or Tenant's Personal Property, unless they are an integral part of the Premises
and specifically covered by insurance proceeds received by Landlord, such
excluded items being the sole responsibility of Tenant to restore, (iii) such
destruction shall not terminate this Lease, and (iv) all obligations of Tenant
under this Lease shall remain in effect, except that the Basic Monthly Rent
shall be abated or reduced, between the date of such destruction and the date of
completion of restoration, by the ratio of (a) the area of the Premises rendered
unusable or inaccessible by the destruction to (b) the area of the Premises
prior to such destruction. Notwithstanding anything to the contrary in this
Lease, Landlord may, at its election, terminate this Lease by so notifying
Tenant in writing on or before the later of 60 days after such destruction or 60
days after Landlord's receipt of the proceeds from insurance maintained by
Landlord, if (A) then-existing laws do not permit such restoration, (B) such
destruction occurs during the last year of the Term, (C) such destruction
exceeds fifty percent (50%) of the then-replacement value of the Premises, the
Building, or the Project or (D) Landlord determines that the cost of such
restoration exceeds the amount of insurance proceeds relating to such
destruction actually received by Landlord from insurance maintained by Landlord.
If Landlord so terminates this Lease, then (1) Landlord shall have no obligation
to restore the Project, (2) Landlord shall retain all insurance proceeds
relating to such destruction, and (3) this Lease shall terminate as of 30 days
after such notice of termination from Landlord to Tenant. If Landlord restores
the Premises as provided above, then Tenant waives the provisions of California
Civil Code Sections 1932(2) and 1933(4) or any successor statute with respect to
any destruction of the Premises. In the event Landlord restores the Premises
following any such destruction, Tenant shall immediately refixturize, re-equip,
and restock the Premises and shall re-open the Premises for business as soon
thereafter as is reasonably practicable.
30. Condemnation. If during the Term, or during the period of time between
------------
the execution of this Lease and the Lease Commencement Date, there is any taking
of all or any part of the Premises or any interest in this Lease by the exercise
of any governmental power, whether by legal proceedings or otherwise, by any
public or quasi-public authority, or private corporation or individual, having
the power of condemnation (any of the preceding a "Condemnor"), or a voluntary
sale or transfer by Landlord to any Condemnor, either under threat of
condemnation or while legal proceedings for condemnation are pending (any of the
preceding, a "Condemnation"), the rights and obligations of Landlord and Tenant
shall be determined pursuant to this Paragraph. If such Condemnation is of the
entire Premises, then this Lease shall terminate on the date the Condemnor takes
possession of the Premises (the "Date of Condemnation"). A temporary
Condemnation of the Premises, or any part of the Premises, for less than 180
days, shall not constitute a Condemnation under this Paragraph; but the Basic
Monthly Rent shall abate as to the portion of the Premises affected during such
temporary Condemnation. If such Condemnation is of any portion, but not all, of
the Premises, then this Lease shall remain in effect, except that, if the
remaining portion of the Premises is rendered unsuitable for Tenant's continued
use of the Premises, then Tenant may elect to terminate this Lease, by so
notifying Landlord in writing (the "Termination Notice") within 30 days after
the date that the nature and extent of the Condemnation have been determined.
Such termination shall be effective on the earlier of (i) the date that is 30
days after the giving of the Termination Notice, or (ii) the Date of
Condemnation. If Tenant does not give to Landlord the Termination Notice within
such 30-day period, then all obligations of Tenant under this Lease shall remain
in effect, except that (unless the Premises are restored as set forth below)
Basic Monthly Rent shall be reduced by the ratio of (a) the area of the Premises
taken to (b) the area of the Premises immediately prior to the Date of
Condemnation. Notwithstanding anything to the contrary in this Paragraph, if,
within 20 days after Landlord's receipt of the Termination Notice, Landlord
notifies Tenant that Landlord at its cost will add to the remaining Premises (or
substitute for the Premises other comparable space in the Project) so that the
area of the Premises will be substantially the same after the Condemnation as
they were before the Condemnation, and Landlord commences the restoration
promptly and completes it within 150 days after Landlord so notifies Tenant,
then all obligations of Tenant under this Lease shall remain in effect, except
that Basic
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<PAGE>
Monthly Rent shall be abated or reduced during the period from the Date of
Condemnation until the completion of such restoration by the ratio of (A) the
area of the Premises taken to (B) the area of the Premises immediately prior to
the Date of Condemnation. Unless Landlord restores the Premises pursuant to the
preceding sentence, or unless Tenant gives to Landlord the Termination Notice
within the relevant 30-day period, Tenant at its sole cost shall accomplish any
restoration required by Tenant to use the Premises. All compensation, sums, or
anything of value awarded, paid, or received on a total or partial Condemnation
(the "Award") shall belong to and be paid to Landlord. Tenant shall have no
right to any part of the Award, and Tenant hereby assigns to Landlord all of
Tenant's right, title, and interest in and to any part of the Award, except that
Tenant shall receive from the Award any sum paid expressly to Tenant from the
Condemnor for Tenant's loss of goodwill. Landlord and Tenant waive the
provisions of any statute (including without limitation California Code of Civil
Procedure Section 1265.130 or any successor statute) that allows Landlord or
Tenant to petition the superior court (or any other local court) to terminate
this Lease in the event of a partial taking of the Premises. Nothing herein
contained shall be deemed or construed to prevent Tenant from interposing and
prosecuting in any condemnation proceedings a claim for the value of any
personal property installed in or made to the Premises by Tenant, or for its
costs of moving or loss of business by reason of such condemnation.
31. Assignment and Other Transfers. Without Landlord's prior written
------------------------------
consent, which shall not be unreasonably withheld, none of the following shall
occur (nor be permitted by Tenant to occur), voluntarily, involuntarily, by
operation of law, or otherwise (any of the following, a "Transfer"): (i) any
assignment, sublease, disposition, sale, concession, license, license agreement
for the use of any portion of the Premises, mortgage, encumbrance,
hypothecation, pledge, collateral assignment, or other transfer, by Tenant of
this Lease, any interest in this Lease, or all or any portion of the Premises;
or (ii) [***] any assignment, disposition, sale, transfer, acquisition, or
-----
issuance of equitable interests (whether stock, partnership or otherwise) in
Tenant, to or by any person, entity, or group of related persons or affiliated
entities, whether in a single transaction or in a series of related or unrelated
transactions, which results in such person, entity, or group holding (or
assigning, transferring, disposing of, or selling) fifty percent (50%) or more
of the aggregate issued and outstanding equitable interests in Tenant. Landlord
shall not be liable in damages to Tenant or to any proposed subtenant, assignee
or other transferee (any of the preceding a "Proposed Transferee") if such
consent is adjudicated to have been unreasonably withheld, and, in such event,
Tenant's sole remedy shall be to have the proposed Transfer declared as valid as
if Landlord's consent had been given, although Tenant shall be entitled to
reasonable attorney's fees if Tenant is the prevailing party in such litigation.
At least 30 days prior to entering into any proposed Transfer, Tenant shall
submit to Landlord the sum of $250.00 (as payment toward Landlord's and
Landlord's attorneys' cost of reviewing, consenting to, rejecting and/or
consummating any proposed Transfer), and a written notice ("Tenant's Notice")
which includes or sets forth in reasonable detail (a) the form of the proposed
Transfer, including without limitation all related agreements, documents,
instruments, exhibits, and escrow instructions, (b) the name and address of the
Proposed Transferee, (c) the terms and conditions of the proposed Transfer,
including without limitation the commencement or effective date of the proposed
Transfer, which shall be at least 30 days after Tenant's Notice is given, and
(d) the nature, character, and current banking, financial, and other credit
information and references with respect to the Proposed Transferee and the
business of the Proposed Transferee in reasonably sufficient detail to enable
Landlord to determine the Proposed Transferee's financial responsibility. Within
14 days after Landlord's receipt from Tenant of such sum and Tenant's Notice,
and all documentation requested of Tenant by Landlord, Landlord shall notify
Tenant whether Landlord has consented to the proposed Transfer. Any consent by
Landlord to any proposed Transfer shall not constitute a consent with respect to
any other Transfer. If Landlord consents to any proposed Transfer, and Tenant
fails to consummate such Transfer on or before the commencement or effective
date of the proposed Transfer (as set forth in Tenant's Notice), then such
consent shall be deemed withdrawn and Tenant shall be required again to comply
with this Paragraph before making a Transfer. Landlord shall not have
unreasonably withheld its consent with respect to any Transfer if Landlord shall
not have received such sum or Tenant's Notice, if the nature or character of the
Proposed Transferee, or the proposed occupancy of the Premises by the Proposed
Transferee, if the Proposed Transferee's proposed use is different than the
Permitted Use is not in keeping with the dignity and character of the Building
and the surrounding area, if the proposed Transfer will result in the diminution
of the value or marketability of the Premises or the Project, if Landlord is not
satisfied that the Proposed Transferee is creditworthy, or if the proposed
Transfer will conflict with or result in a breach of any of the provisions of,
or constitute a default under, any agreement, instrument, or document to which
Landlord is a party or by which the Project may be bound. No Transfer shall
release or discharge Tenant from any liability, whether past, present, or
future, under this Lease and Tenant shall continue to remain primarily liable
under this Lease. Tenant irrevocably assigns to Landlord, as security for
Tenant's obligations under this Lease, all rent and other amounts from any
Transfer, and Landlord, as assignee and as special attorney-in-fact for Tenant,
or a receiver for Tenant appointed on Landlord's application, may collect such
rent and other amounts and apply them toward Tenant's obligations under this
Lease; except that, unless Tenant defaults under this Lease, Tenant shall have
the right to collect such rent and other amounts. Unless otherwise agreed to by
all parties, the Tenant's security deposit, if any, shall be retained by
Landlord and returned to the lawful tenant in possession at the time of the
Lease termination, subject to the terms and conditions of Paragraph 6 of this
Lease. Any Transfer must contain the following provisions, which provisions
whether contained in such Transfer or not, shall apply to such Transfer: (A)
Such Transfer shall be subject and subordinate to all provisions of this Lease;
(B) No Proposed Transferee shall be permitted to enter into any Transfer without
Landlord's prior written consent; and (C) At Landlord's option, in the event of
cancellation or termination of this Lease for any reason or the surrender of
this Lease, whether voluntarily, involuntarily, by operation of law or
otherwise, prior to the expiration of such Transfer, the Proposed Transferee
shall make full and complete attornment to Landlord for the balance of the term
of such Transfer. Such attornment shall be evidenced by an agreement in form and
substance satisfactory to Landlord which the Proposed Transferee shall execute
and deliver to Landlord within five days after request by Landlord. Tenant shall
promptly reimburse Landlord for Landlord's reasonable cost (less any payment
made by Tenant with Landlord as set forth above) of reviewing, consenting to,
rejecting and/or consummating any proposed
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Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
Transfer, including without limitation reasonable attorneys' fees. Tenant shall
promptly pay to Landlord fifty percent (50%) of all rents and other
consideration, of whatever nature, payable by the Proposed Transferee (or
receivable by Tenant) pursuant to any Transfer, which exceed (1) if a sublease
of a portion of the Premises, the portion of the Basic Monthly Rent that is
allocable to the portion of the Premises subleased (such allocation based on the
area of the portion subleased), or (2) if any other Transfer, the Basic Monthly
Rent. See Addendum No. 1
--------------
32. Common Areas; Continued Development of Project. Landlord may, at its
----------------------------------------------
election, (i) close any of the Common Areas to the extent required in the
opinion of Landlord's legal counsel to prevent a dedication of any of the Common
Areas or the accrual of any rights to any person or to the public in and to any
portion of the Common Areas, (ii) close, temporarily, any of the Common Areas
for maintenance purposes, (iii) designate other property outside the boundaries
of the Project to become part of the Common Areas, (iv) close off or otherwise
utilize portions of the Common Areas while constructing improvements or making
repairs or alterations to any portion of the Project, and/or (v) make any
changes to the Common Areas, or any part of the Project, including without
limitation changes to buildings or other improvements, the addition of new
buildings or other improvements, and/or changes in the location of driveways,
entrances, exits, vehicular parking spaces, or the direction of the flow of
traffic. Tenant acknowledges that the development of the Project is continuing
and may, at Landlord's election, include the construction of additional
buildings and improvements to the Common Areas. Landlord's right pursuant to
this Paragraph 32 shall be subject to the condition that exercise of any of such
rights shall not unreasonably interfere with Tenant's use of the Premises, or
decrease the minimum number of parking spaces required to be made available for
use by Tenant under this Lease.
