<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1999
REGISTRATION NO. 333-76681
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JUNIPER NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3661 77-042528
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
385 RAVENDALE DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 526-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SCOTT KRIENS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JUNIPER NETWORKS, INC.
385 RAVENDALE DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 526-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LARRY W. SONSINI NORA L. GIBSON
JUDITH MAYER O'BRIEN TAMARA L. TOMPKINS
BRUCE MCNAMARA ELISA S. LEE
W. BRIAN KINARD BROBECK PHLEGER & HARRISON LLP
WILSON SONSINI GOODRICH & ROSATI ONE MARKET
PROFESSIONAL CORPORATION SPEAR STREET TOWER
650 PAGE MILL ROAD SAN FRANCISCO, CALIFORNIA 94105
PALO ALTO, CALIFORNIA 94304-1050 (415) 442-0900
(650) 493-9300
</TABLE>
------------------------
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) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) 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. [ ]
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT (2) PRICE REGISTRATION FEE(3)
- -------------------------------------------- ------------------- ------------------- ------------------- -------------------
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock ($.00001 par value)............ 5,520,000 $30.00 $165,600,000 $46,037
- ----------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes 720,000 shares of common stock which the Underwriters have the
right to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose determining the registration fee pursuant
to Rule 457(a) promulgated under the Securities Act of 1933, as amended.
(3) $35,295 of this fee has been paid previously.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED JUNE 23, 1999.
4,800,000 Shares
[Juniper logo]
Common Stock
----------------------
This is an initial public offering of shares of common stock of Juniper
Networks, Inc. Juniper Networks is offering 2,000,000 shares to be sold in this
offering. The selling stockholders identified in this prospectus are offering an
additional 2,800,000 shares. Juniper Networks will not receive any of the
proceeds from the sale of shares by the selling stockholders.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $28.00 and $30.00. Application has been made for quotation
of the common stock on the Nasdaq National Market under the symbol "JNPR".
See "Risk Factors" beginning on page 6 to read about certain factors you
should consider before buying shares of the common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share
--------- Total
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Juniper Networks.............. $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 98,071 shares from Juniper Networks and 621,929 shares from one of
the selling stockholders at the initial public offering price less the
underwriting discount.
----------------------
The underwriters expect to deliver the shares in New York, New York on
, 1999.
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
----------------------
Prospectus dated , 1999.
<PAGE> 3
[Inside Cover Art]
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Juniper Networks, the common stock being sold in this
offering and our consolidated financial statements, including the notes to those
statements, appearing elsewhere in this prospectus. Unless otherwise indicated,
this prospectus assumes:
- - the conversion of our outstanding preferred stock into common stock upon the
closing of this offering; and
- - that the underwriters do not exercise the option granted by us and a selling
stockholder to purchase additional shares in this offering.
JUNIPER NETWORKS, INC.
We are a provider of Internet infrastructure solutions that enable
Internet service providers and other telecommunications service providers
(collectively, service providers) to meet the demands resulting from the rapid
growth of the Internet. We deliver next generation Internet backbone routers
that are specifically designed, or purpose-built, for service provider networks
and offer our customers increased reliability, performance, scalability,
interoperability and flexibility, and reduced complexity and cost compared to
current alternatives. Our flagship product is the M40 Internet backbone router.
The M40 combines the features of our JUNOS Internet Software, high performance
application specific integrated circuits, or ASICs, based packet forwarding
technology and Internet optimized architecture into a purpose-built solution for
service providers. Unlike conventional routers, which were originally developed
for enterprise applications and are increasingly inadequate for service provider
use in public networks, our Internet backbone routers are specifically designed
to accommodate the size and scope of the Internet.
We sell our Internet backbone routers primarily through a direct sales
force and an original equipment manufacturer. Our M40 Internet backbone router
is currently used by several of the world's leading service providers, such as
UUNet, an MCI WorldCom Company, Cable & Wireless USA, IBM Global Services (which
has been acquired by AT&T Corp.), Frontier GlobalCenter Inc. and Verio Inc.
We believe that the Internet will continue to grow at significant rates
and will evolve into the next generation public network, superseding and
expanding upon many of the functions provided by the traditional telephone
network. This trend will drive the need for new Internet infrastructure
equipment that can deliver the high levels of reliability and scalability needed
in a public network. We believe we have developed the first commercially
available Internet backbone routing platform specifically designed and built to
meet these requirements. Ryan Hankin Kent, an industry research firm, estimates
that the market for Internet backbone routers was $169 million in 1998 and is
expected to increase to approximately $5.5 billion in 2003.
Our objective is to become the primary supplier of high performance
Internet backbone infrastructure equipment. The following are key elements of
our strategy:
- - leverage our early lead as supplier of purpose-built Internet infrastructure
equipment;
- - work closely with our key customers;
- - increase our penetration in major service providers;
- - leverage our early successes to rapidly penetrate new customers;
- - expand our sales and distribution network;
- - maintain and extend our technology leadership; and
- - enable new IP-based services.
3
<PAGE> 5
Our principal executive offices are located at 385 Ravendale Drive,
Mountain View, California 94043, and our telephone number is (650) 526-8000.
Juniper Networks, the Juniper Networks logo and M40 are trademarks of Juniper
Networks. Each trademark, trade name or service mark of any other company
appearing in this prospectus belongs to its holder. Information contained on our
website, www.juniper.net, does not constitute part of the prospectus. We were
incorporated in the State of California in February 1996. We reincorporated in
the State of Delaware in March 1998.
THE OFFERING
The following information assumes that the underwriters do not exercise the
option granted by us and the selling stockholders listed on page 61 under the
caption "Principal and Selling Stockholders" to purchase additional shares in
this offering. See "Underwriting."
----------------------
<TABLE>
<S> <C>
Shares offered by Juniper Networks...................... 2,000,000 shares
Shares offered by the selling stockholders.............. 2,800,000 shares
Shares to be outstanding after the offering(1).......... 49,032,869 shares
Use of proceeds......................................... For general corporate purposes,
principally working capital and capital
expenditures.
Proposed Nasdaq National Market symbol.................. "JNPR"
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1999. It excludes:
- 19,187,500 shares of common stock reserved for issuance under our Amended
1996 Stock Plan (including the 3,000,000 shares reserved for issuance on
April 19, 1999), of which 4,291,564 shares were subject to outstanding
options at a weighted average exercise price of $4.53 per share, and
4,813,669 shares were available for future grants;
- 262,910 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $1.65 per share; and
- 500,000 shares available for issuance under our 1999 Employee Stock
Purchase Plan. See "Capitalization," "Management -- Incentive Stock
Plans," "Description of Capital Stock" and Notes 5, 6 and 10 to the
Consolidated Financial Statements.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
INCEPTION YEAR ENDED ENDED
(FEBRUARY 2, 1996) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------- ------------------
1996 1997 1998 1998 1999
------------------ -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues............... $ -- $ -- $ 3,807 $ -- $ 10,044
Operating loss............. (1,939) (11,598) (32,270) (4,411) (6,767)
Net loss................... (1,799) (10,363) (30,971) (3,905) (6,675)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------
AS
ACTUAL ADJUSTED(1)
------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $49,449 $102,289
Working capital............................................. 41,756 94,596
Total assets................................................ 67,125 119,965
Long-term obligations, less current portion................. 2,834 2,834
Stockholders' equity........................................ 47,135 99,975
</TABLE>
- ---------------
(1) The consolidated balance sheet data at March 31, 1999, as adjusted, gives
effect to the sale of the shares at an assumed initial public offering price
of $29.00, after deducting the underwriting discount and estimated offering
expenses payable by us.
5
<PAGE> 7
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below before making an investment decision.
OUR FAILURE TO INCREASE OUR REVENUES WOULD PREVENT US FROM ACHIEVING AND
MAINTAINING PROFITABILITY
We have incurred significant losses since inception and expect to continue
to incur losses in the future. As of March 31, 1999, we had an accumulated
deficit of $49.8 million. Although our net revenues have grown from zero in the
quarter ended September 30, 1998 to $10.0 million in the quarter ended March 31,
1999, we cannot be certain that our revenues will continue to grow, or that we
will achieve sufficient revenues to achieve profitability. We have large fixed
expenses and we expect to continue to incur significant and increasing sales and
marketing, product development and administrative expenses. As a result, we will
need to generate significantly higher revenues to achieve and maintain
profitability. See "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Consolidated
Financial Statements and the Notes to the Consolidated Financial Statements for
more information on our results of operations.
OUR LIMITED OPERATING HISTORY MAKES FORECASTING DIFFICULT
As a result of our limited operating history, it is difficult to forecast
accurately our revenues, and we have limited meaningful historical financial
data upon which to base planned operating expenses. Specifically, we began
operations in February 1996, introduced our M40 Internet backbone router product
in September 1998 and began shipping the M40 in volume in October 1998. In
addition, our operating expenses are largely based on anticipated revenue trends
and a high percentage of our expenses are and will continue to be fixed in the
short-term. The revenue and income potential of our products and business are
unproven and the market that we are addressing is rapidly evolving. If we do not
achieve our expected revenues, our operating results will be below our
expectations and the expectations of investors and market analysts, which could
cause the price of our common stock to decline.
THE M40 CURRENTLY IS OUR ONLY PRODUCT AND A SIGNIFICANT PORTION OF OUR FUTURE
REVENUE DEPENDS ON ITS COMMERCIAL SUCCESS
Our future growth and a significant portion of our future revenue depends
on the commercial success of our M40 Internet backbone router, which is the only
product that we currently offer. Many customers who have purchased the M40 have
not yet fully deployed the product in large network environments and may not
choose to do so. Even if our customers do fully deploy our product, it may not
operate as expected. Failure of the M40 to operate as expected could delay or
prevent its adoption. If our target customers do not widely adopt, purchase and
successfully deploy the M40, our revenues will not grow significantly and our
business, financial condition and results of operations will be seriously
harmed.
OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP PRODUCTS AND PRODUCT ENHANCEMENTS
THAT WILL ACHIEVE MARKET ACCEPTANCE
We cannot assure you that we will be able to develop new products or
product enhancements in a timely manner, or at all. Any failure to develop new
products or product enhancements will substantially decrease market acceptance
and sales of our present and future products which will significantly harm our
business and financial results. Even if we are able to develop and commercially
introduce new products and enhancements, we cannot assure you that the new
products or enhancements will achieve widespread market acceptance. Any failure
of our future products to achieve market
6
<PAGE> 8
acceptance could harm our business and financial results.
THE LONG SALES AND IMPLEMENTATION CYCLES FOR THE M40, AS WELL AS OUR EXPECTATION
THAT CUSTOMERS WILL SPORADICALLY PLACE LARGE ORDERS WITH SHORT LEAD TIMES MAY
CAUSE REVENUES AND OPERATING RESULTS TO VARY SIGNIFICANTLY FROM QUARTER TO
QUARTER
A customer's decision to purchase the M40 involves a significant
commitment of its resources and a lengthy evaluation and product qualification
process. As a result, our sales cycle may be lengthy. Throughout the sales
cycle, we often spend considerable time educating and providing information to
prospective customers regarding the use and benefits of the M40. Even after
making the decision to purchase the M40, our customers tend to deploy the M40
slowly and deliberately. Timing of deployment can vary widely and depends on the
skill set of the customer, the size of the network deployment, the complexity of
the customer's network environment and the degree of hardware and software
configuration necessary to deploy the M40. Customers with large networks usually
expand their networks in large increments on a periodic basis. Accordingly, we
expect to receive purchase orders for significant dollar amounts on an irregular
basis. Because of our limited operating history, we cannot predict these sales
and development cycles. These long cycles, as well as our expectation that
customers will tend to sporadically place large orders with short lead times,
may cause our revenues and operating results to vary significantly and
unexpectedly from quarter to quarter.
WE HAVE A LIMITED NUMBER OF CUSTOMERS UPON WHOM WE RELY, AND ANY DECREASE IN
REVENUE FROM THESE CUSTOMERS COULD HAVE AN ADVERSE EFFECT ON US
We began recognizing revenues from sales of the M40 in the quarter ended
December 31, 1998. A significant portion of our revenues to date have been
recognized from a limited number of customers. Revenues from significant
customers as a percentage of net revenues are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DEC. 31, 1998 MARCH 31, 1999
------------- --------------
<S> <C> <C>
*UUNet............... 78% 40%
Ericsson Business
Networks AB........ 22% 9%
*MCI WorldCom-
vBNS............... -- 15%
Verio............... -- 16%
</TABLE>
- ---------------
* Subsidiaries of MCI WorldCom, each of which run separate networks and make
separate purchasing decisions.
We expect that the majority of our revenues will continue to depend on
sales of the M40 to a small number of customers. Any downturn in the business of
these customers or potential new customers could significantly decrease the
sales of the M40 to these customers which could seriously harm our revenues and
results of operations.
IF THE INTERNET DOES NOT CONTINUE TO EXPAND AS A WIDESPREAD COMMUNICATIONS
MEDIUM, DEMAND FOR OUR PRODUCTS MAY DECLINE SIGNIFICANTLY
Our future success depends on the continued growth of the Internet as a
widely used medium for commerce and communication. If the Internet does not
continue to expand as a widespread communications medium and commercial
marketplace, the growth of the market for Internet infrastructure equipment may
not continue and the demand for our products could decline significantly.
WE FACE INTENSE COMPETITION THAT COULD REDUCE OUR MARKET SHARE
Competition in the Internet infrastructure market is intense. This market
has historically been dominated by Cisco with other companies such as Bay
Networks and Ascend providing products to a smaller segment of the market. In
addition, a number of private companies have announced plans
7
<PAGE> 9
for new products to address the same problems which our products address.
In order to compete effectively in the Internet router market we must
deliver products which:
- - provide extremely high network reliability;
- - provide high performance interfaces and packet processing capabilities;
- - scale easily and efficiently with minimum disruption to the network;
- - interoperate with existing network designs and equipment vendors;
- - reduce the complexity of the network by decreasing the need for overlapping
equipment; and
- - provide a cost-effective solution for service providers.
If we are unable to compete successfully against our current and future
competitors, we could experience price reductions, reduced gross margins and
loss of market share, any one of which could materially and adversely affect our
business, operating results and financial condition. See
"Business -- Competition" for detailed information about our competition.
WE MUST EXPAND SUBSTANTIALLY OUR DIRECT AND INDIRECT SALES OPERATIONS IN ORDER
TO INCREASE MARKET AWARENESS AND SALES OF OUR PRODUCTS
Our products and services require a sophisticated sales effort targeted at
several key people within our prospective customers' organizations. This sales
effort requires the efforts of select personnel as well as specialized system
and consulting engineers. We have recently expanded our direct sales force and
plan to hire additional qualified sales personnel and system and consulting
engineers. Competition for these individuals is intense, and we might not be
able to hire the kind and number of sales personnel and system and consulting
engineers we need. In addition, we believe that our future success is dependent
upon establishing successful relationships with a variety of distribution
partners. We have entered into agreements with only a small number of
distribution partners. In addition, some of our distribution partners also sell
products that compete with the M40. We cannot be certain that we will be able to
reach agreement with additional distribution partners on a timely basis or at
all, or that our distribution partners will devote adequate resources to selling
our products.
If we are unable to expand our direct and indirect sales operations, we
may not be able to increase market awareness or sales of our products, which may
prevent us from achieving and maintaining profitability.
IF WE DO NOT EXPAND SUBSTANTIALLY OUR CUSTOMER SERVICE AND SUPPORT ORGANIZATION,
SALES OF OUR PRODUCTS MAY BE SIGNIFICANTLY REDUCED
The complexity of our products and the difficulty of installing them
require highly trained customer service and support personnel. We currently have
a small customer service and support organization and will need to increase our
staff to support new customers and the expanding needs of existing customers.
Hiring customer service and support personnel is very competitive in our
industry due to the limited number of people available with the necessary
technical skills and understanding of the Internet. If we are unable to expand
our customer service and support organization, we may not be able to increase
sales of our products, which would seriously harm our business.
WE ARE DEPENDENT ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR SEVERAL KEY
COMPONENTS, AND IF WE ARE UNABLE TO BUY THESE COMPONENTS ON A TIMELY BASIS, WE
WILL NOT BE ABLE TO DELIVER THE M40 TO OUR CUSTOMERS
We currently purchase several key components, including ASICs and power
supplies, from single or limited sources. We worked with IBM for over two years
to develop several of our key proprietary application specific integrated
circuits, or ASICs, which are custom designed integrated circuits built to
perform a specific function more rapidly than a general purpose microprocessor.
IBM is currently our sole
8
<PAGE> 10
source supplier of these ASICs. These ASICs are very complex, and we may not be
able to develop an alternate source to IBM in a timely manner, which could hurt
our ability to deliver the M40 to our customers. We also purchase power supplies
from a single source and purchase other custom components from other sole or
limited sources. If we are unable to buy these components on a timely basis, we
will not be able to deliver the M40 to our customers, which would seriously
impact present and future sales and revenue which would, in turn, seriously harm
our business.
WE CURRENTLY DEPEND ON ONE CONTRACT MANUFACTURER, AND IF WE HAVE TO QUALIFY A
NEW CONTRACT MANUFACTURER WE MAY LOSE REVENUE AND DAMAGE OUR CUSTOMER
RELATIONSHIPS
Solectron, a third party manufacturer for numerous companies, manufactures
the M40 at its Milpitas, California facility on a purchase order basis and is
our sole manufacturer. We currently do not have a long-term supply contract with
Solectron.
Qualifying a new contract manufacturer and commencing volume production is
expensive and time consuming. If we are required or choose to change contract
manufacturers, we may lose revenue and damage our customer relationships.
IF WE FAIL TO ACCURATELY PREDICT OUR MANUFACTURING REQUIREMENTS, WE COULD INCUR
ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS
Because we currently do not have a long-term supply contract with
Solectron, they are not obligated to supply products to us for any specific
period, in any specific quantity or at any certain price, except as may be
provided in a particular purchase order. We provide forecasts of our demand to
Solectron up to six months prior to scheduled delivery of products to our
customers. If we overestimate our requirements, Solectron may have excess
inventory, which would increase our costs. If we underestimate our requirements,
Solectron may have an inadequate inventory, which could interrupt manufacturing
of our products and result in delays in shipments and revenues. In addition,
lead times for materials and components we order vary significantly and depend
on factors such as the specific supplier, contract terms and demand for each
component at a given time. We also may experience shortages of certain
components from time to time, which also could delay the manufacturing of our
products.
WE DEPEND UPON SOLECTRON TO MANUFACTURE OUR PRODUCTS ON A TIMELY BASIS
We plan to regularly introduce new products and product enhancements,
which will require that we coordinate our efforts with those of our suppliers
and Solectron to rapidly achieve volume production. If we should fail to
effectively manage our relationship with Solectron, or if Solectron experiences
delays, disruptions or quality control problems in its manufacturing operations,
our ability to ship products to our customers could be delayed.
THE UNPREDICTABILITY AND SEASONALITY OF OUR QUARTERLY RESULTS MAY ADVERSELY
AFFECT THE TRADING PRICE OF OUR COMMON STOCK
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. The primary factors that
may affect us include the following:
- - demand for the M40;
- - the timing of sales of the M40;
- - the timing of recognizing revenue and deferred revenue;
- - new product introductions by our competitors;
- - changes in our pricing policies or the pricing policies of our competitors;
- - our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
9
<PAGE> 11
- - our ability to obtain sufficient supplies of the sole or limited source
components, including ASICs and power supplies for the M40;
- - increases in the prices of the components we purchase;
- - our ability to attain and maintain production volumes and quality levels for
the M40;
- - decisions by end-users to reallocate their information resources to other
purposes, including year 2000 preparedness;
- - Internet growth and demand for Internet infrastructure;
- - prototype expenses;
- - costs related to acquisitions of technology or businesses; and
- - general economic conditions as well as those specific to the Internet and
related industries.
In addition, we are dependent on decisions by customers to build their
Internet infrastructure, which decisions are in turn dependent upon the success
and expected demand for the services offered by those customers. Furthermore,
the long sales and implementation cycles for the M40, as well as the degree to
which customers will sporadically place large orders with short lead times, may
cause revenues and operating results to vary significantly from quarter to
quarter.
We also expect to experience seasonality in our operating results. We
expect the growth rate in our sales to be adversely affected in the third
quarter due to a slowdown in sales in Europe and other foreign areas during the
summer months. In addition, we expect the growth rate in our sales in the first
quarter to be adversely affected due to our customers' budgeting cycles.
We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations,
broaden our customer support capabilities and develop new distribution channels.
We also plan to expand our general and administrative functions to address the
increased reporting and other administrative demands, which will result from
this offering and the increasing size of our business. Our operating expenses
are largely based on anticipated revenue trends and a high percentage of our
expenses are, and will continue to be, fixed in the short term. As a result, a
delay in generating or recognizing revenue for the reasons set forth above, or
for any other reason, could cause significant variations in our operating
results from quarter to quarter and could result in substantial operating
losses.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. It is likely that in some future quarters, our operating results
may be below the expectations of public market analysts and investors. In this
event, the price of our common stock may fall.
IF OUR PRODUCTS DO NOT INTEROPERATE WITH OUR CUSTOMERS' NETWORKS, INSTALLATIONS
WILL BE DELAYED OR CANCELLED AND COULD RESULT IN SUBSTANTIAL PRODUCT RETURNS
WHICH COULD HARM OUR REPUTATION
Our products are designed to interface with our customers' existing
networks, each of which has different specifications and utilizes multiple
protocol standards. Many of our customers' networks contain multiple generations
of products that have been added over time as these networks have grown and
evolved. Our products must interoperate with all of the products within these
networks as well as future products in order to meet our customers'
requirements. If we find errors in the existing software used in our customers'
networks, we must modify our JUNOS Internet Software to fix or overcome these
errors so that our products will interoperate and scale with the existing
software and hardware. If our products do not interoperate with those of our
customers' networks, installations could be delayed, orders for our products
could be cancelled or our products could be returned. This would also seriously
harm our reputation, which could seriously harm our business and prospects.
10
<PAGE> 12
BECAUSE OUR PRODUCTS ARE COMPLEX AND ARE DEPLOYED IN COMPLEX ENVIRONMENTS, THEY
MAY HAVE ERRORS OR DEFECTS THAT WE FIND ONLY AFTER FULL DEPLOYMENT, WHICH COULD
SERIOUSLY HARM OUR BUSINESS
The M40, including our JUNOS Internet Software, is a highly complex
product. In addition, the M40 is designed to be deployed in very large and
complex networks. Although we have thoroughly tested the M40, because of the
nature of the product, it can only be fully tested when deployed in very large
networks with high amounts of traffic. To date, customers have only deployed the
M40 on a limited basis. Consequently, our customers may discover errors or
defects in the hardware or the software after it has been fully deployed. If we
are unable to fix errors or other problems that may be identified in full
deployment, we could experience:
- - loss of or delay in revenues and loss of market share;
- - loss of customers;
- - failure to achieve market acceptance;
- - diversion of development resources;
- - increased service and warranty costs;
- - legal actions by our customers; and
- - increased insurance costs.
CUSTOMER PRODUCT LIABILITY CLAIMS BASED ON ERRORS IN OUR SOFTWARE OR MISTAKES IN
PERFORMING OUR SERVICES COULD RESULT IN COSTLY LITIGATION AGAINST US
We may be subject to claims based on errors in our software or mistakes in
performing our services, including claims relating to damages to our customers'
internal systems. Our contracts with our customers generally contain provisions
designed to limit our exposure to potential product liability claims, such as
disclaimers of warranties and limitations on liability for special,
consequential and incidental damages. We believe our product liability insurance
is adequate to cover potential product liability claims. However, a product
liability claim, whether successful or not, could seriously impact our capital
reserves, harm our reputation, and direct the attention of key personnel away
from our business, any of which could harm our business.
PROBLEMS ARISING FROM USE OF OUR PRODUCTS IN CONJUNCTION WITH OTHER VENDORS'
PRODUCTS COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION
Service providers typically use our products in conjunction with products
from other vendors. As a result, when problems occur, it may be difficult to
identify the source of the problem. These problems may cause us to incur
significant warranty and repair costs, divert the attention of our engineering
personnel from our product development efforts and cause significant customer
relations problems.
OUR PRODUCTS ARE NEW AND FACE RAPID TECHNOLOGICAL CHANGES AND EVOLVING STANDARDS
AND IF WE DO NOT RESPOND IN A TIMELY MANNER, OUR BUSINESS COULD BE HARMED
The Internet infrastructure market is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. In developing our products, we have made, and will
continue to make, assumptions with respect to which standards will be adopted by
our customers and competitors. If the standards adopted are different from those
which we have chosen to support, market acceptance of our products may be
significantly reduced or delayed and our business will be seriously harmed. In
addition, the introduction of products embodying new technologies and the
emergence of new industry standards could render our existing products obsolete.
In addition, in order to introduce products embodying new technologies and
new industry standards, we must be able to gain access to the latest
technologies of our suppliers such as IBM. Any failure to gain access to the
latest technologies could harm our business and operating results.
11
<PAGE> 13
OUR FAILURE TO ESTABLISH AND MAINTAIN KEY CUSTOMER RELATIONSHIPS MAY RESULT IN
DELAYS IN INTRODUCING NEW PRODUCTS OR CAUSE CUSTOMER TO FOREGO PURCHASING OUR
PRODUCTS
Our future success will also depend upon our ability to develop and manage
key customer relationships in order to introduce a variety of new products and
product enhancements that address the increasingly sophisticated needs of our
customers. Our failure to establish and maintain these customer relationships
may adversely affect our ability to develop new products and product
enhancements. In addition, we may experience delays in releasing new products
and product enhancements in the future. Material delays in introducing new
products and enhancements or our inability to introduce competitive new products
may cause customers to forego purchases of our products and purchase those of
our competitors, which could seriously harm our business.
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, OUR BUSINESS, FINANCIAL CONDITION
AND PROSPECTS COULD BE SERIOUSLY HARMED
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We continue to increase the scope of our operations domestically and
internationally and have grown our headcount substantially. At December 31,
1997, we had a total of 80 employees and at March 31, 1999, we had a total of
190 employees. In addition, we plan to continue to hire a significant number of
employees this year. This growth has placed, and our anticipated growth in
future operations will continue to place, a significant strain on our management
systems and resources. We expect that we will need to continue to improve our
financial and managerial controls, reporting systems and procedures, and will
need to continue to expand, train and manage our work force worldwide.
Furthermore, we expect that we will be required to manage multiple relationships
with various customers and other third parties.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET AND IF WE ARE UNABLE TO HIRE ADDITIONAL PERSONNEL, OUR ABILITY
TO SELL OUR PRODUCTS COULD BE HARMED
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel. None
of our officers or key employees is bound by an employment agreement for any
specific term. Nor do we have "key person" life insurance policies covering any
of our employees.
We also intend to hire a significant number of engineering, sales,
marketing and support personnel in the future, and we believe our success
depends, in large part, upon our ability to attract and retain these key
employees. Competition for these persons is intense, especially in the San
Francisco Bay area. In particular, we have experienced difficulty in hiring
qualified ASIC, software, system and test and customer support engineers and
there can be no assurance that we will be successful in attracting and retaining
these individuals. The loss of the services of any of our key employees, the
inability to attract or retain qualified personnel in the future, or delays in
hiring required personnel, particularly engineers and sales personnel, could
delay the development and introduction of and negatively impact our ability to
sell our products.
IF WE BECOME SUBJECT TO UNFAIR HIRING CLAIMS WE COULD INCUR SUBSTANTIAL COSTS IN
DEFENDING OURSELVES
Companies in our industry whose employees accept positions with
competitors frequently claim that their competitors have engaged in unfair
hiring practices. We have received claims of this kind in the past and we cannot
assure you that we will not receive claims of this kind in the future as we seek
to hire qualified personnel or that those claims will not result in material
litigation. We could incur substantial costs in defending ourselves against
these claims, regardless of their merits.
12
<PAGE> 14
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States.
NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY
BE VERY EXPENSIVE
From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third party licenses will be available to us on commercially reasonable
terms, if at all. The inability to obtain any third-party license required to
develop new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost either of which could seriously harm our business, financial condition and
results of operations.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS
WHICH COULD SERIOUSLY HARM OUR BUSINESS
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. Although we
have never been involved in any intellectual property litigation, we may be a
party to litigation in the future to protect our intellectual property or as a
result of an alleged infringement of others' intellectual property. These claims
and any resulting lawsuit, if successful, could subject us to significant
liability for damages and invalidation of our proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force us to do one or more
of the following:
- - stop selling, incorporating or using our products that use the challenged
intellectual property;
- - obtain from the owner of the infringed intellectual property right a license
to sell or use the relevant technology, which license may not be available on
reasonable terms, or at all; or
- - redesign those products that use such technology.
If we are forced to take any of the foregoing actions, our business may be
seriously harmed. Although we carry general liability insurance, our insurance
may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. For more information concerning our
intellectual property rights, see "Business -- Intellectual Property."
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We market and sell our products in the United States and internationally.
We have established an office in England to market and sell our products in
Europe and are in the process of establishing a presence in Asia.
We intend to expand substantially our international operations and enter
new international markets. This expansion will require significant management
attention and financial resources to develop successfully direct and indirect
international sales and support channels. We may not be able to maintain or
increase international market demand for the M40.
We currently have limited experience in marketing and distributing our
products
13
<PAGE> 15
internationally and in developing versions of our products that comply with
local standards. In addition, international operations are subject to other
inherent risks, including:
- - greater difficulty in accounts receivable collection and longer collection
periods;
- - difficulties and costs of staffing and managing foreign operations;
- - the impact of recessions in economies outside the United States;
- - unexpected changes in regulatory requirements;
- - certification requirements;
- - reduced protection for intellectual property rights in some countries;
- - potentially adverse tax consequences; and
- - political and economic instability.
Our international revenues have been less than $2,000,000 to date and are
generally denominated in U.S. dollars. Consequently, we do not currently engage
in currency hedging activities. However, a portion of our international revenues
may be denominated in foreign currencies in the future.
WE FACE A NUMBER OF UNKNOWN RISKS
ASSOCIATED WITH YEAR 2000 PROBLEMS
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
We have designed the M40 for use in the year 2000 and beyond and believe
it is year 2000 compliant. However, our products are generally integrated into
larger networks involving sophisticated hardware and software products supplied
by other vendors. Each of our customers' networks involves different
combinations of third party products. We cannot evaluate whether all of their
products are year 2000 compliant. We may face claims based on year 2000 problems
in other companies' products or based on issues arising from the integration of
multiple products within the overall network. Although no claims of this kind
have been made, we may in the future be required to defend our products in legal
proceedings which could be expensive regardless of the merits of these claims.
If our suppliers, vendors, major distributors, partners, customers and
service providers fail to correct their year 2000 problems, these failures could
result in an interruption in, or a failure of, our normal business activities or
operations. If a year 2000 problem occurs, it may be difficult to determine
which party's products have caused the problem. These failures could interrupt
our operations and damage our relationships with our customers. Due to the
general uncertainty inherent in the year 2000 problem resulting from the
readiness of third-party suppliers and vendors, we are unable to determine at
this time whether year 2000 failures could harm our business and our financial
results.
Our customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems to
become year 2000 compliant. This situation may reduce funds available to
purchase our products. In addition, some customers may wait to purchase our
products until after the year 2000, which may reduce our revenue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION
We intend to make investments in complementary companies, products or
technologies. While we have no current agreements or negotiations underway, we
may buy businesses, products or
14
<PAGE> 16
technologies in the future. In the event of any future purchases, we could:
- - issue stock that would dilute our current stockholders' percentage ownership;
- - incur debt;
- - assume liabilities;
- - incur amortization expenses related to goodwill and other intangible assets;
or
- - incur large and immediate write-offs.
These purchases also involve numerous risks, including:
- - problems combining the purchased operations, technologies or products;
- - unanticipated costs;
- - diversion of management's attention from our core business;
- - adverse effects on existing business relationships with suppliers and
customers;
- - risks associated with entering markets in which we have no or limited prior
experience; and
- - potential loss of key employees, particularly those of the purchased
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future.
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE
OUR PROFITS OR MARKET VALUE
Our management will have considerable discretion in the application of the
net proceeds, and you will not have the opportunity, as part of your investment
decision, to assess whether the proceeds are being used appropriately. The net
proceeds may be used for corporate purposes that do not increase our
profitability or our market value. Pending application of the proceeds, they may
be placed in investments that do not produce income or that lose value. See "How
We Intend to Use the Proceeds From This Offering."
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK AND A PUBLIC MARKET FOR OUR
SECURITIES MAY NOT DEVELOP OR BE SUSTAINED
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering, and the market price might fall below the initial
public offering price. The initial public offering price may bear no
relationship to the price at which the common stock will trade upon completion
of this offering. The initial public offering price will be determined based on
negotiations between us and the representatives of the underwriters, based on
factors that may not be indicative of future market performance. See
"Underwriting."
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER JUNIPER NETWORKS AFTER
THIS OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL
We anticipate that the executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
43.6% of our outstanding common stock following the completion of this offering.
These stockholders, if acting together, would be able to influence significantly
all matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. See "Principal and Selling Stockholders."
PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD
PREVENT A CHANGE IN OUR CONTROL
Provisions of our amended and restated certificate of incorporation,
bylaws, and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. See
"Description of Capital Stock."
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER THIS
OFFERING THAT COULD CAUSE OUR STOCK PRICE TO FALL
Our current stockholders hold a substantial number of shares, which they
will
15
<PAGE> 17
be able to sell in the public market in the near future. Sales of a substantial
number of shares of our common stock after this offering could cause our stock
price to fall. In addition, the sale of these shares could impair our ability to
raise capital through the sale of additional stock. See "Shares Eligible for
Future Sale."
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR SHARE PRICE WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT
The market price of our common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control,
including:
- - quarterly variations in operating results;
- - changes in financial estimates by securities analysts;
- - changes in market valuations of Internet related companies;
- - announcements by us or our competitors of new products or of significant
acquisitions, strategic partnerships or joint ventures;
- - any loss of a major customer;
- - additions or departures of key personnel;
- - any deviations in net revenues or in losses from levels expected by securities
analysts;
- - future sales of common stock; and
- - volume fluctuations, which are particularly common among highly volatile
securities of Internet related companies.
16
<PAGE> 18
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify
forward-looking statements. This prospectus also contains forward-looking
statements attributed to third parties relating to their estimates regarding the
growth of Internet use. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this prospectus.
Our actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by us and
described in the preceding pages and elsewhere in this prospectus.
HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING
Our net proceeds from the sale of the 2,000,000 shares of common stock
offered by us are estimated to be $52.8 million at an assumed initial public
offering price of $29.00 per share, after deducting the underwriting discount
and estimated offering expenses payable by us (approximately $1.1 million).
Our principal purposes for engaging in this offering are to:
- - increase our equity capital;
- - create a public market for our common stock;
- - facilitate future access by us to public equity markets; and
- - provide increased visibility of Juniper Networks in a marketplace where our
principal competitors are publicly-held companies.
We expect to use the net proceeds from this offering for working capital
and general corporate purposes. In addition, we may use a portion of the net
proceeds to acquire complementary products, technologies or businesses; however,
we currently have no plans, commitments or agreements nor are we involved in any
negotiations with respect to any such transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities. We will not receive any proceeds
from the sale of the shares being sold by the selling stockholders. See
"Principal and Selling Stockholders."
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our lease lines prohibit the payment of dividends without
prior approval.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth (1) our actual capitalization as of March
31, 1999, and (2) our capitalization as adjusted to give effect to the sale of
2,000,000 shares of common stock at an assumed initial public offering price of
$29.00 per share (less the underwriting discount and estimated offering expenses
payable by us). You should read this table in conjunction with our consolidated
financial statements and the related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------
ACTUAL AS ADJUSTED
----------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Long-term obligations, net of current portion............ $ 2,834 $ 2,834
Stockholders' equity:
Convertible preferred stock, $0.00001 par value,
14,039,059 shares authorized actual (10,000,000 as
adjusted); 13,796,904 shares issued and outstanding
actual (none as adjusted)........................... * --
Common stock, $0.00001 par value, 71,000,000 shares
authorized actual (200,000,000 as adjusted);
21,265,387 shares issued and outstanding actual;
49,400,209 shares issued and outstanding as
adjusted(1)......................................... * *
Additional paid-in capital............................. 102,305 155,145
Deferred stock compensation............................ (5,362) (5,362)
Accumulated deficit.................................... (49,808) (49,808)
-------- --------
Total stockholders' equity.......................... 47,135 99,975
-------- --------
Total capitalization........................... $ 49,969 $102,809
======== ========
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1999. It excludes (A) 19,187,500
shares of common stock reserved for issuance under our Amended 1996 Stock
Plan (including the 3,000,000 shares reserved for issuance on April 19,
1999), of which 4,291,564 shares were subject to outstanding options at a
weighted average exercise price of $4.53 per share and 4,813,669 shares
available for future grants, (B) 262,910 shares of common stock issuable
upon exercise of outstanding warrants at a weighted average exercise price
of $1.65 per share; and (C) 500,000 shares available for issuance under our
1999 Employee Stock Purchase Plan. See "Management -- Incentive Stock
Plans," "Description of Capital Stock" and Notes 5, 6 and 10 to the
Consolidated Financial Statements.
* Less than $1,000
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<PAGE> 20
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value per
share by dividing the net tangible book value (total assets less tangible assets
and total liabilities) by the number of outstanding shares of common stock.
Our pro forma net tangible book value at March 31, 1999, was $47.1
million, or $1.00 per share, based on 47,032,869 shares of our common stock
outstanding after giving effect to the conversion of all outstanding shares of
our preferred stock into common stock upon the closing of this offering.
After giving effect to the sale of the 2,000,000 shares of common stock by
us at an assumed initial public offering price of $29.00 per share (less the
underwriting discount and estimated offering expenses payable by us), our pro
forma net tangible book value at March 31, 1999, would be $100.00 million, or
$2.04 per share. This represents an immediate increase in the pro forma net
tangible book value of $1.04 per share to existing stockholders and an immediate
dilution of $26.96 per share to new investors, or approximately 93.0% of the
assumed offering price of 29.00 per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 29.00
Pro forma net tangible book value per share at March 31,
1999................................................... $1.00
Increase per share attributable to new investors.......... 1.04
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.04
------
Dilution per share to new investors......................... $ 26.96
======
</TABLE>
-------------------------
The following table shows on a pro forma basis at March 31, 1999, after
giving effect to the conversion of all outstanding shares of our preferred stock
into an aggregate of 25,767,482 shares of common stock upon the closing of this
offering, the number of shares of common stock purchased from us, the total
consideration paid to us and the average price paid per share by existing
stockholders and by new investors purchasing common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)(2).. 47,032,869 95.9% $ 94,463,911 62.0% $ 1.99
New investors(2)...... 2,000,000 4.1 58,000,000 38.0 29.00
---------- ----- ------------ -----
Total(1)............ 49,032,869 100.0% $152,463,911 100.0%
========== ===== ============ =====
</TABLE>
- ---------------
(1) The above information is based on shares outstanding as of March 31, 1999.
It excludes (A) 19,187,500 shares of common stock reserved for issuance
under our Amended 1996 Stock Plan (including the 3,000,000 additional shares
reserved for issuance on April 19, 1999), of which 4,291,564 shares were
subject to outstanding options at a weighted average exercise price of $4.53
per share and 4,813,669 shares were available for future grants; (B) 262,910
shares of common stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $1.65 per share; and (C) 500,000 shares
available for issuance under our 1999 Employee Stock Purchase Plan. See
"Management -- Incentive
19
<PAGE> 21
Stock Plans," "Description of Capital Stock" and Notes 5, 6 and 10 to the
Consolidated Financial Statements.
(2) Sales by the selling stockholders in this offering will reduce the number of
shares of common stock held by existing stockholders to 44,232,869 shares or
90.2% of the shares to be outstanding after this offering and the number of
shares held by new investors will be increased to 4,800,000 shares, or 9.8%
of the number of shares to be outstanding after this offering. If the
underwriters' option to purchase additional shares is exercised in full, the
number of shares held by existing stockholders will be further reduced to
43,610,940 shares, or 88.7% of the number of shares to be outstanding after
this offering and the number of shares held by new investors will be
increased to 5,520,000 shares, or 11.3% of the number of shares to be
outstanding after this offering. See "Principal and Selling Stockholders."
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes included elsewhere in this prospectus. The consolidated statement
of operations data set forth below for the period from February 2, 1996
(inception) to December 31, 1996, and for the fiscal years ended December 31,
1997 and 1998, and the consolidated balance sheet data as of December 31, 1997
and 1998 have been derived from the audited consolidated financial statements of
Juniper Networks, Inc. included elsewhere in this prospectus, which have been
audited by Ernst & Young LLP, Independent Auditors. The consolidated balance
sheet data at December 31, 1996 are derived from unaudited consolidated
financial statements that are not included in this prospectus. The consolidated
statement of operations data for the three-month periods ended March 31, 1998
and 1999, and the consolidated balance sheet data as of March 31, 1999, are
unaudited. In the opinion of management, all necessary adjustments (consisting
only of normal recurring adjustments) have been included to present fairly the
unaudited quarterly results when read in conjunction with the audited
consolidated financial statements and the notes thereto appearing elsewhere in
this prospectus. The historical results are not necessarily indicative of
results to be expected for any future period. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 2, THREE MONTHS
1996) TO YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ------------------- -----------------
1996 1997 1998 1998 1999
------------ -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................................ $ -- $ -- $ 3,807 $ -- $10,044
Cost of revenues........................................ -- -- 4,416 39 6,347
------- -------- -------- ------- -------
Gross profit (loss)..................................... -- -- (609) (39) 3,697
Operating expenses:
Research and development.............................. 1,850 9,406 23,987 3,497 6,181
Sales and marketing................................... -- 1,149 4,216 519 2,603
General and administrative............................ 89 1,043 2,223 335 776
Amortization of deferred stock compensation........... -- -- 1,235 21 904
------- -------- -------- ------- -------
Total operating expenses............................ 1,939 11,598 31,661 4,372 10,464
------- -------- -------- ------- -------
Operating loss.......................................... (1,939) (11,598) (32,270) (4,411) (6,767)
Interest income (expense), net.......................... 140 1,235 1,299 506 92
------- -------- -------- ------- -------
Net loss................................................ $(1,799) $(10,363) $(30,971) $(3,905) $(6,675)
======= ======== ======== ======= =======
Basic and diluted net loss per share(1)................. $ (0.46) $ (1.21) $ (2.39) $ (0.36) $ (0.45)
======= ======== ======== ======= =======
Shares used in computing basic and diluted net loss per
share(1).............................................. 3,958 8,591 12,957 10,872 14,990
======= ======== ======== ======= =======
Pro forma basic and diluted net loss per share
(unaudited)(1)........................................ $ (0.84) $ (0.17)
======== =======
Shares used in computing pro forma basic and diluted net
loss per share (unaudited)(1)......................... 37,070 39,324
======== =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):
Cash, cash equivalents and short-term investments....... $ 9,468 $ 46,227 $ 20,098 $49,449
Working capital......................................... 9,315 44,691 14,432 41,756
Total assets............................................ 10,388 50,210 36,671 67,125
Long-term obligations, less current portion............. 408 2,083 5,204 2,834
Stockholders' equity.................................... 9,728 46,048 17,065 47,135
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the shares used to compute net loss per share.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and the related notes included elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors including the risks
discussed in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We are a provider of Internet infrastructure solutions that enable
Internet service providers and other telecommunications service providers, or,
collectively, service providers, to meet the demands resulting from the rapid
growth of the Internet. We deliver next generation Internet backbone routers
that are specifically designed, or purpose-built, for service provider networks
and offer our customers increased reliability, performance, scalability,
interoperability and flexibility, and reduced complexity and cost compared to
current alternatives. Our flagship product is the M40 Internet backbone router.
The M40 combines the features of our JUNOS Internet Software, high performance
ASIC-based packet forwarding technology and Internet optimized architecture into
a purpose-built solution for service providers.
In September 1998, after extensive field testing of our JUNOS Internet
Software, we began shipping our first product, the M40 Internet backbone router,
with volume shipments beginning in October 1998. We currently sell through our
direct sales force to major service providers in North America. In addition, we
distribute through value added resellers system integrators and resellers to
smaller customers in North America and to international customers. Distribution
and support is also provided by our strategic original equipment manufacturer
relationship with Ericsson.
From our inception in February 1996 through September 1998, our operating
activities were primarily devoted to increasing our research and development
capabilities, designing our ASICs, developing our software, developing and
testing the M40 and developing other products. We also staffed our
administrative, marketing and sales organizations and implemented strategic
relationships. Since our inception, we have incurred significant losses, and as
of March 31, 1999, we had an accumulated deficit of $49.8 million. We have not
achieved profitability on a quarterly or annual basis, and anticipate that we
will incur net losses for at least the next several quarters. We expect to incur
significant sales and marketing, research and development and general and
administrative expenses and, as a result, we will need to generate significantly
higher revenues to achieve and maintain profitability.
Our revenues currently are derived from sales of one product, the M40.
While we are developing and plan to introduce future products, there can be no
assurance that we will be successful in these efforts. To date, we have
generated a substantial portion of our revenues from a limited number of
customers, with three customers accounting for 71% of our net revenues in the
three months ended March 31, 1999. While we are seeking to diversify our
customer base, there can be no assurance that these efforts will be successful.
To date, most of our direct sales have been in North America, and our
international sales have been through our strategic original equipment
manufacturer relationship with Ericsson. However, we have recently launched
sales and marketing efforts internationally, initially focused on Europe and
Asia.
We expect that a significant portion of our future revenues will continue
to come from sales of the M40 to a small number of customers. We have focused
our initial sales and marketing efforts primarily on the world's leading service
providers. We expect to receive a large portion of our revenues from
22
<PAGE> 24
these initial customers until we can sufficiently penetrate additional accounts.
Because the market for Internet backbone routers is new and evolving, the
volume and timing of orders are difficult to predict. A customer's decision to
purchase the M40 typically involves a significant commitment of their resources
and a lengthy evaluation and product qualification process. This initial
evaluation and product qualification process typically takes several months and
includes:
- - technical evaluation;
- - integration;
- - testing;
- - network planning; and
- - implementation into the network.
Even after making the decision to purchase the M40, our customers tend to
deploy the M40 slowly and deliberately. Timing of deployment can vary widely and
depends on the skill set of the customer, the size of the network deployment,
the complexity of the customer's network environment and the degree of hardware
and software configuration necessary to deploy the M40. Customers with large
networks usually expand their networks in large increments on a periodic basis.
Accordingly, we expect to receive purchase orders for significant dollar amounts
on an irregular basis. Because of our limited operating history, we cannot
predict these sales and development cycles. Long sales and implementation cycles
for the M40, as well as the expectation that customers will tend to sporadically
place large orders with short lead times, may cause revenues and operating
results to vary significantly and unexpectedly from quarter to quarter.
We recognize product revenue at the time of shipment, unless we have
future obligations for installation or have to obtain customer acceptance, in
which case revenue is deferred until these obligations are met. Revenue from
service obligations is deferred and recognized on a straight-line basis over the
contractual period. Amounts billed in excess of revenue recognized are included
as deferred revenue in the accompanying consolidated balance sheets. At March
31, 1999, a total of $7.9 million of revenue was deferred. It is currently
expected that this deferred revenue will be recognized in 1999. The amount of
estimated product returns is provided for in the period of the sale. We provide
a reserve for warranty returns based on our warranty history. Historically,
selling prices in the Internet infrastructure equipment market have been
relatively stable. However, as competitors launch new products, this pricing
trend may change.
Our gross margins will primarily be affected by the following factors:
- - demand for our products and services;
- - new product introductions both by us and by our competitors;
- - changes in our pricing policies and those of our competitors;
- - the mix of interfaces sold;
- - the mix of products and services sold;
- - the mix of sales channels through which our products and services are sold;
- - the mix of domestic and international sales; and
- - the volume manufacturing pricing we are able to attain from our partner for
outsourced manufacturing.
We have outsourced our manufacturing, our repair operations and the
majority of our supply chain management operations. Accordingly, a significant
portion of our cost of revenues consists of payments to Solectron, our contract
manufacturer. Solectron manufactures our products using quality assurance
programs and standards which we established. Manufacturing engineering and
documentation control are conducted at our facility in Mountain View,
California.
Research and development expenses consist primarily of salaries and
related personnel costs, fees paid to consultants and outside service providers,
non-recurring engineering charges and prototype costs related to the design,
development, testing
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<PAGE> 25
and enhancement of our ASICs and software and system development. We expense our
research and development costs as they are incurred. Several components of our
research and development effort require significant expenditures, the timing of
which can cause significant quarterly variability in our expenses. The number of
prototypes required to build and test a complex product such as the M40 is large
and this building and testing process occurs over a short period of time. Our
ASIC development requires an upfront payment of non-recurring engineering
charges, regardless of whether the integrated circuit works, and a per unit cost
payable as ASICs are purchased. With several large ASICs in our architecture, we
will incur large non-recurring engineering and prototype expenses with every
enhancement of the M40 and any new product development. We are devoting
substantial resources to the continued development of new products. We believe
that research and development is critical to our strategic product development
objectives and that to leverage our leading technology and meet the changing
requirements of our customers, we will need to fund investments in several
development projects in parallel. As a result, we expect our research and
development expenses to increase in absolute dollars in the future.
Selling and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with promotional and
other marketing expenses. We intend to expand our direct and indirect sales
operations substantially, both domestically and internationally, in order to
increase market awareness of our products. We expect that sales and marketing
expenses will increase substantially in absolute dollars over the next year as
we hire additional sales and marketing personnel, initiate additional marketing
programs to support the M40 and establish sales offices in additional domestic
and international locations. In addition, we believe our future success is
dependent upon establishing successful relationships with a variety of
distribution partners. To date, we have entered into agreements with only a
small number of distribution partners. To be successful, we must reach agreement
with additional distribution partners in several countries. Similarly, the
complexity of our Internet backbone routers and the difficulty of installing
them require highly trained customer service and support personnel. We expect to
significantly expand our customer service and support organization to meet these
requirements. We believe that continued investment in sales and marketing is
critical to our success and expect these expenses to increase in absolute
dollars in the future.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, facilities, human resources
personnel, recruiting expenses, professional fees and other 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 our operation as a public company.
