<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1997
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MMC NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3674 77-0319809
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
1134 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 731-1600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
PRABHAT K. DUBEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MMC NETWORKS, INC.
1134 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 731-1600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
AARON J. ALTER GREGORY M. GALLO
KENNETH M. SIEGEL PETER M. ASTIZ
RAMSEY HANNA SCOTT M. STANTON
WILSON SONSINI GOODRICH & ROSATI GRAY CARY WARE & FREIDENRICH
PROFESSIONAL CORPORATION A PROFESSIONAL CORPORATION
650 PAGE MILL ROAD 400 HAMILTON AVENUE
PALO ALTO, CALIFORNIA 94304 PALO ALTO, CALIFORNIA 94301-1825
(650) 493-9300 (650) 328-6561
----------------
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, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
===============================================================================
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value.......... $36,225,000 $10,977.27
===============================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
----------------
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 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued August 20, 1997
Shares
[MMC NETWORKS LOGO APPEARS HERE]
COMMON STOCK
-----------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE
COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. APPLICATION HAS
BEEN MADE TO LIST THE SHARES OF COMMON STOCK OFFERED HEREBY ON
THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "MMCN."
-----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share.............. $ $ $
Total(3)............... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of
1933, as amended. See "Underwriters."
(2) Before deducting expenses estimated at $1,000,000 payable by the
Company.
(3) The Company has granted the Underwriters an option, exercisable within
30 days from the date hereof, to purchase up to an aggregate of
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$ , $ and $ , respectively. See "Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Gray Cary Ware & Freidenrich, A Professional Corporation, counsel for the
Underwriters. It is expected that delivery of the Shares will be made on or
about , 1997, at the office of Morgan Stanley & Co. Incorporated,
New York, N.Y., against payment therefor in immediately available funds.
-----------
MORGAN STANLEY DEAN WITTER
DEUTSCHE MORGAN GRENFELL
WESSELS, ARNOLD & HENDERSON
, 1997
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................ 3
The Company....................... 4
Risk Factors...................... 5
Use of Proceeds................... 14
Dividend Policy................... 14
Capitalization.................... 15
Dilution.......................... 16
Selected Financial Data........... 17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 18
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business.......................... 24
Management........................ 35
Certain Transactions.............. 43
Principal Stockholders............ 45
Description of Capital Stock...... 47
Shares Eligible for Future Sale... 50
Underwriters...................... 52
Legal Matters..................... 54
Experts........................... 54
Additional Information............ 54
Index to Financial Statements..... F-1
</TABLE>
----------------
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports containing unaudited financial information for the first
three quarters of each year.
----------------
ATMS2000, BitStream Processor, Direct Replication Engine, MMC Networks, NCI,
Per-Flow Queuing (PFQ), PS1000, ViX, and the MMC Networks logo are trademarks
of the Company. This Prospectus also includes product names and other trade
names and trademarks of the Company and of other organizations.
----------------
Except as otherwise noted herein, information in this Prospectus assumes (i)
no exercise of the Underwriters' over-allotment option, (ii) the
reincorporation of the Company into Delaware prior to the effective date of
this Prospectus, (iii) the conversion of all outstanding shares of Preferred
Stock of the Company into shares of Common Stock of the Company that will
occur in connection with this offering, and (iv) the authorization of
10,000,000 shares of undesignated Preferred Stock upon the closing of this
offering.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACATIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS
OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITERS."
2
<PAGE>
BACKGROUND GRAPHIC:
TIME-LAPSE NIGHT TIME PHOTOGRAPH OF BUSY COMPLEX FREEWAY INTERCHANGE AS A
METAPHOR FOR NETWORK TRAFFIC.
TEXT:
MMC NETWORKS
NETWORK PROCESSORS FOR WIRE-SPEED NETWORKING EQUIPMENT
PROVIDING NETWORKING VENDORS
.HIGH PERFORMANCE
.ADVANCED FEATURES
.RAPID TIME-TO-MARKET
.SOFTWARE PROGRAMMABILITY
.LOW SYSTEM COST
<PAGE>
TEXT BOX:
MMC NETWORKS IS A LEADING DEVELOPER AND SUPPLIER OF NETWORK PROCESSORS--HIGH-
PERFORMANCE, OPEN-ARCHITECTURE, SOFTWARE-PROGRAMMABLE PROCESSORS OPTIMIZED FOR
NETWORKING APPLICATIONS. THESE NETWORK PROCESSORS ENABLE A NEW GENERATION OF
HIGH-PERFORMANCE LAN AND WAN NETWORKING EQUIPMENT.
MMC NETWORKS' CURRENT PRODUCT FAMILIES ...
PS1000 Fast Ethernet
ATMS2000 ATM
PROVIDE ADVANCED FEATURES AT WIRE SPEED ...
Layer 3 Switching and Routing
Internetworking of LANs and WANs
Security
Class of Service
Quality of Service
Network Management
FOR NETWORKING EQUIPMENT TARGETED AT ...
ENTERPRISE NETWORKS ...
Campus Backbone Web Server Farms
Power Workgroup WAN Backbone
Wiring Closet Dedicated Distribution
Data Centers Remote Access Servers
AND SERVICE PROVIDER SERVICES ...
Internet Dial Access
Frame Relay Dedicated Access
ATM xDSL, Cable
Integrated Services Sonet/SDH
MMC NETWORKS HAS ACHIEVED OVER 35 DESIGN WINS WITH 27
CUSTOMERS, INCLUDING:
Cisco NEC
Fujitsu Olicom
Hitachi SNT
Ipsilon Toshiba
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by more detailed
information and the Financial Statements and notes thereto appearing elsewhere
in this Prospectus.
THE COMPANY
MMC Networks, Inc. (the "Company" or "MMC Networks") is a leading developer
and supplier of network processors--high-performance, open-architecture,
software-programmable processors optimized for networking applications. The
Company's network processors form the core silicon "engines" of LAN and WAN
switches and routers and are designed to allow network equipment vendors to
rapidly develop high-performance, feature-rich, cost-effective products
supporting a broad range of networking functions. MMC Networks' customers
employ the Company's network processors to develop and market multi-gigabit,
wire-speed switches and routers with advanced features such as layer 3
switching, internetworking of LANs and WANs, security, class of service,
quality of service and network management. The Company's current products, the
PS1000 and ATMS2000 families of network processors, provide the core
functionality of high-performance Fast Ethernet and Asynchronous Transfer Mode
("ATM") networking equipment, respectively. The Company believes that network
equipment vendors are able to reduce design and development costs and
accelerate product development cycles for high-performance routers and switches
by using the Company's products. All of the Company's products are based on the
Company's proprietary ViX architecture, which enables network equipment vendors
to easily and cost-effectively implement high-performance, value-added features
in their switch and router products.
To date, the Company has achieved more than 35 design wins with 27 network
equipment vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC,
Olicom, SNT and Toshiba) are shipping networking products that incorporate the
Company's network processors. MMC Networks outsources all of its semiconductor
manufacturing, allowing the Company to focus its resources on designing,
developing and marketing its network processor products.
THE OFFERING
<TABLE>
<S> <C>
Total Common Stock outstanding prior
to this offering.................... 24,803,280 shares(1)
Common Stock offered................. shares
Common Stock to be outstanding after
the offering........................ shares
Use of proceeds...................... For general corporate purposes including
working capital and capital expenditures.
See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.............................. MMCN
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ 165 $ 577 $ 10,515 $ 4,690 $ 8,201
Total costs and expenses.......... 453 3,257 10,113 4,544 7,845
Operating income (loss)........... (288) (2,680) 402 146 356
Net income (loss)................. (226) (2,576) 702 326 434
Net income per share (2).......... .02 .01 .01
Shares used to compute net income
per share (2).................... 29,048 28,822 29,256
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........ $ 5,562
Total assets............................................. 11,732
Long-term obligations.................................... 447
Total stockholders' equity............................... 8,723
</TABLE>
- ------
(1) Based on the number of shares outstanding as of June 30, 1997. Excludes (i)
5,243,601 shares of Common Stock then issuable upon the exercise of options
outstanding under the Company's 1993 Stock Option Plan (the "1993 Plan")
with a weighted average exercise price of $1.86 per share, (ii) 1,500,000
shares of Common Stock reserved for issuance under the Company's 1997 Stock
Plan (the "1997 Plan"), (iii) 300,000 shares reserved for issuance under
the Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan"),
(iv) 150,000 shares of Common Stock reserved for issuance under the
Company's 1997 Director Option Plan (the "Director Plan"), and (v) 156,963
shares of Common Stock issuable upon the exercise of outstanding warrants
with a weighted average exercise price of $.64 per share. See "Management--
Benefit Plans," "Description of Capital Stock" and Notes 5, 8 and 9 of
Notes to Financial Statements.
(2) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in per share calculations. Net
income (loss) per share prior to 1996 has not been presented since such
amounts are not meaningful.
(3) As adjusted to reflect the sale of shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $
per share after deducting estimated underwriting discounts and commissions
and estimated offering expenses. See "Use of Proceeds" and
"Capitalization."
3
<PAGE>
THE COMPANY
MMC Networks is a leading developer and supplier of network processors--
high-performance, open-architecture, software-programmable processors
optimized for networking applications. The Company's network processors form
the core silicon "engines" of LAN and WAN switches and routers and are
designed to allow network equipment vendors to rapidly develop high-
performance, feature-rich, cost-effective products supporting a broad range of
networking functions. MMC Networks' customers employ the Company's network
processors to develop and market multi-gigabit, wire-speed switches and
routers with advanced features such as layer 3 switching, internetworking LANs
and WANs, security, class of service, quality of service and network
management. The Company believes that network equipment vendors are able to
reduce design and development costs and accelerate product development cycles
for high-performance switches and routers by using the Company's products.
The dramatic increase in network traffic, the growing size and complexity of
private and public networks and the proliferation of diverse networking
technologies and protocols have fueled demand for network switching and
routing equipment which delivers superior price/performance, multiprotocol
connectivity and support for a variety of advanced networking features. While
attempting to meet customers' demands for switches and routers with increased
performance and advanced features, heightened competition in the networking
equipment market is forcing vendors to accelerate time-to-market for new
products, reduce costs, differentiate their products and address the needs of
an increasingly segmented customer base. The Company works closely with major
network equipment vendors to develop network processors which enable vendors
to more rapidly design and bring to market a broad variety of advanced,
differentiated, high-performance networking solutions.
The Company's current products, the PS1000 and ATMS2000 families of network
processors, provide the core functionality of high-performance Fast Ethernet
and ATM networking equipment, respectively. All of the Company's products are
based on the Company's proprietary ViX architecture, which employs a
centralized shared-memory structure and point-to-point connections to provide
wire-speed routing performance, scalable port densities and cost-effective
feature support without significant performance degradation. The Company's
core technologies are designed to support multiple tiers of user-defined
quality of service in, frame/cell conversion without external segmentation and
reassembly ("SAR") chips and rapid data multicasting and broadcasting
capabilities. The Company's network processors employ an open architecture
which allows network equipment vendors to more easily implement advanced
features and differentiate their product offerings.
To date, the Company has achieved more than 35 design wins with 27 network
equipment vendors, of which eight (Cisco Systems, Inc., Fujitsu Denso, Ltd.,
Hitachi Computer Products (America), Inc., Ipsilon Networks, Inc., NEC
Corporation, Olicom, Inc., Switched Network Technologies, Inc. ("SNT") and
Toshiba Corporation) are shipping networking products that incorporate the
Company's network processors. The Company markets its products primarily
through a direct sales and marketing organization and provides field support
and assistance in product design and development to its network equipment
vendor customers through its staff of factory systems engineers and product
designers and architects. MMC Networks outsources all of its semiconductor
manufacturing, allowing the Company to focus its resources on designing,
developing and marketing its network processor products.
The Company was incorporated in California in September 1992 and intends to
reincorporate in Delaware prior to the effectiveness of this offering. The
Company's principal executive offices are located at 1134 East Arques Avenue,
Sunnyvale, California 94086, and its telephone number is (408) 731-1600.
4
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully before purchasing the
Common Stock offered hereby. This Prospectus contains forward- looking
statements that involve risks and uncertainties. Actual events or results
could differ materially from those discussed in the forward-looking statements
as a result of various factors, including, without limitation, the risk
factors set forth below and elsewhere in the Prospectus.
Limited Operating History; No Assurance of Future Profitability. The Company
was incorporated in 1992 and did not begin shipping products in volume until
the fourth quarter of 1995. Accordingly, the Company has a limited operating
history upon which investors may evaluate the Company and its prospects. The
Company had an accumulated deficit of $1.7 million as of June 30, 1997.
Although the Company has experienced significant revenue growth in recent
periods and first achieved profitability in the first quarter of 1996, these
results should not be considered indicative of future revenue growth, if any,
nor is there any assurance that the Company will be profitable in any future
period. The Company intends to increase its operating expenses significantly
during the balance of 1997 and in 1998, particularly in research and
development and sales and marketing. Due to the anticipated increases in the
Company's operating expenses, the Company's operating results will be
adversely affected if the Company's revenues do not increase significantly
over the same period. The sales cycle for the Company's products can range
from three to six months or more, with an additional nine to 18 months or more
before a network equipment vendor customer commences volume production of
equipment which incorporates the Company's products. As a result, there may be
a significant delay between the Company increasing its research and
development and sales and marketing expenses and its generation of higher
revenues, if any, from such expenditures. The Company's prospects must be
considered in light of the risks, challenges and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in rapidly evolving markets such as the data networking and
semiconductor industries. To address these risks, the Company must, among
other things, successfully increase the scope of its operations, respond to
competitive developments, continue to attract, retain and motivate qualified
personnel and continue to commercialize products incorporating innovative
technologies. There can be no assurance that the Company will be successful in
addressing these risks and challenges. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Fluctuations in Operating Results. Fluctuations in the Company's operating
results have occurred in the past and are likely to occur in the future due to
a variety of factors, any of which may have a material adverse effect on the
Company's operating results. In particular, the Company's quarterly results of
operations may vary significantly due to general business conditions in the
networking equipment and semiconductor industries, changes in demand for the
network equipment products of the Company's customers, the timing and amount
of orders from the Company's network equipment vendor customers, cancellations
or delays of customer product orders, new product introductions by the Company
or its competitors, cancellations, changes or delays of deliveries of products
to the Company by its suppliers, increases in the costs of products from the
Company's suppliers, fluctuations in product life cycles, price erosion,
competition, changes in the mix of products sold by the Company, availability
of semiconductor foundry capacity, variances in the timing and amount of
nonrecurring engineering funding and operating expenses, seasonal fluctuations
in demand, intellectual property disputes and general economic conditions. The
Company has at times recognized a substantial portion of its revenues in the
last month of a quarter. Since a large portion of the Company's operating
expenses, including rent, salaries and capital lease expenses, is fixed and
difficult to reduce or modify, if revenue does not meet the Company's
expectations, the material adverse effect of any revenue shortfall will be
magnified by the fixed nature of these operating expenses. All of the above
factors are difficult for the Company to forecast, and these and other factors
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company's lengthy sales
cycle limits its visibility regarding future financial performance. As a
result of all of the foregoing, there can be no assurance that the Company
will be able to sustain profitability on a quarterly or an annual basis.
Moreover, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indicative of future
operating results. The Company's operating results in a future quarter or
quarters are likely to fall below the expectations
5
<PAGE>
of public market analysts or investors. In such event, the price of the
Company's Common Stock will likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence Upon Development of the Market for Network Processors. The
Company's future prospects are dependent upon the acceptance of network
processors as an alternative to the ASIC components and general purpose
processors traditionally utilized by network equipment vendors. The Company's
future prospects are also dependent upon acceptance by the Company's customers
of third party sourcing for network processors as an alternative to in-house
development. Many of the Company's current and potential customers have
substantial technological capabilities and financial resources and currently
develop internally the ASIC components and program the general purpose
processors utilized in their products. These customers may in the future
continue to utilize internally developed ASIC components and general purpose
processors or may determine to develop or acquire components, technologies or
network processors that are similar to, or that may be substituted for, the
Company's products. The Company must anticipate market trends and the price,
performance and functionality requirements of such network equipment vendors
and must successfully develop and manufacture products that meet these
requirements. In addition, the Company must make products available to such
customers on a timely basis and at competitive prices. If the Company's
network equipment vendor customers fail to accept network processors as an
alternative, if they develop or acquire the technology to develop such
components internally rather than purchase the Company's products, or if the
Company is otherwise unable to develop strong relationships with network
equipment vendors, the Company's business, financial condition and results of
operations would be materially and adversely affected. See "Business--MMC
Networks' Strategy" and "--Competition."
Customer Concentration. The Company's customer base is highly concentrated.
A relatively small number of customers has accounted for a significant portion
of the Company's revenues to date, and the Company expects that this trend
will continue for the foreseeable future. The Company currently has only eight
customers which are using the Company's network processors in volume
production. In particular, sales to Cisco accounted for approximately 51.0%
and 24.4% of sales in 1996 and the first six months of 1997, respectively. In
addition, to date, only Hitachi has commenced production of a product
incorporating the Company's PS1000 products. Sales to Hitachi accounted for
approximately 17.3% of the Company's sales for the first six months of 1997.
Each of the Company's network equipment vendor customers, including Cisco and
Hitachi, can cease incorporating the Company's products with limited notice to
the Company and with little or no penalty. The Company's agreements with
network equipment vendor customers do not require minimum purchases. In
addition, certain of the Company's network equipment vendor customers offer or
may offer network equipment utilizing ASICs, general purpose processors,
network processors and other devices (designed by themselves or third parties)
that compete with those offered by the Company, or have pre-existing
relationships with current or potential competitors of the Company. Pursuant
to the Company's agreements with Cisco and certain of its other customers,
under certain circumstances, such customers have the right to manufacture the
Company's network processors for resale as part of their products or to
otherwise use proprietary technology of the Company in their products. The
circumstances in which customers have such rights include certain defaults by
the Company, a change of control of the Company and certain other events
relating to the Company's inability, or potential inability, to supply
products to such customers. In any such event, the Company will not
necessarily be entitled to royalty payments or fees for use of its technology.
The obligation of customers to pay royalties, if any, may be dependent upon
the customer's ability to obtain products at a price lower than that
previously charged by the Company to the customer.
The Company's longstanding relationship with Cisco may inhibit other leading
network equipment vendors from adopting the Company's network processors.
Cisco faces intense competition from vendors such as Bay Networks, Inc., 3Com
Corporation and FORE Systems, Inc. ("FORE"), none of which currently uses the
Company's network processors. Accordingly, the Company's future operating
results may be substantially dependent on Cisco's competitive position in the
networking equipment market. Any reduction or delay in sales of the Company's
products by its network equipment vendor customers could have a material
6
<PAGE>
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that the Company will retain its current
network equipment vendor customers or that it will be able to recruit
additional customers. The loss of one or more of the Company's customers or
the inability of the Company to successfully develop relationships with
additional significant network equipment vendors could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Sales, Marketing and Technical
Support."
Erosion of Average Selling Prices. The data networking and semiconductor
industries have experienced rapid erosion of average selling prices ("ASPs")
due to a number of factors, including rapid technological change,
price/performance enhancements and product obsolescence. The Company may
experience substantial period-to-period fluctuations in future operating
results due to ASP erosion. The Company anticipates that ASPs will decrease in
the future in response to product introductions by competitors or the Company
or other factors, including price pressures from significant customers. In
particular, the market for Ethernet switching and routing components has
experienced and is expected to continue to experience significant ASP erosion.
Therefore, the Company must continue to develop and introduce new products on
a timely basis which incorporate features that can be sold at higher ASPs.
Failure to achieve any or all of the foregoing could cause the Company's
revenues and gross margins to decline, which would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Lengthy Sales Cycle. The Company sells its products to network equipment
vendors. The Company's sales cycle involves test and evaluation of its
products by the potential customer, design of the customer's equipment to
incorporate the Company's products and the customer's own sales cycle to its
customers. The sales cycle for the test and evaluation of the Company's
products can range from three to six months or more with an additional nine to
18 months or more before a customer commences volume production of equipment
which incorporates the Company's products. Because of such lengthy sales
cycle, the Company may experience a delay between increasing expenses for
research and development and sales and marketing efforts and the generation of
higher revenues, if any, from such expenditures. In addition, the delays
inherent in such lengthy sales cycle raise additional risks of customer
decisions to cancel or change product plans, which could result in the loss of
anticipated sales by the Company. The Company's business, operating results
and financial condition could be materially adversely affected if customers
curtail, reduce or delay orders during such sales cycle. See "Business--Sales,
Marketing and Technical Support."
New Product Development and Technological Change. The data networking and
semiconductor industries are characterized by rapidly changing technology,
frequent product introductions and evolving industry standards. Accordingly,
the Company's future performance depends on a number of factors, including its
ability to identify emerging technological trends in its target markets, to
develop and maintain competitive products, to enhance its products by adding
innovative features that differentiate its products from those of competitors,
to bring products to market on a timely basis at competitive prices, to
properly identify target markets and to respond effectively to new
technological changes or new product announcements by others. No assurance can
be given that the Company's design and introduction schedules for any
additions and enhancements to its existing and future products will be met,
that these products will achieve market acceptance, or that the Company will
be able to sell these products at ASPs that are favorable to the Company. In
evaluating new product decisions, the Company must anticipate well in advance
future demand for product features and performance characteristics, as well as
available supporting technologies, manufacturing capacity, industry standards
and competitive product offerings. The Company must also continue to make
significant investments in research and development in order to continually
enhance the performance and functionality of its products to keep pace with
competitive products and customer demands for improved performance, features
and functionality. Technical innovations of the type required for the Company
to remain competitive are inherently complex and require long development
cycles. Such innovations must be completed before developments in networking
technologies or standards render them obsolete and must be sufficiently
compelling to induce network equipment vendors to favor them over alternative
technologies. Moreover, the Company must generally incur substantial research
and development costs before
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the technical feasibility and commercial viability of a product line can be
ascertained. There can be no assurance that revenues from future products or
product enhancements will be sufficient to recover the development costs
associated with such products or enhancements or that the Company will be able
to secure the financial resources necessary to fund future development. The
failure to successfully develop new products on a timely basis could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Research and Development."
Dependence on Independent Manufacturers. The Company outsources all of its
semiconductor manufacturing, assembly and test. The Company's suppliers
currently deliver fully assembled and tested products on a turnkey basis. The
semiconductor industry is highly cyclical and, in the past, foundry capacity
has been very limited at times and may become limited in the future.
Currently, only one of the Company's products is manufactured by more than one
supplier. The Company depends on its suppliers to deliver sufficient
quantities of finished product to the Company in a timely manner. Since the
Company places its orders on a purchase order basis and does not have a long-
term volume purchase agreement with any of its existing suppliers, any of
these suppliers may allocate, and in the past have allocated, capacity to the
production of other products while reducing deliveries to the Company on short
notice. The Company has recently experienced delays in obtaining an adequate
supply of certain of its products from one supplier, as well as certain
problems regarding the quality of the products delivered by that supplier, and
as a result has begun obtaining such products from an alternative supplier.
There can be no assurance that the Company will not have similar or more
protracted problems in the future with existing or new suppliers. In the event
of a loss of, or a decision by the Company to change, a key supplier or
foundry, qualifying a new supplier or foundry and commencing volume production
could involve delay and expense, resulting in lost revenues, reduced operating
margins and possible detriment to customer relationships.
The Company must place orders approximately 12 to 14 weeks in advance of
expected delivery. As a result, the Company has only a limited ability to
react to fluctuations in demand for its products, which could cause the
Company to have an excess or a shortage of inventory of a particular product.
Moreover, any failure of global semiconductor manufacturing capacity to
increase in line with demand could cause foundries to allocate available
capacity to larger customers or customers with long-term supply contracts. The
inability of the Company to obtain adequate foundry capacity at acceptable
prices, or any delay or interruption in supply, could reduce the Company's
product revenues or increase the Company's cost of revenues and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company continuously evaluates the benefits, on a product-by-product
basis, of migrating to a smaller semiconductor geometry process in order to
reduce costs, and has commenced migration of certain products to smaller
geometries. The Company believes that the transitioning of its products to
increasingly smaller geometries will be important for the Company to remain
competitive. No assurance can be given that future process migration will be
achieved without difficulty.
In the future, the Company expects to change its supply arrangements to
assume more of the product manufacturing responsibilities. Such changes will
include contracting for wafer manufacturing and subcontracting for assembly
and test rather than purchasing finished product. The Company has begun
investing in design tools, libraries and personnel with the expectation of
assuming greater manufacturing responsibilities by mid-1998. The assumption of
greater manufacturing responsibilities involves additional risks including not
only the risks discussed above, but also risks associated with variances in
production yields, obtaining adequate test and assembly capacity at reasonable
cost, and other general risks associated with the manufacture of
semiconductors. In addition, the Company also expects that it may enter into
volume purchase agreements pursuant to which the Company must commit to
minimum levels of purchases and which may require up-front investments. The
inability of the Company to effectively assume greater manufacturing
responsibilities or manage volume purchase arrangements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing."
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Competition. The data networking and semiconductor industries are intensely
competitive and are characterized by constant technological change, rapid
rates of product obsolescence and price erosion. The Company's PS1000 and
ATMS2000 product families compete with products from companies such as Texas
Instruments Incorporated, Lucent Technologies, Inc., PMC-Sierra Inc., Galileo
Technology Ltd., Integrated Telecom Technology, Inc. and I-Cube, Inc. In
addition, the Company expects significant competition in the future from major
domestic and international semiconductor suppliers. The Company also may face
competition from suppliers of products based on new or emerging technologies.
Moreover, several established electronics and semiconductor suppliers have
recently entered or indicated an intent to enter the switching and routing
equipment market. In addition, many of the Company's existing and potential
customers internally develop ASICs, general purpose processors, network
processors and other devices which attempt to perform all or a portion of the
functions performed by the Company's products.
Many of the Company's current and prospective competitors offer broader
product lines and have significantly greater financial, technical,
manufacturing and marketing resources than the Company. In particular,
companies such as Texas Instruments and Lucent Technologies have proprietary
semiconductor manufacturing ability, preferred vendor status with many of the
Company's customers, extensive marketing power and name recognition, greater
financial resources than the Company, and other significant advantages over
the Company. In addition, current and potential competitors may determine, for
strategic reasons, to consolidate, lower the prices of their products or
bundle their products with other products. Current and potential competitors
have established or may establish financial or strategic relationships among
themselves or with existing or potential customers, resellers or other third
parties. Accordingly, it is possible that new competitors or alliances among
competitors could emerge and rapidly acquire significant market share. The
Company believes that important competitive factors in its market are
performance, price, length of development cycle, design wins with major
network equipment vendors, support for new data networking standards, features
and functionality, adaptability of products to specific applications, support
of product differentiation, reliability, technical service and support, and
protection of products by effective utilization of intellectual property laws.
Failure of the Company to compete successfully as to any of these or other
factors could have a material adverse effect on its operating results. The
failure of the Company to successfully develop and market products that
compete successfully with those of other suppliers in the market would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company must compete for the services
of qualified distributors and sales representatives. To the extent that the
Company's competitors offer such distributors or sales representatives more
favorable terms or a higher volume of business, such distributors or sales
representatives may decline to carry, or discontinue carrying, the Company's
products. The Company's business, financial condition and results of
operations could be adversely affected by any failure to maintain and expand
its distribution network. See "Business--Competition."
Product Complexity. Products as complex as those offered by the Company
frequently contain errors, defects and bugs when first introduced or as new
versions are released. The Company has in the past experienced such errors,
defects and bugs. Delivery of products with production defects or reliability,
quality or compatibility problems could significantly delay or hinder market
acceptance of such products, which could damage the Company's reputation and
adversely affect the Company's ability to retain its existing customers and to
attract new customers. Moreover, such errors, defects or bugs could cause
problems, interruptions, delays or a cessation of sales to the Company's
customers. Alleviating such problems may require significant expenditures of
capital and resources by the Company. There can be no assurance that, despite
testing by the Company, its suppliers or its customers, errors, defects or
bugs will not be found in new products after commencement of commercial
production, resulting in additional development costs, loss of, or delays in,
market acceptance, diversion of technical and other resources from the
Company's other development efforts, claims by the Company's customers or
others against the Company, or the loss of credibility with the Company's
current and prospective customers. Any such event would have a material
adverse effect on the Company's business, financial condition and results of
operations.
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Dependence on Growth in Demand for Networking Equipment. The Company's
future success is in large measure dependent on continued growth in the market
for networking equipment, in particular the market for mid- to high-end
switches and routers which are manufactured and sold by the Company's
customers. The market for these products has in the past and may in the future
fluctuate significantly based upon numerous factors, including the lack of
industry standards, adoption of alternative technologies, capital spending
levels and general economic conditions. There can be no assurance with respect
to the rate or extent to which the networking equipment market will grow, if
at all, nor can there be any assurance that the Company will not experience a
decline in demand for its products. Any decrease in the growth of the
networking equipment market or decline in demand for the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--MMC Networks'
Strategy."
Order and Shipment Uncertainties. The Company's sales are generally made
pursuant to individual purchase orders that may be canceled or deferred by
customers on short notice without significant penalty. Cancellation or
deferral of product orders could result in the Company holding excess
inventory, which could have a material adverse effect on the Company's profit
margins and restrict its ability to fund its operations. The Company
recognizes revenue upon shipment of products to the customer. Refusal of
customers to accept shipped products or delays or difficulties in collecting
receivable accounts could result in significant charges against income, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Protection of Intellectual Property. Since its inception, the Company has
devoted significant resources to research and development. The Company relies
primarily on a combination of nondisclosure agreements and other contractual
provisions as well as patent, trademark, trade secret, and copyright law to
protect its proprietary rights. Failure of the Company to enforce and protect
its intellectual property rights could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that such intellectual property rights can be successfully
asserted in the future or will not be invalidated, circumvented or challenged.
From time to time, third parties, including competitors of the Company, may
assert patent, copyright and other intellectual property rights to
technologies that are important to the Company. There can be no assurance that
third parties will not assert infringement claims against the Company in the
future, that assertions by third parties will not result in costly litigation
or that the Company would prevail in any such litigation or be able to license
any valid and infringed patents from third parties on commercially reasonable
terms, if at all. Litigation, regardless of the outcome, is likely to result
in substantial cost and diversion of resources of the Company. Any
infringement claim or other litigation against or by the Company could
materially adversely affect the Company's business, financial condition and
results of operations.
In addition, there can be no assurance that competitors of the Company, many
of which have substantially greater resources than the Company and have made
substantial investments in competing technologies, do not have, or will not
seek to apply for and obtain, patents that will prevent, limit or interfere
with the Company's ability to make, use or sell its products either in the
United States or in international markets. The Company has received notice
from FORE stating that FORE believes that the Company's products infringe two
of FORE's patents and offering the Company a license to such patents. The
Company has received a legal opinion from Dergosits & Noah, LLP, its patent
counsel, to the effect that certain claims made in the FORE patents are
invalid, and that, as to the other claims, the Company's products do not
infringe. However, there can be no assurance that FORE will not file a lawsuit
against the Company or that the Company will prevail in any such litigation.
Furthermore, there can be no assurance that the Company will not in the future
become subject to patent infringement claims and litigation or interference
proceedings to determine the priority of inventions. The defense and
prosecution of intellectual property suits, interference proceedings and
related legal and administrative proceedings are both costly and time
consuming. Any such suit or proceeding involving the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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Dependence on Key Personnel and Hiring of Additional Personnel. The
Company's success depends to a significant degree upon the continued
contributions of its key management and other personnel, many of whom would be
difficult to replace. The Company does not have employment contracts with any
of its key personnel and only maintains limited key man life insurance on two
of its officers. In addition, the Company believes that its success depends to
a significant extent on the ability of its management to operate effectively,
both individually and as a group. Several members of the Company's management
team have joined the Company in the last 12 months. The Company may experience
difficulty in integrating members of its management team. The Company must
also attract and retain highly skilled managerial and other personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel. The
loss of the services of any of the key personnel, the inability to attract or
retain qualified personnel in the future or delays in hiring required
personnel, particularly engineers, could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, companies in the networking industry whose employees accept
positions with competitive companies frequently claim that their competitors
have engaged in unfair hiring practices. There can be no assurance that the
Company will not receive such claims in the future as it seeks to hire
qualified personnel or that such claims will not result in material litigation
involving the Company. The Company could incur substantial costs in defending
itself against any such claims, regardless of their merits. See "Business--
Employees" and "Management--Executive Officers and Directors."
Management of Growth. The Company has experienced a period of rapid growth
and expansion which has placed, and continues to place, a significant strain
on its resources. To accommodate this growth, the Company will be required to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the improvement of its accounting and other
internal management systems, all of which may require substantial management
effort. There can be no assurance that such efforts can be accomplished
successfully. In addition, this growth as well as the Company's product
development activities have necessitated an increase in the number of the
Company's employees, resulting in increased responsibilities for the Company's
management. If the Company sustains its growth in the future, the Company will
need to continue to implement and improve its operational, financial and
management information systems and to hire, train, motivate and manage its
expanding employee base. There can be no assurance that the Company's systems,
procedures and controls will be adequate to support the Company's operations.
Any failure to improve the Company's operational, financial and management
information systems, or to hire, train, motivate or manage its employees could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Risks Associated with Expansion of International Business
Activities. Substantially all of the Company's sales to date have been to
customers located in the United States, including sales to U.S.-based
affiliates of non-U.S. network equipment vendors. If the Company's
international sales increase, the Company will be subject to additional risks
inherent in international operations. All of the Company's international sales
to date are U.S. dollar-denominated. As a result, an increase in the value of
the U.S. dollar relative to foreign currencies could make the Company's
products less competitive in international markets. In addition, the Company
procures a portion of its manufacturing, assembly and test services from
suppliers located outside the United States. International business activities
may be limited or disrupted by the imposition of governmental controls, export
license requirements, restrictions on the export of critical technology,
currency exchange fluctuations, political instability, trade restrictions and
changes in tariffs. Demand for the Company's products could also be adversely
affected by seasonality of international sales and economic conditions in the
Company's primary overseas markets. These international factors could have a
material adverse effect on future sales of the Company's products to
international customers and, consequently, on the Company's business,
financial condition and results of operations. See "Business--Sales, Marketing
and Technical Support" and "--Manufacturing."
Need for Additional Capital. The Company may require substantial additional
working capital to fund its business, particularly to finance inventories and
accounts receivable and for product development. The Company believes that the
net proceeds of this offering, together with its existing cash balances and
available line of credit
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and cash flow expected to be generated from future operations, will be
sufficient to meet the Company's capital requirements through the next twelve
months, although the Company could be required, or could elect, to seek to
raise additional capital before such time. The Company's future capital
requirements will depend on many factors, including the rate of revenue
growth, if any, the timing and extent of spending to support product
development efforts and the expansion of sales and marketing efforts, the
timing and size of business or technology acquisitions, the timing of
introductions of new products and enhancements to existing products, and
market acceptance of the Company's products. There can be no assurance that
additional equity or debt financing, if required, will be available on
acceptable terms or at all. Any such additional financing may result in
significant dilution to the Company's then existing investors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Risks Associated with Potential Acquisitions. As part of its business
strategy, the Company expects to review acquisition prospects that would
complement its existing product offerings, augment its market coverage or
enhance its technological capabilities, or that may otherwise offer growth
opportunities. While the Company has no current agreements or negotiations
underway with respect to any such acquisitions, the Company may make
acquisitions of businesses, products or technologies in the future. Future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's operating results and/or
the price of the Company's Common Stock. Acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations,
technologies and products, diversion of management's attention to other
business concerns, risks of entering markets in which the Company has no or
limited prior experience and potential loss of key employees of acquired
organizations. No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel
that might be acquired in the future, and the failure of the Company to do so
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Use of Proceeds."
Cyclicality of Semiconductor Industry. The semiconductor industry has
historically been characterized by significant downturns and wide fluctuations
in supply and demand. From time to time, the industry has also experienced
significant fluctuations in anticipation of changes in general economic
conditions. This cyclicality has been characterized by significant variances
in product demand, production capacity and accelerated erosion of unit ASPs.
Industry-wide fluctuations in the future could have a material adverse effect
on the Company's business, financial condition and results of operations.
Expected Volatility of Stock Price. In recent years the stock market in
general, and the market for shares of high technology, data networking and
semiconductor companies in particular, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. The trading price of the Company's Common Stock is
expected to be subject to extreme fluctuations in response to both business-
related issues, such as quarterly variations in operating results,
announcements of new products by the Company or its competitors, the gain or
loss of significant network equipment vendor customers, and stock market-
related influences, such as changes in analysts' estimates, the presence or
absence of short-selling of the Company's Common Stock and events affecting
other companies that the market deems to be comparable to the Company. In
addition, technology stocks have from time to time experienced extreme price
and volume fluctuations that often have been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. Moreover,
the trading prices of many high technology, data networking and semiconductor
stocks are at or near their historical highs and reflect price/earning ratios
substantially above historical norms. There can be no assurance that the
trading price of the Company's Common Stock will not decline below its initial
offering price to the public. See "Underwriters."
Discretionary Use of Proceeds of this Offering. The Company has no current
specific plans for the use of the net proceeds of this offering. The Company's
management will retain broad discretion in the allocation of the net proceeds
of this offering. There can be no assurance that the proceeds will be utilized
in a manner that the stockholders deem optimal or that the proceeds can or
will be invested to yield a significant return upon the
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completion of this offering. Upon completion of this offering, the Company
will receive net proceeds of approximately $ million (assuming no exercise
of the Underwriters' over-allotment option and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company), substantially all of which will be invested in investment-
grade, interest-bearing securities for an indefinite period. See "Use of
Proceeds."
Effect of Antitakeover Provisions. Certain provisions of the Company's
Certificate of Incorporation and Bylaws and of Delaware law could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions could diminish the opportunities for a
stockholder to participate in tender offers, including tender offers at a
price above the then current market value of the Common Stock. Such provisions
may also inhibit increases in the market price of the Common Stock that could
result from takeover attempts. The Certificate of Incorporation authorizes
10,000,000 shares of undesignated Preferred Stock. The Board of Directors of
the Company, without further stockholder approval, may issue this Preferred
Stock with such terms as the Board of Directors may determine, which could
have the effect of delaying or preventing a change in control of the Company.
The issuance of Preferred Stock could also adversely affect the voting power
of the holders of Common Stock, including the loss of voting control to
others. Such Preferred Stock could be utilized to implement, without
stockholder approval, a stockholders' right plan that could be triggered by
certain change in control transactions, which could delay or prevent a change
in control of the Company or could impede a merger, consolidation, takeover or
other business combination involving the Company, or discourage a potential
acquiror from making a tender offer or otherwise attempting to obtain control
of the Company. The Company's Bylaws and indemnity agreements provide that the
Company will indemnify officers and directors against losses that they may
incur in legal proceedings resulting from their service to the Company. In
addition, the Company's charter documents provide for a classified Board of
Directors and eliminate the right of stockholders to call special meetings of
stockholders and to take action by written consent. Moreover, Section 203 of
the Delaware General Corporation Law restricts certain business combinations
with "interested stockholders" as defined by that statute. The provisions of
the Certificate of Incorporation and of Delaware law are intended to encourage
potential acquirors to negotiate with the Company and allow the Board the
opportunity to consider alternative proposals in the interest of maximizing
stockholder value. However, such provisions may also have the effect of
discouraging acquisition proposals or delaying or preventing a change in
control of the Company, which in turn may have an adverse effect on the market
price of the Company's Common Stock. In addition to the foregoing, certain of
the Company's customers would have the right to manufacture the Company's
network processors for resale as part of their products, or otherwise use the
Company's proprietary technology in their products, in the event of a change
of control of the Company. Such contract provisions may have the effect of
discouraging acquisition proposals. See "Description of Capital Stock."
Control by Principal Stockholders. A substantial majority of the Company's
capital stock is held by a limited number of stockholders. At the completion
of this offering, the Company's officers and directors and parties affiliated
or related to such persons will own approximately % of the shares of Common
Stock outstanding or issuable upon conversion of convertible securities.
Accordingly, such stockholders are likely, for the foreseeable future, to
continue to be able to control major decisions of corporate policy and
determine the outcome of any major transaction or other matter submitted to
the Company's stockholders or Board of Directors, including potential mergers
or acquisitions involving the Company, amendments to the Company's Certificate
of Incorporation, and the like. Stockholders other than such principal
stockholders are therefore likely to have little or no influence on decisions
regarding such matters. See "Principal Stockholders."
Dilution. Investors participating in this offering will incur immediate and
substantial dilution in the net tangible book value of their shares of Common
Stock in the amount of approximately $ per share, at an assumed public
offering price of $ per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company. Additional dilution will occur upon the exercise of outstanding stock
options. See "Dilution."
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Shares Eligible for Future Sale. Sales of the Company's Common Stock in the
public market after this offering could adversely affect the market price of
the Company's Common Stock. Upon completion of this offering, the Company will
have approximately shares of Common Stock outstanding, of which
approximately shares (approximately if the Underwriters' over-allotment
option is exercised in full) will be freely transferable without restriction
or registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless such shares are held by affiliates of the Company, as that term
is defined in Rule 144 under the Securities Act. The officers and directors
and all existing stockholders of the Company have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the
date of this offering. However, Morgan Stanley & Co. Incorporated may, in its
sole discretion, at any time without notice, release all or any portion of the
shares subject to lock-up agreements. Holders of 21,118,743 shares of Common
Stock will have certain rights with respect to registration of such shares of
Common Stock for sale to the public. Sales of Common Stock by existing
stockholders in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Common Stock. In
addition, approximately 5,170,795 shares are issuable upon exercise of
outstanding options granted under the Company's stock option plans as of the
date of this Prospectus. The Company intends to file a registration statement
immediately after the closing of this offering to allow resale of such option
shares. See "Management--Benefit Plans," "Description of Capital Stock--
Registration Rights" and "Shares Eligible for Future Sale."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered by the Company hereby are estimated to be $ ,
at an assumed initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company. The principal purposes of this
offering are to obtain additional capital, to create a public market for the
Company's Common Stock, to enhance the Company's ability to use its Common
Stock as consideration for acquisitions and as a means of attracting and
retaining key employees, and to facilitate future access by the Company to
public capital markets. As of the date of this Prospectus, the Company has no
specific plans as to the use of the net proceeds of this offering. The Company
ultimately expects to use the net proceeds from this offering for general
corporate purposes, including working capital and capital expenditures. A
portion of the proceeds may also be used to make strategic acquisitions of
complementary businesses, technologies or products. Although the Company
evaluates such potential acquisitions from time to time, the Company currently
has no understanding, commitment or agreement with respect to any such
acquisitions. Pending such uses, the Company intends to invest the net
proceeds of this offering in U.S. investment grade, interest-bearing
securities.
DIVIDEND POLICY
Since January 1, 1995, the Company has not declared or paid any cash
dividends on its Common Stock. The Company presently intends to retain future
earnings, if any, for use in the operation and expansion of its business and
does not anticipate paying cash dividends in the foreseeable future. In
addition, the Company's bank line of credit agreement prohibits the payment of
dividends without prior consent of the bank.
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CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1997 (i) on an actual basis and (ii) as adjusted to give effect to the sale of
shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $ per share after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company, and the conversion of all outstanding shares of Preferred
Stock into 13,341,780 shares of Common Stock. This table should be read in
conjunction with the Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations..................................... $ 447 $ 447
------- ------
Stockholders' equity:
Preferred Stock: no par value, 13,498,737 shares
authorized, 13,341,780 issued and outstanding, actual;
$.001 par value, 10,000,000 shares authorized, no
shares issued and outstanding, as adjusted............. 10,247 --
Common Stock: no par value, 60,000,000 shares
authorized, 11,461,500 shares issued and outstanding,
actual; $.001 par value, 100,000,000 shares authorized,
shares issued and outstanding, as adjusted
(1).................................................... 438
Additional paid-in capital.............................. --
Notes receivable from stockholders...................... (295)
Accumulated deficit..................................... (1,667)
------- ------
Total stockholders' equity.............................. 8,723
------- ------
Total capitalization.................................. $ 9,170 $
======= ======
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1997. Excludes
(i) 5,243,601 shares of Common Stock then issuable upon the exercise of
options outstanding under the Company's 1993 Plan with a weighted average
exercise price of $1.86 per share, (ii) 1,500,000 shares of Common Stock
reserved for issuance under the Company's 1997 Plan, (iii) 300,000 shares
reserved for issuance under the Company's 1997 Purchase Plan, (iv) 150,000
shares of Common Stock reserved for issuance under the Company's 1997
Director Plan, and (v) 156,963 shares of Common Stock issuable upon the
exercise of outstanding warrants with a weighted average exercise price of
$.64 per share. See "Management--Benefit Plans," "Description of Capital
Stock" and Note 5, 8 and 9 of Notes to Financial Statements.