33. Relocation. [Intentionally deleted].
----------
34. Access by Landlord. Landlord and any of Landlord's Invitees shall have
------------------
the right to enter the Premises at all reasonable times, during normal business
hours if feasible under the circumstances, and upon 24 hours notice, except in
the case of an emergency, (i) to determine whether the Premises are in good
condition and whether Tenant is complying with its obligations under this Lease,
(ii) to do any necessary maintenance or make any restoration to the Premises
that Landlord has the right or obligation to perform, (iii) to serve, post, or
keep posted any notices required or allowed under this Lease, (v) to post "for
sale" or "for rent" or "for lease" signs, (vi) to show the Premises to brokers,
agents, prospective buyers, prospective tenants, or other persons interested in
a listing of, financing, purchasing, or occupying the Project, the Premises or
any portion of the Project or the Premises, and (vii) to shore the foundations,
footings, and walls of the Project, and to erect scaffolding and protective
barricades around and about the Premises, but not so as to prevent entry to the
Premises, and to do any other act or thing necessary for the safety or
preservation of the Premises if any excavation or other construction is
undertaken or is about to be undertaken on any adjacent property or nearby
street. In the event of an emergency Landlord shall have the right to enter the
Premises at any time, without prior notice to Tenant. Landlord's rights under
this Paragraph extend, with Landlord's consent, to the owner of adjacent
property on which excavation or construction is to take place and the adjacent
property owner's agents, employees, officers, and contractors. Landlord shall
not be liable for any inconvenience, disturbance, loss of business, nuisance, or
other damage arising out of any entry on the Premises as provided in this
Paragraph except damage resulting directly from the grossly negligent acts of
Landlord or Landlord's Invitees. Tenant shall not be entitled to any abatement
or reduction of Basic Monthly Rent or other Rent because of the exercise by
Landlord of any rights under this Paragraph. In the event of any entry by
Landlord onto the Premises, Landlord shall use its commercially reasonable best
efforts not to interfere with the conduct of Tenant's business.
35. Landlord's Reserved Rights. Landlord, as owner of the Project, in
--------------------------
addition to Landlord's other rights hereunder, reserves the right from time to
time: (i) to change the name of the Project; (ii) to temporarily utilize
portions of the Common Areas for, among other things, entertainment, outdoor
shows, displays, automobile and other product shows, the leasing of kiosks, or
such other uses which, in Landlord's judgment, tend to attract the public; and
(iii) to utilize the lighting standards and other areas or improvements in the
Common Areas for advertising purposes. Landlord's right pursuant to this
Paragraph 35 shall be subject to the condition that exercise of any of such
rights shall not unreasonably interfere with Tenant's use of the Premises, or
decrease the minimum number of parking spaces required to be made available for
use by Tenant under this Lease.
36. Indemnity and Exemption of Landlord from Liability. Tenant hereby
--------------------------------------------------
agrees to indemnify, protect, and hold harmless Landlord and its shareholders,
officers, directors, agents, property managers, employees, contractors, and the
partners comprising Landlord (if any) from and against all Claims (as defined
below) and all costs, expenses, and attorneys' fees incurred in the defense or
handling of any such Claims or any action or proceeding brought on any of such
Claims. For purposes of this Lease, the term "Claims" shall mean all
liabilities, damages, losses, costs, expenses, attorneys' fees, and claims
(except to the extent they result from Landlord's negligent acts or willful
misconduct) arising from or which seek to impose liability under or because of
(i) Tenant's or Tenant's Invitees' use of the Premises, (ii) the conduct of
Tenant's business, (iii) any activity, work, or things done, permitted, or
suffered by Tenant or any of Tenant's Invitees in or about the Premises or
elsewhere, (iv) any breach or default in the performance of any obligation to be
performed by Tenant under this Lease, and/or (v) any negligence of Tenant or any
of Tenant's Invitees. If any action or proceeding is brought against Landlord or
its shareholders, officers, directors, agents, property managers, employees,
contractors, or the partners comprising Landlord (if any) by reason of any such
Claims, Tenant upon notice from Landlord shall defend such action or proceeding
at Tenant's sole cost by legal counsel reasonably satisfactory to Landlord.
Except to the extent caused by Landlord's negligent acts or willful misconduct,
Tenant assumes all risk of, Tenant waives all claims against Landlord in respect
of, and Landlord shall not be liable for, any of the matters set forth above in
this Paragraph or any of the following: injury to Tenant's business, loss of
income from such business, or damage or injury to the goods, wares, merchandise,
or other property or the person of Tenant, Tenant's Invitees, or any other
persons in, upon, or about the Premises, whether such damage, loss, or injury is
caused by or results from criminal acts, fire, steam, electricity, gas, water,
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<PAGE>
rain, the breakage, leakage, obstruction or other defects of pipes, sewer lines,
sprinklers, wires, appliances, plumbing, air-conditioning or lighting fixtures,
or any other cause, conditions arising upon the Premises, or other sources or
places, and regardless of whether the cause of such damage, loss, or injury or
the means of repairing such damage, loss, or injury is inaccessible to Tenant.
This Lease shall not be affected or impaired by any change to any part of the
Project or any sidewalks, streets or improvements nearby the Project. Landlord
may, at its election, at any time and without liability to Tenant, change the
name of the Project. Notwithstanding anything to the contrary in this Paragraph
36:
(a) Tenant shall not waive any claims against Landlord or be required
to indemnify, defend, or hold Landlord harmless from or against claims,
liability, loss, cost or expense arising out of the breach by Landlord, or
Landlord's agents, employees, or independent contractors (collectively
"Landlord's Agents"), of any covenant, representation or warranty under this
Lease.
(b) Except to the extent caused by the negligent acts or willful
misconduct of Tenant or Tenant's employees, officers, or agents, Landlord shall
protect, defend and hold harmless Tenant and Tenant's employees, officers, and
agents against and from any and all claims, demands, losses, liabilities,
damages, costs and expenses (including, without limitation, attorneys' and
consultants' fees and the costs and expenses of defense) arising or resulting
from (i) Landlord's or Landlord's Agents' breach of any covenant, representation
or warranty under this Lease and (ii) Landlord's or Landlord's Agents'
negligence or willful misconduct. The mutual indemnity obligations of Landlord
and Tenant under this Lease shall not, however, release the respective insurers
of Landlord and Tenant from such insurers' obligations under any policies
covering their respective insureds.