In connection with the grant of certain stock options to employees during
1998 and the three months ended March 31, 1999, we recorded deferred
compensation of $6.4 million and $1.1 million, respectively, representing the
difference between the deemed value of the common stock for accounting purposes
and the exercise price of these options at the date of grant. Deferred
compensation is presented as a reduction of stockholders' equity and is
amortized over the vesting period of the applicable options. We expensed $1.2
million of deferred compensation during the year ended December 31, 1998, and
$904,000 of deferred compensation during the three months ended March 31, 1999.
This compensation expense relates to stock options awarded to individuals in all
operating expense categories. See Note 6 of our consolidated financial
statements.
As of December 31, 1998, we had $34.0 million of federal net operating
loss carryforwards and $33.0 million of state net operating loss carryforwards
for tax reporting purposes available to offset future taxable
24
<PAGE> 26
income. Such net operating loss carryforwards expire at various dates beginning
in 2004 to the extent that they are not utilized. We have not recognized any
benefit from the future use of loss carryforwards for these periods, or for any
other periods, since inception. Management's evaluation of all the available
evidence in assessing realizability of the tax benefits of such loss
carryforwards indicates that the underlying assumptions of future profitable
operations contain risks that do not provide sufficient assurance to recognize
the tax benefits currently.
RESULTS OF OPERATIONS
NET REVENUES
The quarter ended December 31, 1998, was our first quarter of revenue. Net
revenues were $3.8 million in the year ended December 31, 1998, and $10.0
million for the three months ended March 31, 1999. Two customers accounted for
100% of the net revenues in the three months ended December 31, 1998, and three
customers accounted for 71% of the net revenues in the three months ended March
31, 1999.
COST OF REVENUES
Cost of revenues for the year ended December 31, 1998, were $4.4 million
and for the three months ended March 31, 1999, were $6.3 million. Cost of
revenues was high during these periods due to the large cost of initial start-up
of production. Cost of revenues includes the cost of our customer service and
support organization. Cost of service and support for the year ended December
31, 1998, was $1.5 million and for the three months ended March 31, 1999, was
$1.1 million.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $24.0 million in 1998, an increase
of $14.6 million or 155% over 1997, and were $6.2 million in the three months
ended March 31, 1999, an increase of $2.7 million or 77% over the comparable
quarter of 1998. The increase was due primarily to increased costs associated
with a significant increase in personnel, which accounted for approximately 30%
of the increase in 1998 over 1997 and 50% of the increase in the three months
ended March 31, 1999 over the comparable quarter in 1998. An increase in
non-recurring engineering costs accounted for approximately 10% of the increase
in 1998 over 1997 and a negligible portion of the increase in the three months
ended March 31, 1999 over the comparable quarter in 1998. The increase in
research and development expenses in 1998 over 1997 was due also to an increase
in prototype expenses, which accounted for approximately 40% of the increase in
research and development expenses in 1998 over 1997; however, the increase in
research and development expenses in the three months ended March 31, 1999 over
the comparable quarter in 1998 was partially offset by a decrease of
approximately 40% in prototype expenses in the three months ended March 31, 1999
over the comparable quarter in 1998. The primary purposes of the increase in
research and development expenses were to support the completion, bring-up,
alpha test (the early tests of the product in labs) and beta test (the tests
conducted at customer premises just prior to shipping the product when product
is of sufficient quality to run in production networks) phases of the product
development and to complete the M40 product. Development is essential to our
future success and we expect that research and development expenses will
increase in absolute dollars in future periods.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $4.2 million in 1998, an increase of
$3.1 million or 267% over 1997, and were $2.6 million in the three months ended
March 31, 1999, an increase of $2.1 million or 401% over the comparable quarter
of 1998. The increase was due primarily to a significant increase in the number
of sales and marketing personnel, which increased costs associated with such
increase in personnel accounted for approximately 70% of the increase in 1998
over 1997 and 50% of the increase in the three months ended
25
<PAGE> 27
March 31, 1999 over the comparable quarter in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $2.2 million in 1998, an
increase of $1.2 million or 113% over 1997, and $776,000 in the three months
ended March 31, 1999, an increase of $441,000 or 132% over the comparable
quarter of 1998. The increase was due primarily to the increased costs
associated with an increase in the number of general and administrative
personnel and with increased recruiting, accounting and consulting activities,
each of which accounted for approximately 35% of the increase in general and
administrative expenses in 1998 over 1997 and 25% and 60%, respectively, of the
increase in the three months ended March 31, 1999 over the comparable quarter in
1998. The primary purpose of the increase was to support our growing business
activities.
INTEREST AND OTHER EXPENSE
Interest and other expense includes expenses related to our financing
obligations. Interest and other expense totaled $657,000 in 1998 and $231,000 in
the three months ended March 31, 1999. This compares to expenses of $325,000 in
1997 and $104,000 in the three months ended March 31, 1998. This increase was
generated by larger interest charges on capital lease obligations.
INTEREST INCOME
Interest income includes income on our cash investments. Interest income
was $2.0 million in 1998 and $323,000 in the three months ended March 31, 1999.
This compares with interest income of $1.6 million in 1997 and with interest
income of $610,000 in the three months ended March 31, 1998. Most of the
interest increase in 1998 was generated from interest income on larger cash
balances from the proceeds of issuances of our preferred stock.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for the quarters ended
March 31, 1999 and December 31, 1998, which are the only quarters for which we
have recognized revenue. The information for each of these quarters is unaudited
and has been prepared on the same basis as the audited financial statements
appearing elsewhere in this prospectus. In the opinion of management, all
necessary adjustments consisting only of normal recurring adjustments, have been
included to present fairly the unaudited quarterly results when read in
conjunction with our audited consolidated financial statements and the related
notes appearing elsewhere in this prospectus. These operating results are not
26
<PAGE> 28
necessarily indicative of the results of any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................................ $ 3,807 $10,044
Cost of revenues............................................ 3,815 6,347
------- -------
Gross profit (loss)......................................... (8) 3,697
Operating expenses:
Research and development.................................. 6,145 6,181
Sales and marketing....................................... 1,718 2,603
General and administrative................................ 882 776
Amortization of deferred stock compensation............... 648 904
------- -------
Total operating expenses............................... 9,393 10,464
------- -------
Operating loss.............................................. (9,401) (6,767)
Interest income (expense), net.............................. 117 92
------- -------
Net loss.................................................... $(9,284) $(6,675)
======= =======
</TABLE>
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. The primary factors that
may affect us include the following:
- - demand for the M40;
- - the timing of sales of the M40;
- - the timing of recognizing revenue and deferred revenue;
- - new product introductions by our competitors;
- - changes in our pricing policies or the pricing policies of our competitors;
- - our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
- - our ability to obtain sufficient supplies of sole or limited source
components, including ASICs and power supplies for the M40;
- - increases in the prices of the components we purchase;
- - our ability to attain and maintain production volumes and quality levels for
the M40;
- - decisions by end-users to reallocate their information resources to other
purposes, including year 2000 preparedness;
- - Internet growth and demand for Internet infrastructure;
- - prototype expenses;
- - costs related to acquisitions of technology or businesses; and
- - general economic conditions as well as those specific to the Internet and
related industries.
In addition, we are dependent on decisions by customers to build their
Internet infrastructure, which decisions are in turn dependent upon the success
and expected demand for the services offered by those customers. Furthermore,
the long sales and implementation cycles for the M40, as well as the degree to
which customers will sporadically place large orders with short lead
27
<PAGE> 29
times, may cause revenues and operating results to vary significantly from
quarter to quarter.
We also expect to experience seasonality in our operating results. We
expect the growth rate in our sales to be adversely affected in the third
quarter due to a slowdown in sales in Europe and other foreign areas during the
summer months. In addition, we expect the growth rate in our sales in the first
quarter to be adversely affected due to our customers' budgeting cycles.
We plan to increase significantly our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations,
broaden our customer support capabilities and develop new distribution channels.
We also plan to expand our general and administrative functions to address the
increased reporting and other administrative demands, which will result from
this offering and the increasing size of our business. Our operating expenses
are largely based on anticipated revenue trends, and a high percentage of our
expenses are and will continue to be fixed in the short term. As a result, a
delay in generating or recognizing revenue for the reasons set forth above or
for any other reason could cause significant variations in our operating results
from quarter to quarter and could result in substantial operating losses.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. It is likely that in some future quarters, our operating results
may be below the expectations of public market analysts and investors. In this
event, the price of our common stock may fall.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of approximately $90.8 million of convertible preferred stock as well as
through capital leases for computers, office equipment, software and furniture.
We used $24.8 million in cash for operations in 1998, an increase of $16.2
million from the $8.6 million used in 1997. The increase was primarily due to an
increase in our net loss from $10.4 million in 1997 to $31.0 million in 1998,
partially offset by increased non-cash charges in 1998. We used $1.7 million in
cash for operations in the three months ended March 31, 1999, as a result of our
net loss of $6.7 million, partially offset by non-cash charges.
We generated $9.3 million in cash from investing activities in 1998 and
used $13.0 million in cash from investing activities in 1997. We generated $48.5
million in cash in 1997, $5.2 million in cash in 1998 and $32.4 million in cash
in the three months ended March 31, 1999, from financing activities, primarily
private sales of convertible preferred stock. We have used leases to partially
finance capital purchases. In addition, we had $7.4 million in capitalized lease
obligations outstanding at December 31, 1998, and $4.0 million at March 31,
1999.
Cash, cash equivalents and short-term investments totaled $20.1 million at
December 31, 1998, down from $46.2 million at December 31, 1997. Most of the
decrease came from cash used in operations and the purchase of equipment. At
March 31, 1999, cash, cash equivalents and short-term investments totaled $49.5
million. The increase from December 31, 1998 was due to the receipt of $33.9
million from the sale of preferred stock in March 1999.
Our capital requirements depend on numerous factors, including:
- - market acceptance of our products;
- - the resources we devote to developing, marketing, selling and supporting our
products;
- - the timing and extent of establishing international operations; and
- - other factors.
We expect to devote substantial capital resources to continue our research
and development efforts, to hire and expand our sales, support, marketing and
product development organizations, to expand
28
<PAGE> 30
marketing programs, to establish additional facilities worldwide and for other
general corporate activities. Although we believe that our current cash balances
will be sufficient to fund our operations for at least the next 12 months, there
can be no assurance that we will not require additional financing within this
time frame or that such additional funding, if needed, will be available on
terms acceptable to us or at all.
In the quarter ended March 31, 1999, accounts receivable increased to $8.6
million, accrued warranty liability increased to $1.5 million and deferred
revenue increased to $7.9 million, as compared to December 31, 1998, due to the
increase in revenues in the this quarter as compared to the quarter ended
December 31, 1998.
Our customers are billed at the time that the product is shipped, with
payment terms generally of 30 days. We have deferred revenue recognition on
shipments to new customers until the point at which the installation obligations
are satisfied. The typical installation process, which involves customer and
Juniper Networks personnel, historically has taken approximately 90 days. For
sales to existing customers, we recognize revenue upon shipment as these
customers have already concluded the product testing period. Customers
historically either have paid us prior to the completion of the installation
process, or in no instance later than 30 days subsequent to the completion of
the installation process. The accounts receivable balance as of December 31,
1998 was collected prior to March 31, 1999.
YEAR 2000 COMPLIANCE
IMPACT OF THE YEAR 2000 COMPUTER PROBLEM. The year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have
time-sensitive software may recognize a date represented as "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
STATE OF READINESS OF OUR PRODUCTS. We have designed the M40 for use in
the year 2000 and beyond and believe it is year 2000 compliant. However, our
products are generally integrated into larger networks involving sophisticated
hardware and software products supplied by other vendors. Each of our customers'
networks involves different combinations of third party products. We cannot
evaluate whether all of their products are year 2000 compliant. We may face
claims based on year 2000 problems in other companies' products or based on
issues arising from the integration of multiple products within the overall
network. Although no such claims have been made, we may in the future be
required to defend our products in legal proceedings which could be expensive
regardless of the merits of such claims.
STATE OF READINESS OF OUR INTERNAL SYSTEMS. Our business may be affected
by year 2000 issues related to non-compliant internal systems developed by us or
by third-party vendors. We have received assurances that all material systems
from third-party vendors in use by us are year 2000 compliant. We are not
currently aware of any year 2000 problem relating to any of our material
internal systems. We are in the process of testing all such systems for year
2000 compliance and plan to complete such testing before September 30, 1999. We
do not believe that we have any significant systems that contain embedded chips
that are not year 2000 compliant.
Our internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers and
service providers. We believe that absent a systemic failure outside our
control, such as a prolonged loss of electrical or telephone service, year 2000
problems at third parties such as suppliers, customers and service providers
will not have a material impact on our operations.
29
<PAGE> 31
If our suppliers, vendors, major distributors, partners, customers and
service providers fail to correct their year 2000 problems, these failures could
result in an interruption in, or a failure of, our normal business activities or
operations. If a year 2000 problem occurs, it may be difficult to determine
which party's products have caused the problem. These failures could interrupt
our operations and damage our relationships with our customers. Due to the
general uncertainty inherent in the year 2000 problem resulting from the
readiness of third-party suppliers and vendors, we are unable to determine at
this time whether year 2000 failures could harm our business and our financial
results.
Our customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems to
become year 2000 compliant. This situation may reduce funds available to
purchase our products. In addition, some customers may wait to purchase our
products until after the year 2000, which may reduce our revenue.
COST. Based on our assessment to date, we anticipate that costs associated
with testing and remediating our internal systems will be approximately
$200,000.
RISKS. Failures of our internal systems to be year 2000 compliant could
temporarily prevent us from processing orders, issuing invoices and developing
products and could require us to devote significant resources to correcting such
problems. Due to the general uncertainty inherent in the year 2000 computer
problem, resulting from the uncertainty of the year 2000 readiness of
third-party suppliers and vendors, we are unable to determine at this time
whether the consequences of year 2000 failures will have a material impact on
our business, results of operations or financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP, No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires entities to capitalize certain costs related to internal-use software
once certain criteria have been met. We expect that the adoption of SOP No. 98-1
will not have a material impact on our financial position or results of
operations. We adopted SOP No. 98-1 effective January 1, 1999.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. We expect that the adoption of SOP No. 98-5 will not have a material
impact on our financial position or results of operations. We adopted SOP No.
98-5 effective January 1, 1999.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we do
not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of FAS No. 133 will not have a material
impact on our financial position or results of operations. We adopted FAS No.
133 effective January 1, 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET INTEREST RATE SENSITIVITY
The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our
investments without significantly increasing risk. Some of the securities that
we have invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing rate and the prevailing interest rate later
rises, the principal amount of our investment will probably decline. To minimize
this risk, we
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<PAGE> 32
maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, money market funds and
government and non-government debt securities. In general, money market funds
are not subject to market risk because the interest paid on such funds
fluctuates with the prevailing interest rate. In addition, we invest in
relatively short-term securities. As of December 31, 1998, all of our
investments mature in less than one year. See Note 2 to the Consolidated
Financial Statements.
The following table presents the amounts of our cash equivalents and
short-term investments that are subject to market risk by range of expected
maturity and weighted average interest rates as of December 31, 1998. This table
does not include money market funds because those funds are not subject to
market risk.
<TABLE>
<CAPTION>
MATURING BETWEEN THREE
MATURING IN THREE MONTHS MONTHS AND ONE YEAR TOTAL
------------------------ ---------------------- -------
<S> <C> <C> <C>
Included in cash and cash
equivalents............... $16,520 $ -- $16,520
Weighted average interest
rate...................... 5.33% --% 5.33%
</TABLE>
EXCHANGE RATE SENSITIVITY
We operate primarily in the United States, and all sales to date have been
made in US dollars. Accordingly, we have had no material exposure to foreign
currency rate fluctuations.
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<PAGE> 33
BUSINESS
OVERVIEW
We are a provider of Internet infrastructure solutions that enable
Internet service providers and other telecommunications service providers, or,
collectively, service providers, to meet the demands resulting from the rapid
growth of the Internet. We deliver next generation Internet backbone routers
that are specifically designed, or purpose-built, for service provider networks
and offer our customers increased reliability, performance, scalability,
interoperability and flexibility, and reduced complexity and cost compared to
current alternatives. Our flagship product is the M40 Internet backbone router.
The M40 combines the features of our JUNOS Internet Software, high performance
ASIC-based packet forwarding technology and Internet optimized architecture into
a purpose-built solution for service providers. Unlike conventional routers,
which were originally developed for enterprise applications and are increasingly
inadequate for service provider use in public networks, our Internet backbone
routers are specifically designed to accommodate the size and scope of the
Internet.
We believe that the Internet will continue to grow at significant rates
and will evolve into the next generation public network, superseding and
expanding upon many of the functions provided by the traditional telephone
network. This trend will drive the need for new Internet infrastructure
equipment that can deliver the high levels of reliability and scalability needed
in a public network. We believe we have developed the first commercially
available Internet backbone routing platform specifically designed and built to
meet these requirements. Ryan Hankin Kent, an industry research firm, estimates
that the market for Internet backbone routers was $169 million in 1998 and is
expected to increase to approximately $5.5 billion in 2003.
We sell our Internet backbone routers primarily through a direct sales
force and one original equipment manufacturer. Our M40 Internet backbone router
is currently used by several of the world's leading service providers, such as
UUNet, Cable & Wireless, IBM Global Services, Frontier GlobalCenter and Verio.
INDUSTRY BACKGROUND
The Internet has evolved from an academic research project into a network
of hundreds of separately administered, public and private networks
interconnected using Internet Protocol, or IP. IP traffic is growing
exponentially, driven by increasing numbers of new users, connected devices and
Internet transactions. The result of the widespread use of IP is a ubiquitous
network that today carries a large and growing amount of data traffic enabling
millions of users to share information and conduct electronic commerce.
International Data Corporation, an industry research firm, forecasts continued
dramatic growth worldwide in the Internet and Internet traffic:
- - World Wide Web users will grow from approximately 69 million in 1997 to
approximately 300 million in 2002;
- - the number of computers and other devices accessing the World Wide Web will
grow from approximately 78 million in 1997 to approximately 515 million by
2002; and
- - commerce revenues on the Internet will grow from approximately $32 billion at
the end of 1998 to approximately $426 billion by the end of 2002.
The importance of IP continues to increase as the number of users,
connected devices and transactions over the Internet grows. This growth
highlights the potential for the Internet to become the replacement for the
traditional telephone network and the pervasive public network.
The rapid adoption of the Internet and the tremendous growth of IP traffic
have prompted service providers to construct large scale data networks. These
networks are being optimized to transport data traffic as compared to
traditional telephone networks, which were optimized to transport voice traffic.
The architecture of these next generation networks is being driven by two key
technologies: packet/cell switching and optical networking.
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ADVANTAGES OF PACKET/CELL SWITCHING. Packet/cell switching technology,
which divides data traffic into distinct units called packets or cells and
routes each packet or cell independently, provides superior use of available
network capacity compared to traditional circuit switching technology. In a
circuit switched network, each data stream, such as a voice telephone call
between two points, is provided with a dedicated channel, or circuit, for the
duration of the telephone call. This approach leads to inefficient use of
network resources because a channel is fully dedicated to each transaction,
whether or not data is actually flowing at any given moment. As a result, a
circuit switched architecture is highly inefficient for Internet applications
which tend to create large bursts of data traffic followed by long periods of
silence. Packet/cell switching architectures enable greater utilization out of a
fixed capacity circuit by combining traffic that has different capacity demands
of the circuit at different times. Packet/cell switches more efficiently fill
the available network bandwidth with packets of data from many users, thereby
reducing the wasted bandwidth due to silence from any one particular user. The
use of packet/cell switching is driving the architecture of the Internet to be
fundamentally different from traditional circuit switched voice based networks.
In packet/cell switched networks, IP has emerged as the de facto standard for
providing services to end users. Primary packet/cell switching products include
frame relay switches, ATM switches and routers.
RAPID ADVANCES IN OPTICAL NETWORKING. Optical networking technology uses
pulses of light, rather than pulses of electricity, to transmit data in a
network, and uses fiber optic connections instead of wires. Optical networking
can be used to transmit much more information over a given connection than
electrical signals can convey. Optical networking advances, such as dense
wavelength division multiplexing, or DWDM, which allows transmission of several
frequencies of light over one strand of optical fiber, have enabled still higher
data transmission rates and improved efficiency of bandwidth utilization.
Currently available DWDM technology enables the transmission of up to 128
frequencies which allows a service provider to multiply the transmission
capacity of a fiber optic network by a factor of up to 128.
PACKET/CELL TECHNOLOGIES HAVE NOT KEPT UP WITH OPTICAL TECHNOLOGIES. Many
service providers are installing DWDM equipment and are increasingly focusing on
combining IP and optical networking technologies. However, traditional packet
switching equipment is not capable of forwarding packets at rates sufficient to
keep pace with optical transmission speeds. As affordable fiber optic
transmission capacity becomes widely available, the performance and complexity
of current packet/cell switching architectures is increasingly constraining the
growth of the Internet.
The intersection of traditional packet/cell switching and fiber optic
technology is demonstrated by the following diagram:
[DIAGRAM]
THE NEW REQUIREMENTS OF THE INTERNET
The reliability and performance of current Internet infrastructure
equipment have become critical issues for service providers as they continue to
support dramatic growth in IP traffic and increasingly seek to offer new revenue
generating, mission-critical services, such as Virtual Private Networks, or
VPNs, and voice-over IP. New requirements for next generation networks are
driving a set of new requirements for Internet infrastructure equipment,
including:
- - high reliability;
- - high performance;
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- - high performance under stressful conditions;
- - scalability;
- - interoperability;
- - reduced complexity; and
- - cost effectiveness.
HIGH RELIABILITY. As businesses and consumers increasingly rely on the
Internet for mission-critical applications, high network reliability becomes
essential. Service providers are increasingly expected to provide a similar
degree of reliability on the Internet that users have become accustomed to on
the traditional telephone network. The "five nines" (99.999%) reliability
standard of the traditional telephone network is becoming the target to which
suppliers of next-generation Internet platforms are being compared. As service
providers begin to bundle voice and data on their networks, this high degree of
reliability is becoming even more critical.
HIGH PERFORMANCE. To handle the rapid growth in IP traffic, today's
networks increasingly require routers that can operate at interface speeds as
high as 2.5 billion bits of information per second, or Gbps, and in the near
future, 10 Gbps. The processing of data packets at these high speeds requires
sophisticated forwarding technology to inspect each packet and assign it to a
destination based on priority, data type and other considerations. Since a large
number of IP packets, many of which perform critical administrative functions,
are small in size, high performance Internet routers need to achieve their
specified transmission speeds even for small packet sizes. Since smaller packets
increase packet processing demands, routing large numbers of smaller packets
tends to be more resource intensive than routing of larger packets. Routers
based on general-purpose microprocessors traditionally are unable to forward
small packets at maximum rates, and, as a consequence, fail to operate at wire
speed, which results in data loss, packet retransmission and network
instability. A wire speed router, which achieves its specified transmission rate
for any type of traffic passing through it, can accomplish this task. Unlike the
enterprise environment, where network capacity is relatively inexpensive and
service quality requirements are not as demanding, the additional capacity and
related costs of network bandwidth and low service levels resulting from
retransmission of dropped packets are increasingly unacceptable to service
providers. Thus, provisioning of mission-critical services increasingly requires
the high performance enabled by wire speed processing.
HIGH PERFORMANCE UNDER STRESSFUL CONDITIONS. In a large and complex
network, individual components inevitably fail. However, the failure of an
individual device or link must not compromise the network as a whole. In a
typical network, when a failure occurs, the network loses some degree of
capacity and, in turn, a greater load falls on the remaining network routers,
which must provide alternate routes. Routers must quickly adjust to the new
state of the network to maintain packet forwarding rates and avoid dropping
significant numbers of packets when active routes are lost or when large numbers
of routes change. Routing protocols are used to accomplish this convergence, a
process that places even greater stress on the router. Given the complexity of
Internet infrastructure, particularly compared to enterprise networks, the
convergence process is far more complex and places a far greater load on the
routing software, thereby requiring a much more sophisticated device.
SCALABILITY. Due to the rapid growth in Internet users and IP traffic,
service providers must continuously expand their networks, both in terms of
increased numbers of access points of presence, or PoPs, and also greater
capacity per PoP. To facilitate this expansion process, Internet infrastructure
equipment must be highly scalable. Next generation routers therefore need to be
upgradeable and configurable to function within constantly changing networks
while incurring minimal downtime.
INTEROPERABILITY. Service providers do not have the time or inclination to
change their existing networks to favor introduction of new products; rather,
new products must be compatible with the existing environment. Given the open
and inter-connected nature of the Internet, the complexity of running an
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Internet backbone network requires a service provider to control and police
relations with other service providers. For example, service providers must
carefully control what traffic is accepted under what conditions from other
providers. Major service providers connect their respective networks via peering
arrangements, in which service providers agree to exchange traffic with one
another. These arrangements are prone to abuse, such as the illicit use by one
service provider of another service provider's backbone to carry excess traffic.
Service provider relationships are controlled by a set of rules called policies,
implemented through a data protocol called Border Gateway Protocol 4, or BGP4.
The software in each router must offer 100% compatibility with all aspects of
BGP4, as well as 100% compatibility with the interior protocols and standards
used within each service provider's backbone network. The compatibility level
must be maintained despite changes to software equipment configuration and
network architecture and upgrades to the various protocol standards. Thus,
routing software must be flexible and quickly upgradeable to support any
necessary revisions. This level of compatibility, in turn, cannot impact the
performance, scalability or reliability of the equipment. Attaining this
sophisticated level of interoperability is highly challenging and requires
significant testing to ensure compatibility.
REDUCED COMPLEXITY. Today's Internet architectures are highly complex.
Since traditional routers have not fully met service providers' needs, many
service providers have tried to improve Internet backbone performance by adding
additional network devices such as ATM switches in the core of the network. As a
result, service providers have built networks with ATM switches surrounded by an
overlay network of lower capacity routers. These different layers of equipment
lead to higher capital costs and the need to manage distinct network elements.
ATM switches are also poorly suited to carrying IP traffic, which results in
inefficient use of network bandwidth. Moreover, this network design can cause
unpredictable router behavior during periods of stress because the routers are
not aware of the ATM backbone infrastructure and thus cannot quickly converge if
there is a partial network outage.
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This type of layered backbone network with a complex patchwork of products
based on different technologies is represented below:
[DIAGRAM]
COST EFFECTIVENESS. Exponential growth in IP traffic and intense price
competition in the telecommunications market is increasingly requiring service
providers to seek solutions that significantly reduce the capital expenditures
required to build and operate their networks. In addition to the basic cost of
equipment such as routers, service providers incur substantial ancillary costs
in terms of space required to deploy the equipment, power consumption and
on-going operations and maintenance. Service providers therefore want to deploy
dense and varied equipment configurations in limited amounts of rack and floor
space. Currently, service providers are moving from OC-3 (155 million bits per
second, or Mbps) and OC-12 (622 Mbps) speed networks at the core to higher
capacity OC-12 and OC-48 (2.5 gigabits per second, or Gbps) speed networks. In
turn, the connections from each PoP to the core are evolving from 100 Mbps and
OC-3 speeds to gigabit and OC-12 transmission rates. Therefore, in order to
continue to scale their networks toward higher data speeds in a cost effective
manner, service providers need the ability to mix and match easily many
different speed connections at appropriate densities, without significantly
increasing the consumption of space or power.
There is a clear need for next generation routers that can support high
speeds and offer new IP-based services. Network operators are eagerly seeking
new solutions that increase the level of scalability and reliability within
their networks and reduce the cost and complexity of their architectures.
THE JUNIPER NETWORKS SOLUTION
We develop, market and sell what we believe is the first commercially
available purpose-built Internet backbone router optimized for the specific high
performance needs of service providers. Our flagship product, the M40 Internet
backbone router, combines the features of our JUNOS Internet Software,
high-performance ASIC-based
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packet forwarding technology and Internet-optimized architecture.
JUNOS INTERNET SOFTWARE. Our Internet software, called JUNOS, is one of
our key competitive differentiators. JUNOS is designed to meet the IP network
routing, operations and control requirements of the world's largest service
providers and is an integral component of the M40 system architecture. The
ability of JUNOS to manage the complex network sharing relationships among
service providers allows the M40 to be placed at critical points in the core of
a service provider's network. The JUNOS Internet Software allows the M40 to have
widespread network placement due to its interoperability with Cisco's
Internetwork Operating System, or IOS, currently the most broadly deployed
routing operating system. The ability to coexist has enabled the M40 to achieve
successful deployment where other products in the past have failed.
Unconstrained by legacy routing software, we developed JUNOS using a
modular design, in which distinct functions are implemented as separate modules
with well defined interfaces and interactions, simplifying troubleshooting and
maintenance. JUNOS operates in protected memory mode. These features keep
functionality distinct, and minimize the impact of any failure that may occur to
the specific software application in which the failure occurs. Also, we believe
JUNOS' software modularity will enable the continuous upgrade of new enhanced
capabilities, while protecting reliability and compatibility with existing
networks. The design and development of the JUNOS Internet Software has been
possible due to the significant Internet engineering expertise of our
development team. Our expert engineers have authored or co-authored 22 Requests
for Comments, which are documents by industry experts that define major
standards for Internet protocols.
HIGH PERFORMANCE ASIC-BASED PACKET FORWARDING TECHNOLOGY. The M40 Internet
backbone router contains five major integrated circuits that we designed and
built using the most advanced ASIC technology. These ASICs contain over five
million gates in total, with three of the designs each having a larger number of
transistors than the Intel Pentium II microprocessor. The result is a system
that is substantially faster than today's general purpose microprocessor based
routers in its ability to process and forward IP packets, allowing the M40 to
deliver high performance at wire speed. The ability to enhance and implement
large scale ASICs will be a long-term differentiator for us, particularly as the
sophistication required to forward traffic across higher speed networks
increases. We expect to leverage our existing ASIC technology in future products
and continue to capitalize on our advanced ASIC design capabilities.
INTERNET OPTIMIZED ARCHITECTURE. As a purpose-built Internet backbone
router, the M40 employs an architecture designed exclusively for the Internet.
The M40 system architecture provides a clean separation between the routing and
packet-forwarding functions. Separating these two functions enables us to
develop independently a full-featured routing protocol and traffic engineering
functionality through our JUNOS Internet Software and wire speed packet
forwarding performance through high performance ASICs. Furthermore, with the
routing and forwarding functions segregated, the M40 does not sacrifice
performance, even when there is a failure in the network. When a failure occurs,
JUNOS detects the failure and is able to quickly converge to the new state of
the network while the ASICs continue to forward packets at wire speed until they
receive updated routes from JUNOS.
The key benefits of our solution are:
- - carrier class reliability;
- - wire speed performance;
- - scalability;
- - interoperability;
- - flexibility;
- - reduced complexity; and
- - cost effectiveness.
CARRIER CLASS RELIABILITY. The M40's system architecture provides reliable
operation for service providers in large
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complex networks even under abnormal conditions. This architecture, combined
with JUNOS' modular software design, limits the impact of a failure to the
specific software application. In addition, the hardware used in the M40 has
been designed with a very high level of integration to maximize the mean time
between failure. Moreover, data and instructions have appropriate error
correction and parity checks in memory to guarantee their integrity.
WIRE SPEED PERFORMANCE. We believe the M40 is the first Internet backbone
router that can forward minimum-sized IP packets over OC-48 links at wire speed.
This maximizes network stability and the capacity utilization of expensive wide
area circuits. In contrast to available solutions, the M40 is able to maintain
packet forwarding rates and to avoid dropping significant numbers of packets
when active routes are lost or when large numbers of routes change.
SCALABILITY. Our JUNOS Internet Software is designed to accommodate
service providers' scale requirements. In addition, the ASIC interface links
have been oversized, enabling the M40 to easily scale with growing levels of
data traffic. We believe our software and ASIC designs represent a competitive
advantage, because it is very difficult for existing vendors to graft these
capabilities to their prior generation designs.
INTEROPERABILITY. The M40 has demonstrated consistent interoperability
with existing network infrastructures. Our internal test environments confirm
interoperability with Cisco routers, a variety of leading ATM and Gigabit
Ethernet switches and SONET add drop multiplexers. Deployment of the M40 at
several major carriers has demonstrated that JUNOS is interoperable with
installed Cisco routers for both routing and administration. In addition, JUNOS
enables service providers to manage their complex peering relationships with
other service providers despite frequent software, equipment configuration and
network architecture changes.
FLEXIBILITY. Our ASICs are programmable and provide the flexibility to add
support for new protocols or changes in existing protocols. Since JUNOS is
modular in architecture and already supports existing and emerging protocols, it
is also a platform for efficiently introducing new interfaces and new services
in the network.
REDUCED COMPLEXITY. The M40 is purpose-built for service providers and
allows a simple and more structured approach to building Internet backbones
compared to the complex topologies in place today. With the M40, service
providers can build more efficient networks with less dependence on devices like
ATM switches, which reduce the operational burdens of running multiple distinct
network layers.
Additionally, the M40 offers a thorough implementation of traffic
engineering based on MPLS, including the ability to dynamically adapt traffic
flows according to rules adopted by the network operator. Traffic engineering
refers to a set of capabilities for understanding underlying traffic trends in
the network and maximizing the utilization of the network on multiple
dimensions.
[DIAGRAM]
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COST EFFECTIVENESS. We have integrated these customer benefits into a
system that provides critical routing and forwarding functions at lower overall
cost. The M40's wire speed performance allows service providers to reduce
network operating cost by making more efficient use of their networks. In
addition, we designed the M40 to support a broad variety and density of
interfaces in a unit that occupies half a typical telecommunications rack. As a
result, service providers can cost effectively deploy the M40, which can be
easily upgraded, to connect to a variety of speed and circuit types at the
network core.
THE JUNIPER NETWORKS STRATEGY
Our objective is to become the primary supplier of high performance
Internet backbone infrastructure. The key elements of our strategy include:
- - leverage early lead as supplier of purpose-built Internet infrastructure;
- - work very closely with key customers;
- - increase penetration at major service providers;
- - leverage early success to penetrate new customers rapidly;
- - expand sales and distribution network;
- - maintain and extend technology leadership; and
- - enable new IP-based services.
LEVERAGE EARLY LEAD AS SUPPLIER OF PURPOSE-BUILT INTERNET
INFRASTRUCTURE. From inception we have focused solely on designing and building
Internet infrastructure for service providers. We have integrated purpose-built
software and hardware into an Internet optimized architecture that specifically
meets service providers' needs and have seen significantly positive initial
responses from our existing and potential customers. We believe that many of
these customers will deploy Internet backbone infrastructure equipment from only
a few vendors. The purpose-built advantages of the M40 provide us with a
time-to-market lead, which is a critical advantage in gaining rapid penetration
as one of these selected vendors. Once our products are widely deployed in a
service provider's network as the primary or even secondary Internet backbone
infrastructure equipment, we create a significant barrier to entry to potential
competitors who do not currently offer commercially-viable next generation
routing solutions.
WORK VERY CLOSELY WITH KEY CUSTOMERS. In developing the M40 and JUNOS
Internet Software, we worked very closely with customers to design and build a
product specifically to meet their complex needs. Since JUNOS has been available
and used by our customers for over a year, we understand clearly the challenges
facing these carriers, enabling us to subsequently design additional features
and capabilities into both our software and hardware. We believe our close
relationships with, and constant feedback from, our customers have been key
elements in our design wins and rapid deployment to date. We plan to continue to
work very closely with our key customers to implement enhancements to current
products as well as to design future products that specifically meet their
evolving needs. We are also actively involved with these customers in developing
key standards, such as MPLS, and are an active participant in standards
organizations such as the Internet Engineering Task Force and the Optical
Internetworking Forum.
INCREASE PENETRATION AT MAJOR SERVICE PROVIDERS. Our initial focus has
been to penetrate several of the largest service providers, where operators have
the technical sophistication, resources and desire to test and evaluate our
solution against potential alternatives. While we have received initial orders
from major service providers, such as UUNet, Cable & Wireless, IBM Global
Services, Frontier GlobalCenter and Verio, we believe that there is a
significant opportunity to further penetrate these large and complex networks
given the advantages of the M40. As the growth of the Internet requires these
service providers to continue to build their networks and replace outdated
equipment, we will pursue further opportunities to capture greater market share
within these large accounts.
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LEVERAGE EARLY SUCCESSES TO PENETRATE NEW CUSTOMERS RAPIDLY. We believe
that the Internet infrastructure equipment buying patterns of the medium and
smaller-sized service providers typically lag behind those of the larger service
providers. Since the network challenges that the large service providers face
today are likely to be the problems encountered by smaller service providers in
the near future, we believe smaller service providers are likely to deploy
equipment similar to larger service providers. Furthermore, smaller service
providers often lack the technical resources to thoroughly test different
vendors' products. Therefore, they typically piggyback on larger service
providers' evaluation efforts by purchasing the same platforms deployed by the
larger service providers. Since we have begun to sell to several of the largest
service providers, we intend to leverage this success by allocating our
marketing efforts towards a greater number of medium and smaller-sized service
providers.
EXPAND SALES AND DISTRIBUTION NETWORK. In order to pursue the large number
of potential customers for our Internet infrastructure solutions, we plan to
aggressively add to our sales and distribution capabilities. We are adding to
our direct sales and support capabilities for our major customers in North
America and adding value-added resellers, system integrators and distributors to
sell to and support our other domestic and international customers. In addition
to our strategic original equipment manufacturer relationship with Ericsson, we
are adding distribution partners on a country specific basis. In the quarter
ended March 31, 1999, we added seven salespeople and announced the opening of a
European office and a presence in Asia.
MAINTAIN AND EXTEND TECHNOLOGY LEADERSHIP. Our Internet software, ASIC
technology and Internet-optimized architecture have been key elements to
establishing our technology leadership. We believe that these elements are
highly leverageable into future products we are currently building. We intend to
maintain and extend our technological leadership in the Internet infrastructure
market through continued significant investment in JUNOS Internet Software and
ASIC designs to enhance the feature richness of the M40 and to develop future
differentiated offerings for service providers.
ENABLE NEW IP-BASED SERVICES. Our platform enables service providers to
build networks cost effectively and to offer new differentiated services for
their customers more efficiently than conventional products. While we believe
that current service providers are likely to be the largest and most successful
IP network operators in the near term, many new service providers are likely to
emerge oriented around the delivery of IP-based services. These services, which
include web hosting, outsourced Internet and intranet services, VPNs, outsourced
enterprise applications and voice-over IP, are cost-effectively enabled by our
Internet infrastructure platform. Although the market for our products today is
driven primarily by the need for traditional Internet network capacity, as other
IP-based services and applications continue to grow in importance, the total
potential market for our products will continue to grow commensurately.
TECHNOLOGY
Our core technology consists of our Internet backbone router architecture,
JUNOS Internet Software and ASIC hardware expertise. Our general-purpose
architecture is initially embodied in the M40, but also is designed to serve as
the platform for future generations of products.
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M40 ARCHITECTURE
The following diagram illustrates the architecture of the M40 Internet
backbone router:
[DIAGRAM]
The M40 architecture delivers the forwarding rates and network control
necessary to scale Internet backbones rapidly and reliably. The M40 system
includes a Routing Engine, or RE, and a Packet Forwarding Engine, or PFE. The
clean separation of the routing and forwarding functions ensures that the two
functions do not compete for the same resources.
THE ROUTING ENGINE. The RE consists of the JUNOS Internet Software
operating on an Intel-based platform. The JUNOS Internet Software features
Internet-scale protocol support, with flexible policy software that enables
maximum control over the acceptance, modification and advertisement of route
prefixes. In addition, the JUNOS Internet Software offers a range of
configuration management tools that simplify the configuration process and help
protect against operator error. The RE conducts the processing intensive
activity of maintaining the routing table, from which the forwarding table
residing in the PFE is derived. The RE is connected to the PFE through a
dedicated 100 Mbps link. After constructing or updating the forwarding table,
the RE downloads a copy of the table to the PFE. Updates to the forwarding table
are done atomically in small incremental steps so that packet forwarding is not
interrupted by routing changes.
THE PACKET FORWARDING ENGINE. The M40 delivers wire speed packet
forwarding using our ASIC designs. All links between ASICs are oversized,
dedicated channels, and the PFE architecture is free from the bottlenecks faced
by traditional crossbar switches, which use intelligent agent software to
perform both routing and forwarding functions over multiple connections to
either parts of the network. Bottleneck can occur in a crossbar switch because
the routing and forwarding functions are not separated. The heart of the PFE is
the Internet Processor ASIC. With over one million gates and a lookup rate of
over 40 million packets per second, or Mpps, the Internet Processor represents
the largest and fastest route lookup ASIC currently available, capable of
processing data at throughput rates in excess of 40 Gbps.
All lookup rates reflect longest-match route table lookups for all packets
and all lookups are performed in hardware. There is no caching mechanism, which
is a mechanism by which critical information, such as destinations for traffic,
is stored in rapidly accessible memory to make the process of looking up traffic
destinations faster. In addition there is no risk of cache misses in the system
which can result in slower storage access and thus considerably slower traffic
delivery. In addition, the forwarding table can be updated without affecting
forwarding rates. The Internet Processor is programmable to support up to four
different forwarding tables (layer 2 and/or layer 3) simultaneously. Supported
forwarding protocols currently
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include unicast and multicast IPv4 and MPLS. Finally, the Internet Processor
maintains its performance regardless of length of lookups or table size.
The PFE also features a shared memory system with single-stage buffering,
so packets are written to and read from memory only once. Single-stage buffering
greatly reduces the complexities and throughput delays associated with
multistage buffering systems. The pooled memory is distributed across the
Flexible PIC Concentrator, or FPC, cards, allowing memory to scale as interfaces
are added. The Internet Processor also features prefix accounting mechanisms
that operate at rates in excess of 20 Mpps.
JUNOS INTERNET SOFTWARE: TRAFFIC ENGINEERING AND CONTROL
JUNOS Internet Software offers a full suite of Internet-scale,
Internet-tested routing protocols. Protocols and software tools, which are used
to control and direct network traffic, are critical to an Internet backbone
routing solution. Software control is made more important by the fact that the
size and complexity of backbone networks are increasing at a time when service
providers are looking to differentiate themselves through value-added service
offerings.
JUNOS Internet Software features implementations of all major Internet
protocols, including BGP4, DVMRP, PIM, IS-IS, Open Shortest Path First. IS-IS
and Open Shortest Path First are algorithms broadly used in enterprise networks
and by service providers to determine and update the running state of the
network and available destinations in the network. These implementations were
developed in-house by our design team which has extensive experience in
addressing the scaling issues of rapidly growing service providers.
JUNOS Internet Software also provides a new level of traffic engineering
capabilities with its implementation of MPLS. Developed in conjunction with the
Internet Engineering Task Force, our MPLS capability offers enhanced visibility
into traffic patterns and the ability to control the path traffic takes through
the network. Path selection enables service providers to engineer traffic for
efficient use of network capacity and avoidance of congestion. We expect MPLS
and its traffic engineering capabilities to become a crucial tool for service
providers as they scale their networks.
JUNOS Internet Software features a modular design, with separate programs
running in protected memory space in conjunction with an independent operating
system. Unlike monolithic, unprotected operating system designs, which are prone
to system wide failure, the protected, modular approach improves reliability by
ensuring that modifications made to one module have no unwanted side-effects on
other sections of the software. In addition, having clean software interfaces
between modules facilitates software development and maintenance, enabling
faster response to customer needs and delivery of new features.
JUNOS Internet Software has been extensively tested in multiple service
provider networks to ensure compatibility with Cisco's IOS. Since each major
service provider's network is different, this extensive testing is necessary to
ensure seamless introduction into existing service provider environments.
PRODUCTS
M40 INTERNET BACKBONE ROUTER
The M40 Internet backbone router is specifically designed for the
specialized needs of service providers. The M40 features leading-edge
packet-forwarding performance, very high port density and flexibility, and
purpose-built Internet software. The M40 delivers higher speed performance for
service providers than current alternatives. The M40 helps solve the critical
problem of managing backbone networks by ensuring greater control over traffic
and better use of network capacity and by providing service providers
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with the necessary traffic engineering tools, such as MPLS.
LOGO
FEATURES OF THE M40 INTERNET BACKBONE ROUTER
PORT DENSITY PER RACK-INCH. Our M40 Internet backbone router offers very
high port density per rack-inch, ensuring optimal use of valuable and scarce PoP
rack space. Because the forwarding engine is oversized, all interfaces perform
at wire speed for all packet sizes.
The M40 router features a highly flexible combination of backbone
interface speeds on the market today. In a 35-inch chassis, the M40 router
provides 8 OC-48/STM-16, 32 OC-12/STM-4, 128 OC-3/STM-1 or 128 DS3 interfaces.
M40 interfaces are located on Physical Interface Cards, or PICs, which plug into
FPC boards. There are eight FPC slots on the M40 and each FPC slot supports up
to four PICs and an aggregate throughput rate of more than 2.5 Gbps. In addition
to supporting wire speed OC-48 interfaces, each FPC supports various
combinations of interfaces, permitting the mixing of interface types and speeds
on a single FPC. Supported PIC interfaces include:
- - 1-port OC-48/STM-16 SONET/SDH;
- - 1-port OC-12/STM-4 SONET/SDH;
- - 1-port OC-12/STM-4 ATM;
- - 4-port OC-3/STM-1 SONET/SDH;
- - 2-port OC-3/STM-1 ATM;
- - 4-port DS3; and
- - 1-port Gigabit Ethernet.
The PIC interface cards are sold both as part of the initial product
configuration and also, subsequently, as add-on items. Interfaces are typically
added as the customer's network expands or the capacity of individual links is
upgraded.
CLASS-OF-SERVICE FLEXIBILITY. The M40 router is designed for a variety of
class-of-service applications. The M40's queuing mechanism is based on a
weighted round-robin selection among multiple queues on outgoing interfaces.
Queues can be configured with drop profiles to control the rate of packet drops
based on utilization of buffer capacity.
LOW POWER CONSUMPTION. As provider PoPs have grown and become more fully
populated with systems, power consumption has become a significant concern.
Access to sufficient power can be a constraint on the ability of a facility to
support a larger network. Because of its low part count and efficient design,
our M40 Internet backbone router draws less than 1700 watts of power (35A at
48V) in a fully loaded configuration, enabling it to offer very high performance
and port density per watt.
ENGINEERED FOR STRESSFUL CONDITIONS. The M40 architecture is designed to
reliably handle stressful network conditions. For example, the route lookup
capacity of our Internet Processor has been oversized with respect to interface
speeds. In addition, the separation of routing and processing enables the M40 to
converge quickly while maintaining wire speed.
BUILT FOR RELIABILITY. In addition to preserving network reliability, the
M40 router
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<PAGE> 45
is designed to ensure system reliability. The M40's cooling system is fully
redundant to protect against individual fan failure. Similarly, the M40's dual
power supplies are fully redundant, each capable of supporting the full power
load of the system. The M40 can boot off of any one of multiple redundant
storage media, ensuring that the system remains operational in the event of a
disk failure. For software reliability, JUNOS Internet Software features a
protected, modular design with separate processes running in protected memory
space on top of an independent operating system. A modular design protects
against system wide failures, ensuring that modifications made to one module
have no unwanted side-effects on other portions of the code base. Finally, a low
component count and an efficient design combine to give the M40 system superior
reliability.
The M40 base price list ranges between $45,000 and $55,000. PIC module
prices begin at $18,000.
CUSTOMERS
The following is a list of our customers that as of March 31, 1999, have
ordered at least $100,000 of products:
<TABLE>
<S> <C> <C>
BACKBONE ISP: INTERNATIONAL (ASIA/EUROPE): EDUCATION/GOVERNMENT:
AT&T Corporation Ericsson MCI NSF-sponsored
Cable & Wireless, Inc. Nissho Electronics WorldCom-vBNS
Frontier GlobalCenter Corporation University of Southern
IBM Global Services NTT PC Communications, Inc. California
PSINet, Inc. Oki Electric Industry Company, University of Washington
TCG CERFnet, Inc. Ltd.
UUNET
Verio Inc.
CONTENT SITE/HOSTING: MULTISERVICE IP:
AboveNet Communications, Inc. The Data Place, Inc.
Conxion Corporation QWEST Communications
Exodus Communications, Inc. International Inc.
</TABLE>
In the quarter ended March 31, 1999, we recognized revenue from shipments
to six of these customers. Revenues from significant customers as a percentage
of net revenues are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DEC. 31, 1998 MARCH 31, 1999
------------- --------------
<S> <C> <C>
*UUNet...................................................... 78% 40%
Ericsson................................................... 22% 9%
*MCI WorldCom-vBNS.......................................... -- 15%
Verio...................................................... -- 16%
</TABLE>
- ---------------
* Subsidiaries of MCI WorldCom, each of which run separate networks and make
separate purchasing decisions.
SALES AND MARKETING
We sell and market our products through a combination of our direct sales
organization, value-added resellers, a strategic original equipment manufacturer
partner relationship and country specific distributors.
DIRECT SALES. Our North American direct sales organization is divided into
Western and Eastern regional operations. Our direct sales
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<PAGE> 46
efforts are focused on the largest service providers. The direct sales account
managers cover the market on an assigned account basis and work as a team with
account oriented systems engineers. They are directed by a regional operations
manager who reports to the North American Director of Sales. We also have a team
of consulting engineers that provide our customers with guidance and assistance
on the evolution of their networks as it relates to the deployment of our
products. These consulting engineers also help in defining the features that are
required for our products to be successful in specific applications. A key
feature in our selling effort is the relationship we establish at various levels
in our customers' organization. Our sales team maintains contact with key
individuals who have service planning and infrastructure buildout
responsibility.
VALUE-ADDED RESELLERS. We plan to complement our direct sales effort in
the United States through the addition of a small number of highly focused
value-added resellers. Our arrangements with value-added resellers typically
have been non-exclusive and provide the value-added reseller with discounts
based upon the volume of their orders.
ORIGINAL EQUIPMENT MANUFACTURER PARTNER. We have established a strategic
distribution relationship with Ericsson. We believe that Ericsson has
significant customer relationships in place and offers products which complement
ours. Ericsson will provide the first level of support to its customers. Our
agreement with Ericsson allows Ericsson to distribute our products on a
worldwide, non-exclusive basis with discounts based upon the volume of orders
received through Ericsson.