15
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997, was
approximately $8,723,000, or $.35 per share of Common Stock. Net tangible book
value per share represents the amount of total tangible assets of the Company
reduced by the amount of its total liabilities and divided by the total number
of shares of Common Stock outstanding. Without taking into account any other
changes in such net tangible book value after June 30, 1997, other than to
give effect to the sale by the Company of the shares of Common Stock
offered hereby at an assumed initial public offering price of $ per share
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company, the pro forma net tangible book
value of the Company as of June 30, 1997, would have been $ , or $
per share. This amount represents an immediate increase in such net tangible
book value of $ per share to existing stockholders and an immediate
dilution of $ per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................ $
Net tangible book value per share as of June 30, 1997................. $ .35
Increase per share attributable to new investors......................
-----
Pro forma net tangible book value per share after the offering.........
---
Dilution per share to new investors.................................... $
===
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the differences between the existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price paid per
share, based upon an assumed initial public offering price of $ per share
(before deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company) with respect to the
shares offered by the Company hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 24,803,280 % $ % $
New investors..............
---------- ----- --------- ----------
Total.................... 100.0% $ 100.0%
========== ===== ========= ==========
</TABLE>
The above computations assume that (i) the Underwriters' over-allotment
option is not exercised and (ii) no options or warrants are exercised after
June 30, 1997. As of June 30, 1997, there were outstanding options to purchase
an aggregate of 5,243,601 shares of Common Stock at a weighted average
exercise price of $1.86 per share and warrants, exercisable for 156,963 shares
of Common Stock, with a weighted average exercise price of $.64 per share. To
the extent the above options and warrants have been or are exercised, there
will be further dilution to new investors. See "Management--Benefit Plans,"
"Description of Capital Stock" and Note 5 of Notes to Financial Statements.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements and notes thereto included
elsewhere in this Prospectus. The balance sheet data as of December 31, 1995
and 1996 and the statement of operations data for the years ended December 31,
1994, 1995, and 1996 are derived from the audited financial statements
included elsewhere in this Prospectus. The balance sheet data as of December
31, 1992, 1993 and 1994 and the statement of operations data for period from
inception to December 31, 1992 and the year ended December 31, 1993 are
derived from audited financial statements of the Company not included herein.
The balance sheet data as of June 30, 1997 and the statement of operations
data for the six-month periods ended June 30, 1996 and 1997 are derived from
unaudited financial statements included elsewhere in this Prospectus. In the
opinion of management, such unaudited financial statements have been prepared
on the same basis as the audited financial statements referred to above and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position of the Company and
the results of operations for the indicated periods. Operating results for the
six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the full year.
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD FROM ENDED
INCEPTION TO YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------------------------------ ----------------
1992 1993 1994 1995 1996 1996 1997
------------ --------- --------- ---------- ---------- ------- -------
(IN THOUSANDS, EXECEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ -- $ -- $ 165 $ 577 $ 10,515 $ 4,690 $ 8,201
Cost of revenues........ -- -- 23 304 3,576 1,595 2,535
----- -------- -------- ---------- ---------- ------- -------
Gross profit............ -- -- 142 273 6,939 3,095 5,666
----- -------- -------- ---------- ---------- ------- -------
Operating expenses:
Research and
development, net...... (87) (186) 132 1,802 3,312 1,590 2,751
Selling, general and
administrative........ 21 184 298 1,151 3,225 1,359 2,559
----- -------- -------- ---------- ---------- ------- -------
Total operating
expenses.............. (66) (2) 430 2,953 6,537 2,949 5,310
----- -------- -------- ---------- ---------- ------- -------
Operating income (loss). 66 2 (288) (2,680) 402 146 356
----- -------- -------- ---------- ---------- ------- -------
Other income (expense):
Interest income........ -- 5 64 146 427 253 155
Interest expense....... -- -- (2) (42) (110) (65) (68)
----- -------- -------- ---------- ---------- ------- -------
Total other income..... -- 5 62 104 317 188 87
----- -------- -------- ---------- ---------- ------- -------
Income (loss) before
income taxes........... 66 7 (226) (2,576) 719 334 443
Provision for income
taxes.................. -- -- -- -- 17 8 9
----- -------- -------- ---------- ---------- ------- -------
Net income (loss)...... $ 66 $ 7 $ (226) $ (2,576) $ 702 $ 326 $ 434
===== ======== ======== ========== ========== ======= =======
Net income per share(1). $ .02 $ .01 $ .01
========== ======= =======
Shares used to compute
net income per
share(1)............... 29,048 28,822 29,256
========== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments........ $ 27 $ 23 $2,920 $8,102 $ 6,318 $ 7,036 $ 5,562
Working capital................ 68 19 2,777 7,177 7,113 7,287 6,851
Total assets................... 75 33 3,322 9,527 10,676 10,333 11,732
Long-term obligations.......... -- -- 100 301 636 740 447
Total stockholders' equity..... 68 19 2,830 7,446 8,177 7,788 8,723
</TABLE>
- --------
(1) For an explanation of the number of shares used to compute net income per
share, see Note 2 of Notes to Financial Statements. Net income (loss) per
share prior to 1996 has not been presented since such amounts are not
meaningful.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those discussed in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
MMC Networks is a leading developer and supplier of network processors--
high-performance, open-architecture, software-programmable processors
optimized for networking applications. From its inception in September 1992
through late 1995, the Company was engaged principally in research and
development, and a substantial portion of the Company's operating expenses
during such period was related to such research and development activities.
The Company commenced volume shipments of its ATMS2000 products in late 1995
and of its PS1000 products in 1996. The Company's operating results to date in
1997 reflect increased market acceptance and sales of the Company's products.
The Company recognizes revenue at the time of product shipment to its
customers. Product returns and sales allowances, which have not been
significant through June 30, 1997, are estimated and provided for at the time
of sale.
Substantially all of the Company's revenues have been derived from sales of
its ATMS2000 and PS1000 product families to a small number of customers. Sales
to the Company's three largest customers in 1996 and for the six months ended
June 30, 1997 accounted for 76.0% and 63.8% of total revenues, respectively.
The Company expects that significant customer concentration will continue for
the foreseeable future. As a result, the Company's business, financial
condition and operating results may be materially adversely affected by any
cancellation, delay or deferral of orders by any of its significant customers.
See "Risk Factors--Customer Concentration" and "Business--Products" and "--
Customers."
The Company markets and sells its products primarily through a direct sales
and marketing organization. Substantially all of the Company's sales to date
have been to customers located in the United States, including sales to U.S.-
based affiliates of non-U.S. network equipment vendors. The Company has sales
representatives in the United States, Canada, Israel, Japan, Taiwan and the
United Kingdom.
The Company has been profitable for the last six quarters. As of June 30,
1997, the Company had an accumulated deficit of $1.7 million. Although the
Company has experienced revenue growth in recent periods and first achieved
profitability in the first quarter of 1996, these results should not be
considered indicative of future revenue growth, if any, nor is there any
assurance that the Company will be profitable in any future period. See "Risk
Factors--Limited Operating History; No Assurance of Future Profitability" and
"--Fluctuations in Operating Results."
As described above, in the period from 1992 to late 1995, the Company was
primarily engaged in initial research and development. In late 1995, the
Company began commercial sales of its products and focused on adding features
and functionality to such products. Because of the Company's significantly
different levels of operations during 1994, 1995 and 1996, year-to-year
comparisons may be less meaningful than comparisons of recent quarterly
results. The following discussion summarizes the Company's quarterly results
of operations in 1996 and in the first six months of 1997.
18
<PAGE>
RESULTS OF OPERATIONS
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain statement of operations data for each
quarter of 1996 and for the first two quarters of 1997, as well as such data
expressed as a percentage of the Company's revenues for each quarter. This
information has been presented on the same basis as the audited Financial
Statements appearing elsewhere in this Prospectus and, in the opinion of
management, includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary to present fairly the
unaudited quarterly results. This information should be read in conjunction
with the Company's audited Financial Statements and notes thereto appearing
elsewhere in this Prospectus. The operating results for any quarter are not
necessarily indicative of results for any future period. See "Risk Factors--
Fluctuations in Operating Results."
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $2,162 $2,528 $2,336 $3,489 $3,421 $4,780
Cost of revenues........ 903 692 845 1,136 1,118 1,417
------ ------ ------ ------ ------ ------
Gross profit............ 1,259 1,836 1,491 2,353 2,303 3,363
------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development, net...... 600 990 577 1,145 1,096 1,655
Selling, general and
administrative........ 605 754 833 1,033 1,062 1,497
------ ------ ------ ------ ------ ------
Total operating
expenses............. 1,205 1,744 1,410 2,178 2,158 3,152
------ ------ ------ ------ ------ ------
Operating income........ 54 92 81 175 145 211
Interest income, net.... 113 75 61 68 45 42
------ ------ ------ ------ ------ ------
Income before income
taxes.................. 167 167 142 243 190 253
Provision for income
taxes.................. 4 4 3 6 4 5
------ ------ ------ ------ ------ ------
Net income.............. $ 163 $ 163 $ 139 $ 237 $ 186 $ 248
====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF REVE-
NUES:
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 41.8 27.4 36.2 32.6 32.7 29.6
------ ------ ------ ------ ------ ------
Gross profit............ 58.2 72.6 63.8 67.4 67.3 70.4
------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development, net...... 27.7 39.2 24.6 32.8 32.1 34.7
Selling, general and
administrative........ 28.0 29.8 35.7 29.6 31.0 31.3
------ ------ ------ ------ ------ ------
Total operating
expenses............. 55.7 69.0 60.3 62.4 63.1 66.0
------ ------ ------ ------ ------ ------
Operating income........ 2.5 3.6 3.5 5.0 4.2 4.4
Interest income, net.... 5.2 3.0 2.6 2.0 1.4 .9
------ ------ ------ ------ ------ ------
Income before income
taxes.................. 7.7 6.6 6.1 7.0 5.6 5.3
Provision for income
taxes.................. .2 .2 .1 .2 .1 .1
------ ------ ------ ------ ------ ------
Net income.............. 7.5% 6.4% 6.0% 6.8% 5.4% 5.2%
====== ====== ====== ====== ====== ======
</TABLE>
19
<PAGE>
Revenues. Substantially all product revenues to date have been derived from
sales of the Company's ATMS2000 and PS1000 product families to network
equipment vendors. During 1996, several of the Company's customers began
shipping production volumes of networking systems which incorporate the
Company's ATMS- 2000 products. Starting in the second quarter of 1996, the
Company introduced and began shipping its PS1000 products. During the second
quarter of 1996, revenues increased to $2.5 million from $2.2 million for the
first quarter of 1996 due primarily to a substantial increase in shipments of
the Company's ATMS2000 product family and to higher sales of reference design
kits. The decline in revenue in the third quarter of 1996 to $2.3 million
reflected reduced shipments of ATMS2000 products. The growth in revenues in
the fourth quarter of 1996 and the second quarter of 1997 reflected increased
sales of both the ATMS2000 and PS1000 product families to new and existing
customers.
Cost of Revenues; Gross Profit. Cost of revenues consists principally of the
cost of purchased packaged semiconductor products from outside manufacturers
and warranty costs. Gross margin in the first quarter of 1996 was 58.2%,
primarily as a result of significant start-up production costs. Gross margin
improved to 72.6% in the second quarter of 1996, due in part to a substantial
increase in shipments of ATMS2000 products and increased shipments of
reference design kits, which typically have a higher gross margin than
finished products. The decline in gross margin to 63.8% in the third quarter
of 1996 reflected a shift in product mix. The increases in gross margin in the
fourth quarter of 1996 and the first and second quarters of 1997 to 67.4%,
67.3% and 70.4%, reflected lower per unit prices paid to the Company's
contract manufacturers and increased sales of higher margin products.
Research and Development Expenses, Net. Research and development expenses
consist primarily of salaries and related costs of employees engaged in
research, design and development activities as well as related subcontracting
costs. These costs are reduced by non-recurring engineering ("NRE") funding
provided by the Company's customers to facilitate acceleration of certain
product development projects. Research and development expenditures prior to
applying NRE funding have increased in absolute dollars in each quarter,
reflecting the addition of research and development personnel and associated
costs. Net research and development expenses have varied from quarter to
quarter depending in part on the amount of NRE funding earned by the Company
in a particular quarter. Research and development expenses increased as a
percentage of revenues in the second quarter of 1996 due to unusually high
contract engineering and pre-production charges associated with the launch of
PS1000 products. During the third quarter of 1996, the Company earned higher
than typical NRE funding, which commensurately reduced research and
development expenses in that quarter. The Company anticipates that research
and development expenses will continue to increase in absolute dollars as the
Company continues to increase the number of research and development personnel
and incurs pre-production charges associated with new products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist mainly of employee-related expenses,
commissions to sales representatives and trade exhibition and facilities
expenses. During the first three quarters of 1996, selling, general and
administrative expenses increased in absolute dollars and as a percentage of
revenues due primarily to increased commissions on higher sales, increased
product marketing costs associated with the introduction of new products, the
establishment of a sales office in Boston, and additional personnel. In the
third quarter of 1996, selling, general and administrative expenses increased
to 35.7% of revenues, due in part to the Company's move to new facilities with
higher rent. In the second quarter of 1997, selling, general and
administrative expenses increased to $1.5 million from $1.1 million in the
first quarter of 1997, due primarily to the hiring of additional sales and
marketing personnel. The Company anticipates that selling, general and
administrative expenses will continue to increase in absolute dollars due to
increased sales activity as well as costs associated with being a publicly
held company.
Fluctuations in the Company's operating results have occurred in the past
and are likely to occur in the future due to a variety of factors, any of
which may have a material adverse effect on the Company's operating results.
In particular, the Company's quarterly results of operations may vary
significantly due to general business conditions in the networking equipment
and semiconductor industries, changes in demand for the networking
20
<PAGE>
equipment products of the Company's customers, the timing and amount of orders
from the Company's network equipment vendor customers, cancellations or delays
of customer product orders, new product introductions by the Company or its
competitors, cancellations, changes or delays of deliveries of products to the
Company by its suppliers, increases in the costs of products from the
Company's suppliers, fluctuations in product life cycles, price erosion,
competition, changes in the mix of products sold by the Company, availability
of semiconductor foundry capacity, variances in the timing and amount of
nonrecurring engineering funding and operating expenses, seasonal fluctuations
in demand, intellectual property disputes and general economic conditions. The
Company has at times recognized a substantial portion of its revenues in the
last month of a quarter. Since a large portion of the Company's operating
expenses, including rent, salaries and capital lease expenses, is fixed and
difficult to reduce or modify, if revenue does not meet the Company's
expectations, the material adverse effect of any revenue shortfall will be
magnified by the fixed nature of these operating expenses. All of the above
factors are difficult for the Company to forecast, and these and other factors
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company's lengthy sales
cycle limits its visibility regarding future financial performance. As a
result of all of the foregoing, there can be no assurance that the Company
will be able to sustain profitability on a quarterly or an annual basis.
Moreover, the Company believes that period-to-period comparisons are not
necessarily meaningful and should not be relied upon as indicative of future
operating results. The Company's operating results in a future quarter or
quarters are likely to fall below the expectations of public market analysts
or investors. In such event, the price of the Company's Common Stock will
likely be materially adversely affected.
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
Revenues. Revenues increased from $4.7 million for the six months ended June
30, 1996 to $8.2 million in the six months ended June 30, 1997. This increase
in revenues reflected the increased acceptance of the Company's ATMS2000 and
PS1000 families of network processors by new and existing customers.
Cost of Revenues; Gross Profit. Cost of revenues increased from $1.6 million
for the six months ended June 30, 1996 to $2.5 million for the six months
ended June 30, 1997 reflecting increased sales of the Company's network
processors to new and existing customers, including volume shipments of the
Company's new PS1000 product family. Gross margin increased from 66.0% for the
six months ended June 30, 1996 to 69.1% for the six months ended June 30,
1997. Gross margin was lower in the first six months of 1996 as a result of
higher costs associated with the commencement of volume production during this
period.
Research and Development Expenses, Net. Net research and development
expenses increased from $1.6 million for the six months ended June 30, 1996 to
$2.8 million for the six months ended June 30, 1997 due to the addition of
research and development personnel and associated costs. As a percentage of
total revenues, research and development expenses were 33.9% and 33.5% for the
six months ended June 30, 1996 and 1997, respectively, reflecting the
Company's continuing investments in research and new product development.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1.4 million for the six months ended
June 30, 1996 to $2.6 million for the six months ended June 30, 1997 due
primarily to increased sales commissions on higher sales, increased product
marketing costs associated with new products, additional personnel, higher
costs associated with the Company's new facility and the establishment of a
sales office in Boston.
Interest Income. Interest income reflects interest earned on average cash,
cash equivalents and short-term investment balances. Interest income was
$253,000 and $155,000 for the six months ended June 30, 1996 and 1997,
respectively, reflecting a decrease in cash balances and investments from
period to period.
Interest Expense. Interest expense reflects interest on borrowings against
lease lines to finance the acquisition of capital equipment. Interest expense
was $65,000 and $68,000 for the six months ended June 30, 1996 and 1997,
respectively.
21
<PAGE>
Provision for Income Taxes. Due to the utilization of net operating loss
carryforwards, the provision for income taxes in the first six months of 1996
and 1997 consisted solely of federal and state alternative minimum taxes.
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Revenues. Revenues for 1994, 1995 and 1996 were $165,000, $577,000 and
$10,515,000, respectively. The Company commenced sales of its network
processors in late 1995 and substantially increased shipments to its customers
in 1996.
Cost of Revenues; Gross Profit. Cost of revenues was $23,000, $304,000 and
$3.6 million in 1994, 1995 and 1996, respectively, reflecting increased sales
in these periods. Gross margin was 86.1%, 47.3% and 66.0% for 1994, 1995 and
1996, respectively. In 1994, revenues were primarily attributable to sales of
reference design kits. In 1995, the Company commenced shipments of its first
ATMS2000 products, and cost of revenues reflected start-up manufacturing
costs. In 1996, increased gross margin reflected increased production volumes
resulting in lower unit prices paid to the Company's contract manufacturers.
Research and Development Expenses, Net. Net research and development
expenses were $132,000, $1.8 million and $3.3 million in 1994, 1995 and 1996,
respectively. Research and development expenses as a percentage of revenues
were 80.0%, 312.3% and 31.5% in 1994, 1995 and 1996, respectively. The
increases in research and development expenses in absolute dollars primarily
reflected the addition of personnel and related costs during these periods.
The decrease in research and development expenses as a percentage of revenues
in 1996 reflected the substantial increase in product shipments in 1996.
Selling, General and Administrative. Selling, general and administrative
expenses were $298,000, $1.2 million and $3.2 million in 1994, 1995 and 1996,
respectively. These increases in absolute dollars were primarily due to
increased commissions on higher sales, increased product marketing costs
associated with new products, additional personnel, costs associated with the
Company's new facility commencing in September 1996 and the establishment of a
sales office in Boston. Selling, general and administrative expenses as a
percentage of total revenues were 180.6%, 199.5% and 30.7% in 1994, 1995 and
1996, respectively. The decrease in selling, general and administrative
expenses as a percentage of revenues in 1996 reflected the substantial
increase in product shipments in 1996.
Interest Income. Interest income totaled $64,000, $146,000 and $427,000 in
1994, 1995 and 1996, respectively. The increases reflect interest earned on
higher balances of cash, cash equivalents and short-term investments resulting
from sales of Preferred Stock in July 1994 and November 1995.
Interest Expense. Interest expense totaled $2,000, $42,000 and $110,000 in
1994, 1995 and 1996, respectively. The increase in interest expense resulted
from increased borrowing against established lease lines to finance the
acquisition of additional capital equipment.
Provision for Income Taxes. The provision for income taxes of $17,000 in
1996 represents federal and state alternative minimum taxes. No current
provisions for income taxes were recorded in 1994 or 1995 as the Company
incurred net operating losses for income tax purposes from July 12, 1994, the
date on which the Company elected to be taxed as a Subchapter C corporation,
through December 31, 1995. In addition, no deferred benefit for income taxes
was recorded in 1994 or 1995 as the Company was in a net deferred tax asset
position for which a full valuation allowance was provided.
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $2.0 million and $700,000, respectively. The
federal net operating loss carryforwards expire in 2010. The state net
operating loss carryforwards expire in 2000. As of December 31, 1996, the
Company also had research and development credit carryforwards for federal and
state tax purposes of approximately $169,000 and $145,000, respectively. The
federal research and development credit carryforwards expire beginning in 2009
through 2011. The state research and development credit carryforwards expire
beginning in 1999 through 2001.
22
<PAGE>
Under the Tax Reform Act of 1986, the amount of net operating losses that
can be utilized may be limited in certain circumstances including, but not
limited to, a cumulative stock ownership change of more than 50% over a three-
year period. See Note 4 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
From inception, the Company has financed its operations and capital
requirements primarily through sales of Preferred Stock. At June 30, 1997, the
Company had $5.6 million in cash, cash equivalents and short-term investments,
a decrease of $756,000 from December 31, 1996. This decrease was primarily
attributable to an increase in accounts receivable resulting from increased
sales. As of June 30, 1997, the Company had an accumulated deficit of $1.7
million.
In April 1997 the Company entered into a $5.0 million revolving bank credit
facility, which bears interest at the bank's prime rate, and a $3.0 million
bank lease line, which bears interest at the bank's prime rate plus .5%. Both
facilities expire in April 1998. At June 30, 1997, the Company had not made
any borrowings under either facility. As of such date, however, the Company
had $832,000 in borrowings under two prior lease facilities. See Notes 8 and 9
of Notes to Financial Statements.
Through June 30, 1997, the Company had acquired approximately $3.2 million
in capital assets. The Company intends to purchase approximately $3.0 million
of additional capital assets during the remainder of 1997, but currently has
no other significant commitments to acquire capital equipment.
The Company uses a number of independent suppliers to manufacture
substantially all of its products. As a result, the Company relies on these
suppliers to allocate to the Company a sufficient portion of foundry capacity
to meet the Company's needs and deliver sufficient quantities of the Company's
products on a timely basis. See "Risk Factors--Dependence on Independent
Manufacturers." These arrangements allow the Company to avoid utilizing its
capital resources for manufacturing facilities and work-in-process inventory
and focus substantially all of its resources on the design, development and
marketing of its products.
Net cash provided by (used in) financing activities was $3.0 million, $7.1
million, ($252,000) and ($110,000) in 1994, 1995, 1996 and the first six
months of 1997, respectively, resulting primarily from the issuance of $3.1
million of Preferred Stock in 1994 and $7.2 million of Preferred Stock in
1995, and the repayment of principal on capital lease obligations in 1996 and
the first six months of 1997, respectively.
The Company requires substantial working capital to fund its business,
particularly to finance accounts receivable and inventory, and for investments
in property and equipment. The Company's need to raise capital in the future
will depend on many factors, including the rate of sales growth, market
acceptance of the Company's existing and new products, the amount and timing
of research and development expenditures, the timing and size of acquisitions
of businesses or technologies, the timing of the introduction of new products
and the expansion of sales and marketing efforts. There can be no assurance
that additional equity or debt financing, if required, will be available on
terms satisfactory to the Company, if at all. See "Risk Factors--Need for
Additional Capital." The Company believes the net proceeds of this offering
combined with its existing capital resources and cash generated from
operations, if any, will be sufficient to meet the Company's needs for at
least the next 12 months, although the Company could seek to raise additional
capital during that period.
23
<PAGE>
BUSINESS
MMC Networks is a leading developer and supplier of network processors--
high-performance, open-architecture, software-programmable processors
optimized for networking applications. The Company's network processors form
the core silicon "engines" of LAN and WAN switches and routers, and are
designed to allow network equipment vendors to rapidly develop high-
performance, feature-rich, cost-effective products supporting a broad range of
networking functions. MMC Networks' customers employ the Company's network
processors to develop and market multi-gigabit, wire-speed switches and
routers with advanced features such as layer 3 switching, internetworking of
LANs and WANs, security, class of service, quality of service and network
management. The Company's current products, the PS1000 and ATMS2000 families
of network processors, provide the core functionality of high-performance Fast
Ethernet and ATM network switches, respectively. The Company believes that
network equipment vendors are able to reduce design and development costs and
accelerate product development cycles for high-performance routers and
switches by using the Company's products. All of the Company's products are
based on the Company's proprietary ViX architecture, which enables network
equipment vendors to easily and cost-effectively implement high-performance
value-added features in their switch and router products.
To date, the Company has achieved more than 35 design wins with 27 network
equipment vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC,
Olicom, SNT and Toshiba) are shipping networking products that incorporate the
Company's network processors. MMC Networks outsources all of its semiconductor
manufacturing, allowing the Company to focus its resources on designing,
developing and marketing its network processor products.
INDUSTRY BACKGROUND
The proliferation of high-performance personal computers, workstations and
servers along with the growing reliance on increasingly data-intensive
networked applications has resulted in dramatic growth in traffic over data
networks. In addition, as organizations and individuals increasingly rely on
intranets and the Internet, networks have been extended to connect branch
offices, home offices, mobile users and, more recently, customers and
suppliers. The rise in data traffic has been accompanied by substantial growth
in the number of protocols employed in LAN and WAN networking, including
Ethernet, Token Ring, Fiber-Distributed Data Interface ("FDDI"), WAN serial
lines, X.25, Frame Relay and dial-up access. More recently, Fast Ethernet,
Gigabit Ethernet, higher-speed Frame Relay and ATM networks are beginning to
be deployed. These trends continue to drive demand for high-performance
networking equipment that supports internetworking a variety of types of LANs
and WANs.
As the size and performance requirements of networks have grown, network
equipment vendors have increasingly focused on advanced switching and routing
devices to enable large-scale, high-performance networks. Known as layer 3
switches, IP switches, high-speed routers or switching routers, these devices
are designed to enable a network hierarchy that facilitates the implementation
of such networks. In addition to improved performance and multiprotocol
connectivity, enterprises and network service providers are increasingly
demanding networking equipment that supports a broad variety of advanced
features, without compromising performance. For example, as the reach of
enterprise data networks has spread to WANs and the Internet, network
administrators need security at multiple points in the network. As businesses
become more dependent on intranets and the Internet, they are increasingly
focused on differentiated classes or priorities of service for certain of
their applications and users to make more efficient use of networking
resources. Similarly, new applications such as video conferencing, multimedia
training and Internet telephony require end-to-end quality of service
guaranteed across entire networks. Finally, in order to implement advanced
features and functionality across complex, high speed networks, network
administrators also need better network management capabilities to help them
analyze the traffic flowing through the network, to anticipate traffic growth,
and to quickly isolate and solve network problems.
While attempting to respond to customer demands for more performance, new
capabilities, greater security and better management, network equipment
vendors face growing competition, evolving networking standards
24
<PAGE>
and increasing market segmentation. Rapid growth in the data networking
industry has attracted a multitude of new entrants who are competing with or,
in many instances, are being acquired by major network equipment vendors. In
order to compete effectively, network equipment vendors must improve their
time-to-market and lower their costs while continuing to increase performance
and add advanced features and differentiated functionality. At the same time,
network equipment vendors must support multiple evolving industry standards
and protocols and must address the diverse needs of customers in an
increasingly segmented networking market. For example, a small office may
require a simple network built with one Ethernet LAN switch, a large
corporation may require multiple Fast Ethernet high-speed routers connected to
an ATM campus backbone switch, and an Internet service provider may require a
dedicated OC-3 or SDH-1 backbone switch with downlinks that support dedicated
and dial-up connectivity.
In order to address the needs of their increasingly diverse customer base
and provide support for a broad array of networking protocols and
functionalities without substantially degrading performance, network equipment
vendors have employed increasingly capable semiconductor devices in their
networking equipment, the most important being those used as the switching or
routing "engines." Network equipment vendors have traditionally relied on two
general approaches for these semiconductor engines: general purpose processors
which are software-programmable or custom-developed ASICs. Each of these
approaches has advantages but involves significant trade-offs with respect to
performance, feature implementation, time-to-market or cost. Switches and
routers utilizing general purpose processors can be brought to market
relatively rapidly, can be easily adapted to changes in industry protocols and
standards and can be programmed in software to add additional features, but
these benefits are usually not achievable without significant performance
degradation or unacceptably high unit production cost. Alternatively, switches
and routers based on ASICs can be designed to achieve high performance and
produced at relatively low unit cost, but the ASIC development cycle is
usually too time consuming to permit the development of high-performance ASICs
with advanced feature sets while meeting network equipment vendors' time-to-
market constraints. In addition, ASICs involve the risk of additional delays
associated with multiple iterations that may be required in the ASIC
development cycle, provide little flexibility to conform to rapidly evolving
standards and protocols and lack the full feature support that would allow
them to address multiple segments of the networking market. Consequently,
neither approach achieves network equipment vendors' requirements for high
performance and advanced features without imposing an unacceptable time-to-
market and/or cost burden.
MARKET OPPORTUNITY FOR NETWORK PROCESSORS
The Company believes that these market trends have created a significant
opportunity for network processors--high-performance, open-architecture,
software-programmable processors optimized for networking applications. These
network processors enable the design and development of switching and routing
solutions that incorporate advanced features, operate without significant
performance degradation, address evolving standards and multiple market
segments through software programmability, and can be produced in a cost-
efficient manner and within the time-to-market constraints of the competitive
networking equipment market. The Company believes that network processors
offer network equipment vendors the ability to reduce the time and expense
involved in developing customized chip sets for individual network switching
products, while allowing vendors to focus on developing networking systems
which are powerful, cost-effective, differentiated and feature-rich to satisfy
the needs of their increasingly diverse customer bases.
MMC NETWORKS' SOLUTION
MMC Networks is a leading developer and supplier of network processors
enabling a new generation of high-performance networking equipment. These
network processors are designed to allow network equipment vendors to rapidly
develop high-performance, feature-rich, cost-effective, scalable LAN and WAN
switches and routers targeting the specific needs of distinct customer
segments. The Company believes that, by designing-in the Company's network
processors, network equipment vendors can simultaneously reduce development
costs, accelerate time-to-market and focus on enhancing system differentiation
with advanced features and functionality. Using the Company's network
processors as building blocks, MMC Networks' customers are
25
<PAGE>
offering or designing multi-gigabit, wire-speed switches and routers with
enhanced features including internetworking among multiple types of LANs and
WANs, security, class of service, quality of service and network management
without significant performance degradation.
The Company currently offers the PS1000 Fast Ethernet and ATMS2000 ATM
families of network processors. All of the Company's products are based on the
Company's ViX architecture, which is designed to enable network equipment
vendors to construct cost-effective, high-bandwidth, high-port-count, feature-
rich, modular and stand-alone switches and routers. The Company's proprietary
Per Flow Queuing ("PFQ") technology extends the ViX architecture to support
class of service and quality of service for network switches. To date, the
Company has achieved more than 35 design wins with 27 network equipment
vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC, Olicom, SNT
and Toshiba) are shipping networking products that incorporate the Company's
network processors.
MMC NETWORKS' STRATEGY
MMC Networks' strategy is to enable network equipment vendors to rapidly
develop and introduce differentiated products by leveraging the high-
performance, feature-rich, software-programmable and cost-effective network
processors offered by the Company. Key elements of the Company's strategy
include:
Target High-Growth Markets. MMC Networks' network processors target the
rapidly growing enterprise and service provider markets. These markets require
high-performance, feature-rich, mid- to high-end LAN and WAN networking
equipment solutions. The Company believes that as these markets continue to
grow, they will become increasingly specialized. Consequently, network
equipment vendors will need to deliver a broader mix of products in order to
satisfy increasingly sophisticated and diverse customer performance and
feature requirements. The Company focuses on the design and development of
network processors that enable network equipment vendors to rapidly design and
bring to market a broad variety of differentiated networking solutions meeting
the performance and feature requirements of this evolving market.
Facilitate Customer Success. Increasing competition and evolving networking
standards have exerted and will continue to exert pressure on network
equipment vendors to introduce new products rapidly and cost-effectively. MMC
Networks' network processors are designed to improve network equipment
vendors' time-to- market and lower their development costs by providing them
with software programmable processing functionality to enable them to address
evolving standards and multiple market segments. The Company works closely
with its customers to design network processors that enable performance and
functionality compatible with such customers' current and future needs and
that complement network equipment vendors' product development efforts.
Extend Technology Leadership. MMC Networks has made substantial investments
in the technologies that underlie its network processors, with the goal of
setting new price/performance benchmarks and enabling the widespread use of
sophisticated networking functionality. For example, the Company's ViX
architecture, which forms the basis of all of its products, is designed to
enable network equipment vendors to implement value-added features without
significant performance degradation. MMC Networks is continually developing
new technologies for its network processors, such as the Company's next
generation network processors which are designed to integrate the processing
of data from different protocols.
Leverage Fabless Semiconductor Model. MMC Networks seeks to leverage the
flexibility of its fabless semiconductor business model to lower technology
and production risks, increase profitability and reduce time-to-market. The
Company's fabless model allows it to focus on its core network processor
design competencies, while minimizing the capital and operating infrastructure
requirements. In addition, the Company's reliance on mainstream semiconductor
design and manufacturing technologies rather than newer, more expensive
manufacturing processes reduces the risks inherent in newer, less proven
process technologies.
TECHNOLOGY
MMC Networks' network processors are high-performance, multi-gigabit, open-
architecture, software-programmable processors with instruction sets that have
been optimized for processing and switching data, voice
26
<PAGE>
and video packets and cells. The Company believes that the key underlying
technologies employed in its network processors give it a substantial
competitive advantage. The core technologies employed in current products or
to be implemented in future products include the Company's ViX architecture,
Per-Flow Queuing technology, Direct Replication Engine technology, Virtual SAR
technology and Programmable BitStream Processor technology.
ViX Architecture. The ViX architecture is a switch fabric architecture that
uses a patented point-to-point connection matrix that permits the use of a
wide, centralized, shared-memory structure, while separating control
information from user data. The ViX architecture's use of "point-to-point
connections" is designed to enable network equipment vendors to easily scale
the number of ports in their switches and routers, unlike shared-bus
architectures that run into clock frequency, bus capacitance and pin count
limitations. The use of a "wide, centralized shared-memory structure" enables
network equipment vendors to scale the bandwidth and amount of buffer memory,
unlike crossbar architectures which become increasingly expensive as bandwidth
and buffer requirements increase. The "separation of control information from
user data" enables network equipment vendors to more easily implement high-
performance processing, queuing, replication and switching functions for
networking applications, unlike shared-bus and crossbar architectures, which
may require complex processors to coordinate multiple functions across
multiple ports and the replication of user data within their buffers. In
addition, the ViX architecture is designed as an open architecture, providing
external access to the appropriate timing and control signals, which enables
network equipment vendors to more easily implement differentiated features and
functionality.
Per-Flow Queuing Technology. All networking switches and routers must buffer
data when networks become congested. Networks that use conventional switches
and routers usually buffer data on a linear, first-in-first-out ("FIFO")
basis. As data accumulates in the buffer, new data sits "behind" all of the
information that previously arrived at the switch/router. High-priority
information sent to that switch or router is not distinguished from other data
and is therefore "stuck" in the back of the buffer until such other data is
sent. MMC Networks' PFQ technology is designed to alleviate the limitations of
FIFO queuing by assigning each piece of data to its own unique queue and then
scheduling the sending of the data according to software-programmable
algorithms developed by the network equipment vendor, thus allowing the switch
or router to implement class of service or quality of service functionality.
Switches and routers incorporating PFQ technology can be designed to support
up to 500,000 queues, providing enough queues for large-scale networks.
Direct Replication Engine Technology. When data must be broadcast to all
ports on a switch or router or "multicast" to select ports, routers and
switches must replicate data packets for each port connection. This process
may significantly degrade performance. MMC Networks' Direct Replication Engine
technology is designed to provide wire-speed multicast and broadcast
capability by leveraging the separation of control information from user data
enabled by the ViX architecture. This capability allows the switch or router
to store a single copy of the data to be transmitted and replicate it to
multiple ports in a single instruction cycle.
Virtual SAR Technology. Conventional switches and routers use expensive
segmentation and reassembly ("SAR") chips to convert frames to cells and vice
versa, thus enabling the internetworking of ATM with Ethernet, frame relay and
other packet-based protocols. The Company's Virtual SAR technology, which will
be implemented in its next generation of network processors, is expected to
provide the ability to convert frames to cells and vice versa, thus
eliminating the need for expensive external SAR chips.
Programmable BitStream Processor Technology. MMC Networks' Programmable
BitStream Processor technology, which will be incorporated in its next
generation of network processors, is expected to perform control information
processing functionality including real-time parsing, matching and table look-
up, as well as bit stream manipulations such as adding, deleting,
substituting, appending and pre-pending. This functionality is expected to
enable network equipment vendors to build high-performance switches and
routers with additional services that address network security, class of
service and quality of service, and improve management throughout the network.
27
<PAGE>
TARGET MARKETS AND PRODUCTS
MMC Networks' products serve two primary markets: the enterprise network
market and the service provider market. The Company's Fast Ethernet and ATM
products are being designed into networking equipment intended for both of
these markets. The following table summarizes the key product and service
applications within each of these markets:
<TABLE>
<CAPTION>
ENTERPRISE NETWORK SERVICE PROVIDER SERVICES
<S> <C> <C> <C>
Campus
Backbones WebServer Farms Internet Dial-up Access
Power
Workgroups WAN Backbones FrameRelay Dedicated Access
Wiring Closets Dedicated Distribution ATM xDSL, Cable
Data Centers Remote Access Servers Integrated Services Sonet/SDH
</TABLE>
The Company's PS1000 and ATMS2000 product families provide the core
functionality for Fast Ethernet and ATM switches and routers developed by
network equipment vendors targeting both the enterprise network and service
provider markets. The Company also offers reference design kits, which assist
customers in their technical evaluation of the Company's products. See "--
Technology."
The PS1000 Family. The PS1000 network processor family implements the core
functionality of a high- performance Fast Ethernet switch, provides extensions
for layer 3 routing and is optimized for power workgroup, wiring closet and
LAN backbone applications. The PS1000 network processor family enables network
equipment vendors to build low-cost, highly-integrated solutions supporting
scalable port densities from eight to 128 10-Mbps Ethernet ports, and up to 16
100-Mbps Fast Ethernet ports with the option of one or two ATM uplinks. The
flexible PS1000 ViX-based architecture allows a high degree of customer
product differentiation in terms of bandwidth segmentation, port type
implementations, support for external frame forwarding, prioritization and
uplinks.
The following table sets forth MMC Networks' PS1000 product family:
<TABLE>
<CAPTION>
DATE OF
PRODUCT DESCRIPTION INTRODUCTION
<C> <S> <C>
PS1001 PSP Packet switch processor which provides the Second quarter
central core of the switching operation 1996
PS1002 FEIU Fast Ethernet interface unit comprised of Second quarter
four 10/100-Mbps full-duplex Fast Ethernet 1996
MAC ports
PS1003 EIU Ethernet interface unit comprised of six Fourth quarter
10-Mbps MAC ports and two 10/100-Mbps MAC 1996
ports
PS1004 AIU ATM interface unit that provides an ATM Expected in third
uplink for Ethernet switches quarter 1997
PS1005 ARL Address resolution logic device that Third quarter 1996
provides full frame forwarding and
filtering logic
PS1007 NCB Network component interconnect ("NCI") bus Third quarter 1996
to CPU bridge
PS1008 NPB NCI bus to PCI bus bridge Second quarter
1997
</TABLE>
A 16-port full-duplex Fast Ethernet switch can be constructed using a set of
four PS1001s, four PS1002s, four PS1005s, and either a PS1007 or PS1008. This
chip set is priced at approximately $1,125 per set in quantities of 1,000 per
year. PS1004 processors may be used to add optional ATM uplinks to the switch.
The ATMS2000 Family. The ATMS2000 network processor family provides the core
functionality of a high-performance ATM switch and the capabilities for layer
3 routing. The ATMS2000 network processor family is optimized for feature-rich
building or campus backbones, power workgroups and WAN access. The ATMS2000
network processor family provides a cost-effective solution for 2.5- or 5-Gbps
switches and routers with port densities of up to 32 OC-3 ports or eight OC-12
ports. The flexible ViX-based architecture enables the centralized
implementation of value-added features such as PFQ, as well as customer-
defined features, without the need to change any of the linecards in the
network.
28
<PAGE>
The following table sets forth MMC Networks' ATMS2000 product family:
<TABLE>
<CAPTION>
DATE OF
PRODUCT DESCRIPTION INTRODUCTION
<C> <S> <C>
ATMS2001 Memory access buffer which acts as an Second quarter
MBUF interface between the ATMS2002 PIF and a 1995
common memory bank
ATMS2002 PIF Port interface which interfaces the Second quarter
ATMS2000 switch core with ATM Physical 1995
Layer Devices
ATMS2003 Switch controller which manages data queues Second quarter
SWC1 and provides an interface to the CPU 1995
ATMS2004 Switch controller which manages the reading Second quarter
SWC2 and writing of data to various external 1995
data structures and performs pipeline
control
ATMS2101 Optional feature chip set that monitors and First quarter 1997
XChecker polices cell traffic, providing statistics,
usage parameter control and/or packet
discard
ATMS2110 Optional feature chip set that offloads First quarter 1997
XPort cell reception and transmission from the
CPU
ATMS2200 Co-processor that implements PFQ Second quarter
XStream 1997
</TABLE>
A 32-port OC-3 5-Gbps switch or router utilizing the Company's ATMS2000
network processor requires six ATMS2001s, eight ATMS2002s, and one each of the
ATMS2003 and ATMS2004. This chip set is priced at approximately $2,000 per set
in quantities of 1,000 per year. The ATMS2101, ATMS2110 and ATMS2200 may be
used to add additional features to the network processor.
Reference Design Kits. To facilitate the adoption by network equipment
vendors and speed the design cycle for its network processors, MMC Networks
designs and makes available system-level reference design kits. The Company's
reference design kits include a reference machine, schematics, layout details,
documentation and firmware, including device drivers and diagnostic software.
Source code for the reference machines can be licensed from the Company, as
can the bus models for those companies who design their own interfaces to the
network processors.
Products Under Development. The Company expects to continue to enhance and
refine its network processors, while adding additional operational features
designed to make the Company's products more attractive to a wide range of
network equipment vendors. In particular, the Company is developing a new
family of network processors based on its ViX architecture, which is designed
to implement the Company's new Virtual SAR and Programmable BitStream
Processing technologies.
CUSTOMERS
MMC Networks sells its products to a variety of network equipment vendors.
To date, the Company has achieved more than 35 design wins with 27 network
equipment vendors, of which eight (Cisco, Fujitsu, Hitachi, Ipsilon, NEC,
Olicom, SNT and Toshiba) are shipping networking products that incorporate the
Company's network processors. To qualify as a design win, a customer must have
(i) purchased network processor prototypes, a reference design kit or software
drivers from the Company, and (ii) commenced development of a product
incorporating the Company's network processors. During the design-in process,
the Company works closely with each customer to assist in resolving technical
questions and to help the customer achieve volume production of its products.
There can be no assurance that any design win will result in a released
product by a network equipment vendor.
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<PAGE>
For the six months ended June 30, 1997, sales to Cisco and Hitachi accounted
for 24.4% and 17.3% of the Company's total revenues, respectively. For the
year ended December 31, 1996, sales to Cisco and Hitachi accounted for 51.0%
and 10.3% of total revenues, respectively. In addition, sales to Mitsui Comtek
Corp., a distributor which serves Japan, accounted for 22.1% and 14.7% of the
Company's total revenues for the six months ended June 30, 1997 and the year
ended December 31, 1996, respectively. The Company currently has purchase
agreements with Cisco, Olicom and Optical Data Systems, Inc. None of the
Company's customer purchase agreements contains a minimum purchase
requirement. Customers typically purchase the Company's products pursuant to
short-term purchase orders that may be canceled without charge if notice is
given within an agreed-upon period. The Company's future success depends in
significant part upon the decision of the Company's current and prospective
customers to continue to purchase products from the Company. There can be no
assurance that the Company will retain its current network equipment vendor
customers or that it will be able to recruit additional customers. The loss of
one or more of the Company's customers or the inability of the Company to
successfully develop relationships with additional significant network
equipment vendors could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors--
Customer Concentration."