37. Hazardous Substances. Landlord hereby notifies Tenant, and Tenant
--------------------
hereby acknowledges that, prior to the leasing of the Premises pursuant to this
Lease, Tenant has been notified, pursuant to California Health and Safety Code
Section 25359.7 (or any successor statue), that Landlord knows, or has
reasonable cause to believe, that certain hazardous substances (as such term is
used in such Section 25359.7), such as common cleaning supplies, office
supplies, spillage of petroleum products from motor vehicles, and other consumer
products, may have come to be located on or beneath the Premises and/or the
Project. Tenant hereby agrees to indemnify Landlord against all actions,
liabilities, damages, losses, costs, expenses, attorneys' fees, and claims
(except to the extent they arise as a result of Landlord's grossly negligent
acts or willful misconduct), arising from or relating to: (i) any discharges,
releases, or threatened releases of any Hazardous Material (as defined below)
into ambient air, water, or land by Tenant or Tenant's Invitee's, or otherwise
from, on, under, or above the Premises, (ii) the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, or hazardous or toxic wastes, substances, or materials
by Tenant or Tenant's Invitees, or otherwise from, on, or under, the Premises,
or (iii) a violation of any environmental law by Tenant or Tenant's Invitees on,
under, or above the Premises (for purposes hereof, "environmental laws" shall
mean any Federal, State, or local law, statute, regulation, ordinance,
guideline, or common law principle relating to public health or safety or the
use or control of the environment, including without limitation the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Carpenter-Presley-Tanner Hazardous Substance Account Act, the California
Hazardous Waste Control Law, the Federal Clean Air Act, the California Air
Resources Act, the Federal Clean Water Act, the California Porter-Cologne Water
Quality Control Act, the Federal Resource Conservation and Recovery Act, the
California Nejedly-Z'berg-Dills Solid Waste Management and Recovery Act, and
California Health and Safety Code Section 25359.7). Tenant agrees to promptly
reimburse Landlord for all of Landlord's costs arising from periodic monitoring
of Tenant's use, handling, or storage of Hazardous Substances at or surrounding
the Premises. Tenant shall not cause or permit any Hazardous Material to be
generated, brought onto, used, stored, or disposed of in or about the Premises,
the Building, or the Project by Tenant or its agents, employees, contractors,
subtenants, or invitees, except for limited quantities of standard office and
janitorial supplies. Tenant shall: (a) use, store, and dispose of all such
permitted Hazardous Material in strict compliance with all applicable statutes,
ordinances, and regulations in effect during the Lease Term that govern and/or
relate to Hazardous Material, public health and safety and protection of the
environment, and (b) comply at all times during the Lease Term with all
environmental laws relating to Tenant's use, storage, or disposal of Hazardous
Material. If the Premises are contaminated due to the acts or omissions of
Tenant or Tenant's Invitees by any Hazardous Material during the Term, then (1)
Tenant shall promptly notify Landlord in writing of such contamination, and (2)
Landlord may elect to either (A) demand that Tenant perform all remediation
required by Landlord (to Landlord's satisfaction and at Tenant's sole cost,
necessary to return the Premises (and/or the Project) to at least as good a
condition as the Premises (or the Project) are in as of the date of this Lease,
which Tenant shall immediately do upon receipt of notice from Landlord, or (B)
proceed to cause such investigation, clean-up, and remediation work which
Landlord deems necessary or desirable to be undertaken, whereupon the entire
cost thereof (plus a supervisory fee equal to ten percent (10%) of such cost)
will be payable by Tenant to Landlord upon demand as Additional Rent. If Tenant
does not promptly commence and diligently pursue such remediation, then Landlord
may, at Landlord's election, perform or cause to be performed such remediation
and Tenant shall immediately, upon demand, pay the cost thereof, plus a
supervisory fee in the amount of ten percent (10%) of such cost. Tenant's
obligations and liability under this Paragraph shall survive the termination of
Tenant's tenancy and the Term of this Lease, except that nothing contained in
this Paragraph shall be deemed to impose liability on Tenant for any problem
arising after the Term of this Lease provided neither Tenant nor Tenant's
Invitees contributed to such problem during the Term of the Lease. As used in
this Lease, the term "Hazardous Material" shall mean any hazardous or toxic
substance, material, or waste that is or becomes regulated by the United States,
the State of California, or any local government authority having jurisdiction
over the Building. Hazardous Material includes, without limitation: (a) any
"hazardous substance", as that term is defined in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) (42
United States Code Sections 9601-9675); (b) "Hazardous waste", as that term is
defined in the Resource Conservation and Recovery Act of 1976 (RCRA) (42 United
States Code Sections 6901-6992k); (c) any pollutant, contaminant, or hazardous,
dangerous, or toxic chemical, material, or substance, within the meaning of any
other applicable federal, state, or local law, regulation, ordinance, or
requirement (including consent decrees and administrative orders
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<PAGE>
imposing liability or standards of conduct concerning any hazardous, dangerous,
or toxic waste, substance, or material, now or hereafter in effect); (d)
petroleum products; (e) radioactive material, including any source, special
nuclear, or byproduct material as defined in 42 United States Code Sections
2011-2297; (f) Asbestos in any form or condition; and (g) polychlorinated
biphenyls (PCBs) and substances or compounds containing PCBs. Notwithstanding
anything to the contrary contained in the Lease, Tenant shall have no obligation
to "clean up," monitor, abate, or to comply with any law regarding, or to
reimburse, release, indemnify, or defend Landlord with respect to any toxic or
hazardous substances (including, without limitation, asbestos and "PCB's") which
now or hereafter become regulated by any governmental authority or agency
thereof (hereinafter "Hazardous Materials") and which Tenant did not store,
dispose of, or transport in, use, or cause to be on the Premises in violation of
any Hazardous Materials laws. Furthermore, if any Hazardous Materials are
presented in the Premises (or the underlying soil or groundwater) and such
presence was not caused by Tenant or Tenant's Invitees, Landlord shall protect,
indemnify, defend, and hold Tenant harmless from and against any and all claims,
liability, loss, proceedings, damages, causes of action, cost, or expense
(including attorneys' fees) arising therefrom.
38. Prohibition Against Asbestos-Containing Materials. Tenant shall not
-------------------------------------------------
allow or permit any materials which contain asbestos in any form or
concentration ("Asbestos-Containing Materials") to be used or stored in the
Premises or used in the construction of any improvements or alterations to the
Premises, including, without limitation, building or construction materials and
supplies. Such prohibition against Asbestos-Containing Materials shall apply
regardless of whether the Asbestos-Containing Materials may be considered safe
or approved for use by a manufacturer, supplier, or governmental authority, or
by common use or practice. Landlord shall have the right, upon reasonable
notice, to enter upon and conduct inspections of the Premises to determine
Tenant's compliance with this Paragraph. If Tenant allows or permits Asbestos-
Containing Materials to be used or stored in the Premises or used in the
construction of any improvements or alterations to the Premises, (a) Tenant
shall, upon notice from Landlord, immediately remove such Asbestos-Containing
Materials at Tenant's sole cost, (b) such removal shall comply with all
applicable laws, regulations, and requirements concerning asbestos and the
removal and disposal of Asbestos-Containing Materials, (c) Tenant shall
reimburse Landlord for all expenses incurred in connection with any inspection
of the Premises conducted by Landlord, and (d) unless Tenant completes such
removal within 30 days after notice from Landlord, Landlord may, at its
election, do either or both of the following: (i) declare Tenant in breach of
this Lease and terminate this Lease upon 10 days prior written notice to Tenant,
and (ii) remove and dispose of the Asbestos-Containing Materials and obtain
reimbursement from Tenant for the cost of such removal and disposal, including a
supervisory fee payable to Landlord in the amount of ten percent of said removal
and disposal. Tenant shall indemnify Landlord and Landlord's directors,
officers, employees, and agents against all costs, liability, expenses,
penalties, and claims for damages, including, without limitation, litigation
costs and attorneys' fees, arising from (A) the presence of Asbestos-Containing
Materials upon the Premises, to the extent that such Asbestos-Containing
Materials are used or stored in the Premises or used in the construction of any
improvements or alterations in the Project, Building, or to the Premises by
Tenant or Tenant's agents, employees, representatives, or independent
contractors, (b) any lawsuit, settlement, governmental order, or decree relating
to the presence, handling, removal, or disposal of Asbestos-Containing Materials
upon or from the Premises, to the extent that such Asbestos-Containing Materials
are used or stored in the Premises or used in the construction of any
improvements or alternations to the Premises by Tenant or Tenant's agents,
employees, representatives or independent contractors, or (C) Tenant's failure
to perform its obligations to remove such Asbestos-Containing Materials under
this Paragraph.
39. Security Measures. Tenant acknowledges (i) that the Basic Monthly Rent
-----------------
does not include the cost of any security measures for any portion of the
Project (ii) that Landlord shall have no obligation to provide any such security
measures, (iii) that Landlord has made no representation to Tenant regarding the
safety or security of the Project, and (iv) that Tenant will be solely
responsible for providing any security it deems necessary to protect itself, its
property, and Tenant's Invitees in, on, or about the Project. If Landlord
provides any security measures at any time, then the cost thereof shall be
included as part of the Lease Expenses, but Landlord will not be obligated to
continue providing such security measures for any period of time, Landlord may
discontinue such service without notice and without liability to Tenant, and
Landlord will not be obligated to provide such security measures with any
particular standard of care. Tenant assumes all responsibility for the security
and safety of Tenant, Tenant's property, and Tenant's Invitees. Tenant releases
Landlord from all claims for damage, loss, or injury to Tenant, Tenant's
Invitees, and/or to the personal property of Tenant and/or of Tenant's Invitees,
even if such damage, loss, or injury is caused by or results from the criminal
or negligent acts of third parties. Landlord shall have no duty to warn Tenant
of any criminal acts or dangerous conduct that has occurred in or near the
Project, regardless of Landlord's knowledge of such crimes or conduct.
40. Subordination and Attornment. This Lease and Tenant's rights under
----------------------------
this Lease are subject and subordinate to any mortgage, deed of trust, ground
lease, or underlying lease (and to all renewals, modifications, consolidations,
replacements, or extensions thereof), now or hereafter affecting the Premises.
Upon the written request to Landlord from Tenant, Landlord will exercise good
faith efforts to obtain a commercially reasonable nondisturbance agreement
(which may be part of a subordination and attornment agreement) recognizing
Tenant's right to possession and quiet enjoyment of the Premises upon the
transfer of Landlord's interest to such senior party, provided Tenant is not in
default under this Lease. The provisions of this Paragraph shall be self-
operative, and no further instrument of subordination shall be required. In
confirmation of such subordination, however, Tenant shall promptly execute and
deliver any instruments that Landlord, any Lender, or the lessor under any
ground or underlying lease, may request to evidence such subordination. Tenant
hereby irrevocably constitutes and appoints Landlord as Tenant's special
attorney-in-fact to execute and deliver such instruments. Notwithstanding the
preceding provisions of this Paragraph, if any ground lessor or Lender elects to
have this Lease prior to the lien of its ground lease, deed of trust, or
mortgage, and gives written notice thereof to Tenant that this Lease shall be
deemed prior to such ground lease, deed of trust, or mortgage, whether this
Lease is dated prior or subsequent to the date of such ground lease, deed of
trust, or mortgage, then this Lease shall be deemed to be prior to the lien of
such
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<PAGE>
ground lease or mortgage and such ground lease, deed of trust, or mortgage shall
be deemed to be subordinate to this Lease. If any Lender, or the lessor of any
ground or underlying lease affecting the Premises, shall hereafter succeed to
the rights of Landlord under this Lease, whether by foreclosure, deed in lieu of
foreclosure or otherwise, then (i) such successor landlord shall not be subject
to any offsets or defenses which Tenant might have against Landlord, (ii) such
successor landlord shall not be bound by any prepayment by Tenant of more than
one month's installment of Basic Monthly Rent or any other Rent, (iii) such
successor landlord shall not be subject to any liability or obligation of
Landlord except those arising after such succession, (iv) Tenant shall attorn to
and recognize such successor landlord as Tenant's landlord under this Lease, (v)
Tenant shall promptly execute and deliver any instruments that may be necessary
to evidence such attornment, (vi) Tenant hereby irrevocably appoints Landlord
(and such successor landlord) as Tenant's special attorney-in-fact to execute
and deliver such instruments on behalf of Tenant, and (vii) upon such
attornment, this Lease shall continue in effect as a direct lease between such
successor landlord and Tenant upon and subject to all of the provisions of this
Lease. If any Lender requests reasonable amendment(s) to this Lease at any time
during the Term, then Tenant shall not unreasonably withhold or delay its
written consent to such amendment(s), provided such amendments do not materially
increase Tenant's obligations or materially decrease Tenant's rights hereunder.
41. Estoppel Certificate. Within ten days after written request from
--------------------
Landlord, Tenant shall execute and deliver to Landlord, in recordable form, a
certificate stating (i) that this Lease is unmodified and in full force and
effect, or in full force and effect as modified, and stating all modifications,
(ii) the then-current Basic Monthly Rent, (iii) the dates to which Basic Monthly
Rent has been paid in advance, (iv) whether or not the amount of any security
deposit, prepaid rent or other payment constituting Rent which has been paid,
(v) whether or not Tenant or Landlord is in default under this Lease and whether
there currently exist any defenses or rights of offset under the Lease, (vi) all
Landlord's Work required by this Lease is complete and (vii) such other matters
as Landlord shall reasonably request. Tenant's failure to deliver such
certificate within such ten day period shall be conclusive upon Tenant for the
benefit of Landlord, and any successor in interest to Landlord, any lender or
proposed lender, and any purchaser of the Project that, except as may be
represented by Landlord, this Lease is unmodified and in full force and effect,
no Rent has been paid more than 30 days in advance, and neither Tenant nor
Landlord is in default under this Lease. Tenant irrevocably constitutes and
appoints Landlord as its special attorney-in-fact to execute and deliver such
certificate to any third party if Tenant fails to deliver such certificate
within such ten day period.