INTERNATIONAL DISTRIBUTORS. In order to further our international sales
objectives, we are establishing a number of country specific distributors. These
distributors have expertise in deploying complex Internet infrastructure
equipment in their respective markets and provide the first level of support
required by our international customers.
As of March 31, 1999, we employed 30 people in our sales support and
marketing organizations.
CUSTOMER SERVICE AND SUPPORT
We believe that a broad range of support services is essential to the
successful installation and ongoing support of the M40. We have hired support
engineers with proven Internet experience. We offer services in the following
areas: 24 hours a day, seven days a week technical assistance (on-line,
telephone and on-site), professional services, educational services, logistics
services and web-based information.
We offer a variety of flexible and comprehensive support programs,
including basic hardware and software warranty services, next day onsite parts
and labor, 24 hours a day, seven days a week same day parts and labor and
on-site resident engineers. We deliver these services directly to major end
users and also utilize a two-tiered support model, leveraging the capabilities
of our partners and third party organizations. We also train our partners in the
delivery of education and support services.
Customer service and support provide front line product support and is the
problem resolution interface to our partners and direct end users. If customer
service and support are unable to resolve an issue themselves, they duplicate
the problem scenario and provide the failure information, such as logs, dumps,
traces and system configuration to appropriate subject matter experts in our
engineering department.
Based on the severity of the problem and the impact to our customers'
network, there are strict escalation guidelines to ensure that the appropriate
technical resource and management attention is brought to bear on the problem in
a timeframe commensurate with problem priority. The overall goal is to fix the
problem, at the appropriate level, in the right timeframe in order to ensure our
customers' satisfaction.
As of March 31, 1999, we employed 12 people in our customer service and
support organization, with the majority located
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in our Mountain View, California corporate headquarters.
RESEARCH AND DEVELOPMENT
We have assembled a team of skilled engineers with extensive experience in
the fields of high end computing, network system design, Internet routing
protocols and embedded software. These individuals have been drawn from leading
computer data networking and telecommunications companies. In addition to
building complex hardware and software systems, the engineering team has
experience in delivering very large, highly integrated ASICs and extremely
scalable Internet software.
Our research and development department is organized into teams that work
in parallel on several projects in a way similar to the development of
successive generations of complex microprocessors. As a result, we will seek to
offer our customers next generation products as they are needed.
We believe that strong product development capabilities are essential to
our strategy of enhancing our core technology, developing additional
applications, incorporating that technology and maintaining the competitiveness
of our product and service offerings. We are leveraging our first generation
ASICs, developing additional network interfaces targeted to our customer
applications and continuing to develop next generation technology to support the
anticipated growth in network bandwidth requirements. We continue to expand the
functionality of our JUNOS Internet Software to improve performance and
scalability, and to provide an enhanced user interface.
Our research and development process is driven by the availability of new
technology, market demand and customer feedback. We have invested significant
time and resources in creating a structured process for undertaking all product
development projects. This process involves all functional groups and all levels
within our company. Following an assessment of market demand, our research and
development team develops a full set of comprehensive functional product
specifications based on inputs from the product management and sales
organizations. This process is designed to provide a framework for defining and
addressing the steps, tasks and activities required to bring product concepts
and development projects to market.
As of March 31, 1999, we employed 114 people in our research and
development group.
Our research and development expenses totaled $6.2 million for the three
months ended March 31, 1999, $24.0 million for the year ended December 31, 1998,
$9.4 million for the year ended December 31, 1997 and $1.9 million for the
period from February 2, 1996, the date of our inception, to December 31, 1996.
MANUFACTURING
Our manufacturing operation is entirely outsourced. We have developed a
strategic relationship with Solectron, under which we have subcontracted our
manufacturing activity. This subcontracting activity extends from prototypes to
full production and includes activities such as material procurement, final
assembly, test, control and shipment to our customers. We design, specify and
monitor all of the tests that are required to meet internal and external quality
standards. This arrangement provides us with the following benefits:
- - we operate without dedicating any space to manufacturing operations;
- - we conserve the working capital that would be required for funding inventory;
- - we can adjust manufacturing volumes quickly to meet changes in demand; and
- - we can quickly deliver products to customers through Solectron's turnkey
manufacturing and drop shipment capabilities.
Our ASICs are manufactured by IBM using its 0.25 micron process. IBM is
responsible for all aspects of the production of the ASICs using our proprietary
designs.
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COMPETITION
Competition in the Internet infrastructure market is intense. The market
historically has been dominated by Cisco Systems, Inc., with other companies
such as Bay Networks, Inc. (now Nortel Networks Corporation) and Ascend
Communications, Inc. (which has agreed to be acquired by Lucent Technologies
Inc.) providing products to a smaller segment of the market. In addition, a
number of private companies have announced plans for new products to address the
same problems which our products address.
Cisco traditionally has been the dominant supplier of solutions to this
market. We believe this is the result of its early leadership position in the
enterprise router market. As the Internet has grown rapidly, Cisco has leveraged
this position and has developed a broad product line of routers which support
all major local area and wide area interfaces. We believe that our ability to
compete with Cisco depends upon our ability to demonstrate that our products are
superior in meeting the needs of service providers and are extremely compatible
with Cisco's current and future products. Although we believe that we are
currently among the top providers of Internet infrastructure solutions
worldwide, we cannot assure you that we will be able to compete successfully
with Cisco, currently the leading provider in this market.
We expect that, over time, large companies with significant resources,
technical expertise, market experience, customer relationships and broad product
lines, such as Lucent and Nortel, will introduce new products which are designed
to compete more effectively in this market. As a result, we expect to face
increased competition in the future from larger companies with significantly
more resources than we have. Although we believe that our technology and the
purpose-built features of our products make them unique and will enable us to
compete effectively with these companies, we cannot assure you that we will be
successful.
Many of our current and potential competitors, such as Cisco, Lucent and
Nortel, have significantly broader product lines than we do and may bundle their
products with other networking products in a manner that may discourage
customers from purchasing the M40 Internet backbone router. Also, many of our
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged. Increased competition could
result in price reduction, fewer customer orders, reduced gross margins and loss
of market share, any of which could seriously harm our operating results.
There are also many small private companies which claim to have products
with greater capabilities than the M40. We believe that there is likely to be
consolidation in this industry with one or more of these smaller private
companies being acquired by a large, established supplier of Internet
infrastructure products. As a result, we expect to face increased competition in
the future from larger companies with significantly more resources than we have.
Several companies also provide solutions which can substitute for some
uses of routers. For example, high bandwidth asynchronous transfer mode, or ATM,
switches, are used in the core of certain major backbone service providers. ATM
switches can carry a variety of traffic types, including voice, video and data,
using fixed, 53 byte cells. Companies that use ATM switches are enhancing their
products with new software technologies such as multi protocol label switching,
or MPLS, which can potentially simplify the task of mixing routers and switches
in the same network. These substitutes can reduce the need for large numbers of
routers.
INTELLECTUAL PROPERTY
Our success and ability to compete are substantially dependent upon our
internally developed technology and know how. We have two patents issued
relating to high speed switching devices. These patents will expire in April 18,
2017 and December 16, 2016, respectively. In addition we have four patent
applications pending in the United States relating to the design of the M40 and
our future products. Our engineering teams
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<PAGE> 49
have significant expertise in ASIC design and we own all rights to the design of
the ASICs which form the core of the M40. Our JUNOS Internet Software was
developed internally and is protected by United States and other copyright laws.
While we rely on patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as the technological
and creative skills of our personnel, new product developments, frequent product
enhancements and reliable product maintenance are essential to establishing and
maintaining a technology leadership position. There can be no assurance that
others will not develop technologies that are similar or superior to our
technology.
Our success will depend upon our ability to obtain necessary intellectual
property rights and protect our intellectual rights. We cannot be certain that
we will be able to obtain the necessary intellectual property rights or that
other parties will not contest our intellectual property rights.
LEGAL PROCEEDINGS
We are not subject to any material legal proceedings.
EMPLOYEES
As of March 31, 1999, we had 190 full-time employees, 114 of whom were
engaged in research and development, 30 in sales and marketing, 12 in customer
support and 34 in finance, administration and operations. None of our employees
is represented by a labor union. We have not experienced any work stoppages and
we consider our relations with our employees to be good.
Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of
whom is bound by an employment agreement requiring service for any defined
period of time. The loss of the services of one or more of our key employees
could have a material adverse effect on our business, financial condition and
results of operations. Our future success also depends on our continuing ability
to attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that we can retain our key personnel in the future.
FACILITIES
We sublease approximately 60,000 square feet in two buildings located in
Mountain View, California. Approximately 33,000 square feet are subleased
pursuant to a sublease that expires December 31, 2001, and approximately 27,000
square feet are subleased pursuant to a lease that expires June 30, 2000. We
believe that by the end of 1999, we will need additional space to accommodate
our growth. In response to this necessary additional space, we have entered into
leases for approximately 144,000 and 25,000 square feet of office space in
Sunnyvale, California. The lease on the office space for 144,000 square feet
will commence on the later of May 1, 2000 or the completion of our improvements
on the premises, and it will expire on the later of May 1, 2012 or twelve years
after the completion of our improvements on the premises. The lease on the
office space for 25,000 square feet will commence on October 1, 1999, and it
will expire two months after the later of May 1, 2000 or the completion of our
improvements on the 144,000 square foot facility. The commercial real estate
market in the San Francisco Bay area is volatile and unpredictable in terms of
available space, rental fees, occupancy rates and preferred locations. We can
not be certain that additional space will be available when we require it, or
that it will be affordable or in a preferred location.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages, as of March 31, 1999,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Scott Kriens......................... 41 President, Chief Executive Officer and Chairman of the
Board
Pradeep Sindhu....................... 46 Chief Technical Officer and Vice Chairman of the Board
Joe Furgerson........................ 40 Vice President of Marketing
Marcel Gani.......................... 46 Chief Financial Officer
Steven Haley......................... 44 Vice President of Worldwide Sales and Service
Gary Heidenreich..................... 50 Vice President of Operations
Peter L. Wexler...................... 43 Vice President of Engineering
William R. Hearst III(1)............. 49 Director
Vinod Khosla(2)...................... 44 Director
C. Richard Kramlich(1)............... 63 Director
William Stensrud(2).................. 48 Director
</TABLE>
- ---------------
(1) Member of audit committee
(2) Member of compensation committee
SCOTT KRIENS has served as President, Chief Executive Officer and Chairman
of the board of directors of Juniper Networks since October 1996. From April
1986 to January 1996, Mr. Kriens served as Vice President of Sales and Vice
President of Operations at StrataCom, Inc., a telecommunications equipment
company, which he co-founded in 1986. Mr. Kriens received a B.A. in Economics
from California State University, Hayward.
PRADEEP SINDHU co-founded Juniper Networks in February 1996 and served as
Chief Executive Officer and Chairman of the board of directors until September
1996. Since then, Dr. Sindhu has served as Vice Chairman of the board of
directors and Chief Technical Officer of Juniper Networks. From September 1984
to February 1991, Dr. Sindhu worked as a Member of the Research Staff, and from
March 1987 to February 1996, as the Principal Scientist, and from February 1994
to February 1996, as Distinguished Engineer at the Computer Science Lab, Xerox
Corporation, Palo Alto Research Center, a technology research center. Dr. Sindhu
holds a B.S.E.E. from the Indian Institute of Technology in Kanpur, an M.S.E.E.
from the University of Hawaii and a Masters in Computer Science and Ph.D. in
Computer Science from Carnegie-Mellon University.
JOE FURGERSON joined Juniper Networks in January 1997. He served as our
Director of Marketing from January 1997 to September 1998 and has served as our
Vice President of Marketing since September 1998. From April 1994 to December
1996, Mr. Furgerson served as Director of Product Marketing, Network Systems
Division at 3Com Corporation, a data networking company. He holds a B.A. in
Economics from Claremont Men's College and an M.B.A. from the Stanford Graduate
School of Business.
MARCEL GANI joined Juniper Networks as Chief Financial Officer in February
1997. From January 1996 to January 1997, Mr. Gani served as Vice President and
Chief Financial Officer of NVIDIA Corporation, a 3D graphic processor company.
Mr. Gani also held the positions of Vice President and Chief Financial Officer
at Grand Junction Networks, a data networking company acquired by Cisco Systems,
Inc., from March 1995 to January 1996, and at Primary Access Corporation, a data
networking company
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<PAGE> 51
acquired by 3Com Corporation, from March 1993 to March 1995. Mr. Gani holds an
M.B.A. from the University of Michigan.
STEVEN HALEY joined Juniper Networks as Vice President of Worldwide Sales
and Service in August 1997. Prior to joining Juniper Networks, Mr. Haley served
as Vice President of Sales at Cisco Systems, Inc., a data networking company,
from July 1996 to August 1997. From February 1990 to July 1996, he worked for
StrataCom, Inc., serving in a variety of management roles from Managing
Director, Europe to Vice President of Sales, Americas. He holds a B.S. in
Marketing from the University of Massachusetts, Amherst.
GARY HEIDENREICH joined Juniper Networks in July 1997 as Vice President of
Operations. From August 1993 to July 1997, Mr. Heidenreich served as Vice
President of Systems Manufacturing at 3Com Corporation. Mr. Heidenreich holds an
M.B.A. from the University of Dallas and a B.S.I.E. from New Mexico State
University.
PETER L. WEXLER joined Juniper Networks as Vice President of Engineering
in January 1997. From April 1995 to January 1997, Mr. Wexler served as Vice
President of Engineering at Bay Networks, a data networking company. From April
1993 to April 1995, Mr. Wexler served as Director of High-End Platform
Development at Wellfleet Communications, a predecessor to Bay Networks and a
manufacturer of high-performance routers. He holds a B.S.E. from State
University of New York at Stony Brook, an M.S.E. from the University of Illinois
and an M.B.A. from Boston University.
WILLIAM R. HEARST III has served as a Director of Juniper Networks since
February 1996 and has served as a member of the audit committee since July 1998.
Mr. Hearst has been a General Partner of Kleiner Perkins Caufield & Byers, a
venture capital firm, since January 1995. From May 1995 to August 1996, he was
the founding Chief Executive Officer of At Home Corporation, a data networking
company and Internet service provider. Before joining Kleiner Perkins Caufield &
Byers, Mr. Hearst was editor and publisher of the San Francisco Examiner, a news
publication, for eleven years. Mr. Hearst also serves on the boards of At Home
Corporation, Hearst-Argyle Television and Com21, Inc. He is a fellow of the
American Association for the Advancement of Science and a Trustee of the
Carnegie Institute of Washington and the California Academy of Sciences. Mr.
Hearst holds an A.B. degree in Mathematics from Harvard University.
VINOD KHOSLA has served a Director of Juniper Networks since February 1996
and has served as a member of the compensation committee since July 1998. Mr.
Khosla has been a General Partner with the venture capital firm of Kleiner
Perkins Caufield & Byers from February 1986 to the present. Mr. Khosla was a
co-founder of Daisy Systems Corporation, an electronic design automation
company, and the founding Chief Executive Officer of Sun Microsystems, Inc., a
computer and data networking company. Mr. Khosla also serves on the boards of
Asera, Cerent, Concentric Network Corporation, Corio Inc., Corvis Corporation,
Excite Inc., Siara Systems and QWEST Communications International Inc., as well
as several other private companies. Mr. Khosla holds a B.S.E.E. from the Indian
Institute of Technology in New Delhi, an M.S.E. from Carnegie-Mellon University,
and an M.B.A. from the Stanford Graduate School of Business.
C. RICHARD KRAMLICH has served as a Director of Juniper Networks since
July 1996 and has been a member of the audit committee since July 1998. Mr.
Kramlich is the co-founder and has been a General Partner of New Enterprise
Associates, L.P., a venture capital fund, since 1978. He is a director of
Healtheon Corporation, Ascend Communications, Inc., Com 21, Inc., Lumisys, Inc.,
Silicon Graphics, Inc. and Chalone Wire Group, Inc. Mr. Kramlich holds a B.A.
from Northwestern University and an M.B.A. from Harvard Business School.
WILLIAM STENSRUD has served as a Director of Juniper Networks since
October 1996 and has served as a member of the compensation committee since July
1998. Mr. Stensrud has been a General Partner with
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<PAGE> 52
the venture capital firm of Enterprise Partners from January 1997 to the
present. Mr. Stensrud was an independent investor and turn-around executive from
March 1996 to January 1997. During this period Mr. Stensrud served as President
at Paradyne Corporation and as a director of Paradyne Corporation, GlobeSpan
Corporation and Paradyne Partners LLP, all data networking companies. From
January 1992 to July 1995, Mr. Stensrud served as President and Chief Executive
Officer of Primary Access Corporation, a data networking company acquired by
3Com Corporation. From the acquisition through March 1996, Mr. Stensrud served
as an executive at 3Com Corporation. From 1986 to 1992, Mr. Stensrud served as
the Marketing Vice President of StrataCom, Inc., a telecommunications equipment
company, which Mr. Stensrud co-founded. Mr. Stensrud also serves on the boards
of Rhythms Corporation, Paradyne Corporation and GlobeSpan Corporation. He holds
a B.S. degree in Electrical Engineering and Computer Science from Massachusetts
Institute of Technology.
BOARD OF DIRECTORS
Our board of directors currently consists of six authorized members. Upon
completion of this offering, our certificate of incorporation will provide for a
classified board of directors consisting of three classes of directors, each
serving staggered three-year terms. As a result, a portion of our board of
directors will be elected each year. To implement the classified structure,
prior to the consummation of the offering, two of the nominees to the board of
directors will be elected to one-year terms, two will be elected to two-year
terms and two will be elected to three-year terms. Thereafter, directors will be
elected for three-year terms. Messrs. Kriens and Stensrud have been designated
Class I Directors, whose terms expire at the 2000 annual meeting of
stockholders. Messrs. Khosla and Sindhu have been designated Class II Directors,
whose terms expire at the 2001 annual meeting of stockholders. Messrs. Hearst
and Kramlich have been designated Class III Directors, whose terms expire at the
2002 annual meeting of stockholders. This classification of the board of
directors may delay or prevent a change in control of our company or in our
management. See "Description of Capital Stock -- Delaware Anti-Takeover Law and
Certain Charter and Bylaw Provisions."
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been elected and qualified. There
are no family relationships among any of our directors, officers or key
employees.
BOARD COMMITTEES
We established an audit committee and a compensation committee in July
1998. The audit committee consists of Messrs. Hearst and Kramlich. The audit
committee reviews our internal accounting procedures and consults with and
reviews the services provided by our independent accountants.
The compensation committee consists of Messrs. Khosla and Stensrud. The
compensation committee reviews and recommends to the board of directors the
compensation of all of our officers and directors, including stock compensation
and loans and establishes and reviews general policies relating to the
compensation and benefits of our employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors
as a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee 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.
DIRECTOR COMPENSATION
We do not currently compensate in cash our directors for their service as
members of the board of directors, although they are reimbursed for certain
expenses in
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<PAGE> 53
connection with attendance at board of director and compensation committee
meetings. Under our 1996 Stock Plan, nonemployee directors are eligible to
receive stock option grants at the discretion of the board of directors or other
administrator of the plan. For further information regarding the provisions of
the 1996 Stock Plan, see "-- Incentive Stock Plans."
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- - any breach of their duty of loyalty to the corporation or its stockholders;
- - acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
- - unlawful payments of dividends or unlawful stock repurchases or redemptions;
or
- - any transaction from which the director derived an improper personal benefit.
The limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in their capacity as an officer, director, employee or other
agent, regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors, executive
officers and controller, in addition to the indemnification provided for in our
bylaws. These agreements, among other things, provide for indemnification of our
directors, executive officers and controller for judgments, fines, settlement
amounts and certain expenses, including attorneys' fees incurred by the
director, executive officer or controller in any action or proceeding, including
any action by or in the right of Juniper Networks, arising out of the person's
services as a director, executive officer or controller of us, any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. A stockholder's investment in us may be adversely affected to the
extent we pay the costs of settlement or damage awards against our directors and
officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
52
<PAGE> 54
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the
compensation earned, awarded or paid for services rendered to us in all
capacities for the fiscal year ended December 31, 1998, by our Chief Executive
Officer and our four next most highly compensated executive officers who earned
more than $100,000 in salary and bonus during the fiscal year ended December 31,
1998, whom we refer to in this prospectus collectively as the "Named Executive
Officers":
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS COMPENSATION
- ---------------------------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Scott Kriens...................... $170,000 $ -- 1,245 $1,200(1)
President and Chief Executive
Officer
Steven Haley...................... 150,000 69,039 38,130 1,133(1)
Vice President of Worldwide
Sales and Service
Pradeep Sindhu.................... 140,225 25,000 1,785 1,004(1)
Chief Technical Officer
Peter Wexler...................... 150,000 -- 1,020 1,133(1)
Vice President of Engineering
Marcel Gani....................... 150,000 -- 915 1,133(1)
Chief Financial Officer
</TABLE>
- ---------------
(1) Consists of premiums paid by us for term life insurance.
53
<PAGE> 55
OPTION GRANTS IN LAST FISCAL YEAR. The following table shows certain
information regarding stock options granted to the Named Executive Officers
during the fiscal year ended December 31, 1998. All of these stock options were
granted under our 1996 Stock Plan and have a term of ten years, subject to
earlier termination in the event the optionees' services to us cease. See
"-- Incentive Stock Plan" for a description of material terms of these stock
options. See "Certain Transactions" for a description of the exercises of stock
options granted to the Named Executive Officers under the 1996 Stock Plan. In
accordance with the rules of the Securities and Exchange Commission, also shown
below is the potential realizable value over the term of the option (the period
from the grant date to the expiration date) based on assumed rates of stock
appreciation of 5% and 10%, compounded annually. These amounts are based on
certain assumed rates of appreciation and do not represent our estimate of our
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of the common stock.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS GRANTED APPRECIATION FOR
UNDERLYING TO EMPLOYEES EXERCISE OPTION TERM(3)
OPTIONS DURING PRICE EXPIRATION -----------------------
NAME GRANTED PERIOD(1) PER SHARE(2) DATE 5% 10%
- ---- ---------- ---------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Scott Kriens......... 1,245(4) 0.035% $1.67 8/16/08 $ 56,732 $ 91,568
Steven Haley......... 37,500(5) 1.076 0.83 5/13/08 1,740,298 2,789,570
630(4) 0.018 1.67 8/16/08 28,708 46,336
Pradeep Sindhu....... 1,785(6) 0.051 1.67 8/16/08 81,339 131,284
Peter Wexler......... 1,020(6) 0.029 1.67 8/16/08 46,479 75,020
Marcel Gani.......... 915(4) 0.026 1.67 8/16/08 41,695 67,297
</TABLE>
- ---------------
(1) Based on an aggregate of 3,512,480 options granted by us during the fiscal
year ended December 31, 1998, to our employees, directors and consultants,
including the Named Executive Officers.
(2) Options were granted at an exercise price equal to the fair market value of
our common stock, as determined in good faith by our board of directors.
(3) The potential realizable value is calculated based on the ten year term of
the option at its time of grant. It is calculated assuming that the assumed
initial public offering price of $29.00 per share appreciates at the
indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price.
(4) As of March 31, 1999, each of the options for Messrs. Kriens, Haley and Gani
listed in the table under this note had been exercised, but the shares
purchased are subject to repurchase by us at the original exercise price
upon the optionee's cessation of services prior to vesting of the shares,
which will be fully vested and no longer be subject to repurchase by us on
August 16, 1999. See "Employment Agreements" for a description of
accelerated vesting for Messrs. Kriens and Gani.
(5) As of March 31, 1999, the options for Mr. Haley listed in the table under
this note had not been exercised, but the shares are subject to early
exercise by Mr. Haley and are then subject to repurchase by us at the
original exercise price upon Mr. Haley's cessation of service prior to
vesting of such shares. The options for Mr. Haley under this note vested as
to 25% on May 13, 1999, and the balance vests in a series of monthly
installments over the next three years of service.
(6) As of March 31, 1999, none of the options for Messrs. Sindhu and Wexler
listed in the table under this note had been exercised, but the shares are
subject to early exercise by Messrs. Sindhu and Wexler and are then subject
to repurchase by us at the original exercise price upon optionee's cessation
of service prior to the vesting of such shares. These options shall fully
vest and no longer be subject to repurchase by us on August 16, 1999.
54
<PAGE> 56
AGGREGATE OPTION EXERCISES AND OPTION VALUES. The following table sets
forth information with respect to the Named Executive Officers concerning option
exercises for the fiscal year ended December 31, 1998, and exercisable and
unexercisable options held as of December 31, 1998:
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE DECEMBER 31, 1998 DECEMBER 31, 1998(2)
ACQUIRED ON REALIZED --------------------------- ---------------------------
NAME EXERCISE (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott Kriens......... 1,245(3) $2,075 -- -- $ -- $ --
Pradeep Sindhu....... -- -- 1,785(4) -- 48,784 --
Marcel Gani.......... 915(3) 1,525 -- -- -- --
Peter Wexler......... -- -- 1,020(4) -- 27,877 --
Steven Haley......... 630(3) 1,050 37,500(5) -- 1,056,375 --
</TABLE>
- ---------------
(1) Based on the fair market value of our stock on the date of grant, as
determined by our board of directors, minus the exercise price, multiplied
by the number of shares issued upon exercise of the option.
(2) The value of in-the-money options is based on an assumed initial public
offering price of $29.00 per share, the fair market value of our stock on
December 31, 1998, minus the per share exercise price, multiplied by the
number of shares underlying the option.
(3) As of March 31, 1999, each of the options for Messrs. Kriens, Haley and Gani
listed in the table under this note had been exercised, but the shares
purchased are subject to repurchase by us at the original exercise price
upon the optionee's cessation of services prior to vesting of the shares,
which shares shall be fully vested and no longer subject to repurchase by us
on August 16, 1999. See "Employment Agreements" for a description of
accelerated vesting for Messrs. Kriens and Gani.
(4) As of March 31, 1999, none of the options for Messrs. Sindhu and Wexler
listed in the table under this note had been exercised, but the shares are
subject to early exercise by Messrs. Sindhu and Wexler and are then subject
to repurchase by us at the original exercise price upon optionee's cessation
of service prior to the vesting of the shares. These options shall be fully
vested and no longer subject to repurchase by us on August 16, 1999.
(5) As of March 31, 1999, these options had not been exercised, but the shares
are subject to early exercise by Mr. Haley and are then subject to
repurchase by us at the original exercise price upon Mr. Haley's cessation
of service prior to vesting of such shares. As of May 13, 1999, 25% of these
options were vested and the balance vests in a series of monthly
installments over the following three years.
INCENTIVE STOCK PLANS
1996 STOCK PLAN, (AS AMENDED ON APRIL 19, 1999)
Our 1996 Stock Plan, as amended on April 19, 1999, provides for the grant
of incentive stock options to employees and nonstatutory stock options, or
incentive stock options and stock purchase rights to employees, directors and
consultants. A total of 19,187,500 shares of common stock have been reserved for
issuance under the 1996 Stock Plan. An annual increase will be added on the
first day of our fiscal year, beginning in 2000, equal to the lesser of:
- - 3,000,000 shares;
- - 5% of the outstanding shares on that date; or
- - a lesser amount determined by the board of directors.
55
<PAGE> 57
As of March 31, 1999, options to purchase 4,291,564 shares of common stock were
outstanding and 4,813,669 shares available for future grant (including the
3,000,000 shares reserved for issuance on April 19, 1999).
The compensation committee of the board of directors administers the 1996
Stock Plan and determines the terms of options granted, including the exercise
price, the number of shares subject to individual option awards and the vesting
period of the options. No employee may be granted options to purchase more than
1,000,000 shares in any fiscal year, except that in the initial year of
employment, the limit is 2,000,000 shares. The exercise price of incentive stock
option grants cannot be lower than 100% of the fair market value of the common
stock on the date of grant and, in the case of incentive stock options granted
to holders of more than 10% of our voting power, not less than 110% of the fair
market value. The term of an incentive stock option cannot exceed ten years, and
the term of an incentive stock option granted to a holder of more than 10% of
our voting power cannot exceed five years. Stock purchase rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
1996 Stock Plan and/or cash awards made outside of the 1996 Stock Plan. Options
and stock purchase rights granted under our 1996 Stock Plan generally become
exercisable at the rate of 1/4 of the total number of shares subject to the
option twelve months after the date of grant, and 1/48 of the shares subject to
the option each month thereafter. Options not assumed or substituted by a
successor corporation in the event we are acquired, will terminate on the
closing date of the acquisition. The board of directors may amend, modify or
terminate the 1996 Stock Plan at any time as long as such amendment,
modification or termination does not impair the rights of plan participants with
respect to outstanding options under the 1996 Stock Plan. Our 1996 Stock Plan
will terminate in June 2006, unless terminated earlier by the board of
directors.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan was adopted in April 1999, and will
be effective upon completion of this offering, subject to stockholder approval.
The 1999 Employee Stock Purchase Plan provides our employees with an opportunity
to purchase common stock of Juniper Networks through accumulated payroll
deductions. A total of 500,000 shares of common stock have been reserved for
issuance under the 1999 Employee Stock Purchase Plan, none of which had been
issued as of March 31, 1999. An annual increase will be added on the first day
of our fiscal year, beginning in 2000, equal to the lesser of:
- - 500,000 shares;
- - 1% of the outstanding shares on that date; or
- - a lesser amount determined by the board of directors.
The 1999 Employee Stock Purchase Plan will be administered by our board of
directors or by a committee appointed by the board of directors. The 1999
Employee Stock Purchase Plan will permit eligible employees to purchase common
stock through payroll deductions of up to 10% of an employee's base compensation
on each pay day during the offering period, provided that no employee may
purchase more than 1,000 shares in any twelve-month period, and in no event may
an employee purchase more than $25,000 worth of stock, determined at the fair
market value of the shares at the time the option is granted, in one calendar
year. Any employee employed by us on a given enrollment date is eligible to
participate during that offering period, provided they remain employed by us for
the duration of that offering period. Unless the board of directors or its
committee determines otherwise, the 1999 Employee Stock Purchase Plan will be
implemented in a series of offering periods, each approximately six months in
duration; provided, however, that the first offering period will be
approximately thirteen months in duration, ending on the last trading day on or
before July 31, 2000. Offering periods will begin on the first trading day on or
after August 1 and February 1 of each year and terminate on the last trading day
in the period six months later. However, the first offering period shall
commence on the date upon which the registration statement, of which this
56
<PAGE> 58
prospectus is a part, is declared effective by the Commission and terminate on
the last trading day in the period ending July 31, 2000. In the event we are
acquired, offering and purchase periods then in progress will be shortened and
all options automatically exercised. The price at which common stock will be
purchased under the 1999 Employee Stock Purchase Plan is equal to 85% of the
fair market value of the common stock on the first day of the applicable
offering period or the last day of the applicable purchase period, whichever is
lower. Employees may end their participation in the offering period at any time,
and participation automatically ends on termination of employment. The board of
directors may amend, modify or terminate the 1999 Employee Stock Purchase Plan
at any time as long as the amendment, modification or termination does not
impair vesting rights of plan participants. The 1999 Employee Stock Purchase
Plan will terminate on April 18, 2009, unless terminated earlier in accordance
with its provisions.
401(k) PLAN
In 1996, we adopted a Retirement Savings and Investment Plan, or 401(k)
plan, covering our full-time employees located in the United States. The 401(k)
plan is intended to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended, so that contributions to the 401(k) plan by employees, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) plan. Pursuant to the 401(k) plan, employees may elect to reduce
their current compensation by up to the lesser of 20% of their annual
compensation or the statutorily prescribed annual limit ($10,000 in 1998) and to
have the amount of the reduction contributed to the 401(k) plan. The 401(k) plan
does not permit additional matching contributions to the 401(k) plan by us on
behalf of participants in the 401(k) plan.
EMPLOYMENT AGREEMENTS
We entered into a severance agreement with Mr. Kriens on October 1, 1996,
which provides that he will be entitled to base compensation and benefit
payments for a period of three months, in the event that his employment is
terminated in connection with a change of control of Juniper Networks. Further,
Mr. Kriens' restricted stock would be released from any repurchase option and
his stock options would become vested and exercisable as to an additional amount
equal to that amount which would have vested and become exercisable had Mr.
Kriens remained employed for a period of 18 months following the change of
control. If his employment continues following a change of control, his stock
options will be vested and exercisable at a rate 1.5 times the rate otherwise
set forth in the stock option agreement for a period of twelve months following
the change of control. Under the employment agreement, Mr. Kriens is entitled to
receive three months' base compensation and benefits, regardless of whether
there is a change of control, in the event that his employment is involuntarily
terminated. Upon involuntary termination, and regardless of whether there has
been a change of control, Mr. Kriens' restricted stock and stock options would
become immediately vested and exercisable as to an additional amount equal to
the number of stock options which would have become vested and exercisable
during the three-month period following the involuntary termination had Mr.
Kriens remained employed with us.
We entered into an employment agreement with Mr. Gani in February 1997,
which provides that he will be entitled to receive base compensation and
benefits for a period of three months, in the event of involuntary termination.
In the event of a change of control at Juniper Networks, the vesting of Mr.
Gani's stock options will accelerate as to that number of options equal to the
number of shares that would vest over the next 30 months in accordance with our
standard vesting schedule or the balance of his unvested stock, whichever amount
is less.
57
<PAGE> 59
CERTAIN TRANSACTIONS
Since our inception in February 1996, there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which
we were or are to be a party in which the amount involved exceeds $60,000, and
in which any director, executive officer, holder of more than 5% of our common
stock or any member of the immediate family of any of these people had or will
have a direct or indirect material interest other than compensation agreements
and other arrangements, which are described where required in "Management," and
the transactions described below.
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
COMMON STOCK. On February 26, 1996, we issued 2,250,000 shares of common
stock at a price of $0.044 per share to Mr. Sindhu, one of our founders,
executive officers and directors.
On June 11, 1996, we issued the following shares of common stock at a price
of $0.044 per share to the following purchasers, among others:
<TABLE>
<CAPTION>
SHARES OF
PURCHASER COMMON STOCK
- --------- ------------
<S> <C>
Kleiner, Perkins, Caufield & Byers VII..................... 5,493,749
KPCB VII Founders Fund..................................... 600,001
KPCB Information Sciences Zaibatsu Fund II................. 156,249
</TABLE>
Kleiner, Perkins, Caufield & Byers VII, KPCB VII Founders Fund and KPCB
Information Sciences Zaibatsu Fund II are affiliated entities and together are
considered a holder of more than 5% of our common stock. Messrs. Khosla and
Hearst, two of our directors, are general partners of Kleiner, Perkins, Caufield
& Byers VII, KPCB VII Founders Fund and KPCB Information Sciences Zaibatsu Fund
II. Messrs. Khosla and Hearst disclaim beneficial ownership of the securities
held by such entities, except for their proportional interests in the entities.
SERIES A PREFERRED STOCK. On June 11, 1996, we sold 1,743,751 shares of
our Series A Preferred Stock for $1.00 per share. Each share of Series A
Preferred Stock is convertible into 2.25 shares of common stock. The purchasers
of the Series A Preferred Stock included, among others:
<TABLE>
<CAPTION>
AS CONVERTED
SHARES OF SHARES OF
PURCHASER SERIES A STOCK COMMON STOCK
- --------- -------------- ------------
<S> <C> <C>
Kleiner, Perkins, Caufield & Byers VII... 1,513,834 3,406,127
KPCB VII Founders Fund................... 165,333 371,999
KPCB Information Sciences Zaibatsu Fund
II..................................... 43,056 96,876
</TABLE>
SERIES B PREFERRED STOCK. On August 5, 1996, November 8, 1996, and
December 30, 1996, we sold a total of 3,333,334 shares, 484,683 shares, and
3,958 shares, respectively, of our Series B Preferred Stock for $2.40 per share.
In addition, on December 16, 1996, and June 18, 1997, we granted warrants
exercisable for 83,333 shares and 10,000 shares, respectively, of our Series B
Preferred Stock at an exercise price of $2.40. Each share of Series B Preferred
Stock is
58
<PAGE> 60
convertible into 2.25 shares of common stock. The purchasers of the Series B
Preferred Stock included, among others:
<TABLE>
<CAPTION>
AS CONVERTED
SHARES OF SHARES OF
PURCHASER SERIES B STOCK COMMON STOCK
- --------- -------------- ------------
<S> <C> <C>
Kleiner, Perkins, Caufield & Byers VII... 304,688 685,548
KPCB Information Sciences Zaibatsu Fund
II..................................... 7,812 17,577
New Enterprise Associates VI, Limited
Partnership............................ 1,214,583 2,732,812
NEA Presidents Fund, L.P. ............... 31,250 70,313
NEA Ventures 1996, L.P. ................. 4,167 9,376
Kriens 1996 Trust U/T/A
October 29, 1996....................... 364,683 820,537
Stensrud Family Trust U/T/A September 6,
1993................................... 120,000 270,000
</TABLE>
New Enterprise Associates VI, Limited Partnership and NEA Presidents Fund,
L.P. and NEA Ventures 1996, L.P. are affiliated entities and together are
considered a holder of more than 5% of our common stock. Mr. Kramlich, one of
our directors, is a partner of New Enterprise Associates VI, Limited Partnership
and NEA Presidents Fund, L.P. and NEA Ventures 1996, L.P. Mr. Kramlich disclaims
beneficial ownership of the securities held by these entities, except for his
proportional interest in the entities. Mr. Kriens, one of our directors and
executive officers and a holder of more than 5% of our common stock, is a
trustee of the Kriens 1996 Trust U/T/A October 29, 1996. Mr. Stensrud, one of
our directors, is a trustee of the Stensrud Family Trust U/T/A September 16,
1993.
SERIES C PREFERRED STOCK. On July 1, 1997, and September 30, 1997, we sold
4,479,286 shares and 671,892 shares, respectively, of our Series C Preferred
Stock for $8.93 per share. Each share of Series C Preferred Stock is convertible
into 2.25 shares of common stock. The sale of Series C Preferred Stock included,
among others, the sale of 783,875 shares of Series C Preferred Stock (1,763,718
shares as converted to common stock) to Ericsson Business Networks AB, which is
a holder of more than 5% of our common stock.
SERIES D AND D-1 PREFERRED STOCK. On March 16, 1999, we sold 500,000
shares of our Series D Preferred Stock and 2,580,000 shares of our Series D-1
Preferred Stock for $11.03 per share to Ericsson Business Networks AB.
Each share of Series D Preferred Stock is convertible into one share of
common stock. Each share of D-1 Preferred Stock is convertible into shares of
common stock according to a conversion ratio obtained by dividing $11.03 by the
then-effective Conversion Price, as defined in our certificate of incorporation.
At the closing of this offering, the effective Conversion Price of the Series
D-1 Preferred Stock shall be eighty-five percent (85%) of the initial public
offering price; and therefore, each share of Series D-1 Preferred Stock is
convertible into 0.44746 shares of common stock.
STOCK OPTION GRANTS TO CERTAIN DIRECTORS
On October 9, 1996, we granted to William Stensrud, one of our directors,
an option to purchase 45,000 shares of our common stock at $0.11 per share,
which vests over four years with 1/8 of the total number of shares vesting after
six months and the balance vesting in a series of monthly installments over the
next 42 months of service thereafter.
59
<PAGE> 61
INDEMNIFICATION
We have entered into indemnification agreements with each of our directors and
officers. These indemnification agreements will require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law.
All future transactions, including any loans from us to our officers, directors,
principal stockholders or affiliates, will be approved by a majority of the
board of directors, including a majority of the independent and disinterested
members of the board of directors or, if required by law, a majority of
disinterested stockholders, and will be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
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<PAGE> 62
PRINCIPAL AND SELLING 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 the sale of common stock offered in this prospectus:
- -each stockholder known by us to own beneficially more than 5% of our common
stock, as explained below;
- -each of the Named Executive Officers;
- -each of our directors;
- -all of our directors and executive officers as a group; and
- -all other selling stockholders.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after March
31, 1999, are deemed outstanding, while the shares are not deemed outstanding
for purposes of computing percentage ownership of any other person. Unless
otherwise indicated in the footnotes below, the persons and entities named in
the table have sole voting or investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
The number and percentage of shares beneficially owned are based on the
aggregate of (i) 47,032,869 shares of common stock outstanding as of March 31,
1999, assuming conversion of all outstanding shares of preferred stock into
common stock, and (ii) 2,000,000 shares of common stock issued in this offering.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED AFTER
BEFORE SALE UNDER THIS SALE UNDER THIS
PROSPECTUS PROSPECTUS(2)
----------------------- SHARES TO -------------------------
NUMBER PERCENTAGE BE SOLD(2) NUMBER PERCENTAGE
OFFICERS AND DIRECTORS(1): ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Scott Kriens(3).......................... 3,153,485 6.7% -- 3,153,485 6.4%
Steven Haley(4).......................... 375,630 * -- 375,630 *
Pradeep Sindhu(5)........................ 2,251,785 4.8 -- 2,251,785 4.6
Peter Wexler(6).......................... 676,020 1.4 -- 676,020 1.4
Marcel Gani(7)........................... 417,165 * -- 417,165 *
William Hearst(8)........................ 10,828,125 23.0 -- 10,828,125 22.1
c/o Kleiner, Perkins, Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Vinod Khosla(9).......................... 10,828,125 23.0 -- 10,828,125 22.1
c/o Kleiner, Perkins, Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
C. Richard Kramlich(10).................. 2,812,501 6.0 -- 2,812,501 5.7
c/o New Enterprise Associates
2490 Sand Hill Road
Menlo Park, CA 94025
William R. Stensrud(11).................. 315,000 * -- 315,000 *
c/o Enterprise Partners
7979 Ivanhoe Ave., Suite 550
La Jolla, CA 92037
All directors and executive officers as a
group (11 persons)(12)................. 21,585,156 45.9 -- 21,585,156 44.1
5% STOCKHOLDERS:
Kleiner, Perkins, Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025(13)............... 10,828,125 23.0 -- 10,828,125 22.1
</TABLE>
61
<PAGE> 63
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED AFTER
BEFORE SALE UNDER THIS SALE UNDER THIS
PROSPECTUS PROSPECTUS(2)
----------------------- SHARES TO -------------------------
NUMBER PERCENTAGE BE SOLD(2) NUMBER PERCENTAGE
OFFICERS AND DIRECTORS(1): ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
New Enterprise Associates
2490 Sand Hill Road
Menlo Park, CA 94025(14)............... 2,812,501 6.0 -- 2,812,501 5.7
Ericsson Business Networks AB
S-131 89 Stockholm
Sweden(15)............................. 3,418,165 7.3 -- 3,418,165 6.97
SELLING STOCKHOLDERS:
Crosspoint Venture Partners 1996
2925 Woodside Road
Woodside, CA 94062(16)................. 1,658,210 3.5 1,036,281 621,929 1.3
Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario, L6T 5P6
Canada................................. 1,763,719 3.7 1,763,719 -- --
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Unless otherwise indicated, the address of each listed stockholder is c/o
Juniper Networks, Inc., 385 Ravendale Drive, Mountain View, California
94043.
(2) Assumes no exercise of underwriters' over-allotment option. Percentage
ownership figures after the offering do not include shares that may be
purchased by each person in the offering.
(3) Includes 3,152,240 shares held in the name of the Kriens 1996 Trust of
which Scott Kriens and his spouse are trustees. Includes 974,072 shares
subject to our right of repurchase, as of March 31, 1999, which lapses over
time.
(4) Includes 20,000 shares held in the name of the Haley Family Foundation
Trust and 30,000 shares held in the name of trusts for Mr. Haley's
children. Includes 204,537 shares subject to our right of repurchase, as of
March 31, 1999, which lapses over time and an option exercisable for 37,500
shares of which all 37,500 shares are exercisable within 60 days of March
31, 1999.
(5) Includes 517,410 shares subject to our right of repurchase, as of March 31,
1999, which lapses over time. Includes 60,000 shares gifted to Mr. Sindhu's
children pursuant to the California Uniform Transfer to Minors Act.
(6) Includes 324,458 shares subject to our right of repurchase, as of March 31,
1999, which lapses over time and an option exercisable for 1,020 shares of
which all 1,020 shares are exercisable within 60 days of March 31, 1999.
(7) Includes 416,250 shares held in the name of the Gani 1995 Trust dated
December 8, 1995, of which Mr. Gani and his spouse are trustees. Includes
243,494 shares subject to our right of repurchase, as of March 31, 1999,
which lapses over time.
(8) Comprised of 10,828,125 shares held by entities affiliated with Kleiner,
Perkins, Caufield & Byers. Mr. Hearst is a general partner of Kleiner,
Perkins, Caufield & Byers and is a director of Juniper. Mr. Hearst
disclaims beneficial ownership of shares held by those entities, except to
the extent of his proportional interest arising from his partnership
interest in Kleiner, Perkins, Caufield & Byers.
(9) Comprised of 10,828,125 shares held by entities affiliated with Kleiner,
Perkins, Caufield & Byers. Mr. Khosla is a general partner of Kleiner,
Perkins, Caufield & Byers and is a director of Juniper. Mr. Khosla
disclaims beneficial ownership of shares held by those entities, except to
the extent of his proportional interest arising from his partnership
interest in Kleiner, Perkins, Caufield & Byers.
(10) Comprised of 2,812,500 shares held by entities affiliated with New
Enterprise Associates. Mr. Kramlich is a general partner of New Enterprise
Associates and is a director of Juniper. Mr. Kramlich disclaims beneficial
ownership of shares held by those entities, except to the extent of his
proportional interest in New Enterprise Associates.
(11) Includes 270,000 shares held in the name of the Stensrud Family Trust U/T/A
September 16, 1993, as community property. Includes 17,813 shares subject
to our right of repurchase, as of March 31, 1999, which lapses over time.
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<PAGE> 64
(12) Includes all shares referenced in notes 3 through 11 above, except that the
shares beneficially owned by Messrs. Hearst and Khosla are counted only
once in this calculation. Includes 755,445 shares beneficially owned by two
other executive officers, 39,195 of which are subject to options
exercisable within 60 days of March 31, 1999.
(13) Includes (i) 9,585,423 shares held by Kleiner, Perkins, Caufield & Byers
VII, (ii) 972,000 shares held by KPCB VII Founders Fund and (iii) 270,702
shares held by KPCB Information Sciences Zaibatsu Fund II.
(14) Includes (i) 2,732,812 shares held by New Enterprise Associates VI, Limited
Partnership, (ii) 70,313 shares held by NEA Presidents Fund, L.P., and
(iii) 9,376 shares held by NEA Ventures 1996, L.P.
(15) Includes 1,154,447 shares of common stock issuable upon conversion of
2,580,000 Series D-1 Preferred Stock at an assumed initial public offering
price of $29.00 per share.
(16) Crosspoint Venture Partners 1996 has granted the underwriters the option to
purchase their remaining 621,929 shares of stock to cover overallotments,
if any.
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<PAGE> 65
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 200,000,000 shares of common stock, $0.00001
par value, and 10,000,000 shares of undesignated Preferred Stock, $0.00001 par
value. The following description of our capital stock does not purport to be
complete and is subject to and qualified by our certificate of incorporation and
bylaws, which are included as exhibits to the Registration Statement of which
this prospectus forms a part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of March 31, 1999, there were 47,032,869 shares of common stock
outstanding, as adjusted to reflect the conversion of all outstanding shares of
preferred stock into common stock, which were held of record by approximately
159 stockholders.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of Juniper Networks, the holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of preferred stock, if any, then outstanding. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon the closing of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. We cannot state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things, restricting dividends on the common stock,
diluting the voting power of the common stock, impairing the liquidation rights
of the common stock and delaying or preventing a change in control of Juniper
Networks without further action by the stockholders. We have no present plans to
issue any shares of preferred stock.
WARRANTS
At March 31, 1999, there were warrants outstanding to purchase a total of
93,333 shares of Series B Preferred Stock and 23,516 shares of Series C
Preferred Stock. Warrants to purchase 83,333 shares of Series B Preferred Stock
and 23,516 shares of Series C Preferred Stock will remain outstanding after the
completion of this offering and will become exercisable for an aggregate of
240,410 shares of common stock. These will expire on December 15, 2003, unless
earlier exercised.
REGISTRATION RIGHTS
The holders of 32,055,198 shares of common stock, as converted, and the
holders of warrants to purchase 262,910 shares of common stock or their
permitted transferees are entitled to certain rights with respect to
registration of the shares under the Securities Act at any time after 180 days
following the closing of this offering. Under the terms of the agreements
between us and the holders of the registrable securities, by written consent of
at least 40% of the registrable securities then outstanding, the holders may
require on one occasion that we, at our expense, file a registration statement
under the Securities Act, with respect to the registrable securities, provided
that at least 20% of the registrable securities would be included in the
proposed
64
<PAGE> 66
registration or the anticipated public offering price of the proposed
registration would be at least $10,000,000. In addition, holders of registrable
securities may, at any time twelve months after the closing of this offering and
at their expense, require on three separate occasions that we register their
shares for public resale on Form S-3 or similar short-form registration,
provided that we are eligible to use Form S-3 or similar short-form
registration, and provided further that the value of the securities to be
registered is at least $5,000,000. Furthermore, in the event we elect to
register any of our shares of common stock after this offering for purposes of
effecting any public offering, the holders of registrable securities are
entitled, at our expense, to include their shares of common stock in the
registration, subject to the right of the underwriter to reduce the number of
shares proposed to be registered in view of market conditions.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN
CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation
and bylaws could make it more difficult to acquire us by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions, summarized below, are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of us to first negotiate with us.
We believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure us outweigh the disadvantages of discouraging takeover or
acquisition proposals because, among other things, negotiation of these
proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of interested
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Our certificate of incorporation and bylaws require that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of the stockholders and may not be effected by
a consent in writing. In addition, special meetings of our stockholders may be
called only by the board of directors or certain of our officers. Our
certificate of incorporation and bylaws also provide that, beginning upon the
closing of this offering, our board of directors will be divided into three
classes, with each class serving staggered three-year terms, and that certain
amendments of the certificate of incorporation and of the bylaws require the
approval of holders of at least 66 2/3% of the voting power of all outstanding
stock. These provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of Juniper Networks.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Norwest Bank
Minnesota, N.A.