SALES, MARKETING AND TECHNICAL SUPPORT
The Company targets customers based on industry leadership, technology
leadership and target applications. The Company maintains close working
relationships with its customers in order to design and develop solutions
which specifically address their needs. The Company markets its products
through a direct sales and marketing organization, headquartered in Sunnyvale,
California, with a sales office in Boston, and through sales representatives
in the United States, Canada, Israel, Japan, Taiwan and the United Kingdom.
Sales representatives are selected for their understanding of the networking
marketplace and their ability to provide effective field sales support for MMC
Networks' products. The Company's relationships with many of its
representatives have been established within the last year, and the Company is
unable to predict the extent to which some of these representatives will be
successful in marketing and selling the Company's products.
Sales to U.S. customers account for the substantial majority of MMC
Networks' revenues. Although the Company has a number of international
customers, substantially all of these customers currently order through, and
receive shipments at, their U.S. operations.
The Company has a number of marketing programs designed to inform network
equipment vendors about the capabilities and benefits of the Company's
products. The Company's marketing efforts include participation in industry
trade shows, technical conferences and technology seminars, preparation of
competitive analyses, sales training, publication of technical and educational
articles in industry journals, maintenance of MMC Networks' World Wide Web
site, advertising, and direct mail distribution of Company literature.
Technical support to customers is provided through factory system engineers
and, if necessary, product designers and architects. Local field support is
provided in person or by telephone. The Company plans to hire additional
support staff for remote offices, as the need arises. The Company believes
that providing network equipment vendors with comprehensive product service
and support is critical to maintaining a competitive position in the
networking market and is critical to shortening customers' design-in cycles.
The Company works closely with its customers to monitor the performance of its
product designs and to provide support at each stage of customer product
development.
RESEARCH AND DEVELOPMENT
The Company's success will depend to a substantial degree upon its ability
to develop and introduce in a timely fashion new products and enhancements to
its existing products that meet changing customer requirements and emerging
industry standards. MMC Networks has made and plans to continue to make
substantial investments in research and development and to participate in the
development of industry standards.
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<PAGE>
The Company focuses its development efforts on network processor product
development. Before a new product is developed, the Company's research and
development engineers work with marketing managers and customers to develop a
comprehensive requirements specification. After the product is designed and
commercially released, Company engineers continue to work with customers on
early design-in efforts to understand requirements for future generations and
upgrades. Most of the Company's engineers are involved in algorithm and chip
design and verification. In addition, the Company also has a group of software
engineers and reference machine designers.
The Company's research and development expenditures, net of nonrecurring
engineering funding, totaled $2.8 million in the first six months of 1997 and
$3.3 million in the year ended December 31, 1996, representing 33.5% and 31.5%
of revenues for such periods, respectively. Research and development expenses
primarily consist of salaries and related costs of employees engaged in
ongoing research, design and development activities and subcontracting costs.
These expenses are reduced by non-recurring engineering fees paid by the
Company's customers to facilitate product development projects. Currently,
there are 39 employees and full-time contractors engaged in research and
development. The Company performs its research and product development
activities at its headquarters in Sunnyvale, California. The Company is
seeking to hire additional skilled development engineers, who are currently in
short supply. The Company's business, operating results and financial
condition could be adversely affected if it encounters delays in hiring
additional engineers. See "Risk Factors--Dependence on Key Personnel and
Hiring of Additional Personnel."
The Company's future performance depends on a number of factors, including
its ability to identify emerging technological trends in its target markets,
to develop and maintain competitive products, to enhance its products by
adding innovative features that differentiate its products from those of
competitors, to bring products to market on a timely basis at competitive
prices, to properly identify target markets and to respond effectively to new
technological changes or new product announcements by others. No assurance can
be given that the Company's design and introduction schedules for any
additions and enhancements to its existing and future products will be met,
that these products will achieve market acceptance, or that these products
will be able to be sold at ASPs that are favorable to the Company. In
evaluating new product decisions, the Company must anticipate well in advance
the future demand for product features and performance characteristics, as
well as available supporting technologies, manufacturing capacity, industry
standards and competitive product offerings. The Company must also continue to
make significant investments in research and development in order to
continually enhance the performance and functionality of its products to keep
pace with competitive products and customer demands for improved performance,
features and functionality. Technical innovations of the type required for the
Company to remain competitive are inherently complex and require long
development cycles. Such innovations must be completed before developments in
networking technologies or standards render them obsolete and must be
sufficiently compelling to induce network equipment vendors to favor them over
alternative technologies. Moreover, the Company must generally incur
substantial research and development costs before the technical feasibility
and commercial viability of a product line can be ascertained. There can be no
assurance that revenues from future products or product enhancements will be
sufficient to recover the development costs associated with such products or
enhancements or that the Company will be able to secure the financial
resources necessary to fund future development. The failure to successfully
develop new products on a timely basis could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Risk Factors--New Product Development and Technological Change."
MANUFACTURING
Currently, the Company outsources all of its semiconductor manufacturing,
assembly and test. The Company's suppliers currently deliver fully assembled
and tested products on a turnkey basis. This "fabless" semiconductor
manufacturing model allows the Company to focus substantially all of its
resources on the design, development and marketing of products and
significantly reduces the capital requirements of the Company.
In 1995 and 1996, MMC Networks subcontracted its semiconductor manufacturing
to Oki Semiconductor and NEC in Japan and Motorola, Inc. in the United States.
In 1997, the Company added TSMC in Taiwan. In
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<PAGE>
1998, it is expected that a growing percentage of the Company's production
will be contracted to TSMC and potentially other new suppliers as new products
reach volume production. The Company chose these four manufacturers in large
part due to their conformance with international standards of technology,
their capacity, their quality and their support for the state-of-the-art
design tools used by MMC Networks. Only one of the Company's products is
currently manufactured by more than one supplier.
MMC Networks uses mainstream CMOS processes for the manufacturing of its
products instead of depending on leading edge processes in order to help
reduce technical risks and production capacity constraints. The Company's main
products currently are fabricated in .5 and .8 micron CMOS. The Company
continuously evaluates the benefits, on a product-by-product basis, of
migrating to a smaller geometry process in order to reduce costs, and has
commenced migration of certain products to smaller geometries. The Company
believes that transitioning its products to increasingly smaller geometries
will be important for the Company to remain competitive. No assurance can be
given that future process migration will be achieved without difficulty.
Since the Company places its orders on a purchase order basis and does not
have a long term volume purchase agreement with any of its existing suppliers,
any of these suppliers may allocate, and in the past have allocated, capacity
to the production of other products while reducing deliveries to the Company
on short notice. The Company has recently experienced delays in obtaining an
adequate supply of certain of its products from one supplier, as well as
certain problems regarding the quality of the products delivered by that
supplier, and as a result has begun obtaining such products from an
alternative supplier. There can be no assurance that the Company will not have
similar or more protracted problems in the future with existing or new
suppliers. In the event of a loss of, or a decision by the Company to change,
a key supplier or foundry, qualifying a new supplier or foundry and commencing
volume production could involve delay and expense, resulting in lost revenues,
reduced operating margins and possible detriment to customer relationships.
The Company must place orders approximately 12 to 14 weeks in advance of
expected delivery. As a result, the Company has only a limited ability to
react to fluctuations in demand for its products, which could cause the
Company to have an excess or a shortage of inventory of a particular product.
Moreover, any failure of global semiconductor manufacturing capacity to
increase in line with demand could cause foundries to allocate available
capacity to larger customers or customers with long-term supply contracts. The
inability of the Company to obtain adequate foundry capacity at acceptable
prices, or any delay or interruption in supply, could reduce the Company's
product revenues or increase the Company's cost of revenues and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In the future, the Company expects to change its supply arrangements to
assume more of the product manufacturing responsibilities. Such changes will
include contracting for wafer manufacturing and subcontracting for assembly
and test rather than purchasing finished product. The Company has begun
investing in design tools, libraries and personnel with the expectation of
assuming greater manufacturing responsibilities by mid 1998. The assumption of
greater manufacturing responsibilities involves additional risks including not
only the risks discussed above, but also risks associated with variances in
production yields, obtaining adequate test and assembly capacity at reasonable
cost, and other general risks associated with the manufacture of
semiconductors. In addition, the Company also expects that it may enter into
volume purchase agreements pursuant to which the Company must commit to
minimum levels of purchases and which may require up front investments. The
inability of the Company to effectively transition to greater manufacturing
responsibilities or manage volume purchase arrangements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors--Dependence on Independent Manufacturers."
COMPETITION
The data networking and semiconductor industries are intensely competitive
and are characterized by constant technological change, rapid rates of product
obsolescence and price erosion. The Company's PS1000 and ATMS2000 product
families compete with products from companies such as Texas Instruments,
Lucent Technologies, PMC-Sierra, Galileo Technology, Integrated Telecom and I-
Cube. In addition, the Company
32
<PAGE>
expects significant competition in the future from major domestic and
international semiconductor suppliers. The Company also may face competition
from suppliers of products based on new or emerging technologies. Moreover,
several established electronics and semiconductor suppliers have recently
entered or indicated an intent to enter the switching and routing equipment
market. In addition, many of the Company's existing and potential customers
internally develop ASICs, general purpose processors, network processors and
other devices which attempt to perform all or a portion of the functions
performed by the Company's products.
Many of the Company's current and prospective competitors offer broader
product lines and have significantly greater financial, technical,
manufacturing and marketing resources than the Company. In particular,
companies such as Texas Instruments and Lucent Technologies have proprietary
semiconductor manufacturing ability, preferred vendor status with many of the
Company's customers, extensive marketing power and name recognition, greater
financial resources than the Company, and other significant advantages over
the Company. In addition, current and potential competitors may determine, for
strategic reasons, to consolidate, lower the prices of their products
substantially or to bundle their products with other products. Current and
potential competitors have established or may establish financial or strategic
relationships among themselves or with existing or potential customers,
resellers or other third parties. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and rapidly acquire
significant market share. The Company believes that important competitive
factors in its market are performance, price, length of development cycle,
design wins with major network equipment vendors, support for new data
networking standards, features and functionality, adaptability of products to
specific applications, support of product differentiation, reliability,
technical service and support, and protection of products by effective
utilization of intellectual property laws. Failure of the Company to compete
successfully as to any of these or other factors could have a material adverse
effect on its operating results. The failure of the Company to successfully
develop and market products that compete successfully with those of other
suppliers in the market would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company must compete for the services of qualified distributors and sales
representatives. To the extent that the Company's competitors offer such
distributors or sales representatives more favorable terms or a higher volume
of business, such distributors or sales representatives may decline to carry,
or discontinue carrying, the Company's products. The Company's business,
financial condition and results of operations could be adversely affected by
any failure to maintain and expand its distribution network. See "Risk
Factors--Competition."
INTELLECTUAL PROPERTY
The Company's future success and ability to compete are dependent, in part,
upon its proprietary technology. The Company has been granted one patent in
the United States, the claims of which cover certain aspects of its ViX
architecture, and has received notice of allowance of one additional patent.
In addition, the Company has filed 21 other patent applications, 11 in the
United States and ten outside the United States, relating to other aspects of
systems employing the ViX architecture. There can be no assurance that any
patents will issue pursuant to the Company's current or future patent
applications or that patents issued pursuant to such applications will not be
invalidated, circumvented, challenged or licensed to others. In addition,
there can be no assurance that the rights granted under any such patents will
provide competitive advantages to the Company or be adequate to safeguard and
maintain the Company's proprietary rights.
In addition, the Company claims copyright protection for certain proprietary
software and documentation. The Company also attempts to protect its trade
secrets and other proprietary information through agreements with its
customers, suppliers, employees and consultants, and through other security
measures. Although the Company intends to protect its rights vigorously, there
can be no assurance that these measures will be successful. In addition, the
laws of certain countries in which the Company's products are or may be
manufactured or sold, including Japan and Taiwan, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the networking industry, its
33
<PAGE>
technical expertise and ability to introduce new products on a timely basis
will be more important in maintaining its competitive position than protection
of its intellectual property and that patent, trade secret and copyright
protection are important but must be supported by expanding the knowledge,
ability and experience of the Company's personnel and introducing and
enhancing products. Although the Company continues to implement protective
measures and intends to defend vigorously its intellectual property rights,
there can be no assurance that these measures will be successful.
Many participants in the semiconductor and networking industries have a
significant number of patents and have frequently demonstrated a readiness to
commence litigation based on allegations of patent and other intellectual
property infringement. From time to time, third parties, including competitors
of the Company, may assert patent, copyright and other intellectual property
rights to technologies that are important to the Company. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future, that assertions by third parties will not result in
costly litigation or that the Company would prevail in any such litigation or
be able to license any valid and infringed patents from third parties on
commercially reasonable terms, if at all. Litigation, regardless of the
outcome, is likely to result in substantial cost and diversion of resources of
the Company. Any infringement claim or other litigation against or by the
Company could materially adversely affect the Company's business, financial
condition and results of operations.
In addition, there can be no assurance that competitors of the Company, many
of which have substantially greater resources than the Company and have made
substantial investments in competing technologies, do not have, or will not
seek to apply for and obtain, patents that will prevent, limit or interfere
with the Company's ability to make, use or sell its products either in the
United States or in international markets. The Company has received notice
from FORE stating that FORE believes that the Company's products infringe two
of FORE's patents and offering the Company a license to such patents. The
Company has received a legal opinion from Dergosits & Noah, LLP, its patent
counsel, to the effect that certain claims made in the FORE patents are
invalid, and that as to the other claims, the Company's products do not
infringe. However, there can be no assurance that FORE will not file a lawsuit
against the Company or that the Company will prevail in any such litigation.
Furthermore, there can be no assurance that the Company will not in the future
become subject to patent infringement claims and litigation or interference
proceedings to determine the priority of inventions. The defense and
prosecution of intellectual property suits, interference proceedings and
related legal and administrative proceedings are both costly and time
consuming. Any such suit or proceeding involving the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Protection of Intellectual
Property."
EMPLOYEES
As of July 31, 1997, the Company had a total of 69 full-time employees and
nine full-time contractors. Of the total number of employees, 39 were in
research and development, 14 in marketing and technical support, seven in
sales, and 18 in operations and administration. The Company's employees are
not represented by any collective bargaining agreement, and the Company has
never experienced a work stoppage. The Company believes its employee relations
are good.
The Company's future success is heavily dependent upon its ability to hire
and retain qualified technical, marketing and management personnel. The
competition for such personnel is intense, particularly for engineering
personnel with related networking and integrated circuit design expertise and
for technical support personnel with networking engineering expertise.
FACILITIES
The Company's main executive, administrative and technical offices occupy
approximately 35,000 square feet in Sunnyvale, California, under a lease that
expires in March 1999. Of the 35,000 square feet, approximately 8,000 square
feet is occupied by another company under a sublease that expires in January
1998. The Company believes that its existing facilities are adequate to meet
its requirements through 1998. The Company leases its Boston area office on a
month-to-month basis.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of June 30, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Prabhat K. Dubey................ 46 President, Chief Executive Officer and
Director
Amos Wilnai..................... 57 Chairman of the Board and Executive Vice
President, Business Development
Sena C. Reddy................... 49 Executive Vice President, Operations
William R. Walker............... 55 Vice President, Chief Financial Officer and
Secretary
Alexander Joffe................. 40 Vice President, Engineering
Brent R. Bilger................. 39 Vice President, Marketing
John A. Teegen.................. 38 Vice President, Sales
John G. Adler (1)............... 60 Director
Irwin Federman (2).............. 61 Director
Andrew S. Rappaport (2)......... 39 Director
Geoffrey Y. Yang (1)............ 38 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
PRABHAT K. DUBEY has served as the Company's President and Chief Executive
Officer, and as a director, since he joined the Company in October 1994. From
March 1994 to August 1994, Mr. Dubey was the Chief Operating Officer of
Wireless Access, Inc., a supplier of communications devices and chip sets.
From August 1989 to March 1994, he served as Vice President and General
Manager of the Wireless & Messaging DSP IC Group at Lucent Technologies, a
communications products company and former subsidiary of AT&T Corporation. Mr.
Dubey holds a Ph.D. in Physics from the Indian Institute of Technology and an
M.B.A. from the University of Western Ontario.
AMOS WILNAI has served as the Chairman of the Board of Directors since he
founded the Company in September 1992. Since September 1994, Mr. Wilnai has
also served as the Company's Executive Vice President of Business Development.
From September 1992 to October 1994, he was the President of the Company. Mr.
Wilnai has a B.S.E.E. degree from the Technion Institute of Technology in
Israel and an M.S.E.E. degree from the Polytechnic Institute in Brooklyn.
SENA C. REDDY has served as the Company's Executive Vice President of
Operations since he joined the Company in January 1997. Prior to joining the
Company, Mr. Reddy spent more than 11 years at Cirrus Logic Inc., a
semiconductor company, where he served as the Senior Vice President of
Operations from April 1994 to January 1997, Vice President of Manufacturing
from July 1991 to April 1994, and the Director of Wafer Fabrication and
Technology from September 1985 to June 1991. Mr. Reddy holds an M.S.E.E.
degree from Oklahoma State University.
WILLIAM R. WALKER has served as the Company's Vice President, Chief
Financial Officer and Secretary since joining the Company in June 1996. From
May 1987 to June 1996, Mr. Walker was with Zilog, Inc., a semiconductor
manufacturer, where he served most recently as Senior Vice President and Chief
Financial Officer. Mr. Walker received a B.S. degree from the University of
Wisconsin and an M.B.A. from the University of Maryland. Mr. Walker is also a
Certified Public Accountant.
ALEXANDER JOFFE has served as the Company's Vice President of Engineering
since July 1994. From March 1993 to July 1994, Mr. Joffe was the Company's
Director of Engineering. Prior to joining the Company,
35
<PAGE>
Mr. Joffe spent more than eight years with Motorola Semiconductor Products, a
semiconductor manufacturing subsidiary of Motorola, Inc., where he served most
recently as an engineering manager. Mr. Joffe holds a B.S.E.E. degree from the
Technion Institute of Technology in Israel.
BRENT R. BILGER has served as the Company's Vice President of Marketing
since joining the Company in April 1997. Prior to joining the Company, Mr.
Bilger spent more than seven years with Cisco, a network equipment vendor,
where he served most recently as the Director of Marketing for service
providers. Mr. Bilger also served as the Director of Marketing of high-end
routers and ATM products during part of his tenure at Cisco. Mr. Bilger
received a B.A. degree from Dartmouth College, a B.E. degree from Thayer
School, Dartmouth College, and an M.S.E.E. degree from Cornell University.
JOHN A. TEEGEN has served as the Company's Vice President of Sales since
joining the Company in January 1997. From August 1994 to January 1997, Mr.
Teegen was the Vice President of Worldwide Sales for Intellon Corporation, a
semiconductor company. From August 1987 to August 1994, Mr. Teegen was
employed by VLSI Technology, Inc., also a semiconductor company, where he
served in a variety of sales management positions, most recently as the Vice
President of Consumer and Industrial Sales. Mr. Teegen holds a B.S.E.E. degree
from the University of Florida.
JOHN G. ADLER has served as a director of the Company since March 1997. Mr.
Adler has been the Chairman of the Board of Directors of Adaptec, Inc., an
electronic equipment manufacturing company, since May 1990. Mr. Adler also
served as the President of Adaptec, Inc. from May 1985 to August 1992 and as
its Chief Executive Officer from December 1986 to July 1995. Mr. Adler holds a
B.S.E.E. degree from University of Mississippi and was a Sloan Executive
Fellow at Stanford University in 1971. He also serves on the advisory council
of the College of Engineering at San Jose State University and is on the
Dean's Advisory Board of the Leavey School of Business and Administration at
Santa Clara University.
IRWIN FEDERMAN has served as a director of the Company since July 1994. Mr.
Federman has been a general partner of U.S. Venture Partners, a venture
capital firm, since April 1990. From 1988 to 1990 he was a Managing Director
of Dillon Read & Co., an investment banking firm, and a general partner in its
venture capital affiliate, Concord Partners. Mr. Federman also serves on the
boards of directors of TelCom Semiconductor, Inc., a semiconductor products
company, SanDisk Corporation, a semiconductor company, Western Digital
Corporation, a disk drive manufacturer, Komag Incorporated, a thin film media
manufacturer, NeoMagic Corporation, a developer of multimedia accelerators,
Checkpoint Software Technology, Ltd., a network security software company and
QuickLogic Corporation, a manufacturer of programmable logic devices. He is on
the Dean's Advisory Board of Santa Clara University's Leavey School of
Business and Administration. Mr. Federman received a B.S. degree in Accounting
from Brooklyn College, is a Certified Public Accountant, and was awarded an
honorary Doctorate of Engineering Science from Santa Clara University.
ANDREW S. RAPPAPORT has served as a director of the Company since July 1994.
Mr. Rappaport has been a partner of August Capital, LLC, a venture capital
firm, since July 1996. Prior to that time, Mr. Rappaport was the President of
The Technology Research Group, Inc. a Boston-based strategic management
consulting firm which he founded in August 1984. He is also a director of
Storm Technology, Inc., a photoelectronics manufacturing company. Mr.
Rappaport attended Princeton University.
GEOFFREY Y. YANG has served as a director of the Company since July 1994.
Mr. Yang has been a general partner of Institutional Venture Partners, a
venture capital firm, since June 1989. He also serves on the Board of
Directors of Excite, Inc., an Internet search engine company. Mr. Yang holds a
B.A. in Economics from Princeton University, a B.S.E. in Engineering and
Management Systems from Princeton University, as well as an M.B.A. from
Stanford University.
There are no family relationships among any of the Company's directors or
executive officers.
36
<PAGE>
The Company's Board of Directors is divided into three classes: Classes I,
II and III. The initial term of the Class I directors expires at the Company's
annual meeting of stockholders in 1998; the initial term of the Class II
directors expires at the Company's annual meeting of stockholders in 1999; and
the initial term of the Class III directors expires at the Company's annual
meeting of stockholders in 2000. Thereafter, the term of each class of
directors will be three years. All directors hold office until the annual
meeting of stockholders at which their respective class is subject to
reelection and until their successors are duly elected and qualified, or until
their earlier resignation or removal.
BOARD COMMITTEES
Audit Committee. The Audit Committee of the Board of Directors reviews and
monitors the corporate financial reporting and the internal and external
audits of the Company, including among other things, the Company's internal
audit and control functions, the results and scope of the annual audit and
other services provided by the Company's independent accountants, and the
Company's compliance with legal matters with a significant impact on the
Company's financial reports. In addition, the Audit Committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, the Company's independent accountants. The Audit Committee
also monitors transactions between the Company and its officers, directors and
employees for any potential conflicts of interest. The current members of the
Audit Committee are Irwin Federman and Andrew S. Rappaport.
Compensation Committee. The Compensation Committee of the Board of Directors
reviews and makes recommendations to the Board regarding the Company's
compensation policy and all forms of compensation to be provided to executive
officers and directors of the Company, including among other things, annual
salaries and bonuses, and stock option and other incentive compensation
arrangements. In addition, the Compensation Committee reviews bonus and stock
compensation arrangements for all other employees of the Company. As part of
the foregoing, the Compensation Committee also administers the Company's 1997
Stock Plan and 1997 Employee Stock Purchase Plan. The current members of the
Compensation Committee are John G. Adler and Geoffrey Y. Yang.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the Company's fiscal year ended December 31, 1996, the members of the
Compensation Committee were John G. Adler and Irwin Federman. No interlocking
relationship exists between any member of the Company's Board of Directors or
the Compensation Committee and any member of the board of directors or
compensation committee of any other company, nor has any such interlocking
relationship existed in the past. See "Certain Transactions."
DIRECTOR COMPENSATION
The Company's directors do not receive cash compensation for their services
as members of the Board of Directors. Under the Company's 1997 Director Option
Plan, however, each of the Company's directors who is not also an employee of
the Company is automatically granted an option to purchase (i) 40,000 shares
of the Company's Common Stock at a purchase price equal to the fair market
value of such shares on the date of grant, upon becoming a director, and (ii)
an additional 10,000 shares of the Company's Common Stock at a purchase price
equal to the fair market value of such shares on the date of grant, following
the announcement of the Company's earnings for the prior fiscal year, provided
that such director has served on the Board of Directors for the preceding six
months. Such directors do not receive any other compensation for their
services as members of the Board of Directors. See "--Benefit Plans--1997
Director Option Plan."
37
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended December 31, 1996
(the "Last Fiscal Year") certain information with respect to the compensation
of the Company's Chief Executive Officer and each of the two other executive
officers of the Company who were serving as executive officers of the Company
at the end of the Last Fiscal Year and whose total annual salary and bonus
during such fiscal year exceeded $100,000 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL --------------
COMPENSATION SECURITIES
---------------- UNDERLYING
NAME AND POSITION SALARY BONUS OPTIONS(#)
----------------- -------- ------- ----------
<S> <C> <C> <C>
Prabhat K. Dubey.............................. $165,000 -- --
President and Chief Executive Officer
Amos Wilnai................................... 150,000 -- --
Executive Vice President, Business
Development
Alexander Joffe............................... 140,000 $50,000 300,000
Vice President, Engineering
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to the Named
Executive Officers regarding grants of options to purchase Common Stock of the
Company made during the Last Fiscal Year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------ ANNUAL RATES OF
PERCENTAGE OF STOCK PRICE
TOTAL OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(1)
GRANTED EMPLOYEES PRICE EXPIRATION ---------------------
NAME (# OF SHARES) IN 1996 ($/SHARE) DATE 5% 10%
---- ------------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Prabhat K. Dubey (2).... -- -- -- -- -- --
Amos Wilnai............. -- -- -- -- -- --
Alexander Joffe (3)..... 300,000(4) 9.2% $.67 5/9/06 $ 125,785 $ 318,764
</TABLE>
- --------
(1) Amounts represent hypothetical gains that could be achieved if the option
was exercised at the end of the option term to purchase all of the
underlying stock subject to such option, assuming such stock had
appreciated during the term of the option at the assumed annualized rates
of 5% and 10%, respectively. The assumed 5% and 10% rates of stock price
appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future price of its Common Stock. Actual gains, if any, on stock
option exercises are dependent on the future performance of the Company,
overall conditions and the option holder's continued employment with the
Company throughout the entire vesting period and option term. This table
does not take into account any appreciation in the fair market value of
the Company's Common Stock from the date of grant to the date of this
offering, other than the columns reflecting assumed rates of appreciation
of 5% and 10%, respectively.
(2) On April 25, 1997, the Board of Directors granted an option to Mr. Dubey
to purchase 225,000 shares of the Company's Common Stock for a purchase
price of approximately $3.33 per share. Such option will vest with respect
to 56,250 shares on April 25, 1998, and with respect to an additional
4,688 shares each full month of continuous employment with the Company
thereafter. The exercise price equaled the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
38
<PAGE>
(3) On April 25, 1997, the Board of Directors granted an option to Mr. Joffe
to purchase 150,000 shares of the Company's Common Stock for a purchase
price of approximately $3.33 per share. Such option will vest with respect
to 37,500 shares on April 25, 1998, and with respect to an additional
3,125 shares each full month of continuous employment with the Company
thereafter. The exercise price equaled the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
(4) Represents an option to purchase 300,000 shares of the Company's Common
Stock granted on May 9, 1996 under the Company's 1993 Plan. Such option
vested with respect to 75,000 shares on the first anniversary of the date
of grant, and has vested and will continue to vest with respect to an
additional 6,250 shares each full month of continuous employment with the
Company thereafter. The exercise price equaled the fair market value of
the Common Stock on the date of grant, as determined by the Board of
Directors.
FISCAL YEAR END OPTION VALUES
The following table sets forth certain information with respect to the
number and value of the stock options held by each of the Named Executive
Officers at the end of the Last Fiscal Year. No options were exercised by the
Named Executive Officers during the Last Fiscal Year.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Prabhat K. Dubey............ -- -- -- --
Amos Wilnai................. -- -- -- --
Alexander Joffe............. -- 300,000 -- $399,990
</TABLE>
- --------
(1) Represents the difference between the fair market value of the shares
underlying such option at fiscal year-end ($2.00 per share, as determined
by the Board of Directors) and the exercise price of such option
(approximately $.67 per share).
BENEFIT PLANS
1993 Stock Plan. The Company's 1993 Stock Plan (the "1993 Plan") provides
for the grant of incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") to employees of the
Company, and the grant of nonstatutory stock options and stock purchase rights
("SPRs") to employees and consultants of the Company. As of August 1, 1997,
options to purchase an aggregate of 5,170,795 shares of Common Stock of the
Company were outstanding under the 1993 Plan. The Board of Directors has
determined that no further options will be granted under the 1993 Plan after
the completion of this offering.
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") was
approved by the Board of Directors in August 1997 and is expected to be
approved by the stockholders in September 1997. The 1997 Plan provides for the
grant of incentive stock options to employees (including officers and employee
directors) and for the grant of nonstatutory stock options and SPRs to
employees, directors and consultants. The following shares have been reserved
for issuance under the 1997 Plan: (a) 1,500,000 shares of Common Stock, which
includes shares which have been reserved but unissued under the 1993 Plan; (b)
any shares returned to the 1993 Plan as a result of termination of options
under the 1993 Plan; and (c) shares added to the 1997 Plan pursuant to
automatic annual increases equal to the lesser of (i) 1,000,000 shares, (ii)
5% of all then outstanding shares of Common Stock of the Company, or (iii) a
lesser amount determined by the Board of Directors. Unless terminated sooner,
the 1997 Plan will terminate automatically in August 2007.
The 1997 Plan may be administered by the Board of Directors or a committee
thereof (as applicable, the "Administrator"). The Administrator has the power
to determine the terms of the options or SPRs granted,
39
<PAGE>
including the exercise price of the option or SPR, the number of shares
subject to each option or SPR, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, the Administrator has
the authority to amend, suspend or terminate the 1997 Plan, provided that no
such action may affect any share of Common Stock previously issued and sold or
any option previously granted under the 1997 Plan.
Options and SPRs granted under the 1997 Plan are not generally transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months after the end of an optionee's
status as an employee, director or consultant of the Company, or within 12
months after such optionee's termination by death or disability, but in no
event later than the expiration of the option's 10 year term. Unless the
Administrator determines otherwise, the agreements governing the terms of the
SPRs (each an "SPR Agreement") will grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment with the Company for any reason (including death or disability).
The purchase price for the shares of Common Stock repurchased pursuant to an
SPR Agreement will be the original price paid by the purchaser and may be paid
by cancellation of any indebtedness of the purchaser to the Company. The
repurchase option will lapse at a rate determined by the Administrator. The
exercise price of all incentive stock options granted under the 1997 Plan must
be at least equal to the fair market value of the Common Stock on the date of
grant. The exercise price of nonstatutory stock options and SPRs granted under
the 1997 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must at least be equal to the fair market value of the Common Stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date and the term of
such incentive stock option must not exceed five years. The term of all other
options granted under the 1997 Plan may not exceed ten years.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option is to be assumed or an equivalent option substituted for
by the successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the Administrator will provide
for the optionee to have the right to exercise such options or SPRs as to all
of the optioned stock, including shares as to which such options or SPRs would
not otherwise be exercisable. If the Administrator makes an option or SPR
exercisable in full in the event of a merger or sale of assets, the
Administrator will notify the optionee that the option or SPR will be fully
exercisable for a period of 15 days from the date of such notice, and the
option or SPR will terminate upon the expiration of such period.
1997 Employee Stock Purchase Plan. The Company's 1997 Employee Stock
Purchase Plan (the "1997 Purchase Plan") was adopted by the Board of Directors
in August 1997 and is expected to be approved by the stockholders in September
1997. A total of 300,000 shares of Common Stock has been reserved for issuance
under the 1997 Purchase Plan, plus shares added to the plan pursuant to
automatic annual increases equal to the lesser of (i) 400,000 shares, (ii) .8%
of all then outstanding shares of Common Stock of the Company, or (iii) a
lesser amount determined by the Board of Directors.
The 1997 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains consecutive, overlapping, 24-month offering periods. Each
offering period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period which commences on the
first trading day on or after the date of this Prospectus and ends on the last
trading day on or before October 31, 1999.
Employees are eligible to participate in the 1997 Purchase Plan if they are
customarily employed by the Company or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year.
However, any employee who (i) immediately after grant owns stock possessing 5%
or more of the total combined voting power or value of all classes of the
capital stock of the Company, or (ii) whose rights
40
<PAGE>
to purchase stock under all employee stock purchase plans of the Company
accrues at a rate which exceeds $25,000 worth of stock for each calendar year
may not purchase stock under the 1997 Purchase Plan. The 1997 Purchase Plan
permits participants to purchase Common Stock through payroll deductions of up
to 10% of the participant's "compensation." Compensation is defined as the
participant's base gross earnings and commissions excluding payments for
overtime, shift premiums, incentive compensation, incentive payments, bonuses
and other compensation. The maximum number of shares a participant may
purchase during a single purchase period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the 1997 Purchase Plan is 85% of the lower of the fair market
value of the Common Stock at the beginning of the offering period or at the
end of the purchase period. In the event the fair market value at the end of a
purchase period is less than the fair market value at the beginning of the
offering period, the participants will be withdrawn from the current offering
period following exercise and automatically re-enrolled in a new offering
period. The new offering period will use the lower fair market value as of the
first date of the new offering period to determine the purchase price for
future purchase periods. Participants may end their participation at any time
during an offering period, and they will be paid their payroll deductions to
date. Participation ends automatically upon termination of employment with the
Company.
Rights granted under the 1997 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1997 Purchase Plan. The 1997 Purchase Plan
provides that, in the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
outstanding option granted thereunder may be assumed or substituted for by the
successor corporation. If the successor corporation refuses to assume or
substitute such outstanding options, the offering period then in progress will
be shortened and a new exercise date will be set. The 1997 Purchase Plan will
terminate in August 2007. The Board of Directors has the authority to amend or
terminate the 1997 Purchase Plan, except that no such action may adversely
affect any outstanding rights to purchase stock granted under the 1997
Purchase Plan.
1997 Director Option Plan. The 1997 Director Option Plan (the "Director
Plan") was adopted by the Board of Directors in August 1997 and is expected to
be approved by the stockholders in September 1997. The Director Plan provides
for the grant of nonstatutory stock options to non-employee directors. The
Director Plan has a term of ten years, unless terminated sooner by the Board
of Directors. A total of 150,000 shares of Common Stock have been reserved for
issuance under the Director Plan, plus annual increases equal to (i) the
number of shares of stock underlying options granted under the Director Plan
in the immediately preceding year, or (ii) a lesser amount determined by the
Board of Directors.
The Director Plan provides that each non-employee director will
automatically be granted an option to purchase 40,000 shares of Common Stock
(the "First Option") on the date which such person first becomes a non-
employee director, unless immediately prior to becoming a non-employee
director, such person was an employee director of the Company. In addition to
the First Option, each non-employee director will automatically be granted an
option to purchase 10,000 shares (a "Subsequent Option") on the date two days
after the announcement of the Company's fiscal year-end earnings of each year,
if on such date he or she will have served on the Board of Directors for at
least the preceding six months. Each First Option and each Subsequent Option
will have a term of 10 years. Each First Option will vest as to 25% of the
optioned stock one year from the date of grant, and as to an additional 1/48
of the optioned stock each full month thereafter, provided the person
continues to serve as a Director on such dates. Each Subsequent Option will
vest as to 1/12 of the optioned stock each full month after the date of grant.
The exercise price of each First Option and each Subsequent Option is 100% of
the fair market value per share of the Common Stock, generally determined with
reference to the closing price of the Common Stock as reported on the Nasdaq
National Market on the last trading day prior to the date of grant.
41
<PAGE>
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each outstanding option may be assumed or an
equivalent option substituted for by the successor corporation. If an option
is assumed or substituted for by the successor corporation, it will continue
to vest as provided in the Director Plan. However, if a non-employee
director's status as a director of the Company or the successor corporation,
as applicable, is terminated other than upon a voluntary resignation by the
non-employee director, each option granted to such non-employee director will
become fully vested and exercisable. If the successor corporation does not
agree to assume or substitute for such options, they will become fully vested
and exercisable for a period of 15 days from the date the Board of Directors
notifies the optionee of the option's full exercisability, after which period
such options will terminate. Options granted under the Director Plan must be
exercised within three months of the end of the optionee's tenure as a
director of the Company, or within 12 months after such director's termination
by death or disability, but in no event later than the expiration of the
option's 10 year term. No option granted under the Director Plan is
transferable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's 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 (i)
any breach of their duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) unlawful payments of dividends
or unlawful stock repurchase or redemptions, or (iv) any transaction from
which the director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. The Company's Bylaws also
permit it to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the Bylaws would permit indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or executive
officer of the Company, any subsidiary of the Company or any other company or
enterprise to which the person provides services at the request of the
Company. At the present time, there is no pending litigation or proceeding
involving a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company believes that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and executive officers.
42
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1994, there has not been any transaction or series of
similar transactions to which the Company was or is a party in which the
amount involved exceeded or exceeds $60,000 and in which any director,
executive officer, holder of more than 5% of any class of the Company's voting
securities, or any member of the immediate family of any of the foregoing
persons had or will have a direct or indirect material interest, other than
the transactions described below.
Series A Preferred Stock Financing. On July 12, 1994, the Company issued and
sold an aggregate of 9,255,000 shares of Series A Preferred Stock for an
aggregate purchase price of $3,085,000, or approximately $.33 per share. The
investors in such shares included, among others, venture capital funds
affiliated with Institutional Venture Partners ("IVP") and U.S. Venture
Partners ("USVP"), each of which holds more than 5% of the Company's voting
securities as of the date of this Prospectus. The number of shares purchased
and the aggregate purchase price paid by affiliates of IVP and USVP in
connection with such transaction are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES AGGREGATE
NAME OF PURCHASER PURCHASED PURCHASE PRICE
- ----------------- ---------------- --------------
<S> <C> <C>
Institutional Venture Partners VI, L.P.......... 4,410,000 $1,455,300
Institutional Venture Management VI, L.P. ...... 90,000 29,700
U.S. Venture Partners IV, L.P................... 3,892,500 1,284,525
Second Ventures Limited Partnership II.......... 472,500 155,925
U.S.V.P. Entrepreneur Partners II, L.P. ........ 135,000 44,550
Upon the closing of this offering, each share of Series A Preferred Stock
will automatically convert into one share of Common Stock of the Company.
Series B Preferred Stock Financing. On November 16, 1995, the Company issued
and sold an aggregate of 4,086,780 shares of Series B Preferred Stock for an
aggregate purchase price of $7,219,967, or approximately $1.77 per share. The
investors in such shares included, among others, venture capital funds
affiliated with Kleiner Perkins Caulfield & Byers ("KPCB"), IVP and USVP, each
of which holds more than 5% of the Company's voting securities as of the date
of this Prospectus. The number of shares purchased and the aggregate purchase
price paid by affiliates of KPCB, IVP and USVP in connection with such
transaction are as follows:
<CAPTION>
AGGREGATE
NUMBER OF SHARES APPROXIMATE
NAME OF PURCHASER PURCHASED PURCHASE PRICE
- ----------------- ---------------- --------------
<S> <C> <C>
Kleiner Perkins Caulfield & Byers VII........... 1,194,672 $2,114,569
KPCB VII Founders Fund.......................... 129,856 229,845
KPCB Information Sciences Zaibatsu Fund II...... 33,964 60,116
Institutional Venture Partners VI, L.P.......... 851,322 1,506,840
IVP Founders Fund I, L.P. ...................... 36,226 64,120
Institutional Venture Management VI, L.P........ 18,114 32,062
U.S. Venture Partners IV, L.P................... 783,396 1,386,602
Second Ventures Limited Partnership II.......... 95,094 168,316
U.S.V.P. Entrepreneur Partners II, L.P.......... 27,172 48,094
</TABLE>
Upon the closing of this offering, each share of Series B Preferred Stock
will automatically convert into one share of Common Stock of the Company.
43
<PAGE>
Shareholder Rights Agreements. In connection with the Series A Preferred
Stock financing described above, the Company entered into a shareholder rights
agreement with, among others, Amos Wilnai, Alexander Joffe and holders of the
Company's Series A Preferred Stock, pursuant to which the Company granted,
among other things, certain stock registration rights to such parties. In
connection with the Series B Preferred Stock financing described above, the
Company amended such agreement to, among other things, add the holders of
Series B Preferred Stock as parties thereto. Under the agreement, as amended,
Mr. Wilnai and Mr. Joffe have certain registration rights with respect to an
aggregate of 7,875,000 of the shares of Common Stock held by them or issuable
upon the exercise of stock options granted to them. In addition, the holders
of Common Stock of the Company issued upon the conversion of the Company's
Series A Preferred Stock and Series B Preferred Stock have certain
registration rights with respect to such shares. See "Description of Capital
Stock--Registration Rights."
Indemnification Agreements. The Company has entered into indemnification
agreements with each of its directors and executive officers. See
"Management--Limitation on Liability and Indemnification Matters."
Loans to Officers. From time to time the Company has made loans to certain
executive officers of the Company to fund the exercise price of stock options
held by such officers. These loans are evidenced by full recourse promissory
notes which mature on the earlier to occur of (i) the fifth anniversary of the
issuance date, in the case of the notes issued to Prabhat K. Dubey and Mr.
Joffe, and the third anniversary of the issuance date, in the case of the
notes issued to William R. Walker, (ii) a date which is 30 days after the
termination of the respective officer's employment with the Company for any
reason other than death or disability, in the case of the notes issued to Mr.
Dubey and Mr. Joffe, and six months after the termination of Mr. Walker's
employment with the Company, in the case of the notes issued to Mr. Walker,
and (iii) a date which is one year after the date of termination of the
respective officer's employment with the Company due to death or disability,
in the case of the notes issued to Mr. Dubey and Mr. Joffe. Such promissory
notes are also secured by the shares of Common Stock purchased with the
proceeds of such loans. With respect to the notes issued to Mr. Walker, in the
event that Mr. Walker should sell any of the shares pledged to secure such
notes, the proceeds from such sale must be applied first to prepay the
interest and then the principal, if any, due and payable on such notes. The
following table sets forth the name and position of such officers, certain
information with respect to the promissory notes issued to evidence such
loans, and the number of shares of the Company's Common Stock purchased with
the proceeds of such loans.
<TABLE>
<CAPTION>
ANNUAL
PRINCIPAL SHARES INTEREST ISSUANCE MATURITY
NAME AND POSITION AMOUNT PURCHASED RATE(%) DATE DATE
----------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Prabhat K. Dubey................ $ 60,000 1,800,000 .00 10/31/95 10/31/00
President and Chief Executive
Officer
Alexander Joffe................. 47,400 1,800,000 .00 11/3/95 11/3/00
Vice President, Engineering
William R. Walker............... 100,000 150,000 5.75 12/17/96 12/17/99
Vice President, Chief Financial 70,000 105,000 5.75 1/2/97 1/2/00
Officer and Secretary
</TABLE>
The entire principal amount and accrued interest, if any, on each of the
loans described in the table set forth above remains outstanding as of the
date of this offering.
On March 7, 1997, the Company made a loan to Mr. Dubey in the aggregate
principal amount of $100,000 and bearing interest at the rate of 6.07% per
annum. The loan is evidenced by a full recourse promissory note, dated
October 31, 1996, which matures on the earlier to occur of (i) October 31,
1999, or (ii) a date which is six months after the date of any termination of
Mr. Dubey's employment with the Company. The promissory note is secured by a
pledge of 1,800,000 shares of the Company's Common Stock owned by Mr. Dubey
and currently held in escrow. The entire principal amount and accrued interest
on the loan to Mr. Dubey remains outstanding as of the date of this
Prospectus.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of June 30, 1997, and
as adjusted to reflect the sale of the securities offered by the Company in
this offering held by (i) each person (or group of affiliated persons) who is
known by the Company to beneficially own more than 5% of the Company's Common
Stock, (ii) each of the Company's directors and Named Executive Officers, and
(iii) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED(2)
SHARES --------------------------
NAMES AND ADDRESSES OF BENEFICIAL BENEFICIALLY BEFORE THE AFTER THE
OWNERS(1) OWNED(2) OFFERING OFFERING
--------------------------------- ------------ ----------- ----------
<S> <C> <C> <C>
Institutional Venture Partners(3)..... 5,405,662 21.8%
3000 Sand Hill Road
Bldg. 2, Suite 290
Menlo Park, CA 94025
U.S. Venture Partners(4).............. 5,405,662 21.8
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Kleiner Perkins Caulfield & Byers(5).. 1,358,492 5.5
2750 Sand Hill Road
Menlo Park, CA 94025
Alexander Joffe(6).................... 1,893,750 7.6
Prabhat K. Dubey(7)................... 1,800,000 7.3
Amos Wilnai(8)........................ 1,737,226 7.0
Nitzan Wilnai......................... 1,313,206 5.3
Sigal Wilnai.......................... 1,313,206 5.3
Yael Wilnai........................... 1,313,206 5.3
John G. Adler......................... -- *
Irwin Federman(9)..................... -- *
Andrew S. Rappaport................... 225,000 *
Geoffrey Y. Yang(10).................. -- *
All directors and executive officers
as a group (11 persons)
(6)(7)(8)(11)........................ 16,722,300 67.2
</TABLE>
- --------
* Less than 1%.