42. Waiver. No delay or omission in the exercise of any right or remedy of
------
Landlord in the event of any default by Tenant shall impair such right or remedy
or be construed as a waiver. The receipt and acceptance by Landlord of
delinquent Rent shall not constitute a waiver of any default other than the
particular Rent payment accepted. Landlord's receipt and acceptance from Tenant,
on any date (the "Receipt Date"), of an amount less than Rent due on such
Receipt Date, or to become due at a later date but applicable to a period prior
to such Receipt Date, shall not release Tenant of its obligation (i) to pay the
full amount of such Rent due on such Receipt Date or (ii) to pay when due the
full amount of such Rent to become due at a later date but applicable to a
period prior to such Receipt Date. No act or conduct of Landlord, including
without limitation, the acceptance of the keys to the Premises, shall constitute
an acceptance by Landlord of the surrender of the Premises by Tenant before the
Expiration Date. Only a written notice from Landlord to Tenant stating
Landlord's election to terminate Tenant's right to possession of the Premises
shall constitute acceptance of the surrender of the Premises and accomplish a
termination of this Lease. Landlord's consent to or approval of any act by
Tenant requiring Landlord's consent or approval shall not be deemed to waive or
render unnecessary Landlord's consent to or approval of any other or subsequent
act by Tenant. 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
provision of this Lease. Tenant hereby waives any rights granted to Tenant under
California Code of Civil Procedure Section 1179, California Civil Code Section
3275, and/or any successor statute(s). Tenant represents and warrants that if
Tenant breaches this Lease and, as a result, this Lease is terminated, Tenant
will not suffer any undue hardship as a result of such termination and, during
the Term, will make such alternative or other contingency plans to provide for
its vacation of the Premises and relocation in the event of such termination.
Tenant acknowledges that Tenant's waivers set forth in this Paragraph are a
material part of the consideration for Landlord's entering into this Lease and
that Landlord would not have entered into this Lease in the absence of such
waivers.
43. Brokers. Each party hereto represents and warrants that it has dealt
-------
with no broker in connection with this Sublease and the transactions
contemplated herein, except as listed in Paragraph 2.15 above. Each party shall
indemnify, protect, defend and hold the other party harmless from all costs and
expenses (including reasonable attorneys' fees) arising from or relating to a
breach of the foregoing representation and warranty. See Addendum No. 1.
--------------
44. Easements. Landlord may, at its election, from time to time, grant
---------
such easements, rights and dedications, and cause the recordation of parcel
maps, easement and operating agreements, and restrictions affecting the Premises
and the Project. Tenant shall promptly sign any documents or instruments to
accomplish the foregoing upon request by Landlord. Tenant irrevocably appoints
Landlord as Tenant's special attorney-in-fact to execute and deliver such
documents or instruments on behalf of Tenant if Tenant refuses or fails to do
so. Landlord's right pursuant to this Paragraph 44 shall be subject to the
condition that exercise of any of such rights shall not unreasonably interfere
with Tenant's use of the Premises, or decrease the minimum number of parking
spaces required to be made available for use by Tenant under this Lease.
45. Limitations on Landlord's Liability. If Landlord is in default of this
-----------------------------------
Lease, and as a consequence Tenant recovers a money judgment against Landlord,
such judgment shall be satisfied only out of the proceeds of sale received upon
execution of such judgment and levy against the right, title, and interest of
Landlord in the Project, and out of rent or other income from the Project
receivable by Landlord or out of the consideration received by Landlord from the
sale or other disposition of all or any part of Landlord's right, title, and
interest in the Project.
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Neither Landlord nor Landlord's shareholders, officers, directors, agents,
property managers, employees, contractors, or the partners comprising Landlord
(if any) shall be personally liable for any deficiency.
46. Sale or Transfer of Premises. If Landlord sells or transfers any
----------------------------
portion of the Premises, Landlord, on consummation of the sale or transfer,
shall be released from any liability thereafter accruing under this Lease. If
any security deposit or prepaid rent has been paid by Tenant, Landlord may
transfer the security deposit and/or prepaid rent to Landlord's successor-in-
interest and on such transfer Landlord shall be discharged from any further
liability arising from the security deposit or prepaid rent.
47. Quitclaim Deed. Tenant shall execute and deliver to Landlord on the
--------------
Expiration Date or earlier termination of this Lease, promptly on Landlord's
request, a quitclaim deed to the Premises, in recordable form, designating
Landlord as transferee.
48. No Merger. The voluntary or other surrender of this Lease by Tenant,
---------
or a mutual cancellation of this Lease, or a termination by Landlord, shall not
work a merger, and shall, at the option of Landlord, terminate any existing
subleases or may, at the option of Landlord, operate as an assignment to
Landlord of any such subleases.
49. Confidentiality. Except as essential to the consummation of the
---------------
transaction contemplated by this Lease (together with all amendments and addenda
hereto):
49.1. Tenant shall keep and maintain the terms of this Lease and the
transactions contemplated by this Lease or any aspect of this Lease in strict
confidence; and
49.2. Tenant may not make or allow any notices, statements,
disclosures, communication, or news releases concerning this Lease, the terms of
this Lease and the transactions contemplated by this Lease or any aspect of this
Lease. Nothing provided herein, however, shall prevent Tenant from disclosing to
its legal counsel and/or certified public accountants, prospective purchasers,
or lenders the existence and terms of this Lease or any transaction under this
Lease, or any aspect of this lease, or from complying with any governmental or
court order or similar legal requirement which requires such party to disclose
this Lease, the terms of this Lease, the transaction contemplated by this Lease
and/or any aspect of this Lease; provided that such party uses reasonable and
diligent good faith efforts to disclose no more than is absolutely required to
be disclosed by such legal requirement.
49.3. If Tenant violates this confidentiality provision, in addition
to all other remedies to which Landlord may be entitled under law or in equity,
Landlord shall be entitled to receive immediately the entire value of any rent
relief, rent abatement, free rent, reimbursement, or other concession which
Landlord has previously granted to Tenant.
50. Miscellaneous.
-------------
50.1. Tenant covenants and agrees not to protest or in any way oppose
any application for a license to serve or sell liquor filed by tenants or other
users of space within the Project.
50.2. Upon Landlord's written request, Tenant shall promptly furnish
to Landlord, from time to time, financial statements certified by Tenant to be
true and correct, reflecting Tenant's then current financial condition. Such
financial statements shall include a current balance sheet and a profit and loss
statement covering the most recent 12-month period available. In addition,
Tenant shall provide Landlord with its annual audited financial statements
prepared by its outside firm of certified public accountants. Landlord shall not
request financial statements from Tenant more than once every six months and
Landlord or Landlord's Lender shall keep the information contained therein in
confidence. Furthermore, Tenant's obligations with respect to financial
statements shall be limited to Tenant's financial statements existing as of the
time of the request. In the event that Tenant becomes a publicly traded company
and a reporting company under the Federal Securities Laws, then, until such time
as Tenant ceases to be publicly traded, Tenant's obligations with respect to
delivery of financial statements shall cease and Landlord's obligation as to
confidentiality of Tenant's financial statements shall cease.
50.3. Notwithstanding any other provision in this Lease to the
contrary, Tenant shall refrain from selling or otherwise distributing any
alcoholic beverages unless such sale is specifically permitted pursuant to
Paragraph 2.12, above, and in any event, such sales shall be expressly forbidden
under this Lease unless and until Tenant holds the appropriate license as issued
and/or approved by the California Alcoholic Beverage Control Agency.
50.4. This Lease shall be governed by and construed in accordance with
the laws of the state in which the Premises are located. If the Premises are
located outside of California, then the references in this Lease to California
statutes shall be deemed to include any relevant statute of the jurisdiction in
which the Premises are located that is comparable to such California statutes.
50.5. For purposes of venue and jurisdiction, this Lease shall be
deemed made and to be performed in the City of San Diego, California (whether or
not the Premises are located in San Diego, California) and Landlord and Tenant
hereby consent to the jurisdiction of the Courts of the County of San Diego.
50.6. This Lease may be executed in counterparts, each of which shall
be deemed an original and all of which together shall constitute one document.
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<PAGE>
50.7. Whenever the context so requires, all words used in the singular
shall be construed to have been used in the plural (and vice versa), each gender
shall be construed to include any other genders, and the word "person" shall be
construed to include a natural person, a corporation, a firm, a partnership, a
joint venture, a trust, an estate or any other entity.
50.8. Each provision of this Lease shall be valid and enforceable to the
fullest extent permitted by law. If any provision of this Lease or the
application of such provision to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease, or the
application of such provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected by such
invalidity or unenforceability, unless such provision or such application of
such provision is essential to this Lease.
50.9. In the event any litigation, arbitration, mediation, or other
proceeding ("Proceeding") is initiated by any party against any other party to
enforce, interpret or otherwise obtain judicial or quasi-judicial relief in
connection with this Lease the prevailing party in such Proceeding shall be
entitled to recover from the unsuccessful party all costs, expenses, and actual
attorney's fees and expert witness fees relating to or arising out of such
Proceeding (whether or not such Proceeding proceeds to judgment), and any post-
judgment or post-award proceeding including without limitation one to enforce
any judgment or award resulting from any such Proceeding. Any such judgment or
award shall contain a specific provision for the recovery of all such
subsequently incurred costs, expenses, and actual attorney's fees and expert
witness fees.
50.10. This Lease shall become effective when it has been executed by each
of Landlord and Tenant.
50.11. Subject to any restriction on transferability contained in this
Lease, this Lease shall be binding upon and shall inure to the benefit of the
successors-in-interest and assigns of each party to this Lease. Nothing in this
Paragraph shall create any rights enforceable by any person not a party to this
Lease, except for the rights of the successors-in-interest and assigns of each
party to this Lease, unless such rights are expressly granted in this Lease to
other specifically identified persons.
50.12. The headings of the Paragraphs of this Lease have been included only
for convenience, and shall not be deemed in any manner to modify or limit any of
the provisions of this Lease, or be used in any manner in the interpretation of
this Lease.
50.13. Time and strict and punctual performance are of the essence with
respect to each provision of this Lease.
50.14. Each party to this Lease and its legal counsel have had an
opportunity to review and revise this Lease. The rule of construction that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Lease or any Addendum or Exhibit to this Lease,
and such rule of construction is hereby waived by Tenant.