HOLDING COMPANY STRUCTURE
On May 13, 1999 our stockholders approved a proposal to reorganize into a
holding company structure in which we would
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<PAGE> 67
become a wholly-owned subsidiary of a new corporation which would be owned by
our existing stockholders. Our board of directors subsequently decided to
abandon the formation of this holding company structure. Although we currently
do not have any plans to implement a holding company structure, we may at any
time decide to do so. In addition, as permitted by Delaware law, we may
implement this structure without submitting it to our stockholders for approval.
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<PAGE> 68
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, we will have outstanding 49,032,881
shares of common stock, assuming the issuance of 2,000,000 shares of common
stock offered by us and no exercise of options after March 31, 1999, and
assuming no exercise of the underwriters' over-allotment option. All of the
4,800,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act; provided, however,
that if shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act, their sales of shares would be subject to certain
limitations and restrictions that are described below.
The remaining 49,032,869 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. Of these shares, all 49,032,869
shares will be subject to "lock-up" agreements described below on the effective
date of this offering. On the effective date of this offering, shares not
subject to the lock-up agreements described below will not be eligible for sale
pursuant to Rule 144(k). All of the directors and officers as well as
stockholders collectively holding more than 99% of the outstanding common stock
have entered into lock-up agreements with the underwriters that provide that the
shares set forth in the table below will become eligible for sale on the dates
set forth in the table below, 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>
APPROXIMATE
SHARES ELIGIBLE
RELEVANT DATES FOR FUTURE SALE COMMENT
- -------------- --------------- ------------------------------------------
<S> <C> <C>
On effective date(1)................. 4,800,000 Shares sold in this offering.
90 days after effective date(2)...... 0 Shares saleable under Rules 144 and 701.
2 days after September 30, 1999
quarterly results are
released(3)........................ 6,268,238 15% of shares subject to lock-up released;
shares saleable under Rules 144 and 701.
30 days after September 30, 1999
quarterly results are released..... 10,433,476 Additional 25% of shares subject to
lock-up released; shares saleable under
Rules 144 and 701.
180 days after effective date........ 22,677,779 All shares subject to lock-up released;
shares saleable under Rules 144 and 701.
</TABLE>
- ---------------
(1) Assumes no exercise of underwriters' over-allotment option.
(2) Assumes effective date of June 24, 1999.
(3) Assumes quarterly results are released on October 25, 1999.
As of March 31, 1999, there were a total of 4,291,564 shares of common
stock subject to outstanding options under our 1996 Stock Plan, 137,026 of which
were vested, and all of which are subject to lock-up agreements. Immediately
after the completion of the 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 1996 Stock Plan, as
amended, and 1999 Employee Stock Purchase Plan. On the
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<PAGE> 69
date 180 days after the effective date of the
offering, a total of 1,083,152 shares of common stock subject to outstanding
options will be vested. After the effective dates of the registration statements
on Form S-8, shares purchased upon exercise of options granted pursuant to the
1996 Stock Plan, as amended, and 1999 Employee Stock Purchase Plan generally
would be available for resale in the public market.
Our officers, directors and stockholders have agreed not to sell or
otherwise dispose of any of their shares for the time periods described above.
Goldman, Sachs & Co., 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 our
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:
- - 1% of the number of shares of common stock then outstanding, which will equal
approximately 490,328 shares immediately after this offering; or
- - 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 us.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" 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 of our employees, directors, officers,
consultants or advisors who purchases shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this 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.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer 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.
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<PAGE> 70
WHERE YOU MAY FIND ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the shares of common stock in
this offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to Juniper Networks
and our common stock, we refer you to the registration statement and the
exhibits and schedule that were filed with the registration statement.
Statements contained in this prospectus about the contents of any contract or
any other document that is filed as an exhibit to the registration statement are
not necessarily complete, and we refer you to the full text of the contract or
other document filed as an exhibit to the registration statement. A copy of the
registration statement and the exhibits and schedule that were filed with the
registration statement may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of
the registration statement may be obtained from the SEC upon payment of the
prescribed fee. The Securities and Exchange Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http://www.sec.gov.
Upon completion of this offering, Juniper Networks will become subject to
the information and periodic reporting requirements of the Securities Exchange
Act of 1934, and, in accordance with the requirements of the Securities Exchange
Act of 1934, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. These periodic reports, proxy
statements and other information will be available for inspection and copying at
the regional offices, public reference facilities and web site of the Securities
and Exchange Commission referred to above.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the underwriters by
Brobeck Phleger & Harrison LLP, San Francisco, California. As of the date of
this prospectus, WS Investment Company 96A and WS Investment Co. 96B, each an
investment partnership composed of certain current and former members of and
persons associated with Wilson Sonsini Goodrich & Rosati, Professional
Corporation, in addition to certain current individual members of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, beneficially own an aggregate of
159,374 of Juniper Networks' common stock.
EXPERTS
Ernst & Young, LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, for the period from February
2, 1996 (inception) to December 31, 1996, and for each of the two years in the
period ended December 31, 1998, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given upon the authority of
such firm as experts in accounting and auditing.
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(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 72
JUNIPER NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Stockholders' Equity.............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 73
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Juniper Networks, Inc.
We have audited the accompanying consolidated balance sheets of Juniper
Networks, Inc. as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from inception (February 2, 1996) to December 31, 1996 and for each of the two
years in the period ended December 31, 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 consolidated financial position of Juniper
Networks, Inc. at December 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for the period from inception (February 2,
1996) to December 31, 1996 and for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
February 26, 1999
F-2
<PAGE> 74
JUNIPER NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT STATED VALUE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, MARCH 31, EQUITY AT
-------------------- --------- MARCH 31,
1997 1998 1999 1999
---- ---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 30,442 $ 20,098 $ 48,947
Short-term investments................................... 15,785 -- 502
Accounts receivable...................................... -- 8,056 8,618
Prepaid expenses and other current assets................ 543 680 845
-------- -------- --------
Total current assets....................................... 46,770 28,834 58,912
Property, equipment and purchased software, net............ 3,315 7,702 8,078
Other assets............................................... 125 135 135
-------- -------- --------
Total assets............................................... $ 50,210 $ 36,671 $ 67,125
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 661 $ 4,745 $ 5,378
Accrued warranty liability............................... -- 684 1,514
Accrued milestone payment................................ 423 -- --
Accrued compensation and related liabilities............. 245 1,114 1,223
Deferred revenue......................................... -- 5,639 7,858
Current obligations under capital leases................. 750 2,220 1,183
-------- -------- --------
Total current liabilities.................................. 2,079 14,402 17,156
Other long-term liabilities................................ -- 43 48
Long-term obligations under capital leases................. 2,083 5,161 2,786
Commitments
Stockholders' equity:
Convertible preferred stock, $0.00001 stated value,
issuable in series: 10,859 shares authorized at
December 31, 1997 and 1998, 14,039 shares authorized at
March 31, 1999 (10,000 shares pro forma); 10,717 shares
issued and outstanding at December 31, 1997 and 1998,
and 13,797 shares issued and outstanding at March 31,
1999 (none pro forma); aggregate liquidation preference
of $90,889 at March 31, 1999 (none pro forma).......... -- -- $ --
Common stock, $0.00001 stated value, 67,500 shares
authorized at December 31, 1998, and 71,000 shares
authorized at March 31, 1999 (200,000 pro forma);
19,121, 20,577, and 21,265 issued and outstanding at
December 31, 1997 and 1998 and March 31, 1999 (47,033
pro forma)............................................. -- -- -- --
Additional paid-in capital............................... 58,210 65,351 102,305 102,305
Deferred stock compensation.............................. -- (5,153) (5,362) (5,362)
Accumulated deficit...................................... (12,162) (43,133) (49,808) (49,808)
-------- -------- -------- --------
Stockholders' equity....................................... 46,048 17,065 47,135 $ 47,135
-------- -------- -------- ========
$ 50,210 $ 36,671 $ 67,125
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 75
JUNIPER NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(FEBRUARY 2, YEAR ENDED ENDED
1996) TO DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------- ------------------
1996 1997 1998 1998 1999
------------ ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................. $ -- $ -- $ 3,807 $ -- $10,044
Cost of revenues............. -- -- 4,416 39 6,347
------- -------- -------- ------- -------
Gross profit (loss).......... -- -- (609) (39) 3,697
Operating expenses:
Research and development... 1,850 9,406 23,987 3,497 6,181
Sales and marketing........ -- 1,149 4,216 519 2,603
General and
administrative.......... 89 1,043 2,223 335 776
Amortization of deferred
stock compensation...... -- -- 1,235 21 904
------- -------- -------- ------- -------
Total operating
expenses......... 1,939 11,598 31,661 4,372 10,464
------- -------- -------- ------- -------
Operating loss............... (1,939) (11,598) (32,270) (4,411) (6,767)
Interest and other expense... (1) (325) (657) (104) (231)
Interest income.............. 141 1,560 1,956 610 323
------- -------- -------- ------- -------
Net loss..................... $(1,799) $(10,363) $(30,971) $(3,905) $(6,675)
======= ======== ======== ======= =======
Basic and diluted net loss
per share.................. $ (0.46) $ (1.21) $ (2.39) $ (0.36) $ (0.45)
======= ======== ======== ======= =======
Shares used in computing
basic and diluted net loss
per share.................. 3,958 8,591 12,957 10,872 14,990
======= ======== ======== ======= =======
Pro forma basic and diluted
net loss per share
(unaudited)................ $ (0.84) $ (0.17)
======== =======
Shares used in computing pro
forma basic and diluted net
loss per share
(unaudited)................ 37,070 39,324
======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 76
JUNIPER NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- --------------- PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
------ ------ ------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders...................... -- $-- 4,050 $-- $ 9 $ -- $ -- $ 9
Issuance of Series A preferred
stock to investors, net of
issuance costs................ 1,744 -- -- -- 1,738 -- -- 1,738
Issuance of common stock........ -- -- 11,844 -- 603 -- -- 603
Issuance of Series B preferred
stock to investors, net of
issuance costs................ 3,818 -- -- -- 9,157 -- -- 9,157
Issuance of Series B preferred
stock in exchange for
consulting services........... 4 -- -- -- 9 -- -- 9
Issuance of warrants to purchase
Series B preferred stock...... -- -- -- -- 11 -- -- 11
Net loss........................ -- -- -- -- -- -- (1,799) (1,799)
------ -- ------ -- -------- ------- -------- --------
Balance at December 31, 1996...... 5,566 -- 15,894 -- 11,527 -- (1,799) 9,728
Issuance of warrants to purchase
Series B preferred stock...... -- -- -- -- 1 -- -- 1
Issuance of Series C preferred
stock to investors............ 5,151 -- -- -- 45,953 -- -- 45,953
Issuance of warrants to purchase
Series C preferred stock...... -- -- -- -- 3 -- -- 3
Issuance of common stock, net of
repurchases................... -- -- 3,227 -- 375 -- -- 375
Compensation expense related to
stock options................. -- -- -- -- 351 -- -- 351
Net loss........................ -- -- -- -- -- -- (10,363) (10,363)
------ -- ------ -- -------- ------- -------- --------
Balance at December 31, 1997...... 10,717 -- 19,121 -- 58,210 -- (12,162) 46,048
Exercise of stock options
by employees, net of
repurchases................... -- -- 1,456 -- 753 -- -- 753
Deferred stock compensation..... -- -- -- -- 6,388 (6,388) -- --
Amortization of deferred stock
compensation.................. -- -- -- -- -- 1,235 -- 1,235
Net loss........................ -- -- -- -- -- -- (30,971) (30,971)
------ -- ------ -- -------- ------- -------- --------
Balance at December 31, 1998...... 10,717 -- 20,577 -- 65,351 (5,153) (43,133) 17,065
Issuance of Series D and D-1
preferred stock to investors
(unaudited)................... 3,080 -- -- -- 33,948 -- -- 33,948
Exercise of stock options by
employees (unaudited)......... -- -- 558 -- 656 -- -- 656
Issuance of common stock to
employees (unaudited)......... -- -- 130 -- 1,237 -- -- 1,237
Deferred stock compensation
(unaudited)................... -- -- -- -- 1,113 (1,113) -- --
Amortization of deferred stock
compensation (unaudited)...... -- -- -- -- -- 904 -- 904
Net loss (unaudited)............ -- -- -- -- -- -- (6,675) (6,675)
------ -- ------ -- -------- ------- -------- --------
Balance at March 31, 1999
(unaudited)..................... 13,797 $-- 21,265 $-- $102,305 $(5,362) $(49,808) $ 47,135
====== == ====== == ======== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 77
JUNIPER NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(FEBRUARY 2, YEAR ENDED ENDED
1996) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------- -----------------
1996 1997 1998 1998 1999
------------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................. $(1,799) $(10,363) $(30,971) $(3,905) $(6,675)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and lease
amortization..................... 47 712 2,171 339 1,051
Amortization of prepaid maintenance
contracts........................ -- 238 367 9 133
Amortization of deferred stock
compensation..................... -- 351 1,235 21 904
Loss on disposal of property,
equipment, and purchased
software......................... -- 59 -- -- --
Issuance of stock for consulting
services......................... 18 21 30 -- --
Issuance of warrants in connection
with certain leasing
arrangements..................... 28 14 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable.............. -- -- (8,056) -- (562)
Prepaid expenses and other
current assets................. (82) (699) (504) (258) (298)
Other assets..................... (49) (104) (10) 125 --
Accounts payable and other
current
liabilities.................... 172 489 4,084 306 633
Accrued warranty liability....... -- -- 684 -- 830
Accrued milestone payment........ -- 423 (423) (423) --
Accrued compensation and related
liabilities.................... -- 245 869 86 109
Deferred revenue................. -- -- 5,639 -- 2,219
Other long-term liabilities...... -- -- 43 18 5
------- -------- -------- ------- -------
Net cash used in operating
activities............................ (1,665) (8,614) (24,842) (3,682) (1,651)
INVESTING ACTIVITIES:
Purchases of property, equipment, and
purchased software.................. (864) (3,110) (6,531) (1,011) (1,422)
Purchases of short-term investments... (5,870) (20,715) (3,501) (118) (502)
Maturities of short-term
investments......................... -- 10,800 19,286 6,841 --
------- -------- -------- ------- -------
Net cash provided by (used in)
investing activities................ (6,734) (13,025) 9,254 5,712 (1,924)
</TABLE>
F-6
<PAGE> 78
JUNIPER NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(FEBRUARY 2, YEAR ENDED ENDED
1996) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------- -----------------
1996 1997 1998 1998 1999
------------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from sale leaseback
liabilities......................... 535 2,603 5,705 863 --
Payments on lease obligations......... (25) (439) (1,157) (258) (3,412)
Proceeds from issuance of preferred
stock............................... 10,895 45,953 -- -- 33,948
Issuance of common stock.............. 592 396 699 -- 1,888
Repurchase of common stock............ -- (30) (3) (3) --
------- -------- -------- ------- -------
Net cash provided by financing
activities.......................... 11,997 48,483 5,244 602 32,424
------- -------- -------- ------- -------
Net increase (decrease) in cash and
cash equivalents.................... 3,598 26,844 (10,344) 2,632 28,849
Cash and cash equivalents at beginning
of period........................... -- 3,598 30,442 30,442 20,098
------- -------- -------- ------- -------
Cash and cash equivalents at end of
period.............................. $ 3,598 $ 30,442 $ 20,098 $33,074 $48,947
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest................ $ -- $ 210 $ 592 $ 96 $ 138
======= ======== ======== ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Acquisition of property, equipment and
purchased software under capital
lease............................... $ 535 $ 2,243 $ 5,692 $ 863 $ --
======= ======== ======== ======= =======
Deferred stock compensation........... $ -- $ -- $ 6,388 $ -- $ 1,113
======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE> 79
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Juniper Networks, Inc. ("Juniper Networks") was incorporated in the state
of California on February 2, 1996. Juniper Networks was reincorporated in the
state of Delaware on March 15, 1998. Juniper Networks was established for the
purpose of providing Internet infrastructure solutions to Internet service
providers and other telecommunication service providers. Juniper Networks
develops next generation Internet backbone routers.
From inception, in February 1996, through September 1998, Juniper
Networks' operating activities were primarily devoted to increasing research and
development capabilities, designing ASICs, developing software, developing and
testing the M40 and other products which are currently in development, staffing
the administrative, marketing and sales organizations and establishing strategic
relationships. Accordingly, Juniper Networks was classified as a development
stage company through that date. Juniper Networks commenced product shipments in
October 1998 and therefore emerged from the development stage.
INTERIM FINANCIAL INFORMATION
The financial information at March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited but includes all adjustments, consisting
only of normal recurring adjustments, that Juniper Networks considers necessary
for a fair presentation of its financial position, operating results, and cash
flows for the interim date and periods presented. Results for the three-month
period ended March 31, 1999 are not necessarily indicative of results for the
entire fiscal year or future periods.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Juniper
Networks and its wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Juniper Networks considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of commercial paper and money market accounts.
Juniper classifies, at the date of acquisition, its marketable securities
into available-for-sale categories in accordance with the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Currently, Juniper classifies its securities as available-for-sale
which are reported at fair market value with the related unrealized gains and
losses included in stockholders' equity. Unrealized gains and losses were not
material for all periods presented. Realized gains and losses and declines in
value of securities judged to be other than temporary are included in interest
income. Interest and dividends on all securities are included in interest
income.
CONCENTRATIONS
Financial instruments that potentially subject Juniper Networks to
concentrations of
F-8
<PAGE> 80
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
credit risk consist principally of investments in debt securities and trade
receivables. Juniper Networks is exposed to credit risks in the event of default
by the financial institutions or issuers of investments to the extent recorded
on the balance sheet. Juniper Networks generally does not require collateral.
For the year ended December 31, 1998, two customers, A and B, accounted for 78%
and 22% of Juniper Networks' net revenues. For the three months ended March 31,
1999, three customers, A, C, and D, accounted for 40%, 15% and 16% of Juniper
Networks' net revenues.
Juniper Networks receives certain custom semiconductor chips from a sole
supplier. Additionally, Juniper Networks relies on one hardware manufacturer for
the production of its product. The inability of the supplier or manufacturer to
fulfill supply requirements of Juniper Networks could negatively impact future
results.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of Juniper Networks' short-term investments is based on
quoted market prices. The carrying value of those investments approximates their
fair value.
The fair value of short-term and long-term capital lease obligations is
estimated based on current interest rates available to Juniper Networks for debt
instruments with similar terms, degrees of risk, and remaining maturities. The
carrying values of these obligations approximate their respective fair values.
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Property, equipment and purchased software, including equipment leased
under capital leases, are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided on a straight-line
basis over the lesser of the estimated useful life, generally three to five
years, or the lease term of the respective assets.
REVENUE RECOGNITION
Juniper Networks generally recognizes product revenue at the time of
shipment, assuming that collectibility is probable, unless Juniper Networks has
future obligations for installation or has to obtain customer acceptance in
which case revenue is deferred until these obligations are met. Revenue from
service obligations is deferred and recognized on a straight-line basis over the
contractual period. Amounts billed in excess of revenue recognized are included
as deferred revenue in the accompanying consolidated balance sheets.
WARRANTY RESERVES
Juniper Networks' product generally carries a one-year warranty that
includes factory repair services as needed for replacement of parts. Estimated
expenses for warranty obligations are accrued as revenue is recognized.
RESEARCH AND DEVELOPMENT
Costs to develop Juniper Networks' products are expensed as incurred in
accordance with the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 2, "Accounting for Research and Development
Costs," which establishes accounting and reporting standards for research and
development.
COMPREHENSIVE INCOME
Effective January 1, 1998, Juniper Networks adopted Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FAS 130). Juniper Networks has no components
of other comprehensive income and accordingly the comprehensive loss is the same
as net loss for all periods presented.
STOCK-BASED COMPENSATION
Juniper Networks accounts for its stock options and equity awards in
accordance with
F-9
<PAGE> 81
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the provisions of the Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and has elected to follow the "disclosure only"
alternative prescribed by Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123).
NET LOSS PER SHARE
Basic net loss per share and diluted net loss per share are presented in
conformity with Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (FAS 128), for all periods
presented. Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued or granted
for nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if they had been outstanding for all periods presented.
To date, Juniper Networks has not had any issuances or grants for nominal
consideration.
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock outstanding
during the period, less the weighted average number of shares of common stock
issued to founders, investors and employees that are subject to repurchase (see
Notes 5 and 6). Basic and diluted pro forma net loss per share, as presented in
the consolidated statements of operations, has been computed as described above
and also gives effect, under Securities and Exchange Commission guidance, to the
conversion of the convertible preferred stock (using the if-converted method)
from the original date of issuance, using an assumed initial public offering
price of $29.00 per share to calculate the conversion ratio for Series D1
convertible preferred stock.
F-10
<PAGE> 82
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(FEBRUARY 2, 1996) YEAR ENDED ENDED
TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------- -----------------
1996 1997 1998 1998 1999
------------------ -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss.......................... $(1,799) $(10,363) $(30,971) $(3,905) $(6,675)
======= ======== ======== ======= =======
Basic and diluted:
Weighted-average shares of
common stock outstanding..... 11,030 18,623 19,691 19,096 20,921
Less: weighted-average shares
subject to repurchase........ (7,072) (10,032) (6,734) (8,224) (5,931)
------- -------- -------- ------- -------
Weighted-average shares used in
computing basic and diluted
net loss per share........... 3,958 8,591 12,957 10,872 14,990
======= ======== ======== ======= =======
Basic and diluted net loss per
share........................ $ (0.46) $ (1.21) $ (2.39) $ (0.36) $ (0.45)
======= ======== ======== ======= =======
Pro forma:
Net loss........................ $(30,971) $(6,675)
======== =======
Shares used above............... 12,957 14,990
Pro forma adjustment to reflect
weighted effect of assumed
conversion of convertible
preferred stock.............. 24,113 24,334
-------- -------
Shares used in computing pro
forma basic and diluted net
loss per common share
(unaudited).................. 37,070 39,324
======== =======
Pro forma basic and diluted net
loss per common share
(unaudited).................. $ (0.84) $ (0.17)
======== =======
</TABLE>
Juniper Networks has excluded all convertible preferred stock, warrants
for convertible preferred stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted loss per share because all such
securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of diluted net loss per share were
10,810,000, 28,937,000, 33,923,000, 34,483,000 and 34,222,000 for the period
from inception (February 2, 1996) through December 31, 1996 for the two years
ended December 31, 1997 and 1998 and for the three months ended March 31, 1998
and 1999, respectively.
F-11
<PAGE> 83
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
If the offering contemplated by this prospectus is consummated, all of the
convertible preferred stock outstanding will automatically be converted into
common stock. Unaudited pro forma stockholders' equity at March 31, 1999, as
adjusted for the assumed conversion of convertible preferred stock based on the
shares of convertible preferred stock outstanding at March 31, 1999 at an
assumed initial public offering price of $29 per share, is disclosed on the
consolidated balance sheet. Series A, B and C preferred stock convert to common
stock at a conversion rate of 2.25. Series D preferred stock converts to common
stock at a conversion rate of 1. Series D-1 converts to common stock at a rate
of 0.44746, assuming an initial offering price of $29 per share.
SEGMENT INFORMATION
Effective January 1, 1998, Juniper Networks adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information" (FAS
131). FAS 131 changes the way companies report financial and descriptive
information about reportable operating segments in annual financial statements
and interim financial reports issued to stockholders. Juniper Networks operates
solely in one segment, the development and marketing of Internet infrastructure
equipment, and therefore there is no impact to Juniper Networks' consolidated
financial statements due to the adoption of FAS 131.
RECENT ACCOUNTING PRONOUNCEMENTS
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). SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. Juniper Networks adopted SOP 98-1 in January
1999, with no material impact on its consolidated financial position, results of
operations, or cash flows.
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). SOP 98-5, which is effective for fiscal years beginning
after December 31, 1998, provides guidance on the financial reporting of
start-up costs and organization costs. It requires the costs of start-up
activities and organization costs to be expensed as incurred. Juniper Networks
adopted SOP 98-5 in January 1999, with no significant impact on consolidated
operating results, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), which will be effective for the fiscal year
ended December 31, 2000. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. Juniper Networks has
not evaluated the impact of FAS 133, however, it believes the adoption of FAS
133 will not have a material effect on the financial position, consolidated
results of operations, or cash flows as Juniper Networks has not entered into
any derivative contracts.
F-12
<PAGE> 84
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CASH EQUIVALENTS AND SHORT-TERM
INVESTMENTS
Cash equivalents and short-term investments consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C>
Money market funds................................... $ 14,351 $ 3,037 $ 48,814
Commercial paper..................................... 12,536 16,520 502
Government securities................................ 9,205 -- --
Corporate debt securities............................ 7,061 -- --
Certificates of deposit.............................. 3,066 -- --
-------- -------- --------
Total available-for-sale investments................. 46,219 19,557 49,316
Less amounts classified as cash equivalents.......... (30,434) (19,557) (48,814)
-------- -------- --------
Total investments.................................... $ 15,785 $ -- $ 502
======== ======== ========
</TABLE>
3. PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Property, equipment and purchased software consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
---- ----
<S> <C> <C>
Computers and equipment..................................... $2,242 $ 7,435
Purchased software.......................................... 1,394 2,540
Furniture and fixtures...................................... 424 594
------ -------
Total....................................................... 4,060 10,569
Less accumulated depreciation and lease amortization........ (745) (2,867)
------ -------
Property, equipment and purchased software, net............. $3,315 $ 7,702
====== =======
</TABLE>
4. CAPITAL LEASE OBLIGATIONS
Juniper Networks enters into various capital leases, including sale and
leaseback transactions, to finance purchases of property, equipment and
software. As of December 31, 1997 and 1998 and March 31, 1999, under various
lease lines of credit, Juniper Networks had $4,861,000, $1,891,000, and
$5,000,000 available for future purchases of property, equipment and software
that expire through June 30, 1999. Under the terms of certain lease agreements,
warrants to purchase the Company's preferred stock have been granted as
described in Note 5. Capitalized costs of $2,778,000 and $8,470,000, and
accumulated amortization of $690,000 and $905,000 are included in property and
equipment at December 31, 1997 and 1998.
F-13
<PAGE> 85
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments under capital leases consist of the following (in
thousands):
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
------------
<S> <C>
1999........................................................ $2,974
2000........................................................ 2,859
2001........................................................ 2,449
2002........................................................ 582
------
Total minimum lease payments................................ 8,864
Less amount representing interest........................... (1,483)
------
Present value of net minimum lease payments................. 7,381
Less current portion........................................ (2,220)
------
Long-term portion........................................... $5,161
======
</TABLE>
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
SHARES ISSUED
AND OUTSTANDING AT
---------------------------------------
DECEMBER 31,
SHARES ------------------------ MARCH 31,
AUTHORIZED 1997 1998 1999
---------- ---- ---- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Series A............................ 1,743,751 1,743,751 1,743,751 1,743,751
Series B............................ 3,915,308 3,821,975 3,821,975 3,821,975
Series C............................ 5,200,000 5,151,178 5,151,178 5,151,178
Series D (unaudited)................ 600,000 -- -- 500,000
Series D-1 (unaudited).............. 2,580,000 -- -- 2,580,000
---------- ---------- ---------- ----------
Total preferred stock............... 14,039,059 10,716,904 10,716,904 13,796,904
========== ========== ========== ==========
</TABLE>
Holders of Juniper Networks' preferred stock are entitled to one vote for
each share of common stock into which the preferred stock is convertible.
Holders of Juniper Networks' preferred stock shall also be entitled to vote
separately as a class with regard to customary protective provisions.
The stockholders of Series A, B, and C preferred stock are entitled to
annual noncumulative dividends per share of $0.05, $0.12, and $0.45 when and if
declared by the board of directors. Under the terms of certain lease agreements,
Juniper Networks is prohibited from declaring or paying any dividends on its
capital stock. In the event of any voluntary or involuntary liquidation of
Juniper Networks, Series A, B, and C stockholders are entitled to a liquidation
preference per share of $1.00, $2.40, and $8.93 plus any declared but unpaid
dividends, all in preference to the holders of the common stock. Upon the
completion of this distribution, the holders of the common stock will receive
any and all remaining assets of Juniper Networks.
F-14
<PAGE> 86
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The stockholders of Series A, B, and C preferred stock have the right at
any time after the date of issuance to convert each of their shares into 2.25
shares of common stock, which equals the initial offering price per share of
Series A, B, and C preferred stock of $1.00, $2.40 and $8.93, respectively,
divided by $0.4444, $1.07, and $3.97. Each of these conversion rates is subject
to adjustments for dilution. Each share of preferred stock shall be
automatically converted into shares of common stock at the then effective
conversion rate upon (a) the closing of the issuance of shares following the
effectiveness of a registration statement under the Securities Act of 1933,
pursuant to a firm commitment public offering of Juniper Networks' common stock
at a price per share of not less than three times the applicable conversion
price for the Series A and B preferred stock and at a price per share of not
less than one-and-a-half times the then applicable conversion price for the
Series C preferred stock, subject to adjustments for dilution, with aggregate
proceeds in excess of $10,000,000 or (b) the affirmative vote of the holders of
66 2/3 of the then outstanding shares of preferred stock.
See description of Series D and D-1 preferred stock in Note 10.
WARRANTS
Juniper Networks periodically grants warrants in connection with certain
lease arrangements. Juniper Networks had the following warrants to purchase
shares of preferred stock outstanding at December 31, 1998 and March 31, 1999:
<TABLE>
<CAPTION>
PREFERRED EXERCISE
STOCK PRICE PER DATE EXPIRATION OF
NUMBER OF SHARES SERIES SHARE ISSUED WARRANTS
- ---------------- --------- --------- ------ -------------
<S> <C> <C> <C> <C>
83,333......................... Series B $2.40 December 1996 December 2003
10,000......................... Series B 2.40 June 1997 June 2002
23,516......................... Series C 8.93 June 1997 December 2003
- ---------
116,849
- ---------
- ---------
</TABLE>
All of the outstanding warrants are exercisable immediately and will become
exercisable for common stock at the then effective conversion rate if Juniper
Networks completes an initial public offering of its common stock. The fair
value of the warrants are amortized as interest expense over the life of the
respective lease arrangements.
COMMON STOCK
Juniper Networks is authorized to issue up to 71,000,000 shares of its
common stock. At December 31, 1997 and 1998 and March 31, 1999, 19,121,347,
20,577,328, and 21,265,387 shares were issued and outstanding. Prior to the
adoption of the 1996 Stock Option Plan (see Note 6), Juniper Networks issued
shares of common stock to founders, investors, and employees. The shares issued
to investors were fully vested upon purchase. Generally, shares issued to
founders and employees were sold pursuant to restricted stock purchase
agreements containing provisions established by the board of directors. These
provisions give Juniper Networks the right to repurchase the shares at the
original sales price. This right expires at the rate of 25% after one year and
2.0833% per month thereafter. At December 31, 1997 and 1998 and March 31, 1999,
2,564,063, 1,382,813, and 1,217,501 of these shares, issued outside of the 1996
Stock Option Plan, remained subject to repurchase. See Note 6 for shares subject
to repurchase under the 1996 Stock Option Plan.
F-15
<PAGE> 87
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Juniper Networks effected a three-for-two stock split of its common stock
on June 27, 1997 and October 2, 1998. All share and per share amounts have been
adjusted to reflect the splits.
Common stock reserved for future issuance consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
(UNAUDITED)
<S> <C> <C>
Common stock reserved for:
Conversion of preferred stock............................. 24,113,034 25,767,482
Conversion of preferred stock issuable on exercise of
warrants............................................... 262,910 262,910
Stock option plan......................................... 6,663,292 6,105,233
---------- ----------
Total common stock reserved for future issuance............. 31,039,236 32,135,625
========== ==========
</TABLE>
6. STOCK OPTION PLAN
Juniper Networks' 1996 Stock Option Plan (the "Plan") provides for the
granting of incentive stock options to employees and nonstatutory stock options
to employees, directors and consultants. Incentive stock options are granted at
an exercise price of not less than the fair value per share of the common stock
on the date of grant as determined by the board of directors. Nonstatutory stock
options are granted at an exercise price of not less than 85% of the fair value
per share on the date of grant as determined by the board of directors. Options
granted to consultants are in consideration for the fair value of services
previously rendered and are not contingent upon future events. No options have
been granted to consultants to date. Vesting and exercise provisions are
determined by the board of directors. Options granted under the Plan generally
become exercisable over a four-year period beginning on the date of grant.
Options granted under the Plan have a maximum term of ten years.
Option activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------------------
NUMBER PRICE PER WEIGHTED-AVERAGE
OF SHARES SHARE EXERCISE PRICE
--------- --------- ----------------
<S> <C> <C> <C>
Options granted........................... 1,797,750 $0.11-$ 0.40 $ 0.22
----------
Balance at December 31, 1997.............. 1,797,750 0.11-$ 0.40 0.22
Options granted........................... 3,512,480 0.53-$ 4.90 1.86
Options exercised......................... (1,507,316) 0.11-$ 4.90 0.49
Options canceled.......................... (121,676) 0.11-$ 1.67 0.27
----------
Balance at December 31, 1998.............. 3,681,238 0.11-$ 4.90 1.67
Options granted (unaudited)............... 1,242,900 8.80-$14.00 11.82
Options exercised (unaudited)............. (558,059) 0.11-$ 8.80 1.17
Options canceled (unaudited).............. (74,515) 1.67-$14.00 10.27
----------
Balance at March 31, 1999 (unaudited)..... 4,291,564 0.11-$14.00 4.53
==========
</TABLE>
F-16
<PAGE> 88
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Plan also provides for the sale of shares of common stock to employees
and consultants at the fair value per share of the common stock as determined by
the board of directors. Shares issued to consultants are for the fair value of
services previously rendered and are not contingent upon future events. Shares
sold to employees are made pursuant to restricted stock purchase agreements
containing provisions established by the board of directors. These provisions
give Juniper Networks the right to repurchase the shares at the original sales
price. This right expires at a rate determined by the board of directors,
generally at the rate of 25% after one year and 2.0833% per month thereafter.
During the period from inception (February 2, 1996) to December 31, 1996
and the year ended December 31, 1997, Juniper Networks issued 4,840,884 and
3,572,433 shares under the Plan. No shares were issued under the Plan in the
year ended December 31, 1998 and the three month period ended March 31, 1999. At
December 31, 1997 and 1998 and March 31, 1999, 6,340,994, 4,685,104, and
4,575,599 shares were subject to repurchase rights under the Plan. At December
31, 1997, 345,095 shares had been repurchased under the Plan. As of December 31,
1998 and March 31, 1999, 396,425 shares had been repurchased under the Plan.
Juniper Networks has reserved 16,187,500 shares of common stock for
issuance under the Plan. At December 31, 1998, 2,982,054 shares were available
for future option grants or stock sales under the Plan. At March 31, 1999,
1,813,669 shares were available for future option grants or stock sales under
the Plan.
In 1997, Juniper Networks recorded compensation expense of $351,000
representing the difference between the deemed fair value and the exercise price
of certain option grants made during the year.
During the year ended December 31, 1998 and the three months ended March
31, 1999, in connection with the grant of certain stock options to employees,
Juniper Networks recorded deferred stock compensation of $6,388,000 and
$1,113,000 representing the difference between the exercise price and the deemed
fair value of Juniper Networks' common stock on the date such stock options were
granted. Such amount is included as a reduction of stockholders' equity and is
being amortized by charges to operations on a graded vesting method. Juniper
Networks recorded amortization of deferred stock compensation expense of
$1,235,000 for the year ended December 31, 1998 and $904,000 for the three
months ended March 31, 1999. At December 31, 1998 and March 31, 1999, Juniper
Networks had a total of $5,153,000 and $5,362,000 remaining to be amortized over
the corresponding vesting period of each respective option, generally four
years. The amortization expense relates to options awarded to employees in all
operating expense categories. This amount has not been separately allocated to
these categories.
STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock-based compensation plans. Because the exercise
price of Juniper Networks' employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense was recognized.
Pro forma information regarding net loss has been determined as if Juniper
Networks had accounted for its employee stock options under the fair value
method prescribed by FAS 123. The resulting effect on pro forma net loss
disclosed is not likely to be representative of the effects on net (loss) on a
pro forma basis in future years, due to subsequent years including additional
grants and years of vesting.
F-17
<PAGE> 89
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option granted through March 31, 1999 was estimated
on the date of grant using the minimum value method with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED THREE MONTHS
(FEBRUARY 2, 1996) DECEMBER 31, ENDED MARCH 31,
TO DECEMBER 31, -------------------- --------------------
1996 1997 1998 1998 1999
------------------ --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Dividend yield............... -- -- -- -- --
Volatility factor............ -- -- -- -- --
Risk-free interest rate...... 6.20% 6.20% 5.23% 5.23% 5.23%
Expected life................ 4.5 years 4.5 years 4.5 years 4.5 years 4.0 years
Weighted average fair value
of options granted in the
period..................... $0.02 $0.03 $0.37 $0.37 $2.19
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to pro forma expense over the options' vesting period. Pro forma
information follows (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(FEBRUARY 2, YEAR ENDED ENDED
1996) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, ------------------- -----------------
1996 1997 1998 1998 1999
------------ -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Loss:
As Reported................... $(1,799) $(10,363) $(30,971) $(3,905) $(6,675)
Pro Forma..................... (1,805) (10,403) (31,143) (3,922) (6,849)
Basic and Diluted Net Loss Per
Share:
As Reported................... (0.46) (1.21) (2.39) (0.36) (0.45)
Pro Forma..................... (0.46) (1.21) (2.40) (0.36) (0.46)
</TABLE>
7. 401(k) PLAN
Juniper Networks maintains a savings and retirement plan under Section
401(k) of the Internal Revenue Code. All employees are eligible to participate
on their first day of employment with Juniper Networks. Under the plan,
employees may contribute up to 20% of their pretax salaries per year but not
more than the statutory limits. Juniper Networks does not contribute to the
plan.
8. COMMITMENTS
Juniper Networks leases its facilities under operating leases that expire
in 2001. Rental expense for the period from inception (February 2, 1996) to
December 31, 1996 and for the years ended December 31, 1997 and 1998, were
$145,000, $529,000, and $937,000.
F-18
<PAGE> 90
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments under the noncancellable operating leases consist
of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
1999........................ $1,422
2000........................ 1,071
2001........................ 721
------
Total minimum lease
payments.................. $3,214
======
</TABLE>
Juniper Networks has outstanding purchase order commitments for materials
of approximately $2,442,000 at December 31, 1998 and $2,000,000 at March 31,
1999. Juniper Networks expects the purchase orders to be fulfilled in 1999. Of
this amount, Juniper Networks has accrued approximately $295,000 and $160,000 of
the outstanding commitments for obsolete inventory as of December 31, 1998 and
March 31, 1999. These expenses are included within cost of revenue in the year
ended December 31, 1998 and the three months ended March 31, 1999.
9. INCOME TAXES
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the period from inception
(February 2, 1996) to December 31, 1996, or for the years ended December 31,
1997, and 1998.
Significant components of Juniper Networks' deferred tax assets as of
December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 4,600 $ 13,470
Research credit carryforwards....................... 600 1,490
Deferred revenue.................................... -- 2,700
Other temporary differences......................... -- 390
------- --------
Total deferred tax assets............................. 5,200 18,050
Valuation allowance................................... (5,200) (18,050)
------- --------
Net deferred tax assets............................... $ -- $ --
======= ========
</TABLE>
FASB Statement No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based upon the weight of
available evidence, which includes Juniper Networks' historical operating
performance and the reported cumulative net losses in all prior years, Juniper
Networks has provided a full valuation allowance against its net deferred tax
assets.
The net valuation allowance increased by $5,200,000 during the year ended
December 31, 1997.
At December 31, 1998, Juniper Networks had net operating loss
carryforwards for federal and California tax purposes of approximately
$34,000,000 and $33,000,000. Juniper Networks also had federal and state
research and development tax credit carryforwards of approximately $950,000 and
$815,000. The net operating loss and tax credit carryforwards will expire at
various dates beginning in 2004, if not utilized.
Utilization of net operating loss and credit carryforwards may be subject
to a substantial annual limitation due to the
F-19
<PAGE> 91
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ownership change limitations provided by the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
the net operating loss and credit carryforwards before utilization.
10. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT
1999 EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the board of directors approved the adoption of Juniper
Networks' 1999 Employee Stock Purchase Plan (the "purchase plan"). A total of
500,000 shares of common stock have been reserved for issuance under the 1999
purchase plan, plus, commencing on January 1, 2000, annual increases equal to
the lesser of 500,000 shares, 1% of the outstanding common shares on such date
or a lesser amount determined by the board of directors. The 1999 purchase plan
permits eligible employees to acquire shares of Juniper Networks' common stock
through periodic payroll deductions of up to 10% of base compensation. No more
than 1,000 shares may be purchased by each employee in any twelve month period,
and in no event, may an employee purchase more than $25,000 worth of stock,
determined at the fair market value of the shares at the time such option is
granted, in one calendar year. The purchase plan will be implemented in a series
of offering periods, each approximately six months in duration; provided,
however, that the first offering period will be approximately thirteen months in
duration, ending on the last trading day on or before July 31, 2000. The price
at which the common stock may be purchased is 85% of the lesser of the fair
market value of Juniper Network's common stock on the first day of the
applicable offering period or on the last day of the respective purchase period.
The initial offering period will commence on the effectiveness of the initial
public offering and will end on July 31, 2000.
ISSUANCE OF SERIES D AND D-1 CONVERTIBLE PREFERRED STOCK
In March 1999, Juniper Network's board of directors approved an increase
in the authorized number of shares of preferred stock to 14,039,059 shares.
In March 1999, the Company issued 500,000 shares of Series D preferred
stock and 2,580,000 shares of Series D-1 preferred stock at $11.03 per share,
resulting in cash proceeds of $33,972,400.
Holders of Juniper Networks' Series D and D-1 preferred stock are entitled
to one vote for each share of common stock into which the preferred stock is
convertible. Holders of Juniper Networks' preferred stock shall also be entitled
to vote separately as a class with regard to customary protective provisions.
The holders of Series D and D-1 preferred stock are entitled to annual
noncumulative dividends per share of $0.55 per share when and if declared by the
board of directors. In the event of any voluntary or involuntary liquidations of
Juniper Networks, Series D and D-1 shareholders are entitled to a liquidation
preference per share of $11.03 per share plus any declared but unpaid dividends,
all in preference to the holders of the common stock. Upon the completion of
this distribution, the holders of the common stock will receive any and all
remaining assets of Juniper Networks.
The holders of Series D and D-1 preferred stock have the right at any time
after the date of issuance to convert each of their shares into a number of
shares of common stock determined by dividing the initial offering price per
share of the Series D and D-1 preferred stock by the conversion price, which is
$11.03. This conversion rate is subject to adjustments for dilution. Each share
of preferred stock shall be automatically converted into shares of common stock
at the then effective conversion rate upon (a) the closing of the issuance of
shares following the effectiveness
F-20
<PAGE> 92
JUNIPER NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of a registration statement under the Securities Act of 1933, pursuant to a firm
commitment offering of Juniper Networks' common stock at a price per share of
not less than three times the applicable conversion rate for the Series A and B
preferred stock, a price per share of not less than one-and-a-half times the
then applicable conversion rate for the Series C preferred stock, and a price
per share of not less than one times the then applicable conversion rate for the
Series D and D-1 preferred stock, subject to adjustments for dilution, with
aggregate proceeds in excess of $10,000,000 or (b) the affirmative vote of the
holders of 66 2/3 of the then outstanding shares of preferred stock.
If within one hundred and eighty days of the original issue date of the
Series D-1 preferred stock, Juniper Networks files a registration statement
under the Securities Act of 1933 covering an underwritten initial public
offering, the Series D-1 conversion rate will be modified to equal the original
issue price per share of the Series D-1 preferred stock divided by 85% of the
initial public offering price. If, between 180 days and one year from the
original issue date of the Series D-1 preferred stock, Juniper Networks files a
registration statement under the Securities Act of 1933 covering an underwritten
initial public offering, the Series D-1 conversion rate will be modified to
equal the original issue price per share of the Series D-1 preferred stock
divided by 75% of the initial public offering price. If, between one year and
fifteen months from the original issue date of the Series D-1 preferred stock,
Juniper Networks files a registration statement under the Securities Act of 1933
covering an underwritten initial public offering, the Series D-1 conversion rate
will be modified to equal the original issue price per share of the Series D-1
preferred stock divided by 65% of the initial public offering price. If Juniper
Networks files a registration statement under the Securities Act of 1933
covering an underwritten initial public offering after 15 months from the
original issue date of the Series D-1 preferred stock there will be no
adjustment to the Series D-1 conversion rate.
AMENDMENT TO 1996 STOCK OPTION PLAN
On April 19, 1999, the board of directors approved the following
amendments to the 1996 Stock Option Plan:
(i) The number of shares reserved for issuance under the Plan was
increased by 3,000,000 to 19,187,500 shares.
(ii) An annual increase to the Plan will be added on the first day of each
fiscal year, beginning in 2000, equal to the lesser of (1) 3,000,000
shares, (2) 5% of the outstanding shares on that date, or (3) a
lesser amount determined by the board of directors.
F-21
<PAGE> 93
UNDERWRITING
Juniper Networks, the selling stockholders and the underwriters for this
offering named below have entered into an underwriting agreement with respect to
the shares being offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., Credit Suisse First Boston Corporation, BancBoston
Robertson Stephens Inc., and Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated are the representatives of the underwriters.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Goldman, Sachs & Co.........................................
Credit Suisse First Boston Corporation......................
BancBoston Robertson Stephens Inc...........................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated..............................................
---------
Total..................................................... 4,800,000
=========
</TABLE>
------------------------------
If the underwriters sell more shares than the total number set forth in
the table above, the underwriters have an option to buy up to an additional
98,071 shares from Juniper Networks and an option to buy an additional 621,929
shares from one of the selling stockholders to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following table shows the per share and the underwriting discount to
be paid to the underwriters by Juniper Networks and the selling stockholders.
Such amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase 720,000 additional shares.
Paid by the Company
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>
Paid by the Selling Stockholders
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated among Juniper
Networks and the representatives. Among the factors to be considered in
determining the initial public offering price of the shares, in addition to
prevailing market conditions, will be Juniper Networks' historical performance,
estimates of the business potential and earnings
U-1
<PAGE> 94
prospects of Juniper Networks, an assessment of Juniper Networks' management and
the consideration of the above factors in relation to market valuation of
companies in related businesses.
Juniper Networks, the officers, the directors and the stockholders have
agreed with the underwriters not to dispose of or hedge any of their shares of
common stock or securities convertible into or exchangeable for shares of common
stock during the period from the date of this prospectus continuing through the
date 180 days after the date of this prospectus, except that (i) two (2) days
after Juniper Networks publicly releases its operating results for the quarter
ended September 30, 1999, fifteen percent (15%) of the total number of shares of
common stock locked-up pursuant to lock-up agreements shall be released from the
lock-up provisions on a pro rata basis for each stockholder subject to such
lock-up agreements, and (ii) thirty (30) days after Juniper Networks releases
its operating results for the quarter ended September 30, 1999, another twenty-
five percent (25%) of the total number of shares of common stock locked-up
pursuant to lock-up agreements shall be released from the lock-up provisions on
a pro rata basis for each stockholder subject to such lock-up agreements. In
addition, shares of common stock can be released with the prior written consent
of Goldman, Sachs & Co. See "Shares Eligible for Future Sale" for a discussion
of certain transfer restrictions.
At the request of Juniper Networks, the underwriters have reserved at the
initial public offering price up to eight percent of the shares of common stock
for sale to directors, officers, employees, business associates and related
persons of Juniper Networks. The number of shares of common stock available for
sale to the general public will be reduced to the extent these individuals
purchase such reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered by this prospectus.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
The common stock will be quoted on the Nasdaq National Market under the
symbol "JNPR."
Juniper Networks estimates that the total expenses of the offering payable
by us, excluding the underwriting discount, will be approximately $1,100,000.
Juniper Networks and the selling stockholders have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
U-2
<PAGE> 95
APPENDIX -- DESCRIPTION OF GRAPHICS
PROSPECTUS COVER
Juniper Networks, Inc. Logo
INSIDE FRONT COVER
A diagram that shows the M40 providing the critical links in the Internet
backbone to the fiber optic core of a Service Provider's Network. Four different
links showing the M40 and other pictures are depicted with the tag lines as
follows: 1) The hub of the diagram has the tag line "Controlling the Fiber-Optic
Core"; "Connecting the Service Provider" and "Servers"; 2) "Concentrating
Network Access," "Home" and "Business"; 3) "Managing Exploding Traffic Demands,"
"Cyber Cafe," "ATM" and "Cellular"; 4) "Differentiated Services for Multimedia
Applications," and "Multimedia Web Pages,"; 5) At the bottom of the page is the
text "Juniper Networks M40 Internet backbone routers are linking users and
applications across the new public network."
PAGE 33
Diagram showing areas of bottleneck when packet/cell switching and fiber optic
technologies are deployed together. The left side of the diagram is labeled
"Electronic Packet/Cell Switching" above pictures of computers. To the right of
the diagram is the text "Electronic Packet/Cell Switching" above pictures of
servers which are labeled "Servers." Between these pictures are links labeled
"Fiber Optic Core" and the text "Bottleneck" at the edges of the Fiber Optic
Core links.
PAGE 36
Diagram showing a typical architecture for a service provider's network
backbone, including the placement of network routes, switches and access
concentration points. Diagram contains the text "Enterprise Routers," "DS3,"
"DS1," "DS0," "OC-12," "OC-3," "ATM," "OC-12 ATM or OC-12 SONET or OC-48
SONET," "Core Backbone," "Intra-POP," "Access," "Router," "Switch" and "Access
Concentration Point."
PAGE 38
Diagram showing traffic path between router points labeled "San Francisco" and
"New York." Below the diagram is a legend of icons in the diagram which are
labeled "Shortest path," "Traffic Engineered Path" and "Router."
PAGE 41
Diagram showing the JUNOS Routing Engine with the text "Forwarding Table"
contained in the diagram. Also includes a diagram below this diagram of the
Packet Forwarding Engine containing the text "Forwarding Table," "Internet
Processor," "Memory-based Switch Fabric" and "I/O Card."