(1) Except as otherwise noted below, the address of each person listed in the
table is c/o MMC Networks, Inc., 1134 East Arques Avenue, Sunnyvale,
California 94086.
(2) Number of shares beneficially owned and the percentage of shares
beneficially owned are based on (i) 24,803,280 shares outstanding as of
June 30, 1997, and (ii) shares outstanding after this
offering. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission, and includes voting and
investment power with respect to such shares. All shares of Common Stock
subject to options currently exercisable or exercisable within 60 days
after June 30, 1997 are deemed to be outstanding and to be beneficially
owned by the person holding such options for the purpose of computing the
number of shares beneficially owned and the percentage ownership of such
person, but are not deemed to be outstanding and to be beneficially owned
for the purpose of computing the percentage ownership of any other
person. Except as indicated in the footnotes to the table and subject to
applicable community property laws, based on information provided by the
persons named in the table, such persons have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them.
(3) Includes 5,261,322 shares held by Institutional Venture Partners VI,
L.P., 108,114 shares held by Institutional Venture Management VI, L.P.,
and 36,226 shares held by IVP Founders Fund I, L.P. Geoffrey Y. Yang, a
director of the Company, is a General Partner of Institutional Venture
Management VI, L.P., which is the General Partner of each of such limited
partnerships.
(4) Includes 4,675,896 shares held by U.S. Venture Partners IV, L.P., 567,594
shares held by Second Ventures Limited Partnership II, and 162,172 shares
held by U.S.V.P. Entrepreneur Partners II, L.P. Irwin
45
<PAGE>
Federman, a director of the Company, is a General Partner of Presidio
Management Group IV, L.P., which is the General Partner of each of such
limited partnerships.
(5) Includes 1,194,672 shares held by Kleiner Perkins Caufield & Byers VII,
129,856 shares held by KPCB VII Founders Fund, and 33,964 shares held by
KPCB Information Sciences Zaibatsu Fund II.
(6) Includes 93,750 shares issuable pursuant to options currently exercisable
or exercisable within 60 days of June 30, 1997.
(7) Includes 502,590 shares held by Dr. Ranjana Sharma as custodian for Mr.
Dubey's minor children. Mr. Dubey disclaims beneficial ownership of all
such shares.
(8) Does not include 1,313,206 shares held by each of Nitzan Wilnai, Sigal
Wilnai and Yael Wilnai, Mr. Wilnai's adult children. Also does not
include 75,470 shares held by Miriam Wilnai, Mr. Wilnai's mother. Mr.
Wilnai disclaims beneficial ownership of all such shares.
(9) Does not include 4,675,896 shares held by U.S. Venture Partners IV, L.P.,
567,594 shares held by Second Ventures Limited Partnership II, and
162,172 shares held by U.S.V.P. Entrepreneur Partners II, L.P. As the
General Partner of Presidio Management Group IV, L.P., which is the
General Partner of each of such limited partnerships, Mr. Federman may be
deemed to share voting and investment power with respect to such shares.
However, Mr. Federman disclaims beneficial ownership of all such shares
except to the extent of his pecuniary interest therein.
(10) Does not include 5,261,322 shares beneficially owned by Institutional
Venture Partners VI, L.P., 108,114 shares held by Institutional Venture
Management VI, L.P., and 36,226 shares held by IVP Founders Fund I, L.P.
As a General Partner of Institutional Venture Management VI, L.P., which
is the General Partner each of such limited partnerships, Mr. Yang may be
deemed to share voting and investment power with respect to such shares.
However, Mr. Yang disclaims beneficial ownership of all such shares
except to the extent of his pecuniary interest therein.
(11) Includes shares held by Institutional Venture Partners VI, L.P.,
Institutional Venture Management VI, L.P., IVP Founders Fund I, L.P. U.S.
Venture Partners IV, L.P., Second Ventures Limited Partnership II, and
U.S.V.P. Entrepreneur Partners II, L.P.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, the Company will be authorized to
issue 100,000,000 shares of Common Stock, $.001 par value, and 10,000,000
shares of undesignated Preferred Stock, $.001 par value. Immediately after the
completion of this offering, the Company estimates there will be an aggregate
of shares of Common Stock issued and outstanding and approximately
5,170,795 shares of Common Stock issuable upon exercise of outstanding
options. Upon completion of this offering, there will be no shares of
Preferred Stock issued and outstanding.
The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Company's
Certificate of Incorporation and Bylaws and by the provisions of applicable
Delaware law.
The Certificate of Incorporation and Bylaws contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of
delaying, deferring, or preventing a future takeover or change in control of
the Company unless such takeover or change in control is approved by the Board
of Directors.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of Common Stock do not have
cumulative voting rights under the Company's Bylaws or Certificate of
Incorporation, and therefore, holders of a majority of the shares voting for
the election of directors can elect all of the directors. In such event, the
holders of the remaining shares will not be able to elect any directors.
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the rights of preferred stockholders and the
terms of any existing or future agreements between the Company and its
debtholders. Since January 1, 1995, the Company has not declared or paid any
cash dividends on its Common Stock. The Company presently intends to retain
future earnings, if any, for use in the operation and expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future. In addition, the Company's bank line of credit agreement prohibits the
payment of dividends without prior consent of the bank. In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to
the prior rights of any holders of Preferred Stock then outstanding.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 10,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting a series or the designation of such series,
without any further vote or action by the Company's stockholders. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the market price,
and the voting and other rights, of the holders of Common Stock. The issuance
of Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no current plans to issue any shares of
Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar is BankBoston, N.A. Its telephone
number is (800) 730-6001.
47
<PAGE>
WARRANTS
In October 1994, in conjunction with the execution and delivery of a Master
Lease Agreement by and between the Company and Dominion Ventures, Inc.
("Dominion"), the Company issued a warrant (the "Dominion Warrant") to
Dominion to purchase 123,000 shares of the Company's Series A Preferred Stock
at a purchase price of approximately $.33 per share. Upon completion of this
offering, such warrant will convert into the right to purchase an equivalent
number of shares of the Company's Common Stock at the same exercise price per
share. The Dominion Warrant may be exercised at any time before October 31,
2003. The Dominion Warrant contains provisions relating to adjustment of the
exercise price and the number of shares of stock issuable upon exercise
thereof under certain circumstances, including stock splits, reverse stock
splits, combinations and reclassifications of the Company's Preferred Stock.
The Dominion Warrant also provides that the warrant holder may exercise the
warrant without payment of cash by surrendering the warrant and receiving
shares of Common Stock equal in value to the value of the warrant so
surrendered.
In February 1996, in conjunction with the execution and delivery of a Master
Equipment Lease Agreement by and between the Company and Lighthouse Capital
Partners, L.P. ("Lighthouse"), the Company issued another warrant (the
"Lighthouse Warrant") to Lighthouse to purchase 33,963 shares of the Company's
capital stock at a purchase price of approximately $1.77 per share. Upon
completion of this offering, such warrant will convert into the right to
purchase an equivalent number of shares of the Company's Common Stock at the
same exercise price per share. The Lighthouse Warrant may be exercised at any
time before January 31, 2003. The Lighthouse Warrant contains provisions
relating to adjustment of the exercise price and the number of shares of stock
issuable upon exercise thereof under certain circumstances, including stock
splits, reverse stock splits, combinations and reclassifications of the
Company's Preferred Stock. The Lighthouse Warrant also provides that the
warrant holder may exercise the warrant without payment of cash by
surrendering the warrant and receiving shares of Common Stock equal in value
to the value of the warrant so surrendered.
LISTING
The Company has applied to designate its Common Stock for quotation on the
Nasdaq National Market under the trading symbol "MMCN."
REGISTRATION RIGHTS
Following the closing of this offering, the holders of approximately
21,118,743 shares of Common Stock (the "Registrable Securities"), will be
entitled to certain rights with respect to the registration of such shares
under the Securities Act. In the event that the Company proposes to register
any of its securities under the Securities Act, either for its own account or
the account of other security holders, the holders of Registrable Securities
are entitled to notice of such registration and are entitled to include their
Registrable Securities in such registration, subject to certain marketing and
other limitations. Beginning six months after the closing of this offering,
certain holders of Registrable Securities have the right to require the
Company, on not more than two occasions, to file a registration statement
under the Securities Act in order to register all or any part of their
Registrable Securities. The Company may in certain circumstances defer such
registrations and the underwriters have the right, subject to certain
limitations, to limit the number of shares included in such registrations.
Further, holders of Registrable Securities may require the Company to register
all or a portion of their shares with registration rights on Form S-3, when
such form becomes available to the Company, subject to certain conditions and
limitations.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of the Common
Stock. Such provisions may also inhibit fluctuations in the market
48
<PAGE>
price of the Common Stock that could result from takeover attempts. The
Company is also afforded the protections of Section 203 of the Delaware
General Corporation Law, which could delay or prevent a change in control of
the Company or could impede a merger, consolidation, takeover or other
business combination involving the Company or discourage a potential acquiror
from making a tender offer or otherwise attempting to obtain control of the
Company. In addition, the Board of Directors has authority to issue up to
10,000,000 shares of Preferred Stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares without
any further vote or action by the stockholders. The rights of the holders of
the Company's Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights, senior to
the Common Stock, and as a result, the issuance of such Preferred Stock could
have a material adverse effect on the market value of the Common Stock. The
Company has no present plan to issue shares of Preferred Stock. The Company's
Certificate of Incorporation provides that, so long as the Board of Directors
consists of more than two directors, the Board of Directors will be divided
into three classes of directors serving staggered three-year terms. As a
result, only one of the three classes of the Company's Board of Directors will
be elected each year. The classified board structure may have the effect of
delaying or inhibiting any attempt to acquire control of the Company. The
Company's Certificate of Incorporation also provides that, upon the completion
of the offering, stockholders can take action only at a duly called annual or
special meeting of stockholders. Accordingly, stockholders of the Company will
not be able to take action by written consent in lieu of a meeting. In
addition, the Company's Bylaws permit only a majority of the Board of
Directors (or a committee thereof) to call a special meeting of stockholders,
and require prior notice of matters to be brought before stockholder meetings.
These provisions may have the effect of delaying hostile takeovers or delaying
changes in control or management of the Company.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this offering the Company will have outstanding an
aggregate of shares of Common Stock (based upon shares outstanding
at June 30, 1997), assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options or warrants. Of these shares,
all of the shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, unless such
shares are purchased by "affiliates" of the Company as that term is defined in
Rule 144 under the Securities Act (the "Affiliates"). The remaining shares of
Common Stock held by existing stockholders will continue to be "restricted
securities" as that term is defined in Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. As a result of the contractual restrictions described below
and the provisions of Rules 144, 144(k) and 701, all Restricted Shares will be
available for sale in the public market upon expiration of the lock-up
arrangements at least 180 days after the date of this Prospectus.
The officers and directors and all existing stockholders of the Company have
agreed not to sell or otherwise dispose of any of their shares for a period of
180 days after the date of this offering. However, Morgan Stanley & Co.
Incorporated may, in its sole discretion, at any time without notice, release
all or any portion of the shares subject to lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the number of shares of Common Stock then outstanding
(which will equal approximately shares immediately after this
offering), or (ii) 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 manner of sale provisions and notice requirements and
to the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an Affiliate of the
Company 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 except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may therefore be sold immediately
upon the completion of this offering. In general, under Rule 701 of the
Securities Act as currently in effect, any employee, consultant or advisor of
the Company who purchases shares from the Company in connection with a
compensatory stock or option plan or other written agreement is eligible to
resell such shares 90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
Upon completion of this offering, the holders of 21,118,743 shares of Common
Stock issuable upon conversion of Preferred Stock, or their transferees, will
be entitled to certain rights with respect to the registration of such shares
under the Securities Act. See "Description of Capital Stock--Registration
Rights." Registration of such shares under the Securities Act would result in
such shares becoming freely tradeable without restriction under the Securities
Act (except for shares purchases by Affiliates) immediately upon the
effectiveness of such registration.
50
<PAGE>
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the 1993 Plan,
the 1997 Plan, the Director Plan and the 1997 Purchase Plan. See "Management--
Benefit Plans." Such registration statement is expected to be filed and become
effective as soon as practicable after the effective date of this offering.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to the Affiliates, be available for
sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the lock-up agreements described above. As of
June 30, 1997, options to purchase 5,243,601 shares of Common Stock were
issued and outstanding under the 1993 Plan, and no options to purchase shares
had been granted under the 1997 Plan, the Director Plan or the 1997 Purchase
Plan. See "Management--Director Compensation" and "--Benefit Plans."
51
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters") for whom Morgan Stanley & Co. Incorporated,
Deutsche Morgan Grenfell Inc. and Wessels, Arnold & Henderson, L.L.C. are
acting as representatives (the "Representatives") have severally agreed to
purchase, and the Company has agreed to sell to them, severally, the
respective number of shares of Common Stock set forth opposite the names of
such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Deutsche Morgan Grenfell Inc.......................................
Wessels, Arnold & Henderson, L.L.C.................................
---
Total............................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those covered by the Underwriters' over-allotment option described below) if
any such shares are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of shares of Common Stock
at the public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as the number set forth
next to such Underwriter's name in the preceding table bears to the total
number of shares of Common Stock set forth next to the names of all
Underwriters in the preceding table.
The Representatives have informed the Company that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
of Common Stock offered by them.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors, stockholders and option holders
of the Company have agreed not to sell or otherwise dispose of
52
<PAGE>
Common Stock or convertible securities of the Company for up to 180 days after
the date of this Prospectus without the prior consent of Morgan Stanley & Co.
Incorporated. The Company has agreed in the Underwriting Agreement that it
will not, directly or indirectly, without the prior written consent of Morgan
Stanley & Co. Incorporated, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exchangeable for Common
Stock, for a period of 180 days after the date of this Prospectus, except
under certain circumstances.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to five percent of the shares of the
Common Stock offered hereby (including shares subject to the Underwriters'
over-allotment option) for certain parties who have expressed an interest in
purchasing such shares in the offering. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the
same basis as other shares offered hereby.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiations
among the Company and the Representatives. Among the factors considered in
determining the initial public offering price will be the future prospects of
the Company and its industry in general, sales, earnings and certain other
financial and operating information of the Company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company. The estimated initial public offering price
range set forth on the cover page of this Preliminary Prospectus is subject to
change as a result of market conditions and other factors.
53
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain matters will be passed upon for the Underwriters by
Gray Cary Ware & Freidenrich, A Professional Corporation, Palo Alto,
California. As of the date of this Prospectus, WS Investment Company 94A and
WS Investment Company 95B, investment partnerships composed of certain current
and former members of and persons associated with Wilson Sonsini Goodrich &
Rosati, Professional Corporation beneficially own an aggregate of 87,876
shares of Common Stock of the Company, and a member of Wilson Sonsini Goodrich
& Rosati, Professional Corporation owns 25,542 shares of Common Stock of the
Company.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
Certain statements in this Prospectus set forth under the captions "Risk
Factors--Protection of Intellectual Property" and "Business--Intellectual
Property," insofar as they relate to patent infringement claims asserted by
FORE, have been passed upon by Dergosits & Noah, LLP, San Francisco,
California, patent counsel to the Company, as experts on such matters.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1, including amendments thereto, under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules filed therewith. For further information with respect
to the Company and the Common Stock offered hereby, reference is hereby made
to such Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus regarding the contents of
any contract or other document referred to are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all
or any part thereof may be obtained from such office upon the payment of the
prescribed fees. Such materials may also be obtained from the Commission's web
site at http://www.sec.gov.
54
<PAGE>
MMC NETWORKS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of
MMC Networks, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of MMC Networks, Inc. at December
31, 1995 and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
March 14, 1997, except as to
Note 9, which is as of August
15, 1997
F-2
<PAGE>
MMC NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 250 $ 4,809 $ 2,953
Short-term investments......................... 7,852 1,509 2,609
Accounts receivable, net of allowances of $45,
$133 and $165................................. 637 2,025 3,343
Inventories.................................... 154 511 231
Prepaid expenses and other current assets...... 64 122 277
------- ------- -------
Total current assets......................... 8,957 8,976 9,413
Property and equipment, net...................... 542 1,616 2,235
Other assets..................................... 28 84 84
------- ------- -------
$ 9,527 $10,676 $11,732
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 617 $ 586 $ 1,036
Accrued expenses............................... 195 789 1,041
Customer deposits.............................. 850 100 100
Current portion of capital lease obligations... 118 388 385
------- ------- -------
Total current liabilities.................... 1,780 1,863 2,562
------- ------- -------
Capital lease obligations, net of current
portion......................................... 301 636 447
------- ------- -------
Commitments and contingencies (Note 8)
Stockholders' equity:
Series A Convertible Preferred Stock: no par
value; 9,378 shares authorized; 9,255 shares
issued and outstanding ....................... 3,055 3,055 3,055
Series B Convertible Preferred Stock: no par
value; 4,087, 4,121 and 4,121 shares
authorized; 4,087 shares issued and
outstanding .................................. 7,192 7,192 7,192
Common Stock: no par value; 60,000 shares
authorized; 10,365, 11,121 and 11,461 shares
issued and outstanding ....................... 127 256 438
Notes receivable from stockholders............. (125) (225) (295)
Accumulated deficit............................ (2,803) (2,101) (1,667)
------- ------- -------
Total stockholders' equity................... 7,446 8,177 8,723
------- ------- -------
$ 9,527 $10,676 $11,732
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MMC NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- ------------------
1994 1995 1996 1996 1997
----- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues......................... $ 165 $ 577 $10,515 $ 4,690 $ 8,201
Cost of revenues................. 23 304 3,576 1,595 2,535
----- ------- ------- -------- --------
Gross profit................. 142 273 6,939 3,095 5,666
----- ------- ------- -------- --------
Operating expenses:
Research and development, net.. 132 1,802 3,312 1,590 2,751
Selling, general and
administrative................ 298 1,151 3,225 1,359 2,559
----- ------- ------- -------- --------
Total operating expenses..... 430 2,953 6,537 2,949 5,310
----- ------- ------- -------- --------
Operating income (loss).......... (288) (2,680) 402 146 356
----- ------- ------- -------- --------
Other income (expense):
Interest income................ 64 146 427 253 155
Interest expense............... (2) (42) (110) (65) (68)
----- ------- ------- -------- --------
Total other income .......... 62 104 317 188 87
----- ------- ------- -------- --------
Income (loss) before income
taxes........................... (226) (2,576) 719 334 443
Provision for income taxes....... -- -- 17 8 9
----- ------- ------- -------- --------
Net income (loss)................ $(226) $(2,576) $ 702 $ 326 $ 434
===== ======= ======= ======== ========
Net income per share (Note 2).... $ 0.02 $ 0.01 $ 0.01
======= ======== ========
Shares used to compute net income
per share (Note 2) 29,048 28,822 29,256
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MMC NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES RETAINED
PREFERRED STOCK COMMON STOCK RECEIVABLE EARNINGS
---------------- ------------- FROM (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS DEFICIT) TOTAL
------- -------- ------ ------ ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... -- $ -- 6,075 $ 2 $ -- $ 17 $ 19
Issuance of Series A
Convertible Preferred
Stock, net of issuance
costs of $30........... 9,255 3,055 -- -- -- -- 3,055
Issuance of Common Stock
in exchange for
services............... -- -- 22 -- -- -- --
Distribution to
stockholder............ -- -- -- -- -- (18) (18)
Net loss................ -- -- -- -- -- (226) (226)
------- -------- ------ ---- ----- ------- -------
Balance at December 31,
1994................... 9,255 3,055 6,097 2 -- (227) 2,830
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs of $28........... 4,087 7,192 -- -- -- -- 7,192
Exercise of stock
options................ -- -- 4,268 125 -- -- 125
Advances to employees
for exercise of stock
options................ -- -- -- -- (125) -- (125)
Net loss................ -- -- -- -- -- (2,576) (2,576)
------- -------- ------ ---- ----- ------- -------
Balance at December 31,
1995................... 13,342 10,247 10,365 127 (125) (2,803) 7,446
Exercise of stock
options................ -- -- 741 123 -- -- 123
Advances to employees
for exercise of stock
options................ -- -- -- -- (100) -- (100)
Issuance of Common Stock
in exchange for
services............... -- -- 15 6 -- -- 6
Net income.............. -- -- -- -- -- 702 702
------- -------- ------ ---- ----- ------- -------
Balance at December 31,
1996................... 13,342 10,247 11,121 256 (225) (2,101) 8,177
Exercise of stock
options (unaudited).... -- -- 325 152 -- -- 152
Advances to employees
for exercise of stock
options (unaudited).... -- -- -- -- (70) -- (70)
Issuance of Common Stock
in exchange for
services (unaudited)... -- -- 15 30 -- -- 30
Net income (unaudited).. -- -- -- -- -- 434 434
------- -------- ------ ---- ----- ------- -------
Balance at June 30, 1997
(unaudited)............ 13,342 $ 10,247 11,461 $438 $(295) $(1,667) $ 8,723
======= ======== ====== ==== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MMC NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................. $ (226) $(2,576) $ 702 $ 326 $ 434
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization.... 15 97 479 181 386
Issuance of Common Stock in
exchange for services........... -- -- 6 -- 30
Changes in assets and
liabilities:
Accounts receivable............. (209) (427) (1,388) (1,071) (1,318)
Inventories..................... -- (154) (357) (110) 280
Prepaid expenses and other
assets......................... (56) (26) (114) (41) (155)
Accounts payable................ 19 598 (31) (76) 450
Accrued expenses................ 52 128 594 17 252
Customer deposits............... 275 575 (750) (147) --
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities.......... (130) (1,785) (859) (921) 359
------- ------- ------- ------- -------
Cash flows from investing
activities:
Sale (purchase) of short-term
investments...................... (2,332) (5,520) 6,343 4,197 (1,100)
Acquisition of property and
equipment........................ -- (162) (673) (110) (1,005)
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities........... (2,332) (5,682) 5,670 4,087 (2,105)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Proceeds from issuance of
Convertible Preferred Stock, net. 3,055 7,192 -- -- --
Proceeds from exercise of stock
options.......................... -- -- 23 15 82
Principal payments on capital
lease obligations................ (10) (63) (275) (50) (192)
Distribution to stockholder....... (18) -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities........... 3,027 7,129 (252) (35) (110)
------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents.................. 565 (338) 4,559 3,131 (1,856)
Cash and cash equivalents at
beginning of period............... 23 588 250 250 4,809
------- ------- ------- ------- -------
Cash and cash equivalents at end of
period............................ $ 588 $ 250 $ 4,809 $ 3,381 $ 2,953
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest............ $ 2 $ 42 $ 110 $ 65 $ 68
Cash paid for income taxes........ $ -- $ -- $ -- $ -- $ 17
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING
ACTIVITIES:
Acquisition of property and
equipment through capital leases. $ 140 $ 352 $ 880 $ 721 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
MMC Networks, Inc. (the "Company") was incorporated in California on
September 25, 1992 as a Subchapter S corporation and became a Subchapter C
corporation effective July 12, 1994. The Company is a leading developer and
supplier of network processors--high-performance, open-architecture, software-
programmable processors optimized for networking applications. The Company
sells its products primarily in the United States.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, cash equivalents and short-term investments
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Short-term investments
consist primarily of commercial paper and U.S. Treasury securities with
maturities of more than three months when purchased. The Company has
categorized its short-term investments as available-for-sale. At December 31,
1995 and 1996, the fair market value of the Company's short-term investments
approximated cost.
Inventories
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.
Property and equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets, generally three years.
Warranty costs
Anticipated costs related to product warranties are charged to operations as
revenues are recognized. The Company has not experienced significant warranty
claims to date.
Revenue recognition; customer concentration
Revenues are recognized upon shipment of product to customers.
The following table summarizes the percentage of total revenues accounted
for by the Company's significant customers (significant customers are those
customers accounting for more than 10% of the Company's total revenues) during
1994, 1995, 1996 and the six months ended June 30, 1997:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- JUNE 30,
1994 1995 1996 1997
------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
A................................ -- 48% 51% 24%
B................................ -- -- 15 22
C................................ -- -- 10 17
D................................ -- 12 -- --
E................................ -- 11 -- --
F................................ -- 11 -- --
G................................ 91% -- -- --
</TABLE>
F-7
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Research and development
Research and development costs are charged to operations as incurred. The
Company on occasion receives nonrecurring engineering funding for development
projects to apply or enhance the Company's technology to a particular
customer's needs. Such funding is recognized over the term of the respective
contract using the percentage of completion method. At the time of
recognition, amounts received under research and development contracts are
offset against research and development expenses. (See Note 7)
Software development costs
Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards No. 86 ("FAS
86") requires the capitalization of certain software development costs once
technological feasibility is established, which the Company defines as the
completion of a working model. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of
current sales to total projected product sales, whichever is greater. To date,
the period between achieving technological feasibility and the general
availability of such software has been short, and software development costs
qualifying for capitalization have been insignificant. Accordingly, the
Company has not capitalized any software development costs.
Income taxes
From inception through July 11, 1994, the Company elected to be taxed as a
Subchapter S corporation for federal income tax and California franchise tax
purposes. As a result, the Company's sole stockholder paid tax on the taxable
income of the Company, and no federal income taxes were payable at the
corporate level.
Beginning July 12, 1994, the Company became taxable as a Subchapter C
corporation and since that date has accounted for income taxes using an asset
and liability approach. The asset and liability approach requires the
recognition of taxes payable or refundable for the current year and deferred
tax liabilities and assets for the future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. The
measurement of current and deferred tax liabilities and assets are based on
the provisions of the enacted tax law; the effects of future changes in tax
laws or rates are not anticipated. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Stock-based compensation
The Company accounts for stock based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. The
Company provides additional pro forma disclosures as required under Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-
Based Compensation." (See Note 5.)
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and accounts receivable. The Company places its cash,
cash equivalents and short-term investments primarily in market rate accounts,
commercial paper and U.S. Treasury bills. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company provides an allowance for doubtful
accounts receivable based upon the expected collectibility of such
receivables.
F-8
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock splits
In October 1996, the Company effected a 2-for-1 stock split of its Common
Stock and Convertible Preferred Stock. The accompanying financial statements
have been retroactively adjusted to reflect this split.
See Note 9 for subsequent stock split.
Net income (loss) per share
Net income (loss) per share is presently computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of Convertible Preferred Stock (using the if
converted method) and stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation if their
effect is antidilutive, except that, pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, Convertible Preferred Stock
(using the if converted method) and common equivalent shares (using the
treasury stock method and the initial public offering price) issued subsequent
to July 31, 1996 have been included in the computation as if they were
outstanding for all periods presented. Net income (loss) per share prior to
1996 has not been presented since such amounts are not meaningful. See "recent
accounting pronouncements" for a discussion of prospective change in computing
net income (loss) per share.
Dependence on independent manufacturers
The Company outsources all of its semiconductor manufacturing, assembly and
test. The Company's suppliers currently deliver fully assembled and tested
products on a turnkey basis. The semiconductor industry is highly cyclical
and, in the past, foundry capacity has been very limited at times and may
become limited in the future. Currently, only one of the Company's products is
manufactured by more than one supplier. The Company depends on its suppliers
to deliver sufficient quantities of finished product to the Company in a
timely manner. Since the Company places its orders on a purchase order basis
and does not have a long-term volume purchase agreement with any of its
existing suppliers, any of these suppliers may allocate, and in the past have
allocated, capacity to the production of other products while reducing
deliveries to the Company on short notice. The Company has recently
experienced delays in obtaining an adequate supply of certain of its products
from one supplier, as well as certain problems regarding the quality of the
products delivered by that supplier, and as a result has begun obtaining such
products from an alternative supplier. There can be no assurance that the
Company will not have similar or more protracted problems in the future with
existing or new suppliers. In the event of a loss of, or a decision by the
Company to change, a key supplier or foundry, qualifying a new supplier or
foundry and commencing volume production could involve delay and expense,
resulting in lost revenues, reduced operating margins and possible detriment
to customer relationships.
F-9
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Recent accounting pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("FAS 128"). This statement is effective for the Company's quarter ending
December 31, 1997 and requires restatement of all prior periods. The Statement
redefines earnings per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic
earnings per share and fully diluted earnings per share is replaced by diluted
earnings per share. The following table sets forth unaudited pro forma basic
and diluted net income per share, computed in accordance with the requirements
of FAS 128, giving effect for the treatment of all common equivalent shares
issued subsequent to July 31, 1996 as outstanding for all periods presented
pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, for the year ended December 31, 1996 and the six month periods ended June
30, 1996 and 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Basic income per share.......................... $0.05 $ 0.03 $ 0.03
Diluted income per share........................ 0.02 0.01 0.01
</TABLE>
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for the reporting of comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income as defined includes all changes in
equity (net assets) during a period from nonowner sources. Examples of items
to be included in comprehensive income, which are excluded from net income,
include foreign currency translation adjustments and unrealized gain/loss on
available-for-sale securities. The disclosures prescribed by FAS 130 are
effective beginning with the first quarter of calendar 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("FAS 131"). This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has not yet determined the
impact, if any, of adopting this new standard. The disclosures prescribed by
FAS 131 are effective for calendar 1998.
Proposed public offering of Common Stock (unaudited)
If the offering contemplated by this Prospectus (the "Offering") is
consummated, all of the Convertible Preferred Stock outstanding as of the
closing date will automatically be converted into an aggregate of 13,341,780
shares of Common Stock based on the shares of Convertible Preferred Stock
outstanding as of June 30, 1997. Unaudited pro forma stockholders' equity at
June 30, 1997, adjusted for the conversion of Preferred Stock, and giving
effect to the Board's actions described in Note 9, is as follows (in
thousands, except share and per share data):
<TABLE>
<S> <C>
Preferred Stock: $0.001 par value; 10,000,000 shares authorized; no
shares issued or outstanding...................................... $ --
Common Stock: $0.001 par value; 100,000,000 shares authorized;
24,803,280 shares issued and outstanding ......................... 20
Additional paid-in capital......................................... 10,665
Notes receivable from stockholders................................. (295)
Accumulated deficit................................................ (1,667)
-------
$ 8,723
=======
</TABLE>
F-10
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Interim results (unaudited)
The accompanying balance sheet as of June 30, 1997, the statements of
operations and of cash flows for the six months ended June 30, 1996 and 1997,
and the statement of stockholders' equity for the six months ended June 30,
1997 are unaudited. In the opinion of management, the statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting solely of normal recurring adjustments, necessary for
the fair statement of the results of the interim periods. The data disclosed
in these notes to financial statements at such date and for such period are
also unaudited.
NOTE 3--COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1995 1996 1997
----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Inventories:
Raw materials........... $ 24 $ 99 $ 150
Finished goods.......... 130 412 81
----- ------ ------
$ 154 $ 511 $ 231
===== ====== ======
Property and equipment:
Computers and equipment. $ 282 $1,397 $1,622
Furniture and fixtures.. 44 59 243
Purchased software...... 328 751 1,347
----- ------ ------
654 2,207 3,212
Less accumulated
depreciation and
amortization............. (112) (591) (977)
----- ------ ------
$ 542 $1,616 $2,235
===== ====== ======
</TABLE>
NOTE 4--INCOME TAXES:
The provision for income taxes of $17,000 in 1996 represents federal and
state alternative minimum taxes.
No current provision for income taxes was recorded in 1994 or 1995 as the
Company incurred net operating losses for income tax purposes from July 12,
1994, the date on which the Company elected to be taxed as a Subchapter C
corporation, through December 31, 1995. In addition, no deferred benefit for
income taxes was recorded in 1994 or 1995 as the Company was in a net deferred
tax asset position for which a full valuation allowance was provided.
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards......................... $ 994 $ 737
Research and development credit carryforwards............ 111 314
Inventory reserves and basis differences................. 4 129
Accrued expenses......................................... 64 187
Customer deposits........................................ 341 --
Other.................................................... 71 126
------- -------
Total deferred tax assets.............................. 1,585 1,493
Valuation allowance...................................... (1,585) (1,493)
------- -------
Net deferred tax assets................................ $ -- $ --
</TABLE>
F-11
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Because the Company only emerged from the development stage in 1996 and
consequently, does not have an extensive history of profitability, management
believes that it is more likely than not that the Company will not realize its
deferred tax assets. Consequently, a full valuation allowance has been
provided at both December 31, 1995 and 1996.
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $2.0 million and $700,000, respectively,
available to reduce future taxable income. The federal net operating loss
carryforwards expire in 2010. The state net operating loss carryforwards
expire in 2000.
At December 31, 1996, the Company had research and development credit
carryforwards for federal and state tax reporting purposes of $169,000 and
$145,000, respectively. The federal research and development credit
carryforwards expire beginning in 2009 through 2011. The state research and
development credit carryforwards expire beginning in 1999 through 2001.
Under the Tax Reform act of 1986, the amount of net operating losses that
can be utilized may be limited in certain circumstances including, but not
limited to, a cumulative stock ownership change of more than 50% over a three-
year period, as defined.
NOTE 5--CAPITAL STOCK:
Convertible Preferred Stock
The Company has authorized 13,498,737 shares of Convertible Preferred Stock,
of which 9,378,000 shares have been designated Series A Convertible Preferred
Stock ("Series A") and 4,120,737 shares have been designated Series B
Convertible Preferred Stock ("Series B"). The Convertible Preferred Stock has
certain rights, preferences and privileges with respect to dividends,
conversion, liquidation and voting as described below.
In July 1994, the Company issued 9,255,000 shares of Series A at $0.33 per
share. In November 1995, the Company issued 4,086,780 shares of Series B at
$1.77 per share. At December 31, 1996, the Company had reserved 13,341,780
shares of Common Stock for issuance upon conversion of outstanding shares of
Convertible Preferred Stock.
Each share of Convertible Preferred Stock is convertible into one share of
Common Stock, subject to adjustment for anti-dilution, and will be converted
into Common Stock in the event of the closing of a public offering of the
Company's Common Stock for which aggregate gross proceeds equal at least
$7,500,000. Shares of Convertible Preferred Stock have voting rights equal to
Common Stock on an as-if converted basis.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, holders of Series A and Series B are entitled
to receive $0.33 and $1.77 per share, respectively, plus any declared but
unpaid dividends, prior to any distribution to the holders of Common Stock.
1993 Stock Plan
In April 1993, the Company's Board of Directors (the "Board") adopted the
1993 Stock Plan (the "1993 Plan"). The 1993 Plan, as amended, provides for the
granting of stock options and stock purchase rights to employees, directors
and consultants for the purchase of up to 10,725,000 shares of Common Stock.
Options granted under the 1993 Plan are for periods not to exceed ten years,
and may be either incentive stock options ("ISOs") or nonstatutory stock
options ("NSOs"). ISOs are granted at exercise prices which are not less than
100% of the estimated fair value of the Common Stock, as determined by the
Board, on the date of the grant. NSOs are granted at prices not less than 85%
of the estimated fair value of the Common Stock, as determined by the Board,
on the date of the grant. To date all options granted under the 1993 Plan have
been granted at the estimated fair market value as of a the date of grant, as
determined by the Board. Options granted under the 1993 Plan generally vest at
a rate of 25% on the first anniversary of the date of grant and as to 1/48 of
the underlying shares per month thereafter. Options may be exercised in
exchange for cash or promissory notes payable to the Company.
F-12
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock purchase rights may be granted either alone, in addition to, or in
tandem with other awards granted under the 1993 Plan. Stock purchase rights
are granted at prices not less than 85% of the estimated fair value of the
shares on the date of grant, as determined by the Board, and must be exercised
within thirty days from the date of grant. Shares purchased through the
exercise of stock purchase rights are subject to repurchase by the Company at
the original purchase price paid by the purchaser in the event the purchaser's
employment with the Company is terminated for any reason. Such repurchase
option lapses at a rate determined at the date of grant, in no event less than
20% per year. No stock purchase rights have been granted under the 1993 Plan
to date.
The following table summarizes stock option activity under the 1993 Plan:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- ---------
<S> <C> <C> <C>
Balance at December 31, 1993................. 7,121,250 303,750 $0.03
Granted...................................... (4,769,439) 4,769,439 0.03
---------- ----------
Balance at December 31, 1994................. 2,351,811 5,073,189 0.03
Granted...................................... (846,000) 846,000 0.03
Exercised.................................... -- (4,268,250) 0.03
Canceled..................................... 171,000 (171,000) 0.03
---------- ----------
Balance at December 31, 1995................. 1,676,811 1,479,939 0.03
Authorized................................... 3,300,000 -- --
Granted...................................... (3,265,500) 3,265,500 0.79
Exercised.................................... -- (741,534) 0.17
Canceled..................................... 810,000 (810,000) 0.29
---------- ----------
Balance at December 31, 1996................. 2,521,311 3,193,905 0.71
Authorized (unaudited)....................... 1,500,000 -- --
Granted (unaudited).......................... (2,754,000) 2,754,000 2.90
Exercised (unaudited)........................ -- (325,116) 0.47
Canceled (unaudited)......................... 379,188 (379,188) 0.73
---------- ----------
Balance at June 30, 1997 (unaudited)......... 1,646,499 5,243,601 1.86
========== ==========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.03 853,155 8.22 $0.03 180,977 $0.03
0.18 to 0.42 627,750 9.16 0.23 -- --
0.67 to 1.10 1,069,500 9.42 0.75 -- --
2.00 643,500 9.92 2.00 -- --
--------- -------
$0.03 to 2.00 3,193,905 9.15 0.71 180,977 $0.03
========= =======
</TABLE>
The weighted-average estimated grant-date fair values of options granted
under the 1993 Plan during 1995 and 1996, determined using the minimum value
model as prescribed by SFAS No. 123, were $0.01 and $0.20, respectively. The
fair value of each option is estimated on the date of grant using the minimum
value method with the following assumptions for grants during 1995 and 1996:
annual dividend yield of 0.0%; risk-free annual interest rates of 5.63% to
7.31% in 1995 and 5.28% to 6.55% in 1996; and an expected option term of four
years.
F-13
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Had the Company recorded compensation based on the estimated grant-date fair
value, using the minimum value model as prescribed by SFAS 123, for options
granted under the 1993 Plan, the Company's net income (loss) would have been
reduced to the pro forma amounts below for the years ended December 31, 1995
and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------- ----
(IN
THOUSANDS)
<S> <C> <C>
Net income (loss):
As reported................................................ $(2,576) $702
Pro forma.................................................. $(2,576) $661
</TABLE>
The pro forma effect on net income (loss) for 1995 and 1996 is not
representative of the pro forma effect on net income (loss) in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
NOTE 6--NOTES RECEIVABLE FROM STOCKHOLDERS:
In October and November 1995, the Company made full recourse loans totaling
$125,000 to certain employees pursuant to the Company's stock plan. The loans
are secured by 4,268,250 shares of the Company's Common Stock. The loans are
non-interest bearing and are due in October and November 2000 or earlier in
the event of the borrower's termination of employment with the Company.
In December 1996, the Company accepted a full recourse promissory note
totaling $100,000 from one of its officers upon the exercise of certain stock
options pursuant to the Company's 1993 Plan. The note bears interest at 5.75%
per annum and is due upon the earlier of three years from the date of the note
or six months following termination of employment with the Company.
NOTE 7--RESEARCH AND DEVELOPMENT CONTRACTS:
During the years ended December 31, 1994, 1995 and 1996, the Company
performed research and development under several contracts and recognized
$549,000, $280,000 and $863,000, respectively, as an offset against research
and development expenses. These contracts provide for the development of
technology in exchange for development funding.
NOTE 8--COMMITMENTS AND CONTINGENCIES:
The Company leases its facility under a noncancelable lease agreement which
expires in March 1999. Rent expense under noncancelable operating leases was
$48,000, $112,000 and $245,000 during the years ended December 31, 1994, 1995
and 1996, respectively.
In 1994, the Company entered into a master lease agreement with a leasing
company for the acquisition of property and equipment. The leasing company's
commitment to fund purchases of capital equipment under this agreement expired
on January 15, 1996. During 1995 and 1996, the Company leased $352,000 and
$54,000, respectively, of property and equipment under this agreement which
have been classified as capital leases. These capital leases terminate at
various dates through 1999. In connection with the master lease agreement the
Company issued a warrant to purchase 123,000 shares of Series A at $0.33 per
share. The estimated fair value of the warrant was not material on the date of
issuance. The warrant expires on the earlier of October 2003 or upon the
fourth anniversary of an initial public offering of the Company's Common
Stock. A total of 123,000 shares of Series A have been reserved for issuance
upon exercise of the warrant. The warrant had not been exercised at
December 31, 1996.
F-14
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In February 1996, the Company entered into a new master lease agreement with
a leasing company for the acquisition of property and equipment. The agreement
provides for up to $750,000 for equipment purchases made through June 30,
1997, all of which had been utilized as of December 31, 1996. Capital leases
under this agreement terminate at various dates through 1999. In connection
with the master lease agreement the Company issued a warrant to purchase
33,963 shares of Series B at $1.77 per share. The estimated fair value of the
warrant was not material on the date of issuance. The warrant expires in
January 2003. A total of 33,963 shares of Series B have been reserved for
issuance upon exercise of the warrant. The warrant had not been exercised at
December 31, 1996.
As of December 31, 1995 and 1996, property and equipment recorded under
capital leases, consisting primarily of computer equipment and purchased
software, totaled $492,000 and $1,372,000, respectively, with related
accumulated amortization of $112,000 and $517,000, respectively.
Future minimum lease payments under all noncancelable operating and capital
leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
Year ending December 31,
1997................................................ $ 525,000 $ 482,000
1998................................................ 512,000 401,000
1999................................................ 128,000 301,000
---------- ----------
Total minimum payments............................ $1,165,000 1,184,000
==========
Less amount representing interest..................... 160,000
----------
Present value of lease obligations................ 1,024,000
Less current portion.................................. 388,000
----------
Lease obligations, net of current portion......... $ 636,000
==========
</TABLE>
From time to time, third parties, including competitors of the Company, may
assert patent, copyright and other intellectual property rights to
technologies that are important to the Company. Management does not believe
that any such matters that are currently pending will have a material adverse
impact on the Company's financial position and results of operations.
NOTE 9--SUBSEQUENT EVENTS:
In July 1997, the Company effected a 3-for-2 stock split of its Common Stock
and Convertible Preferred Stock. The accompanying financial statements have
been retroactively adjusted to reflect this split.
Certain equity transactions
In August 1997, the Company's Board of Directors authorized, subject to
stockholder approval, the reincorporation of the Company in Delaware and the
associated exchange of one share of each class and series of stock of the
predecessor Company for one share of each corresponding class and series of
stock of the Delaware successor. The reincorporation will occur prior to
completion of the Offering. Effective upon the closing of the Offering, the
Company will be authorized to issue 100,000,000 shares of Common Stock and
10,000,000 shares of undesignated Preferred Stock, and the Board of Directors
will have the authority to issue the undesignated Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof.
F-15
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1997 Stock Plan
In August 1997, the Company's Board of Directors adopted, subject to
stockholder approval, the 1997 Stock Plan (the "1997 Plan"). The 1997 Plan is
intended to serve as the successor equity incentive program to the Company's
1993 Plan. The 1997 Plan provides for the grant of incentive stock options
("ISOs") to employees, officers and employee directors and nonstatutory stock
options ("NSOs") and stock purchase rights ("SPRs") to employees, directors
and consultants. ISOs granted to participants owning stock possessing more
than 10% of the voting power of all classes of stock must have an exercise
price at least equal to 110% of the fair market value on the date of grant and
are for periods not to exceed five years. All other options granted under the
plan must have an exercise price at least equal to the fair market value on
the date of grant and are for periods not to exceed ten years. Options granted
under the 1997 Plan generally shall vest at a rate of 25% on the first
anniversary of the date of grant and as to 1/48 of the underlying shares per
month thereafter.