50.15. All notices required or permitted to be given by Tenant to Landlord
shall be in writing and shall be personally delivered, sent by certified mail,
postage prepaid, return receipt requested, or sent by a nationally recognized
overnight express courier service that provides written confirmation of delivery
to Landlord at the address set forth in Paragraph 2.10 of this Lease. Each such
notice or other communication shall be deemed given, delivered and received upon
its actual receipt, except that if it is sent by mail in accordance with this
Paragraph, then it shall be deemed given, delivered and received three days
after the date such notice or other communication is deposited with the United
States Postal Service in accordance with this Paragraph. Landlord or Tenant must
give a notice of a change of its address to the other, if such address changes.
Landlord shall be required to give all notices pursuant to Paragraph 25 of this
Lease writing and shall be personally delivered, sent by certified mail, postage
prepaid, return receipt requested, or sent by a nationally recognized overnight
express courier service that provides written confirmation of delivery to Tenant
at the address set forth in Paragraph 2.11 of this Lease. Each such notice or
other communication shall be deemed given, delivered and received upon its
actual receipt, except that if it is sent by mail in accordance with this
Paragraph, then it shall be deemed given, delivered and received three days
after the date such notice or other communication is deposited with the United
States Postal Service in accordance with this Paragraph. Notwithstanding the
foregoing, routine correspondence between Landlord and Tenant shall be
deliverable by regular U.S. mail or other such means of delivery as may become
customary.
50.16. If more than one person is Tenant, then the obligations of Tenant
under this Lease shall be the joint and several obligations of each of such
persons; provided, however, that any act or signature of one or more of any of
such persons and any notice or refund given to or served on any one of such
persons shall be fully binding on each of such persons.
50.17. All provisions, whether covenants or conditions, to be performed or
observed by Tenant shall be deemed to be both covenants and conditions.
50.18. All payments to be made by Tenant to Landlord under this Lease shall
be in United States currency.
50.19. The Exhibits and Addendum attached to this Lease are incorporated
herein by this reference.
50.20. [Intentionally deleted].
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50.21. [Intentionally deleted].
50.22. This Lease, the Exhibits A, B, C and Addendum(s), if any, attached
----------------
hereto and forming a part hereof, as if set forth herein, constitute all of the
covenants, promises, assurances, representations, warranties, statements,
agreements, conditions and understandings between Landlord and Tenant concerning
the Premises and the Project and there are no covenants, promises, assurances,
representations, warranties, statements, conditions, or understandings, either
oral or written, between them, other than as herein set forth. Except as herein
otherwise provided, no subsequent alteration, change, or addition to this Lease
shall be binding upon Landlord or Tenant unless reduced to writing and signed by
each of them. Notwithstanding the foregoing, the Landlord may, from time to
time, establish and amend such reasonable and nondiscriminatory rules,
regulations, and signage criteria, in a written form, for the benefit of the
Project and Building. Violations of such rules, regulations, and signage
criteria by Tenant or Tenant's invitees shall constitute a material default of
this Lease.
50.23. This Lease, upon full execution, supersedes and revokes any and all
previous leases governing the Premises, lease negotiations, arrangements,
letters of intents, offers to lease, lease proposals or drafts, brochures,
representations, and information conveyed, whether oral or written, between
parties hereto or their respective representations or any other person purported
to represent Landlord or Tenant. The Tenant acknowledges it has not been induced
to enter into this Lease by any representations not set forth in the Leases, nor
has it relied on any such representations. No such representations should be
used in the interpretation or construction of this Lease and the Landlord shall
have no liability for any consequences arising as a result of any such
representations.
LANDLORD:
PACIFIC SORRENTO MESA HOLDINGS, L.P.,
a California limited partnership, and
PACIFIC STONECREST HOLDINGS, L.P.,
a California limited partnership, as tenants in common
By: American Assets, Inc., as Agent
BY: /s/ JOHN W. CHAMBERLAIN
_______________________________________
John W. Chamberlain
Chief Executive Officer
DATE: 4/1/99
__________________________________________
TENANT:
COPPER MOUNTAIN NETWORKS, INC.
A CALIFORNIA CORPORATION
BY: /s/ JOSEPH MARKEE
_______________________________________________________
Joseph Markee, Vice President and Chairman of the Board
DATE: 4/1/99
_____________________________________________________
BY: /s/ JOHN CREELMAN
_______________________________________________________
John Creelman, Secretary and Chief Financial Officer
DATE: 4/1/99
_____________________________________________________
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<PAGE>
EXHIBIT A
(PAGE 1 OF 2)
Legal Description
Parcel 1:
Lot 29 of Pacific Corporate Center Unit Nos. 3 and 4, in the City of San Diego
County of San Diego, State of California, according to map thereof No. 11560,
filed in the office of the County Recorder of San Diego County, July 9, 1986.
Said legal description now reads as follows:
Lot 36 of Pacific Corporate Center Unit No. 9, in the City of San Diego, County
of San Diego, State of California, according to map thereof No. 12775, filed in
the office of the County Recorder of San Diego County, January 31, 1991.
Parcel 2:
Lots 26, 27 and 28 of Unit Nos. 3 and 4 of Pacific Corporate Center, in the City
of San Diego, County of San Diego, State of California, according to map thereof
No. 11560 filed in the office of the County Recorder of San Diego County, July
9, 1986, said legal description now reads as follows:
Lots 32, 33, 34 and 35 of Pacific Corporate Center Unit No. 9, in the City of
San Diego, County of San Diego, State of California, according to map thereof
No. 12775, filed in the office of the County Recorder of San Diego, County,
January 31, 1991 as File No. 1991-0045781 of official records.
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<PAGE>
EXHIBIT A
(PAGE 2 OF 2)
Site Plan
2
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<PAGE>
EXHIBIT B
(PAGE 1 OF 3)
Floor 1
1
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<PAGE>
EXHIBIT B
(PAGE 2 OF 3)
Floor 2
2
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<PAGE>
EXHIBIT B
(PAGE 3 OF 3)
Floor 3
3
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<PAGE>
EXHIBIT "C"
TENANT IMPROVEMENTS TO THE PREMISES
-----------------------------------
GENERAL RECITAL: LANDLORD SHALL PROVIDE A STANDARD TENANT FINISH FOR THE
- ---------------
PREMISES, SUBJECT TO THE TERMS AND CONDITIONS AS MORE COMPLETELY DESCRIBED
HEREIN.
Section 1. Definitions and Representatives. All terms used herein which
-------------------------------
are not defined shall have the meanings ascribed to them in the Lease to which
this Exhibit is attached. This Addendum is incorporated within such Lease and
references in this Addendum to "this Lease" shall will mean the Lease to which
this Exhibit is attached. Landlord appoints Landlord's Representative to act for
Landlord and Tenant appoints Tenant's Representative to act for Tenant in all
matters covered by this Agreement. All inquiries, requests, instructions,
authorizations and other communications with respect to the matters covered by
this Agreement will be made to Landlord's Representative or Tenant's
Representative, as the case may be. Tenant will not make any inquiries of or
requests to, and will not give any instructions or authorizations to, any other
employee or agent of Landlord, including Landlord's architect, engineers and
contractors or any of their agents or employees, with regard to matters covered
by this Agreement. Either party may change its Representative under this
Agreement at any time with three business (3) days' prior written notice to the
other party.
Tenant's Representative: /s/ JOHN CREELMAN
__________________________________.
Landlord's Representative: Rick McKee, Vice President, c/o American Assets,
Inc.
Landlord's Designer: Facility Solutions
Landlord's Contractor: Ninteman Construction
Section 2. Landlord's Work. Following execution of this Lease by Landlord and
---------------
Tenant, Landlord shall cause the Premises to be built-out and delivered to
Tenant in accordance with working drawings, plans, and specifications for the
Premises prepared by Facility Solutions, based on a scope of work and
specifications supplied by Tenant. The build-out of the Premises shall be
completed by Landlord's Contractor, or such other contractor selected by
Landlord and approved by Tenant without unreasonably withholding such approval,
in a good and workmanlike manner. Subcontracting work shall be competitively bid
to three subcontractors. Tenant shall have the ability to recommend
subcontractors, and Landlord shall not unreasonably withhold its consent to
submitting bids to such recommended subcontractors. The working drawings, plans,
and specifications for Landlord's Work shall be those attached hereto, or if no
such working drawings, plans, and specifications are attached, then, (a) within
five (5) business days after execution of this Lease, Tenant shall provide
Landlord with sufficient information concerning the scope of work and
specifications to enable Landlord to prepare working drawings, plans, and
specifications for the build-out of the Premises, and (b) Landlord and Tenant
shall, within fifteen days after the date that Landlord submits such working
drawings, plans, and specifications to Tenant for Tenant's approval, mutually
approve such working drawings, plans, and specifications ("Landlord's Work"). If
Landlord and Tenant have not agreed on such working drawings, plans, and
specifications within 15 days following Landlord's delivery of working drawings,
plans, and specifications to Tenant, then Landlord may, at its election,
terminate this Lease upon 15 days written notice to Tenant, if the parties are
still unable to agree on working drawings, plans, and specifications during such
15 day period. Notwithstanding anything to the contrary contained herein:
(i) Landlord's Work shall be completed in compliance with all
applicable laws, codes, ordinances and other governmental
requirements then applicable to the Premises and the Building.
(ii) Landlord's Work shall be done pursuant to either a fixed-price
construction contract or a cost plus fee construction contract
subject to a guaranteed maximum price (the "Construction
Contract"). Tenant shall have the right to approve the
Construction Contract, which approval shall not be unreasonably
withheld or delayed beyond 2 business days after Tenant's receipt
of such contract.
Section 3. Modifications. Tenant may request and authorize changes in the
-------------
work during construction, only by written instructions from Tenant's
Representative to Landlord's Representative on a form approved by Landlord. All
such changes shall be subject to Landlord's prior written approval in accordance
with Section 4 of this Agreement. Prior to commencing any such change, Landlord
shall prepare and deliver to Tenant, for Tenant's approval, a change order (the
"Change Order") setting forth the additional time required to perform the change
and the total cost of such change, which will include associated architectural,
engineering and construction contractor's fees, delay costs, additional
coordination costs, and Landlord's estimated costs in implementing the Change
Order, such Landlord's costs not to exceed five percent (5%) of the amount of
the Change Order. If Tenant fails to approve such Change Order within two (2)
business days after delivery by Landlord, Tenant shall be deemed to have
withdrawn the proposed Change Order and Landlord shall not proceed to perform
the change. Upon Landlord's receipt of Tenant's approval, Contractor shall
proceed to perform the change and, if such change is estimated to increase the
cost of Landlord's Work above the amount of the Allowance, Tenant shall pay for
such excess cost prior to the time Contractor starts work on such Change Order.