PAGE 43
Picture of our M40 Internet backbone router together with a data table of rack
configuration information. The data table includes the following configuration
data:
Interface Ports Per M40 Ports per 7ft. Rack
- ------------------------------------------------------------------------
OC-48 STM-16 SONET/SDH 8 16
- ------------------------------------------------------------------------
OC-12/STM-4 ATM 32 64
- ------------------------------------------------------------------------
OC-12/STM-4 SONET/SDH 32 64
- ------------------------------------------------------------------------
OC-3/STM-1 ATM 64 128
- ------------------------------------------------------------------------
OC-3/STM-1 SONET/SDH 128 256
- ------------------------------------------------------------------------
DS3 128 256
- ------------------------------------------------------------------------
Gigabit Ethernet 32 64
INSIDE BACK COVER
A hub and spoke diagram showing a photograph of our M40 Internet backbone with
the three critical ASIC components of the M40. Surrounding the photo of the M40
is the following text listed in counter clockwise order starting from the top:
1) "Purpose-built wire speed system for scaling the new public network growth";
2) "Using the IP infrastructure to manage our business of delivering the new
public network"; 3) "Services for customers to harness technology for
competitive advantage"; 4) "creating the fiber optic new public network with
greater bandwidth and richer services"; and 5) "JUNOS Internet Software for
traffic engineering, network optimization and control." Also includes a diagram
on the lower left hand portion showing the JUNOS Routing Engine with the text
"Forwarding Table" contained in the diagram. To the right of this diagram is the
text "Routing Engine uses knowledge of network to construct a forwarding table."
Also includes a diagram below this diagram of the Packet Forwarding Engine
containing the text "Forwarding Table," "Internet Processor," "Memory-based
Switch Fabric" and "I/O Card." To the right of this diagram is the text "Packet
Forwarding Engine (PFE) directs packets from an input interface to an output
interface based on the forwarding table."
PROSPECTUS BACK COVER
Juniper Networks, Inc. Logo
<PAGE> 96
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 6
Note Regarding Forward-Looking
Statements........................ 17
How We Intend to Use the Proceeds
from this Offering................ 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Consolidated Financial
Data.............................. 21
Management's Discussion and Analysis
Of Financial Condition and Results
of Operations..................... 22
Business............................ 32
Management.......................... 49
Certain Transactions................ 58
Principal and Selling
Stockholders...................... 61
Description of Capital Stock........ 64
Shares Eligible for Future Sale..... 67
Where You May Find Additional
Information....................... 69
Legal Matters....................... 69
Experts............................. 69
Index to Consolidated Financial
Statements........................ F-1
Underwriting........................ U-1
</TABLE>
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
4,800,000 Shares
JUNIPER NETWORKS, INC.
Common Stock
-------------------------
[Juniper logo]
-------------------------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
BANCBOSTON
ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
Representatives of the Underwriters
------------------------------------------------------
------------------------------------------------------
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee and the Nasdaq National Market listing
fee. None of such expenses will be borne by selling stockholders.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 46,037
NASD filing fee............................................. 17,060
Nasdaq National Market listing fee.......................... 5,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 450,000
Accounting fees and expenses................................ 250,000
Blue Sky qualification fees and expenses.................... 3,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous fees and expenses............................. 43,509
----------
Total.............................................. $1,024,606
==========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article Eighth of our amended and restated certificate of incorporation
provides for the indemnification of directors and officers to the fullest extent
permissible under Delaware law.
Article VI of our bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of Juniper Networks if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to our best interest, and, with respect to any criminal action or proceeding,
the indemnified party had no reason to believe his or her conduct was unlawful.
We have entered into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our bylaws,
and intend to enter into indemnification agreements with any new directors and
executive officers in the future. The indemnification agreements may require us,
among other things, to indemnify our directors and officers against certain
liabilities that may arise by reason of their status or service as directors and
officers (other than liabilities arising from willful misconduct of culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors and
officers' insurance, if available on reasonable terms.
Reference is also made to Section 8 of the Underwriting Agreement contained in
Exhibit 1.1 hereto, indemnifying officers and directors of Juniper Networks
against certain liabilities.
II-1
<PAGE> 98
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have issued unregistered securities to a limited number
of persons as described below:
1. On February 6, 1996, we sold 4,050,000 shares of our common stock for
an aggregate purchase price of $8,910.00 to employees.
2. On April 15, 1996 we sold 225,000 shares of our common stock for an
aggregate purchase price of $2,002.50 to an employee.
3. On June 12, 1996 we sold 450,000 shares of our common stock for an
aggregate purchase price of $20,025.00 to an employee.
4. From inception through March 31, 1999 (the most recent practicable
date), we granted stock options and restricted stock purchase rights to
purchase an aggregate of 14,966,447 shares of our common stock at
prices ranging from $0.11 to $14.00 per share to employees, consultants
and directors pursuant to our 1996 Stock Plan.
5. From inception through March 31, 1999 (the most recent practicable
date), we issued and sold an aggregate of 10,367,409 shares of our
common stock to employees, consultants and directors for aggregate
consideration of $2,022,816.00 pursuant to exercise of options granted
under our 1996 Stock Plan.
6. From inception through March 31, 1999, we issued an aggregate of
111,283 shares of our common stock under our 1996 Stock Plan to
consultants in consideration for past services rendered for an
aggregate value of $74,365.00.
7. On June 11, 1996, we sold 1,743,751 shares of Series A Preferred Stock
for $1.00 per share to the following investors for an aggregate
purchase price of $1,743,751: Kleiner Perkins Caufield & Byers Fund
VII, KPCB Information Sciences Zaibatsu Fund II, Kleiner Perkins
Caufield & Byers VII and WS Investment Company 96A.
8. On June 11, 1996, we sold 6,328,123 shares of Common Stock for $0.44
per share to the following investors for an aggregate purchase price of
$281,249.90: Kleiner Perkins Caufield & Byers Fund VII, KPCB
Information Sciences Zaibatsu Fund II, Kleiner Perkins Caufield & Byers
VII and WS Investment Company 96A.
9. On August 5, 1996 and November 8, 1996, we sold 3,818,017 shares of our
Series B Preferred Stock for $2.40 per share to the following private
investors for an aggregate purchase price of $9,163,240.80: Benchmark
Capital Partners, L.P., Benchmark Founders' Fund, L.P., Crosspoint
Venture Partners 1996, Institutional Venture Management VII, L.P., IVP
Founders Fund, I, L.P., Institutional Venture Partners VI, L.P., KPCB
Informational Sciences Zaibatsu Fund II, Kleiner Perkins Caufield &
Byers VII, Kriens 1996 Trust U/T/A October 29, 1996, McQuillan
Consulting Self-Empowered Profit Sharing Plan, NEA Presidents Fund
L.P., NEA Ventures 1996, L.P., New Enterprise Associates VI, Limited
Partnership, O'Brien Family Trust, U/T/A dated 7/1/92, Larry Sonsini,
Stensud Family Trust U/T/A September 16, 1993 and WS Investment Company
96B.
10. On December 16, 1996, in connection with an equipment lease, we issued
a warrant to purchase 83,333 shares of our Series B Preferred Stock at
an exercise price of $2.40 per share to Venture Lending & Leasing, Inc.
11. On December 30, 1996, we issued 3,958 shares of Series B Preferred
Stock at $2.40 per share to William Gunning and Florin Oprescu as
consideration for past services rendered.
II-2
<PAGE> 99
12. On June 18, 1997, in connection with a lease agreement, we issued a
warrant to purchase 10,000 shares of our Series B Preferred Stock at an
exercise price of $2.40 per share to Excite @Home.
13. On July 1, 1997 and September 30, 1997, we sold 5,151,178 shares of our
Series C Preferred Stock at $8.93 per share to the following private
investors for an aggregate purchase price of $46,000,020: 3Com
Corporation, Anschutz Family Investment Company LLC, AT&T Venture Fund
II, L.P., Crosspoint Venture Partners 1996, Ericsson Business Networks
AB, Lucent Technologies, Inc., Newbridge Networks Corporation, Nortel
Networks Corporation and UUNet Technologies, Inc.
14. On September 30, 1997, in connection with an equipment lease, we issued
a warrant to purchase 23,516 shares of our Series C Preferred Stock at
an exercise price of $8.93 per share to Venture Lending & Leasing, Inc.
15. On March 3, 1999, we issued 130,000 shares of common stock to an
employee at an exercise price of $9.90 per share pursuant to a
restricted stock purchase agreement.
16. On March 16, 1999, we sold 500,000 shares of our Series D Preferred
Stock and 2,580,000 shares of Series D-1 Preferred Stock both for
$11.03 per share to Ericsson Business Networks AB for an aggregate
purchase price of $33,972,400.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein.
Except as indicated above, none of the foregoing transactions involved any
underwriters, underwriting discounts or commissions, or any public offering, and
we believe that each transaction was exempt from the registration requirements
of the Securities Act by virtue of Section 4(2) thereof, Regulation D
promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients in such transactions represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.3** Amended and Restated Bylaws of the Registrant.
4.1 Form of Registrant's Common Stock certificate.
4.2** Warrant to purchase shares of Series B Preferred Stock of
the Registrant issued to Venture Lending & Leasing, Inc.
4.3** Warrant to purchase shares of Series B Preferred Stock of
the Registrant issued to At Home Corporation.
4.4** Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Venture Lending & Lending, Inc.
4.5** Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Venture Lending & Lending, Inc.
</TABLE>
II-3
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
4.6** Third Amended and Restated Registration Rights Agreement
dated March 9, 1999.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati Professional
Corporation.
10.1** Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive
officers.
10.2** Amended and Restated 1996 Stock Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4** Sublease between Trident Microsystems, Inc. and the
Registrant dated July 1, 1998.
10.5** Sublease between At Home Corporation and the Registrant
dated June 4, 1998.
10.6** Severance Agreement between Scott Kriens and the Registrant
dated October 1, 1996.
10.7** Change of Control Agreement between Marcel Gani and the
Registrant dated February 18, 1997.
10.8+** Agreement for ASIC Design and Purchase of Products by and
between IBM Microelectronics and the Registrant dated August
26, 1997.
10.8.1+** Amendment One to Agreement for ASIC Design and Purchase of
Products by and between IBM Microelectronics and the
Registrant dated January 5, 1998.
10.8.2+** Amendment Two to Agreement for ASIC Design and Purchase of
Products by and between IBM Microelectronics and the
Registrant dated March 2, 1998.
10.9+** Standard Manufacturing Agreement by and among Solectron
California Corporation, Fine Pitch Technology Inc. and the
Registrant dated June 10, 1998.
10.10 Lease by and between Mathilda Associates LLC and Registrant
dated June 18, 1999.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
23.3** Consent of International Data Corporation.
23.4** Consent of Ryan, Hankin Kent.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- ---------------
** Previously filed.
+ Confidential treatment requested as to certain portions of this exhibit.
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification by us for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the provisions referenced in Item 14 of this Registration
Statement or otherwise, we have been advised that in the opinion
II-4
<PAGE> 101
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by us of expenses incurred or paid by a director, officer, or
controlling person of Juniper Networks in the successful defense of any action,
suit or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered hereunder, we will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 102
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1993, 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 MOUNTAIN
VIEW, STATE OF CALIFORNIA, ON THE 22ND DAY OF JUNE, 1999.
JUNIPER NETWORKS, INC.
By *
------------------------------------
Scott Kriens
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President and Chief Executive June 22, 1999
- --------------------------------------------------- Officer and Chairman of the
Scott Kriens Board (Principal Executive
Officer)
* Chief Technical Officer and Vice June 22, 1999
- --------------------------------------------------- Chairman of the Board
Pradeep Sindhu
/s/ MARCEL GANI Chief Financial Officer June 22, 1999
- --------------------------------------------------- (Principal Financial and
Marcel Gani Accounting Officer)
* Director June 22, 1999
- ---------------------------------------------------
William R. Hearst III
* Director June 22, 1999
- ---------------------------------------------------
Vinod Khosla
* Director June 22, 1999
- ---------------------------------------------------
C. Richard Kramlich
* Director June 22, 1999
- ---------------------------------------------------
William Stensrud
*By: /s/ MARCEL GANI Attorney-in-fact June 22, 1999
----------------------------------------------
Marcel Gani
</TABLE>
II-6
<PAGE> 103
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.3** Amended and Restated Bylaws of the Registrant.
4.1 Form of Registrant's Common Stock certificate.
4.2** Warrant to purchase shares of Series B Preferred Stock of
the Registrant issued to Venture Lending & Leasing, Inc.
4.3** Warrant to purchase shares of Series B Preferred Stock of
the Registrant issued to At Home Corporation.
4.4** Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Venture Lending & Lending, Inc.
4.5** Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Venture Lending & Lending, Inc.
4.6** Third Amended and Restated Registration Rights Agreement
dated March 9, 1999.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati Professional
Corporation.
10.1** Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive
officers.
10.2** Amended and Restated 1996 Stock Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4** Sublease between Trident Microsystems, Inc. and the
Registrant dated July 1, 1998.
10.5** Sublease between At Home Corporation and the Registrant
dated June 4, 1998.
10.6** Severance Agreement between Scott Kriens and the Registrant
dated October 1, 1996.
10.7** Change of Control Agreement between Marcel Gani and the
Registrant dated February 18, 1997.
10.8+** Agreement for ASIC Design and Purchase of Products by and
between IBM Microelectronics and the Registrant dated August
26, 1997.
10.8.1+** Amendment One to Agreement for ASIC Design and Purchase of
Products by and between IBM Microelectronics and the
Registrant dated January 5, 1998.
10.8.2+** Amendment Two to Agreement for ASIC Design and Purchase of
Products by and between IBM Microelectronics and the
Registrant dated March 2, 1998.
10.9+** Standard Manufacturing Agreement by and among Solectron
California Corporation, Fine Pitch Technology Inc. and the
Registrant dated June 10, 1998.
10.10 Lease by and between Mathilda Associates LLC and Registrant
dated June 18, 1999.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
23.3** Consent of International Data Corporation.
23.4** Consent of Ryan, Hankin Kent.
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- ---------------
** Previously filed.
+ Confidential treatment requested as to certain portions of this exhibit.
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
[SEAL] [LOGO] JUNIPER NETWORKS [SEAL]
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN
DEFINITIONS AND A
STATEMENT AS TO THE
RIGHTS, PREFERENCES,
PRIVILEGES AND
RESTRICTIONS ON SHARES
CUSIP 48203R 10 4
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
$.00001 PAR VALUE PER SHARE, OF
JUNIPER NETWORKS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
COUNTERSIGNED AND REGISTERED
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR
DATED: BY
AUTHORIZED SIGNATURE
MARCEL GANI [CORPORATE SEAL] SCOTT KRIENS
CHIEF FINANCIAL OFFICER PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE> 2
JUNIPER NETWORKS, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designation
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviation, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _______________ Custodian _______________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
Act _________________________
JT TEN - as joint tenants with right of (State)
survivorship and not as tenants
in common UNIF TRF MIN ACT - _______________ Custodian (until age ____)
COM PROP - as community property (Cust)
__________________ under Uniform Transfers
(Minor)
to Minors Act _________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________________
X ______________________________________
X ______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
-----------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
- ----------------------------------------------------
AMERICAN BANK NOTE COMPANY
3804 ATLANTIC AVENUE MAY 18, 1999 fm
SUITE 12
LONG BEACH, CA 90807 004967bk
(562) 925-2233
(FAX) (562)426-7480 NEW
- ----------------------------------------------------
<PAGE> 1
EXHIBIT 5.1
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone (650) 493-9300 Facsimile (650) 493-6811
June 22, 1999
Juniper Networks, Inc.
385 Riverdale Drive
Mountain View, CA 94043
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on April 21, 1999 (the "Registration
Statement") in connection with the registration under the Securities Act of
1933, as amended, of 5,520,000 shares of Common Stock of Juniper Networks, Inc.
(the "Shares"). As your counsel in connection with this transaction, we have
examined the proceedings proposed to be taken in connection with said sale and
issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
various states, where required, the Shares when issued and sold in the manner
referred to in the Registration Statement will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
----------------------------------------
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 10.10
LEASE
BY AND BETWEEN
MATHILDA ASSOCIATES LLC,
A CALIFORNIA LIMITED LIABILITY COMPANY
AS LANDLORD
AND
JUNIPER NETWORKS, INC.
A DELAWARE CORPORATION
AS TENANT
JUNE 18, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 1 REFERENCE...................................................................................1
1.1 References......................................................................................1
ARTICLE 2 LEASED PREMISES, TERM AND POSSESSION........................................................3
2.1 Demise Of Leased Premises.......................................................................3
2.2 Right To Use Outside Areas......................................................................3
2.3 Lease Commencement Date And Lease Term..........................................................3
2.4 Delivery Of Possession..........................................................................3
2.5 Performance Of Tenant Improvements; Acceptance Of Possession....................................3
2.6 Surrender Of Possession.........................................................................3
ARTICLE 3 RENT, LATE CHARGES AND SECURITY DEPOSITS....................................................4
3.1 Base Monthly Rent...............................................................................4
3.2 Additional Rent.................................................................................4
3.3 Year-End Adjustments............................................................................5
3.4 Late Charge, And Interest On Rent In Default....................................................5
3.5 Payment Of Rent.................................................................................5
3.6 Prepaid Rent....................................................................................5
3.7 Security Deposit................................................................................5
ARTICLE 4 USE OF LEASED PREMISES AND OUTSIDE AREA.....................................................6
4.1 Permitted Use...................................................................................6
4.2 General Limitations On Use......................................................................6
4.3 Noise And Emissions.............................................................................6
4.4 Trash Disposal..................................................................................7
4.5 Parking.........................................................................................7
4.6 Signs...........................................................................................7
4.7 Compliance With Laws And Private Restrictions...................................................7
4.8 Compliance With Insurance Requirements..........................................................7
4.9 Landlord's Right To Enter.......................................................................7
4.10 Use Of Outside Areas............................................................................8
4.11 Environmental Protection........................................................................8
4.12 Rules And Regulations...........................................................................9
ARTICLE 5 REPAIRS, MAINTENANCE, SERVICES AND UTILITIES................................................9
5.1 Repair And Maintenance..........................................................................9
(a) Tenant's Obligations...................................................................9
(b) Landlord's Obligation.................................................................10
5.2 Utilities......................................................................................10
5.3 Security.......................................................................................10
5.4 Energy And Resource Consumption................................................................10
5.5 Limitation Of Landlord's Liability.............................................................10
ARTICLE 6 ALTERATIONS AND IMPROVEMENTS...............................................................10
6.1 By Tenant......................................................................................10
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
6.2 Ownership Of Improvements......................................................................11
6.3 Alterations Required By Law....................................................................11
6.4 Liens..........................................................................................11
ARTICLE 7 ASSIGNMENT AND SUBLETTING BY TENANT........................................................12
7.1 By Tenant......................................................................................12
7.2 Merger, Reorganization, or Sale of Assets......................................................12
7.3 Landlord's Election............................................................................12
7.4 Conditions To Landlord's Consent...............................................................13
7.5 Assignment Consideration And Excess Rentals Defined............................................13
7.6 Payments.......................................................................................14
7.7 Good Faith.....................................................................................14
7.8 Effect Of Landlord's Consent...................................................................14
ARTICLE 8 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY...........................................14
8.1 Limitation On Landlord's Liability And Release.................................................14
8.2 Tenant's Indemnification Of Landlord...........................................................14
ARTICLE 9 INSURANCE..................................................................................15
9.1 Tenant's Insurance.............................................................................15
9.2 Landlord's Insurance...........................................................................15
9.3 Mutual Waiver Of Subrogation...................................................................16
ARTICLE 10 DAMAGE TO LEASED PREMISES..................................................................16
10.1 Landlord's Duty To Restore.....................................................................16
10.2 Insurance Proceeds.............................................................................16
10.3 Landlord's Right To Terminate..................................................................16
10.4 Tenant's Right To Terminate....................................................................17
10.5 Tenant's Waiver................................................................................17
10.6 Abatement Of Rent..............................................................................17
ARTICLE 11 CONDEMNATION...............................................................................17
11.1 Tenant's Right To Terminate....................................................................17
11.2 Landlord's Right To Terminate..................................................................17
11.3 Restoration....................................................................................17
11.4 Temporary Taking...............................................................................17
11.5 Division Of Condemnation Award.................................................................17
11.6 Abatement Of Rent..............................................................................18
11.7 Taking Defined.................................................................................18
ARTICLE 12 DEFAULT AND REMEDIES.......................................................................18
12.1 Events Of Tenant's Default.....................................................................18
12.2 Landlord's Remedies............................................................................18
12.3 Landlord's Default And Tenant's Remedies.......................................................19
12.4 Limitation Of Tenant's Recourse................................................................19
12.5 Tenant's Waiver................................................................................20
</TABLE>
ii.
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 13 GENERAL PROVISIONS.........................................................................20
13.1 Taxes On Tenant's Property.....................................................................20
13.2 Holding Over...................................................................................20
13.3 Subordination To Mortgages.....................................................................20
13.4 Tenant's Attornment Upon Foreclosure...........................................................21
13.5 Mortgagee Protection...........................................................................21
13.6 Estoppel Certificate...........................................................................21
13.7 Tenant's Financial Information.................................................................21
13.8 Transfer By Landlord...........................................................................21
13.9 Force Majeure..................................................................................21
13.10 Notices........................................................................................21
13.11 Attorneys' Fees................................................................................22
13.12 Definitions....................................................................................22
(a) Real Property Taxes...................................................................22
(b) Landlord's Insurance Costs............................................................23
(c) Property Maintenance Costs............................................................23
(d) Property Operating Expenses...........................................................23
(e) Law...................................................................................23
(f) Lender................................................................................23
(g) Private Restrictions..................................................................23
(h) Rent..................................................................................23
13.13 General Waivers................................................................................23
13.14 Miscellaneous..................................................................................23
13.15 Cooperation....................................................................................24
ARTICLE 14 CORPORATE AUTHORITY BROKERS AND ENTIRE AGREEMENT...........................................24
14.1 Corporate Authority............................................................................24
14.2 Brokerage Commissions..........................................................................24
14.3 Entire Agreement...............................................................................24
14.4 Landlord's Representations.....................................................................24
ARTICLE 15 OPTIONS TO EXTEND..........................................................................25
ARTICLE 16 FIRST EXPANSION OPTION.....................................................................26
ARTICLE 17 SECOND EXPANSION OPTION....................................................................27
ARTICLE 18 TELEPHONE SERVICE..........................................................................27
</TABLE>
iii.
<PAGE> 5
LEASE
THIS LEASE, dated June 18, 1999 for reference purposes only, is made by
and between MATHILDA ASSOCIATES LLC, a California limited liability company
("Landlord") and JUNIPER NETWORKS, INC., a Delaware corporation ("Tenant"), to
be effective and binding upon the parties as of the date the last of the
designated signatories to this Lease shall have executed this Lease (the
"Effective Date of this Lease").
ARTICLE 1
REFERENCE
1.1 REFERENCES. All references in this Lease (subject to any further
clarifications contained in this Lease) to the following terms shall have the
following meaning or refer to the respective address, person, date, time period,
amount, percentage, calendar year or fiscal year as below set forth:
<TABLE>
<S> <C>
Tenant's Address for Notice: Prior to the Lease Commencement Date:
Juniper Networks, Inc.
385 Ravendale Drive
Mountain View, California 94043
After the Lease Commencement Date:
At the Leased Premises.
Tenant's Representative: General Counsel
Landlord's Address for Notices: c/o Menlo Equities LLC
525 University Avenue
Suite 100
Palo Alto, California 94301
Landlord's Representative: Henry Bullock/Richard Holmstrom
Phone Number: (650) 326-9300
Intended Delivery Date: May 1, 2000
Intended Commencement Date: June 1, 2000
Lease Term: Twelve (12) years
Lease Expiration Date: Twelve (12) Years
from the Lease Commencement Date,
unless earlier terminated in
accordance with the terms of this
Lease, or extended by Tenant pursuant
to Article 15.
Options to Renew: Two (2) option(s) to renew, each for a
term of five (5) years.
First Month's Prepaid Rent: $360,787.50 (applied to the first
month in which Base Monthly Rent is
due)
Tenant's Security Deposit: $4,329,450.00 (subject to adjustment
pursuant to Section 3.7)
Late Charge Amount: Five Percent (5%) of the Delinquent
Amount
Tenant's Required Liability
Coverage: $3,000,000 Combined Single Limit
Tenant's Broker: Joan Haynes and Steve Gibson of
Colliers International
Landlord's Broker: Don Reimann, Gregg Von Thaden and Jon
Condrey of Colliers International
Property: That certain real property situated in
the City of Sunnyvale, County of Santa
Clara, State of California, to be
improved with two (2) building(s),
which real property is shown on the
Site Plan attached hereto as Exhibit
"A" and is commonly known as or
otherwise described as follows:
Mathilda Research Centre.
</TABLE>
1.
<PAGE> 6
<TABLE>
<S> <C>
Building: That certain building on the Property
in which the Leased Premises are
located commonly known as 1194
Mathilda Avenue (the "Building"),
which Building is shown outlined on
Exhibit "A" hereto (designated as
Building A). The 1184 Building (as
defined in Article 16) is shown as
Building B on the Site Plan.
Outside Areas: The "Outside Areas" shall mean all
areas which are located outside of and
contiguous to the Building, as
shown the Site Plan attached as
Exhibit A, such as pedestrian
walkways, parking areas, landscaped
area, open areas and enclosed trash
disposal areas.
Leased Premises: All the interior space within
the Building, including stairwells,
connecting walkways, and atriums,
to consist of approximately
rentable 144,315 square feet and, for
purposes of this Lease, agreed to
contain said number of square feet.
Tenant's Expense Share: The term "Tenant's Expense Share"
shall mean the percentage obtained by
dividing the rentable square footage
of the Leased Premises at the time of
calculation by the rentable square
footage of the Building. Such
percentage is currently 100%. In the
event that the rentable square footage
of the Leased Premises is changed,
Tenant's Expense Share shall be
recalculated to equal the percentage
described in the first sentence of
this paragraph, so that the aggregate
Tenant's Expense Share of all tenants
of the Building shall equal 100%.
Tenant's Property Share: The term "Tenant's Property Share"
shall mean the percentage obtained by
dividing the rentable square footage
of the Leased Premises at the time of
calculation by the rentable square
footage of all buildings currently
located or to be located on the
Property. Such percentage is currently
54%. In the event that any portion of
the Property is sold by Landlord, or
the rentable square footage of the
Leased Premises or the Property is
otherwise changed, Tenant's Property
Share shall be recalculated to equal
the percentage described in the first
sentence of this paragraph, so that
the aggregate Tenant's Project Share
of all tenants of the Property shall
equal 100%.
Base Monthly Rent: The term "Base Monthly Rent" shall
mean the following:
</TABLE>
<TABLE>
Period Monthly Amount
------ --------------
<S> <C> <C>
Months 1-12 $360,787.50
</TABLE>
<TABLE>
<S> <C>
Commencing with Month 13 of the Lease
Term and at the end of each 12 month
period thereafter (until the Lease
Expiration Date), Base Monthly Rent
shall be increased at a rate of 3.5%
per annum compounded annually.
Permitted Use: General Office, research and
development, marketing, sales,
manufacturing, distribution, warehouse
and other related lawful uses.
Exhibits: The term "Exhibits" shall mean the
Exhibits of this Lease which are
described as follows:
Exhibit "A" - Site Plan showing the
Property, the Outside Areas and
delineating the Building in which the
Leased Premises are to be located.
Exhibit "B" - Work Letter
Exhibit "C" - Lease Commencement Date
Certificate
Exhibit "D" - Form of Tenant Estoppel
Certificate
Exhibit "E" - Form of Letter of Credit
Exhibit "F" - Form of Landlord Waiver
</TABLE>
2.
<PAGE> 7
ARTICLE 2
LEASED PREMISES, TERM AND POSSESSION
2.1 DEMISE OF LEASED PREMISES. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord, for the Lease Term and upon the terms and subject
to the conditions of this Lease, that certain interior space described in
Article 1 as the Leased Premises, reserving and excepting to Landlord the right
to fifty percent (50%) of all assignment consideration and excess rentals as
provided in Article 7 below. Tenant's lease of the Leased Premises, together
with the appurtenant right to use the Outside Areas as described in Paragraph
2.2 below, shall be conditioned upon and be subject to the continuing compliance
by Tenant with (i) all the terms and conditions of this Lease, (ii) all Laws
governing the use of the Leased Premises and the Property, (iii) all Private
Restrictions, easements and other matters now of public record respecting the
use of the Leased Premises and Property, and (iv) all reasonable rules and
regulations from time to time established by Landlord.
2.2 RIGHT TO USE OUTSIDE AREAS. As an appurtenant right to Tenant's right to the
use and occupancy of the Leased Premises, Tenant shall have the right to use the
Outside Areas in conjunction with its use of the Leased Premises solely for the
purposes for which they were designated and intended and for no other purposes
whatsoever. Tenant's right to so use the Outside Areas shall be subject to the
limitations on such use as set forth in Article 1 and shall terminate
concurrently with any termination of this Lease. Tenant shall have the exclusive
right to use the amphitheater located in the Outside Areas. In the event Tenant
does not exercise the First Expansion Option (as defined in Article 16),
Landlord will request approval from the tenant who occupies the 1184 Building
for Tenant's use of the sport courts located adjacent to the 1184 Building,
provided that such tenant shall be entitled to give or withhold its consent in
it sole and absolute discretion.
2.3 LEASE COMMENCEMENT DATE AND LEASE TERM. Subject to Paragraph 2.4 below, the
term of this Lease shall begin, and the Lease Commencement Date shall be deemed
to have occurred on the date which is thirty (30) days after the actual Delivery
Date, as determined pursuant to Section 2.4 below. The term of this Lease shall
in all events end on the Lease Expiration Date (as set forth in Article 1). The
Lease Term shall be that period of time commencing on the Lease Commencement
Date and ending on the Lease Expiration Date (the "Lease Term").
2.4 DELIVERY OF POSSESSION. Landlord shall deliver to Tenant possession of the
Leased Premises upon Substantial Completion of the Tenant Improvements as that
term is defined in the Work Letter attached hereto as Exhibit B. The date that
the Leased Premises are so delivered to the Tenant shall be deemed the "Delivery
Date." If Landlord is unable to so deliver possession of the Leased Premises to
Tenant in the agreed condition on or before the Intended Delivery Date, Landlord
shall have until the date that is thirty (30) days after the Intended Delivery
Date (the "Delivery Grace Period") to deliver the Leased Premises. Additionally,
the Delivery Grace Period above set forth shall be extended for such number of
days as Landlord may be delayed in delivering possession of the Leased Premises
to Tenant by reason of Force Majeure or the action or inaction of Tenant. If
Landlord is unable to deliver possession of the Leased Premises in the agreed
condition to Tenant within the Delivery Grace Period (including any extension
thereof by reason of Force Majeure or the actions or inactions of Tenant), then
Tenant shall receive as its sole remedy a credit of two (2) days of free rent
for each day that the Leased Premises are not delivered to Tenant after
expiration of the Delivery Grace Period (including any extension thereof by
reason of Force Majeure or the actions or inactions of Tenant), which free rent
shall apply to the first month in which Base Monthly Rent is due. If Landlord is
unable to deliver possession of the Leased Premises in the agreed condition to
Tenant within sixty (60) days after the expiration of the Delivery Grace Period
(including any extension thereof by reason of Force Majeure or the actions or
inactions of Tenant), Tenant may choose, as its sole remedy, to terminate this
Lease, and in the event of such termination Landlord shall not be liable in
damages to Tenant for any delay. Tenant may not terminate this Lease at any time
after the date Landlord notifies Tenant that the Leased Premises have been put
into the agreed condition and are available for delivery to Tenant, unless
Landlord's notice is not given in good faith. Tenant may occupy the Leased
Premises commencing on the Delivery Date for purposes of installing furniture,
fixtures and equipment, provided that Tenant shall be responsible for Additional
Rent during such period and Tenant shall comply with all other provisions of
this Lease (other than the payment of Base Monthly Rent).
2.5 PERFORMANCE OF TENANT IMPROVEMENTS; ACCEPTANCE OF POSSESSION. Landlord
shall, pursuant to the work letter attached to and made a part of this Lease
(the "Work Letter"), perform the work and make the installations in the Leased
Premises substantially as set forth in the Work Letter (such work and
installations hereinafter referred to as the "Tenant Improvements"). It is
agreed that by occupying the Leased Premises, Tenant formally accepts same and
acknowledges that the Leased Premises are in the condition called for hereunder,
subject to reasonable punchlist items and latent defects specified by Tenant to
Landlord in writing within ten (10) days of such occupancy.
2.6 SURRENDER OF POSSESSION. Immediately prior to the expiration or upon the
sooner termination of this Lease, Tenant shall remove all of Tenant's signs from
the exterior of the Building and shall remove all of Tenant's equipment, trade
fixtures, furniture, supplies, wall decorations and other personal property from
within the Leased Premises, the Building and the Outside Areas, and shall vacate
and surrender the Leased Premises, the Building, the Outside Areas and the
Property to Landlord in the same condition, broom clean, as existed at the Lease
Commencement Date, damage by casualty or condemnation (which events shall be
governed by Articles 10 and 11) and reasonable wear and tear excepted. Except
for such reasonable wear and tear, Tenant shall (i) repair all damage to the
Leased Premises, the exterior of the Building and the Outside Areas caused by
Tenant's removal of Tenant's property, (ii) patch and refinish, to Landlord's
reasonable satisfaction, all penetrations made by Tenant or its employees to the
roof, floor, interior or exterior walls or ceiling of the Leased Premises and
the Building, whether such penetrations were made with Landlord's approval or
not, (iii) repair or replace all stained or damaged ceiling tiles, wall
coverings and floor coverings to the reasonable satisfaction of Landlord, (iv)
repair all damage caused by
3.
<PAGE> 8
Tenant to the exterior surface of the Building and the paved surfaces of the
Outside Areas and, where necessary, replace or resurface same. Additionally, to
the extent that Landlord shall have notified or is deemed to have notified
Tenant in writing at the time the improvements were completed that it desired to
have certain improvements made by Tenant or at the request of Tenant removed at
the expiration or sooner termination of the Lease, Tenant shall, upon the
expiration or sooner termination of the Lease, remove any such improvements
constructed or installed by Landlord or Tenant and repair all damage caused by
such removal; provided however, Tenant shall not be required to remove the
Tenant Improvements installed pursuant to the Work Letter. If the Leased
Premises, the Building, the Outside Areas and the Property are not surrendered
to Landlord in the condition required by this paragraph at the expiration or
sooner termination of this Lease, Landlord may, at Tenant's expense, so remove
Tenant's signs, property and/or improvements not so removed and make such
repairs and replacements not so made or hire, at Tenant's expense, independent
contractors to perform such work. Tenant shall be liable to Landlord for all
costs incurred by Landlord in returning the Leased Premises, the Building and
the Outside Areas to the required condition, together with interest on all costs
so incurred from the date paid by Landlord at the then maximum rate of interest
not prohibited or made usurious by law until paid. Tenant shall pay to Landlord
the amount of all costs so incurred plus such interest thereon, within ten (10)
days of Landlord's billing Tenant for same. Tenant shall indemnify Landlord
against loss or liability resulting from delay by Tenant in surrendering the
Leased Premises, including, without limitation, any claims made by any
succeeding Tenant or any losses to Landlord with respect to lost opportunities
to lease to succeeding tenants.
ARTICLE 3
RENT, LATE CHARGES AND SECURITY DEPOSITS
3.1 BASE MONTHLY RENT. Commencing on the Lease Commencement Date (as determined
pursuant to Paragraph 2.3 above) and continuing throughout the Lease Term,
Tenant shall pay to Landlord, without prior demand therefor, in advance on the
first day of each calendar month, the amount set forth as "Base Monthly Rent" in
Article 1 (the "Base Monthly Rent").
3.2 ADDITIONAL RENT. Commencing on the Lease Commencement Date (as determined
pursuant to Paragraph 2.3 above) and continuing throughout the Lease Term, in
addition to the Base Monthly Rent and to the extent not required by Landlord to
be contracted for and paid directly by Tenant, Tenant shall pay to Landlord as
additional rent (the "Additional Rent") the following amounts:
(a) An amount equal to all Property Operating Expenses (as defined in
Article 13) incurred by Landlord. Payment shall be made by whichever of the
following methods (or combination of methods) is (are) from time to time
designated by Landlord:
(i) Landlord may forward invoices or bills for such expenses to
Tenant, and Tenant shall, no later than thirty (30) days following receipt of
any such invoices or bills, pay such invoices or bills and deliver satisfactory
evidence of such payment to Landlord, and/or
(ii) Landlord may bill to Tenant, on a periodic basis not more
frequently than monthly, the amount of such expenses (or group of expenses) as
paid or incurred by Landlord, and Tenant shall pay to Landlord the amount of
such expenses within thirty (30) days after receipt of a written bill therefor
from Landlord, and/or
(iii) Landlord may deliver to Tenant Landlord's reasonable estimate
of any given expense (such as Landlord's Insurance Costs or Real Property
Taxes), or group of expenses, which it anticipates will be paid or incurred for
the ensuing calendar or fiscal year, as Landlord may determine, and Tenant shall
pay to Landlord an amount equal to the estimated amount of such expenses for
such year in equal monthly installments during such year with the installments
of Base Monthly Rent.
Landlord reserves the right to change from time to time the methods of billing
Tenant for any given expense or group of expenses or the periodic basis on which
such expenses are billed.
(b) Landlord's share of the consideration received by Tenant upon
certain assignments and sublettings as required by Article 7.
(c) Any legal fees and costs that Tenant is obligated to pay or
reimburse to Landlord pursuant to Article 13; and
(d) Any other charges or reimbursements due Landlord from Tenant
pursuant to the terms of this Lease.
Notwithstanding the foregoing, Landlord may elect by thirty (30) days prior
written notice to Tenant (provided such written notice is received by Tenant at
least thirty (30) days prior to delinquency) to have Tenant pay Real Property
Taxes or any portion thereof directly to the applicable taxing authority, in
which case Tenant shall make such payments and deliver satisfactory evidence of
payment to Landlord no later than ten (10) days before such Real Property Taxes
become delinquent.
Tenant may cause an audit of Landlord's books and records to determine the
accuracy of Landlord's billings for Property Operating Expenses under this
Lease, provided Tenant commences such audit within sixty (60) days after
Tenant's receipt of the year-end statement described in Section 3.3 above
setting forth the annual reconciliation of the Property Operating Expenses or
any change in estimated monthly expenses under Section 3.2(a)(iii) above. If
4.
<PAGE> 9
such audit reveals that the actual Property Operating Expenses for any given
year were less than the amount that Tenant paid for Property Operating Expenses
for any such year, then Landlord shall pay to Tenant the excess. If such audit
reveals a discrepancy of more than three (3%) percent of the actual amount of
any Property Operating Expenses charges, then Landlord shall pay the cost of the
audit.
Additionally, Tenant shall have the right, by appropriate proceedings, to
protest or contest any assessment, reassessment or allocation of Real Property
Taxes or any change therein or any application of any Law to the Leased Premises
or Tenant's use thereof. Landlord will reasonably cooperate with Tenant in the
contest or proceedings. If Tenant does not pay the Real Property Taxes when due
which are the subject of such protest or contest, Tenant shall post a bond in
lieu thereof in an amount reasonably determined by Landlord but not less than
one hundred twenty-five percent (125%) of the amount demanded by the taxing
authorities which holds Landlord and the Property harmless from any damage
arising out of the contest and ensuring the payment of any judgment that may be
rendered. With respect to any contest of Real Property Taxes or Laws conducted
by Tenant, Tenant shall hold Landlord and the Property harmless from any damage
arising out of such protest or contest and shall pay any judgment that may be
rendered in connection with such contest or protest. Any protest or contest
conducted by Tenant under this paragraph shall be at Tenant's expense and if
interest or late charges become payable as a result of such contest or protest,
Tenant shall pay the same. Tenant shall receive a proportionate share of any
refund applicable to the Lease Term based on the amount of Real Property Taxes
paid by Tenant as Tenant's Property Share (if the refund is applicable to the
land) or Tenant's Expense Share (if the refund is applicable to the Building or
other improvements in the Outside Areas).
3.3 YEAR-END ADJUSTMENTS. If Landlord shall have elected to bill Tenant for the
Property Operating Expenses (or any group of such expenses) on an estimated
basis in accordance with the provisions of Paragraph 3.2(a)(iii) above, Landlord
shall furnish to Tenant within three months following the end of the applicable
calendar or fiscal year, as the case may be, a statement setting forth (i) the
amount of such expenses paid or incurred during the just ended calendar or
fiscal year, as appropriate, and (ii) the amount that Tenant has paid to
Landlord for credit against such expenses for such period. If Tenant shall have
paid more than its obligation for such expenses for the stated period, Landlord
shall, at its election, either (i) credit the amount of such overpayment toward
the next ensuing payment or payments of Additional Rent that would otherwise be
due or (ii) refund in cash to Tenant the amount of such overpayment within
thirty (30) days after it has been conclusively determined by Landlord that an
overpayment has been made by Tenant. If such year-end statement shall show that
Tenant did not pay its obligation for such expenses in full, then Tenant shall
pay to Landlord the amount of such underpayment within ten days from Landlord's
billing of same to Tenant. The provisions of this Paragraph shall survive the
expiration or sooner termination of this Lease.
3.4 LATE CHARGE, AND INTEREST ON RENT IN DEFAULT. Tenant acknowledges that the
late payment by Tenant of any monthly installment of Base Monthly Rent or any
Additional Rent will cause Landlord to incur certain costs and expenses not
contemplated under this Lease, the exact amounts of which are extremely
difficult or impractical to fix. Such costs and expenses will include without
limitation, administration and collection costs and processing and accounting
expenses. Therefor, if any installment of Base Monthly Rent is not received by
Landlord from Tenant when the same becomes due, Tenant shall immediately pay to
Landlord a late charge in an amount equal to the amount set forth in Article 1
as the "Late Charge Amount," and if any Additional Rent is not received by
Landlord when the same becomes due, Tenant shall immediately pay to Landlord a
late charge in an amount equal to 5% of the Additional Rent not so paid;
provided, however, that once but only once in any twelve (12) month period
during the Lease Term, Tenant shall be entitled to written notice of non-receipt
of Base Monthly Rent or Additional Rent from Landlord, and Tenant shall not be
liable for any Late Charge Amount or other late charge hereunder if such
installment of Base Monthly Rent or Additional Rent is received by Landlord
within ten (10) days after Tenant's receipt of such notice from Landlord.
Landlord and Tenant agree that this late charge represents a reasonable estimate
of such costs and expenses and is fair compensation to Landlord for the
anticipated loss Landlord would suffer by reason of Tenant's failure to make
timely payment. In no event shall this provision for a late charge be deemed to
grant to Tenant a grace period or extension of time within which to pay any
rental installment or prevent Landlord from exercising any right or remedy
available to Landlord upon Tenant's failure to pay each rental installment due
under this Lease when due, including the right to terminate this Lease. If any
rent remains delinquent for a period in excess of 10 calendar days, then, in
addition to such late charge, Tenant shall pay to Landlord interest on any rent
that is not so paid from said tenth day at the then maximum rate of interest not
prohibited or made usurious by Law until paid.
3.5 PAYMENT OF RENT. Except as specifically provided otherwise in this Lease,
all rent shall be paid in lawful money of the United States, without any
abatement, reduction or offset for any reason whatsoever, to Landlord at such
address as Landlord may designate from time to time. Tenant's obligation to pay
Base Monthly Rent and all Additional Rent shall be appropriately prorated at the
commencement and expiration of the Lease Term. The failure by Tenant to pay any
Additional Rent as required pursuant to this Lease when due shall be treated the
same as a failure by Tenant to pay Base Monthly Rent when due, and Landlord
shall have the same rights and remedies against Tenant as Landlord would have
had Tenant failed to pay the Base Monthly Rent when due.
3.6 PREPAID RENT. Tenant shall, within ten (10) days following execution of this
Lease, pay to Landlord the amount set forth in Article 1 as "First Month's
Prepaid Rent" as prepayment of rent for credit against the first payment of Base
Monthly Rent due hereunder.
3.7 SECURITY DEPOSIT.
5.
<PAGE> 10
(a) Tenant , within ten (10) days following execution of this Lease,
shall deposit with Landlord the amount set forth in Article 1 as the "Security
Deposit" as security for the performance by Tenant of the terms of this Lease to
be performed by Tenant, and not as prepayment of rent. Upon the commencement of
the second year of the Lease Term, and at the commencement of each subsequent
year, provided that Tenant is not then in default (and has never been in default
beyond any applicable notice and cure periods) in its payment of Base Monthly
Rent or Additional Rent, the amount of the Security Deposit shall be reduced by
twenty percent (20%) of the outstanding amount. In the event (i) Tenant becomes
a publicly traded company and (ii) Tenant reports net profits for three (3)
consecutive quarters (as shown on its quarterly financial statements prepared in
accordance with generally accepted accounting principles), and provided that
Tenant is not then in default (and has never been in default beyond any
applicable notice and cure periods) in its payment of Base Monthly Rent or
Additional Rent, the Security Deposit shall be returned to Tenant and thereafter
no Security Deposit will be required. In the event (1) Tenant becomes a publicly
traded company and maintains a market capitalization of Two Billion Dollars
($2,000,000,000) for two consecutive quarters and (2) quarterly revenues exceed
Twenty Five Million Dollars ($25,000,000) for two consecutive quarters (as shown
on its quarterly financial statements prepared in accordance with generally
accepted accounting principles), and provided that Tenant is not then in default
(and has never been in default beyond any applicable notice and cure periods) in
its payment of Base Monthly Rent or Additional Rent, the Security Deposit shall
be reduced by an amount equal to fifty percent (50%) of the original amount.
(b) Landlord may apply such portion or portions of the Security Deposit
as are reasonably necessary for the following purposes: (i) to remedy any
default by Tenant in the payment of Base Monthly Rent or Additional Rent or a
late charge or interest on defaulted rent, or any other monetary payment
obligation of Tenant under this Lease; (ii) to repair damage to the Leased
Premises, the Building or the Outside Areas caused or permitted to occur by
Tenant; (iii) to clean and restore and repair the Leased Premises, the Building
or the Outside Areas following their surrender to Landlord if not surrendered in
the condition required pursuant to the provisions of Article 2, and (iv) to
remedy any other default of Tenant to the extent permitted by Law including,
without limitation, paying in full on Tenant's behalf any sums claimed by
materialmen or contractors of Tenant to be owing to them by Tenant for work done
or improvements made at Tenant's request to the Leased Premises. In this regard,
Tenant hereby waives any restriction on the uses to which the Security Deposit
may be applied as contained in Section 1950.7(c) of the California Civil Code
and/or any successor statute. In the event the Security Deposit or any portion
thereof is so used, Tenant shall pay to Landlord, promptly upon demand, an
amount in cash sufficient to restore the Security Deposit to the full original
sum or shall replenish the letter of credit, if applicable. Landlord shall not
be deemed a trustee of the Security Deposit. Landlord may use the Security
Deposit in Landlord's ordinary business and shall not be required to segregate
it from Landlord's general accounts. Tenant shall not be entitled to any
interest on any cash Security Deposit held by Landlord. If Landlord transfers
the Building or the Property during the Lease Term, Landlord may pay the
Security Deposit to any subsequent owner in conformity with the provisions of
Section 1950.7 of the California Civil Code and/or any successor statute, in
which event the transferring landlord shall be released from all liability for
the return of the Security Deposit. Tenant specifically grants to Landlord (and
Tenant hereby waives the provisions of California Civil Code Section 1950.7 to
the contrary) a period of ninety days following a surrender of the Leased
Premises by Tenant to Landlord within which to inspect the Leased Premises, make
required restorations and repairs, receive and verify workmen's billings
therefor, and prepare a final accounting with respect to the Security Deposit.
In no event shall the Security Deposit or any portion thereof, be considered
prepaid rent. Notwithstanding the foregoing, in lieu of a cash Security Deposit,
Tenant may deliver to Landlord a clean, unconditional, irrevocable, transferable
letter of credit in the full amount of the Security Deposit required pursuant to
Article 1 hereof (the "Letter of Credit") in form and issued by a financial
institution ("Issuer") satisfactory to Landlord in its sole discretion,
substantially in the form attached as Exhibit E. The Letter of Credit shall
permit partial draws, and provide that draws thereunder will be honored upon
receipt by Issuer of a written statement signed by Landlord or its authorized
agent stating that Landlord is entitled to draw down on the Letter of Credit
pursuant to the terms of the Lease. The Letter of Credit shall have an
expiration period of one (1) year but shall automatically renew by its terms
unless affirmatively cancelled by either Issuer or Tenant, in which case Issuer
must provide Landlord 30 days' prior written notice of such expiration or
cancellation. Any amount drawn under the Letter of Credit shall be held or used
by Landlord in accordance with this Section 3.7. If the amount of the Letter of
Credit is reduced in accordance with the terms of this Lease, Tenant shall have
the right to replace the existing Letter of Credit with another Letter of Credit
at the reduced amount. If the Tenant fails to renew or replace the Letter of
Credit as required under this Lease at least thirty (30) days before its stated
expiration date, Landlord may draw upon the entire amount of the Letter of
Credit, provided that if Landlord so draws on the Letter of Credit, so long as
Tenant is not otherwise in default, Landlord shall deliver the amount so drawn
to Tenant upon Tenant's delivery to Landlord of a new Letter of Credit in the
amount then required, provided that Tenant makes such delivery within ten (10)
days of Landlord's draw.
(c) In the event Mathilda Associates LLC transfers or sells its
interest in the Property to person any entity other than an institutional buyer
(a "Non-Institutional Buyer"), Tenant shall have the right to require that the
Security Deposit be held by the lender, if any, providing the financing for such
Non-Institutional Buyer to acquire the Property, or be held in an escrow account
controlled by such Non-Institutional Buyer, which account shall be subject to
escrow instructions specifying that (1) Landlord shall only have the right to
draw on the Letter of Credit to the extent the Landlord is entitled to pursuant
to this Section 3.7, (2) Landlord shall deliver a statement to the escrow holder
prior to any draw down, certifying that Landlord is entitled to draw on the
Letter of Credit pursuant to this Section 3.7, and (3) that within ninety (90)
days after expiration of this Lease, the escrow holder shall release the Letter
to Credit to Tenant consistent with the terms of this Lease. For purposes
hereof, the term "institutional buyer" shall include, without limitation, life
insurance companies, banks, pension funds, pension fund advisors, opportunity
funds, hedge funds, private owners who directly or indirectly own more than
$200,000,000 of real estate, or real estate investment trusts.