Stock purchase rights are for periods and prices determined by the Board.
Shares purchased through the exercise of SPRs are subject to repurchase by the
Company at the original price paid by the purchaser in the event that the
purchaser's employment with the Company terminates. The repurchase right
lapses at a rate determined by the Board.
The following shares have been reserved for issuance under the 1997 plan:
(a) 1,500,000 shares of Common Stock, which includes shares which have been
reserved but unissued under the 1993 Plan; (b) any shares returned to the 1993
Plan as a result of termination of options under the 1993 Plan; and (c) shares
added to the 1997 Plan pursuant to automatic annual increases equal to the
lesser of (i) 1,000,000 shares, (ii) 5% of all then outstanding shares of
Common Stock of the Company, or (iii) a lesser amount determined by the Board.
Unless terminated sooner, the 1997 Plan will terminate automatically in August
2007.
1997 Director Option Plan
In August 1997, the Company's Board of Directors adopted, subject to
stockholder approval, the 1997 Director Option Plan (the "Director Plan"). The
Director Plan provides for the grant of nonstatutory stock options to non-
employee directors. Options granted under the Director Plan are for periods
not to exceed ten years and are granted at exercise prices not less than 100%
of the fair market value on the date of grant. The Director Plan provides that
each non-employee director will automatically be granted a nonstatutory option
to purchase 40,000 shares of Common Stock (the "First Option") on the date
which such person first becomes a non-employee director, unless immediately
prior to becoming a non-employee director, such person was an employee
director of the Company. In addition to the First Option, each non-employee
director will automatically be granted an option to purchase 10,000 shares (a
"Subsequent Option") on the date two days after the announcement of the
Company's fiscal year-end earnings of each year, if on such date he or she
will have served on the Board of Directors for at least the preceding six
months. Each First Option and each Subsequent Option will have a term of 10
years. Each First Option will vest as to 25% of the optioned stock one year
from the date of grant, and as to an additional 1/48 of the optioned stock
each full month thereafter, provided the person continues to serve as a
Director on such dates. Each Subsequent Option will vest as to 1/12 of the
optioned stock each full month after the date of grant. A total of 150,000
shares of Common Stock have been reserved for issuance under the Director
Plan, plus annual increases equal to (i) the number of shares of stock
underlying options granted under the the Director Plan in the immediately
preceding year, or (ii) a lesser amount determined by the Board.
F-16
<PAGE>
MMC NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1997 Employee Stock Purchase Plan
In August 1997, the Company's Board of Directors adopted, subject to
stockholder approval, the 1997 Employee Stock Purchase Plan (the "1997
Purchase Plan"). The 1997 Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code and contains 24-month offering
periods, with four six-month purchase periods included in each offering
period. The 1997 Purchase Plan permits employees to purchase Common Stock of
the Company through payroll deductions of up to 10% of the participant's
compensation. The price of stock purchased under the 1997 Purchase Plan shall
be 85% of the lower of the fair market value of the Common Stock at the
beginning of the offering period or at the end of the purchase period. A total
of 300,000 shares of Common Stock has been reserved for issuance under the
1997 Purchase Plan, plus shares added to the plan pursuant to automatic annual
increases equal to the lesser of (i) 400,000 shares, (ii) 0.8% of all then
outstanding shares of Common Stock of the Company, or (iii) a lesser amount
determined by the Board.
Bank line of credit
In April 1997, the Company entered into a revolving credit facility
agreement and lease line agreement with a bank. The revolving line of credit
provides for working capital advances of up to $5.0 million and bears interest
at the bank's prime rate. The lease line allows for advances of up to $3.0
million and bears interest at the bank's prime rate plus 0.5%. The lines
expire in April 1998. The lines are secured by the assets of the Company.
Among other provisions, the Company is required to maintain certain financial
covenants. In addition, payment of dividends is prohibited without the bank's
prior consent. At June 30, 1997, there were no amounts outstanding under
either facility.
F-17
<PAGE>
[MMC NETWORKS LOGO APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses payable by
the Registrant in connection with the sale of the Common Stock being
registered hereby, other than underwriting commissions and discounts.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ----------
<S> <C>
SEC Registration Fee........................................... $ 10,977
NASD Filing Fee................................................ 4,123
Nasdaq National Market Listing Fee............................. 50,000
Blue Sky Fees and Expenses..................................... 12,500
Printing and Engraving Expenses................................ 200,000
Legal Fees and Expenses........................................ 300,000
Accounting Fees and Expenses................................... 200,000
Transfer Agent and Registrar Fees.............................. 10,000
Miscellaneous.................................................. 212,400
----------
Total........................................................ $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 145 of the Delaware General Corporation Law (the
"DGCL"), the Registrant's Certificate of Incorporation provides that each
person who is or was or who had agreed to become a director or officer of the
Registrant or who had agreed at the request of the Registrant's Board of
Directors or an officer of the Registrant to serve as an employee or agent of
the Registrant or as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified by the Registrant to the full extent permitted by the DGCL or any
other applicable laws. Such Certificate of Incorporation also provides that
the Registrant may enter into one or more agreements with any person which
provides for indemnification greater or different than that provided in such
Certificate, and that no amendment or repeal of such Certificate shall apply
to or have any effect on the right to indemnification permitted or authorized
thereunder for or with respect to claims asserted before or after such
amendment or repeal arising from acts or omissions occurring in whole or in
part before the effective date of such amendment or repeal.
The Registrant's Bylaws provide that the Registrant shall indemnify to the
full extent authorized by law any person made or threatened to be made a party
to an action or a proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or intestate was or
is a director, officer or employee of the Registrant or any predecessor of the
Registrant or serves or served any other enterprise as a director, officer or
employee at the request of the Registrant or any predecessor of the
Registrant.
The Registrant has entered into indemnification agreements with its
directors and certain of its officers.
The Registrant intends to purchase and maintain insurance on behalf of any
person who is a director or officer against any loss arising from any claim
asserted against him and incurred by him in any such capacity, subject to
certain exclusions.
See also the undertakings set out in response to Item 17 herein.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since August 1, 1994, the Registrant has issued and sold the following
securities which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"):
1. On October 19, 1994, the Registrant issued 21,600 shares of its Common
Stock to a consultant as compensation for past services rendered.
2. On November 16, 1995, the Registrant issued and sold an aggregate of
4,086,780 shares of its Series B Preferred Stock, convertible into an equal
number of shares of Common Stock of the Registrant, for an aggregate
purchase price of $7,219,967, or approximately $1.77 per share, to a total
of 20 accredited investors.
3. On April 8, 1996, the Registrant issued 15,000 shares of its Common
Stock to a consultant as compensation for past services rendered.
4. On January 22, 1997, the Registrant issued 15,000 shares of its Common
Stock to a consultant as compensation for past services rendered.
5. On October 31, 1994, the Registrant issued a Warrant to Purchase
Shares of Series A Preferred Stock (the "Dominion Warrant") to Dominion
Ventures, Inc. ("Dominion") pursuant to which Dominion has the right to
purchase up to an aggregate of 123,000 shares of the Registrant's Series A
Preferred Stock for a purchase price of approximately $.33 per share. The
Dominion Warrant was issued in connection with the execution and delivery
of a Master Lease Agreement between the Registrant and Dominion pursuant to
which the Registrant obtained an equipment line of credit from Dominion.
6. On February 23, 1996, the Registrant issued a Preferred Stock Purchase
Warrant (the "Lighthouse Capital Warrant") to Lighthouse Capital Partners,
L.P. ("Lighthouse Capital") pursuant to which Lighthouse Capital has the
right to purchase up to an aggregate of 33,963 shares of the Registrant's
Series B Preferred Stock for a purchase price of approximately $1.77 per
share. The Lighthouse Capital Warrant was issued in connection with the
execution and delivery of a Master Equipment Lease Agreement between the
Registrant and Lighthouse Capital pursuant to which the Registrant obtained
an equipment line of credit from Lighthouse Capital.
7. From August 1, 1994 to June 30, 1997, the Registrant issued to
employees, officers, directors and consultants of the Registrant options to
purchase an aggregate of 9,169,500 shares of Common Stock of the
Registrant, at exercise prices ranging from $.03 per share to $5.33 per
share, pursuant to the Registrant's 1993 Stock Plan.
8. From August 1, 1994 to June 30, 1997, the Registrant issued an
aggregate of 5,334,900 shares of Common Stock of the Registrant upon the
exercise of options at exercise prices ranging from $.03 per share to $5.33
per share.
The sales of securities set forth in paragraphs 1-6 above were deemed to be
exempt from the registration requirements of the Securities Act in reliance on
Section 4(2) thereof, or Regulation D promulgated thereunder, as transactions
by an issuer not involving a public offering. The sale of securities set forth
in paragraph 8 above was deemed to be exempt from the registration
requirements of the Securities Act in reliance on Rule 701 promulgated under
Section 3(b) of the Securities Act as transactions by an issuer pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under such Rule 701. The granting of stock options described in paragraph 7
above did not require registration under the Securities Act, or an exemption
therefrom, insofar as such grants did not involve a "sale" of securities as
such term is used in Section 2(3) of the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant (to be filed immediately after the closing of this
offering).
3.3 Bylaws of the Registrant.
4.1 Specimen Common Stock certificate of the Registrant (in standard
printer form, not provided).
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1 Form of Indemnification Agreement for directors and executive
officers of the Company.
10.2 1993 Stock Option Plan.
10.3 1997 Employee Stock Purchase Plan.
10.4 1997 Stock Plan.
10.5 1997 Director Option Plan.
10.6 Series A Preferred Stock Purchase Agreement dated July 12, 1994, by
and among the Registrant and the Purchasers named therein.
10.7 Series B Preferred Stock Purchase Agreement dated November 16, 1995,
by and among the Registrant and the Purchasers named therein.
10.8 First Amended and Restated Shareholder Rights Agreement dated
November 16, 1995 by and among the Registrant and the Shareholders
named therein.
10.9 Sublease, dated June 14, 1996, by and between Olivetti Advanced
Technology Center, Inc. and the Registrant, and the Lease Agreement,
dated December 22, 1994, by and between Herman Christensen, Jr.,
Raymond Christensen and Olivetti Advanced Technology Center, Inc.
10.10+ Development, License and Purchase Agreement, effective as of
December 19, 1994 (the "Cisco Agreement"), by and between Cisco
Systems, Inc. and the Registrant, as amended by the First Amendment
to the Cisco Agreement, effective as of January 30, 1996, and
Amendment Number 2 to the Cisco Agreement, dated July 7, 1997.
10.11 Supplier Escrow Agreement, dated as of April 21, 1997, by and
between the Registrant, Hitachi Computer Products (America), Inc.
and SourceFile.
11.1 Statement of Computation of Net Income Per Share.
23.1 Consent of independent accountants.
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (See Exhibit 5.1).
23.3 Consent of Dergosits & Noah, LLP.
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- --------
* Documents to be filed by amendment.
+ Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
b. FINANCIAL STATEMENT SCHEDULES.
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to 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.
The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement 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.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing of this offering, as specified in the Underwriting Agreement,
certificates in such denomination and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, State of
California, on the 20th day of August, 1997.
MMC Networks, Inc.
/s/ Prabhat K. Dubey
By: _________________________________
PRABHAT K. DUBEY,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Prabhat K. Dubey and William R. Walker,
and each of them acting individually, as his true and lawful attorneys-in-fact
and agents, with full power of each to act alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought), and file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, with full power of each to act alone, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or his or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
/s/ Prabhat K. Dubey President, Chief August 20, 1997
- ------------------------------------- Executive Officer
PRABHAT K. DUBEY and Director
(Principal
Executive Officer)
/s/ William R. Walker Vice President, August 20, 1997
- ------------------------------------- Finance, Chief
WILLIAM R. WALKER Financial Officer
and Secretary
(Principal
Financial and
Accounting Officer)
/s/ Amos Wilnai Chairman August 20, 1997
- -------------------------------------
AMOS WILNAI
/s/ John G. Adler Director August 20, 1997
- -------------------------------------
JOHN G. ADLER
II-5
<PAGE>
SIGNATURE TITLE DATE
/s/ Irwin Federman Director August 20, 1997
- -------------------------------------
IRWIN FEDERMAN
/s/ Andrew S. Rappaport Director August 20, 1997
- -------------------------------------
ANDREW S. RAPPAPORT
/s/ Geoffrey Y. Yang Director August 20, 1997
- -------------------------------------
GEOFFREY Y. YANG
II-6
<PAGE>
SCHEDULE II
MMC NETWORKS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING STATEMENT OF FROM AT END
OF PERIOD OPERATIONS ALLOWANCE OF PERIOD
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 1994...... $ -- $ -- $ -- $ --
==== ==== ==== ====
Year ended December 31, 1995...... $ -- $ 45 $ -- $ 45
==== ==== ==== ====
Year ended December 31, 1996...... $ 45 $ 88 $ -- $133
==== ==== ==== ====
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 Form of Amended and Restated Certificate of Incorporation of the
Registrant (to be filed immediately after the closing of this
offering).
3.3 Bylaws of the Registrant.
4.1 Specimen Common Stock certificate of the Registrant (in standard
printer form, not provided).
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of Indemnification Agreement for directors and executive officers
of the Company.
10.2 1993 Stock Option Plan.
10.3 1997 Employee Stock Purchase Plan.
10.4 1997 Stock Plan.
10.5 1997 Director Option Plan.
10.6 Series A Preferred Stock Purchase Agreement dated July 12, 1994, by
and among the Registrant and the Purchasers named therein.
10.7 Series B Preferred Stock Purchase Agreement dated November 16, 1995,
by and among the Registrant and the Purchasers named therein.
10.8 First Amended and Restated Shareholder Rights Agreement dated November
16, 1995 by and among the Registrant and the Shareholders named
therein.
10.9 Sublease, dated June 14, 1996, by and between Olivetti Advanced
Technology Center, Inc. and the Registrant, and the Lease Agreement,
dated December 22, 1994, by and between Herman Christensen, Jr.,
Raymond Christensen and Olivetti Advanced Technology Center, Inc.
10.10+ Development, License and Purchase Agreement, effective as of December
19, 1994 (the "Cisco Agreement"), by and between Cisco Systems, Inc.
and the Registrant, as amended by the First Amendment to the Cisco
Agreement, effective as of January 30, 1996, and Amendment Number 2 to
the Cisco Agreement, dated July 7, 1997.
10.11 Supplier Escrow Agreement, dated as of April 21, 1997, by and between
the Registrant, Hitachi Computer Products (America), Inc. and
SourceFile.
11.1 Statement of Computation of Net Income Per Share.
23.1 Consent of independent accountants.
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(See Exhibit 5.1).
23.3 Consent of Dergosits & Noah, LLP.
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule (EDGAR filed version only).
</TABLE>
- --------
* Documents to be filed by amendment.
+ Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.46.
<PAGE>
EXHIBIT 1.1
Shares
------------------------
MMC NETWORKS, INC.
COMMON STOCK, PAR VALUE $.001 PER SHARE
UNDERWRITING AGREEMENT
, 1997
- ---------------------
<PAGE>
_____________, 1997
Morgan Stanley & Co. Incorporated
Deutsche Morgan Grenfell Inc.
Wessels, Arnold & Henderson, L.L.C.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
MMC Networks, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters"), an aggregate of ____________________ shares of the Common
Stock, par value $.001 per share of the Company (the "Firm Shares"). The
Company also proposes to issue and sell to the several Underwriters not more
than an additional ____________________ shares of its Common Stock, par value
$.001 per share (the "Additional Shares") if and to the extent that you, as
Managers of the Offering, shall have determined to exercise, on behalf of the
Underwriters, the right to purchase such shares of common stock granted to the
Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares". The shares of Common
Stock, par value $.001 per share, of the Company to be outstanding after giving
effect to the sales contemplated hereby are hereinafter referred to as the
"Common Stock".
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement") then any reference herein to the
term "Registration Statement" shall be deemed to include such Rule 462
Registration Statement.
As part of the offering contemplated by this Agreement, Morgan Stanley &
Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the Shares set
forth opposite its name on Schedule I to this Agreement, up to ____________
shares, for sale to the Company's employees, officers, and directors and other
parties associated with the Company (collectively, "Participants"), as set forth
in the Prospectus under the heading "Underwriting" (the "Directed Share
Program"). The Shares to be sold by Morgan Stanley pursuant to the Directed
Share Program (the "Directed Shares") will be sold by Morgan Stanley pursuant to
this Agreement at the public offering price. Any Directed Shares not orally
confirmed for purchase by any Participants by the end of the first business day
after the date on which this Agreement is executed will be offered to the public
by Morgan Stanley as set forth in the Prospectus.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
---------------------------------------------
represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by
the Commission.
(b) (i)The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, (ii)the Registration Statement and the
Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and
(iii)the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph 1(j) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company; and the Company has no
subsidiary or subsidiaries and does not control, directly or indirectly,
any corporation, partnership, joint venture, association or other
business organization.
(d) This Agreement has been duly authorized, executed and delivered
by the Company.
(e) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(f) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid
and non-assessable.
(g) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
-2-
<PAGE>
(h) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company that is material to the Company, or
any judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company, and no consent, approval,
authorization or order of, or qualification with, any governmental body
or agency is required for the performance by the Company of its
obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states in connection with the
offer and sale of the Shares.
(i) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company, from that set forth in the Prospectus
(exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement).
(j) There are no legal or governmental proceedings pending or
threatened to which the Company is a party or to which any of the
properties of the Company is subject that are required to be described
in the Registration Statement or the Prospectus and are not so described
or any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that are not
described or filed as required.
(k) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(l) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(m) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) has received all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct its
business and (iii) is in compliance with all terms and conditions of any
such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on the Company.
-3-
<PAGE>
(n) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to
third parties) which would, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(o) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement.
(p) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company
has not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased any of
its outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock; and (3) there
has not been any material change in the capital stock, short-term debt
or long-term debt of the Company, except in each case as described in or
contemplated by the Prospectus.
(q) The Company has good and marketable title in fee simple to all
real property and good and marketable title to all personal property
owned by it which is material to the business of the Company, in each
case free and clear of all liens, encumbrances and defects except such
as are described in the Prospectus or such as do not materially affect
the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company; and any real
property and buildings held under lease by the Company is held by it
under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company, in each case
except as described in or contemplated by the Prospectus.
(r) The Company owns or possesses, or can acquire on reasonable
terms, all material patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names currently
employed by it in connection with the business now operated by it, and
neither the Company nor any of its employees has received any notice of
infringement of or conflict with (and knows of no such infringement or
conflict) asserted rights of others with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in any material adverse change
in the condition, financial or otherwise, or in the earnings, business
or operations of the Company; and the Company has received an opinion
from special patent counsel to the Company as to the invalidity of
certain third party patents or the non-infringement by the Company's
products of certain third party patents.
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<PAGE>
(s) No material labor dispute with the employees of the Company
exists, except as described in or contemplated by the Prospectus, or, to
the knowledge of the Company, is imminent; and the Company is not aware
of any existing, threatened or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers or
contractors that could result in any material adverse change in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company.
(t) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which they are engaged; the
Company has not been refused any insurance coverage sought or applied
for; and the Company does not have any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would not
materially and adversely affect the condition, financial or otherwise,
or the earnings, business or operations of the Company, except as
described in or contemplated by the Prospectus.
(u) The Company possess all certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct its business, and the Company has not
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a material adverse change in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company, except as described in or contemplated by the
Prospectus.
(v) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (1) transactions are
executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(3) access to assets is permitted only in accordance with management's
general or specific authorization; and (4) the recorded accountability
for assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
Furthermore, the Company represents and warrants to Morgan Stanley that
(i) the Registration Statement, the Prospectus and any preliminary prospectus
comply, and any further amendments or supplements thereto will comply, with any
applicable laws or regulations of foreign jurisdictions in which the Prospectus
or any preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and that (ii) no
authorization, approval, consent, license, order, registration or qualification
of or with any government, governmental instrumentality or court, other than
such as have been obtained, is necessary under the securities laws and
regulations of foreign jurisdictions in which the Directed Shares are offered
outside the United States.
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2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell
-------------------------------
to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company at $___________ a share (the "Purchase Price") the number of Firm Shares
set forth in Schedule I hereto opposite the name of such Underwriter.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to
____________________ Additional Shares at the Purchase Price. If you, on behalf
of the Underwriters, elect to exercise such option, you shall so notify the
Company in writing not later than 30 days after the date of this Agreement,
which notice shall specify the number of Additional Shares to be purchased by
the Underwriters and the date upon which such shares are to be purchased. Such
date may be the same as the Closing Date (as defined below) but not earlier than
the Closing Date nor later than ten business days after the date of such notice.
Additional Shares may be purchased as provided in Section 4 hereof solely for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. If any Additional Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of Firm Shares set forth in Schedule I
hereto opposite the name of such Underwriter bears to the total number of Firm
Shares.
The Company hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending (180) days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder or (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing or (C) the issuance by the Company of
Shares of Common Stock under the employee benefit plans described in the
Prospectus.
3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the
------------------------
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$___________ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of
$___________ a share under the Public Offering Price, and that any Underwriter
may allow, and such dealers may reallow, a concession, not in excess of
$___________ a share, to any Underwriter or to certain other dealers.
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4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made to
--------------------
the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 A.M., New York City time, on ____________, 19___, or at
such other time on the same or such other date, not later than ____________,
19___, as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "Closing Date".
Payment for any Additional Shares shall be made to the Company in Federal
or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 A.M., New York City time, on the date specified in the notice described in
Section 2 or at such other time on the same or on such other date, in any event
not later than ____________, 19___, as shall be designated in writing by you.
The time and date of such payment are hereinafter referred to as the "Option
Closing Date".
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and such denominations as you shall
request in writing not later than one full business day prior to the Closing
Date or the Option Closing Date, as the case may be. The Certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the
-------------------------------------------
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 5:00 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading
or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations of
the Company, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement) that, in your judgment, is material and
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<PAGE>
adverse and that makes it, in your judgment, impracticable to market
the Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in clause (a) above and to the
effect that the representations and warranties of the Company contained
in this Agreement are true and correct as of the Closing Date and that
the Company has complied with all of the agreements and satisfied all of
the conditions on its part to be performed or satisfied hereunder on or
before the Closing Date.
The officer signing and delivering such certificate may rely upon the best
of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
outside counsel for the Company, dated the Closing Date, to the effect
that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing or property
requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
and the Company has no subsidiary or subsidiaries and does not
control, directly or indirectly, any corporation, partnership, joint
venture, association or other business organization.
(ii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
(iii) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(iv) the Shares have been duly authorized and, when issued
and delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar rights;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not
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<PAGE>
contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or, to the best of such
counsel's knowledge, any agreement or other instrument binding upon
the Company that is material to the Company or, to the best of such
counsel's knowledge, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the
Company, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale
of the Shares;
(vii) the statements (A) in the Prospectus under the captions
"____________________", "____________________" "Description of
Capital Stock" and "Underwriters" and (B) in the Registration
Statement in Items 14 and 15, in each case insofar as such statements
constitute summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
(viii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which the
Company is a party or to which any of the properties of the Company
is subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are required
to be described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement that are not
described or filed as required;
(ix) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of
1940, as amended; and
(x) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules and other financial and statistical data included therein
as to which such counsel need not express any opinion) comply as to
form in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder,
(B) has no reason to believe that (except for financial statements
and schedules and other financial and statistical data as to which
such counsel need not express any belief) the Registration Statement
and the prospectus included therein at the time the Registration
Statement became effective contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (C) has no reason to believe that (except for
financial statements and schedules and other financial and
statistical data as to which such counsel need not express any
belief) the
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<PAGE>
Prospectus contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Gray Cary Ware & Freidenrich, A Professional Corporation,
counsel for the Underwriters, dated the Closing Date, covering the
matters referred to in subparagraphs (iv), (v), (vii) (but only as to
the statements in the Prospectus under "Description of Capital Stock"
and "Underwriters") and (x) of paragraph (c) above.
With respect to subparagraph (x) of paragraph (c) above, Wilson
Sonsini Goodrich & Rosati, Professional Corporation and Gray Cary Ware &
Freidenrich, A Professional Corporation, may state that their opinion
and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are
without independent check or verification, except as specified.
The opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, described in paragraphs (c) above, shall be rendered to the
Underwriters at the request of the Company and shall so state therein.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing
Date, as the case may be, in form and substance satisfactory to the
Underwriters, from Price Waterhouse, L.L.P., independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a "cut-
--------
off date" not earlier than the date hereof.
(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain stockholders, officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
(g) The Underwriters shall have received on the Closing Date an
opinion of special patent counsel for the Company, dated the Closing
Date, with respect to certain patent law matters. Such opinion shall be
in form and substance satisfactory to the Underwriters.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the delivery to you on the Option Closing Date of such
documents as you may reasonably request with respect to the good standing of the
Company, the due authorization and issuance of the Additional Shares and other
matters related to the issuance of the Additional Shares.
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6. COVENANTS OF THE COMPANY. In further consideration of the
------------------------
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four (4) signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 5:00 P.M. New York City time on the business
day next succeeding the date of this Agreement and during the period
mentioned in paragraph (c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement
to which you reasonably object, and to file with the Commission within
the applicable period specified in Rule 424(b) under the Securities Act
any prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with
sales by an Underwriter or dealer, any event shall occur or condition
exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with
applicable law forthwith to prepare, file with the Commission and
furnish, at is own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which
Shares may have been sold by you on behalf of the Underwriters and to
any other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the
twelve-month period ending ____________, 19___ that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) that in connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from
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sale, transfer, assignment, pledge or hypothecation for a period of
three months following the date of the effectiveness of the Registration
Statement. Morgan Stanley will notify the Company as to which
Participants will need to be so restricted. The Company will direct the
transfer agent to place stop transfer restrictions upon such securities
for such period of time.
(g) to pay all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp
duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program.
(h) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, the Company agrees to
pay or cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees, disbursements
and expenses of the Company's counsel and the Company's accountants in
connection with the registration and delivery of the Shares under the
Securities Act and all other fees or expenses in connection with the
preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and
dealers, in the quantities hereinabove specified, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon,
(iii) the cost of printing or producing any Blue Sky or Legal Investment
memorandum in connection with the offer and sale of the Shares under
state securities laws as provided in Section 6(d) hereof, including
filing fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection
with the Blue Sky or Legal Investment memorandum, (iv) all filing fees
and disbursements of counsel to the Underwriters incurred in connection
with the review and qualification of the offering of the Shares by the
National Association of Securities Dealers, Inc., (v) all fees and
expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all
costs and expenses incident to listing the Shares on the NASDAQ National
Market, (vi) the cost of printing certificates representing the Shares,
(vii) the costs and charges of any transfer agent, registrar or
depositary, (viii) the costs and expenses of the Company relating to
investor presentations on any "road show" undertaken in connection with
the marketing of the offering of the Shares, including, without
limitation, expenses associated with the production of road show slides
and graphics, fees and expenses of any consultants engaged in connection
with the road show presentations with the prior approval of the Company,
travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and the cost of any aircraft chartered
in connection with the road show, and (ix) all other costs and expenses
incident to the performance of the obligations of the Company hereunder
for which provision is not otherwise made in this Section. It is
understood, however, that except as provided in this Section, Section 6
entitled "Indemnity and Contribution", and the last paragraph of
Section 7 below, the Underwriters will pay all of their costs and
expenses, including fees
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and disbursements of their counsel, stock transfer taxes payable on
resale of any of the Shares by them and any advertising expenses
connected with any offers they make.
(i) The Company has an agreement with each officer, director and
stockholder of the Company, pursuant to which each such person or entity
agreed not to offer, sell, sell short or otherwise dispose of any shares
of Common Stock or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Stock or
derivative of Common Stock owned by such person (or as to which such
person has the right to direct the disposition of) for a period of 180
days after the date of this Agreement, directly or indirectly ("Standoff
Agreements"). The Company will not release any officer, director or
stockholder from their obligations under the Standoff Agreements except
with the prior written consent of Morgan Stanley.
Furthermore, the Company covenants with Morgan Stanley that the Company
will comply with all applicable securities and other applicable laws, rules and
regulations in each foreign jurisdiction in which the Directed Shares are
offered in connection with the Directed Share Program.
7. INDEMNITY AND CONTRIBUTION.
--------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of either Section 15 of the Securities Act or Section 20 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action
or claim) caused by any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto), or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, the directors of the Company, the
officers of the Company who sign the Registration Statement and each
person, if any, who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act from
and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably
incurred in connection with defending or investigating any such action
or claim) caused by any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as
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amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only
with reference to information relating to such Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use
in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(c) The Company agrees to indemnify and hold harmless Morgan Stanley
and each person, if any, who controls Morgan Stanley within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange
Act ("Morgan Stanley Entities"), from and against any and all losses,
claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred in connection with defending
or investigating any such action or claim) (i) caused by any untrue
statement or alleged untrue statement of a material fact contained in
the prospectus wrapper material prepared by or with the consent of the
Company for distribution in foreign jurisdictions in connection with the
Directed Share Program attached to the Prospectus or any preliminary
prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statement therein, when considered in conjunction, with the
Prospectus or any applicable preliminary prospectus, not misleading;
(ii) caused by the failure of any Participant to pay for and accept
delivery of the Shares which, immediately following the effectiveness of
the Registration Statement, were subject to a properly confirmed
agreement to purchase; or (iii) related to, arising out of, or in
connection with the Directed Share Program, provided that, the Company
shall not be responsible under this subparagraph (c)(3) for any losses,
claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or
gross negligence of Morgan Stanley Entities.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to paragraph (a), (b) or (c) of
this Section 7, such person (the "indemnified party") shall promptly
notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party
and any others the indemnifying party may designate in such proceeding
and shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for (i) the fees and
expenses of more than one separate firm (in addition to any local
counsel) for all Underwriters and all persons, if any, who control any
Underwriter within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act, and (ii) the fees and expenses of
more than one separate firm (in addition to any local
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counsel) for the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company
within the meaning of either such Section, and that all such fees and
expenses shall be reimbursed as they are incurred. In the case of any
such separate firm for the Underwriters and such control persons of any
Underwriters, such firm shall be designated in writing by Morgan
Stanley. Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 7(c) hereof in respect of
such action or proceeding, then in addition to such separate firm for
the indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one separate firm (in
addition to any local counsel) for Morgan Stanley for the defense of any
losses, claims, damages and liabilities arising out of the Directed
Share Program, and all persons, if any, who control Morgan Stanley
within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but
if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at
any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of
any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying
party shall not have reimbursed the indemnified party in accordance with
such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party,
effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject
matter of such proceeding.
(e) To the extent the indemnification provided for in paragraph (a),
(b) or (c) of this Section 7 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party under such paragraph,
in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received
by the indemnifying party or parties on the one hand and the indemnified
party or parties on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the
relative fault of the indemnifying party or parties on the one hand and
of the indemnified party or parties on the other hand in connection with
the statements or
-15-
<PAGE>
omissions that resulted in such losses, claims, damages or liabilities,
as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on
the other hand in connection with the offering of the Shares shall be
deemed to be in the same respective proportions as the net proceeds from
the offering of the Shares (before deducting expenses) received by the
Company and the total underwriting discounts and commissions received by
the Underwriters, in each case as set forth in the table on the cover of
the Prospectus, bear to the aggregate Public Offering Price of the
Shares. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information, supplied by the Company or by the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the respective
number of Shares they have purchased hereunder, and not joint.
(f) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined
by pro rata allocation (even if the Underwriters were treated as one
--- ----
entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in
paragraph (d) of this Section 7. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be
deemed to include, subject to the limitations set forth above, any legal
or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which
the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any
damages that such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not
exclusive and shall not limit any rights or remedies which may otherwise
be available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of
the Company contained in this Agreement shall remain operative and in
full force and effect regardless of (i) any termination of this
Agreement, (ii) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter or the Company,
its officers or directors or any person controlling the Company and
(iii) acceptance of and payment for any of the Shares.
8. TERMINATION. This Agreement shall be subject to termination by
-----------
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior
-16-
<PAGE>
to the Closing Date (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the National Association of Securities
Dealers, Inc., The Chicago Board of Options Exchange, the Chicago Mercantile
Exchange or the Chicago Board of Trade, (ii) trading of any securities of the
Company shall have been suspended on any exchange or in any over-the-counter
market, (iii) a general moratorium on commercial banking activities in New York
shall have been declared by either Federal or New York State authorities or
(iv) there shall have occurred any outbreak or escalation of hostilities or any
change in financial markets or any calamity or crisis that, in your judgment, is
material and adverse and (b) in the case of any of the events specified in
clauses (a)(i) through (iv), such event, singly or together with any other such
event, makes it, in your judgment, impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus.
9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become
--------------------------------------
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
--------
Shares that any Underwriter has greed to purchase pursuant to this Agreement be
increased pursuant to this Section 9 by an amount in excess of one-ninth of such
number of Shares without the written consent of such Underwriter. If, on the
Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase
Firm Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Firm Shares to
be purchased, and arrangements satisfactory to you and the Company for the
purchase of such Firm Shares are not made within 36 hours after such default,
this Agreement shall terminate without liability on the part of any non-
defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter
or Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to
(i) terminate their obligation hereunder to purchase Additional Shares or
(ii) purchase not less than the number of Additional Shares that such non-
defaulting Underwriters would have been obligated to purchase in the absence of
such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
-17-
<PAGE>
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
10. COUNTERPARTS. This Agreement may be signed in two or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. APPLICABLE LAW. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of New York.
12. HEADINGS. The headings of the sections of this Agreement have been
--------
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
MMC NETWORKS, INC.
By:
---------------------------------
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Deutsche Morgan Grenfell Inc.
Wessels, Arnold & Henderson, L.L.C.
Acting severally on behalf of themselves
and the several Underwriters named herein.
By Morgan Stanley & Co. Incorporated
By:
---------------------------------
Name:
Title:
-18-
<PAGE>
SCHEDULE I
Underwriter Number of Firm Shares To Be Purchased
- ----------------------------------- -----------------------------------------
Morgan Stanley & Co. Incorporated
Deutsche Morgan Grenfell Inc.
Wessels, Arnold & Henderson, L.L.C.
---------------------------------------
Total.................
=======================================
-19-
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
MMC NETWORKS, INC.
FIRST
The name of this corporation is "MMC Networks, Inc." (the "Corporation")
SECOND
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
THIRD
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, County of New Castle, Delaware 19805. The name
of its registered agent at such address is Corporation Service Company.
FOURTH
A. The total number of shares which the Corporation shall have authority
to issue is One Hundered Thirteen Million, Four Hundred and Ninety Eight
Thousand, and Seven Hundred and Thirty Seven (113,498,737) shares of capital
stock.
B. Of such authorized shares, One Hundred Million (100,000,000) shares
shall be designated "Common Stock," par value $0.001 per share.
C. Of such authorized shares, Thirteen Million, Four Hundred and Ninety
Eight Thousand, and Seven Hundred and Thirty Seven (13,498,737) shares shall be
designated "Preferred Stock," par value $0.001 per share. The Preferred Stock
shall consist of two series designated Series A Preferred Stock (the "Series A
Preferred"), consisting of 9,378,000 shares, and Series B Preferred Stock (the
"Series B Preferred"), consisting of 4,120,737 shares.
D. A statement of the rights, preferences, privileges and restrictions
granted to or imposed on the Preferred Stock and the holders thereof is as
follows:
1. Dividends. The holders of the outstanding Preferred Stock shall
---------
be entitled to receive, out of any funds legally available therefor, dividends
at the rate of $0.03 per share of Series A Preferred and $0.159 per share of
Series B Preferred, per annum, payable in preference and priority to
<PAGE>
any payment of any dividend on Common Stock when and as declared by the Board of
Directors. After payment of such dividends, any additional dividends declared
shall be distributed among all holders of Series A Preferred, Series B Preferred
and Common Stock in proportion to the number of shares of Common Stock which
would be held by each such holder if all shares of Series A Preferred and Series
B Preferred were converted into Common Stock at the then effective Conversion
Price (as defined in paragraph 3(a) below). The right to such dividends on the
Preferred Stock shall not be cumulative, and no right shall accrue to holders of
Preferred Stock by reason of the fact that dividends on such shares are not
declared or paid in any prior year.
In the event that the Corporation shall have declared but unpaid
dividends outstanding immediately prior to, and in the event of, a conversion of
Preferred Stock (as provided in paragraph 3 hereof), the Corporation shall, at
the option of each holder, pay in cash to each holder of Series A Preferred and
Series B Preferred subject to conversion the full amount of any such dividends
or allow such dividends to be converted into Common Stock in accordance with,
and pursuant to the terms specified in, paragraph 3 hereof.
2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of the Series A
Preferred and Series B Preferred shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership
thereof, the sum of $0.333 and $1.767, respectively (adjusted for any
subdivisions, combinations, consolidations or stock distributions or dividends
with respect to such shares effected after the date this Certificate of
Incorporation was filed with the Secretary of State), and, in addition, an
amount equal to all declared but unpaid dividends on the Preferred Stock (the
"Liquidation Preference"). If, upon occurrence of such event the assets and
funds thus distributed among the holders of the Preferred Stock shall be
insufficient to permit the payment to such holders of the full preferential
amount, then the entire assets and funds of the Corporation legally available
for distribution shall be distributed among the holders of the Preferred Stock
in proportion to the full liquidation preferences to which such holder is
entitled.
After payment has been made to the holders of the Preferred Stock
of the Liquidation Preference, the holders of the Preferred Stock and the Common
Stock shall be entitled to receive the remaining assets of the Corporation in
proportion to the number of shares of Common Stock which would be held by each
such holder if all shares of Preferred Stock then held by each such holder were
converted into Common Stock at the then effective Conversion Prices (as defined
in paragraph 3(a) below) (such proportion being defined herein as "equally on an
as-converted basis") until such time as the holders of the Series A Preferred
have received an aggregate of $1.167 (including amounts previously paid as the
Liquidation Preference of the Series A Preferred pursuant to the preceding
paragraph) for each share of Series A Preferred then held by them. If the assets
and funds thus distributed among the holders of the Preferred Stock and Common
Stock shall be insufficient to permit the payment to the holders of the Series A
Preferred of an aggregate of $1.167 then the remaining assets and funds of the
Corporation legally available for distribution (after payment of the Liquidation
2
<PAGE>
Preferences pursuant to the preceding paragraph) shall be distributed among the
holders of the Preferred Stock and Common Stock equally on an as-converted
basis.
Thereafter, the holders of the Common Stock and Series B
Preferred shall be entitled to receive the remaining assets of the Corporation
equally on an as-converted basis until such time as the holders of the Series B
Preferred have received an aggregate of $3.333 (including amounts previously
paid as the Liquidation Preference of the Series B Preferred pursuant to the
preceding paragraph) for each share of Series B Preferred then held by them. If
the assets and funds thus distributed among the holders of the Series B
Preferred and Common Stock shall be insufficient to permit the payment to the
holders of the Series B Preferred of an aggregate of $3.333 for each share of
Series B Preferred held by them, then the remaining assets and funds of the
Corporation legally available for distribution (after payment of the amounts
specified in the preceding two paragraphs) shall be distributed among the
holders of the Series B Preferred and Common Stock equally on an as-converted
basis.
Thereafter, the remaining assets of the Corporation shall be
distributed to the holders of the Common Stock pro rata based upon the number of
shares held by each such holder.
(b) For purposes of this paragraph 2, a liquidation, dissolution or
winding up of the Corporation shall be deemed to be occasioned by, and to
include, (i) the Corporation's sale of all or substantially all of its assets or
(ii) any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) which will result in
the holders of the outstanding voting equity securities of the Corporation
immediately prior to such transaction holding less than fifty percent (50%) of
the voting equity securities of the surviving entity immediately following such
transaction.
(c) For purposes of this paragraph 2, the amount of assets and
surplus funds of this Corporation available for distribution upon a liquidation,
dissolution or winding up of this Corporation shall be determined as follows:
(i) insofar as it consists of cash, be computed at the aggregate
amount of cash held by this Corporation at the time of the liquidation,
dissolution or winding up, excluding amounts paid or payable for accrued
interest or accrued dividends; and
(ii) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of the liquidation, dissolution
or winding up, as determined in good faith by the Board.
3. Conversion. The holders of the Preferred Stock shall have conversion
----------
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred and Series B
----------------
Preferred shall be convertible, at the option of the holder thereof, at any time
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing $0.333, in the case of the Series
3
<PAGE>
A Preferred, or $1.767 in the case of the Series B Preferred, by the Conversion
Price, determined as hereinafter provided, in effect at the time of conversion.
The price at which shares of Common Stock shall be deliverable upon conversion
(individually the "Series A Conversion Price" and the "Series B Conversion
Price," and collectively the "Conversion Prices") shall initially be $0.333 per
share of Common Stock for conversions of Series A Preferred and $1.767 per share
of Common Stock for conversions of Series B Preferred.
Each share of Preferred Stock shall automatically be converted
into shares of Common Stock at the then effective Conversion Price (i) in the
event of a firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock for the account of the Corporation to the
public at an aggregate offering price to the public of not less than $7,500,000,
or (ii) at the election of the holders of seventy-five percent (75%) of the
outstanding shares of the Preferred Stock. In the event of an offering referred
to in subsection (i) above, the person(s) entitled to receive the Common Stock
issuable upon such conversion of Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
underwritten public offering.
(b) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of Preferred Stock. In lieu of any fractional
share to which a holder would otherwise be entitled, the Corporation shall pay
cash equal to such fraction multiplied by the fair market value of the Common
Stock as determined by the Board of Directors. Before any holder of Preferred
Stock shall be entitled to convert the same into full shares of Common Stock, he
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the Preferred Stock, and
shall give written notice to the Corporation at such office that he elects to
convert the same. Such notice shall also state whether the holder elects,
pursuant to paragraph 1 hereof, to receive declared but unpaid dividends on the
Preferred Stock proposed to be converted in cash, or to convert such dividends
into shares of Common Stock at their fair market value as determined by the
Board of Directors. The Corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such holder of Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which he
shall be entitled as aforesaid and a check payable to the holder in the amount
of any cash amounts payable as the result of a conversion into a fractional
share of Common Stock, and any declared but unpaid dividends on the converted
Preferred Stock which the holder elected to receive in cash. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. If the conversion is in
connection with an underwritten public offering of securities registered
pursuant to the Securities Act of 1933, the conversion shall be conditioned upon
the closing of such public offering, in which event the person(s) entitled to
receive the Common Stock issuable upon such conversion of the Preferred Stock
shall not be deemed to have converted such Preferred Stock until immediately
prior to such closing.
4
<PAGE>
(c) Adjustments to Conversion Price for Diluting Issues.
---------------------------------------------------
(i) Special Definitions. For purposes of this paragraph 3, the
-------------------
following definitions shall apply.
(A) "Options" shall mean rights, options or warrants to
-------
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(B) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares (other than Common Stock, Preferred Stock and warrants to
purchase Preferred Stock) or other securities convertible into or exchangeable
for Common Stock.
(C) "Series A Original Issue Date" shall mean the date on
----------------------------
which a share of Series A Preferred was first issued.
(D) "Series B Original Issue Date" shall mean the date on
----------------------------
issued.which a share of Series B Preferred was first
(E) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock issued (or, pursuant to paragraph 3(c)(iii), deemed to be
issued) by the Corporation after the date of filing of this Certificate of
Incorporation:
(1) upon conversion of shares of Series A Preferred or
Series B Preferred Stock;
(2) to officers or employees of, or consultants to,
the Corporation pursuant to a stock grant, option plan or purchase plan or other
employee stock incentive program (collectively, the "Plans") approved by the
Board of Directors up to a maximum of 12,225,000 shares (post-split), or such
greater number as is approved by unanimous consent of the total number of
directors elected and serving as such;
(3) as a dividend or distribution on the Preferred
Stock;
(4) upon exercise or conversion of warrants to
purchase shares of Common Stock issued in connection with equipment lease
financing transactions or bank financing transactions approved by the Board of
Directors, where the issuance of such warrants is not principally for the
purpose of raising additional equity capital for the Corporation; and
(5) by way of dividend or other distribution on shares
of Common Stock excluded from the definition of Additional Shares of Common
Stock by the foregoing clauses (1), (2), (3) and (4) or on shares of Common
Stock so excluded.