1
<PAGE>
Section 4. Landlord's Approval. Landlord may withhold its approval of any
-------------------
revisions requested by Tenant to the plans and specifications, or any Tenant
Change Orders which require work which: (i) exceeds or affects the structural
integrity of the Building or any part of the utility installations or HVAC
System; (ii) is not approved (if such approval is required) by the holder of any
mortgage or deed of trust encumbering the Building at the time the work is
proposed; (iii) violates any agreement which affects the Building or which binds
Landlord; (iv) Landlord reasonably believes will increase the cost of operation
or maintenance of any of the systems of the Building; (v) Landlord reasonably
believes will reduce the market value of the Building at the end of the Term;
(vi) does not conform to applicable building codes or is not approved by any
governmental authority with jurisdiction over the Premises and/or the Building;
(vii) does not conform to Landlord's "Building Standard" tenant improvement
specifications unless otherwise approved by Landlord; or (viii) Landlord
reasonably believes will result in a delay in the completion of Landlord's Work,
or result in an increase in the cost of Landlord's Work in excess of the
Allowance (unless Tenant pays such excess in advance).
Section 5. Improvement Allowance. Landlord shall be responsible for bearing
---------------------
all costs and expenses of completing the Landlord's Work up to a maximum of
[***] (the "Allowance"). All costs and expenses in excess of such Allowance
- -----
shall be at Tenant's sole expense and shall be paid in accordance with this
Section 5. If Landlord at any time determines that the cost of the Landlord's
Work is likely to exceed the amount of the Allowance (such excess, the "Excess
Amount"), Tenant shall elect either, or a combination, of the following two
options with respect to the entire Excess Amount: (a) the payment by Tenant to
Landlord of the Excess Amount concurrently with the performance of Landlord's
Work in accordance with the terms of this Section 5, or (b) the election by
Tenant to increase the Basic Monthly Rent under this Lease by an amount
sufficient to fully amortize the Excess Amount over the Initial Term plus
interest at 10 percent per annum.
To the extent to which Tenant elects to pay the Excess Amount concurrently
with the performance of Landlord's Work (pursuant to clause (a) above), Tenant
shall advance fifty percent (50%) of such amount to Landlord prior to (and as a
condition to) Landlord's commencing or completing the Landlord's Work and any
failure by Tenant to pay such funds to Landlord within five (5) business days
shall constitute a default under this Lease. Tenant shall pay the balance of
such amount within ten (10) calendar days following its receipt of invoices
therefor and Tenant's failure to do so shall constitute a default under this
Lease.
To the extent to which Tenant elects to amortize the Excess Amount through an
increase to Basic Monthly Rent (pursuant to clause (b) above), Landlord and
Tenant shall, prior to (and as a condition to) Landlord's commencing or
completing the Landlord's Work, enter into an Amendment to this Lease setting
forth such increased Basic Monthly Rent. Tenant's failure to execute and return
such Amendment within 5 days after receipt shall constitute a default under this
Lease.
The Allowance shall include without limitation any and all costs of
construction, city permits, space planning, engineering, blueprints,
reimbursables, and Landlord's actual cost of administration and supervision of
Landlord's Work and overhead attributable to Landlord's work up to a maximum
amount of $0.25 per Rentable Square Foot. Landlord's Work shall use, whenever
possible, the construction materials which currently exist at the Building and
the fair market value of such materials shall be deducted from the Allowance.
Landlord and Tenant acknowledge that the cost of window coverings for the
Premises (estimated to total less than $20,000) shall be allocated 25 percent to
each of Landlord, Tenant (and therefore paid through the Allowance), Landlord's
broker (John Burnham), and Tenant's broker (Irving Hughes Group).
Section 6. Effect of Delay on Lease Term. In the event Landlord's Work is
-----------------------------
not substantially completed by the Rent Commencement Date specified in the
Lease, the Lease shall not, except as otherwise provided, be affected or
modified and shall remain in full force and effect and Landlord shall not be
liable for any damage suffered or incurred on account of any delay in
completion. Landlord's obligation to complete Landlord's Work is subject to
delays from causes beyond the reasonable control of Landlord such as, but not
limited to, acts of God, strikes, work stoppages, unavailability of or delay in
receiving permits, labor or materials, defaults by contractors or
subcontractors, weather conditions, fire or other casualty, or action of
governmental authorities.
Section 7. Initial Commencement of Lease Term. The Lease Commencement Date
----------------------------------
shall commence upon the later to occur of (i) Landlord's delivery of possession
of the second and third floors of the Building or (ii) the date of Substantial
Completion (as defined in Paragraph 4 of the Lease) of the Landlord's Work on
the second and third floors of the Building. The Rent Commencement Date shall be
determined in accordance with Lease Addendum No. 1 (and may be different dates
for different floors of the Premises), except that such dates shall be
accelerated one day for each day that Substantial Completion of Landlord's Work
would have occurred (as to a particular floor or floors) but for Tenant Delays.
Each of the following events shall be deemed a "Tenant Delay": (a) delays
resulting from any direction by Tenant that Landlord suspend work or otherwise
hold up construction of any portion of the Tenant Improvements because of a
possible change order initiated by Tenant or for any other reason directed by
Tenant; (b) delays because portions of Landlord's Work cannot be performed
until work to be performed by or on behalf of Tenant is performed; (c) delays
due to the failure of Tenant to pay when due any amount payable pursuant to the
Lease or this Exhibit; (d) delays which result directly or indirectly from
Tenant's changes in the working drawings, plans, and specifications; or (e) any
other action or inaction of Tenant that directly or indirectly delays Landlord
in completing Landlord's Work. Tenant shall pay any actual and documented costs
or expenses incurred by Landlord as a result of any Tenant Delays, including
without limitation, any increases in costs or expenses for labor or materials.
Landlord shall provide Tenant with an "Acceptance of Premises" letter upon
Tenant's acceptance of possession, and a "Confirmation of Lease Terms" written
memorandum following the Rent Commencement Date reflecting the exact Lease
Commencement Date; however, any failure to do so shall not affect the Lease
Commencement Date. If the Lease Commencement Date provided for by this Section
is different than the estimated Lease Commencement Date set forth in Paragraph
2.4.1 of
2
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
the Lease, then (a) the Lease Commencement Date provided for by this Section
shall control and (b) Paragraphs 2.4.1 and 2.4.2. of the Lease shall be deemed
amended accordingly. Tenant shall execute the Acceptance of Premises letter on
the date of Landlord's turnover of possession to Tenant, subject to any
punchlist items identified therein. Tenant shall execute and return to Landlord
the Confirmation of Lease Terms memorandum within ten days of submittal by
Landlord. Failure by Tenant to execute the Acceptance of Premises letter or the
Confirmation of Lease Terms memorandum shall not amend the terms thereof, but
shall be deemed as Tenant's final and conclusive acceptance of the terms
thereof.
Section 8. Future Improvements by Tenant to the Premises; Plan Approval.
--------------------------------------------------------------
In the event that Tenant shall desire to perform improvements to the Premises
during the term of the Lease or any extension thereof, Tenant shall, unless
such improvements do not require Landlord's consent pursuant to Paragraph 23 of
the Lease, cause detailed plans and specifications (the "Plans") to be prepared
and delivered to Landlord; which Plans shall reflect the work to be performed
within the Premises by Tenant in order to suitably prepare the Premises for
Tenant's use ("Tenant's Work"). Landlord shall, within a reasonable period of
time following its receipt of the Plans, either approve such Plans or provide
Tenant with the reasons that Landlord is withholding such consent. Performance
of the Tenant's Work shall strictly conform to the approved Plans and any
deviation will require Landlord's prior approval. All costs arising from said
future Tenant's Work shall be the sole and exclusive responsibility of Tenant
to pay, in a prompt and timely fashion as said costs become due.
Section 9. Construction of Tenant Improvements. After the Plans for the
-----------------------------------
Tenant's Work have been approved by Landlord, Tenant, and the local governing
agencies, Tenant shall enter into a construction contract with Contractor (or
such other contractor designated by Landlord) which shall include a provision
for compliance with Landlord's rules and regulations as defined herein, and
Tenant shall provide Landlord with a copy of such contract. Tenant shall perform
no Alterations or Tenant's Work except through Contractor and in strict
accordance with this Exhibit. In no event shall Tenant be permitted to perform
Tenant's Work prior to providing all information requested by Landlord relating
to Tenant's Work. Failure by Tenant to provide any information requested by
Landlord, including but not limited to evidence of Tenant's and Contractor's
compliance with all of the insurance requirements hereof, shall constitute a
default of the Lease in the event Tenant proceeds with Tenant's Work.
Violations of Landlord's rules, regulations, and requirements as set forth
herein or as otherwise established by Landlord shall constitute a default of
this Lease if not corrected by Tenant and/or Contractor within twenty four (24)
hours notice, either written or oral, by Landlord to Tenant. Landlord shall
have the right to post a notice of non-responsibility at a prominent location
within Tenant's Premises.
It shall be the responsibility of Tenant to enforce the following requirements
of Contractor, and all subcontractors of Contractor, at every level:
9.1 Contractor shall perform Tenant's Work in a manner and at times which do
not impede or delay Landlord's contractor in the Project. Any delays in the
completion work by the Landlord or Landlord's contractor on the Project, or the
commencement of the annual rental and any damage to any work caused by
Contractor shall be at the sole cost and expense of Tenant.
9.2 Contractor shall be responsible for the repair, replacement, or clean-up
of any damage by him to other contractors' work which specifically includes
access ways to the Premises which may be concurrently used by others. Firelanes,
sidewalks, hallways, and access to other tenant's suites may not be blocked or
obstructed at any time.
9.3 Contractor shall contain his storage of materials and its operations
within the Premises and such other space as he may be assigned by Landlord.
Should he be assigned space outside of the Premises, it shall move to such other
space as Landlord shall reasonably direct from time to time to avoid
interference or delays with other work. Contractor shall park construction
vehicles in areas reasonably designated by Landlord.
9.4 All trash and surplus construction materials shall be stored within the
Premises and shall be promptly removed from the Premises. Contractor shall not
use common area trash enclosures or waste bins for disposal of trash or surplus
construction material.
9.5 Contractor shall provide temporary utilities, portable toilet facilities
and portable drinking water as required for his work within the Premises.
9.6 Noise shall be kept to a minimum at all times, and shall not be permitted
to interfere with the conduct of other tenant's business, or the general
operation of the Project. Contractor shall notify Landlord or Landlord's
project manager of any planned work to be done on weekends or other than normal
job hours.
9.7 Tenant and Contractor are responsible for compliance with all applicable
codes and regulations of duly constituted authorities having jurisdiction as far
as the performance of the Tenant's Work is concerned and for all applicable
safety regulations established by the Landlord, OSHA, or other regulatory
agencies, and Tenant further agrees to save and hold Landlord harmless for
Tenant's actions arising from Tenant's Work. Prior to commencement of
construction, Tenant shall submit to Landlord evidence of insurance as required
by this Lease and evidence of insurance for Contractor.
9.8 Contractor shall not post signs on any part of the Project or on the
Premises, without Landlord's prior written approval.
9.9 Tenant shall be responsible for and shall obtain and record a Notice of
Completion promptly following completion of Tenant's work.