6.
<PAGE> 11
ARTICLE 4
USE OF LEASED PREMISES AND OUTSIDE AREA
4.1 PERMITTED USE. Tenant shall be entitled to use the Leased Premises solely
for the "Permitted Use" as set forth in Article 1 and for no other purpose
whatsoever. Tenant shall have the right to vacate the Leased Premises at any
time during the Term of this Lease, provided Tenant maintains the Leased
Premises in the same condition as if fully occupied and as otherwise required by
the terms of this Lease. Tenant shall have the right to use the Outside Areas in
conjunction with its Permitted Use of the Leased Premises solely for the
purposes for which they were designed and intended and for no other purposes
whatsoever.
4.2 GENERAL LIMITATIONS ON USE. Tenant shall not do or permit anything to be
done in or about the Leased Premises, the Building, the Outside Areas or the
Property which does or could (i) jeopardize the structural integrity of the
Building or (ii) cause damage to any part of the Leased Premises, the Building,
the Outside Areas or the Property. Tenant shall not operate any equipment within
the Leased Premises which does or could (i) injure, vibrate or shake the Leased
Premises or the Building, (ii) damage, overload or impair the efficient
operation of any electrical, plumbing, heating, ventilating or air conditioning
systems within or servicing the Leased Premises or the Building, or (iii) damage
or impair the efficient operation of the sprinkler system (if any) within or
servicing the Leased Premises or the Building. Tenant shall not (i) install any
equipment or antennas on or make any penetrations of the exterior walls or roof
of the Building or (ii) affix any equipment or make any penetrations or cuts in
the floors, ceiling or walls of the Leased Premises, without Landlord's prior
written consent, which consent shall not be unreasonably withheld; provided,
however, that it shall be reasonable for Landlord to withhold its consent if
Tenant's proposed installations or penetrations impact the structural integrity
of the Building. Any installations, penetrations or cuts in the interior or
exterior walls, roof, floor or ceiling of the Building will be subject to
Tenant's restoration obligations set forth in Section 2.6. Tenant shall not
place any loads upon the floors, walls, ceiling or roof systems which could
endanger the structural integrity of the Building or damage its floors,
foundations or supporting structural components. Tenant shall not place any
explosive, flammable or harmful fluids or other waste materials in the drainage
systems of the Leased Premises, the Building, the Outside Areas or the Property.
Tenant shall not drain or discharge any fluids in the landscaped areas or across
the paved areas of the Property. Tenant shall not use any of the Outside Areas
for the storage of its materials, supplies, inventory or equipment and all such
materials, supplies, inventory or equipment shall at all times be stored within
the Leased Premises. Tenant shall not commit nor permit to be committed any
waste in or about the Leased Premises, the Building, the Outside Areas or the
Property.
4.3 NOISE AND EMISSIONS. All noise generated by Tenant in its use of the Leased
Premises shall be confined or muffled so that it does not interfere with the
businesses of or annoy the occupants and/or users of adjacent properties. All
dust, fumes, odors and other emissions generated by Tenant's use of the Leased
Premises shall be sufficiently dissipated in accordance with sound environmental
practice and exhausted from the Leased Premises in such a manner so as not to
interfere with the businesses of or annoy the occupants and/or users of adjacent
properties, or cause any damage to the Leased Premises, the Building, the
Outside Areas or the Property or any component part thereof or the property of
adjacent property owners.
4.4 TRASH DISPOSAL. Tenant shall provide trash bins or other adequate garbage
disposal facilities within the trash enclosure areas provided or permitted by
Landlord outside the Leased Premises sufficient for the interim disposal of all
of its trash, garbage and waste. All such trash, garbage and waste temporarily
stored in such areas shall be stored in such a manner so that it is not visible
from outside of such areas, and Tenant shall cause such trash, garbage and waste
to be regularly removed from the Property. Tenant shall keep the Leased Premises
in a clean, safe and neat condition and keep the Outside Areas (except the trash
enclosure areas) free and clear of all of Tenant's trash, garbage, waste and/or
boxes, pallets and containers containing same at all times.
4.5 PARKING. Tenant shall have the non-exclusive use of its proportionate share
(calculated using the same method as Tenant's Expense Share) of parking spaces
located in the Outside Areas (which, subject to any transportation management
requirements of the City of Sunnyvale, shall be no less than 3.6 spaces per
1,000 rentable square feet in the Leased Premises). During construction of the
1184 Building (as defined in Article 16), Tenant shall have the non-exclusive
use of all parking areas located on the Property, subject to Landlord's use
thereof for construction activities. Notwithstanding the foregoing, Tenant shall
have exclusive use of the thirty (30) parking spaces directly in front of the
front door to the Leased Premises. Tenant shall not, at any time, park or permit
to be parked any recreational vehicles, inoperative vehicles or equipment in the
Outside Areas or on any portion of the Property. Tenant agrees to assume
responsibility for compliance by its employees and invitees with the parking
provisions contained herein. If Tenant or its employees park any vehicle within
the Property in violation of these provisions, then Landlord may, upon prior
written notice to Tenant giving Tenant one (1) day (or any applicable statutory
notice period, if longer than one (1) day) to remove such vehicle(s). Landlord
reserves the right to grant easements and access rights to others for use of the
parking areas on the Property, provided that such grants do not materially
interfere with Tenant's use of the parking areas.
4.6 SIGNS. Other than business identification signs allowed pursuant to this
Section 4.6, Tenant shall not place or install on or within any portion of the
Leased Premises, the exterior of the Building, the Outside Areas or the Property
any sign, advertisement, banner, placard, or picture which is visible from the
exterior of the Leased Premises. Subject to Landlord's prior written consent,
which shall not be unreasonably withheld, and subject to approval by the City of
Sunnyvale, Tenant shall have the right to install an illuminated business
identification sign
7.
<PAGE> 12
on the Building. Landlord shall cooperate with Tenant's efforts to obtain
approval from the City of Sunnyvale for an illuminated sign. Any such sign shall
be installed at Tenant's sole cost and expense and only in strict compliance
with Landlord's approval (which shall not be unreasonably withheld), and all
Laws and all requirements of the City of Sunnyvale, using a person approved by
Landlord to install same. Subject to Landlord's prior written consent, which
shall not be unreasonably withheld, and subject to approval by the City of
Sunnyvale of the installation of no less than two (2) monument signs for the
Property, Tenant shall have the right to its own business identification
monument sign on the Property, in a location which indicates that such sign
belongs to the Building (or, if Tenant occupies all buildings on the Property,
Tenant shall have the exclusive right to all such monument signs), to be
installed by Landlord at its sole cost and expense. In the event the City of
Sunnyvale only approves the installation of one (1) monument sign for the
Property, Tenant shall have the right to place its business identification
signage on the top of said monument sign, which monument sign shall be installed
by Landlord, at its sole cost and expense. Such monument sign shall comply with
all requirements imposed by the City of Sunnyvale. Landlord may remove any signs
(which have not been approved in writing by Landlord), advertisements, banners,
placards or pictures so placed by Tenant on or within the Leased Premises, the
exterior of the Building, the Outside Areas or the Property and charge to Tenant
the cost of such removal, together with any costs incurred by Landlord to repair
any damage caused thereby, including any cost incurred to restore the surface
(upon which such sign was so affixed) to its original condition. Notwithstanding
anything to the contrary contained herein, Tenant shall remove all of Tenant's
signs, repair any damage caused thereby, and restore the surface upon which the
sign was affixed to its original condition, all to Landlord's reasonable
satisfaction, upon the termination of this Lease.
4.7 COMPLIANCE WITH LAWS AND PRIVATE RESTRICTIONS. Tenant shall abide by and
shall promptly observe and comply with, at its sole cost and expense, all Laws
and Private Restrictions respecting the use and occupancy of the Leased
Premises, the Building, the Outside Areas or the Property including, without
limitation, all Laws governing the use and/or disposal of Hazardous Materials
(except that Tenant shall not be responsible for any Hazardous Materials at the
Leased Premises, the Building, the Outside Areas or the Property prior to the
Delivery Date), and shall defend with competent counsel, indemnify and hold
Landlord harmless from any claims, damages or liability resulting from Tenant's
failure to so abide, observe, or comply. Tenant's obligations hereunder shall
survive the expiration or sooner termination of this Lease.
4.8 COMPLIANCE WITH INSURANCE REQUIREMENTS. With respect to any insurance
policies required or permitted to be carried by Landlord in accordance with the
provision of this Lease, copies of which have been or will, upon Tenant's
written request therefor, be provided to Tenant, Tenant shall not conduct nor
permit any other person to conduct any activities nor keep, store or use (or
allow any other person to keep, store or use) any item or thing within the
Leased Premises, the Building, the Outside Areas or the Property which (i) is
prohibited under the terms of any such policies, (ii) could result in the
termination of the coverage afforded under any of such policies, (iii) could
give to the insurance carrier the right to cancel any of such policies, or (iv)
could cause an increase in the rates (over standard rates) charged for the
coverage afforded under any of such policies. Tenant shall comply with all
requirements of any insurance company, insurance underwriter, or Board of Fire
Underwriters which are necessary to maintain, at standard rates, the insurance
coverages carried by either Landlord or Tenant pursuant to this Lease.
4.9 LANDLORD'S RIGHT TO ENTER. Landlord and its agents shall have the right to
enter the Leased Premises during normal business hours after giving Tenant
reasonable notice and subject to Tenant's reasonable security measures for the
purpose of (i) inspecting the same; (ii) showing the Leased Premises to
prospective purchasers, mortgagees or tenants; (iii) making necessary
alterations, additions or repairs; and (iv) performing any of Tenant's
obligations when Tenant has failed to do so. Landlord shall have the right to
enter the Leased Premises during normal business hours (or as otherwise agreed),
subject to Tenant's reasonable security measures, for purposes of supplying any
maintenance or services agreed to be supplied by Landlord. Landlord shall have
the right to enter the Outside Areas during normal business hours for purposes
of (i) inspecting the exterior of the Building and the Outside Areas; (ii)
posting notices of nonresponsibility (and for such purposes Tenant shall provide
Landlord at least thirty days' prior written notice of any work to be performed
on the Leased Premises); and (iii) supplying any services to be provided by
Landlord. Any entry into the Leased Premises or the Outside Areas obtained by
Landlord in accordance with this paragraph shall not under any circumstances be
construed or deemed to be a forcible or unlawful entry into, or a detainer of,
the Leased Premises, or an eviction, actual or constructive of Tenant from the
Leased Premises or any portion thereof. In exercising its rights under this
Section 4.9, Landlord shall use commercially reasonable efforts to minimize
interference with Tenant's use of the Leased Premises and the Outside Areas.
4.10 USE OF OUTSIDE AREAS. Tenant, in its use of the Outside Areas, shall at all
times keep the Outside Areas in a safe condition free and clear of all
materials, equipment, debris, trash (except within existing enclosed trash
areas), inoperable vehicles, and other items which are not specifically
permitted by Landlord to be stored or located thereon by Tenant. If, in the
opinion of Landlord, unauthorized persons are using any of the Outside Areas by
reason of, or under claim of, the express or implied authority or consent of
Tenant, then Tenant, upon demand of Landlord, shall restrain, to the fullest
extent then allowed by Law, such unauthorized use, and shall initiate such
appropriate proceedings as may be required to so restrain such use. Landlord
reserves the right to grant easements and access rights to others for use of the
Outside Areas and shall not be liable to Tenant for any diminution in Tenant's
right to use the Outside Areas as a result; provided, however, that other than
for construction of the 1184 Building and other requirements under the Use
Permit, of which the Tenant has knowledge and which the Tenant recognizes will
be taking place during the Lease Term, Landlord shall not exercise its rights
pursuant to this Section 4.10 in a manner which materially and adversely affects
Tenant's ability to use the Leased Premises and the Outside Areas for the
Permitted Use or materially and adversely affects Tenant's parking rights.
4.11 ENVIRONMENTAL PROTECTION. Tenant's obligations under this Section 4.11
shall survive the expiration or termination of this Lease.
8.
<PAGE> 13
(a) As used herein, the term "Hazardous Materials" shall mean any toxic
or hazardous substance, material or waste or any pollutant or infectious or
radioactive material, including but not limited to those substances, materials
or wastes regulated now or in the future under any of the following statutes or
regulations and any and all of those substances included within the definitions
of "hazardous substances," "hazardous materials," "hazardous waste," "hazardous
chemical substance or mixture," "imminently hazardous chemical substance or
mixture," "toxic substances," "hazardous air pollutant," "toxic pollutant," or
"solid waste" in the (a) Comprehensive Environmental Response, Compensation and
Liability Act of 1990 ("CERCLA" or "Superfund"), as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"), 42 U.S.C. Section 9601 et
seq., (b) Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C.
Section 6901 et seq., (c) Federal Water Pollution Control Act ("FSPCA"), 33
U.S.C. Section 1251 et seq., (d) Clean Air Act ("CAA"), 42 U.S.C. Section 7401
et seq., (e) Toxic Substances Control Act ("TSCA"), 14 U.S.C. Section 2601 et
seq., (f) Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., (g) Carpenter-Presley-Tanner Hazardous Substance Account Act ("California
Superfund"), Cal. Health & Safety Code Section 25300 et seq., (h) California
Hazardous Waste Control Act, Cal. Health & Safety code Section 25100 et seq.,
(i) Porter-Cologne Water Quality Control Act ("Porter-Cologne Act"), Cal. Water
Code Section 13000 et seq., (j) Hazardous Waste Disposal Land Use Law, Cal.
Health & Safety codes Section 25220 et seq., (k) Safe Drinking Water and Toxic
Enforcement Act of 1986 ("Proposition 65"), Cal. Health & Safety code Section
25249.5 et seq., (l) Hazardous Substances Underground Storage Tank Law, Cal.
Health & Safety code Section 25280 et seq., (m) Air Resources Law, Cal. Health &
Safety Code Section 39000 et seq., and (n) regulations promulgated pursuant to
said laws or any replacement thereof, or as similar terms are defined in the
federal, state and local laws, statutes, regulations, orders or rules. Hazardous
Materials shall also mean any and all other biohazardous wastes and substances,
materials and wastes which are, or in the future become, regulated under
applicable Laws for the protection of health or the environment, or which are
classified as hazardous or toxic substances, materials or wastes, pollutants or
contaminants, as defined, listed or regulated by any federal, state or local
law, regulation or order or by common law decision, including, without
limitation, (i) trichloroethylene, tetrachloroethylene, perchloroethylene and
other chlorinated solvents, (ii) any petroleum products or fractions thereof,
(iii) asbestos, (iv) polychlorinted biphenyls, (v) flammable explosives, (vi)
urea formaldehyde, (vii) radioactive materials and waste, and (viii) materials
and wastes that are harmful to or may threaten human health, ecology or the
environment.
(b) Notwithstanding anything to the contrary in this Lease, Tenant, at
its sole cost, shall comply with all Laws relating to the storage, use and
disposal of Hazardous Materials by Tenant, its subtenants, their respective
agents, employees, contractors or invitees (collectively, the "Tenant Parties").
Tenant shall not store, use or dispose of any Hazardous Materials except for
those Hazardous Materials listed in a Hazardous Materials management plan
("HMMP") which Tenant shall deliver to Landlord upon execution of this Lease and
update at least annually with Landlord ("Permitted Materials") which may be
used, stored and disposed of provided (i) such Permitted Materials are used,
stored, transported, and disposed of in strict compliance with applicable laws,
(ii) such Permitted Materials shall be limited to the materials listed on and
may be used only in the quantities specified in the HMMP, and (iii) Tenant shall
provide Landlord with copies of all material safety data sheets and other
documentation required under applicable Laws in connection with Tenant's use of
Permitted Materials as and when such documentation is provided to any regulatory
authority having jurisdiction, in no event shall Tenant cause or permit to be
discharged into the plumbing or sewage system of the Building or onto the land
underlying or adjacent to the Building any Hazardous Materials. Tenant shall be
solely responsible for and shall defend, indemnify, and hold Landlord and its
agents harmless from and against all claims, costs and liabilities, including
attorneys' fees and costs, arising out of or in connection with Tenant's
storage, use and/or disposal of Hazardous Materials. If the presence of
Hazardous Materials on the Leased Premises caused or permitted by Tenant results
in contamination or deterioration of water or soil, then Tenant shall promptly
take any and all action necessary to clean up such contamination as required by
Law, but the foregoing shall in no event be deemed to constitute permission by
Landlord to allow the presence of such Hazardous Materials. At any time prior to
the expiration of the Lease Term if Tenant has a reasonable basis to suspect
that there has been any release or the presence of Hazardous Materials in the
ground or ground water on the Leased Premises which did not exist upon
commencement of the Lease Term, Tenant shall have the right to conduct
appropriate tests of water and soil and to deliver to Landlord the results of
such tests to demonstrate that no contamination in excess of permitted levels
has occurred as a result of Tenant's use of the Leased Premises. Tenant shall
further be solely responsible for, and shall defend, indemnify, and hold
Landlord and its agents harmless from and against all claims, costs and
liabilities, including attorneys' fees and costs, arising out of or in
connection with any removal, cleanup and restoration work and materials required
hereunder to return the Leased Premises and any other property of whatever
nature to their condition existing prior to the appearance of the Hazardous
Materials, to the extent such removal, cleanup and restoration work is required
by Law.
(c) Upon termination or expiration of the Lease, Tenant at its sole
expense shall cause all Hazardous Materials placed in or about the Leased
Premises, the Building and/or the Property by any Tenant Parties, and all
installations (whether interior or exterior) made by or on behalf of Tenant
relating to the storage, use, disposal or transportation of Hazardous Materials
to be removed from the property and transported for use, storage or disposal in
accordance and compliance with all Laws and other requirements respecting
Hazardous Materials used or permitted to be used by Tenant. Tenant shall apply
for and shall obtain from all appropriate regulatory authorities (including any
applicable fire department or regional water quality control board) all permits,
approvals and clearances necessary for the closure of the Property and shall
take all other actions as may be required to complete the closure of the
Building and the Property. In addition, prior to vacating the Leased Premises,
Tenant shall undertake and submit to Landlord an environmental site assessment
from an environmental consulting company reasonably acceptable to Landlord which
site assessment shall evidence Tenant's compliance with this Paragraph 4.11.
(d) At any time prior to expiration of the Lease term, subject to
reasonable prior notice (not less than forty-eight (48) hours) and Tenant's
reasonable security requirements and provided such activities do not
9.
<PAGE> 14
unreasonably interfere with the conduct of Tenant's business at the Leased
Premises, Landlord shall have the right to enter in and upon the Property,
Building and Leased Premises in order to conduct appropriate tests of water and
soil to determine whether levels of any Hazardous Materials in excess of legally
permissible levels has occurred as a result of any Tenant Parties' use thereof .
Landlord shall furnish copies of all such test results and reports to Tenant
and, at Tenant's option and cost, shall permit split sampling for testing and
analysis by Tenant. Such testing shall be at Tenant's expense if Landlord has a
reasonable basis for suspecting and confirms the presence of Hazardous Materials
in the soil or surface or ground water in, on, under, or about the Property, the
Building or the Leased Premises, which has been caused by or resulted from the
activities of any Tenant Parties.
(e) Landlord may voluntarily cooperate in a reasonable manner with the
efforts of all governmental agencies in reducing actual or potential
environmental damage. Tenant shall not be entitled to terminate this Lease or to
any reduction in or abatement of rent by reason of such compliance or
cooperation. Tenant agrees at all times to cooperate fully with the requirements
and recommendations of governmental agencies regulating, or otherwise involved
in, the protection of the environment.
4.12 RULES AND REGULATIONS. In the event Juniper Networks, Inc. is no longer the
sole tenant of the Building, Landlord shall have the right from time to time to
establish reasonable rules and regulations and/or amendments or additions
thereto respecting the use of the Leased Premises and the Outside Areas for the
care and orderly management of the Property. Upon delivery to Tenant of a copy
of such rules and regulations or any amendments or additions thereto, Tenant
shall comply with such rules and regulations. A violation by Tenant of any of
such rules and regulations shall constitute a default by Tenant under this
Lease. If there is a conflict between the rules and regulations and any of the
provisions of this Lease, the provisions of this Lease shall prevail. Landlord
shall not be responsible or liable to Tenant for the violation of such rules and
regulations by any other tenant of the Property.
4.13 RESERVATIONS. Landlord reserves the right from time to time to grant,
without the consent or joinder of Tenant, such easements, rights of way and
dedications that Landlord deems necessary, and to cause the recordation of
parcel maps and covenants, conditions and restrictions, so long as such
easements, rights of way, dedications and covenants, conditions and restrictions
do not materially and adversely affect the use of the Leased Premises by Tenant,
materially and adversely affect Tenant's parking rights, and do not prohibit any
Permitted Use. Tenant agrees to execute any documents reasonably request by
Landlord to effectuate any such easement rights, dedications, maps or covenants,
conditions and restrictions.
ARTICLE 5
REPAIRS, MAINTENANCE, SERVICES AND UTILITIES
5.1 REPAIR AND MAINTENANCE. Except in the case of damage to or destruction of
the Leased Premises, the Building, the Outside Areas or the Property caused by
an act of God or other peril, in which case the provisions of Article 10 shall
control, the parties shall have the following obligations and responsibilities
with respect to the repair and maintenance of the Leased Premises, the Building,
the Outside Areas, and the Property.
(a) TENANT'S OBLIGATIONS. Tenant shall, at all times during the Lease
Term and at its sole cost and expense, regularly clean and continuously keep and
maintain in good order, condition and repair the Leased Premises and every part
thereof including, without limiting the generality of the foregoing, (i) all
interior walls, floors and ceilings, (ii) all windows, doors and skylights,
(iii) all electrical wiring, conduits, connectors and fixtures, (iv) all
plumbing, pipes, sinks, toilets, faucets and drains, (v) all lighting fixtures,
bulbs and lamps and all heating, ventilating and air conditioning equipment, and
(vi) all entranceways to the Leased Premises. Tenant shall hire, at Tenant's
sole cost and expense, a licensed heating, ventilating and air conditioning
contractor to regularly and periodically (not less frequently than every three
months) inspect and perform required maintenance on the heating, ventilating and
air conditioning equipment and systems serving the Leased Premises. Tenant shall
hire, at Tenant's sole cost and expense, a licensed roofing contractor to
regularly and periodically (not less frequently than semi-annually) inspect and
perform required maintenance on the roof of the Building. If Tenant shall be in
default of its obligations to maintain the heating, ventilating and air
conditioning equipment and systems or roof, Landlord may, at its election,
contract in its own name for such regular and periodic inspections and
maintenance of the heating, ventilating and air conditioning equipment and
systems and/or roof, and charge to Tenant, as Additional Rent, the cost thereof.
Tenant shall, at its sole cost and expense, repair all damage to the Leased
Premises, the Building, the Outside Areas or the Property caused by the
activities of Tenant, its employees, invitees or contractors promptly following
written notice from Landlord to so repair such damages (subject to Section 9.3
of this Lease). If Tenant shall fail to perform the required maintenance or fail
to make repairs required of it pursuant to this paragraph within a reasonable
period of time following notice from Landlord to do so, then Landlord may, at
its election and without waiving any other remedy it may otherwise have under
this Lease or at law, perform such maintenance or make such repairs and charge
to Tenant, as Additional Rent, the costs so incurred by Landlord for same. All
glass within or a part of the Leased Premises, both interior and exterior, is at
the sole risk of Tenant and any broken glass shall promptly be replaced by
Tenant at Tenant's expense with glass of the same kind, size and quality.
Notwithstanding the foregoing, in the event that, due to normal wear and tear
(and not due to other factors, including, without limitation, Tenant's misuse,
overuse or Tenant's alterations, improvements or modifications to the Leased
Premises, the Outside Areas or the Building), Tenant would be required by this
Section 5.1(a) to make a repair or replacement that would be considered a
"capital improvement" as determined in accordance with generally accepted
accounting principles, Landlord shall make such repair or replacement and charge
to Tenant, as Additional Rent, the cost thereof (provided that the cost of such
repair or replacement shall be amortized over its useful life and only the
amortizing portion of such cost shall be included in Additional Rent on a
monthly basis).
10.
<PAGE> 15
(b) LANDLORD'S OBLIGATION. Landlord shall at its sole cost and expense,
at all times during the Lease Term, maintain in good condition and repair the
foundation, the footings, the roof screen, the roof screen penetrations, the
roof structure, load-bearing and exterior walls of the Building. Landlord shall,
at all times during the Lease Term, regularly and continuously keep and maintain
in good order and repair and in a clean and safe condition the Outside Areas,
and charge to Tenant, as Additional Rent, the cost thereof. Landlord shall
regularly and periodically sweep and clean the driveways and parking areas, and
charge to Tenant, as Additional Rent, the cost thereof.
5.2 UTILITIES. Tenant shall arrange at its sole cost and expense and in its own
name, for the supply of gas and electricity to the Leased Premises. In the event
that such services are not separately metered, Tenant shall, at its sole
expense, cause such meters to be installed. Landlord shall maintain the water
meter(s) in its own name; provided, however, that if at any time during the
Lease Term Landlord shall require Tenant to put the water service in Tenant's
name, Tenant shall do so at Tenant's sole cost. Tenant shall be responsible for
determining if the local supplier of water, gas and electricity can supply the
needs of Tenant and whether or not the existing water, gas and electrical
distribution systems within the Building and the Leased Premises are adequate
for Tenant's needs. Tenant shall be responsible for determining if the existing
sanitary and storm sewer systems now servicing the Leased Premises and the
Property are adequate for Tenant's needs. Tenant shall pay all charges for
water, gas, electricity and storm and sanitary sewer services as so supplied to
the Leased Premises, irrespective of whether or not the services are maintained
in Landlord's or Tenant's name.
5.3 SECURITY. Tenant acknowledges that Landlord has not undertaken any duty
whatsoever to provide security for the Leased Premises, the Building, the
Outside Areas or the Property and, accordingly, Landlord is not responsible for
the security of same or the protection of Tenant's property or Tenant's
employees, invitees or contractors. To the extent Tenant determines that such
security or protection services are advisable or necessary, Tenant shall arrange
for and pay the costs of providing same.
5.4 ENERGY AND RESOURCE CONSUMPTION. Landlord may voluntarily cooperate in a
reasonable manner with the efforts of governmental agencies and/or utility
suppliers in reducing energy or other resource consumption within the Property.
Tenant shall not be entitled to terminate this Lease or to any reduction in or
abatement of rent by reason of such compliance or cooperation. Tenant agrees at
all times to cooperate fully with Landlord and to abide by all reasonable rules
established by Landlord (i) in order to maximize the efficient operation of the
electrical, heating, ventilating and air conditioning systems and all other
energy or other resource consumption systems with the Property and/or (ii) in
order to comply with the requirements and recommendations of utility suppliers
and governmental agencies regulating the consumption of energy and/or other
resources.
5.5 LIMITATION OF LANDLORD'S LIABILITY. Landlord shall not be liable to Tenant
for injury to Tenant, its employees, agents, invitees or contractors, damage to
Tenant's property or loss of Tenant's business or profits, nor shall Tenant be
entitled to terminate this Lease or to any reduction in or abatement of rent by
reason of (i) Landlord's failure to provide security services or systems within
the Property for the protection of the Leased Premises, the Building or the
Outside Areas, or the protection of Tenant's property or Tenant's employees,
invitees, agents or contractors, or (ii) Landlord's failure to perform any
maintenance or repairs to the Leased Premises, the Building, the Outside Areas
or the Property until Tenant shall have first notified Landlord, in writing, of
the need for such maintenance or repairs, and then only after Landlord shall
have had a reasonable period of time following its receipt of such notice within
which to perform such maintenance or repairs, or (iii) any failure,
interruption, rationing or other curtailment in the supply of water, electric
current, gas or other utility service to the Leased Premises, the Building, the
Outside Areas or the Property from whatever cause (other than to the extent
caused by Landlord's active negligence or willful misconduct), or (iv) the
unauthorized intrusion or entry into the Leased Premises by third parties (other
than Landlord).
ARTICLE 6
ALTERATIONS AND IMPROVEMENTS
6.1 BY TENANT. Tenant shall not make any alterations to or modifications of the
Leased Premises or construct any improvements within the Leased Premises until
Landlord shall have first approved, in writing, the plans and specifications
therefor, which approval shall not be unreasonably withheld or delayed.
Landlord's approval shall be deemed given if not denied by Landlord in a written
notice to Tenant delivered within fifteen (15) days following receipt of
Tenant's written request. Tenant's written request shall also contain a request
for Landlord to elect whether or not it will require Tenant to remove the
subject alterations, modifications or improvements at the expiration or earlier
termination of this Lease. If such additional request is not included, Landlord
may make such election at the expiration or earlier termination of this Lease
(and for purposes of Tenant's removal obligations set forth in Section 2.6
above, Landlord shall be deemed to have made the election at the time the
alterations, modifications or improvements were completed). Notwithstanding the
foregoing, in the event Tenant exercises the First Expansion Option (as
hereafter defined), Tenant shall have the right, at its sole cost and expense,
subject to the prior written approval of Landlord (which approval shall not be
unreasonably withheld or delayed) to construct a covered open walkway between
the Building and the 1184 Building (as hereafter defined) and Tenant shall not
be required to remove such walkway upon the termination of this Lease. All
modifications, alterations or improvements, once approved by Landlord, shall be
made, constructed or installed by Tenant at Tenant's expense (including all
permit fees and governmental charges related thereto), using a licensed
contractor first approved by Landlord, in substantial compliance with the
Landlord-approved plans and specifications therefor. All work undertaken by
Tenant shall be done in accordance with all Laws and in a good and workmanlike
manner using new materials of good quality. Tenant shall not commence the making
of any such modifications or alterations or the
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construction of any such improvements until (i) all required governmental
approvals and permits shall have been obtained, (ii) all requirements regarding
insurance imposed by this Lease have been satisfied, (iii) Tenant shall have
given Landlord at least five business days prior written notice of its intention
to commence such work so that Landlord may post and file notices of
non-responsibility, and (iv) if requested by Landlord, Tenant shall have
obtained contingent liability and broad form builder's risk insurance in an
amount satisfactory to Landlord in its reasonable discretion to cover any perils
relating to the proposed work not covered by insurance carried by Tenant
pursuant to Article 9. In no event shall Tenant make any modification,
alterations or improvements whatsoever to the Outside Areas or the exterior or
structural components of the Building including, without limitation, any cuts or
penetrations in the floor, roof or exterior walls of the Leased Premises (except
to the extent Tenant has obtained Landlord's approval pursuant to Section 4.2).
As used in this Article, the term "modifications, alterations and/or
improvements" shall include, without limitation, the installation of additional
electrical outlets, overhead lighting fixtures, drains, sinks, partitions,
doorways, or the like. Notwithstanding the foregoing, Tenant, without Landlord's
prior written consent, shall be permitted to make non-structural alterations to
the Building, provided that: (a) such alterations do not exceed $20,000
individually, (b) Tenant shall timely provide Landlord the notice required
pursuant to Paragraph 4.9 above, (c) Tenant shall notify Landlord in writing
within thirty (30) days of completion of the alteration and deliver to Landlord
a set of the plans and specifications therefor, either "as built" or marked to
show construction changes made, and (d) Tenant shall, upon Landlord's request,
remove the alteration at the termination of the Lease and restore the Leased
Premises to their condition prior to such alteration.
6.2 OWNERSHIP OF IMPROVEMENTS. All modifications, alterations and improvements
made or added to the Leased Premises by Tenant (other than Tenant's inventory,
equipment, movable furniture, wall decorations and trade fixtures) shall be
deemed real property and a part of the Leased Premises, but shall remain the
property of Tenant during the Lease. Any such modifications, alterations or
improvements, once completed, shall not be altered or removed from the Leased
Premises during the Lease Term without Landlord's written approval first
obtained in accordance with the provisions of Paragraph 6.1 above. At the
expiration or sooner termination of this Lease, all such modifications,
alterations and improvements other than Tenant's inventory, equipment, movable
furniture, wall decorations and trade fixtures, shall automatically become the
property of Landlord and shall be surrendered to Landlord as part of the Leased
Premises as required pursuant to Article 2, unless Landlord shall require Tenant
to remove any of such modifications, alterations or improvements in accordance
with the provisions of Article 2, in which case Tenant shall so remove same.
Landlord shall have no obligations to reimburse Tenant for all or any portion of
the cost or value of any such modifications, alterations or improvements so
surrendered to Landlord. All modifications, alterations or improvements which
are installed or constructed on or attached to the Leased Premises by Landlord
and/or at Landlord's expense shall be deemed real property and a part of the
Leased Premises and shall be property of Landlord. All lighting, plumbing,
electrical, heating, ventilating and air conditioning fixtures, partitioning,
window coverings, wall coverings and floor coverings installed by Tenant shall
be deemed improvements to the Leased Premises and not trade fixtures of Tenant.
Landlord shall have no lien or interest whatsoever in any of Tenant's property
or equipment located in the Leased Premises or elsewhere, and Landlord waives
any such liens and interests and Landlord hereby agrees to execute a Landlord
Waiver with respect thereto in favor of any lender or equipment lessor of Tenant
strictly in the form attached as Exhibit F.
6.3 ALTERATIONS REQUIRED BY LAW. Tenant shall make all modifications,
alterations and improvements to the Leased Premises, at its sole cost, that are
required by any Law because of (i) Tenant's use or occupancy of the Leased
Premises, the Building, the Outside Areas or the Property, (ii) Tenant's
application for any permit or governmental approval, or (iii) Tenant's making of
any modifications, alterations or improvements to or within the Leased Premises.
If Landlord shall, at any time during the Lease Term, be required by any
governmental authority to make any modifications, alterations or improvements to
the Building or the Property, the cost incurred by Landlord in making such
modifications, alterations or improvements, including interest at a rate equal
to the greater of (a) 12%, or (b) the sum of that rate quoted by Wells Fargo
Bank, N.T. & S.A. from time to time as its prime rate, plus two percent (2%)
("Wells Prime Plus Two") (but in no event more than the maximum interest rate
permitted by law), shall be amortized by Landlord over the useful life of such
modifications, alterations or improvements, as determined in accordance with
generally accepted accounting principles, and the monthly amortized cost of such
modifications, alterations and improvements as so amortized shall be considered
a Property Maintenance Cost.
6.4 LIENS. Tenant shall keep the Property and every part thereof free from any
lien, and shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant, its agents, employees or
contractors relating to the Property. If any such claim of lien is recorded
against Tenant's interest in this Lease, the Property or any part thereof,
Tenant shall bond against, discharge or otherwise cause such lien to be entirely
released within ten days after the same has been recorded. Tenant's failure to
do so shall be conclusively deemed a material default under the terms of this
Lease.
ARTICLE 7
ASSIGNMENT AND SUBLETTING BY TENANT
7.1 BY TENANT. Tenant shall not sublet the Leased Premises or any portion
thereof or assign its interest in this Lease, whether voluntarily or by
operation of Law, without Landlord's prior written consent which shall not be
unreasonably withheld. Any attempted subletting or assignment without Landlord's
prior written consent, at Landlord's election, shall constitute a default by
Tenant under the terms of this Lease. The acceptance of rent by Landlord from
any person or entity other than Tenant, or the acceptance of rent by Landlord
from Tenant with knowledge of a violation of the provisions of this paragraph,
shall not be deemed to be a waiver by Landlord of any provision of this Article
or this Lease or to be a consent to any subletting by Tenant or any assignment
of Tenant's interest in this Lease. Without limiting the circumstances in which
it may be reasonable for Landlord to withhold its
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consent to an assignment or subletting, Landlord and Tenant acknowledge that it
shall be reasonable for Landlord to withhold its consent in the following
instances:
(a) the proposed assignee or sublessee is a governmental agency;
(b) in Landlord's reasonable judgment, the use of the Leased Premises
by the proposed assignee or sublessee would involve occupancy by other than a
Permitted Use as set forth in Article 1, would entail any alterations which
would lessen the value of the leasehold improvements in the Leased Premises, or
would require increased services by Landlord;
(c) in Landlord's reasonable judgment, the financial worth of the
proposed assignee is less than that of Tenant or does not meet the credit
standards applied by Landlord at the time of the proposed assignment;
(d) the proposed assignee or sublessee (or any of its affiliates) has
been in material default under a lease, has been in litigation with a previous
landlord due to a default under a lease, or in the ten years prior to the
assignment or sublease has filed for bankruptcy protection, has been the subject
of an involuntary bankruptcy, or has been adjudged insolvent;
(e) Landlord has experienced a previous default by or is in litigation
with the proposed assignee or sublessee;
(f) in Landlord's reasonable judgment, the Leased Premises, or the
relevant part thereof, will be used in a manner that will violate any negative
covenant as to use contained in this Lease;
(g) the use of the Leased Premises by the proposed assignee or
sublessee will violate any applicable law, ordinance or regulation;
(h) the proposed assignment or sublease fails to include all of the
terms and provisions required to be included therein pursuant to this Article 7;
(i) Tenant is in default of any obligation of Tenant under this Lease,
or Tenant has defaulted on any of its payment obligations under this Lease on
three or more occasions during the 12 months preceding the date that Tenant
shall request consent; or
(j) in the case of a subletting of less than the entire Leased
Premises, if the subletting would result in the division of any floor of the
Building into more than two subleased parcels or would require improvements to
be made outside of the Leased Premises.
7.2 MERGER, REORGANIZATION, OR SALE OF ASSETS. Each of the following shall be
deemed a voluntary assignment of Tenant's interest in this Lease: (a)
dissolution, merger, consolidation or other reorganization of Tenant; or (b) at
any time that the capital stock of Tenant is not publicly traded on a recognized
exchange, the sale or transfer in one or more transactions to one or more
related parties of a controlling percentage of the capital stock of Tenant; or
(c) or the sale or transfer of all or substantially all of the assets of Tenant.
The phrase "controlling percentage" means the ownership of and the right to vote
stock possessing more than fifty percent of the total combined voting power of
all classes of Tenant's capital stock issued, outstanding and entitled to vote
for the election of directors. If Tenant is a partnership, a withdrawal or
change, voluntary, involuntary or by operation of Law, of any general partner,
or the dissolution of the partnership, shall be deemed a voluntary assignment of
Tenant's interest in this Lease. Notwithstanding the foregoing, Tenant (or any
Permitted Assignee, as defined herein) may, without Landlord's prior written
consent and without being subject to any of the provisions of this Article 7,
including without limitation, Landlord's right to recapture any portion of the
Leased Premises, sublet the Leased Premises or assign this Lease to
(individually, a "Permitted Assignee," collectively, "Permitted Assignees"): (i)
a subsidiary, affiliate, division, corporation or joint venture controlling,
controlled by or under common control with Tenant; or (ii) a successor
corporation related to Tenant by merger, consolidation, nonbankruptcy
reorganization, or government action; or (iii) a purchaser of all or
substantially all of the assets of Tenant; provided that either (1) Tenant shall
remain primarily liable under the Lease (except in the event it is not the
surviving entity in the merger) or (2) that any Permitted Assignee under (i),
(ii) or (iii) above has a net worth equal to or greater than Tenant and does not
have any contingent or off-balance sheet liabilities that make it less credit
worthy than Tenant. In the event any proposed assignee or subtenant under (i),
(ii) or (iii) above has a net worth less than Tenant or has contingent or
off-balance sheet liabilities that make it less credit worthy than Tenant,
Landlord's consent (pursuant to Section 7.1 above) shall be required and all of
the terms and conditions of this Article 7 shall apply, except that Landlord
shall not be entitled to terminate this Lease pursuant to Section 7.3, and
Landlord shall not be entitled to any assignment consideration or excess rentals
pursuant to Section 7.5 of this Lease. If any proposed assignee or subtenant
under (i), (ii) or (iii) above does not qualify as a Permitted Assignee because
it has a net worth which is less than Tenant or has contingent or off-balance
sheet liabilities that make it less creditworthy than Tenant, then in the event
Landlord nevertheless consents (pursuant to the provisions of Section 7.1 above)
to such proposed assignee or subtenant, such proposed assignee or subtenant
shall constitute a Permitted Assignee under this Lease.
7.3 LANDLORD'S ELECTION. If Tenant shall desire to assign its interest under the
Lease or to sublet the Leased Premises, Tenant must first notify Landlord, in
writing, of its intent to so assign or sublet, at least thirty (30) days in
advance of the date it intends to so assign its interest in this Lease or sublet
the Leased Premises but not sooner than one hundred eighty days in advance of
such date, specifying in detail the terms of such proposed assignment or
subletting, including the name of the proposed assignee or sublessee, the
property assignee's or sublessee's intended
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use of the Leased Premises, current financial statements (including a balance
sheet, income statement and statement of cash flow, all prepared in accordance
with generally accepted accounting principles) of such proposed assignee or
sublessee, the form of documents to be used in effectuating such assignment or
subletting and such other information as Landlord may reasonably request.
Landlord shall have a period of ten (10) business days following receipt of such
notice and the required information within which to do one of the following: (i)
consent to such requested assignment or subletting subject to Tenant's
compliance with the conditions set forth in Paragraph 7.4 below, or (ii) refuse
to so consent to such requested assignment or subletting, provided that such
consent shall not be unreasonably refused, or (iii) in the case of an assignment
of this Lease or sublet of 100% of the Leased Premises, terminate this Lease.
During such ten (10) business day period, Tenant covenants and agrees to supply
to Landlord, upon request, all necessary or relevant information which Landlord
may reasonably request respecting such proposed assignment or subletting and/or
the proposed assignee or sublessee. Notwithstanding the foregoing, if Landlord
elects to terminate the Lease as provided herein, Landlord shall notify Tenant
thereof during such ten (10) business day period and Tenant shall have ten (10)
business days thereafter to either (i) accept Landlord's termination or (ii)
rescind its request for consent to the assignment or subletting, in which case
the Lease shall continue in full force and effect between Tenant and Landlord.
7.4 CONDITIONS TO LANDLORD'S CONSENT. If Landlord elects to consent, or shall
have been ordered to so consent by a court of competent jurisdiction, to such
requested assignment or subletting, such consent shall be expressly conditioned
upon the occurrence of each of the conditions below set forth, and any purported
assignment or subletting made or ordered prior to the full and complete
satisfaction of each of the following conditions shall be void and, at the
election of Landlord, which election may be exercised at any time following such
a purported assignment or subletting but prior to the satisfaction of each of
the stated conditions, shall constitute a material default by Tenant under this
Lease until cured by satisfying in full each such condition by the assignee or
sublessee. The conditions are as follows:
(a) Landlord having approved in form and substance the assignment or
sublease agreement and any ancillary documents, which approval shall not be
unreasonably withheld by Landlord if the requirements of this Article 7 are
otherwise complied with.
(b) Each such sublessee or assignee having agreed, in writing
satisfactory to Landlord and its counsel and for the benefit of Landlord, to
assume, to be bound by, and to perform the obligations of this Lease to be
performed by Tenant which relate to space being subleased.
(c) Tenant having fully and completely performed all of its obligations
under the terms of this Lease through and including the date of such assignment
or subletting.
(d) Tenant having reimbursed to Landlord all reasonable costs and
reasonable attorneys' fees incurred by Landlord in conjunction with the
processing and documentation of any such requested subletting or assignment.
(e) Tenant having delivered to Landlord a complete and fully-executed
duplicate original of such sublease agreement or assignment agreement (as
applicable) and all related agreements.
(f) Tenant having paid, or having agreed in writing to pay as to future
payments, to Landlord fifty percent (50%) of all assignment consideration or
excess rentals to be paid to Tenant or to any other on Tenant's behalf or for
Tenant's benefit for such assignment or subletting as follows:
(i) If Tenant assigns its interest under this Lease and if all or a
portion of the consideration for such assignment is to be paid by the assignee
at the time of the assignment, that Tenant shall have paid to Landlord and
Landlord shall have received an amount equal to fifty percent (50%) of the
assignment consideration so paid or to be paid (whichever is the greater) at the
time of the assignment by the assignee; or
(ii) If Tenant assigns its interest under this Lease and if Tenant
is to receive all or a portion of the consideration for such assignment in
future installments, that Tenant and Tenant's assignee shall have entered into a
written agreement with and for the benefit of Landlord satisfactory to Landlord
and its counsel whereby Tenant and Tenant's assignee jointly agree to pay to
Landlord an amount equal to fifty percent (50%) of all such future assignment
consideration installments to be paid by such assignee as and when such
assignment consideration is so paid.
(iii) If Tenant subleases the Leased Premises, that Tenant and
Tenant's sublessee shall have entered into a written agreement with and for the
benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and
Tenant's sublessee jointly agree to pay to Landlord fifty percent (50%) of all
excess rentals to be paid by such sublessee as and when such excess rentals are
so paid.
7.5 ASSIGNMENT CONSIDERATION AND EXCESS RENTALS DEFINED. For purposes of this
Article, including any amendment to this Article by way of addendum or other
writing, the term "assignment consideration" shall mean all consideration to be
paid by the assignee to Tenant or to any other party on Tenant's behalf or for
Tenant's benefit as consideration for such assignment, after deduction for
reasonable leasing commissions and reasonable legal fees incurred by Tenant in
connection with such assignment and, during the first six (6) years of the Lease
Term, the cost of tenant improvements made by Tenant at Tenant's sole cost and
expense to prepare the Leased Premises for the assignee, but without deduction
for any other costs or expenses, and the term "excess rentals" shall mean all
consideration to be paid by the sublessee to Tenant or to any other party on
Tenant's behalf or for Tenant's benefit for the sublease of the Leased Premises
in excess of the rent due to Landlord under the terms of this Lease for the
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same period, after deduction for reasonable leasing commissions and reasonable
legal fees incurred by Tenant in connection with such sublease and, during the
first six (6) years of the Lease Term, the cost of tenant improvements made by
Tenant at Tenant's sole cost and expense to prepare the Leased Premises for the
subtenant, but without deduction for any other costs or expenses. Tenant agrees
that the portion of any assignment consideration and/or excess rentals arising
from any assignment or subletting by Tenant which is to be paid to Landlord
pursuant to this Article now is and shall then be the property of Landlord and
not the property of Tenant.
7.6 PAYMENTS. All payments required by this Article to be made to Landlord shall
be made in cash in full as and when they become due. At the time Tenant,
Tenant's assignee or sublessee makes each such payment to Landlord, Tenant or
Tenant's assignee or sublessee, as the case may be, shall deliver to Landlord an
itemized statement in reasonable detail showing the method by which the amount
due Landlord was calculated and certified by the party making such payment as
true and correct.
7.7 GOOD FAITH. The rights granted to Tenant by this Article are granted in
consideration of Tenant's express covenant that all pertinent allocations which
are made by Tenant between the rental value of the Leased Premises and the value
of any of Tenant's personal property which may be conveyed or leased generally
concurrently with and which may reasonably be considered a part of the same
transaction as the permitted assignment or subletting shall be made fairly,
honestly and in good faith. If Tenant shall breach this covenant, Landlord may
immediately declare Tenant to be in default under the terms of this Lease and
terminate this Lease and/or exercise any other rights and remedies Landlord
would have under the terms of this Lease in the case of a material default by
Tenant under this Lease.
7.8 EFFECT OF LANDLORD'S CONSENT. No subletting or assignment, even with the
consent of Landlord, shall relieve Tenant of its personal and primary obligation
to pay rent and to perform all of the other obligations to be performed by
Tenant hereunder. Consent by Landlord to one or more assignments of Tenant's
interest in this Lease or to one or more sublettings of the Leased Premises
shall not be deemed to be a consent to any subsequent assignment or subletting.
If Landlord shall have been ordered by a court of competent jurisdiction to
consent to a requested assignment or subletting, or such an assignment or
subletting shall have been ordered by a court of competent jurisdiction over the
objection of Landlord, such assignment or subletting shall not be binding
between the assignee (or sublessee) and Landlord until such time as all
conditions set forth in Paragraph 7.4 above have been fully satisfied (to the
extent not then satisfied) by the assignee or sublessee, including, without
limitation, the payment to Landlord of all agreed assignment considerations
and/or excess rentals then due Landlord.
ARTICLE 8
LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY
8.1 LIMITATION ON LANDLORD'S LIABILITY AND RELEASE. Landlord shall not be liable
to Tenant for, and Tenant hereby releases Landlord and its partners, principals,
members, officers, agents, employees, lenders, attorneys, and consultants from,
any and all liability, whether in contract, tort or on any other basis, for any
injury to or any damage sustained by Tenant, Tenant's agents, employees,
contractors or invitees, any damage to Tenant's property, or any loss to
Tenant's business, loss of Tenant's profits or other financial loss of Tenant
resulting from or attributable to the condition of, the management of, the
repair or maintenance of, the protection of, the supply of services or utilities
to, the damage in or destruction of the Leased Premises, the Building, the
Property or the Outside Areas, including without limitation (i) the failure,
interruption, rationing or other curtailment or cessation in the supply of
electricity, water, gas or other utility service to the Property, the Building
or the Leased Premises; (ii) the vandalism or forcible entry into the Building
or the Leased Premises; (iii) the penetration of water into or onto any portion
of the Leased Premises; (iv) the failure to provide security and/or adequate
lighting in or about the Property, the Building or the Leased Premises, (v) the
existence of any design or construction defects within the Property, the
Building or the Leased Premises; (vi) the failure of any mechanical systems to
function properly (such as the HVAC systems); (vii) the blockage of access to
any portion of the Property, the Building or the Leased Premises, except that
Tenant does not so release Landlord from such liability to the extent such
damage was proximately caused by Landlord's active negligence, willful
misconduct, or Landlord's failure to perform an obligation expressly undertaken
pursuant to this Lease after a reasonable period of time shall have lapsed
following receipt of written notice from Tenant to so perform such obligation.
In this regard, Tenant acknowledges that it is fully apprised of the provisions
of Law relating to releases, and particularly to those provisions contained in
Section 1542 of the California Civil Code which reads as follows:
"A general release does not extend to claims
which the creditor does not know or suspect to
exist in his favor at the time of executing the
release, which if known by him must have
materially affected his settlement with the
debtor."
Notwithstanding such statutory provision, and for the purpose of implementing a
full and complete release and discharge, Tenant hereby (i) waives the benefit of
such statutory provision and (ii) acknowledges that, subject to the exceptions
specifically set forth herein, the release and discharge set forth in this
paragraph is a full and complete settlement and release and discharge of all
claims and is intended to include in its effect, without limitation, all claims
which Tenant, as of the date hereof, does not know of or suspect to exist in its
favor.