(F) "Next Financing" shall mean the next issuance of the
--------------
Corporation's securities after the Series B Original Issue Date in which the
aggregate sales price of the
5
<PAGE>
securities issued to New Investors is at least $4,000,000 at a per share price
greater than $1.767 per share; provided, however, that the term Next Financing
shall include an issuance of securities by the Corporation if the Corporation
has reached an agreement in principle, as evidenced in writing, with New
Investors for the New Investors to purchase securities of the Corporation for an
aggregate sales price of at least $4,000,000 at a price per share greater than
$1.767, but a lesser amount of securities are actually issued and sold to the
New Investors solely as a result of the holders of the Series A Preferred and
Series B Preferred exercising rights of first refusal to purchase such
securities pursuant to the Shareholder Rights Agreement between the holders of
the Series A Preferred and Series B Preferred and the Corporation, as the same
may be amended from time to time.
(G) "New Investors" shall mean persons or entities other
-------------
than the holders of Common Stock as of the date of filing of this Certificate of
Incorporation or the holders of the Series A Preferred or Series B Preferred.
(ii) No Adjustment of Conversion Price: No adjustment in the
---------------------------------
Conversion Price of a particular series of Preferred Stock shall be made in
respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or deemed
to be issued by the Corporation is less than the Conversion Price in effect for
such series of Preferred Stock on the date of, and immediately prior to such
issue. No adjustment in the Conversion Prices shall be made pursuant to
paragraph (iv) below as a result of any stock dividend or subdivision which
causes an adjustment in the Conversion Price pursuant to subsection (3)(d)
below.
(iii) Deemed Issue of Additional Shares of Common Stock. In the
-------------------------------------------------
event the Corporation at any time or from time to time after the Series A
Original Issue Date or Series B Original Issue Date shall issue any Options or
Convertible Securities or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to paragraph 3(c)(v) hereof) of such Additional Shares of
Common Stock would be less than the Series A Conversion Price or Series B
Conversion Price as applicable in effect on the date of and immediately prior to
such issue, or such record date, as the case may be, and provided further that
in any case in which Additional Shares of Common Stock are deemed to be issued:
(A) no further adjustment in the applicable Conversion
Prices shall be made upon the subsequent issue of Convertible Securities or
shares of Common Stock upon the exercise of such Options or conversion or
exchange of such Convertible Securities;
6
<PAGE>
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or increase or
decrease in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the applicable Conversion Price computed upon
the original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities; and
(C) no readjustment pursuant to clause (B) above shall have
the effect of increasing the applicable Conversion Price to an amount which
exceeds the lower of (i) the applicable Conversion Price on the original
adjustment date, or (ii) the applicable Conversion Price that would have
resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common Stock.
- ----------------------
(A) Adjustment of Series A Conversion Price Upon Issuance
-----------------------------------------------------
of Additional Shares of Common Stock. In the event this Corporation shall issue
- ------------------------------------
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to para graph 3(c)(iii)) without consideration or
for a consideration per share less than the Series A Conversion Price in effect
on the date of and immediately prior to such issue, then and in such event, the
Series A Conversion Price shall be reduced, concurrently with such issue, to a
price (calculated to the nearest cent) determined by multiplying the Series A
Conversion Price by a fraction, the numerator of which shall be the sum of (i)
the number of shares of Common Stock issued and outstanding immediately prior to
such issue, (ii) the number of shares of Common Stock issuable upon conversion
of the Preferred Stock outstanding immediately prior to such issue and (iii) the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the total number of Additional Shares of Common Stock so
issued would purchase at the Series A Conversion Price; and the denominator of
which shall be the sum of (A) the number of shares of Common Stock issued and
outstanding immediately prior to such issue, (B) the number of shares of Common
Stock issuable upon conversion of the Preferred Stock outstanding immediately
prior to such issue and (C) the number of such Additional Shares of Common Stock
so issued.
(B) Adjustment of Series B Conversion Price Upon Issuance
-----------------------------------------------------
of Additional Shares of Common Stock.
- ------------------------------------
(1) Issuance of Additional Shares of Common Stock
---------------------------------------------
Before Next Financing. In the event that prior to the Next Financing, this
- ---------------------
Corporation shall issue Additional Shares of Common Stock (including Additional
Shares of Common Stock deemed to be issued pursuant to paragraph 3(c)(iii))
without consideration or for a consideration per share less than the Series B
Conversion Price in effect on the date of and immediately prior to such issue,
then and in
7
<PAGE>
such event, the Series B Conversion Price in effect immediately after each such
issuance shall be reduced to a price equal to the per share issue price of such
Additional Shares of Common Stock.
(2) Issuance of Additional Shares of Common Stock
---------------------------------------------
After Next Financing. In the event that after the Next Financing this
- --------------------
Corporation shall issue Additional Shares of Common Stock (including Additional
Shares of Common Stock deemed to be issued pursuant to paragraph 3(c)(iii))
without consideration or for a consideration per share less than the Series B
Conversion Price in effect on the date of and immediately prior to such issue,
then and in such event, the Series B Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated to the nearest cent)
determined by multiplying the Series B Conversion Price by a fraction, the
numerator of which shall be the sum of (i) the number of shares of Common Stock
issued and outstanding immediately prior to such issue, (ii) the number of
shares of Common Stock issuable upon conversion of the Preferred Stock
outstanding immediately prior to such issue and (iii) the number of shares of
Common Stock which the aggregate consideration received by the Corporation for
the total number of Additional Shares of Common Stock so issued would purchase
at the Series B Conversion Price; and the denominator of which shall be the sum
of (A) the number of shares of Common Stock issued and outstanding immediately
prior to such issue, (B) the number of shares of Common Stock issuable upon
conversion of the Preferred Stock outstanding immediately prior to such issue
and (C) the number of such Additional Shares of Common Stock so issued.
(v) Determination of Consideration. For purposes of this
------------------------------
paragraph 3(c), the consideration received by the Corporation for the issue of
any Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property. Such consideration shall:
-----------------
(1) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(2) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined by the Board of Directors in the good faith exercise of its
reasonable business judgment; and
(3) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (1) and (2) above, as
determined in good faith by the Board of Directors.
(B) Options and Convertible Securities. The consideration
----------------------------------
per share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to paragraph 3(c)(iii), relating to Options
and Convertible Securities, shall be determined by dividing:
8
<PAGE>
(x) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities; by
(y) the maximum number of shares of Common Stock (as set
forth in the instrument relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
(d) Adjustments for Stock Dividends, Subdivisions, Combinations, or
---------------------------------------------------------------
Consolidations. In the event the Corporation after the date of filing of this
- --------------
Certificate of Incorporation shall pay a stock dividend on the Common Stock, or
the outstanding shares of Common Stock shall be subdivided, combined or
consolidated, by reclassification or otherwise, into a greater or lesser number
of shares of Common Stock, the Series A Conversion Price and Series B Conversion
Price in effect immediately prior to such subdivision or combination shall,
concurrently with the effectiveness of such subdivision, combination or
consolidation, be proportionately adjusted.
(e) No Impairment. The Corporation will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, transfer of assets,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation but will at all times in good
faith assist in the carrying out of all the provisions of this paragraph 3 and
in the taking of all such action as may be necessary or appropriate in order to
protect the conversion rights of the holders of the Preferred Stock against
impairment.
(f) Notices of Record Date. In the event that this Corporation
----------------------
shall propose at any time after the date of filing of this Certificate of
Incorporation:
(i) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;
(iii) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; or
9
<PAGE>
(iv) to merge with or into any other corporation (other than a
merger in which the holders of the outstanding voting equity securities of the
Corporation immediately prior to such merger hold more than fifty percent (50%)
of the voting power of the surviving entity immediately following such merger),
or sell, lease or convey all or substantially all its property or business, or
to liquidate, dissolve or wind up;
then, in connection with each such event, this Corporation shall send to the
holders of the Preferred Stock:
(A) at least twenty (20) days' prior written notice of the
date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote in respect of
the matters referred to in (iii) and (iv) above; and
(B) in the case of the matters referred to in (iii) and
(iv) above, at least twenty (20) days' prior written notice of the date when the
same shall take place (and specifying the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail,
postage prepaid, addressed to the holders of Preferred Stock shares at the
address for each such holder as shown on the books of this Corporation and shall
be deemed given when so mailed.
(g) Recapitalization. If at any time or from time to time there
----------------
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this paragraph 3 or paragraph 2) provision shall be made so that the holders of
the Preferred Stock shall thereafter be entitled to receive upon conversion of
the Preferred Stock the number of shares of stock or other securities or
property of the Corporation to which a holder of Common Stock deliverable upon
conversion of each share of such series would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this paragraph 3 with respect to the rights of
the holders of the Preferred Stock after the recapitalization to the end that
the provisions of this paragraph 3 (including adjustment of the Conversion Price
then in effect and the number of shares purchasable upon conversion of the
Preferred Stock) shall be applicable after that event as nearly equivalent as
may be practicable.
4. Voting Rights and Directors.
---------------------------
(a) Except as otherwise required by law and as provided in paragraph
(b) below, the holders of Preferred Stock and the holders of Common Stock shall
be entitled to notice of any stockholders' meeting and to vote as a single class
upon any matter submitted to the stockholders for a vote, as follows: (i) each
holder of Preferred Stock shall have one vote for each full share of Common
Stock into which its respective shares of Preferred Stock would be convertible
on the record date for the vote and (ii) the holders of Common Stock have one
vote per share of Common Stock.
10
<PAGE>
(b) For so long as at least 3,000,000 shares of Series A Preferred
are outstanding (appropriately adjusted in the event of a stock split, reverse
split, recapitalization or similar event), the holders of shares of Series A
Preferred, voting as a class, shall be entitled to elect two directors. For so
long as at least 1,350,000 shares of Series B Preferred are outstanding
(appropriately adjusted in the event of a stock split, reverse split,
recapitalization or similar event), the holders of shares of Series B Preferred
voting as a class, shall be entitled to elect one director. The holders of
shares of Common Stock voting as a class shall be entitled to elect one
director, and the remaining directors shall be elected by the holders of the
Series A Preferred, Series B Preferred and the holders of Common Stock, voting
as provided in Section (4)(a) above. If at least 3,000,000 shares of Series A
Preferred or 1,350,000 of Series B Preferred are not outstanding (appropriately
adjusted in the event of a stock split, reverse split, recapitalization or
similar event), then the director or directors otherwise elected by the holders
of such series shall be elected by holders of the Series A Preferred, Series B
Preferred and Common Stock, with each share voting as provided in Section (4)(a)
above.
5. Protective Provisions. In addition to any other rights provided by
---------------------
law, so long as any Preferred Stock shall be outstanding, this Corporation shall
not:
(a) Without first obtaining the affirmative vote or written consent
of the holders of not less than a majority of such outstanding shares of Series
A Preferred and Series B Preferred, voting together as a single class on an as-
converted basis:
(i) amend or repeal any provision of, or add any provision to,
this Corporation's Certificate of Incorporation or Bylaws if such action would
alter or change adversely the preferences, rights, privileges or powers of, or
the restrictions provided for the benefit of, the Series A Preferred or Series B
Preferred;
(ii) authorize or issue any shares of any class or series of
stock or any bonds, debentures, notes or other obligations convertible into or
exchangeable for, or having option rights to purchase, any shares of stock of
this Corporation having (A) any preference or priority over, or being on a
parity with, the Series A Preferred or Series B Preferred with respect to
voting, dividends or upon liquidation, or (B) rights similar to any of the
rights of the Series A Preferred or Series B Preferred under this paragraph 5;
(iii) reclassify any Common Stock into shares having any
preference or priority as to dividends or assets superior to or on a parity with
any such preference or priority of the Series A Preferred or Series B Preferred;
(iv) consummate a sale of all or substantially all of the
Corporation's assets or any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation)
which would result in the holders of the outstanding voting equity securities of
the Corporation immediately prior to such transaction holding less than fifty
percent (50%) of the voting power of the surviving entity immediately following
such transaction; or
11
<PAGE>
(v) increase the total number of authorized shares of Series A
Preferred or Series B Preferred.
(b) Without obtaining the prior affirmative vote or written consent
of the holders of not less than seventy-five percent (75%) of such outstanding
shares of Series A Preferred and Series B Preferred, amend Section 3(a)(ii) of
this Certificate of Incorporation providing for conversion of the Series A
Preferred and Series B Preferred into Common Stock upon the election of holders
of seventy-five percent (75%) of the outstanding Series A Preferred and Series B
Preferred.
(c) Without first obtaining the prior affirmative vote or written
consent of the holders of not less than the majority of such outstanding shares
of the Series B Preferred, voting as a single series:
(i) consummate a sale of all or substantially all of the
Corporation's assets or any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation)
which would result in the holders of the outstanding voting equity securities of
the Corporation immediately prior to such transaction holding less than fifty
percent (50%) of the voting power of the surviving entity immediately following
such transaction; or
(ii) increase the total number of authorized shares of Series B
Preferred.
6. Status of Converted Stock. In the event any shares of Preferred
-------------------------
Stock shall be converted pursuant to paragraph 3 hereof, the shares so converted
shall be canceled and shall not be issuable by the Corporation, and the
Certificate of Incorporation of this Corporation shall be appropriately amended
to effect the corresponding reduction in the Corporation's authorized capital
stock.
7. Residual Rights. All rights accruing to the outstanding shares of
---------------
this Corporation not expressly provided for to the contrary herein shall be
vested in the Common Stock.
8. Consent for Certain Repurchases of Common Stock Deemed to be
------------------------------------------------------------
Distributions. Each holder of Preferred Stock shall be deemed to have consented
- -------------
to distributions made by the Corporation in connection with the repurchase of
shares of Common Stock issued to or held by employees or consultants upon
termination of their employment or services pursuant to agreements providing for
such right of repurchase between the Corporation and such persons.
12
<PAGE>
FIFTH
The name and mailing address of the incorporator are as follows:
NAME MAILING ADDRESS
---- ---------------
Aaron J. Alter Wilson, Sonsini, Goodrich & Rosati,
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
SIXTH
The Corporation is to have perpetual existence.
SEVENTH
Elections of directors need not be by written ballot unless a stockholder
demands election by written ballot at the meeting and before voting begins.
EIGHTH
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation.
NINTH
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
TENTH
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or as it may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Restated Certificate of Incorporation inconsistent with this
Article, shall eliminate or reduce the effect of this Article in respect of any
matter occurring, or any cause of action, suit or claim that, but for this
Article, would accrue or arise, prior to such amendment, repeal or adoption of
an inconsistent provision.
13
<PAGE>
ELEVENTH
Section 1. At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term for
which they are elected, and until their successors have been duly elected and
qualified; except that if any such election shall be not so held, such election
shall take place at stockholders' meeting called and held in accordance with the
Delaware General Corporation Law. The directors of the Corporation shall be
divided into three classes as nearly equal in size as is practicable, hereby
designed Class I, Class II and Class III. The term of office of the initial
Class I directors shall expire at the next succeeding annual meeting of
stockholders, the term of office of the initial Class II directors shall expire
at the second succeeding annual meeting of stockholders and the term of office
of the initial Class III directors shall expire at the third succeeding annual
meeting of the stockholders. For the purposes hereof, the initial Class I, Class
II and Class III directors shall be those directors so designated by the
incorporator. At each annual meeting after the first annual meeting of
stockholders, directors to replace those of a Class whose terms expire at such
annual meeting shall be elected to hold office until the third succeeding annual
meeting and until their respective successors shall have been duly elected and
qualified. If the number of directors is hereafter changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as if practicable.
Section 2. The number of directors which constitute the whole Board of
Directors of the Corporation shall be designed in the Bylaws of the Corporation.
Section 3. Vacancies occurring on the Board of Directors for any reason
may be filled by vote of a majority of the remaining members of the Board of
Directors, although less than a quorum, at any meeting of the Board of
Directors. A person so elected by the Board of Directors to fill a vacancy shall
hold office until the next succeeding annual meeting of stockholders of the
Corporation and until his or her successor shall have been duly elected and
qualified.
TWELFTH
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
THIRTEENTH
Notwithstanding any other provisions of this Restated Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of the
capital stock required by law or this Restated Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of the combined
voting power of all of the then-outstanding shares of the Corporation entitled
to vote shall be required to alter, amend or repeal Articles ELEVENTH or
THIRTEENTH hereof or any provision thereof, unless such amendment shall be
approved by a majority of the directors of the Corporation not affiliated or
associated with any person
14
<PAGE>
or entity holding (or which has announced an intention to obtain) 26% or more of
the voting power of the Corporation's outstanding capital stock.
FOURTEENTH
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purposes of forming a corporation pursuant to the Corporation Law of the State
of Delaware, do make this certificate, hereby declaring and certifying, under
penalties of perjury, that this is my act and deed and the facts therein stated
are true, and accordingly have hereunto set my hand this 8th day of August,
1997.
/s/ AARON J. ALTER
----------------------------------------------
Aaron J. Alter
Incorporator
15
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MMC NETWORKS, INC.
FIRST
The name of the Corporation is MMC Networks, Inc. (the "Corporation").
SECOND
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, County of New Castle, Delaware 19805. The name
of its registered agent at such address is Corporation Service Company.
THIRD
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
FOURTH
A. The total number of shares which the Corporation shall have authority
to issue is 110,000,000 shares of capital stock.
B. Of such authorized shares, one hundred million (100,000,000) shares
shall be designated "Common Stock", and have a par value of $.001.
C. Of such authorized shares, ten million (10,000,000) shares shall be
designated "Preferred Stock", and have a par value of $.001. The Preferred
Stock may be issued from time to time in one or more series. The Board of
Directors of the Corporation is authorized to determine or alter the powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock, and
within the limitations or restrictions stated in any resolution or resolutions
of the Board of Directors originally fixing the number of shares constituting
any series, to increase or decrease (but not below the number of shares of any
such series then outstanding) the number of shares of any such series subsequent
to the issuance of shares of that series, to determine the designation of any
series, and to fix the number of shares of any series. In case the number of
shares of any series shall be so decreased, the shares constituting such
decrease shall resume
<PAGE>
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
FIFTH
The Corporation is to have perpetual existence.
SIXTH
Elections of directors need not be by written ballot unless a stockholder
demands election by written ballot at the meeting and before voting begins.
SEVENTH
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation.
EIGHTH
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
NINTH
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or as it may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Restated Certificate of Incorporation inconsistent with this
Article, shall eliminate or reduce the effect of this Article in respect of any
matter occurring, or any cause of action, suit or claim that, but for this
Article, would accrue or arise, prior to such amendment, repeal or adoption of
an inconsistent provision.
TENTH
Section 1. At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term for
which they are elected, and until their successors have been duly elected and
qualified; except that if any such election shall be not so held, such election
shall take place at stockholders' meeting called and held in accordance with the
Delaware General Corporation Law. The directors of the Corporation shall be
divided into three classes as nearly equal in size as is practicable, hereby
designed Class I, Class II and Class III. The term of office of the initial
Class I directors shall expire at the next succeeding annual meeting of
stockholders, the term of office of the initial Class II directors shall expire
at the second succeeding annual meeting of stockholders and the
-2-
<PAGE>
term of office of the initial Class III directors shall expire at the third
succeeding annual meeting of the stockholders. For the purposes hereof, the
initial Class I, Class II and Class III directors shall be those directors so
designated by the incorporator. At each annual meeting of stockholders,
directors to replace those of a Class whose terms expire at such annual
meeting shall be elected to hold office until the third succeeding annual
meeting and until their respective successors shall have been duly elected and
qualified. If the number of directors is hereafter changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as if practicable.
Section 2. The number of directors which constitute the whole Board of
Directors of the Corporation shall be designated in the Bylaws of the
Corporation.
Section 3. Vacancies occurring on the Board of Directors for any reason
may be filled by vote of a majority of the remaining members of the Board of
Directors, although less than a quorum, at any meeting of the Board of
Directors. A person so elected by the Board of Directors to fill a vacancy
shall hold office until the next succeeding annual meeting of stockholders of
the Corporation and until his or her successor shall have been duly elected and
qualified.
ELEVENTH
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
TWELFTH
Effective upon the closing of the Corporation's initial public offering of
securities pursuant to a registration statement filed under the Securities Act
of 1933, as amended, stockholders of the Corporation may not take action by
written consent in lieu of a meeting but must take any actions at a duly called
annual or special meeting.
THIRTEENTH
The stockholders of the Corporation may not take action by written
consent in lieu of a meeting but must take any actions at a duly called annual
or special meeting.
FOURTEENTH
Notwithstanding any other provisions of this Restated Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of the
capital stock required by law or this Restated Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of the combined
voting power of all of the then-outstanding shares of the Corporation entitled
to vote shall be required to alter, amend or repeal Articles TENTH, TWELFTH
THIRTEENTH or FOURTEENTH or any provision thereof, unless such amendment
shall be approved by a majority of the directors of the Corporation not
affiliated or associated with any person or entity holding (or which has
announced an intention to obtain) 20% or more of the voting power of the
Corporation's outstanding capital stock.
-3-
<PAGE>
FOURTEENTH
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
IN WITNESS WHEREOF, MMC Networks, Inc., has caused this Amended and
Restated Certificate of Incorporation to be executed by Prabhat K. Dubey, its
President and Chief Executive Officer attested by William R. Walker, its
Secretary, this ____ day of _________, 1997.
_________________________________________
Prabhat K. Dubey
President and Chief Executive Officer
ATTEST
_______________________________
William R. Walker
Secretary
-4-
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
MMC NETWORKS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - CORPORATE OFFICES.............................................. 1
1.1 REGISTERED OFFICE................................................ 1
1.2 OTHER OFFICES.................................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS...................................... 1
2.1 PLACE OF MEETINGS................................................ 1
2.2 ANNUAL MEETING................................................... 1
2.3 SPECIAL MEETING.................................................. 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS................................. 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE..................... 2
2.6 QUORUM........................................................... 2
2.7 ADJOURNED MEETING; NOTICE........................................ 2
2.8 VOTING........................................................... 2
2.9 WAIVER OF NOTICE................................................. 3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING.......................................................... 3
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS......................................................... 4
2.12 PROXIES.......................................................... 4
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE............................ 4
ARTICLE III - DIRECTORS.................................................... 5
3.1 POWERS........................................................... 5
3.2 NUMBER OF DIRECTORS.............................................. 5
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.......... 5
3.4 RESIGNATION AND VACANCIES........................................ 5
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE......................... 6
3.6 FIRST MEETINGS................................................... 6
3.7 REGULAR MEETINGS................................................. 7
3.8 SPECIAL MEETINGS; NOTICE......................................... 7
3.9 QUORUM........................................................... 7
3.10 WAIVER OF NOTICE................................................. 7
3.11 ADJOURNED MEETING; NOTICE........................................ 7
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING................ 8
3.13 FEES AND COMPENSATION OF DIRECTORS............................... 8
3.14 APPROVAL OF LOANS TO OFFICERS.................................... 8
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
PAGE
----
<S> <C>
ARTICLE IV - COMMITTEES.................................................... 8
4.1 COMMITTEES OF DIRECTORS.......................................... 8
4.2 COMMITTEE MINUTES................................................ 9
4.3 MEETINGS AND ACTION OF COMMITTEES................................ 9
ARTICLE V - OFFICERS....................................................... 9
5.1 OFFICERS......................................................... 9
5.2 ELECTION OF OFFICERS............................................. 10
5.3 SUBORDINATE OFFICERS............................................. 10
5.4 REMOVAL AND RESIGNATION OF OFFICERS.............................. 10
5.5 VACANCIES IN OFFICES............................................. 10
5.6 AUTHORITY AND DUTIES OF OFFICERS................................. 10
5.7 LIMITATIONS ON POWERS AND DUTIES OF OFFICERS..................... 10
ARTICLE VI - INDEMNITY..................................................... 11
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS........................ 11
6.2 INDEMNIFICATION OF OTHERS........................................ 11
6.3 PREPAYMENT OF EXPENSES........................................... 11
6.4 CLAIMS........................................................... 11
6.5 NON-EXCLUSIVITY OF RIGHTS........................................ 12
6.6 OTHER INDEMNIFICATION............................................ 12
6.7 AMENDMENT OR REPEAL.............................................. 12
ARTICLE VII - RECORDS AND REPORTS.......................................... 12
7.1 MAINTENANCE AND INSPECTION OF RECORDS............................ 12
7.2 INSPECTION BY DIRECTORS.......................................... 13
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................... 13
ARTICLE VIII - GENERAL MATTERS............................................. 13
8.1 CHECKS........................................................... 13
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS................. 13
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES........................... 14
8.4 SPECIAL DESIGNATION ON CERTIFICATES.............................. 14
8.5 LOST CERTIFICATES................................................ 14
8.6 CONSTRUCTION; DEFINITIONS........................................ 15
8.7 DIVIDENDS........................................................ 15
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
PAGE
----
<S> <C>
8.8 FISCAL YEAR...................................................... 15
8.9 SEAL............................................................. 15
8.10 TRANSFER OF STOCK................................................ 15
8.11 STOCK TRANSFER AGREEMENTS........................................ 15
8.12 REGISTERED STOCKHOLDERS.......................................... 16
ARTICLE IX - AMENDMENTS.................................................... 16
ARTICLE X - DISSOLUTION.................................................... 16
ARTICLE XI - CUSTODIAN..................................................... 17
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES...................... 17
11.2 DUTIES OF CUSTODIAN.............................................. 17
</TABLE>
-iii-
<PAGE>
BYLAWS
------
OF
--
MMC NETWORKS, INC.
-----------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. At the meeting, directors shall be
elected and any other proper business may be transacted.
2.3 SPECIAL MEETING
---------------
Special meetings of stockholders for any purpose or purposes may be called
at any time by the Board of Directors and by a committee of the Board of
Directors which has been duly designated by the Board of Directors and whose
powers and authority, as expressly provided in a resolution of the Board
<PAGE>
of Directors, include the power to call such meetings, but such special
meetings may not be called by any other person or persons.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. If mailed, such notice
shall be deemed to be given when deposited in the mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the
corporation.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217
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<PAGE>
and 218 of the General Corporation Law of Delaware (relating to voting rights of
fiduciaries, pledgors and joint owners of stock and to voting trusts and other
voting agreements).
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote for each share of capital stock held by such
stockholder.
At a stockholders' meeting at which directors are to be elected, or at
elections held under special circumstances, a stockholder shall be entitled to
cumulate votes (i.e., cast for any candidate a number of votes greater than the
number of votes which such stockholder normally is entitled to cast). Each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes which (absent this provision as to cumulative voting) he would
be entitled to cast for the election of directors with respect to his shares of
stock multiplied by the number of directors to be elected by him, and he may
cast all of such votes for a single director or may distribute them among the
number to be voted for, or for any two or more of them, as he may see fit.
2.9 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of the corporation, or any action that may be taken at any annual
or special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
-3-
<PAGE>
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
-------
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period
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<PAGE>
of at least ten (10) days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be six (6). The number may be
changed by a duly adopted amendment to this bylaw adopted by resolution of the
board of directors in accordance with these bylaws. No reduction of the
authorized number of directors shall have the effect of removing any director
before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws and unless otherwise
provided in the certificate of incorporation, directors shall be elected at
each annual meeting of stockholders to hold office until the next annual
meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the corporation.
When one or more directors so resigns and the resignation is effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in this
section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be
-5-
<PAGE>
filled by a majority of the directors then in office, although less than a
quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
Any and all directors may be removed without cause if the removal is
approved by the affirmative vote of a majority of the outstanding shares of the
corporation entitled to vote. Such approval shall include the affirmative vote
of a majority of the outstanding shares of each class and series entitled to
vote as a class or series on the subject matter being voted upon and shall also
include the affirmative vote of such greater proportion (including all) of the
outstanding shares of any class or series if such greater proportion is required
by the corporation's certificate of incorporation or by applicable laws.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall
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<PAGE>
be necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
board of directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors may be called by any director on
three (3) days' notice to each director, either personally or by mail, telegram,
telex or telephone.
3.9 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
-------------------------
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
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<PAGE>
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be removed
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of directors.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the
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<PAGE>
corporation to be affixed to all papers that may require it; but no such
committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more
assistant vice presidents, assistant secretaries, assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
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<PAGE>
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
The officers of the corporation shall have such powers and duties in the
management of the corporation as may be prescribed by the board of directors
and, to the extent not so provided, as generally pertain to their respective
offices, subject to the control of the board of directors. The board of
directors may require any officer, agent or employee to give security for the
faithful performance of his duties.
5.7 LIMITATIONS ON POWERS AND DUTIES OF OFFICERS
--------------------------------------------
No officer shall take any action, enter into any agreement, make any
representation or, by purposeful inaction, effect any of the actions or
decisions which the Board of Directors is prohibited or restricted from enacting
pursuant to these Bylaws or the certificate of incorporation and their further
amendments.
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<PAGE>
ARTICLE VI
INDEMNITY
---------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of
the corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of the
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 PREPAYMENT OF EXPENSES
----------------------
The corporation shall pay the expenses incurred in defending any proceeding
in advance of its final disposition, provided, however, that the payment of
expenses incurred by a director or officer in advance of the final disposition
of the proceeding shall be made only upon receipt of an undertaking by the
director or officer to repay all amounts advanced if it should be ultimately
determined that the director or officer is not entitled to be indemnified under
this Article or otherwise.
6.4 CLAIMS
------
If a claim for indemnification or payment of expenses under this Article is
not paid in full within sixty days after a written claim therefor has been
received by the corporation the claimant may file suit to recover the unpaid
amount of such claim and, if successful in whole or in part, shall be entitled
to be paid the expense of prosecuting such claim. In any such action the
corporation shall have the burden of proving that the claimant was not entitled
to the requested indemnification or payment of expenses under applicable law.
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<PAGE>
6.5 NON-EXCLUSIVITY OF RIGHTS
-------------------------
The rights conferred on any person by this Article 6 shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the certificate of incorporation, these by-laws,
agreement, vote of stockholders or disinterested directors or otherwise.
6.6 OTHER INDEMNIFICATION
---------------------
The corporation's obligation, if any, to indemnify any person who was or is
serving at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or non-profit entity
shall be reduced by any amount such person may collect as indemnification from
such other corporation, partnership, joint venture, trust, enterprise or non-
profit enterprise.
6.7 AMENDMENT OR REPEAL
-------------------
Any repeal or modification of the foregoing provisions of this Article 6
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each shareholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period
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of at least ten (10) days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
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8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the 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 shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the 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.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of
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the alleged loss, theft or destruction of any such certificate or the issuance
of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both the corporation and a natural
person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The seal of the corporation shall be such as from time to time may be
approved by the board of directors.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
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8.12 REGISTERED STOCKHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be
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attached to and filed with the consent. The consent filed with the Secretary of
State shall have attached to it the affidavit of the secretary or some other
officer of the corporation stating that the consent has been signed by or on
behalf of all the stockholders entitled to vote on a dissolution; in addition,
there shall be attached to the consent a certification by the secretary or some
other officer of the corporation setting forth the names and residences of the
directors and officers of the corporation.
ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
11.2 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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EXHIBIT 10.1
MMC NETWORKS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of this _____
day of __________, 19___, by and between MMC Networks, Inc., a Delaware
corporation (the "Company" or "MMC"), and _________________________
("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other officers and
directors of the Company may not be willing to continue to serve as officers and
directors without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably
1
<PAGE>
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
Indemnitee's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
Indemnitee did not act in good faith and in a manner which Indemnitee reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, by reason of
any action or inaction on the part of Indemnitee while an officer or director or
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees) and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with the defense or settlement
of such action or suit if Indemnitee, acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, except that no indemnification shall be made in respect of any
claim, issue or matter as to which Indemnitee shall have been adjudged to be
liable to the Company unless and only to the extent that the Court of Chancery
of the State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, Indemnitee is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
of the State of Delaware or such other court shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Subsections (a) and (b) of this Section 1 or the
defense of any claim, issue or matter therein, Indemnitee shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee in connection therewith.
2. AGREEMENT TO SERVE. In consideration of the protection afforded by
------------------
this Agreement, if Indemnitee is a director of the Company he agrees to serve at
least for the balance of the current term as a director and not to resign
voluntarily during such period without the written consent of a majority of the
Board of Directors. If Indemnitee is an officer of the Company not serving
under an employment contract, he agrees to serve in such capacity at least for
the balance of the current fiscal year of the Company and not to resign
voluntarily during such period without the written consent of a majority of the
Board of Directors. Following the applicable period set forth above, Indemnitee
agrees to continue to serve in such capacity at the will of the Company (or
under separate agreement, if such agreement exists) so long as he is duly
appointed or elected and qualified in accordance with the applicable
provisions of the by-laws of the Company or any subsidiary of the Company or
until such time as he
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tenders his resignation in writing. Nothing contained in this Agreement is
intended to create in Indemnitee any right to continued employment.
3. EXPENSES; INDEMNIFICATION PROCEDURE.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section l(a) or (b) hereof. Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined that
the Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advances to be made hereunder shall be paid by the Company to the
Indemnitee within twenty (20) days following delivery of a written request
therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) Procedure. Any indemnification and advances provided for in
Section 1 and this Section 3 shall be made no later than forty-five (45) days
after receipt of the written request of Indemnitee. If a claim under this
Agreement, under any statute, or under any provision of the Company's
Certificate of Incorporation or By-laws providing for indemnification, is not
paid in full by the Company within forty-five (45) days after a written request
for payment thereof has first been received by the Company, Indemnitee may, but
need not, at any time thereafter bring an action against the Company to recover
the unpaid amount of the claim and, subject to Section 13 of this Agreement,
Indemnitee shall also be entitled to be paid for the expenses (including
attorneys' fees) of bringing such action. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred in
connection with any action, suit or proceeding in advance of its final
disposition) that Indemnitee has not met the standards of conduct which make it
permissible under applicable law for the Company to indemnify Indemnitee for the
amount claimed, but the burden of proving such defense shall be on the Company
and Indemnitee shall be entitled to receive interim payments of expenses
pursuant to Subsection 3(a) unless and until such defense may be finally
adjudicated by court order or judgment from which no further right of appeal
exists. It is the parties' intention that if the Company contests Indemnitee's
right to indemnification, the question of Indemnitee's right to indemnification
shall be for the court to decide, and neither the failure of the Company
(including its Board of Directors or any committee or subgroup of the Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination that indemnification of Indemnitee is proper in the circumstances
because Indemnitee has met the applicable standard of conduct required by
applicable law, nor an actual determination by the Company (including its Board
of Directors or any committee or subgroup of the Board of Directors, independent
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legal counsel, or its stockholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt by the
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies.
(e) Selection of Counsel. In the event the Company shall be
obligated hereunder to pay the Expenses of any Claim the Company, if
appropriate, shall be entitled to assume the defense of such Claim with counsel
approved by Indemnitee, upon the delivery to Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
Indemnitee and the retention of such counsel by the Company, the Company will
not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same Claim; provided
that, (i) Indemnitee shall have the right to employ Indemnitee's counsel in any
such Claim at Indemnitee's expense and (ii) if (A) the employment of counsel by
Indemnitee has been previously authorized by the Company, (B) Indemnitee shall
have reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, or (C) the Company
shall not continue to retain such counsel to defend such Claim, then the fees
and expenses of Indemnitee's counsel shall be at the expense of the Company.
4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement,
the Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's By-laws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be, ipso facto, within
---- -----
the purview of Indemnitee's rights and Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its By-laws, any agreement,
any vote of stockholders or disinterested Directors, the General Corporation Law
of the State of Delaware, or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while holding such
office. The indemnification provided
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under this Agreement shall continue as to Indemnitee for any action taken or not
taken while serving in an indemnified capacity even though he may have ceased to
serve in an indemnified capacity at the time of any action, suit or other
covered proceeding.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
the position that indemnification is not permissible for liabilities arising
under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken, and may be required in the future
to undertake, with the SEC to submit the question of indemnification to a court
in certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time
----------------------------------------
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of director and officer liability insurance, Indemnitee shall be named
as an insured in such a manner as to provide Indemnitee the same rights and
benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees, if Indemnitee is not an officer or director but is a
key employee. Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain such insurance if the Company determines in
good faith that such insurance is not reasonably available, if the premium costs
for such insurance are disproportionate to the amount of coverage provided, if
the coverage provided by such insurance is limited by exclusions so as to
provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a parent or subsidiary of the Company.
8. SEVERABILITY. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any
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applicable portion of this Agreement that shall not have been invalidated, and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
9. EXCEPTIONS. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law of otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company; or
(d) Claims under Section 16(b). To indemnify Indemnitee for expenses
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute .
10. CONSTRUCTION OF CERTAIN PHRASES.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall
-6-
<PAGE>
include any service as a director, officer, employee or agent of the Company
which imposes duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants, or
beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan, Indemnitee shall be deemed to have acted in a
manner "not opposed to the best interests of the Company" as referred to in this
Agreement.
11. COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
------------------------
the Company and its successors and assigns, and shall inure to the benefit
of Indemnitee and Indemnitee's estate, heirs, legal representatives and
assigns.
13. ATTORNEYS' FEES. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, a court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
14. NOTICE. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipt is acknowledged by the party addressee, on the
date of such receipt, or (ii) if mailed by certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. CONSENT TO JURISDICTION. The Company and the Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
16. CHOICE OF LAW. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
MMC NETWORKS, INC.
By:_____________________
Title:__________________
Address:________________
________________
AGREED TO AND ACCEPTED
INDEMNITEE:
______________________________
(Signature)
______________________________
(Name of Indemnitee)
______________________________
______________________________
(Address)
-8-
<PAGE>
EXHIBIT 10.2
MMC NETWORKS, INC.
(FORMERLY MULTIMEDIA COMMUNICATIONS, INC.)
1993 STOCK PLAN
(AS ADOPTED ON APRIL 22, 1993 AND AMENDED ON JUNE 30, 1994, JULY 5, 1994,
FEBRUARY 7, 1995, MARCH 5, 1996, OCTOBER 31, 1996 AND JUNE 24, 1997)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means a Committee appointed by the Board of Directors
---------
in accordance with Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means MMC Networks, Inc., a California corporation.
-------
(g) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any director of the Company whether
compensated for such services or not; provided that if and in the event the
Company registers any class of any equity security pursuant to the Exchange Act,
the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship with the Company or any Parent or
Subsidiary is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of: (i) any leave
of absence approved by the Company, including sick leave, military leave, or any
other personal leave; provided, however, that for purposes of Incentive Stock
Options, no such leave may exceed ninety (90) days, unless reemployment upon the
expiration of such leave is guaranteed by contract (including certain Company
policies) or statute; provided, further, that on the ninety-first (91st) day of
any such leave (where reemployment is not guaranteed by contract or statute)
<PAGE>
the Optionee's Incentive Stock Option shall cease to be treated as an Incentive
Stock Option and will be treated for tax purposes as a Nonstatutory Stock
Option; or (ii) transfers between locations of the Company or between the
Company, its Parent, its Subsidiaries or its successor.
(i) "Employee" means any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(k) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported, as quoted on such exchange or system for the last market trading day
prior to the time of determination) as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the Nasdaq National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination, or;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonstatutory Stock Option" means an Option not intended to qualify
-------------------------
as an Incentive Stock Option.
(n) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Option" means a stock option granted pursuant to the Plan.
------
(p) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(q) "Optionee" means an Employee or Consultant who receives an Option
--------
or Stock Purchase Right.
-2-
<PAGE>
(r) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(s) "Plan" means this 1993 Stock Plan.
----
(t) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 11 below.
(u) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below .
(v) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(w) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 8,150,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a committee appointed by the Board.
(b) Plan Procedure After the Date, if any, upon Which the Company
-------------------------------------------------------------
becomes Subject to the Exchange Act.
-----------------------------------
(i) Administration With Respect to Directors and Officers. With
-----------------------------------------------------
respect to grants of Options or Stock Purchase Rights to Employees who are also
officers or directors of the Company, the Plan shall be administered by (A) the
Board if the Board may administer the Plan in compliance with Rule 16b-3
promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") with
respect to a plan intended to qualify thereunder as a discretionary plan, or (B)
a committee designated by the Board to administer the Plan, which committee
shall be constituted in such a manner as to permit the Plan to comply with Rule
16b-3 with respect to a plan intended to qualify thereunder as a discretionary
plan. Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with
-3-
<PAGE>
or without cause) and appoint new members in substitution therefor, fill
vacancies, however caused, and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by Rule
16b-3 with respect to a plan intended to qualify thereunder as a discretionary
plan.
(ii) Multiple Administrative Bodies. If permitted by Rule 16b-3,
------------------------------
the Plan may be administered by different bodies with respect to directors, non-
director officers and Employees who are neither directors nor officers.
(iii) Administration With Respect to Consultants and
----------------------------------------------
Other Employees. With respect to grants of Options or Stock Purchase Rights to
- ---------------
Employees or Consultants who are neither directors nor officers of the Company,
the Plan shall be administered by (A) the Board or (B) a committee designated by
the Board, which committee shall be constituted in such a manner as to satisfy
the legal requirements relating to the administration of incentive stock option
plans, if any, of [state] corporate and securities laws, of the Code, and of any
applicable stock exchange (the "Applicable Laws"). Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(c) Powers of the Administrator. Subject to the provisions of the Plan
---------------------------
and, in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange upon which the Common
Stock is listed, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions of any award granted
hereunder;
(vii) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(f) instead of Common Stock;
-4-
<PAGE>
(viii) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock covered by such
Option shall have declined since the date the Option was granted;
(ix) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Stock
Purchase Rights; a nd
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options or Stock Purchase Rights.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be granted
to Employees and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an Option or Stock
Purchase Right may, if otherwise eligible, be granted additional Options or
Stock Purchase Rights.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value:
(i) of Shares subject to an Optionee's Incentive Stock Options
granted by the Company, any Parent or Subsidiary, which
(ii) become exercisable for the first time during any calendar year
(under all plans of the Company or any Parent or Subsidiary)
exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with respect
to such Shares is granted.
(c) The Plan shall not confer upon any Optionee any right with respect
to continuation of employment relationship with the Company, nor shall it
interfere in any way with his or her right or the Company's right to terminate
his or her employment relationship at any time, with or without cause.
(d) Upon the Company or a successor corporation issuing any class of
common equity securities required to be registered under Section 12 of the
Exchange Act or upon the Plan being assumed by a corporation having a class of
common equity securities required to be registered
-5-
<PAGE>
under Section 12 of the Exchange Act, the following limitations shall apply to
grants of Options and Stock Purchase Rights to Employees:
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 300,000 Shares.
(ii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 12.
(iii) If an Option is canceled (other than in connection with a
transaction described in Section 12, the canceled Option will be counted against
the limit set forth in Section 5. For this purpose, if the exercise price of an
Option is reduced, the transaction will be treated as a cancellation
of the Option and the grant of a new Option.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company, as described in Section 18 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 14 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described
in the preceding paragraph, the per Share exercise price shall be no less than
100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
-6-
<PAGE>
(A) granted to a person who, at the time of the grant of such
Option, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of the grant.
(B) granted to any person, the per Share exercise price shall
be no less than 85% of the Fair Market Value per Share on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the Board
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable at such times and under such conditions as
determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
-7-
<PAGE>
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. In the event
----------------------------------------------------
of termination of an Optionee's Continuous Status as an Employee or Consultant
with the Company (but not in the event of an Optionee's change of status from
Employee to Consultant (in which case an Employee's Incentive Stock Option shall
automatically convert to a Nonstatutory Stock Option on the ninety-first (91st)
day following such change of status) or from Consultant to Employee), such
Optionee may, but only within such period of time as is determined by the
Administrator, of at least thirty (30) days, with such determination in the case
of an Incentive Stock Option not exceeding three (3) months after the date of
such termination (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement), exercise his or her Option to
the extent that Optionee was entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the
Option at the date of such termination, or if Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
(c) Disability of Optionee. In the event of termination of an
----------------------
Optionee's consulting relationship or Continuous Status as an Employee as a
result of his or her disability, Optionee may, but only within twelve (12)
months from the date of such termination (and in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination; provided, however, that if such disability is
not a "disability" as such term is defined in Section 22(e)(3) of the Code, in
the case of an Incentive Stock Option such Incentive Stock Option shall
automatically convert to a Nonstatutory Stock Option on the day three months and
one day following such termination. To the extent that Optionee was not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death,
the Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b) of
----------
the Exchange Act must comply with Rule 16b-3 and shall contain such additional
conditions or restrictions as may be required thereunder to qualify for the
maximum exemption from Section 16 of the Exchange Act with respect to Plan
transactions.