3
<PAGE>
9.10 Landlord may require that, prior to the commencement of construction,
Tenant shall obtain or cause its contractor to obtain payment and performance
bonds covering the faithful performance of the contract for the construction of
the Tenant's Work and the payment of all obligations arising thereunder. Such
bonds shall be for the mutual benefit of both Landlord and Tenant.
9.11 Tenant shall provide to Landlord a copy of the fully executed
construction contract, including all addendum and a line item breakdown by trade
thereto, between Tenant and its Contractor for the Tenant's Work.
9.12 All required permits and approvals, including but not limited to
Planning, Building, Fire, and Health department permits, must be obtained and
all necessary calculations, including, but not limited to, those required under
Title 24, must be submitted to the local governing agencies for all work to be
performed by Tenant or Contractor in the Premises.
9.13 Any modifications to the building exterior shall be subject to
Landlord's prior approval. No romex wiring shall be allowed, nor shall water
lines be placed in slabs, unless approved by Landlord prior to installation.
All equipment placed upon the roof as a result of the Tenant's Work, and all
roof penetrations, shall be approved by Landlord prior to the commencement of
work.
9.14 Landlord, at Landlord's reasonable discretion, may from time to time
establish such other reasonable rules and regulations for protection of
property and the general safety of occupants and invitees of the Project. Such
rules and regulations shall apply to Tenant and Contractor as though
established upon the execution of this Exhibit "C".
Section 10. Coordination of Construction. Tenant covenants and agrees that
----------------------------
Tenant and Contractor shall not destroy or in any way damage any portion of the
Building or Project. Further, Tenant covenants and agrees that Tenant and
Contractor shall coordinate the Tenant's Work with any construction schedule for
any work being performed by or on behalf of Landlord or any other tenant, and
that the performance of the Tenant's Work shall not interfere with Landlord's or
any other tenant's construction activities. If there be such interference or
conflict, notice thereof shall be given to Tenant, and immediately after receipt
of such notice the Tenant agrees to cease or cause to be terminated such
interference or conflict. Further, should Tenant delay Landlord's work at the
Premises or any other area of the Building or Project due to the construction of
Tenant's Work, Tenant shall be responsible to Landlord for any lost rents due to
the delay of the commencement of any lease for premises within the Project.
Tenant further covenants and agrees that Tenant and Contractor shall comply with
all rules and regulations promulgated by Landlord, or its agent, and all
directives of Landlord governing construction or installation activities,
including but not limited to, permissible hours for construction or installation
activities, storage of equipment and responsibility for cleaning of work areas.
If Tenant or Contractor shall fail to comply with the provisions of this Section
any costs incurred by Landlord as a result of such failure shall be at Tenant's
sole and exclusive expense.
Section 11. Limitation on Landlord's Liability. Landlord shall not be liable
---------- ----------------------------------
for any loss, cost, damage, or expense incurred or claimed by Tenant or any
other person or party on account of the construction or installation of the
Tenant's Work or any other person or party on account of the construction or
installation of the Tenant's Work or any other improvements to the Premises made
by Tenant. Tenant hereby acknowledges and agrees that the compliance of the
Tenant's Work, or other Alterations made to the Premises by the Tenant and any
plans therefore, with all applicable governmental laws, codes, and regulations
shall be solely Tenant's responsibility. Landlord assumes no liability or
responsibility resulting from the failure of the Tenant to comply with all
applicable governmental laws, codes and regulations or for any defect in any of
the Tenant's Work or other Alteration to the Premises made by Tenant. Tenant
further agrees to indemnify, defend, and hold harmless Landlord from any loss,
cost, damage or expense incurred, claimed, asserted, or arising in connection
with any of the foregoing.
4
<PAGE>
ADDENDUM NO. 1 TO
STANDARD FULL SERVICE GROSS OFFICE LEASE
This Addendum No. 1 is attached to and incorporated within that certain
Standard Full Service Gross Office Lease between AMERICAN ASSETS, INC., As Agent
For PACIFIC SORRENTO MESA HOLDINGS, L.P., a California limited partnership, and
PACIFIC STONECREST HOLDINGS, L.P., a California limited partnership, as tenants
in common ("Landlord"), and COPPER MOUNTAIN NETWORKS, INC., a California
corporation ("Tenant"), who agree as follows:
1. Premises. The Premises consist of approximately 60,942 Rentable
--------
Square Feet, consisting of the entire Rentable Area located on the second and
third floors of the Building and approximately 11,422 Rentable Square Feet
located on the first floor. Landlord acknowledges that a portion of the
Premises on the first floor (location and design of which are subject to
Landlord's approval pursuant to Exhibit "C") will be used by Tenant as a
-----------
reception area. The location and design of such reception area shall be subject
to Landlord's approval pursuant to Exhibit "C".
-----------
2. Rent Commencement Date. Landlord and Tenant acknowledge that it is
----------------------
Landlord's intent to deliver the Premises to Tenant as Landlord's Work for each
floor of the Premises is completed (with the second and third floors delivered
at the same time). With respect to that portion of the Premises located on the
second and third floors of the Building, the Rent Commencement Date is estimated
to occur, subject to Substantial Completion of Landlord's Work located on those
floors pursuant to Exhibit "C", on June 1, 1999. With respect to that portion of
-----------
the Premises located on the first floor, the Rent Commencement Date is estimated
to occur, subject to Substantial Completion of Landlord's Work located on those
floors pursuant to Exhibit "C", on August 1, 1999. Basic Monthly Rent shall
-----------
become payable as each floor of the Premises are delivered to Tenant (with the
second and third floors delivered at the same time) with Landlord's Work
Substantially Complete, based on the proportion to which the number of Rentable
Square Feet in the Substantially Completed portion bears to the total Rentable
Square Feet in the entire Premises. The Initial Expiration Date shall be the
sixth (6th) anniversary of the date upon which Landlord's Work for the last
portion of the Premises is Substantially Complete. If such sixth (6th)
anniversary falls during the middle of a calendar month, then the Initial
Expiration Date shall be the last day of such calendar month.
3. Annual Fixed Increases of Basic Monthly Rent. On each anniversary of
--------------------------------------------
the Rent Commencement Date, which for purposes of rent adjustment for the entire
Premises shall be deemed to be the Rent Commencement Date for the second and
third floors notwithstanding that the Rent Commencement Date with respect to the
first floor is a later date, the Basic Monthly Rent shall be increased by [***]
-----
of the Basic Monthly Rent in effect immediately preceding such
adjustment.
4. Delivery of Possession. Landlord shall use its best efforts to provide
----------------------
Tenant with access to the Premises at least 15 days prior to Substantial
Completion of Landlord's Work, with respect to a given portion of the Premises,
to permit Tenant to commence installation of its furniture, fixtures, and
equipment. If Landlord has not delivered any portion of the Premises with the
Landlord's Work substantially completed to Tenant on or before 60 days following
the estimated Substantial Completion date pursuant to Paragraph 2 above (subject
to delays caused by Tenant), then Tenant shall have the right thereafter to
cancel this Lease with regard to such portion and any other portions that have
not yet been delivered to Tenant. Upon such cancellation, neither party shall
have any further liability to the other relating to such undelivered portion.
<PAGE>
5. Parking. Tenant acknowledges that the Project currently includes
-------
parking equivalent to three and one-half (3.5) spaces per one thousand (1,000)
Useable Square Feet.
Landlord currently intends to eventually add additional parking facilities to
the Project to make available to Tenant a ratio of four (4) spaces per one
thousand (1,000) Useable Square Feet. Landlord will use its commercially
reasonable best efforts to make available to Tenant such ratio of parking on an
interim basis until such parking facilities are added. Tenant acknowledges that
the process of developing parking facilities may require the relocation of
Tenant's parking from time to time to temporary parking areas. Landlord will
designate and maintain at least 10 parking spaces located reasonably close to
the Building as "short term" or "visitor" parking. The use of such parking
spaces shall not be exclusive to Tenant or Tenant's Invitees.
6. [***]
-----
1
Addendum No. 1 to
Pacific Tower Full Service Gross Office
Copper-Mountain-Lease-Addendum-No-1:08027.208
Landlord_______________Tenant________________
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
signage criteria for the Building and Project, however Tenant acknowledges that
Landlord has not yet received necessary governmental approvals for such signage
criteria.
7. Option to Extend. Tenant shall have the option to extend the Lease
----------------
Term (the "Option to Extend") for one additional term of five (5) years (the
"Extension Term"), provided Tenant is in occupancy of not less than seventy-five
percent (75%) of the Premises at the time of exercise of the Option to Extend,
and Tenant gives Landlord written notice of its election to exercise the Option
to Extend no less than nine (9) months prior to the expiration of the Lease
Term. Time is of the essence with respect to such obligation to give notice to
Landlord.
7.1. Restrictions in Transferability of Option. The Option to Extend
-----------------------------------------
is personal to the Tenant originally named in this Lease or any corporation of
which Tenant owns at least fifty-one percent (51%) ("Affiliate") and may not be
exercised by any transferee (as defined below) other than an Affiliate.
7.2. Conditions Terminating Tenant's Rights to Exercise Option.
---------------------------------------------------------
Tenant shall not have the right to exercise the Option to Extend,
notwithstanding anything set forth above to the contrary: (a) during any period
of time commencing from the date Landlord gives to Tenant a written notice that
Tenant is in default under any provision of this Lease and continuing until the
default alleged in said notice is cured; (b) during the period of time
commencing on the day after a monetary obligation to Landlord is due from Tenant
and unpaid (without any necessity for notice thereof to Tenant) and continuing
until the obligation is paid; or (c) in the event that Landlord has given to
Tenant two or more notices of default or a late charge has become payable under
this Lease during the 12-month period prior to the time that Tenant intends to
exercise the Option to Extend. The period of time within which the Option to
Extend may be exercised shall not be extended or enlarged by reason of Tenant's
inability to exercise the Option to Extend because of the foregoing provisions
of this Paragraph, even if the effect thereof is to eliminate Tenant's Right to
Exercise the Option to Extend.
7.3. Conditions Terminating Tenant's Option Rights. All rights with
---------------------------------------------
respect to the Option to Extend shall terminate and be of no further force or
effect even after Tenant's due and timely exercise of the Option to Extend, if,
after such exercise, but prior to the commencement of the Extension Term, (a)
Tenant fails to pay to Landlord a monetary obligation of Tenant for a period of
ten (10) days after such obligation become due (without any necessity of
Landlord to give notice thereof to Tenant); (b) Tenant fails to cure a non-
monetary default within thirty (30) days after the date the Landlord gives
notice to Tenant of such default; or (c) Landlord gives to Tenant two or more
notices of default or a late charge becomes payable for any such default,
whether or not such defaults are cured.
7.4. Terms and Conditions of Extension of Term. If Tenant exercises
-----------------------------------------
the Option to Extend for the Extension Term, then the Base Rent for the first
year of the Extension Term shall adjust to an amount equal to the prevailing
base rental rate for new leases of comparable office space in the Project.