8.2 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant shall defend with competent
counsel satisfactory to Landlord any claims made or legal actions filed or
threatened against Landlord with respect to the violation of any Law, or the
death, bodily injury, personal injury, property damage, or interference with
contractual or property rights suffered by any third party, occurring within the
Leased Premises or resulting from Tenant's use or occupancy of
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the Leased Premises, the Building or the Outside Areas, or resulting from
Tenant's activities in or about the Leased Premises, the Building, the Outside
Areas or the Property, and Tenant shall indemnify and hold Landlord, Landlord's
partners, principals, members, employees, agents and contractors harmless from
any loss liability, penalties, or expense whatsoever (including any loss
attributable to vacant space which otherwise would have been leased, but for
such activities) resulting therefrom, except to the extent proximately caused by
the active negligence or willful misconduct of Landlord or Landlord's failure to
perform an obligation expressly undertaken pursuant to this Lease after a
reasonable period of time shall have lapsed following receipt of written notice
from Tenant to so perform such obligation. This indemnity agreement shall
survive the expiration or sooner termination of this Lease.
ARTICLE 9
INSURANCE
9.1 TENANT'S INSURANCE. Tenant shall maintain insurance complying with all of
the following:
(a) Tenant shall procure, pay for and keep in full force and effect, at
all times during the Lease Term, the following:
(i) Comprehensive general liability insurance insuring Tenant
against liability for personal injury, bodily injury, death and damage to
property occurring within the Leased Premises, or resulting from Tenant's use or
occupancy of the Leased Premises, the Building, the Outside Areas or the
Property, or resulting from Tenant's activities in or about the Leased Premises
or the Property, with coverage in an amount equal to Tenant's Required Liability
Coverage (as set forth in Article 1), which insurance shall contain a "broad
form liability" endorsement insuring Tenant's performance of Tenant's
obligations to indemnify Landlord as contained in this Lease.
(ii) Fire and property damage insurance in so-called "fire and
extended coverage" form insuring Tenant against loss from physical damage to
Tenant's personal property, inventory, trade fixtures and improvements within
the Leased Premises with coverage for the full actual replacement cost thereof;
(iii) Plate glass insurance, at actual replacement cost;
(iv) Pressure vessel insurance, if applicable;
(v) Workers' compensation insurance and any other employee benefit
insurance sufficient to comply with all laws; and
(vi) With respect to making of alterations or the construction of
improvements or the like undertaken by Tenant, contingent liability and
builder's risk insurance, in an amount and with coverage reasonably satisfactory
to Landlord.
(b) Each policy of liability insurance required to be carried by Tenant
pursuant to this paragraph or actually carried by Tenant with respect to the
Leased Premises or the Property: (i) shall, except with respect to insurance
required by subparagraph (a)(vi) above, name Landlord, and such others as are
designated by Landlord, as additional insureds; (ii) shall be primary insurance
providing that the insurer shall be liable for the full amount of the loss, up
to and including the total amount of liability set forth in the declaration of
coverage, without the right of contribution from or prior payment by any other
insurance coverage of Landlord; (iii) shall be in a form satisfactory to
Landlord; (iv) shall be carried with companies reasonably acceptable to Landlord
with Best's ratings of at least A and XI; (v) shall provide that such policy
shall not be subject to cancellation, lapse or change except after at least
thirty days prior written notice to Landlord, and (vi) shall contain a so-called
"severability" or "cross liability" endorsement. Each policy of property
insurance maintained by Tenant with respect to the Leased Premises or the
Property or any property therein (i) shall provide that such policy shall not be
subject to cancellation, lapse or change except after at least thirty days prior
written notice to Landlord and (ii) shall contain a waiver and/or a permission
to waive by the insurer of any right of subrogation against Landlord, its
partners, principals, members, officers, employees, agents and contractors,
which might arise by reason of any payment under such policy or by reason of any
act or omission of Landlord, its partners, principals, members, officers,
employees, agents and contractors.
(C) Prior to the time Tenant or any of its contractors enters the
Leased Premises, Tenant shall deliver to Landlord, with respect to each policy
of insurance required to be carried by Tenant pursuant to this Article, a copy
of such policy (appropriately authenticated by the insurer as having been
issued, premium paid) or a certificate of the insurer certifying in form
satisfactory to Landlord that a policy has been issued, premium paid, providing
the coverage required by this Paragraph and containing the provisions specified
herein. With respect to each renewal or replacement of any such insurance, the
requirements of this Paragraph must be complied with not less than thirty days
prior to the expiration or cancellation of the policies being renewed or
replaced. Landlord may, at any time and from time to time, inspect and/or copy
any and all insurance policies required to be carried by Tenant pursuant to this
Article. If Landlord's Lender, insurance broker, advisor or counsel reasonably
determines at any time that the amount of coverage set forth in Paragraph 9.1(a)
for any policy of insurance Tenant is required to carry pursuant to this Article
is not adequate, then Tenant shall increase the amount of coverage for such
insurance to such greater amount as Landlord's Lender, insurance broker, advisor
or counsel reasonably deems adequate.
9.2 LANDLORD'S INSURANCE. With respect to insurance maintained by Landlord:
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(a) Landlord shall maintain, as the minimum coverage required of it by
this Lease, fire and property damage insurance in so-called "fire and extended
coverage" form insuring Landlord (and such others as Landlord may designate)
against loss from physical damage to the Building with coverage of not less than
one hundred percent (100%) of the full actual replacement cost thereof and
against loss of rents for a period of not less than six months. Such fire and
property damage insurance, at Landlord's election but without any requirements
on Landlord's behalf to do so, (i) may be written in so-called "all risk" form,
excluding only those perils commonly excluded from such coverage by Landlord's
then property damage insurer; (ii) may provide coverage for physical damage to
the improvements so insured for up to the entire full actual replacement cost
thereof; (iii) may be endorsed to cover loss or damage caused by any additional
perils against which Landlord may elect to insure, including earthquake and/or
flood; and/or (iv) may provide coverage for loss of rents for a period of up to
twelve months. Landlord shall not be required to cause such insurance to cover
any of Tenant's personal property, inventory, and trade fixtures, or any
modifications, alterations or improvements made or constructed by Tenant to or
within the Leased Premises. Landlord shall use commercially reasonable efforts
to obtain such insurance at competitive rates.
(b) Landlord shall maintain comprehensive general liability insurance
insuring Landlord (and such others as are designated by Landlord) against
liability for personal injury, bodily injury, death, and damage to property
occurring in, on or about, or resulting from the use or occupancy of the
Property, or any portion thereof, with combined single limit coverage of at
least Three Million Dollars ($3,000,000). Landlord may carry such greater
coverage as Landlord or Landlord's Lender, insurance broker, advisor or counsel
may from time to time determine is reasonably necessary for the adequate
protection of Landlord and the Property.
(c) Landlord may maintain any other insurance which in the opinion of
its insurance broker, advisor or legal counsel is prudent in carry under the
given circumstances, provided such insurance is commonly carried by owners of
property similarly situated and operating under similar circumstances.
9.3 MUTUAL WAIVER OF SUBROGATION. Landlord hereby releases Tenant, and Tenant
hereby releases Landlord and its respective partners, principals, members,
officers, agents, employees and servants, from any and all liability for loss,
damage or injury to the property of the other in or about the Leased Premises or
the Property which is caused by or results from a peril or event or happening
which is covered by insurance actually carried and in force at the time of the
loss by the party sustaining such loss; provided, however, that such waiver
shall be effective only to the extent permitted by the insurance covering such
loss and to the extent such insurance is not prejudiced thereby.
ARTICLE 10
DAMAGE TO LEASED PREMISES
10.1 LANDLORD'S DUTY TO RESTORE. If the Leased Premises, the Building or the
Outside Area are damaged by any peril after the Effective Date of this Lease,
Landlord shall restore the same, as and when required by this paragraph, unless
this Lease is terminated by Landlord pursuant to Paragraph 10.3 or by Tenant
pursuant to Paragraph 10.4. If this Lease is not so terminated, then upon the
issuance of all necessary governmental permits, Landlord shall commence and
diligently prosecute to completion the restoration of the Leased Premises, the
Building or the Outside Area, as the case may be, to the extent then allowed by
law, to substantially the same condition in which it existed as of the Lease
Commencement Date. Landlord's obligation to restore shall be limited to the
improvements constructed by Landlord. Landlord shall have no obligation to
restore any Improvements made by Tenant to the Leased Premises or any of
Tenant's personal property, inventory or trade fixtures. Upon completion of the
restoration by Landlord, Tenant shall forthwith replace or fully repair all of
Tenant's personal property, inventory, trade fixtures and other improvements
constructed by Tenant to like or similar conditions as existed at the time
immediately prior to such damage or destruction.
10.2 INSURANCE PROCEEDS. All insurance proceeds available from the fire and
property damage insurance carried by Landlord shall be paid to and become the
property of Landlord. If this Lease is terminated pursuant to either Paragraph
10.3 or 10.4, all insurance proceeds available from insurance carried by Tenant
which cover loss of property that is Landlord's property or would become
Landlord's property on termination of this Lease shall be paid to and become the
property of Landlord, and the remainder of such proceeds shall be paid to and
become the property of Tenant. If this Lease is not terminated pursuant to
either Paragraph 10.3 or 10.4, all insurance proceeds available from insurance
carried by Tenant which cover loss to property that is Landlord's property shall
be paid to and become the property of Landlord, and all proceeds available from
such insurance which cover loss to property which would only become the property
of Landlord upon the termination of this Lease shall be paid to and remain the
property of Tenant. The determination of Landlord's property and Tenant's
property shall be made pursuant to Paragraph 6.2.
10.3 LANDLORD'S RIGHT TO TERMINATE. Landlord shall have the option to terminate
this Lease in the event any of the following occurs, which option may be
exercised only by delivery to Tenant of a written notice of election to
terminate within thirty days after the date of such damage or destruction:
(a) The Building is damaged by any peril covered by valid and
collectible insurance actually carried by Landlord and in force at the time of
such damage or destruction or by any peril which would have been covered by the
insurance Landlord is required to maintain pursuant to Section 9.2 (an "Insured
Peril") to such an extent that the estimated cost to restore the Building
exceeds the lesser of (i) the insurance proceeds available from insurance
actually carried by Landlord (or which Landlord was required to carry pursuant
to Section 9.2(a) hereof) plus the amount of any deductible (up to a maximum
amount of five percent (5%) of the replacement cost of the Building),
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plus any amount that the Tenant agrees in writing to contribute towards
restoration, or (ii) fifty percent of the then actual replacement cost of the
Building;
(b) The Building is damaged by an uninsured peril, which peril Landlord
was not required to insure against pursuant to the provisions of Article 9 of
this Lease, provided, however, that, subject to the requirements of the holder
of any deed of trust encumbering the Property, Landlord shall not have the right
to terminate this Lease if Tenant notifies Landlord, within thirty (30) days
after Tenant receives Landlord's written notice of termination pursuant to this
Section 10.3, that Tenant will pay for the cost of restoration of the Leased
Premises, in excess of any insurance proceeds to be received by Landlord.
(c) The Building is damaged by any peril and, because of the laws then
in force, the Building (i) cannot be restored at reasonable cost or (ii) if
restored, cannot be used for the same use being made thereof before such damage.
10.4 TENANT'S RIGHT TO TERMINATE. If the Leased Premises, the Building or the
Outside Area are damaged by any peril and Landlord does not elect to terminate
this Lease or is not entitled to terminate this Lease pursuant to this Article,
then as soon as reasonably practicable, Landlord shall furnish Tenant with the
written opinion of Landlord's architect or construction consultant as to when
the restoration work required of Landlord may be complete. Tenant shall have the
option to terminate this Lease in the event any of the following occurs, which
option may be exercised only by delivery to Landlord of a written notice of
election to terminate within seven days after Tenant receives from Landlord the
estimate of the time needed to complete such restoration:
(a) If the time estimated to substantially complete the restoration
exceeds nine (9) months from and after the date the architect's or construction
consultant's written opinion is delivered; or
(b) If the damage occurred within twelve months of the last day of the
Lease Term and the time estimated to substantially complete the restoration
exceeds one hundred eighty days from and after the date such restoration is
commenced.
10.5 TENANT'S WAIVER. Landlord and Tenant agree that the provisions of Paragraph
10.4 above, captioned "Tenant's Right To Terminate", are intended to supersede
and replace the provisions contained in California Civil Code, Section 1932,
Subdivision 2, and California Civil Code, Section 1934, and accordingly, Tenant
hereby waives the provisions of such Civil Code Sections and the provisions of
any successor Civil Code Sections or similar laws hereinafter enacted.
10.6 ABATEMENT OF RENT. In the event of damage to the Leased Premises which does
not result in the termination of this Lease, the Base Monthly Rent (and any
Additional Rent) shall be temporarily abated during the period of restoration in
proportion in the degree to which Tenant's use of the Leased Premises is
impaired by such damage.
ARTICLE 11
CONDEMNATION
11.1 TENANT'S RIGHT TO TERMINATE. Except as otherwise provided in Paragraph 11.4
below regarding temporary takings, Tenant shall have the option to terminate
this Lease if, as a result of any taking, (i) all of the Leased Premises is
taken, or (ii) twenty-five percent (25%) or more of the Leased Premises is taken
and the part of the Leased Premises that remains cannot, within a reasonable
period of time, be made reasonably suitable for the continued operation of
Tenant's business, or (iii) or a portion of the Outside Area is taken such that
the parking available to Tenant is reduced by more than twenty percent (20%),
and the Landlord does not, within a reasonable period of time, provide
alternative parking arrangements within a reasonable walking distance of the
Leased Premises. Tenant must exercise such option within a reasonable period of
time, to be effective on the later to occur of (i) the date that possession of
that portion of the Leased Premises that is condemned is taken by the condemnor
or (ii) the date Tenant vacated the Leased Premises.
11.2 LANDLORD'S RIGHT TO TERMINATE. Except as otherwise provided in Paragraph
11.4 below regarding temporary takings, Landlord shall have the option to
terminate this Lease if, as a result of any taking, (i) all of the Leased
Premises is taken, (ii) twenty-five percent (25%) or more of the Leased Premises
is taken and the part of the Leased Premises that remains cannot, within a
reasonable period of time, be made reasonably suitable for the continued
operation of Tenant's business, or (iii) because of the laws then in force, the
Leased Premises may not be used for the same use being made before such taking,
whether or not restored as required by Paragraph 11.3 below. Any such option to
terminate by Landlord must be exercised within a reasonable period of time, to
be effective as of the date possession is taken by the condemnor.
11.3 RESTORATION. If any part of the Leased Premises or the Building is taken
and this Lease is not terminated, then Landlord shall, to the extent not
prohibited by laws then in force, repair any damage occasioned thereby to the
remainder thereof to a condition reasonably suitable for Tenant's continued
operations and otherwise, to the extent practicable, in the manner and to the
extent provided in Paragraph 10.1.
11.4 TEMPORARY TAKING. If a portion of the Leased Premises is temporarily taken
for a period of one year or less and such period does not extend beyond the
Lease Expiration Date, this Lease shall remain in effect. If any portion of the
Leased Premises is temporarily taken for a period which exceeds one year or
which extends beyond the Lease
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Expiration Date, then the rights of Landlord and Tenant shall be determined in
accordance with Paragraphs 11.1 and 11.2 above.
11.5 DIVISION OF CONDEMNATION AWARD. Any award made for any taking of the
Property, the Building, or the Leased Premises, or any portion thereof, shall
belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of
its right, title and interest in any such award; provided, however, that Tenant
shall be entitled to receive any portion of the award that is made specifically
(i) for the taking of personal property, inventory or trade fixtures belonging
to Tenant, (ii) for the interruption of Tenant's business or its moving costs,
or (iii) for the value of any leasehold improvements installed and paid for by
Tenant. The rights of Landlord and Tenant regarding any condemnation shall be
determined as provided in this Article, and each party hereby waives the
provisions of Section 1265.130 of the California Code of Civil Procedure, and
the provisions of any similar law hereinafter enacted, allowing either party to
petition the Supreme Court to terminate this Lease and/or otherwise allocate
condemnation awards between Landlord and Tenant in the event of a taking of the
Leased Premises.
11.6 ABATEMENT OF RENT. In the event of a taking of the Leased Premises which
does not result in a termination of this Lease (other than a temporary taking),
then, as of the date possession is taken by the condemning authority, the Base
Monthly Rent shall be reduced in the same proportion that the area of that part
of the Leased Premises so taken (less any addition to the area of the Leased
Premises by reason of any reconstruction) bears to the area of the Leased
Premises immediately prior to such taking.
11.7 TAKING DEFINED. The term "taking" or "taken" as used in this Article 11
shall mean any transfer or conveyance of all or any portion of the Property to a
public or quasi-public agency or other entity having the power of eminent domain
pursuant to or as a result of the exercise of such power by such an agency,
including any inverse condemnation and/or any sale or transfer by Landlord of
all or any portion of the Property to such an agency under threat of
condemnation or the exercise of such power.
ARTICLE 12
DEFAULT AND REMEDIES
12.1 EVENTS OF TENANT'S DEFAULT. Tenant shall be in default of its obligations
under this Lease if any of the following events occur:
(a) Tenant shall have failed to pay Base Monthly Rent or any Additional
Rent within three (3) days after notice from Landlord that such rent is past due
provided, however, that such notice shall be concurrent with, and not in
addition to, any notice required by applicable Laws; or
(b) Tenant shall have done or permitted to be done any act, use or
thing in its use, occupancy or possession of the Leased Premises or the Building
or the Outside Areas which is prohibited by the terms of this Lease or Tenant
shall have failed to perform any term, covenant or condition of this Lease
(except those requiring the payment of Base Monthly Rent or Additional Rent,
which failures shall be governed by subparagraph (a) above) within thirty (30)
days after written notice from Landlord to Tenant specifying the nature of such
failure and requesting Tenant to perform same or within such longer period as is
reasonably required in the event such default is curable but not within such
thirty (30) day period, provided such cure is promptly commenced within such
thirty (30) day period and is thereafter diligently prosecuted to completion; or
(c) Tenant shall have sublet the Leased Premises or assigned or
encumbered its interest in this Lease in violation of the provisions contained
in Article 7, whether voluntarily or by operation of law; or
(d) Tenant shall have abandoned the Leased Premises; or
(e) Tenant or any Guarantor of this Lease shall have permitted or
suffered the sequestration or attachment of, or execution on, or the appointment
of a custodian or receiver with respect to, all or any substantial part of the
property or assets of Tenant (or such Guarantor) or any property or asset
essential to the conduct of Tenant's (or such Guarantor's) business, and Tenant
(or such Guarantor) shall have failed to obtain a return or release of the same
within thirty days thereafter, or prior to sale pursuant to such sequestration,
attachment or levy, whichever is earlier; or
(f) Tenant or any Guarantor of this Lease shall have made a general
assignment of all or a substantial part of its assets for the benefit of its
creditors; or
(g) Tenant or any Guarantor of this Lease shall have allowed (or
sought) to have entered against it a decree or order which: (i) grants or
constitutes an order for relief, appointment of a trustee, or condemnation or a
reorganization plan under the bankruptcy laws of the United States; (ii)
approves as properly filed a petition seeking liquidation or reorganization
under said bankruptcy laws or any other debtor's relief law or similar statute
of the United States or any state thereof; or (iii) otherwise directs the
winding up or liquidation of Tenant; provided, however, if any decree or order
was entered without Tenant's consent or over Tenant's objection, Landlord may
not terminate this Lease pursuant to this Subparagraph if such decree or order
is rescinded or reversed within thirty days after its original entry; or
(h) Tenant or any Guarantor of this Lease shall have availed itself of
the protection of any debtor's relief law, moratorium law or other similar law
which does not require the prior entry of a decree or order.
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12.2 LANDLORD'S REMEDIES. In the event of any default by Tenant, and without
limiting Landlord's right to indemnification as provided in Article 8.2,
Landlord shall have the following remedies, in addition to all other rights and
remedies provided by law or otherwise provided in this Lease, to which Landlord
may resort cumulatively, or in the alternative:
(a) Landlord may, at Landlord's election, keep this Lease in effect and
enforce, by an action at law or in equity, all of its rights and remedies under
this Lease including, without limitation, (i) the right to recover the rent and
other sums as they become due by appropriate legal action, (ii) the right to
make payments required by Tenant, or perform Tenant's obligations and be
reimbursed by Tenant for the cost thereof with interest at the then maximum rate
of interest not prohibited by law from the date the sum is paid by Landlord
until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive
relief and specific performance to prevent Tenant from violating the terms of
this Lease and/or to compel Tenant to perform its obligations under this Lease,
as the case may be.
(b) Landlord may, at Landlord's election, terminate this Lease by
giving Tenant written notice of termination, in which event this Lease shall
terminate on the date set forth for termination in such notice, in which event
Tenant shall immediately surrender the Leased Premises to Landlord, and if
Tenant fails to do so, Landlord may, without prejudice to any other remedy which
it may have for possession or arrearages in rent, enter upon and take possession
of the Leased Premises and expel or remove Tenant and any other person who may
be occupying the Leased Premises or any part thereof, without being liable for
prosecution or any claim or damages therefor. Any termination under this
subparagraph shall not relieve Tenant from its obligation to pay to Landlord all
Base Monthly Rent and Additional Rent then or thereafter due, or any other sums
due or thereafter accruing to Landlord, or from any claim against Tenant for
damages previously accrued or then or thereafter accruing. In no event shall any
one or more of the following actions by Landlord, in the absence of a written
election by Landlord to terminate this Lease constitute a termination of this
Lease:
(i) Appointment of a receiver or keeper in order to protect
Landlord's interest hereunder;
(ii) Consent to any subletting of the Leased Premises or assignment
of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise;
or
(iii) Any action taken by Landlord or its partners, principals,
members, officers, agents, employees, or servants, which is intended to mitigate
the adverse effects of any breach of this Lease by Tenant, including, without
limitation, any action taken to maintain and preserve the Leased Premises on any
action taken to relet the Leased Premises or any portion thereof for the account
at Tenant and in the name of Tenant.
(c) In the event Tenant breaches this Lease and abandons the Leased
Premises, Landlord may terminate this Lease, but this Lease shall not terminate
unless Landlord gives Tenant written notice of termination. If Landlord does not
terminate this Lease by giving written notice of termination, Landlord may
enforce all its rights and remedies under this Lease, including the right and
remedies provided by California Civil Code Section 1951.4 ("lessor may continue
lease in effect after lessee's breach and abandonment and recover rent as it
becomes due, if lessee has right to sublet or assign, subject only to reasonable
limitations"), as in effect on the Effective Date of this Lease.
(d) In the event Landlord terminates this Lease, Landlord shall be
entitled, at Landlord's election, to the rights and remedies provided in
California Civil Code Section 1951.2, as in effect on the Effective Date of this
Lease. For purposes of computing damages pursuant to Section 1951.2, an interest
rate equal to the maximum rate of interest then not prohibited by law shall be
used where permitted. Such damages shall include, without limitation:
(i) The worth at the time of the award of the unpaid rent which had
been earned at the time of termination;
(ii) The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided,
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; and
(iii) 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 which in the ordinary course of things would be likely to
result therefrom, including without limitation, the following: (i) expenses for
cleaning, repairing or restoring the Leased Premises, (ii) expenses for
altering, remodeling or otherwise improving the Leased Premises for the purpose
of reletting, including removal of existing leasehold improvements and/or
installation of additional leasehold improvements (regardless of how the same is
funded, including reduction of rent, a direct payment or allowance to a new
tenant, or otherwise), (iii) broker's fees allocable to the remainder of the
term of this Lease, advertising costs and other expenses of reletting the Leased
Premises; (iv) costs of carrying and maintaining the Leased Premises, such as
taxes, insurance premiums, utility charges and security precautions, (v)
expenses incurred in removing, disposing of and/or storing any of Tenant's
personal property, inventory or trade fixtures remaining therein; (vi)
reasonable attorney's fees, expert witness fees, court costs and other
reasonable expenses incurred by Landlord (but not limited to taxable costs) in
retaking possession of the Leased Premises, establishing damages hereunder, and
releasing the Leased Premises; and (vii) any other expenses, costs or damages
otherwise incurred or suffered as a result of Tenant's default.
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12.3 LANDLORD'S DEFAULT AND TENANT'S REMEDIES. In the event Landlord fails to
perform its obligations under this Lease, Landlord shall nevertheless not be in
default under the terms of this Lease until such time as Tenant shall have first
given Landlord written notice specifying the nature of such failure to perform
its obligations, and then only after Landlord shall have had thirty (30) days
following its receipt of such notice within which to perform such obligations;
provided that, if longer than thirty (30) days is reasonably required in order
to perform such obligations, Landlord shall have such longer period. In the
event of Landlord's default as above set forth, then, and only then, Tenant may
then proceed in equity or at law to compel Landlord to perform its obligations
and/or to recover damages proximately caused by such failure to perform (except
as and to the extent Tenant has waived its right to damages as provided in this
Lease).
12.4 LIMITATION OF TENANT'S RECOURSE. If Landlord is a corporation, trust,
partnership, joint venture, limited liability company, unincorporated
association, or other form of business entity, Tenant agrees that (i) the
obligations of Landlord under this Lease shall not constitute personal
obligations of the officers, directors, trustees, partners, joint venturers,
members, owners, stockholders, or other principals of such business entity, and
(ii) Tenant shall have recourse only to the property of such corporation, trust,
partnership, joint venture, limited liability company, unincorporated
association, or other form of business entity for the satisfaction of such
obligations and not against the assets of such officers, directors, trustees,
partners, joint venturers, members, owners, stockholders or principals.
Additionally, if Landlord is a partnership or limited liability company, then
Tenant covenants and agrees:
(a) No partner or member of Landlord shall be sued or named as a party
in any suit or action brought by Tenant with respect to any alleged breach of
this Lease (except to the extent necessary to secure jurisdiction over the
partnership and then only for that sole purpose);
(b) No service of process shall be made against any partner or member
of Landlord except for the sole purpose of securing jurisdiction over the
partnership; and
(c) No writ of execution will ever be levied against the assets of any
partner or member of Landlord other than to the extent of his or her interest in
the assets of the partnership or limited liability company constituting
Landlord.
Tenant further agrees that each of the foregoing covenants and agreements shall
be enforceable by Landlord and by any partner or member of Landlord and shall be
applicable to any actual or alleged misrepresentation or nondisclosure made
regarding this Lease or the Leased Premises or any actual or alleged failure,
default or breach of any covenant or agreement either expressly or implicitly
contained in this Lease or imposed by statute or at common law.
12.5 TENANT'S WAIVER. Landlord and Tenant agree that the provisions of Paragraph
12.3 above are intended to supersede and replace the provisions of California
Civil Code Sections 1932(1), 1941 and 1942, and accordingly, Tenant hereby
waives the provisions of California Civil Code Sections 1932(1), 1941 and 1942
and/or any similar or successor law regarding Tenant's right to terminate this
Lease or to make repairs and deduct the expenses of such repairs from the rent
due under this Lease.
ARTICLE 13
GENERAL PROVISIONS
13.1 TAXES ON TENANT'S PROPERTY. Tenant shall pay before delinquency any and all
taxes, assessments, license fees, use fees, permit fees and public charges of
whatever nature or description levied, assessed or imposed against Tenant or
Landlord by a governmental agency arising out of, caused by reason of or based
upon Tenant's estate in this Lease, Tenant's ownership of property, improvements
made by Tenant to the Leased Premises or the Outside Areas, improvements made by
Landlord for Tenant's use within the Leased Premises or the Outside Areas,
Tenant's use (or estimated use) of public facilities or services or Tenant's
consumption (or estimated consumption) of public utilities, energy, water or
other resources (collectively, "Tenant's Interest"). Upon demand by Landlord,
Tenant shall furnish Landlord with satisfactory evidence of these payments. If
any such taxes, assessments, fees or public charges are levied against Landlord,
Landlord's property, the Building or the Property, or if the assessed value of
the Building or the Property is increased by the inclusion therein of a value
placed upon Tenant's Interest, regardless of the validity thereof, Landlord
shall have the right to require Tenant to pay such taxes, and if not paid and
satisfactory evidence of payment delivered to Landlord at least ten days prior
to delinquency, then Landlord shall have the right to pay such taxes on Tenant's
behalf and to invoice Tenant for the same. Tenant shall, within the earlier to
occur of (a) thirty (30) days of the date it receives an invoice from Landlord
setting forth the amount of such taxes, assessments, fees, or public charge so
levied, or (b) the due date of such invoice, pay to Landlord, as Additional
Rent, the amount set forth in such invoice. Failure by Tenant to pay the amount
so invoiced within such time period shall be conclusively deemed a default by
Tenant under this Lease. Tenant shall have the right to bring suit in any court
of competent jurisdiction to recover from the taxing authority the amount of any
such taxes, assessments, fees or public charges so paid.
13.2 HOLDING OVER. This Lease shall terminate without further notice on the
Lease Expiration Date (as set forth in Article 1). Any holding over by Tenant
after expiration of the Lease Term shall neither constitute a renewal nor
extension of this Lease nor give Tenant any rights in or to the Leased Premises
except as expressly provided in this Paragraph. Any such holding over to which
Landlord has consented shall be construed to be a tenancy from month to month,
on the same terms and conditions herein specified insofar as applicable, except
that the Base Monthly Rent shall be increased to an amount equal to one hundred
fifty percent (150%) of the Base Monthly Rent payable
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during the last full month immediately preceding such holding over. Tenant
acknowledges that if Tenant holds over without Landlord's consent, such holding
over may compromise or otherwise affect Landlord's ability to enter into new
leases with prospective tenants regarding the Leased Premises. Therefore, if
Tenant fails to surrender the Leased Premises upon the expiration or termination
of this Lease, in addition to any other liabilities to Landlord accruing
therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless
from and against all claims resulting from such failure, including, without
limiting the foregoing, any claims made by any succeeding tenant founded upon
such failure to surrender, and any losses suffered by Landlord, including lost
profits, resulting from such failure to surrender.
13.3 SUBORDINATION TO MORTGAGES. This Lease is subject to and subordinate to all
ground leases, mortgages and deeds of trust which affect the Building or the
Property and which are of public record as of the Effective Date of this Lease,
and to all renewals, modifications, consolidations, replacements and extensions
thereof. However, if the lessor under any such ground lease or any lender
holding any such mortgage or deed of trust shall advise Landlord that it desires
or requires this Lease to be made prior and superior thereto, then, upon written
request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and
deliver any and all customary or reasonable documents or instruments which
Landlord and such lessor or lender deems necessary or desirable to make this
Lease prior thereto. Tenant hereby consents to Landlord's ground leasing the
land underlying the Building or the Property and/or encumbering the Building or
the Property as security for future loans on such terms as Landlord shall
desire, all of which future ground leases, mortgages or deeds of trust shall be
subject to and subordinate to this Lease. However, if any lessor under any such
future ground lease or any lender holding such future mortgage or deed of trust
shall desire or require that this Lease be made subject to and subordinate to
such future ground lease, mortgage or deed of trust, then Tenant agrees, within
ten (10) days after Landlord's written request therefor, to execute, acknowledge
and deliver to Landlord any and all documents or instruments reasonably
requested by Landlord or by such lessor or lender as may be necessary or proper
to assure the subordination of this Lease to such future ground lease, mortgage
or deed of trust, but only if such lessor or lender agrees to recognize Tenant's
rights under this Lease and agrees not to disturb Tenant's quiet possession of
the Leased Premises so long as Tenant is not in default under this Lease. If
Landlord assigns the Lease as security for a loan, Tenant agrees to execute such
documents as are reasonably requested by the lender and to provide reasonable
provisions in the Lease protecting such lender's security interest which are
customarily required by institutional lenders making loans secured by a deed of
trust provided that such documents do not materially increase Tenant's
obligations under this Lease.
13.4 TENANT'S ATTORNMENT UPON FORECLOSURE. Tenant shall, upon request, attorn
(i) to any purchaser of the Building or the Property at any foreclosure sale or
private sale conducted pursuant to any security instruments encumbering the
Building or the Property, (ii) to any grantee or transferee designated in any
deed given in lieu of foreclosure of any security interest encumbering the
Building or the Property, or (iii) to the lessor under an underlying ground
lease of the land underlying the Building or the Property, should such ground
lease be terminated; provided that such purchaser, grantee or lessor recognizes
Tenant's rights under this Lease.
13.5 MORTGAGEE PROTECTION. In the event of any default on the part of Landlord,
Tenant will give notice by registered mail to any Lender or lessor under any
underlying ground lease who shall have requested, in writing, to Tenant that it
be provided with such notice, and Tenant shall offer such Lender or lessor a
reasonable opportunity to cure the default, including time to obtain possession
of the Leased Premises by power of sale or judicial foreclosure or other
appropriate legal proceedings if reasonably necessary to effect a cure.
13.6 ESTOPPEL CERTIFICATE. Tenant will, following any request by Landlord,
promptly execute and deliver to Landlord an estoppel certificate substantially
in form attached as Exhibit B, (i) certifying that this Lease is unmodified and
in full force and effect, or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect, (ii) stating the date to which the rent and other charges are paid
in advance, if any, (iii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults if any are claimed, and (iv) certifying such other information
about this Lease as may be reasonably requested by Landlord, its Lender or
prospective lenders, investors or purchasers of the Building or the Property.
Tenant's failure to execute and deliver such estoppel certificate within ten
days after Landlord's request therefor shall be a material default by Tenant
under this Lease, and Landlord shall have all of the rights and remedies
available to Landlord as Landlord would otherwise have in the case of any other
material default by Tenant, including the right to terminate this Lease and sue
for damages proximately caused thereby, it being agreed and understood by Tenant
that Tenant's failure to so deliver such estoppel certificate in a timely manner
could result in Landlord being unable to perform committed obligations to other
third parties which were made by Landlord in reliance upon this covenant of
Tenant. Landlord and Tenant intend that any statement delivered pursuant to this
paragraph may be relied upon by any Lender or purchaser or prospective Lender or
purchaser of the Building, the Property, or any interest in them.
13.7 TENANT'S FINANCIAL INFORMATION. Tenant shall, within ten business days
after Landlord's request therefor, deliver to Landlord a copy of Tenant's (and
any guarantor's) current financial statements (including a balance sheet, income
statement and statement of cash flow, all prepared in accordance with generally
accepted accounting principles) and any such other information reasonably
requested by Landlord regarding Tenant's financial condition. Landlord shall be
entitled to disclose such financial statements or other information to its
Lender, to any present or prospective principal of or investor in Landlord, or
to any prospective Lender or purchaser of the Building, the Property, or any
portion thereof or interest therein. Any such financial statement or other
information which is marked "confidential" or "company secrets" (or is otherwise
similarly marked by Tenant) shall be confidential and shall not be disclosed by
Landlord to any third party except as specifically provided in this paragraph
and then only if the person to whom disclosure is made first agrees to be bound
by the requirements of this Section 13.7, unless the same becomes a part of the
public domain without the fault of Landlord.
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13.8 TRANSFER BY LANDLORD. Landlord and its successors in interest shall have
the right to transfer their interest in the Building, the Property, or any
portion thereof at any time and to any person or entity. In the event of any
such transfer, the Landlord originally named herein (and in the case of any
subsequent transfer, the transferor), from the date of such transfer, (i) shall
be automatically relieved, without any further act by any person or entity, of
all liability for the performance of the obligations of the Landlord hereunder
which may accrue after the date of such transfer so long as the Security Deposit
(or the remaining amount of such Security Deposit after deductions made in
accordance with Section 3.7 of this Lease) is transferred to the transferee (or
returned to the Tenant) and the transferee has agreed to assume and perform all
such obligations which may accrue after the date of such transfer and (ii) shall
be relieved of all liability for the performance of the obligations of the
Landlord hereunder which have accrued before the date of transfer if its
transferee agrees to assume and perform all such prior obligations of the
Landlord hereunder. Tenant shall attorn to any such transferee. After the date
of any such transfer, the term "Landlord" as used herein shall mean the
transferee of such interest in the Building or the Property.
13.9 FORCE MAJEURE. The obligations of each of the parties under this Lease
(other than the obligations to pay money) shall be temporarily excused if such
party is prevented or delayed in performing such obligations by reason of any
strikes, lockouts or labor disputes; government restrictions, regulations,
controls, action or inaction; civil commotion; or extraordinary weather, fire or
other acts of God.
13.10 NOTICES. Any notice required or permitted to be given under this Lease
shall be in writing and (i) personally delivered, (ii) sent by United States
mail, registered or certified mail, postage prepaid, return receipt requested,
(iii) sent by Federal Express or similar nationally recognized overnight courier
service, or (iv) transmitted by facsimile with a hard copy sent within one (1)
business day by any of the foregoing means, and in all cases addressed as
follows, and such notice shall be deemed to have been given upon the date of
actual receipt or delivery (or refusal to accept delivery) at the address
specified below (or such other addresses as may be specified by notice in the
foregoing manner) as indicated on the return receipt or air bill:
IF TO LANDLORD: Mathilda Associates LLC
c/o Menlo Equities LLC
525 University Avenue
Suite 100
Palo Alto, California 94301
Attention: Henry Bullock/Richard Holmstrom
with a copy to: Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, California 94111
Attention: Paul Churchill
IF TO TENANT: Prior to Commencement Date:
Juniper Networks, Inc.
385 Ravendale Drive
Mountain View, California 94043
After the Commencement Date:
At the Leased Premises.
Attention: General Counsel
with a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Bradford C. O'Brien
Any notice given in accordance with the foregoing shall be deemed received upon
actual receipt or refusal to accept delivery.
13.11 ATTORNEYS' FEES. In the event any party shall bring any action,
arbitration proceeding or legal proceeding alleging a breach of any provision of
this Lease, to recover rent, to terminate this Lease, or to enforce, protect,
determine or establish any term or covenant of this Lease or rights or duties
hereunder of either party, the prevailing party shall be entitled to recover
from the non-prevailing party as a part of such action or proceeding, or in a
separate action for that purpose brought within one year from the determination
of such proceeding, reasonable attorneys' fees, expert witness fees, court costs
and other reasonable expenses incurred by the prevailing party.
13.12 DEFINITIONS. Any term that is given a special meaning by any provision in
this Lease shall, unless otherwise specifically stated, have such meaning
wherever used in this Lease or in any Addenda or amendment hereto. In addition
to the terms defined in Article 1, the following terms shall have the following
meanings:
(a) REAL PROPERTY TAXES. The term "Real Property Tax" or "Real Property
Taxes" shall each mean the sum of Tenant's Property Share (as to the land
component of the Property) and Tenant's Expense Share (as to the
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Building and other improvements in the Outside Areas) of (i) all taxes,
assessments, levies and other charges of any kind or nature whatsoever, general
and special, foreseen and unforeseen (including all instruments of principal and
interest required to pay any general or special assessments for public
improvements and any increases resulting from reassessments caused by any change
in ownership or new construction), now or hereafter imposed by any governmental
or quasi-governmental authority or special district having the direct or
indirect power to tax or levy assessments, which are levied or assessed for
whatever reason against the Property or any portion thereof, or Landlord's
interest herein, or the fixtures, equipment and other property of Landlord that
is an integral part of the Property and located thereon, or Landlord's business
of owning, leasing or managing the Property or the gross receipts, income or
rentals from the Property, (ii) all charges, levies or fees imposed by any
governmental authority against Landlord by reason of or based upon the use of or
number of parking spaces within the Property, the amount of public services or
public utilities used or consumed (e.g. water, gas, electricity, sewage or waste
water disposal) at the Property, the number of person employed by tenants of the
Property, the size (whether measured in area, volume, number of tenants or
whatever) or the value of the Property, or the type of use or uses conducted
within the Property, and all costs and fees (including attorneys' fees)
reasonably incurred by Landlord in contesting any Real Property Tax and in
negotiating with public authorities as to any Real Property Tax. If, at any time
during the Lease Term, the taxation or assessment of the Property prevailing as
of the Effective Date of this Lease shall be altered so that in lieu of or in
addition to any the Real Property Tax described above there shall be levied,
awarded or imposed (whether by reason of a change in the method of taxation or
assessment, creation of a new tax or charge, or any other cause) an alternate,
substitute, or additional use or charge (i) on the value, size, use or occupancy
of the Property or Landlord's interest therein or (ii) on or measured by the
gross receipts, income or rentals from the Property, or on Landlord's business
of owning, leasing or managing the Property or (iii) computed in any manner with
respect to the operation of the Property, then any such tax or charge, however
designated, shall be included within the meaning of the terms "Real Property
Tax" or "Real Property Taxes" for purposes of this Lease. If any Real Property
Tax is partly based upon property or rents unrelated to the Property, then only
that part of such Real Property Tax that is fairly allocable to the Property
shall be included within the meaning of the terms "Real Property Tax" or "Real
Property Taxes." Notwithstanding the foregoing, the terms "Real Property Tax" or
"Real Property Taxes" shall not include estate, inheritance, transfer, gift or
franchise taxes of Landlord or the federal or state income tax imposed on
Landlord's income from all sources.
(b) LANDLORD'S INSURANCE COSTS. The term "Landlord's Insurance Costs"
shall mean Tenant's Expense Share of the costs to Landlord to carry and maintain
the policies of fire and property damage insurance for the Building and Tenant's
Property Share of the costs to Landlord to carry and maintain the policies of
fire and property damage insurance on the Property and general liability and any
other insurance required or permitted to be carried by Landlord pursuant to
Article 9, together with any deductible amounts paid by Landlord upon the
occurrence of any insured casualty or loss. Any deductible amount in excess of
twenty five (25%) of the total casualty shall be amortized over the useful life
of the repair or replacement required to restore the Property after such
casualty, and the amortized portion shall be included on a monthly basis in
Landlord's Insurance Costs. Notwithstanding the foregoing, Landlord's Insurance
Costs shall not include the cost of any course of construction insurance carried
by Landlord for the construction of the 1184 Building. Notwithstanding the
foregoing, if Tenant terminates this Lease pursuant to Section 10.4 hereof,
Tenant shall not be required to pay for any insurance deductibles as part of
Landlord's Insurance Costs or otherwise.
(c) PROPERTY MAINTENANCE COSTS. The term "Property Maintenance Costs"
shall mean Tenant's Property Share of all costs and expenses (except Landlord's
Insurance Costs and Real Property Taxes) paid or incurred by Landlord in
protecting, operating, maintaining, repairing and preserving the Property and
all parts thereof, including without limitation, (i) market rate professional
management fees of no more than two percent (2%) of Base Monthly Rent, (ii) the
amortizing portion of any costs incurred by Landlord in the making of any
modifications, alterations or improvements required by any governmental
authority as set forth in Article 6, which are so amortized during the Lease
Term, (iii) any and all on-going operation or maintenance costs imposed on the
Property by or through any development agreement, use permit, site development
agreement, traffic mitigation plan, entitlement, or Private Restrictions
(including but not limited to shuttle and emergency transportation), and (iv)
such other costs as may be paid or incurred with respect to operating,
maintaining, and preserving the Property, repairing and resurfacing paved areas,
and repairing and replacing, when necessary, electrical, plumbing, heating,
ventilating and air conditioning systems serving the Building, provided that the
cost of any capital improvement shall be amortized over the useful life of such
improvement and the amortizing portion of the cost shall be included in Property
Maintenance Costs. If any costs and expenses are partly based upon property or
rents unrelated to the Property, then only that part of such Property
Maintenance Costs that is fairly allocable to the Property shall be included
within the meaning of the terms "Property Maintenance Costs." Notwithstanding
the foregoing provisions of this Section 13.12(c), the following are
specifically excluded from the definition of Property Maintenance Costs and
Tenant shall have no obligation to pay directly or reimburse Landlord for all or
any portion of the following except to the extent any of the foregoing are
caused by the actions or inactions of Tenant, or result from the failure of
Tenant to comply with the terms of the Lease: (a) costs of development or
construction on the Property (other than on-going operation or maintenance costs
as set forth in (iii) above); (b) the costs to repair or replace the structural
portions of the Building or other buildings on the Property, including, without
limitation, the foundation, footings, roof structure, roof screens, roof screen
penetrations, and load bearing and exterior walls of the Building or any other
building located on the Property; (c) depreciation, amortization or other
expense reserves; (d) interest, charges and fees incurred on debt, payments on
mortgages and rent under ground leases; (e) costs and expenses for which Tenant
reimburses Landlord directly or which Tenant pays directly to a third person or
costs for which Landlord has a right of reimbursement from others; (f) costs
occasioned by the active negligence or willful misconduct of Landlord or any
other occupant of the Property or violations of Law by Landlord or any other
occupant of the Property, (g) or costs to correct any construction defect in the
Leased Premises, the Building or the Property; or (h) capital costs incurred to
bring the Building or the Property into compliance with the Use Permit, any
CC&R's, underwriter's requirements, or Laws
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applicable to the Leased Premises, the Building or the Property at the time the
building permit for the Base Building (as defined in the Work Letter) is issued.
(d) PROPERTY OPERATING EXPENSES. The term "Property Operating Expenses"
shall mean and include all Real Property Taxes, plus all Landlord's Insurance
Costs, plus all Property Maintenance Costs.
(e) LAW. The term "Law" shall mean any judicial decisions and any
statute, constitution, ordinance, resolution, regulation, rule, administrative
order, or other requirements of any municipal, county, state, federal, or other
governmental agency or authority having jurisdiction over the parties to this
Lease, the Leased Premises, the Building or the Property, or any of them, in
effect either at the Effective Date of this Lease or at any time during the
Lease Term, including, without limitation, any regulation, order, or policy of
any quasi-official entity or body (e.g. a board of fire examiners or a public
utility or special district).
(f) LENDER. The term "Lender" shall mean the holder of any promissory
note or other evidence of indebtedness secured by the Property or any portion
thereof.
(g) PRIVATE RESTRICTIONS. The term "Private Restrictions" shall mean
(as they may exist from time to time) any and all covenants, conditions and
restrictions, private agreements, easements, and any other recorded documents or
instruments affecting the use of the Property, the Building, the Leased
Premises, or the Outside Areas.
(h) RENT. The term "Rent" shall mean collectively Base Monthly Rent and
all Additional Rent.
13.13 GENERAL WAIVERS. One party's consent to or approval of any act by the
other party requiring the first party's consent or approval shall not be deemed
to waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. No waiver of any provision hereof, or
any waiver of any breach of any provision hereof, shall be effective unless in
writing and signed by the waiving party. The receipt by Landlord of any rent or
payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach. No waiver of any provision of
this Lease shall be deemed a continuing waiver unless such waiver specifically
states so in writing and is signed by both Landlord and Tenant. No delay or
omission in the exercise of any right or remedy accruing to either party upon
any breach by the other party under this Lease shall impair such right or remedy
or be construed as a waiver of any such breach theretofore or thereafter
occurring. The waiver by either party of any breach of any provision of this
Lease shall not be deemed to be a waiver of any subsequent breach of the same or
any other provisions herein contained.
13.14 MISCELLANEOUS. Should any provisions of this Lease prove to be invalid or
illegal, such invalidity or illegality shall in no way affect, impair or
invalidate any other provisions hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor. Any copy of this Lease which is executed by the parties shall be deemed
an original for all purposes. This Lease shall, subject to the provisions
regarding assignment, apply to and bind the respective heirs, successors,
executors, administrators and assigns of Landlord and Tenant. The term "party"
shall mean Landlord or Tenant as the context implies. If Tenant consists of more
than one person or entity, then all members of Tenant shall be jointly and
severally liable hereunder. This Lease shall be construed and enforced in
accordance with the Laws of the State in which the Leased Premises are located.
The captions in this Lease are for convenience only and shall not be construed
in the construction or interpretation of any provision hereof. When the context
of this Lease requires, the neuter gender includes the masculine, the feminine,
a partnership, corporation, limited liability company, joint venture, or other
form of business entity, and the singular includes the plural. The terms "must,"
"shall," "will," and "agree" are mandatory. The term "may" is permissive. When a
party is required to do something by this Lease, it shall do so at its sole cost
and expense without right of reimbursement from the other party unless specific
provision is made therefor. Where Landlord's consent is required hereunder, the
consent of any Lender shall also be required. Landlord and Tenant shall both be
deemed to have drafted this Lease, and the rule of construction that a document
is to be construed against the drafting party shall not be employed in the
construction or interpretation of this Lease. Where Tenant is obligated not to
perform any act or is not permitted to perform any act, Tenant is also obligated
to restrain any others reasonably within its control, including agents,
invitees, contractors, subcontractors and employees, from performing such act.
Landlord shall not become or be deemed a partner or a joint venturer with Tenant
by reason of any of the provisions of this Lease.
13.15 COOPERATION. Notwithstanding anything to the contrary contained herein,
Tenant consents to and agrees to fully cooperate with Landlord and Landlord's
agents, employees and contractors in Landlord's efforts, if any, to improve the
Property with an additional building and divide the Property into separate legal
parcels, which efforts may include, without limitation, the elimination of
landscaping, the restriping or reconfiguration of the parking areas, application
for building permits and other development approvals, parcelization of the
Property and construction of buildings. Tenant agrees to execute such documents
and take such actions as reasonably necessary to assist Landlord with such
efforts and actions. Tenant agrees that such efforts and actions of Landlord
shall not constitute constructive eviction of Tenant from the Property or Leased
Premises. Following any parcelization of the Property, Landlord and Tenant agree
to amend this Lease to conform the descriptions of the Property, Site Plan, and
Outside Areas, and, subject to Section 4.5, the parking areas contained herein
to the parcelization and reconfiguration. Landlord agrees to minimize the
disruption of Tenant's use of the Leased Premises, the Building, the Outside
Areas and the Property to the extent reasonable, given Landlord's efforts and
actions described herein. Specifically, during construction of the 1184
Building, Landlord shall cause all construction trucks to enter the Property
from the drive furthest from the Building on 5th Avenue and all grading on the
Property for construction of the Building and the 1184 Building (other than
grading for landscaping) shall be done at the same time.
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ARTICLE 14
CORPORATE AUTHORITY
BROKERS AND ENTIRE AGREEMENT
14.1 CORPORATE AUTHORITY. If Tenant is a corporation, each individual executing
this Lease on behalf of such corporation represents and warrants that Tenant is
validly formed and duly authorized and existing, that Tenant is qualified to do
business in the State in which the Leased Premises are located, that Tenant has
the full right and legal authority to enter into this Lease, and that he or she
is duly authorized to execute and deliver this Lease on behalf of Tenant in
accordance with its terms. Tenant shall, within thirty days after execution of
this Lease, deliver to Landlord a certified copy of the resolution of its board
of directors authorizing or ratifying the execution of this Lease and if Tenant
fails to do so, Landlord at its sole election may elect to terminate this Lease.