-8-
<PAGE>
(f) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
--------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer, which shall in no event exceed thirty (30) days from the date
upon which the Administrator made the determination to grant the Stock Purchase
Right. The offer shall be accepted by execution of a Restricted Stock purchase
agreement in the form determined by the Administrator. Shares purchased
pursuant to the grant of a Stock Purchase Right shall be referred to herein as
"Restricted Stock."
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine, but at a minimum rate of 20% per year.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
-9-
<PAGE>
12. Adjustments Upon Changes in Capitalization or Merger.
----------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
--------------------
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option or Stock Purchase Right shall be assumed or
an equivalent option or right shall be substituted by such successor corporation
or a parent or subsidiary of such successor corporation. If, in such event, the
Option or Stock Purchase Right is not assumed or substituted, the Option or
Stock Purchase Right shall terminate as of the date of the closing of the
merger. For the purposes of this paragraph, the Option or Stock Purchase Right
shall be considered assumed if, following the merger, the option or right
confers the right to purchase, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger, the
consideration (whether stock, cash, or other securities or property) received in
the merger by holders of Common Stock for each Share held on the effective date
of the transaction (and if holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the outstanding
Shares); provided, however, that if such consideration received in the merger
was not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger.
-10-
<PAGE>
13. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options or Stock Purchase Rights
already granted, and such Options and Stock Purchase Rights shall remain in full
force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
15. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
As a condition to the exercise of an Option or Stock Purchase Right,
the Company may require the person exercising such Option or Stock Purchase
Right to represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is required by any of the aforementioned relevant
provisions of law.
16. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
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<PAGE>
17. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
written agreements in such form as the Board shall approve from time to time.
18. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange upon which the Common Stock is listed.
19. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquired Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquired Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
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<PAGE>
EXHIBIT 10.3
MMC NETWORKS, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1997 Employee Stock Purchase
Plan of MMC Networks, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean MMC Networks, Inc. and any Designated
-------
Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
------------
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
<PAGE>
(i) "Exercise Date" shall mean the last day of each Purchase Period.
-------------
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board, or;
(4) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately
----------------
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 and November
1 of each year and terminating on the last Trading Day in the periods ending
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before October 31,
1999. The duration and timing of Offering Periods may be changed pursuant to
Section 4 of this Plan.
(l) "Plan" shall mean this 1997 Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Purchase Period" shall mean the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
-2-
<PAGE>
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 each year, or on such other date as
the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
October 31, 1999. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without stockholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
-3-
<PAGE>
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof. A participant may increase or decrease
the rate of his or her payroll deductions once during each Purchase Period by
completing or filing with the Company a new subscription agreement authorizing a
change in payroll deduction rate. The change in rate shall be effective with the
first full payroll period following five (5) business days after the Company's
receipt of the new subscription agreement unless the Company elects to process a
given change in participation more quickly. A participant's subscription
agreement shall remain in effect for successive Offering Periods unless
terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the
-4-
<PAGE>
Company's Common Stock determined by dividing such Employee's payroll deductions
accumulated prior to such Exercise Date and retained in the Participant's
account as of the Exercise Date by the applicable Purchase Price; provided that
in no event shall an Employee be permitted to purchase during each Purchase
Period more than 5,000 shares of the Company's Common Stock (subject to any
adjustment pursuant to Section 19) on the Enrollment Date, and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8
hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The
option shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on which
--------
a purchase of shares occurs, the Company shall arrange the delivery to each
participant, as appropriate, of a certificate representing the shares purchased
upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
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<PAGE>
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be three hundred thousand
(300,000) shares, plus an annual increase to be added on the date of each annual
meeting of the stockholders equal to the lesser of (i) 400,000 shares, (ii) 0.8%
of the outstanding shares on such date or (iii) a lesser amount determined by
the Board, subject to adjustment upon changes in capitalization of the Company
as provided in Section 19 hereof. If, on a given Exercise Date, the number of
shares with respect to which options are to be exercised exceeds the number of
shares then available under the Plan, the Company shall make a pro rata
allocation of the shares remaining available for purchase in as uniform a manner
as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such
-6-
<PAGE>
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
--------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding
-7-
<PAGE>
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least
fifteen (15) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least fifteen (15) business days prior to the New Exercise Date, that the
Exercise Date for the participant's option has been changed to the New Exercise
Date and that the participant's option shall be exercised automatically on the
New Exercise Date, unless prior to such date the participant has withdrawn from
the Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or any
other applicable law, regulation or stock exchange rule), the Company shall
obtain stockholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld
-8-
<PAGE>
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-9-
<PAGE>
EXHIBIT 10.4
MMC NETWORKS, INC.
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as
-------------
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the
---------
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means MMC Networks, Inc., a Delaware corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
-2-
<PAGE>
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1997 Stock Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired
----------------
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
-3-
<PAGE>
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13
-------------------------
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is (a) 1,500,000 Shares, including the Shares which have
been reserved but unissued under the Company's 1993 Stock Plan (as amended) (the
"1993 Plan") as of the date of stockholder approval of this Plan, (b) any Shares
returned to the 1993 Plan as a result of termination of options under the 1993
Plan, plus (iii) an annual increase to be added on the date of each annual
meeting of the stockholders, beginning with the 1999 annual meeting of the
stockholders, equal to the lesser of (i) 1,000,000 Shares, (ii) five percent
(5%) of the outstanding Shares on such date or (iii) a lesser amount determined
by the Board. The Shares may be authorized, but unissued, or reacquired Common
Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be
------------------------------
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
----------
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
-4-
<PAGE>
(iv) Other Administration. Other than as provided above, the Plan
--------------------
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
---------------------------
and in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock
to be covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not limited to, the exercise price,
the time or times when Options or Stock Purchase Rights may be exercised (which
may be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Purchase Right shall have declined
since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(x) to modify or amend each Option or Stock Purchase Right (subject
to Section 15(c) of the Plan), including the discretionary authority to extend
the post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
-5-
<PAGE>
(xi) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the Company any
instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or advisable
for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's decisions,
----------------------------------
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be
-----------
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of the
Company, Options to purchase more than 300,000 Shares.
-6-
<PAGE>
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 300,000 Shares
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price shall be no less
than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as
-7-
<PAGE>
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the per Share exercise price shall be no less than 100% of the Fair Market
Value per Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of the Fair Market Value per Share on
the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is granted,
---------------------------------
the Administrator shall fix the period within which the Option may be exercised
and shall determine any conditions which must be satisfied before the Option may
be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
-8-
<PAGE>
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting
of Options granted hereunder shall be tolled during any unpaid leave of absence.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall
-9-
<PAGE>
revert to the Plan. If, after termination, the Optionee does not exercise his
or her Option within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider, the
-----------------
Option may be exercised within such period of time as is specified in the Option
Agreement (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or inheritance, but
only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy out
-----------------
for a payment in cash or Shares an Option previously granted based on such terms
and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either alone,
------------------
in addition to, or in tandem with other awards granted under the Plan and/or
cash awards made outside of the Plan. After the Administrator determines that it
will offer Stock Purchase Rights under the Plan, it shall advise the offeree in
writing or electronically, by means of a Notice of Grant, of the terms,
conditions and restrictions related to the offer, including the number of Shares
that the offeree shall be entitled to purchase, the price to be paid, and the
time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise, the
-----------------
Restricted Stock Purchase Agreement shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
service with the Company for any reason (including death or Disability). The
purchase price for Shares repurchased pursuant to the Restricted Stock Purchase
Agreement shall be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The
repurchase option shall lapse at a rate determined by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
-10-
<PAGE>
(d) Rights as a Stockholder. Once the Stock Purchase Right is exercised,
-----------------------
the purchaser shall have the rights equivalent to those of a stockholder, and
shall be a stockholder when his or her purchase is entered upon the records of
the duly authorized transfer agent of the Company. No adjustment will be made
for a dividend or other right for which the record date is prior to the date the
Stock Purchase Right is exercised, except as provided in Section 13 of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
------------------------------------------------------------------------
Sale.
----
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
--------------------------
or liquidation of the Company, the Administrator shall notify each Optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide for an Optionee to have the
right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
-11-
<PAGE>
(c) Merger or Asset Sale. In the event of a merger of the Company with or
--------------------
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option and Stock Purchase Right shall be assumed or an
equivalent option or right substituted by the successor corporation or a Parent
or Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option or Stock Purchase
Right, the Optionee shall fully vest in and have the right to exercise the
Option or Stock Purchase Right as to all of the Optioned Stock, including Shares
as to which it would not otherwise be vested or exercisable. If an Option or
Stock Purchase Right becomes fully vested and exercisable in lieu of assumption
or substitution in the event of a merger or sale of assets, the Administrator
shall notify the Optionee in writing or electronically that the Option or Stock
Purchase Right shall be fully vested and exercisable for a period of fifteen
(15) days from the date of such notice, and the Option or Stock Purchase Right
shall terminate upon the expiration of such period. For the purposes of this
paragraph, the Option or Stock Purchase Right shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to
-12-
<PAGE>
exercise the powers granted to it hereunder with respect to Options granted
under the Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the exercise
----------------
of an Option or Stock Purchase Right unless the exercise of such Option or Stock
Purchase Right and the issuance and delivery of such Shares shall comply with
Applicable Laws and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will at
---------------------
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
EXHIBIT 10.5
MMC NETWORKS, INC.
1997 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1997 Director Option Plan
--------------------
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the common stock of the Company.
------------
(d) "Company" means MMC Networks, Inc., a Delaware corporation.
-------
(e) "Director" means a member of the Board.
--------
(f) "Employee" means any person, including officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(h) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the date of determination, as reported in The
Wall Street Journal or such other source as the Board deems reliable; or
<PAGE>
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(i) "Inside Director" means a Director who is an Employee.
---------------
(j) "Option" means a stock option granted pursuant to the Plan.
------
(k) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(l) "Optionee" means a Director who holds an Option.
--------
(m) "Outside Director" means a Director who is not an Employee.
----------------
(n) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1997 Director Option Plan.
----
(p) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 150,000 Shares, plus an annual increase to be added on the
date of each annual meeting of the stockholders equal to (i) the Optioned Stock
underlying Options granted in the immediately preceding year, or (ii) a lesser
amount determined by the Board (collectively, the "Pool"). The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
---------------------------------------------------
(a) Procedure for Grants. All grants of Options to Outside Directors
--------------------
under this Plan shall be automatic and nondiscretionary and shall be made
strictly in accordance with the following provisions:
-2-
<PAGE>
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 40,000 Shares (the "First Option") on the date which such
person first becomes an Outside Director, whether through election by the
stockholders of the Company or appointment by the Board to fill a vacancy;
provided, however, that a Director who is an Outside Director on the date of
adoption of this Plan shall not receive a First Option; provided, further, that
an Inside Director who ceases to be an Inside Director but who remains a
Director shall not receive a First Option.
(iii) Each Outside Director shall be automatically granted an
Option to purchase 10,000 Shares (a "Subsequent Option") each year on the date
two days after the Company's financial results for the preceding fiscal year are
announced to the public, provided he or she is then an Outside Director and, if
as of such date, he or she shall have served on the Board for at least the
preceding six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any exercise of an Option granted before the Company has obtained
stockholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 16 hereof.
(v) The terms of any Option granted hereunder shall be as
follows:
(A) the term of the Option shall be ten (10) years.
(B) the Option shall be exercisable only while the Outside
Director remains a Director of the Company, except as set forth in Sections 8
and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Option.
(D) subject to Section 10 hereof, each First Option shall
become exercisable as to 25% of the Shares subject to the First Option on the
first anniversary of its date of grant, and 1/48th of the Shares subject to the
First Option shall vest each month thereafter, provided that the Optionee
continues to serve as a Director on such dates.
(E) subject to Section 10 hereof, each Subsequent Option
shall become exercisable as to 1/12 of the Shares subject to the Subsequent
Option each month after the date of grant, provided that the Optionee continues
to serve as a Director on such dates.
(vi) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the remaining
Shares available for Option grant shall be granted under Options to the Outside
Directors on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the Board or the stockholders to increase the number of Shares which
may be issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
-3-
<PAGE>
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to
---------------------
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) consideration received
by the Company under a cashless exercise program implemented by the Company in
connection with the Plan, or (v) any combination of the foregoing methods of
payment.
8. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable at such times as are set forth in Section 4
hereof; provided, however, that no Options shall be exercisable until
stockholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
-4-
<PAGE>
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. Subject to Section
----------------------------------------------
10 hereof, in the event an Optionee's status as a Director terminates (other
than upon the Optionee's death or total and permanent disability (as defined in
Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but
only within three (3) months following the date of such termination, and only to
the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option on
the date of such termination, and to the extent that the Optionee does not
exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event Optionee's status as a
----------------------
Director terminates as a result of total and permanent disability (as defined in
Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but
only within twelve (12) months following the date of such termination, and only
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option on
the date of termination, or if he or she does not exercise such Option (to the
extent otherwise so entitled) within the time specified herein, the Option shall
terminate.
(d) Death of Optionee. In the event of an Optionee's death, the
-----------------
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number
-5-
<PAGE>
of issued Shares effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration."
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or Subsidiary thereof (the
"Successor Corporation"). If an Option is assumed or substituted for, the
Option or equivalent option shall continue to be exercisable as provided in
Section 4 hereof for so long as the Optionee serves as a Director or a director
of the Successor Corporation. Following such assumption or substitution, if the
Optionee's status as a Director or director of the Successor Corporation, as
applicable, is terminated other than upon a voluntary resignation by the
Optionee, the Option or option shall become fully exercisable, including as to
Shares for which it would not otherwise be exercisable. Thereafter, the Option
or option shall remain exercisable in accordance with Sections 8(b) through (d)
above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of fifteen (15) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
-------------------------------------
-6-
<PAGE>
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
16. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under applicable state and federal law and any stock exchange rules.
-7-
<PAGE>
EXHIBIT 10.6
MULTIMEDIA COMMUNICATIONS, INC.
SERIES A PREFERRED STOCK
PURCHASE AGREEMENT
dated as of
July 12, 1994
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 - Authorization and Sale of Preferred Stock.................. 1
1.1 Authorization................................................ 1
1.2 Sale of Series A Preferred................................... 1
1.3 Sale of Additional Series A Preferred........................ 1
SECTION 2 - Closing Date; Delivery..................................... 1
2.1 First Closing Date........................................... 1
2.2 Delivery..................................................... 2
2.3 Subsequent Closings.......................................... 2
SECTION 3 - Representations and Warranties of the Company.............. 2
3.1 Organization and Standing; Articles and By-Laws.............. 2
3.2 Corporate Power.............................................. 2
3.3 Subsidiaries................................................. 3
3.4 Capitalization............................................... 3
3.5 Authorization................................................ 3
3.6 Title to Properties and Assets; Liens, etc. ................. 3
3.7 Financial Statements......................................... 3
3.8 Patents, Trademarks, etc. ................................... 4
3.9 Material Contracts and Commitments........................... 4
3.10 Compliance with Other Instruments, None Burdensome, etc. .... 4
3.12 Employees.................................................... 5
3.13 Employee Agreements.......................................... 5
3.14 Registration Rights.......................................... 6
3.15 Governmental Consent, etc. .................................. 6
3.16 Disclosure................................................... 6
3.17 Brokers or Finders........................................... 6
3.18 Qualified Small Business Stock............................... 6
3.19 Returns and Complaints....................................... 6
3.20 Agreements; Action........................................... 6
3.21 Related-Party Transactions................................... 7
3.22 Permits...................................................... 8
3.23 Environmental and Safety Laws................................ 8
3.24 Manufacturing and Marketing Rights........................... 8
3.25 Changes...................................................... 8
3.26 Employee Benefit Plans....................................... 9
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.27 Tax Returns, Payments and Elections........................................................................ 9
3.28 Insurance.................................................................................................. 9
3.29 Minute Books............................................................................................... 10
3.30 Labor Agreements and Actions............................................................................... 10
3.31 Real Property Holding Company.............................................................................. 10
SECTION 4 - Representations and Warranties of the Purchasers........................................................... 10
4.1 Investment Representations and Covenants of the Purchasers................................................. 10
4.2 No Public Market........................................................................................... 13
4.3 Receipt of Information..................................................................................... 13
4.4 Financial Statements....................................................................................... 13
SECTION 5 - Conditions to Closing of Purchasers....................................................................... 13
5.1 Representations and Warranties Correct..................................................................... 13
5.2 Covenants...................................................... ............................................ 13
5.3 Opinion of Company's Counsel............................................................................... 14
5.4 Compliance Certificate..................................................................................... 14
5.5 Blue Sky................................................................................................... 14
5.6 Board of Directors......................................................................................... 14
5.7 Restated Articles.......................................................................................... 14
5.8 Proprietary Information Agreements......................................................................... 14
5.9 Secretary's Certificate.................................................................................... 14
5.10 Stock Certificates......................................................................................... 14
5.11 No Material Adverse Change................................................................................. 14
5.12 Co-Sale Agreement.......................................................................................... 14
5.13 Voting Agreement........................................................................................... 14
5.14 Shareholder Rights Agreement............................................................................... 15
SECTION 6 - Conditions to Closing of Company......................................................................... 15
6.1 Representations........................................................................................... 15
6.2 Blue Sky.................................................................................................. 15
6.3 Restated Articles......................................................................................... 15
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 7 - Miscellaneous...................................................................................... 15
7.1 Governing law......................................................................................... 15
7.2 Survival.............................................................................................. 15
7.3 Successors and Assigns................................................................................ 15
7.4 Entire Agreement; Amendment........................................................................... 15
7.5 Notices, etc.......................................................................................... 16
7.6 Delays or Omissions................................................................................... 16
7.7 California Corporate Securities Law................................................................... 16
7.8 Expenses.............................................................................................. 16
7.9 Counterparts.......................................................................................... 17
7.10 Severability......................................................................................... 17
7.11 Gender............................................................................................... 17
</TABLE>
EXHIBITS
A. Schedule of Purchasers
B. Amended and Restated Articles of Incorporation
C. Exceptions to Representations and Warranties of the Company
D. Shareholder Rights Agreement
E. Proprietary Information Agreement
F. Form of Stock Repurchase Agreement
G. Form of Opinion of Wilson, Sonsini, Goodrich & Rosati
H. Form of Co-Sale Agreement
I. Form of Voting Agreement
-iii-
<PAGE>
MULTIMEDIA COMMUNICATIONS, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
This Agreement is made as of July 12, 1994, among Multimedia Communications,
Inc., a California corporation (the "Company"), with its principal office at 710
Lakeway Drive, Suite 150, Sunnyvale, California 94086, and the persons and
entities listed on the Schedule of Purchasers attached as Exhibit A hereto (the
"Purchasers").
SECTION 1
Authorization and Sale of Preferred Stock
-----------------------------------------
1.1 Authorization. The Company has authorized the sale and issuance of up to
-------------
3,585,000 shares of its Series A Preferred Stock ("Series A Preferred"), having
the rights, restrictions, privileges and preferences as set forth in the
Company's Amended and Restated Articles of Incorporation in the form attached to
this Agreement as Exhibit B (the "Restated Articles").
1.2 Sale of Series A Preferred. Subject to the terms and conditions hereof,
--------------------------
the Company will issue and sell to the Purchasers, and the Purchasers will buy
from the Company, the number of shares (the "Shares") of Series A Preferred
specified opposite each Purchaser's name on the Schedule of Purchasers, at a
cash purchase price of $1.00 per share. The Company's agreements with each of
the Purchasers are separate agreements, and the sales of the Series A Preferred
to each of the Purchasers are separate sales.
1.3 Sale of Additional Series A Preferred. The Company shall have until July
-------------------------------------
30, 1994 to sell any shares of Series A Preferred not sold at the First Closing
at the cash purchase price of $1.00 per share. Any such shares sold after the
First Closing are referred to herein as "Additional Shares." The Additional
Shares shall be considered "Shares" and the purchasers of such Additional Shares
(the "Additional Purchasers") shall be considered "Purchasers" for purposes of
this Agreement, and shall have the same rights and obligations as if they had
purchased their shares pursuant to this Agreement at the First Closing. The
maximum number of shares of Series A Preferred the Company may sell hereunder is
3,585,000.
SECTION 2
Closing Date: Delivery
----------------------
2.1 First Closing Date. The first closing of the purchase and sale of the
------------------
Series A Preferred hereunder (the "First Closing") shall be held at 3:00 p.m. on
July 12, 1994 or on such later date or dates as the Company and the Purchasers
may agree to (the date of such Closing being referred to as the "First Closing
Date"). The place of the First Closing (including the place of delivery to the
Purchasers by the Company of the certificates evidencing all shares of Series A
<PAGE>
Preferred being purchased and the place of payment to the Company by the
Purchasers of the purchase price therefor) shall be at the offices of Wilson,
Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-
1050, or such other place as the Purchasers and the Company may mutually agree.
The date of any closing of the transactions contemplated by this Agreement is
sometimes also referred to herein as the "Closing Date".
2.2 Delivery. At the First Closing, the Company will deliver to each
--------
Purchaser a certificate or certificates representing the number of Shares
designated in column 2 of the Schedule of Purchasers to be purchased by each
Purchaser, against payment of the purchase price therefor, by check or wire
transfer payable to the Company, in the amount specified in column 1 of the
Schedule of Purchasers.
2.3 Subsequent Closings. The purchase and sale of any Additional Shares shall
-------------------
be held at a time and place to be agreed upon by the Company and the Additional
Purchasers purchasing at such closing (a "Subsequent Closing"), but no later
than July 30, 1994. At each Subsequent Closing, the Company shall deliver to
each Additional Purchaser purchasing at such closing the certificates
representing the Additional Shares which such Additional Purchaser is purchasing
against delivery to the Company by such Additional Purchaser of the purchase
price therefor by check or wire transfer payable to the Company, in the amount
specified on the Schedule of Purchasers. The Company and each Additional
Purchaser shall execute and deliver signature pages to this Agreement.
SECTION 3
Representations and Warranties of the Company
---------------------------------------------
Except as set forth on Exhibit C attached hereto, the Company hereby
represents and warrants to each Purchaser as follows:
3.1 Organization and Standing: Articles and By-Laws. The Company is a
-----------------------------------------------
corporation duly organized and existing under, and by virtue of, the laws of the
State of California and is in good standing under such laws. The Company has
requisite corporate power to own and operate its properties and assets, and to
carry on its business as presently conducted and as proposed to be conducted.
The Company is not qualified to do business as a foreign corporation in any
jurisdiction and such qualification is not presently required.
3.2 Corporate Power. The Company will have at each Closing Date all requisite
---------------
legal and corporate power to execute and deliver this Agreement and the
Shareholder Rights Agreement attached hereto as Exhibit D (the "Shareholder
Rights Agreement"), to sell and issue the Shares hereunder, to issue the Common
Stock issuable upon conversion of the Series A Preferred and to carry out and
perform its obligations under the terms of this Agreement and the Shareholder
Rights Agreement.
-2-
<PAGE>
3.3 Subsidiaries. The Company has no subsidiaries or affiliated companies and
------------
does not otherwise own or control, directly or indirectly, any other
corporation, association or business entity. The Company is not a participant in
any joint venture, partnership or similar arrangement.
3.4 Capitalization. The authorized capital stock of the Company consists of
--------------
20,000,000 shares of Common Stock, of which 2,025,000 shares are issued and
outstanding, and 3,585,000 shares of Series A Preferred, none of which has been
or will be issued or outstanding prior to the First Closing. All such issued and
outstanding shares have been duly authorized and validly issued, and are fully
paid and nonassessable. The Company has reserved (i) 3,585,000 shares of Series
A Preferred for issuance hereunder (ii) sufficient shares of Common Stock for
issuance upon conversion of the Shares and (iii) 2,475,000 shares of Common
Stock for issuance to employees. The Series A Preferred shall have the rights,
preferences, privileges and restrictions set forth in the Restated Articles.
Except for certain rights of first refusal set forth in the Shareholders Rights
Agreement, there are no other options, warrants, conversion privileges or other
rights presently outstanding to purchase or otherwise acquire any authorized but
unissued shares of capital stock or other securities of the Company. All
outstanding Common Stock was issued in compliance with all federal and state
securities laws. Assuming the accuracy of each Purchaser's representations in
Section 4 below, upon issuance the Shares will have been issued in compliance
with all federal and state securities laws.
3.5 Authorization. All corporate action on the part of the Company, its
-------------
directors and shareholders necessary for the authorization, execution, delivery
and performance of this Agreement and the Shareholder Rights Agreement by the
Company, the authorization, sale, issuance and delivery of the Shares (and the
Common Stock issuable upon conversion of the Shares) and the performance of the
Company's obligations hereunder and thereunder has been taken or will be taken
prior to the First Closing. This Agreement and the Shareholder Rights Agreement,
when executed and delivered by the Company, shall constitute the valid and
binding obligations of the Company enforceable in accordance with their
respective terms. The Shares, when issued in compliance with the provisions of
this Agreement, will be validly issued, fully paid and nonassessable, and free
of any liens or encumbrances and the Common Stock issuable upon conversion of
the Shares has been duly and validly reserved and, when issued in compliance
with the provisions of this Agreement and the Restated Articles, will be validly
issued, fully paid and nonassessable, and free of any liens or encumbrances.
3.6 Title to Properties and Assets; Liens, etc. The Company has good and
------------------------------------------
marketable title to its properties and assets, and has good title to all its
leasehold interests, in each case subject to no mortgage, pledge, lien, lease,
encumbrance or charge, other than (i) the lien of current taxes not yet due and
payable, and (ii) possible minor liens and encumbrances which do not in any case
materially detract from the value of the property subject thereto or materially
impair the operations of the Company, and which have not arisen otherwise than
in the ordinary course of business.
3.7 Financial Statements. The Company has delivered to the Purchasers a copy
--------------------
of the Company's unaudited financial statements for the year ended December 31,
1993 and unaudited
-3-
<PAGE>
financial statements for the quarter ended April 30, 1994 (the "Financial
Statements"). Such Financial Statements have been prepared in good faith. The
Financial Statements present fairly the financial condition and operating
results of the Company as of the dates, and for the periods, indicated therein,
and reflect all material liabilities, contingent or otherwise, at the date
thereof, subject where appropriate to normal year-end adjustments.
3.8 Patents. Trademarks. etc. The Company owns or has the right, or prior to
-------------------------
the First Closing will own or have the right, to use, free and clear of all
liens, charges, claims and restrictions, all patents, trademarks, service marks,
trade names, copyrights, licenses and rights necessary to its business as now
conducted or proposed to be conducted, and is not infringing upon or otherwise
acting adversely to the right or claimed right of, to the best of its knowledge,
any person under or with respect to any of the foregoing. There are no
outstanding options, licenses, or agreements of any kind relating to the
foregoing, nor is the Company bound by or a party to any options, licenses or
agreements of any kind with respect to the patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information, proprietary
rights and processes of any other person or entity. The Company has not received
any written communications alleging that the Company has violated or, by
conducting its business as proposed, would violate any patent, trademark,
service mark, trade name, copyright or trade secret or other proprietary right
of any other person or entity. The Company is not aware that any of its
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employee's best efforts to promote the interests of the Company
or that would conflict with the Company's business as proposed to be conducted.
Neither the execution nor delivery of this Agreement, the Shareholders Rights
Agreement, the Voting Agreement, nor the carrying on of the Company's business
by the employees of the Company, nor the conduct of the Company's business as
proposed, will, to the best of the Company's knowledge, conflict with or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any of such employees is
now obligated. The Company does not believe it is or will be necessary to
utilize any inventions of any of its employees (or people it currently intends
to hire) made prior to their employment by the Company.
3.9 Material Contracts and Commitments. All the material contracts,
----------------------------------
agreements and instruments to which the Company is a party or by which it is
bound which involve obligations of, or payments to, the Company in excess of
$5,000, and all agreements between the Company and its officers, directors,
employees and consultants (the "Material Agreements") are valid, binding and in
full force and effect in all material respects, and are valid, binding and
enforceable by the Company in accordance with their respective terms. The
Company is not in breach of its obligations under the Material Agreements in
accordance with the terms thereof. The Material Agreements are listed in Exhibit
-------
C hereto. To the best of the Company's knowledge, no other party to any of the
- -
Material Agreements is in default thereunder.
3.10 Compliance with Other Instruments, None Burdensome, etc. The Company
--------------------------------------------------------
is not in violation of any term of the Restated Articles of Incorporation or By-
Laws, or in any material
-4-
<PAGE>
respect of any term or provision of any material mortgage, indenture, contract,
indebtedness, lease, agreement, instrument, judgment or decree. The Company, to
the best of its knowledge, is not in violation of any order, statute, rule or
regulation applicable to the Company, which violation reasonably would be
expected to have a material adverse effect on the Company's business. The
execution, delivery and performance of and compliance with this Agreement, and
the issuance of the Shares and the Common Stock issuable upon conversion of the
Shares, have not resulted and will not result in any violation of, or conflict
with, or constitute a default under, or result in the creation of, any mortgage,
pledge, lien, encumbrance or charge upon any of the properties or assets of the
Company; and there is no such violation or default or event which, with the
passage of time or giving of notice or both, would constitute a violation or
default which materially and adversely affects the business of the Company or
any of its properties or assets.
3.11 Litigation. etc. There are no actions, suits, proceedings or
---------------
investigations pending against the Company or its properties before any court or
governmental agency (nor, to the best of the Company's knowledge, is there any
basis therefor or written threat thereof). The foregoing includes, to the best
of the Company's knowledge, actions pending or threatened in writing (or any
basis therefor) involving the prior employment of any of the Company's
employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. There
is no action, suit, proceeding or investigation by the Company currently pending
or which the Company intents to initiate.
3.12 Employees. To the best of the Company's knowledge, no employee of the
---------
Company is in violation of any term of any employment contract, patent
disclosure agreement or any other contract or agreement relating to the
relationship of any such employee with the Company or any other party because of
the nature of the business conducted or to be conducted by the Company. The
Company does not have any collective bargaining agreements covering any of its
employees.
3.13 Employee Agreements. Each director, consultant and person presently
-------------------
employed by the Company has executed (or will execute by the First Closing Date)
a Proprietary Information Agreement in the form of Exhibit E attached hereto,
and each of Amos Wilnai and Alex Joffe has executed a Stock Repurchase Agreement
with the Company in substantially the form of Exhibit F attached hereto. Such
Proprietary Information Agreements and Stock Repurchase Agreements, when
executed and delivered by the Company and such persons, shall constitute valid
and binding obligations of the Company and, to the best of the Company's
knowledge, such other persons. To the best of the Company's knowledge, neither
the execution or delivery of such agreements, nor the carrying on of the
Company's business as employees by such persons, nor the conduct of the
Company's business as proposed, will conflict with or result in a breach of the
terms, conditions or provisions of or constitute a default under any contract,
covenant or instrument under which any of such persons is now obligated.
-5-
<PAGE>
3.14 Registration Rights. Except as set forth in the Shareholder Rights
-------------------
Agreement, the Company is not currently under any obligation to register under
the Securities Act of 1933 any of its presently outstanding securities or any of
its securities which may hereafter be issued.
3.15 Governmental Consent. etc. No consent, approval or authorization of,
-------------------------
or designation, declaration or filing with, any governmental authority on the
part of the Company is required in connection with the valid execution and
delivery of this Agreement and the Shareholder Rights Agreement, or the offer,
sale or issuance of the Series A Preferred (and the Common Stock issuable upon
conversion of the Series A Preferred), or the consummation of any other
transaction contemplated hereby, except (a) filing of the Restated Articles in
the office of the Secretary of State of the State of California, and (b)
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) of the offer and sale of the Series A
Preferred (and the Common Stock issuable upon conversion of the Series A
Preferred) under the California Corporate Securities law of 1968, as amended,
and other applicable Blue Sky laws, which filing and qualification, if required,
will be accomplished in a timely manner prior to or promptly upon completion of
the Closing.
3.16 Disclosure. No statement by the Company contained in this Agreement
----------
and the exhibits attached hereto and any written statement or certificate
furnished or to be furnished to the Purchasers pursuant hereto or in connection
with the transactions contemplated hereby (when read together) contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein or therein not misleading in
light of the circumstances under which they were made.
3.17 Brokers or Finders. The Company has not incurred, and will not incur,
------------------
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
3.18 Qualified Small Business Stock. To the best of the Company's
------------------------------
knowledge, the Shares will constitute "qualified small business stock" within
the meaning of Section 1202 of the Internal Revenue Code of 1986, as amended
(the "Code"), as of the date of issuance.
3.19 Returns and Complaints. The Company has received no customer
----------------------
complaints concerning its products and/or services, nor has it had any of its
products returned by a purchaser thereof, other than minor, nonrecurring
warranty problems.
3.20 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby and by the
Shareholder Rights Agreement, the Voting Agreement and the Co-Sale Agreement,
there are no agreements, understandings or proposed transactions between the
Company and any of its officers, directors, affiliates, or any affiliate
thereof.
-6-
<PAGE>
(b) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound which may involve indemnification by the
Company with respect to infringements of proprietary rights.
(c) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $5,000 or, in the case of
indebtedness and/or liabilities individually less than $5,000, in excess of
$10,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person or entity (including persons or entities
the Company has reason to believe are affiliated therewith) shall be aggregated
for the purpose of meeting the individual minimum dollar amounts of such
subsections.
(e) The Company is not a party to and is not bound by any contract,
agreement or instrument, or subject to any restriction under its Restated
Articles or Bylaws, which adversely affects its business as now conducted or as
proposed to be conducted, its properties, or its financial condition.
(f) The Company has not engaged in the past three (3) months in any
discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company in a
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of, or (iii) regarding any
other form of acquisition, liquidation, dissolution or winding up of the
Company.
3.21 Related-Party Transactions. No employee, officer, or director of the
--------------------------
Company or member of his or her immediate family is indebted to the Company, nor
is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation with which the Company is affiliated or
with which the Company has a business relationship, or any firm or corporation
that competes with the Company, except that employees, officers, or directors of
the Company and members of their immediate families may own stock in publicly
traded companies that may compete with the Company. No
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<PAGE>
member of the immediate family of any officer or director of the Company is
directly or indirectly interested in any contract with the Company.
3.22 Permits. The Company has all franchises, permits, licenses, and any
-------
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and the
Company believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default, in any material respect, under any of such
franchises, permits, licenses, or other similar authority.
3.23 Environmental and Safety Laws. The Company is not in violation of any
-----------------------------
applicable statute, law, or regulation relating to the environmental or
occupational health and safety, and to the best of its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law, or regulation.
3.24 Manufacturing and Marketing Rights. The Company has not granted
----------------------------------
rights to manufacture, produce, assemble, license, market, or sell its products
to any other person, and is not bound by any agreement that affects the
Company's exclusive right to develop, manufacture, assemble, distribute, market,
or sell its products.
3.25 Changes. Since April 30, 1994, there has not been:
-------
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business which have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting the assets, properties, financial condition,
operating results, prospects or business of the Company (as such business is
presently conducted and as it is proposed to be conducted);
(c) any waiver by the Company of a valuable right or of a material debt
owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and which is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is proposed to be conducted):
(e) any change or amendment to a material contract or arrangement by
which the Company or any of its assets or properties is bound or subject;
-8-
<PAGE>
(f) any material change in any compensation arrangement or agreement
with any employee;
(g) any resignation or termination of employment of any officer of the
Company; and the Company, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer;
(h) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(i) any loans or guarantees made by the Company to or for the benefit
of its employees, officers or directors, or any members of their immediate
families, other than travel advances and other advances made in the ordinary
course of its business;
(j) any declaration, setting aside or payment or other distribution in
respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase or other acquisition of any of such stock by the Company;
(k) to the best of the Company's knowledge, any other event or
condition of any character which might materially and adversely affect the
assets, properties, financial condition, operating results or business of the
Company (as such business is presently conducted and as it is proposed to be
conducted); or
(l) any agreement or commitment by the Company to do any of the things
described in this Section 3.25.
3.26 Employee Benefit Plans. The Company does not have any Employee Benefit
----------------------
Plan as defined in the Employee Retirement Income Security Act of 1974.
3.27 Tax Returns, Payments and Elections. The Company has filed all tax
-----------------------------------
returns and reports as required by law. These returns and reports are true and
correct in all material respects. The Company has paid all taxes and other
assessments due. The provision for taxes of the Company as shown in the
Financial Statements is adequate for taxes due or accrued as of the date
thereof. The Company has not elected pursuant to the Code, to be treated as a
Subchapter S corporation or a collapsible corporation pursuant to Section
1362(a) of the Code, nor has it made any other elections pursuant to the Code
(other than elections which relate solely to methods of accounting, depreciation
or amortization) which would have a material effect on the Company, its
financial condition, its business as presently conducted or proposed to be
conducted or any of its properties or material assets.
3.28 Insurance. The Company has in full force and effect fire and casualty
---------
insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles), to allow
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<PAGE>
it to replace any of its properties that might be damaged or destroyed;
and the Company has insurance against other hazards, risks and liabilities to
persons and properties to the extent and in the manner customary for companies
in similar businesses similarly situated.
3.29 Minute Books. The minute books of the Company provided to the
------------
Purchasers contain a complete summary of all meetings of directors and
shareholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all respects.
3.30 Labor Agreements and Actions. The Company is not bound by or subject
----------------------------
to (and none of its assets or properties is bound by or subject to) any written
or oral, express or implied, contract, commitment or arrangement with any labor
union, and no labor union has requested or, to the knowledge of the Company, has
sought to represent any of the employees, representatives or agents of the
Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company (as such business is presently
conducted and as it is proposed to be conducted), nor is the Company aware of
any labor organization activity involving its employees. The Company is not
aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with the Company, nor does the Company
have a present intention to terminate the employment of any of the foregoing.
Subject to general principles related to wrongful termination of employees, the
employment of each officer an employee of the Company is terminable at the will
of the Company.
3.31 Real Property Holding Company. The Company is not a real property
-----------------------------
holding company within the meaning of the Code Section 897.
SECTION 4
Representations and Warranties of the Purchasers
------------------------------------------------
Each Purchaser hereby represents and warrants to the Company with respect to
its purchase of the Shares as follows:
4.1 Investment Representations and Covenants of the Purchasers.
----------------------------------------------------------
(a) This Agreement is made by the Company with each Purchaser in reliance
upon such Purchaser's representations and covenants made in this Section 4,
which by its execution of this Agreement each Purchaser hereby confirms. Each
Purchaser represents that the Shares to be received will be acquired for
investment for its own account, not as a nominee or agent, and not with a view
to the sale or distribution of any part thereof, and that it has no present
intention of selling, granting any participation in or otherwise distributing
the same. Each Purchaser further represents that it does not have any contract,
undertaking, agreement or arrangement with any
-10-
<PAGE>
person to sell, transfer or grant participations to such person or to any third
person, with respect to any of the Shares or any Common Stock acquired on
conversion thereof.
(b) Each Purchaser understands and acknowledges that the offering of
the Shares pursuant to this Agreement will not, and any issuance of Common Stock
on conversion thereof may not, be registered under the Securities Act on the
ground that the sale provided for in this Agreement and the issuance of
securities hereunder is exempt pursuant to Section 4(2) of the Securities Act,
and that the Company's reliance on such exemption is predicated on the
Purchasers' representations set forth herein.
(c) Each Purchaser covenants that in no event will it make any
disposition of any of the Shares, or any Common Stock acquired upon the
conversion thereof, except in accordance with Section 4 of the Shareholder
Rights Agreement.
(d) Each Purchaser represents that it is experienced in evaluating
recently organized, high technology companies such as the Company, is able to
fend for itself in transactions such as the one contemplated by this Agreement,
has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of its prospective investment in the
Company, and has the ability to bear the economic risks of the investment.
(e) Each Purchaser acknowledges and understands that the Shares, and
any Common Stock acquired upon the conversion thereof, must be held indefinitely
unless they are subsequently registered under the Securities Act or an exemption
from such registration is available, and that, except as otherwise provided in
the Shareholder Rights Agreement, the Company is under no obligation to register
either the Shares or Common Stock.
(f) Each Purchaser acknowledges that it has received and reviewed a
copy of Rule 144 promulgated under the Act, which permits limited public resales
of securities acquired in a non-public offering, subject to the satisfaction of
certain conditions. Each Purchaser understands that before the Shares, or any
Common Stock issued upon conversion thereof, may be sold under Rule 144, the
following conditions must be fulfilled, except as otherwise described below: (i)
certain public information about the Company must be available, (ii) the sale
must occur at least two years after the later of the date the Shares were sold
by the Company or the date they were sold by an affiliate of the Company, (iii)
the sale must be made in a broker's transaction and (iv) the number of Shares
sold must not exceed certain volume limitations. If, however, the sale occurs at
least three years after the Shares were sold by the Company or an affiliate of
the Company, and if the Purchaser is not an affiliate of the Company, the
foregoing conditions will not apply. Each Purchaser understands that the current
information referred to above is not now available and the Company has no
present plans to make such information available.
(g) Each Purchaser acknowledges that in the event the applicable
requirements of Rule 144 are not met, registration under the Securities Act or
compliance with another exemption from registration will be required for any
disposition of its stock. Each Purchaser understands that
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<PAGE>
although Rule 144 is not exclusive, the Commission has expressed its opinion
that persons proposing to sell restricted securities received in a private
offering other than in a registered offering or pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales and that such persons and the brokers who
participate in the transactions do so at their own risk.
(h) Each Purchaser covenants that, in the absence of an effective
registration statement covering the stock in question, it will sell, transfer,
or otherwise dispose of the Shares and any Common Stock issued on conversion
thereof only in a manner consistent with its representations and covenants set
forth in this Section 4. In connection therewith each Purchaser acknowledges
that the Company shall make a notation on its stock books regarding the
restrictions on transfer set forth in this Section 4 and shall transfer shares
on the books of the Company only to the extent not inconsistent therewith.
(i) Each Purchaser represents that one or more of the following
criteria are applicable to such Purchaser:
(1) The Purchaser is a director or executive officer of the Company;
or
(2) The Purchaser is a natural person who has a net worth or joint
net worth with the Purchaser's spouse exceeding $1,000,000 at the time of
purchase; or
(3) The Purchaser is a natural person who had an individual income
in excess of $200,000 in each of the two most recent years and who reasonably
expects an income in excess of $200,000 in the current year; or
(4) The Purchaser is either (i) a bank as defined in section 3(a)(2)
of the Securities Act, whether acting in its individual capacity or fiduciary
capacity as trustee, (ii) an insurance company as defined in section 2(13) of
the Securities Act, (iii) an investment company registered under the Investment
Company Act of 1940 or a business development company as defined in section
2(a)(48) of such Act, (iv) a Small Business Investment Company licensed by the
U.S. Small Business Administration under section 301(c) or (d) of the Small
Business Investment Act of 1958; or
(5) The Purchaser is a private business development company as
defined in section 202(a)(22) of the Investment Advisers Act of 1940; or
(6) The Purchaser is a not-for-profit organization or other entity
exempt from income tax under section 501(c)(3) of the Internal Revenue Code with
total assets in excess of $5,000,000; or
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<PAGE>
(7) The Purchaser is a corporation, partnership or trust, and each
and every equity owner of such entity certifies that it meets the qualifications
set forth in (1), (2), (3), (4), (5) or (6) above.
4.2 No Public Market. Each Purchaser understands that no public market now
----------------
exists for any of the securities issued by the Company and that it is unlikely
that a public market will ever exist for the Shares.
4.3 Receipt of Information. Each Purchaser has received and reviewed this
----------------------
Agreement and all Exhibits thereto, and the Financial Statements; it, its
attorney and its accountant have had access to, and an opportunity to review all
documents and other materials requested of, the Company; it and they have been
given an opportunity to ask any and all questions of, and receive answers from,
the Company concerning the terms and conditions of the offering and to obtain
all information it or they believe necessary or appropriate to verify the
accuracy of the Financial Statements and to evaluate the suitability of an
investment in the Series A Preferred; and, in evaluating the suitability of an
investment in the Series A Preferred, it and they have not relied upon any
representations or other information (whether oral or written) other than as set
forth in the documents and answers referred to above. The foregoing, however,
does not limit or modify the representations and warranties of the Company in
Section 3 of this Agreement or the right of the Purchasers to rely thereon.