Furthermore, the Base Monthly Rent will continue to increase annually pursuant
to Paragraph 3 above.
8. Fourth Floor Expansion Right. Commencing as of the date of execution
----------------------------
of this Lease and expiring on October 1, 1999, Tenant shall have the option of
expanding the Premises to include either 50 percent, 75 percent, or 100 percent,
of the Rentable Area on the fourth floor of the Building on the same terms,
provisions, and conditions of this Lease, including a tenant improvement
allowance of [***] per Useable Square Foot. Such option may only be exercised as
-----
to such percentages and the actual configuration of such fourth floor space
shall be subject to Landlord's approval, which will not be unreasonably
withheld. For purposes of this Paragraph 8, "Fourth Floor Premises" shall mean
the fourth floor Rentable Area as to which such option is timely and properly
exercised. Such exercise shall only be effective if (a) Tenant gives written
notice of such exercise to Landlord on or before October 1, 1999, (b) such
written notice specifies that it is effective as to one of the following amounts
of Rentable Area on the fourth floor of the Building: (i) 50 percent, (ii) 75
percent, or (iii) 100 percent, (c) such written notice shall be accompanied by
(A) Tenant's scope of work and specifications sufficient to allow Landlord to
prepare working drawings, plans, and specifications for the Fourth Floor
Premises, and (B) payment of an amount equal to twice the amount of first
month's Basic Monthly Rent for the Fourth Floor Premises, constituting first
month's Basic Monthly Rent and an additional security deposit, respectively.
Landlord may market fourth floor space to potential tenants but Landlord shall
not enter into any lease for the fourth floor with any other tenant that is not
expressly subject to Tenant's rights under this Paragraph. Within 15 days after
Tenant's exercise of such expansion option, Landlord and Tenant shall enter into
an Amendment to this Lease memorializing the expansion of the Premises to
include the Fourth Floor Premises.
8.1. Landlord shall cause the Fourth Floor Premises to be built-out
and delivered to Tenant in accordance with working drawings, plans, and
specifications for the Fourth Floor Premises prepared by Facility Solutions
based on the scope of work and specifications provided by Tenant. Tenant shall
review and approve such working drawings, plans, and specifications in
accordance with the terms and conditions of Exhibit "C". Time is of the essence
-----------
with respect to the timing of Tenant's review and approvals under Exhibit "C".
-----------
8.2. Basic Monthly Rent as to the Fourth Floor Premises shall become
payable upon the later of (a) December 1, 1999, or (b) delivery to Tenant of the
Fourth Floor Premises with Landlord's Work Substantially Complete, except that
such date shall be accelerated one day for each day that Substantial Completion
of Landlord's Work with respect to the Fourth Floor Premises would have occurred
2
Addendum No. 1 to
Pacific Tower Full Service Gross Office
Copper-Mountain-Lease-Addendum-No-1:08027.208
Landlord_______________Tenant________________
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
but for Tenant Delays. Tenant shall pay any actual and documented costs or
expenses incurred by Landlord as a result of any Tenant Delay, including without
limitation, any increases in costs or expenses for labor or materials. The
build-out of the Fourth Floor Premises shall be completed by Landlord's
Contractor in accordance with and subject to the terms and conditions set forth
on Exhibit "C", including without limitation the provisions relating to the
-----------
Allowance, except that (i) the Allowance shall be [***] per Useable Square Foot
of the Fourth Floor Premises, (ii) references to the "Premises" shall mean the
"Fourth Floor Premises," and (iii) Section 7 (entitled "Initial Commencement of
Lease Term") shall not apply, except for the definition of "Tenant Delay."
8.3. Landlord shall provide Tenant with an "Acceptance of Premises"
letter upon Tenant's acceptance of possession of the Fourth Floor Premises, and
a "Confirmation of Lease Terms" written memorandum, however, any failure to do
so shall not affect the date upon which Basic Monthly Rent shall become payable.
Tenant shall execute the Acceptance of Premises letter on the date of Landlord's
turnover of possession to Tenant, subject to any punchlist items identified
therein. Tenant shall execute and return to Landlord the Confirmation of Lease
Terms memorandum within ten days of submittal by Landlord. Failure by Tenant to
execute the Acceptance of Premises letter or the Confirmation of Lease Terms
memorandum shall not amend the terms thereof, but shall be deemed as Tenant's
final and conclusive acceptance of the terms thereof.
8.4. Time is of the essence with respect to Tenant's exercise of such
option. Except as set forth in this Paragraph 8 to the contrary, for purposes of
this Lease the term "Premises" shall include the Fourth Floor Premises for all
purposes including without limitation the expiration of the term of this Lease.
9. First Right to Lease. Subject to any prior exercise by Tenant of the
--------------------
expansion option set forth in Paragraph 8 above, Tenant shall have a continuous
first right of refusal (provided Tenant is not then in default hereunder beyond
the expiration of any applicable notice and cure periods) to lease any available
space on the fourth floor of the Building upon the same terms, provisions, and
conditions that Landlord indicates it would be willing to accept from a bona
fide third party, as set forth in a written notice from Landlord to Tenant
("Landlord's Notice"). Such right must be exercised, if at all, by Tenant
delivering written notice to Landlord, within three (3) business days of
Tenant's receipt of any such Landlord's Notice ("Expansion Acceptance Date"),
that Tenant irrevocably agrees to lease such space upon the exact terms,
provisions, and conditions set forth in the particular Landlord's Notice. If
Tenant timely exercises such right, then Tenant and Landlord shall promptly
execute a lease for such additional space upon the exact terms, provisions, and
conditions contained in the particular Landlord's Notice. If Tenant fails to
accept the terms, provisions, and conditions in a particular Landlord's Notice
by the particular Expansion Acceptance Date, then Landlord may, within 12 months
after the particular Expansion Acceptance Date ("Third Party Deadline"), lease
the space described in the particular Landlord's Notice to a third party for a
rental amount not less than ninety-two and a half percent (92.5%) of the rental
rate set forth in the particular Landlord's Notice. The calculation of the
amount of rent to be paid by any third party tenant shall take into account any
special provisions amounting to a rent abatement or concession in favor of the
third party tenant. If Landlord does not rent the space described in the
particular Landlord's Notice by the Third Party Deadline, Landlord must issue
another Landlord's Notice and comply with this Paragraph with regard to the
particular space before leasing it to a third party. The process described
herein will continue until a particular space is leased by Tenant pursuant to a
Landlord's Notice or such space is rented to a third party in accordance with
this Paragraph.
10. Assignment and Transfers. Notwithstanding anything to the contrary in
------------------------
Paragraph 31 of this Lease and subject to the conditions set forth below,
Landlord's consent shall not be required for any Transfer to (a) a transferee
resulting from a merger or consolidation with the original Tenant under this
Lease, (b) any entity that succeeds to all of the assets of the original Tenant
under this Lease, or (c) a partnership, corporation, or limited liability
company controlled by the original Tenant under this Lease and as to which the
original Tenant under this Lease holds at least 50 percent of the outstanding
equity interests. The foregoing provision is subject to the following
restrictions and conditions: (i) this Addendum Paragraph 7 is personal to the
Tenant originally named in this Lease and shall be inapplicable to any
transferee, (ii) such transferee must have a net worth immediately following
such Transfer at least equal to the net worth of the original Tenant under this
Lease as of the execution of this Lease and as of the date of such Transfer,
(iii) the original Tenant under this Lease shall remain fully liable under this
Lease, (iii) the Premises shall continue to be used in a manner consistent with
the Permitted Use, (iv) such Transfer shall not cause Landlord to violate any
other Lease or agreement regarding the Building or Project, (v) such Transfer
shall otherwise comply with all provisions of this Lease, including Paragraph
31, and (vi) Tenant shall provide Landlord with prior written notice of such
Transfer, and adequate information regarding the proposed Transfer (including
detailed financial information regarding the transferee) at least fifteen (15)
days before the effective date of such Transfer. Landlord acknowledges that
upon Tenant's proposed initial public offering, Tenant intends to convert to a
Delaware corporation. Such conversion shall not constitute a Transfer under
this Lease provided that such conversion results in the Delaware corporation
succeeding to all of Tenant's assets, including without limitation the corporate
name. Upon such conversion, all references in this Lease to the "original
Tenant under this Lease" or similar phrases shall refer to the Delaware
corporation. Upon request by Landlord, Tenant shall execute an amendment to
this Lease evidencing such conversion.
11. Name of Building and Project. Tenant acknowledges that the name of
----------------------------
the Project and Building have yet to be determined and will be established by
Landlord in its sole discretion at a later time.
3
Addendum No. 1 to
Pacific Tower Full Service Gross Office
Copper-Mountain-Lease-Addendum-No-1:08027.208
Landlord_______________Tenant________________
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
12. Loading Dock. Tenant acknowledges and agrees that the loading dock,
------------
truck bay, and freight elevator adjacent to the Premises is for the common use
of all tenants in the Building. Tenant shall comply with such nondiscriminatory
rules and regulations as may be reasonably established by Landlord from time to
time relating to the use of and access to such areas.
13. Brokers. Landlord and Tenant acknowledge that Tenant's broker, [***],
-------
has agreed to limit the commission payable pursuant to this Lease to [***].
-----
LANDLORD:
PACIFIC SORRENTO MESA HOLDINGS, L.P.,
a California limited partnership, and
PACIFIC STONECREST HOLDINGS, L.P.,
a California limited partnership, as tenants in common
By: American Assets, Inc., as Agent
By: /s/ JOHN W. CHAMBERLAIN
_______________________________________
John W. Chamberlain
Chief Executive Officer
DATE: 4/1/99
______________________________________
TENANT:
COPPER MOUNTAIN NETWORKS, INC.
A CALIFORNIA CORPORATION
BY: /s/ JOSEPH MARKEE
_______________________________________________________
Joseph Markee, Vice President and Chairman of the Board
DATE: 4/1/99
________________________________________________
BY: /s/ JOHN CREELMAN
____________________________________________________
John Creelman, Secretary and Chief Financial Officer
DATE: 4/1/99
_________________________________________________
4
Addendum No. 1 to
Pacific Tower Full Service Gross Office
Copper-Mountain-Lease-Addendum-No-1:08027.208
Landlord_______________Tenant________________
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as [***]. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 25,
1999, except for the sixteenth paragraph of Note 5, as to which the date is
April 23, 1999, and Note 10, as to which the date is April 13, 1999, in the
Registration Statement on Amendment No. 3 to Form S-1 (No. 333-73153) and
related Prospectus of Copper Mountain Networks, Inc. expected to be filed on
or about May 11, 1999.
Our audits also included the financial statement schedule of Copper Mountain
Networks, Inc. for the period March 11, 1996 (inception) to December 31, 1996
and for the years ended December 31, 1997 and 1998 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.
Ernst & Young LLP
San Diego, California
May 10, 1999