14.2 BROKERAGE COMMISSIONS. Tenant represents, warrants and agrees that it has
not had any dealings with any real estate broker(s), leasing agent(s), finder(s)
or salesmen, other than the Brokers (as named in Article 1) with respect to the
lease by it of the Leased Premises pursuant to this Lease, and that it will
assume all obligations and responsibility with respect to the payment of such
Brokers, and that it will indemnify, defend with competent counsel, and hold
Landlord harmless from any liability for the payment of any real estate
brokerage commissions, leasing commissions or finder's fees claimed by any other
real estate broker(s), leasing agent(s), finder(s), or salesmen to be earned or
due and payable by reason of Tenant's agreement or promise (implied or
otherwise) to pay (or to have Landlord pay) such a commission or finder's fee by
reason of its leasing the Leased Premises pursuant to this Lease.
14.3 ENTIRE AGREEMENT. This Lease and the Exhibits (as described in Article 1),
which Exhibits are by this reference incorporated herein, constitute the entire
agreement between the parties, and there are no other agreements, understandings
or representations between the parties relating to the lease by Landlord of the
Leased Premises to Tenant, except as expressed herein. No subsequent changes,
modifications or additions to this Lease shall be binding upon the parties
unless in writing and signed by both Landlord and Tenant.
14.4 LANDLORD'S REPRESENTATIONS. Tenant acknowledges that neither Landlord nor
any of its agents made any representations or warranties respecting the
Property, the Building or the Leased Premises, upon which Tenant relied in
entering into the Lease, which are not expressly set forth in this Lease. Tenant
further acknowledges that neither Landlord nor any of its agents made any
representations as to (i) whether the Leased Premises may be used for Tenant's
intended use under existing Law, or (ii) the suitability of the Leased Premises
for the conduct of Tenant's business, or (iii) the exact square footage of the
Leased Premises, and that Tenant relies solely upon its own investigations with
respect to such matters. Tenant expressly waives any and all claims for damage
by reason of any statement, representation, warranty, promise or other agreement
of Landlord or Landlord's agent(s), if any, not contained in this Lease or in
any Exhibit attached hereto.
ARTICLE 15
OPTIONS TO EXTEND
15.1 So long as Juniper Networks, Inc. (or a Permitted Assignee) is the Tenant
hereunder, and subject to the condition set forth in clause (b) below, Tenant
shall have two options to extend the term of this Lease with respect to the
entirety of the Leased Premises, the first for a period of five (5) years from
the expiration of the last year of the Lease Term (the "First Extension
Period"), and the second (the "Second Extension Period") for a period of five
(5) years from the expiration of the First Extension Period, subject to the
following conditions:
(a) Each option to extend shall be exercised, if at all, by notice of
exercise given to Landlord by Tenant not more than twelve (12) months nor less
than nine (9) months prior to the expiration of the last year of the Lease Term
or the expiration of the First Extension Period, as applicable;
(b) Anything herein to the contrary notwithstanding, if Tenant is in
default under any of the material terms, covenants or conditions of this Lease,
either at the time Tenant exercises either extension option or on the
commencement date of the First Extension Period or the Second Extension Period,
as applicable, Landlord shall have, in addition to all of Landlord's other
rights and remedies provided in this Lease, the right to terminate such
option(s) to extend upon notice to Tenant.
15.2 In the event the applicable option is exercised in a timely fashion, the
Lease shall be extended for the term of the applicable extension period upon all
of the terms and conditions of this Lease, provided that the Base Monthly Rent
for each extension period shall be the "Fair Market Rent" for the Leased
Premises, determined as set forth below, with annual increases as determined as
part of the process set forth below.
15.3 Within 30 days after receipt of Tenant's notice of exercise, Landlord shall
notify Tenant in writing of Landlord's estimate of the Base Monthly Rent for the
first year of the applicable extension period, and Landlord's estimate of annual
increases. For purposes hereof, "Fair Market Rent" shall mean collectively, (1)
Base Monthly Rent for the first year of the applicable extension period and (2)
the annual increases determined at the time Base Monthly Rent for the first year
is determined. Within 30 days after receipt of such notice from Landlord, Tenant
shall have the right either to (i) accept Landlord's estimate of Fair Market
Rent or (ii) elect to arbitrate Landlord's estimate of Fair Market Rent, such
arbitration to be conducted pursuant to the provisions hereof. Failure on the
part of Tenant to require arbitration of Fair Market Rent within such 30-day
period shall constitute acceptance of the Fair
26.
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Market Rent for the applicable extension period as calculated by Landlord. If
Tenant elects arbitration, the arbitration shall be concluded within 90 days
after the date of Tenant's election, subject to extension for an additional
30-day period if a third arbitrator is required and does not act in a timely
manner. To the extent that arbitration has not been completed prior to the
expiration of any preceding period for which Base Monthly Rent has been
determined, Tenant shall pay Base Monthly Rent at the rate calculated by
Landlord, with the potential for an adjustment to be made once Fair Market Rent
is ultimately determined by arbitration.
15.4 In the event of arbitration, the judgment or the award rendered in any such
arbitration may be entered in any court having jurisdiction and shall be final
and binding between the parties. The arbitration shall be conducted and
determined in the City and County of San Francisco in accordance with the then
prevailing rules of the American Arbitration Association or its successor for
arbitration of commercial disputes except to the extent that the procedures
mandated by such rules shall be modified as follows:
(a) Tenant shall make demand for arbitration in writing within 30 days
after service of Landlord's determination of Fair Market Rent given under
Paragraph 15.3 above, specifying therein the name and address of the person to
act as the arbitrator on its behalf. The arbitrator shall be qualified as a real
estate appraiser familiar with the Fair Market Rent of similar industrial,
research and development, or office space in the Silicon Valley area who would
qualify as an expert witness over objection to give opinion testimony addressed
to the issue in a court of competent jurisdiction. Failure on the part of Tenant
to make a proper demand in a timely manner for such arbitration shall constitute
a waiver of the right thereto. Within 15 days after the service of the demand
for arbitration, Landlord shall give notice to Tenant, specifying the name and
address of the person designated by Landlord to act as arbitrator on its behalf
who shall be similarly qualified. If Landlord fails to notify Tenant of the
appointment of its arbitrator, within or by the time above specified, then the
arbitrator appointed by Tenant shall be the arbitrator to determine the issue.
(b) In the event that two arbitrators are chosen pursuant to Paragraph
15.4(a) above, the arbitrators so chosen shall, within 15 days after the second
arbitrator is appointed determine the Fair Market Rent. If the two arbitrators
shall be unable to agree upon a determination of Fair Market Rent within such
15-day period, they, themselves, shall appoint a third arbitrator, who shall be
a competent and impartial person with qualifications similar to those required
of the first two arbitrators pursuant to Paragraph 15.4(a). In the event they
are unable to agree upon such appointment within seven days after expiration of
such 15-day period, the third arbitrator shall be selected by the parties
themselves, if they can agree thereon, within a further period of 15 days. If
the parties do not so agree, then either party, on behalf of both, may request
appointment of such a qualified person by the then Chief Judge of the United
States District Court having jurisdiction over the County of Santa Clara, acting
in his private and not in his official capacity, and the other party shall not
raise any question as to such Judge's full power and jurisdiction to entertain
the application for and make the appointment. The three arbitrators shall decide
the dispute if it has not previously been resolved by following the procedure
set forth below.
(c) Where an issue cannot be resolved by agreement between the two
arbitrators selected by Landlord and Tenant or settlement between the parties
during the course of arbitration, the issue shall be resolved by the three
arbitrators within 15 days of the appointment of the third arbitrator in
accordance with the following procedure. The arbitrator selected by each of the
parties shall state in writing his determination of the Fair Market Rent
supported by the reasons therefor with counterpart copies to each party. The
arbitrators shall arrange for a simultaneous exchange of such proposed
resolutions. The role of the third arbitrator shall be to select which of the
two proposed resolutions most closely approximates his determination of Fair
Market Rent. The third arbitrator shall have no right to propose a middle ground
or any modification of either of the two proposed resolutions. The resolution he
chooses as most closely approximating his determination shall constitute the
decision of the arbitrators and be final and binding upon the parties.
(d) In the event of a failure, refusal or inability of any arbitrator
to act, his successor shall be appointed by him, but in the case of the third
arbitrator, his successor shall be appointed in the same manner as provided for
appointment of the third arbitrator. The arbitrators shall decide the issue
within 15 days after the appointment of the third arbitrator. Any decision in
which the arbitrator appointed by Landlord and the arbitrator appointed by
Tenant concur shall be binding and conclusive upon the parties. Each party shall
pay the fee and expenses of its respective arbitrator and both shall share the
fee and expenses of the third arbitrator, if any, and the attorneys' fees and
expenses of counsel for the respective parties and of witnesses shall be paid by
the respective party engaging such counsel or calling such witnesses.
(e) The arbitrators shall have the right to consult experts and
competent authorities to obtain factual information or evidence pertaining to a
determination of Fair Market Rent, but any such consultation shall be made in
the presence of both parties with full right on their part to cross-examine. The
arbitrators shall render their decision and award in writing with counterpart
copies to each party. The arbitrators shall have no power to modify the
provisions of this Lease.
ARTICLE 16
FIRST EXPANSION OPTION
16.1 So long as Juniper Networks, Inc. (or a Permitted Assignee) is the Tenant
hereunder as of its exercise of the option granted herein, and subject to the
conditions set forth below, Tenant shall have one option to lease from Landlord
(the "First Expansion Option"), the 122,435 square foot building (the "1184
Building") to be built on the Property, which building's shell shall, subject to
compliance with all Laws and Private Restrictions, be built to the
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same or substantially similar quality as the Base Building (as defined in the
Work Letter) based on the specifications for the Base Building contained in the
Base Building Plans, subject to the following conditions:
(a) The First Expansion Option shall be exercised, if at all, by notice
of exercise given to Landlord by Tenant prior to December 31, 2000;
(b) Notwithstanding anything to the contrary contained herein, if
Tenant is in default under any of the material terms, covenants or conditions of
this Lease at the time Tenant exercises the First Expansion Option, Landlord
shall have, in addition to all of Landlord's other rights and remedies provided
in this Lease, the right to terminate such First Expansion Option upon notice to
Tenant.
16.2 In the event the First Expansion Option is exercised in a timely fashion,
Landlord and Tenant shall enter into a new lease for the 1184 Building, which
lease shall be upon all of the terms and conditions of this Lease, including,
without limitation, a twelve (12) year term, first month's prepaid rent, thirty
(30) day early delivery date prior to rent and lease commencement, signage
rights and options to extend, provided, however, that (i) the Base Monthly Rent
for the 1184 Building shall be the Fair Market Rent (as defined in Section 15.3)
as determined pursuant to the procedure set forth in Article 15 (which initial
rent for the first year shall in no event be more than five percent (5%) above
or less than five percent (5%) below the Base Monthly Rent in effect under this
Lease for the same period in time), and (ii) the tenant improvement allowance
will be $50.00 per square foot. For purposes of determining fair market rent for
the 1184 Building, Landlord and Tenant (and, if applicable, the arbitrators)
shall take into account that the 1184 Building is a new office/R&D building in
the Santa Clara - Mountain View corridor, and shall reflect the $50.00 per
square foot tenant improvement allowance to be included in the new lease. In
addition, the following terms shall be incorporated into any new lease for the
1184 Building:
(a) the security deposit shall be the lesser of (1) one year's base
monthly rent or (2) a percentage of one year's base monthly rent equal to the
percentage of one year's Base Monthly Rent then held by Landlord under this
Lease and shall have the same criteria for reduction as set forth in this Lease;
(b) the lease term shall commence thirty (30) days after the delivery
date, which delivery date shall be the date of substantial completion of the
tenant improvements to be constructed in accordance with a new work letter to be
signed by Landlord and Tenant, which work letter shall be in the same form as
the Work Letter attached as Exhibit B (changing only the applicable dates); and
(c) the intended delivery date shall be that date reasonably estimated
by Landlord as the date at which Landlord can deliver the 1184 Building with the
tenant improvements substantially complete, which date shall be no sooner than
seven (7) months and no later than eleven (11) months after Tenant's exercise of
the First Expansion Option, and which intended delivery date shall be subject to
a delivery grace period of thirty (30) days and the other provisions contained
in Section 2.4. In the event the parties fail to execute a new lease for the
1184 Building prior to the intended commencement date of such new lease (which
shall be thirty (30) days after the intended delivery date) due to a failure to
agree on Fair Market Rent, Tenant shall commence paying both Base Monthly Rent
(at the rate then in effect for the same period under this Lease) and Additional
Rent, provided that the Base Monthly Rent shall be adjusted upon determination
of Fair Market Rent, with Tenant receiving from Landlord a refund for any
overpayment or paying any shortfall promptly after determination of the Fair
Market Rent as provided herein.
ARTICLE 17
SECOND EXPANSION OPTION
17.1 So long as Juniper Networks, Inc. (or a Permitted Assignee) is the Tenant
hereunder as of its exercise of the option granted herein, and subject to the
conditions set forth below, Tenant shall have one option to lease from Landlord
(the "Second Expansion Option"), the 1220 Building (defined below) which may be
built on the property acquired by Landlord, which building's shell shall,
subject to compliance with all Laws and Private Restrictions, be built to the
same or substantially similar quality as the Base Building (as defined in the
Work Letter), subject to the following conditions:
(a) Landlord's acquisition of the property known as 1220 Mathilda
Avenue, Sunnyvale, California (the "1220 Building"), which acquisition shall be
Landlord's sole and absolute discretion;
(b) Tenant shall have exercised the First Expansion Option, Landlord
and Tenant have entered into a lease for the 1184 Building and Tenant shall have
exercised the Second Expansion Option by notice of exercise is given to Landlord
by Tenant prior to December 31, 2002; provided however, if the Tenant fails to
exercise the First Expansion Option within the time period required pursuant to
Article 16, after expiration of such period Tenant may exercise the Second
Expansion Option by notice of exercise is given to Landlord by Tenant prior to
December 31, 2001.
(c) Notwithstanding anything to the contrary contained herein, if
Tenant is in default under any of the material terms, covenants or conditions of
this Lease at the time Tenant exercises the Second Expansion Option, Landlord
shall have, in addition to all of Landlord's other rights and remedies provided
in this Lease, the right to terminate such Second Expansion Option upon notice
to Tenant.
17.2 In the event the Second Expansion Option is exercised in a timely fashion,
Landlord and Tenant shall enter into a new lease for the 1220 Building, which
lease shall be upon all of the terms and conditions of this Lease including,
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without limitation, a twelve (12) year term, first month's prepaid rent, thirty
(30) day early delivery date prior to rent and lease commencement, signage
rights and options to extend, provided, however, that (i) the Base Monthly Rent
for the 1220 Building shall be the Fair Market Rent (as defined in Section 15.3)
as determined pursuant to the procedure set forth in Article 15 (which initial
rent for the first year shall in no event be more than five percent (5%) above
or less than five percent (5%) below the Base Monthly Rent in effect under this
Lease for the same period in time), (ii) the tenant improvement allowance will
be $50.00 per square foot. For purposes of determining fair market rent for the
1220 Building, Landlord and Tenant (and, if applicable, the arbitrators) shall
take into account that the 1220 Building is a new office/R&D building in the
Santa Clara - Mountain View corridor, and shall reflect the $50.00 per square
foot tenant improvement allowance to be included in the new lease. In addition,
the following terms shall be incorporated into any new lease for the 1220
Building:
(a) the security deposit shall be the lesser of (1) one year's base
monthly rent or (2) a percentage of one year's base monthly rent equal to the
percentage of one year's Base Monthly Rent then held by Landlord under this
Lease;
(b) the lease term shall commence thirty (30) days after the delivery
date, which delivery date shall be the date of substantial completion of the
tenant improvements to be constructed in accordance with a new work letter to be
signed by Landlord and Tenant, which work letter shall be in the same form as
the Work Letter attached as Exhibit B (changing only the applicable dates); and
(c) the intended delivery date shall be that date reasonably estimated
by Landlord as the date at which Landlord can deliver the 1220 Building with the
tenant improvements substantially complete, which date shall be no sooner than
seven (7) months and no later than twelve (12) months after Tenant's exercise of
the Second Expansion Option, provided that such period shall be extended for up
to four (4) months for final determination from the City of Sunnyvale of the FAR
for the 1220 Building (Tenant specifically acknowledging that Landlord intends
to request approval for 50% FAR), and which intended delivery date shall be
subject to a delivery grace period of thirty (30) days and the other provisions
contained in Section 2.4. In the event the parties fail to execute a new lease
for the 1220 Building prior to the intended commencement date of such new lease
(which shall be thirty (30) days after the intended delivery date) due to a
failure to agree on Fair Market Rent, Tenant shall commence paying both Base
Monthly Rent (at the rate then in effect for the same period under this Lease)
and Additional Rent, provided that the Base Monthly Rent shall be adjusted upon
determination of Fair Market Rent, with Tenant receiving from Landlord a refund
for any overpayment or paying any shortfall promptly after determination of the
Fair Market Rent as provided herein.
ARTICLE 18
TELEPHONE SERVICE
Notwithstanding any other provision of this Lease to the contrary:
(a) So long as the entirety of the Building is leased to Tenant:
(i) Landlord shall have no responsibility for providing to Tenant
any telephone equipment, including wiring, within the Leased Premises or for
providing telephone service or connections from the utility to the Leased
Premises; and
(ii) Landlord makes no warranty as to the quality, continuity or
availability of the telecommunications services in the Building, and Tenant
hereby waives any claim against Landlord for any actual or consequential damages
(including damages for loss of business) in the event Tenant's
telecommunications services in any way are interrupted, damaged or rendered less
effective, except to the extent caused by the grossly negligent or willful act
or omission by Landlord, its agents or employees. Tenant accepts the telephone
equipment (including, without limitation, the INC, as defined below) in its
"AS-IS" condition, and Tenant shall be solely responsible for contracting with a
reliable third party vendor to assume responsibility for the maintenance and
repair thereof (which contract shall contain provisions requiring such vendor to
inspect the INC periodically (the frequency of such inspections to be determined
by such vendor based on its experience and professional judgment), and requiring
such vendor to meet local and federal requirements for telecommunications
material and workmanship). Landlord shall not be liable to Tenant and Tenant
waives all claims against Landlord whatsoever, whether for personal injury,
property damage, loss of use of the Leased Premises, or otherwise, due to the
interruption or failure of telephone services to the Leased Premises. Tenant
hereby holds Landlord harmless and agrees to indemnify, protect and defend
Landlord from and against any liability for any damage, loss or expense due to
any failure or interruption of telephone service to the Leased Premises for any
reason. Tenant agrees to obtain loss of rental insurance adequate to cover any
damage, loss or expense occasioned by the interruption of telephone service.
(b) At such time as the entirety of the Building is no longer leased to
Tenant, Landlord shall in its sole discretion have the right, by written notice
to Tenant, to elect to assume limited responsibility for INC, as provided below,
and upon such assumption of responsibility by Landlord, this subparagraph (b)
shall apply prospectively.
(i) Landlord shall provide Tenant access to such quantity of pairs
in the Building intra-building network cable ("INC") as is determined to be
available by Landlord in its reasonable discretion. Tenant's access to the INC
shall be solely by arrangements made by Tenant, as Tenant may elect, directly
with Pacific Bell or Landlord (or such vendor as Landlord may designate), and
Tenant shall pay all reasonable charges as may be
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imposed in connection therewith. Pacific Bell's charges shall be deemed to be
reasonable. Subject to the foregoing, Landlord shall have no responsibility for
providing to Tenant any telephone equipment, including wiring, within the Leased
Premises or for providing telephone service or connections from the utility to
the Leased Premises, except as required by law.
(ii) Tenant shall not alter, modify, add to or disturb any
telephone wiring in the Leased Premises or elsewhere in the Building without the
Landlord's prior written consent, which consent shall not be unreasonably
withheld. Tenant shall be liable to Landlord for any damage to the telephone
wiring in the Building due to the act, negligent or otherwise, of Tenant or any
employee, contractor or other agent of Tenant. Tenant shall have no access to
the telephone closets within the Building, except in the manner and under
procedures established by Landlord. Tenant shall promptly notify Landlord of any
actual or suspected failure of telephone service to the Leased Premises.
(iii) All costs incurred by Landlord for the installation,
maintenance, repair and replacement of telephone wiring in the Building shall be
a Property Maintenance Cost.
(iv) Landlord makes no warranty as to the quality, continuity or
availability of the telecommunications services in the Building, and Tenant
hereby waives any claim against Landlord for any actual or consequential damages
(including damages for loss of business) in the event Tenant's
telecommunications services in any way are interrupted, damaged or rendered less
effective, except to the extent caused by the grossly negligent or willful act
or omission by Landlord, its agents or employees. Tenant acknowledges that
Landlord meets its duty of care to Tenant with respect to the Building INC by
contracting with a reliable third party vendor to assume responsibility for the
maintenance and repair thereof (which contract shall contain provisions
requiring such vendor to inspect the INC periodically (the frequency of such
inspections to be determined by such vendor based on its experience and
professional judgment), and requiring such vendor to meet local and federal
requirements for telecommunications material and workmanship). Subject to the
foregoing, Landlord shall not be liable to Tenant and Tenant waives all claims
against Landlord whatsoever, whether for personal injury, property damage, loss
of use of the Leased Premises, or otherwise, due to the interruption or failure
of telephone services to the Leased Premises. Tenant hereby holds Landlord
harmless and agrees to indemnify, protect and defend Landlord from and against
any liability for any damage, loss or expense due to any failure or interruption
of telephone service to the Leased Premises for any reason. Tenant agrees to
obtain loss of rental insurance adequate to cover any damage, loss or expense
occasioned by the interruption of telephone service.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the respective dates below set forth with the intent to be legally bound thereby
as of the Effective Date of this Lease first above set forth.
LANDLORD:
MATHILDA ASSOCIATES LLC, a California limited liability
company
By: Menlo Equities LLC, a California
limited liability company, Manager
Dated:__________ By: Diamant Investments LLC,
a Delaware limited liability company, Member
By:____________________________________________
Richard J. Holmstrom, Managing Member
(SIGNATURES CONTINUED ON NEXT PAGE)
30.
<PAGE> 35
TENANT:
JUNIPER NETWORKS, INC.,
a Delaware corporation
Dated:___________ By: ________________________________
Title:______________________________
Dated:___________ By: ________________________________
Title:______________________________
31.
<PAGE> 36
EXHIBIT A
SITE PLAN
(To be attached)
1.
<PAGE> 37
EXHIBIT B
WORK LETTER
THIS WORK LETTER, dated June 18, 1999, is entered into by and between
MATHILDA ASSOCIATES LLC ("Landlord"), and JUNIPER NETWORKS, INC., a Delaware
corporation ("Tenant"). On or about the date hereof, Landlord and Tenant entered
into that certain Lease (the "Lease") for certain premises (the "Leased
Premises") commonly known as 1194 Mathilda Avenue, Sunnyvale, California. This
Work Letter sets forth the agreement of Landlord and Tenant with respect to the
improvements to be constructed in the Leased Premises. All defined terms used
herein shall have the meaning set forth in the Lease, unless otherwise defined
in this Work Letter.
1. CONSTRUCTION OF TENANT IMPROVEMENTS. Landlord shall, through a general
contractor to be selected pursuant to Paragraph 4 of this Work Letter, furnish
and install within the Building, substantially in accordance with the Work
Letter, certain items of general construction as described herein (the "Tenant
Improvements"). The quantities, character and manner of installation of all of
the Tenant Improvements shall be subject to the limitations imposed by any
applicable governmental regulations relating to conservation of energy and by
applicable building codes and regulations. In addition, Tenant agrees that the
Tenant Improvements shall not require Landlord to perform work which would (i)
require changes to structural components of the Building or the exterior design
of the Building; (ii) be incompatible with the Base Building Plans (defined
below) or the use permit to be issued by the City of Sunnyvale (the "Use
Permit"); or (iii) delay the completion of the Tenant Improvements beyond the
Intended Delivery Date.
2. BASE BUILDING PLANS. Robinson Mills + Williams (the "Architect") has prepared
building plans and specifications on behalf of Landlord described as Mathilda
Research Centre "Revised Permit Issue" plans dated June 15, 1999, ("Base
Building Plans") which have been approved by Tenant prior to the date hereof.
Landlord hereby agrees to construct the Base Building in accordance with the
Base Building Plans and the cost thereof shall not be deducted from the Tenant
Improvement Allowance.
3. PREPARATION AND APPROVAL OF SPACE PLAN. Commencing on July 5, 1999, Tenant
shall make its representatives available to meet with the Architect in order to
begin the programming process. The Tenant shall work with the Architect to
complete the programming and preliminary design for Architect's preparation of
space plans (the "Space Plans"). Such Space Plans shall be approved by Tenant
and submitted for Landlord's review no later than August 13, 1999. Within five
(5) business days after Landlord receives the Space Plans, Landlord shall either
approve or disapprove the Space Plans. In such event, the Architect shall make
the minimum changes necessary in order to correct any design problems identified
by the Landlord and shall submit to Landlord and Tenant revised Space Plans,
which Landlord and Tenant shall approve or disapprove within two (2) business
days after receipt of the revised Space Plans. This procedure shall be repeated
until the Space Plans are finally approved by Landlord and Tenant.
4. SELECTION OF CONTRACTOR. Landlord's contractor shall be the contractor
selected pursuant to a procedure whereby the Space Plans are submitted to three
(3) contractors (one of which shall be LE Wentz), selected by Landlord and
approved by Tenant, who are requested to each submit a proposal containing the
contractor's fee and general conditions for construction of the improvements
designated on the Space Plans. Landlord and Tenant shall jointly open and review
the fees and general conditions and the qualifications of each contractor, and
shall select the contractor reasonably acceptable to both Landlord and Tenant
("Contractor"). Landlord and Contractor shall enter into a construction contract
(the "Construction Contract") consistent with the terms of the bid to construct
the Tenant Improvements. The Construction Contract shall require that all
subtrades be competitively bid with at least three (3) subcontractors. Tenant
shall have the right to propose subcontractors to be used by the Contractor.
Subcontracts shall be awarded to the lowest qualified bidder, unless otherwise
agreed by Landlord and Tenant.
5. DESIGN DEVELOPMENT. As soon as possible after Landlord's approval of the
Space Plans, Tenant shall commence working with the Architect to determine
Tenant's design specifications and requirements, such that the Architect can
incorporate such specifications and requirements into plans (the "Design
Development Plans") no later than September 17, 1999. The Design Development
Plans shall include specifications for mechanical, electrical, plumbing, HVAC
and cabling, as developed by Architect and its subconsultants on a
"design-build" basis. Within five (5) business days Landlord receives the Design
Development Plans, Landlord shall either approve or disapprove the Design
Development Plans. In such event, the Architect shall make the minimum changes
necessary in order to correct any design problems identified by the Landlord and
shall submit to Landlord and Tenant revised Design Development Plans, which
Landlord and Tenant shall approve or disapprove within two (2) business days
after receipt of the revised Design Development Plans. This procedure shall be
repeated until the Design Development Plans are finally approved by Landlord and
Tenant.
6. APPROVAL OF WORKING DRAWINGS.
(a) After approval of the Design Development Plans and selection of the
Contractor, the Architect shall prepare complete and coordinated architectural
plans and specifications required for the construction of the Tenant
Improvements in conformance with such Space Plans (the "Working Drawings"), and
to prepare drawings and specifications for Changes (as defined below), if any,
requested or required pursuant to Paragraph 8 below.
(b) Landlord shall submit the completed and coordinated Working
Drawings to Tenant for Tenant's approval. Tenant will provide written approval
of the Working Drawings within five (5) business days after such submission. If
Tenant disapproves any part of the submission, the disapproval shall include
written instructions
1.
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adequate for the Architect to revise the Working Drawings. Such revisions shall
be subject to Landlord's approval, which shall not be unreasonably withheld.
Tenant will finally approve the revised Working Drawings within five (5)
business days after submission thereof to Tenant. If Tenant's instructions
necessitate (i) revisions to the Working Drawings (as originally submitted)
which do not conform with the Design Development Plans, or (ii) a change of
scope relative to the Space Plans, the costs incurred by Landlord as a result of
such instructions (including, without limitation, the cost of revising the
Working Drawings) shall be promptly borne and paid by Tenant upon demand by
Landlord.
(c) If Tenant fails to approve the Working Drawings within the
applicable periods set forth in subparagraph 5(b) above, then (A) Landlord shall
not be obligated to commence construction of the Tenant Improvements, (B) Tenant
shall be responsible for any resulting delay, and the cost of such delay, in
Landlord's completion of the Tenant Improvements and delivery of the Leased
Premises, and (C) any such delay shall be deemed a Tenant Delay (as defined
below).
7. COST OF TENANT IMPROVEMENTS. Unless specified otherwise herein, Landlord
shall bear and pay the cost of the Tenant Improvements (which cost shall
include, without limitation, the costs of construction, the cost of permits and
permit expediting, and all architectural and engineering services obtained by
Landlord in connection with the Tenant Improvements, the Contractor's fees,
Landlord's fee for construction administration in an amount equal to the amount
charged by any construction manager retained by Landlord (the "Construction
Manager") up to a maximum of $7,215,750 (the "Tenant Improvement Allowance").
The Tenant Improvement Allowance shall be utilized only for building
improvements to the Building (and Tenant's architect fees), and not for signage,
furniture costs, any third party consulting or contracting fees, any
telecom/cabling costs, or any other purpose. Tenant shall bear and pay the cost
of the Tenant Improvements (including but not limited to all of the foregoing
fees and costs) in excess of the Tenant Improvement Allowance, if any. The cost
of the Tenant Improvements shall exclude the cost of furniture, fixtures and
inventory and other items of Tenant's Work (as defined below). Notwithstanding
the foregoing, the Tenant Improvement Allowance shall not be used for (and
Tenant shall have no responsibility for) the following costs except to the
extent any of the foregoing are caused by Tenant, are due to Tenant Delays or
result from the failure of Tenant to comply with the terms of the Lease or this
Work Letter: (1) Property Maintenance Costs prior to the Delivery Date; (2)
charges for overtime, except to the extent approved by Tenant; (3) costs to
correct construction defects; (4) costs incurred to enforce contracts or cure
contractor or subcontractor defaults (including legal fees); or (5) principal or
interest on construction loan obtained by Landlord for construction of the
Tenant Improvements.
8. CHANGES.
(a) Any request by Tenant for a change in the Tenant Improvements after
approval of the Final Plans (a "Change") shall be accompanied by all information
necessary to clearly identify and explain the proposed Change. As soon as
practicable after receipt of such an Estimate Request form, Landlord shall
notify Tenant of the estimated cost of such Change as well as the estimated
increase in construction time caused by the Change, if any. Tenant shall approve
in writing such estimates within two (2) business days after receipt of
Landlord's notice. Upon receipt of such written request, Landlord shall be
authorized to cause the Contractor to proceed with the implementation of the
requested Change.
(b) The increased cost and time, as determined by Landlord, of all
Changes, including the cost of architectural and engineering services required
to revise the Working Drawings to reflect such Changes, the Contractor's
overhead and fee, and Landlord's fee for construction administration services,
shall be treated as costs of the Tenant Improvements, and shall be as determined
by Landlord upon completion of the Tenant Improvements, subject only to
Landlord's furnishing to Tenant appropriate back-up information from the
Contractor concerning the increased costs and increased construction time.
9. TENANT'S WORK. Landlord and Tenant acknowledge and agree that certain work
required for Tenant's occupancy of the Leased Premises, including but not
limited to the procurement and installation of furniture, fixtures, equipment,
artwork and interior signage are beyond the scope of the Tenant Improvements and
shall be performed by Tenant or its contractors at Tenant's sole cost and
expense. All such work ("Tenant's Work") shall be subject to Landlord's prior
written approval. Tenant shall adopt a construction schedule for Tenant's Work
in conformance with the Contractor's schedule, and shall perform Tenant's Work
in such a way as not to hinder or delay the operations of Landlord or the
Contractor in the Building. Any costs incurred by Landlord as a result of any
interference with Landlord's operations by Tenant or its contractors shall be
promptly paid by Tenant to Landlord upon demand. Landlord shall make all
reasonable efforts to notify Tenant of any such interference of which Landlord
has actual knowledge, but failure to provide such notice shall in no way limit
Landlord's right to demand payment for such costs. Tenant's contractors shall be
subject to Landlord's prior written approval, and to the administrative
supervision of the Contractor. Tenant's Work shall comply with all of the
following requirements:
(a) Tenant's Work shall not proceed until Landlord has approved in
writing: (i) Tenant's contractors, (ii) proof of the amount and coverage of
public liability and property damage insurance carried by Tenant's contractors
in the form of an endorsed insurance certificate naming Landlord, the
Contractor, and the agents of Landlord and the Contractor as additional
insureds, in an amount not less than two million dollars, and (iii) complete and
detailed plans and specifications for Tenant's Work.
2.
<PAGE> 39
(b) Tenant's Work shall be performed in conformity with a valid permit
when required, a copy of which shall be furnished to Landlord before such work
is commenced. In any event, all Tenant's Work shall comply with all applicable
laws, codes and ordinances of any governmental entity having jurisdiction over
the Building. Landlord shall have no responsibility for Tenant's failure to
comply with such applicable laws. Any and all delay in obtaining a certificate
of occupancy due to Tenant's vendors is the responsibility of Tenant and shall
be a Tenant Delay.
(c) In connection with Tenant's Work (e.g., delivering or installing
furniture or equipment to the second floor of the Leased Premises), Tenant or
its contractors shall arrange for any necessary hoisting or elevator service
with Landlord and shall pay such reasonable costs for such services as may be
charged by Landlord.
(d) Tenant shall promptly pay Landlord upon demand for any extra
expense incurred by Landlord by reason of faulty work done by Tenant or its
contractors, by reason of damage to existing work caused by Tenant or its
contractors, or by reason of inadequate cleanup by Tenant or its contractors.
10. COMPLETION; TENANT DELAY.
(a) As used herein, the term "Substantial Completion of the Tenant
Improvements" shall be deemed to mean the date when all of the following shall
have occurred: (i) Landlord shall have delivered to Tenant a certificate of
occupancy issued by the City of Sunnyvale for the Leased Premises, or Tenant may
legally occupy the Leased Premises for the operation of its business without
violating any law or regulation or voiding or adversely affecting its insurance
coverage, whether pursuant to a temporary certificate of occupancy or otherwise;
and (ii) Landlord shall have substantially completed construction of the Base
Building substantially in accordance with the Base Building Plans and all Tenant
Improvements substantially in accordance with the Final Plans, subject only to
the completion of reasonable punch list items, which, in the absence of manifest
error, shall be established by a certificate executed by Landlord's architect
certifying that such state of completion has been achieved. Without limiting the
generality of the foregoing, "Substantial Completion of the Tenant Improvements"
shall not be deemed to have been achieved unless and until (i) the building
systems, including roof, plumbing, HVAC, sprinkler, electrical (including panels
and outlets), doors (both personnel and shipping), lighting, ceiling tiles, and
window coverings are in good working order, (ii) the interior and exterior of
the Building are in compliance with all applicable Laws, (iii) all debris and
clutter has been removed from the Leased Premises and final cleanup completed,
(iv) exterior windows are washed inside and out, and (v) parking lot and
landscaping are in good condition and free of debris, clutter and all
construction equipment. After substantial completion of the Tenant Improvements
and delivery of the Leased Premises to Tenant, Landlord and Tenant shall execute
a Lease Commencement Date Certificate in the form attached as Exhibit "C" to the
Lease.
(b) If Landlord shall be delayed in substantially completing the Tenant
Improvements as a result of:
(i) Tenant's failure to furnish the information, instructions and
plans required in paragraph 3 or approve the Working Drawings, within the
applicable time periods specified in paragraph 5; or
(ii) Any changes in the scope of the Tenant Improvements from that
set forth in the Space Plans, or any Changes to the Final Plans requested by
Tenant after approval thereof pursuant to paragraph 7; or
(iii) Any interruption or interference in Landlord's construction
of the Tenant Improvements caused by Tenant, its contractors or its vendors; or
(iv) Tenant's failure to timely pay any amounts which Tenant is
obligated to pay under this Work Letter; or
(v) Any other act, neglect, failure or omission of Tenant, its
agents, employees or contractors (items (i) through (v) above being collectively
referred to as "Tenant Delays");
then the date upon which the payment of rental under the Lease, shall commence
shall be advanced by the cumulative duration of such Tenant Delays.
11. CONSTRUCTION WARRANTY. Landlord shall construct the Tenant Improvements
substantially in accordance with this Work Letter and the Final Plans, all Laws
and Private Restrictions, and in a good and workmanlike manner, and all
materials and equipment furnished will substantially conform to said plans and
shall be new and otherwise of good quality. Landlord's Contractor and
subcontractors shall be responsible for the correction of defects in design,
workmanship, materials and equipment supplied, and the cost of correction shall
not be charged against the Tenant Improvement Allowance or be a Property
Maintenance Expense.
12. OWNERSHIP OF TENANT IMPROVEMENTS. All of the Tenant Improvements which are
constructed with the Tenant Improvement Allowance shall become the property of
Landlord upon installation and shall not be removed or altered by Tenant, except
to the extent permitted by the Lease. Any part of the Tenant Improvements which
are constructed by Landlord with funds of Tenant shall become the property of
Tenant upon installation and Tenant shall have the right to depreciate and claim
and collect investment tax credits in such improvements; provided, however, that
(i) Tenant shall not remove or alter such improvements except in accordance with
the terms of the Lease; (ii) such improvements shall be surrendered to Landlord,
and title to such improvements shall vest in
3.
<PAGE> 40
Landlord, at the expiration or earlier termination of the Lease Term; and (iii)
in no event shall Landlord have any obligation to pay Tenant for the cost or
value of such improvements. As soon as reasonably practicable, Landlord and
Tenant shall agree in writing which of such improvements are to be constructed
using the Tenant Improvement Allowance (and therefore are Landlord's property)
and which of them are to be installed with Tenant's funds (and therefore are
Tenant's property) during the Lease Term.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Work Letter
as of the respective dates set forth below.
LANDLORD:
MATHILDA ASSOCIATES LLC, a California limited liability
company
By: Menlo Equities LLC, a California
limited liability company, Manager
Dated:__________ By: Diamant Investments LLC,
a Delaware limited liability company, Member
By:____________________________________________
Richard J. Holmstrom, Managing Member
(SIGNATURES CONTINUED ON NEXT PAGE)
4.
<PAGE> 41
TENANT:
JUNIPER NETWORKS, INC.,
a Delaware corporation
Dated:___________ By:_________________________________
Title:______________________________
Dated:___________ By:_________________________________
Title:______________________________
5.
<PAGE> 42
EXHIBIT C
LEASE COMMENCEMENT DATE CERTIFICATE
This Lease Commencement Date Certificate is entered into by Landlord and Tenant
pursuant to the Work Letter attached as Exhibit B to the Lease.
1. (a) Landlord: Mathilda Associates LLC, a California
limited liability company
(b) Tenant: Juniper Networks, Inc.,
a Delaware corporation
(c) Lease: Lease dated June 18, 1999 between
Landlord and Tenant.
(d) Leased Premises: 1194 Mathilda Avenue, Sunnyvale,
California
2. CONFIRMATION OF LEASE COMMENCEMENT.
Landlord and Tenant confirm that the Lease Commencement Date is
____________ and the Expiration Date is ______________ and that Article 1 of the
Lease is amended accordingly.
Landlord and Tenant have executed this Lease Commencement Date
Certificate as of the dates set forth below.
LANDLORD:
MATHILDA ASSOCIATES LLC,
a California limited liability company
By: Menlo Equities LLC,
a California limited liability company
Dated:__________ By:____________________________ Member
TENANT:
JUNIPER NETWORKS, INC., a Delaware corporation
Dated:__________ By:___________________________________________
Title:________________________________________
Dated:__________ By:___________________________________________
Title:________________________________________
1.
<PAGE> 43
EXHIBIT D
FORM OF ESTOPPEL CERTIFICATE
____________________ , 19____
_____________________________
_____________________________
_____________________________
_____________________________
Re 1194 Mathilda Avenue
Sunnyvale, California
Ladies and Gentlemen:
Reference is made to that certain Lease, dated as of June 18, 1999, between
MATHILDA ASSOCIATES LLC, a California limited liability company ("Landlord"),
and the undersigned (herein referred to as the "Lease"). A copy of the Lease
[and all amendment thereto] is[are] attached hereto as EXHIBIT A. At the request
of Landlord in connection with [ State reasons for request for estoppel
certificate ], the undersigned hereby certifies to Landlord and to [ State names
of other parties requiring certification ] and each of your respective
successors and assigns as follows:
1. The undersigned is the tenant under the Lease.
2. The Lease is in full force and effect and has not been amended,
modified, supplemented or superseded except as indicated in Exhibit A.
3. There is no defense, offset, claim or counterclaim by or in favor of
the undersigned against Landlord under the Lease or against the obligations of
the undersigned under the Lease. The undersigned has no renewal, extension or
expansion option, no right of first offer or right of first refusal and no other
similar right to renew or extend the term of the Lease or expand the property
demised thereunder except as may be expressly set forth in the Lease.
4. The undersigned is not aware of any default now existing of the
undersigned or of Landlord under the Lease, nor of any event which with notice
or the passage of time or both would constitute a default of the undersigned or
of Landlord under the Lease except____________________________________________.
5. The undersigned has not received notice of a prior transfer,
assignment, hypothecation or pledge by Landlord of any of Landlord's interest in
the Lease.
6. The monthly rent due under the Lease is $____________ and has been
paid through __________________, and all additional rent due and payable under
the Lease has been paid through _________________.
7. The term of the Lease commenced on __________________, and expires
on ___________________, unless sooner terminated pursuant to the provisions of
the Lease. Landlord has performed all work required by the Lease for the
undersigned's initial occupancy of the demised property.
8. The undersigned has deposited the sum of $____________ with Landlord
as security for the performance of its obligations as tenant under the Lease,
and no portion of such deposit has been applied by Landlord to any obligation
under the Lease.
9. Except as set forth in the Lease, there is no free rent period
pending, nor is Tenant entitled to any Landlord's contribution.
The above certifications are made to Landlord and Lender knowing that
Landlord and Lender will rely thereon in accepting an assignment of the Lease.
Very truly yours,
JUNIPER NETWORKS, INC., a Delaware corporation
By:___________________________________________
Name:_________________________________________
Title:________________________________________
1.
<PAGE> 44
EXHIBIT E
FORM OF LETTER OF CREDIT
Date: ____________________, 1999
Irrevocable Standby Letter of Credit Number: ____________
Beneficiary: Applicant:
Mathilda Associates LLC Juniper Networks, Inc.
525 University Avenue, Suite 100 __________________________________
Palo Alto, California 94301 __________________________________
__________________________________
Amount:
USD $4,329,450.00
(FOUR MILLION THREE HUNDRED
TWENTY-NINE THOUSAND FOUR HUNDRED
FIFTY AND 00/100 U.S. DOLLARS)
Expiration: _____________________
We hereby establish our Irrevocable Standby Letter of Credit No. _______________
in your favor for the account of ______________________________________________,
____________________________, on behalf of______________________________________
_________________________________, available for drawings for up to an aggregate
amount of U.S. $4,329,450.00 (FOUR MILLION THREE HUNDRED TWENTY-NINE THOUSAND
FOUR HUNDRED FIFTY AND 00/100 U.S. DOLLARS). This Letter of Credit is available
by payment upon your draft drawn at sight on us, submitted at the office of
____________________________________________________________, Attention: Letter
of Credit Services, and expires at our close of business on the expiration date
or any automatically extended expiration date as hereinafter set forth.
This Letter of Credit shall expire on ________________________, but such
expiration date shall be automatically extended for a period of one (1) year on
______________________ and on each successive expiration date, unless at least
sixty (60) days before the current expiration date we notify you by overnight
courier that this Letter of Credit is not extended beyond the current expiration
date. In the event you are so notified, any unused portion of the Letter of
Credit shall be available upon presentation of a sight draft by Mathilda
Associates LLC, within the current expiration date.
We give our undertaking to the Beneficiary that sums drawn under and in
compliance with the terms of this Letter of Credit will be duly honored by our
bank on presentation of drawings in accordance with the terms of this credit.
This Letter of Credit is transferable by the Beneficiary. Transfer of this
Letter of Credit is subject to our consent and receipt of Beneficiary's
instructions in the form attached hereto as Exhibit A accompanied by the
original Letter of Credit and amendment(s) if any. Cost or expenses of such
transfer shall be for the account of the Beneficiary.
This Letter of Credit is subject to the Uniform Customs and Practices for
Documentary Credits (1993 Revision) International Chamber of Commerce
Publication No. 500 and engages us to the terms herein.
Yours very truly,
Authorized Signature
Letter of Credit Services
(_____) _________________
1.
<PAGE> 45
EXHIBIT A
_____________________________________
_____________________________________
_____________________________________
_____________________________________
Attention: Letter of Credit Services
Re: Irrevocable Letter of Credit No. ______________
Dear Sirs:
The undersigned acknowledges receipt of your advice No.
____________________ of a credit issued in our favor, the terms of which are
satisfactory. We now return the original advice of the said credit with all
amendments and extensions, if any, and hereby irrevocably transfer the said
credit and all amendments and extensions thereof, if any, to:
__________________________________________
[Name of Transferee]
__________________________________________
[Address]
You are to inform the transferee of this transfer and such transferee
shall have sole rights as beneficiary under the credit, including any
amendments, extension or increases thereof, without notice to or further assent
from us.
Yours very truly,
By:_________________________________________
(The above signature with title as stated
with that on file with us and is authorized
for execution of this instrument.)
____________________________________________
(Bank)
2.
<PAGE> 46
EXHIBIT F
FORM OF LANDLORD WAIVER
THIS LANDLORD WAIVER (this "Waiver") dated _______________, 19__, is
entered into by and between MATHILDA ASSOCIATES LLC, a California limited
liability company ("Landlord") and ___________________ ("Secured Party").
RECITALS
WHEREAS, Landlord is the owner and landlord of the premises described
as 1194 Mathilda Avenue, Sunnyvale, California (the "Property"); and
WHEREAS, Landlord and Juniper Networks, Inc. ("Tenant") have entered
into that certain lease dated June 18, 1999 (as previously and/or hereafter
amended, the "Real Property Lease") pursuant to which Tenant has leased
approximately 144,315 square feet of space at the Property (the "Premises"); and
WHEREAS, Tenant has entered into an equipment lease and/or financing
agreement pursuant to which Tenant has granted a security interest in the
personal property described on Schedule 1 attached hereto (the "Personal
Property") to Secured Party under that certain [Equipment Lease and/or Financing
Agreement] between Tenant and Secured Party dated __________ (the "Financing
Agreement"); and
WHEREAS, Secured Party and Landlord desire to establish their
respective rights regarding the Personal Property and Secured Party's access to
the Premises;
AGREEMENT
NOW, THEREFORE, in consideration of the above Recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. During the term of the Real Property Lease, and subject to
Landlord's interest in the Personal Property, if any, at the expiration or
earlier termination of the Real Property Lease, the Personal Property shall
remain personal property and severable from the Premises and shall not become
part of the Premises or construed as a fixture at the Premises to the extent
that the Tenant Improvement Allowance (as defined in the Real Property Lease)
has not been utilized to pay for the Personal Property or the financing thereof.
2. So long as Tenant occupies the Premises and is not in default under
the Real Property Lease, Secured Party may enter the Premises at any time or
from time to time upon reasonable written notice to Landlord and in compliance
with the terms of the Financing Agreement for purposes of inspecting and/or
removing any and all of the Personal Property in the exercise of its rights and
remedies arising from the Financing Agreement. In the event of a default by
Tenant under the Real Property Lease, Secured Party shall obtain Landlord's
prior written consent prior to entering the Premises.
3. Landlord shall notify Secured Party in the event the Personal
Property remains at the Premises after either (i) Tenant is evicted from the
Premises or (ii) Tenant abandons (as opposed to vacates) the Premises prior to
the expiration of the Real Property Lease. Secured Party shall have 15 days to
remove the Personal Property from the Premises after notification of such action
from Landlord. If Secured Party has not removed the Personal Property within
such 15 day period, Landlord shall have all rights regarding the Personal
Property accorded to it by law and/or pursuant to the Real Property Lease and
Secured Party shall have no further rights regarding such Personal Property.
After Tenant has abandoned or been evicted from the Premises, Secured Party
shall be liable for holdover rent for the total amount of time the Personal
Property remains at the Premises after such eviction or abandonment. For
purposes hereof, "holdover rent" shall mean 200% of the rent in effect under the
Real Property Lease for the period immediately prior to such vacation or
eviction.
4. If Secured Party exercises its right to remove the Personal Property
from the Premises as provided herein, Secured Party shall repair any damage to
the Premises caused by such removal. Landlord shall have the right to require
Secured Party to post a bond acceptable to Landlord to cover the potential cost
of such repair prior to removing any such Personal Property.
5. No auction or sale of the Personal Property shall be conducted by
Secured Party from the Premises without Landlord's prior written consent, which
consent Landlord may withhold in Landlord's sole and absolute discretion.
6. This waiver shall be binding upon the heirs, administrators,
executors, successors and assigns of the Landlord, and shall inure to the
benefit of the successors and assigns of the Secured Party.
1.
<PAGE> 47
IN WITNESS WHEREOF, the parties hereto have executed, sealed and
delivered this Waiver this __________ day of ________________, 199__.
MATHILDA ASSOCIATES LLC,
a California limited liability company
By: Menlo Equities LLC,
a California limited liability company
By:____________________________ Member
SECURED PARTY:
By:_______________________________________
Title:____________________________________
By:_______________________________________
Title:____________________________________
2.
<PAGE> 48
SCHEDULE 1
PERSONAL PROPERTY
3.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 26, 1999, in the Amendment No. 4 to Registration Statement (Form S-1)
and related prospectus of Juniper Networks, Inc. for the registration of shares
of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
June 22, 1999