4.4 Financial Statements. Each purchaser acknowledges that the Financial
--------------------
Statements are not necessarily indicative of results to be expected for the
present, or any future, fiscal period.
SECTION 5
Conditions to Closing of Purchasers
-----------------------------------
The Purchasers' obligations to purchase the Shares at the First Closing and
any Subsequent Closing are, at the option of each Purchaser, subject to the
fulfillment on or prior to the applicable Closing Date of the following
conditions:
5.1 Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by the Company in Section 3 hereof shall be true and correct in
all material respects when made, and shall be true and correct in all material
respects on the applicable Closing Date with the same force and effect as if
they had been made on and as of said date.
5.2 Covenants. All covenants, agreements and conditions contained in this
---------
Agreement to be performed by the Company on or prior to the Closing Date shall
have been performed or complied with in all material respects.
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<PAGE>
5.3 Opinion of Company's Counsel. The Purchasers shall have received from
----------------------------
Wilson, Sonsini, Goodrich & Rosati, counsel to the Company, an opinion addressed
to them, dated the Closing Date, in substantially the form of Exhibit G.
5.4 Compliance Certificate. The Company shall have delivered to the
----------------------
Purchasers a certificate executed by the President of the Company, dated the
Closing Date, and certifying to the fulfillment of the conditions specified in
this Section 5, and that he has made, or caused to be made, such investigations
as he deemed necessary in order to permit him to verify the accuracy of the
information set forth in such certificate.
5.5 Blue Sky. The Company shall have obtained all necessary Blue Sky law
--------
permits and qualifications, or secured an exemption therefrom, required by any
state for the offer and sale of the Series A Preferred and the Common Stock
issuable upon conversion of the Series A Preferred.
5.6 Board of Directors. On or before the First Closing, the Bylaws of the
------------------
Company shall provide for a variable Board of Directors with a minimum of four
(4) directors and a maximum of six (6) directors, with the exact number set at
four (4). The Board of Directors shall at the First Closing consist of Geoffrey
Y. Yang, Irwin Federman, Amos Wilnai and Andy Rappaport.
5.7 Restated Articles. The Restated Articles shall have been filed with the
-----------------
Secretary of State of the State of California.
5.8 Proprietary Information Agreements. Each person presently employed by
----------------------------------
the Company shall have executed a Proprietary Information Agreement in the form
of Exhibit E hereto.
5.9 Secretary's Certificate. The Company shall have delivered to the
-----------------------
Purchaser's special counsel a certificate executed by the Secretary of the
Company, dated as of the Closing, certifying the following matters: (i)
Resolutions adopted by the Company's Board of Directors and Shareholders
relating to the transactions contemplated by this Agreement; (ii) Bylaws of the
Company; and (iii) incumbency of officers of the Company.
5.10 Stock Certificates. The Company shall have delivered to each Purchaser
------------------
a certificate for the number of shares of Series A Preferred set forth opposite
such Purchaser's name on the Schedule of Purchasers.
5.11 No Material Adverse Change. There shall have been no material adverse
--------------------------
change in the Company's business or financial condition.
5.12 Co-Sale Agreement. The Purchasers and each of Amos Wilnai and Alex
-----------------
Joffe shall have entered into the Co-Sale Agreement in substantially the form
attached hereto as Exhibit H.
5.13 Voting Agreement. The Purchasers and each of Amos Wilnai and Alex
----------------
Joffe shall have entered into a Voting Agreement in substantially the form
attached hereto as Exhibit I.
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<PAGE>
5.14 Shareholder Rights Agreement. The Purchasers, the Company and each of
----------------------------
Amos Wilnai and Alex Joffe shall have entered into the Shareholder Rights
Agreement in substantially the form attached hereto as Exhibit D.
SECTION 6
Conditions to Closing of Company
--------------------------------
The Company's obligation to sell and issue the Series A Preferred at the
Closing is, at the option of the Company, subject to the fulfillment of the
following conditions:
6.1 Representations. The representations made by the Purchasers in Section 4
---------------
hereof shall be true and correct when made, and shall be true and correct on the
Closing Date.
6.2 Blue Sky. The Company shall have obtained all necessary Blue Sky Law
--------
permits and qualifications, or secured an exemption therefrom, required by any
state for the offer and sale of the Series A Preferred and the Common Stock
issuable upon conversion of the Series A Preferred.
6.3 Restated Articles. The Restated Articles shall have been filed with the
-----------------
Secretary of State of the State of California.
SECTION 7
Miscellaneous
-------------
7.1 Governing Law. This Agreement shall be governed in all respects by the
-------------
laws of the State of California, without giving effect to the conflicts of laws
principles thereof.
7.2 Survival. The representations, warranties, covenants, and agreements made
--------
herein shall survive any investigation made by any Purchaser and the closing of
the transactions contemplated hereby.
7.3 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors, and administrators of the parties hereto,
provided, however, that the rights of a Purchaser to purchase Shares shall not
be assignable without the written consent of the Company.
7.4 Entire Agreement; Amendment. This Agreement and the other documents
---------------------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged,
or terminated other than by a written instrument signed by the party
-15-
<PAGE>
against whom enforcement of any such amendment, waiver, discharge, or
termination is sought; provided, however, that holders of a majority of the
shares of Common Stock issued or issuable upon conversion of the Series A
Preferred Stock and (whether or not converted) not resold to the public may
waive or amend, on behalf of all Purchasers, any provisions hereof benefiting
Purchasers in respect of the Shares.
7.5 Notices, etc. All notices and other communications required or permitted
------------
hereunder shall be in writing and shall be deemed effectively given upon
delivery to the party to be notified in person or by courier service or five
days after deposit with the United States mail, by registered or certified mail,
postage prepaid, addressed (a) if to a Purchaser, at such Purchaser's address
set forth in Exhibit A, or at such other address as such Purchaser shall have
furnished to the Company in writing, or (b) if to any other holder of any
Shares, at such address as such holder shall have furnished the Company in
writing, or, until any such holder so furnishes an address to the Company, then
to and at the address of the last holder of such Shares who has so furnished an
address to the Company, or (c) if to the Company, one copy should be sent to its
address set forth on the cover page of this Agreement and addressed to the
attention of the Corporate Secretary, or at such other address as the Company
shall have furnished to the Purchasers.
7.6 Delays or Omissions. No delay or omission to exercise any right, power or
-------------------
remedy accruing to any holder of any Shares, upon any breach or default of the
Company under this Agreement, shall impair any such right, power or remedy of
such holder nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any holder of any breach or default under this Agreement, or any
waiver on the part of any holder of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any holder, shall be cumulative and
not alternative.
7.7 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE
-----------------------------------
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH
QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS
AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED
UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE.
7.8 Expenses. The Company and the Purchasers shall each bear their own
--------
expenses and legal fees with respect to this Agreement and the transactions
contemplated hereby; except that, assuming a successful completion of the
offering the Company will pay at the First Closing the
-16-
<PAGE>
reasonable legal fees and reasonable expenses (up to a maximum of $10,000)
upon receipt of a bill therefor, incurred by Brobeck, Phleger & Harrison,
special counsel to the Purchasers.
7.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the Purchasers,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
7.10 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
7.11 Gender. The use of the neuter gender herein shall be deemed to
------
include the masculine and the feminine gender, if the context so requires.
-17-
<PAGE>
The foregoing agreement is hereby executed as of the date first above written.
"COMPANY" MULTIMEDIA COMMUNICATIONS, INC.
a California corporation
By: /s/ Amos Wilnai
------------------------------------
Amos Wilnai, President
"PURCHASERS" INSTITUTIONAL VENTURE PARTNERS VI
FIRST CLOSING By: Its Managing General Partner
Institutional Venture Management VI
By: /s/ Geoffrey Y. Yang
------------------------------------
Geoffrey Y. Yang
INSTITUTIONAL VENTURE MANAGEMENT VI
By: /s/ Geoffrey Y. Yang
------------------------------------
Geoffrey Y. Yang
U.S. VENTURE PARTNERS IV, L.P.
By: /s/ [SIGNATURE]
------------------------------------
Title:
---------------------------------
SECOND VENTURES LIMITED PARTNERSHIP II
By: /s/ [SIGNATURE]
------------------------------------
Title:
---------------------------------
-18-
<PAGE>
U.S. V.P. ENTREPRENEUR PARTNERS II, L.P.
By: /s/ [SIGNATURE]
--------------------------------
Title:
-----------------------------
CROSSCOMM CORPORATION
By:
--------------------------------
Title:
-----------------------------
STANFORD UNIVERSITY
By: /s/ HARRY A. TURNER
--------------------------------
Title: Harry A. Turner, Assistant Secretary,
The Board of Trustees of the Leland
Stanford Junior University
WS INVESTMENT COMPANY 94A
By: /s/ LARRY W. SONSINI
--------------------------------
Title:
-----------------------------
/s/ ROBERT T. CLARKSON
-----------------------------------
Robert T. Clarkson
/s/ LARRY W. SONSINI
-----------------------------------
Larry W. Sonsini
-19-
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Aggregate Number
Name and Address of Purchaser Purchase Price of Shares
- ------------------------------------------- -------------- ----------
<S> <C> <C>
Institutional Venture Partners VI $ 1,470,000 1,470,000
3000 Sand Hill Road
Bldg. 2, Suite 290
Menlo Park, CA 94025
Institutional Venture Management VI 30,000 30,000
3000 Sand Hill Road
Bldg. 2, Suite 290
Menlo Park, CA 94025
U.S. Venture Partners IV, L.P. 1,297,500 1,297,500
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Second Ventures Limited Partnership II 157,500 157,500
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
U.S. V.P. Entrepreneur Partners II, L.P. 45,000 45,000
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
CrossComm Corporation 500,000/1/ 500,000/1/
450 Donald Lynch Blvd.
Marlborough, MA 01752
Stanford University 50,000 50,000
Attention: Carol Gilmer
2770 Sand Hill Road
Menlo Park, CA 94025
WS Investment Company 94A 22,500 22,500
c/o Robert T. Clarkson
650 Page Mill Road
Palo Alto, CA 94304-1050
</TABLE>
_________________________
/1/ CrossComm Corporations did not purchase these shares and, accordingly, the
shares have not been sold.
<PAGE>
<TABLE>
<CAPTION>
Aggregate Number
Name and Address of Purchaser Purchase Price of Shares
- -------------------------------- -------------- ---------
<S> <C> <C>
Robert T. Clarkson 6,250 6,250
650 Page Mill Road
Palo Alto, CA 94304-1050
Larry W. Sonsini 6,250 6,250
650 Page Mill Road ---------- ---------
Palo Alto, CA 94304-1050
Total $3,585,000 3,585,000
========== =========
</TABLE>
-2-
<PAGE>
EXHIBIT 10.7
MMC NETWORKS, INC.
SERIES B PREFERRED STOCK
PURCHASE AGREEMENT
dated as of
November 16, 1995
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 - Authorization and Sale of Preferred Stock 1
1.1 Authorization................................................ 1
1.2 Sale of Series B Preferred................................... 1
1.3 Sale of Additional Series B Preferred........................ 1
SECTION 2 - Closing Date; Delivery 1
2.1 First Closing Date........................................... 1
2.2 Delivery..................................................... 2
2.3 Subsequent Closings.......................................... 2
SECTION 3 - Representations and Warranties of the Company 2
3.1 Organization and Standing; Articles and Bylaws............... 2
3.2 Corporate Power.............................................. 2
3.3 Subsidiaries................................................. 3
3.4 Capitalization............................................... 3
3.5 Authorization................................................ 3
3.6 Title to Properties and Assets; Liens, etc................... 3
3.7 Financial Statements......................................... 3
3.8 Patents, Trademarks, etc..................................... 4
3.9 Material Contracts and Commitments........................... 4
3.10 Compliance with Other Instruments, None Burdensome, etc...... 4
3.11 Litigation, etc.............................................. 5
3.12 Employees.................................................... 5
3.13 Employee Agreements.......................................... 5
3.14 Registration Rights.......................................... 5
3.15 Governmental Consent, etc.................................... 5
3.16 Disclosure................................................... 6
3.17 Brokers or Finders........................................... 6
3.18 Qualified Small Business Stock............................... 6
3.19 Returns and Complaints....................................... 6
3.20 Agreements; Action........................................... 6
3.21 Related-Party Transactions................................... 7
3.22 Permits...................................................... 7
3.23 Environmental and Safety Laws................................ 7
3.24 Manufacturing and Marketing Rights........................... 8
3.25 Changes...................................................... 8
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.26 Employee Benefit Plans....................................... 9
3.27 Tax Returns, Payments and Elections.......................... 9
3.28 Insurance.................................................... 9
3.29 Minute Books................................................. 9
3.30 Labor Agreements and Actions................................. 9
3.31 Real Property Holding Company................................ 10
SECTION 4 - Representations and Warranties of the Purchasers 10
4.1 Investment Representations and Covenants of the Purchasers... 10
4.2 No Public Market............................................. 12
4.3 Receipt of Information....................................... 12
4.4 Financial Statements......................................... 12
SECTION 5 - Conditions to Closing of Purchasers 12
5.1 Representations and Warranties Correct....................... 13
5.2 Covenants.................................................... 13
5.3 Opinion of Company's Counsel................................. 13
5.4 Compliance Certificate....................................... 13
5.5 Blue Sky..................................................... 13
5.6 Board of Directors........................................... 13
5.7 Restated Articles............................................ 13
5.8 Proprietary Information Agreements........................... 13
5.9 Secretary's Certificate...................................... 13
5.10 Stock Certificates........................................... 13
5.11 No Material Adverse Change................................... 14
5.12 Co-Sale Agreement............................................ 14
5.13 Voting Agreement............................................. 14
5.14 Shareholder Rights Agreement................................. 14
SECTION 6 - Conditions to Closing of Company 14
6.1 Representations.............................................. 14
6.2 Blue Sky..................................................... 14
6.3 Restated Articles............................................ 14
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 7 - Miscellaneous................................................. 14
7.1 Governing Law.................................................. 14
7.2 Survival....................................................... 14
7.3 Successors and Assigns......................................... 14
7.4 Entire Agreement; Amendment.................................... 15
7.5 Notices, etc................................................... 15
7.6 Delays or Omissions............................................ 15
7.7 California Corporate Securities Law............................ 15
7.8 Expenses....................................................... 16
7.9 Counterparts................................................... 16
7.10 Severability................................................... 16
7.11 Gender......................................................... 16
</TABLE>
EXHIBITS
A. Schedule of Purchasers
B. Amended and Restated Articles of Incorporation
C. Exceptions to Representations and Warranties of the Company
D. First Amended and Restated Shareholder Rights Agreement
E. Proprietary Information Agreement
F. Form of Opinion of Wilson, Sonsini, Goodrich & Rosati
G. Form of First Amended and Restated Co-Sale Agreement
H. Form of First Amended and Restated Voting Agreement
-iii-
<PAGE>
MMC NETWORKS, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
This Agreement is made as of November 16, 1995, among MMC Networks, Inc., a
California corporation (the "Company"), with its principal office at 2855 Kifer
Road, Suite 200, Santa Clara, California 95051, and the persons and entities
listed on the Schedule of Purchasers attached as Exhibit A hereto (the
"Purchasers").
SECTION 1
Authorization and Sale of Preferred Stock
-----------------------------------------
1.1 Authorization. The Company has authorized the sale and issuance of up
-------------
to 1,362,258 shares of its Series B Preferred Stock ("Series B Preferred"),
having the rights, restrictions, privileges and preferences as set forth in the
Company's Amended and Restated Articles of Incorporation in the form attached to
this Agreement as Exhibit B (the "Restated Articles").
1.2 Sale of Series B Preferred. Subject to the terms and conditions
--------------------------
hereof, the Company will issue and sell to the Purchasers, and the Purchasers
will buy from the Company, the number of shares (the "Shares") of Series B
Preferred specified opposite each Purchaser's name on the Schedule of
Purchasers, at a cash purchase price of $5.30 per share. The Company's
agreements with each of the Purchasers are separate agreements, and the sales of
the Series B Preferred to each of the Purchasers are separate sales.
1.3 Sale of Additional Series B Preferred. The Company shall have until
-------------------------------------
November 30, 1995, to sell any shares of Series B Preferred not sold at the
First Closing at the cash purchase price of $5.30 per share. Any such shares
sold after the First Closing are referred to herein as "Additional Shares." The
Additional Shares shall be considered "Shares" and the purchasers of such
Additional Shares (the "Additional Purchasers") shall be considered "Purchasers"
for purposes of this Agreement, and shall have the same rights and obligations
as if they had purchased their shares pursuant to this Agreement at the First
Closing. The maximum number of shares of Series B Preferred the Company may
sell hereunder is 1,362,258.
SECTION 2
Closing Date; Delivery
----------------------
2.1 First Closing Date. The first closing of the purchase and sale of the
------------------
Series B Preferred hereunder (the "First Closing") shall be held at 3:00 p.m. on
November 16, 1995, or on such later date or dates as the Company and the
Purchasers may agree to (the date of such Closing being referred to as the
"First Closing Date"). The place of the First Closing (including the place of
delivery to the Purchasers by the Company of the certificates evidencing all
shares of Series B Preferred being purchased and the place of payment to the
Company by the Purchasers of the purchase price therefor) shall be at the
offices
<PAGE>
of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California
94304-1050, or such other place as the Purchasers and the Company may mutually
agree. The date of any closing of the transactions contemplated by this
Agreement is sometimes also referred to herein as the "Closing Date."
2.2 Delivery. At the First Closing, the Company will deliver to each
--------
Purchaser a certificate or certificates representing the number of Shares
designated in column 3 of the Schedule of Purchasers to be purchased by each
Purchaser, against payment of the purchase price therefor, by check or wire
transfer payable to the Company, in the amount specified in column 2 of the
Schedule of Purchasers.
2.3 Subsequent Closings. The purchase and sale of any Additional Shares
-------------------
shall be held at a time and place to be agreed upon by the Company and the
Additional Purchasers purchasing at such closing (a "Subsequent Closing"), but
no later than November 30, 1995. At each Subsequent Closing, the Company shall
deliver to each Additional Purchaser purchasing at such closing the certificates
representing the Additional Shares that such Additional Purchaser is purchasing
against delivery to the Company by such Additional Purchaser of the purchase
price therefor by check or wire transfer payable to the Company, in the amount
specified on the Schedule of Purchasers. The Company and each Additional
Purchaser shall execute and deliver signature pages to this Agreement.
SECTION 3
Representations and Warranties of the Company
---------------------------------------------
Except as set forth on Exhibit C attached hereto, the Company hereby
represents and warrants to each Purchaser as follows:
3.1 Organization and Standing; Articles and Bylaws. The Company is a
----------------------------------------------
corporation duly organized and existing under, and by virtue of, the laws of the
State of California and is in good standing under such laws. The Company has
requisite corporate power to own and operate its properties and assets, and to
carry on its business as presently conducted and as proposed to be conducted.
The Company is not qualified to do business as a foreign corporation in any
jurisdiction and such qualification is not presently required.
3.2 Corporate Power. The Company will have at each Closing Date all
---------------
requisite legal and corporate power to execute and deliver this Agreement and
the First Amended and Restated Shareholder Rights Agreement attached hereto as
Exhibit D (the "Shareholder Rights Agreement"), the First Amended and Restated
Co-Sale Agreement attached hereto as Exhibit G (the "Co-Sale Agreement") and the
First Amended and Restated Voting Agreement attached hereto as Exhibit H (the
"Voting Agreement"), to sell and issue the Shares hereunder, to issue the Common
Stock issuable upon conversion of the Series B Preferred and to carry out and
perform its obligations under the terms of this Agreement and the Shareholder
Rights Agreement.
-2-
<PAGE>
3.3 Subsidiaries. The Company has no subsidiaries or affiliated companies
------------
and does not otherwise own or control, directly or indirectly, any other
corporation, association or business entity. The Company is not a participant
in any joint venture, partnership or similar arrangement.
3.4 Capitalization. The authorized capital stock of the Company consists
--------------
of 20,000,000 shares of Common Stock, of which 3,454,950 shares are issued and
outstanding, 3,126,000 shares of Series A Preferred, of which 3,085,000 shares
are issued and outstanding and 1,362,258 shares of Series B Preferred, none of
which has been or will be issued or outstanding prior to the First Closing. All
such issued and outstanding shares have been duly authorized and validly issued,
and are fully paid and nonassessable. The Company has reserved (i) 1,362,258
shares of Series B Preferred for issuance hereunder, (ii) sufficient shares of
Common Stock for issuance upon conversion of the Shares, (iii) sufficient shares
of Common Stock for issuance upon conversion of the Series A Preferred and (iv)
608,937 shares of Common Stock for issuance to employees. The Series B
Preferred shall have the rights, preferences, privileges and restrictions set
forth in the Restated Articles. There are warrants outstanding to purchase
41,000 shares of Series A Preferred. Except as set forth above and in the
Shareholder Rights Agreement, there are no other options, warrants, conversion
privileges or other rights presently outstanding to purchase or otherwise
acquire any authorized but unissued shares of capital stock or other securities
of the Company. All outstanding Common Stock was issued in compliance with all
federal and state securities laws. Assuming the accuracy of each Purchaser's
representations in Section 4 below, upon issuance the Shares will have been
issued in compliance with all federal and state securities laws.
3.5 Authorization. All corporate action on the part of the Company, its
-------------
directors and shareholders necessary for the authorization, execution, delivery
and performance of this Agreement and the Shareholder Rights Agreement by the
Company, the authorization, sale, issuance and delivery of the Shares (and the
Common Stock issuable upon conversion of the Shares) and the performance of the
Company's obligations hereunder and thereunder has been taken or will be taken
prior to the First Closing. This Agreement and the Shareholder Rights
Agreement, when executed and delivered by the Company, shall constitute the
valid and binding obligations of the Company enforceable in accordance with
their respective terms. The Shares, when issued in compliance with the
provisions of this Agreement, will be validly issued, fully paid and
nonassessable, and free of any liens or encumbrances, and the Common Stock
issuable upon conversion of the Shares has been duly and validly reserved and,
when issued in compliance with the provisions of this Agreement and the Restated
Articles, will be validly issued, fully paid and nonassessable, and free of any
liens or encumbrances.
3.6 Title to Properties and Assets; Liens, etc. The Company has good and
------------------------------------------
marketable title to its properties and assets, and has good title to all its
leasehold interests, in each case subject to no mortgage, pledge, lien, lease,
encumbrance or charge, other than (i) the lien of current taxes not yet due and
payable, and (ii) possible minor liens and encumbrances which do not in any case
materially detract from the value of the property subject thereto or materially
impair the operations of the Company, and which have not arisen otherwise than
in the ordinary course of business.
3.7 Financial Statements. The Company has delivered to the Purchasers a
--------------------
copy of the Company's audited financial statements for the year ended December
31, 1994 and unaudited financial
-3-
<PAGE>
statements for the nine months ended September 30, 1995 (the "Financial
Statements"). Such Financial Statements have been prepared in good faith and
present fairly the financial condition and operating results of the Company as
of the dates, and for the periods, indicated therein, and reflect all material
liabilities, contingent or otherwise, at the date thereof, subject where
appropriate to normal year-end adjustments.
3.8 Patents, Trademarks, etc. The Company owns or has the right, or prior
-------------------------
to the First Closing will own or have the right, to use, free and clear of all
liens, charges, claims and restrictions, all patents, trademarks, service marks,
trade names, copyrights, licenses and rights necessary to its business as now
conducted or proposed to be conducted, and is not infringing upon or otherwise
acting adversely to the right or claimed right of, to the best of its knowledge,
any person under or with respect to any of the foregoing. There are no
outstanding options, licenses, or agreements of any kind relating to the
foregoing, nor is the Company bound by or a party to any options, licenses or
agreements of any kind with respect to the patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information, proprietary
rights and processes of any other person or entity. The Company has not
received any written communications alleging that the Company has violated or,
by conducting its business as proposed, would violate any patent, trademark,
service mark, trade name, copyright or trade secret or other proprietary right
of any other person or entity. The Company is not aware that any of its
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employee's best efforts to promote the interests of the Company
or that would conflict with the Company's business as proposed to be conducted.
Neither the execution nor delivery of this Agreement, the Shareholder Rights
Agreement, the Voting Agreement, nor the carrying on of the Company's business
by the employees of the Company, nor the conduct of the Company's business as
proposed, will, to the best of the Company's knowledge, conflict with or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any of such employees is
now obligated. The Company does not believe it is or will be necessary to
utilize any inventions of any of its employees (or people it currently intends
to hire) made prior to their employment by the Company.
3.9 Material Contracts and Commitments. All the material contracts,
----------------------------------
agreements and instruments to which the Company is a party or by which it is
bound which involve obligations of, or payments to, the Company in excess of
$5,000, and all agreements between the Company and its officers, directors,
employees and consultants (the "Material Agreements") are valid, binding and in
full force and effect in all material respects, and are valid, binding and
enforceable by the Company in accordance with their respective terms. The
Company is not in breach of its obligations under the Material Agreements in
accordance with the terms thereof. The Material Agreements are listed in
Exhibit C hereto. To the best of the Company's knowledge, no other party to any
- ---------
of the Material Agreements is in default thereunder.
3.10 Compliance with Other Instruments, None Burdensome, etc. The Company
--------------------------------------------------------
is not in violation of any term of the Restated Articles of Incorporation or By-
Laws, or in any material respect of any term or provision of any material
mortgage, indenture, contract, indebtedness, lease, agree ment, instrument,
judgment or decree. The Company, to the best of its knowledge, is not in
violation of any
-4-
<PAGE>
order, statute, rule or regulation applicable to the Company, which violation
reasonably would be expected to have a material adverse effect on the Company's
business. The execution, delivery and performance of and compliance with this
Agreement, and the issuance of the Shares and the Common Stock issuable upon
conversion of the Shares, have not resulted and will not result in any violation
of, or conflict with, or constitute a default under, or result in the creation
of, any mortgage, pledge, lien, encumbrance or charge upon any of the properties
or assets of the Company; and there is no such violation or default or event
which, with the passage of time or giving of notice or both, would constitute a
violation or default which materially and adversely affects the business of the
Company or any of its properties or assets.
3.11 Litigation, etc. There are no actions, suits, proceedings or
----------------
investigations pending against the Company or its properties before any court or
governmental agency (nor, to the best of the Company's knowledge, is there any
basis therefor or written threat thereof). The foregoing includes, to the best
of the Company's knowledge, actions pending or threatened in writing (or any
basis therefor) involving the prior employment of any of the Company's
employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers.
There is no action, suit, proceeding or investigation by the Company currently
pending or which the Company intents to initiate.
3.12 Employees. To the best of the Company's knowledge, no employee of the
---------
Company is in violation of any term of any employment contract, patent
disclosure agreement or any other contract or agreement relating to the
relationship of any such employee with the Company or any other party because of
the nature of the business conducted or to be conducted by the Company. The
Company does not have any collective bargaining agreements covering any of its
employees.
3.13 Employee Agreements. Each director, consultant and person presently
-------------------
employed by the Company has executed (or will execute by the First Closing Date)
a Proprietary Information Agreement in the form of Exhibit E attached hereto.
Such Proprietary Information Agreements, when executed and delivered by the
Company and such persons, shall constitute valid and binding obligations of the
Company and, to the best of the Company's knowledge, such other persons. To the
best of the Company's knowledge, neither the execution or delivery of such
agreements, nor the carrying on of the Company's business as employees by such
persons, nor the conduct of the Company's business as proposed, will conflict
with or result in a breach of the terms, conditions or provisions of or
constitute a default under any contract, covenant or instrument under which any
of such persons is now obligated.
3.14 Registration Rights. Except as set forth in the Shareholder Rights
-------------------
Agreement, the Company is not currently under any obligation to register under
the Securities Act of 1933 any of its presently outstanding securities or any of
its securities which may hereafter be issued.
3.15 Governmental Consent, etc. No consent, approval or authorization of,
--------------------------
or designation, declaration or filing with, any governmental authority on the
part of the Company is required in connection with the valid execution and
delivery of this Agreement and the Shareholder Rights Agreement, or the offer,
sale or issuance of the Series B Preferred (and the Common Stock issuable upon
conversion of the Series B Preferred), or the consummation of any other
transaction contemplated
-5-
<PAGE>
hereby, except (a) filing of the Restated Articles in the office of the
Secretary of State of the State of California, and (b) qualification (or taking
such action as may be necessary to secure an exemption from qualification, if
available) of the offer and sale of the Series B Preferred (and the Common Stock
issuable upon conversion of the Series B Preferred) under the California
Corporate Securities Law of 1968, as amended, and other applicable Blue Sky
laws, which filing and qualification, if required, will be accomplished in a
timely manner prior to or promptly upon completion of the Closing.
3.16 Disclosure. No statement by the Company contained in this Agreement
----------
and the exhibits attached hereto and any written statement or certificate
furnished or to be furnished to the Purchasers pursuant hereto or in connection
with the transactions contemplated hereby (when read together) contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein or therein not misleading in
light of the circumstances under which they were made.
3.17 Brokers or Finders. The Company has not incurred, and will not incur,
------------------
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
3.18 Qualified Small Business Stock. To the best of the Company's
------------------------------
knowledge, the Shares will constitute "qualified small business stock" within
the meaning of Section 1202 of the Internal Revenue Code of 1986, as amended
(the "Code"), as of the date of issuance.
3.19 Returns and Complaints. The Company has received no customer
----------------------
complaints concerning its products and/or services, nor has it had any of its
products returned by a purchaser thereof, other than minor, nonrecurring
warranty problems.
3.20 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby and by the
Shareholder Rights Agreement, the Voting Agreement and the First Amended and
Restated Co-Sale Agreement between the Company and certain investors (the "Co-
Sale Agreement"), there are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates,
or any affiliate thereof.
(b) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound which may involve indemnification by the
Company with respect to infringements of proprietary rights.
(c) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $5,000 or, in the case of
indebtedness and/or liabilities individually less than $5,000, in excess of
$10,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or
-6-
<PAGE>
(iv) sold, exchanged or otherwise disposed of any of its assets or rights, other
than the sale of its inventory in the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) The Company is not a party to and is not bound by any contract,
agreement or instrument, or subject to any restriction under its Restated
Articles or Bylaws, which adversely affects its business as now conducted or as
proposed to be conducted, its properties, or its financial condition.
(f) The Company has not engaged in the past three (3) months in any
discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company in a
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of, or (iii) regarding any
other form of acquisition, liquidation, dissolution or winding up of the
Company.
3.21 Related-Party Transactions. No employee, officer, or director of the
--------------------------
Company or member of his or her immediate family is indebted to the Company, nor
is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation with which the Company is affiliated or
with which the Company has a business relationship, or any firm or corporation
that competes with the Company, except that employees, officers, or directors of
the Company and members of their immediate families may own stock in publicly
traded companies that may compete with the Company. No member of the immediate
family of any officer or director of the Company is directly or indirectly
interested in any contract with the Company.
3.22 Permits. The Company has all franchises, permits, licenses, and any
-------
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and the
Company believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default, in any material respect, under any of such
franchises, permits, licenses, or other similar authority.
3.23 Environmental and Safety Laws. The Company is not in violation of any
-----------------------------
applicable statute, law, or regulation relating to the environmental or
occupational health and safety, and to the best of its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law, or regulation.
-7-
<PAGE>
3.24 Manufacturing and Marketing Rights. The Company has not granted
----------------------------------
rights to manufacture, produce, assemble, license, market, or sell its products
to any other person, and is not bound by any agreement that affects the
Company's exclusive right to develop, manufacture, assemble, distribute, market,
or sell its products.
3.25 Changes. Since September 30, 1995 there has not been:
-------
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business which have not
been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Company (as such
business is presently conducted and as it is proposed to be conducted);
(c) any waiver by the Company of a valuable right or of a material
debt owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and which is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is proposed to be conducted);
(e) any change or amendment to a material contract or arrangement by
which the Company or any of its assets or properties is bound or subject;
(f) any material change in any compensation arrangement or agreement
with any employee;
(g) any resignation or termination of employment of any officer of the
Company; and the Company, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer;
(h) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(i) any loans or guarantees made by the Company to or for the benefit
of its employees, officers or directors, or any members of their immediate
families, other than travel advances and other advances made in the ordinary
course of its business;
(j) any declaration, setting aside or payment or other distribution in
respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase or other acquisition of any of such stock by the Company;
-8-
<PAGE>
(k) to the best of the Company's knowledge, any other event or
condition of any character which might materially and adversely affect the
assets, properties, financial condition, operating results or business of the
Company (as such business is presently conducted and as it is proposed to be
conducted); or
(l) any agreement or commitment by the Company to do any of the things
described in this Section 3.25.
3.26 Employee Benefit Plans. The Company does not have any Employee
----------------------
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
3.27 Tax Returns, Payments and Elections. The Company has filed all tax
-----------------------------------
returns and reports as required by law. These returns and reports are true and
correct in all material respects. The Company has paid all taxes and other
assessments due. The provision for taxes of the Company as shown in the
Financial Statements is adequate for taxes due or accrued as of the date
thereof. The Company has not elected pursuant to the Code, to be treated as a
Subchapter S corporation or a collapsible corporation pursuant to Section
1362(a) of the Code, nor has it made any other elections pursuant to the Code
(other than elections which relate solely to methods of accounting, depreciation
or amortization) which would have a material effect on the Company, its
financial condition, its business as presently conducted or proposed to be
conducted or any of its properties or material assets.
3.28 Insurance. The Company has in full force and effect fire and casualty
---------
insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles), to allow it to replace any of its properties that might
be damaged or destroyed; and the Company has insurance against other hazards,
risks and liabilities to persons and properties to the extent and in the manner
customary for companies in similar businesses similarly situated.
3.29 Minute Books. The minute books of the Company provided to the
------------
Purchasers contain a complete summary of all meetings of directors and
shareholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all respects.
3.30 Labor Agreements and Actions. The Company is not bound by or subject
----------------------------
to (and none of its assets or properties is bound by or subject to) any written
or oral, express or implied, contract, commitment or arrangement with any labor
union, and no labor union has requested or, to the knowledge of the Company, has
sought to represent any of the employees, representatives or agents of the
Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company (as such business is presently
conducted and as it is proposed to be conducted), nor is the Company aware of
any labor organization activity involving its employees. The Company is not
aware that any officer or key employee, or that any group of key employees,
intends to terminate employment with the Company, nor does the Company have a
present intention to terminate the employment of any of the foregoing. Subject
to general principles related to wrongful termination of employees, the
employment of each officer and employee of the Company is terminable at the will
of the Company.
-9-
<PAGE>
3.31 Real Property Holding Company. The Company is not a real property
-----------------------------
holding company within the meaning of the Code Section 897.
SECTION 4
Representations and Warranties of the Purchasers
------------------------------------------------
Each Purchaser hereby represents and warrants to the Company with respect
to its purchase of the Shares as follows:
4.1 Investment Representations and Covenants of the Purchasers.
----------------------------------------------------------
(a) This Agreement is made by the Company with each Purchaser in
reliance upon such Purchaser's representations and covenants made in this
Section 4, which by its execution of this Agreement each Purchaser hereby
confirms. Each Purchaser represents that the Shares to be received will be
acquired for investment for its own account, not as a nominee or agent, and not
with a view to the sale or distribution of any part thereof, and that it has no
present intention of selling, granting any participation in or otherwise
distributing the same. Each Purchaser further represents that it does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to any of the Shares or any Common Stock acquired on conversion thereof.
(b) Each Purchaser understands and acknowledges that the offering of
the Shares pursuant to this Agreement will not, and any issuance of Common Stock
on conversion thereof may not, be registered under the Securities Act on the
ground that the sale provided for in this Agreement and the issuance of
securities hereunder is exempt pursuant to Section 4(2) of the Securities Act,
and that the Company's reliance on such exemption is predicated on the
Purchasers' representations set forth herein.
(c) Each Purchaser covenants that in no event will it make any
disposition of any of the Shares, or any Common Stock acquired upon the
conversion thereof, except in accordance with Section 4 of the Shareholder
Rights Agreement.
(d) Each Purchaser represents that it is experienced in evaluating
recently organized, high technology companies such as the Company, is able to
fend for itself in transactions such as the one contemplated by this Agreement,
has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of its prospective investment in the
Company, and has the ability to bear the economic risks of the investment.
(e) Each Purchaser acknowledges and understands that the Shares, and
any Common Stock acquired upon the conversion thereof, must be held indefinitely
unless they are subsequently registered under the Securities Act or an exemption
from such registration is available, and that, except as otherwise provided in
the Shareholder Rights Agreement, the Company is under no obligation to register
either the Shares or Common Stock.
-10-
<PAGE>
(f) Each Purchaser acknowledges that it is familiar with Rule 144
promulgated under the Act, which permits limited public resales of securities
acquired in a non-public offering, subject to the satisfaction of certain
conditions. Each Purchaser understands that before the Shares, or any Common
Stock issued upon conversion thereof, may be sold under Rule 144, the following
conditions must be fulfilled, except as otherwise described below: (i) certain
public information about the Company must be available, (ii) the sale must occur
at least two years after the later of the date the Shares were sold by the
Company or the date they were sold by an affiliate of the Company, (iii) the
sale must be made in a broker's transaction and (iv) the number of Shares sold
must not exceed certain volume limitations. If, however, the sale occurs at
least three years after the Shares were sold by the Company or an affiliate of
the Company, and if the Purchaser is not an affiliate of the Company, the
foregoing conditions will not apply. Each Purchaser understands that the
current information referred to above is not now available and the Company has
no present plans to make such information available.
(g) Each Purchaser acknowledges that in the event the applicable
requirements of Rule 144 are not met, registration under the Securities Act or
compliance with another exemption from registration will be required for any
disposition of its stock. Each Purchaser understands that although Rule 144 is
not exclusive, the Commission has expressed its opinion that persons proposing
to sell restricted securities received in a private offering other than in a
registered offering or pursuant to Rule 144 will have a substantial burden of
proof in establishing that an exemption from registration is available for such
offers or sales and that such persons and the brokers who participate in the
transactions do so at their own risk.
(h) Each Purchaser covenants that, in the absence of an effective
registration statement covering the stock in question, it will sell, transfer,
or otherwise dispose of the Shares and any Common Stock issued on conversion
thereof only in a manner consistent with its representations and covenants set
forth in this Section 4. In connection therewith each Purchaser acknowledges
that the Company shall make a notation on its stock books regarding the
restrictions on transfer set forth in this Section 4 and shall transfer shares
on the books of the Company only to the extent not inconsistent therewith.
(i) Each Purchaser represents that one or more of the following
criteria are applicable to such Purchaser:
(1) The Purchaser is a director or executive officer of the
Company; or
(2) The Purchaser is a natural person who has a net worth or
joint net worth with the Purchaser's spouse exceeding $1,000,000 at the time of
purchase; or
(3) The Purchaser is a natural person who had an individual
income in excess of $200,000 in each of the two most recent years and who
reasonably expects an income in excess of $200,000 in the current year; or
(4) The Purchaser is either (i) a bank as defined in section
3(a)(2) of the Securities Act, whether acting in its individual capacity or
fiduciary capacity as trustee, (ii) an insurance company as defined in section
2(13) of the Securities Act, (iii) an investment company registered under
-11-
<PAGE>
the Investment Company Act of 1940 or a business development company as defined
in section 2(a)(48) of such Act, (iv) a Small Business Investment Company
licensed by the U.S. Small Business Administration under section 301(c) or (d)
of the Small Business Investment Act of 1958; or
(5) The Purchaser is a private business development company as
defined in section 202(a)(22) of the Investment Advisers Act of 1940; or
(6) The Purchaser is any organization described in Section
501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific purpose of acquiring
the Shares with total assets in excess of $5,000,000; or
(7) The Purchaser is a corporation, partnership or trust, and
each and every equity owner of such entity certifies that it meets the
qualifications set forth in (1), (2), (3), (4), (5) or (6) above.
4.2 No Public Market. Each Purchaser understands that no public market
----------------
now exists for any of the securities issued by the Company and that it is
unlikely that a public market will ever exist for the Shares.
4.3 Receipt of Information. Each Purchaser has received and reviewed this
----------------------
Agreement and all Exhibits thereto, and the Financial Statements; it, its
attorney and its accountant have had access to, and an opportunity to review all
documents and other materials requested of, the Company; it and they have been
given an opportunity to ask any and all questions of, and receive answers from,
the Company concerning the terms and conditions of the offering and to obtain
all information it or they believe necessary or appropriate to verify the
accuracy of the Financial Statements and to evaluate the suitability of an
investment in the Series B Preferred; and, in evaluating the suitability of an
investment in the Series B Preferred, it and they have not relied upon any
representations or other information (whether oral or written) other than as set
forth in the documents and answers referred to above. The foregoing, however,
does not limit or modify the representations and warranties of the Company in
Section 3 of this Agreement or the right of the Purchasers to rely thereon.
4.4 Financial Statements. Each Purchaser acknowledges that the Financial
--------------------
Statements are not necessarily indicative of results to be expected for the
present, or any future, fiscal period.
SECTION 5
Conditions to Closing of Purchasers
-----------------------------------
The Purchasers' obligations to purchase the Shares at the First Closing and
any Subsequent Closing are, at the option of each Purchaser, subject to the
fulfillment on or prior to the applicable Closing Date of the following
conditions:
-12-
<PAGE>
5.1 Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by the Company in Section 3 hereof shall be true and correct in
all material respects when made, and shall be true and correct in all material
respects on the applicable Closing Date with the same force and effect as if
they had been made on and as of said date.
5.2 Covenants. All covenants, agreements and conditions contained in this
---------
Agreement to be performed by the Company on or prior to the Closing Date shall
have been performed or complied with in all material respects.
5.3 Opinion of Company's Counsel. The Purchasers shall have received from
----------------------------
Wilson, Sonsini, Goodrich & Rosati, counsel to the Company, an opinion addressed
to them, dated the Closing Date, in substantially the form of Exhibit F.
5.4 Compliance Certificate. The Company shall have delivered to the
----------------------
Purchasers a certificate executed by the President of the Company, dated the
Closing Date, and certifying to the fulfillment of the conditions specified in
this Section 5, and that he has made, or caused to be made, such investigations
as he deemed necessary in order to permit him to verify the accuracy of the
information set forth in such certificate.
5.5 Blue Sky. The Company shall have obtained all necessary Blue Sky law
--------
permits and qualifications, or secured an exemption therefrom, required by any
state for the offer and sale of the Series B Preferred and the Common Stock
issuable upon conversion of the Series B Preferred.
5.6 Board of Directors. On or before the First Closing, the Bylaws of the
------------------
Company shall provide for a variable Board of Directors with a minimum of four
(4) directors and a maximum of six (6) directors, with the exact number set at
four (5). The Board of Directors shall at the First Closing consist of P.K.
Dubey, Irwin Federman, Andy Rappaport, Amos Wilnai, and Geoffrey Y. Yang.
5.7 Restated Articles. The Restated Articles shall have been filed with
-----------------
the Secretary of State of the State of California.
5.8 Proprietary Information Agreements. Each person presently employed by
----------------------------------
the Company shall have executed a Proprietary Information Agreement in the form
of Exhibit E hereto.
5.9 Secretary's Certificate. The Company shall have delivered to the
-----------------------
Purchaser's special counsel a certificate executed by the Secretary of the
Company, dated as of the Closing, certifying the following matters: (i)
Resolutions adopted by the Company's Board of Directors and Shareholders
relating to the transactions contemplated by this Agreement; (ii) Bylaws of the
Company; and (iii) incumbency of officers of the Company.
5.10 Stock Certificates. The Company shall have delivered to each
------------------
Purchaser a certificate for the number of shares of Series B Preferred set forth
opposite such Purchaser's name on the Schedule of Purchasers.
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<PAGE>
5.11 No Material Adverse Change. There shall have been no material adverse
--------------------------
change in the Company's business or financial condition.
5.12 Co-Sale Agreement. The Purchasers and each of Amos Wilnai and Alex
-----------------
Joffe shall have entered into the Co-Sale Agreement in substantially the form
attached hereto as Exhibit G.
5.13 Voting Agreement. The Purchasers and each of Amos Wilnai and Alex
----------------
Joffe shall have entered into the Voting Agreement in substantially the form
attached hereto as Exhibit H.
5.14 Shareholder Rights Agreement. The Purchasers, the Company and each of
----------------------------
Amos Wilnai and Alex Joffe shall have entered into the Shareholder Rights
Agreement in substantially the form attached hereto as Exhibit D.
SECTION 6
Conditions to Closing of Company
--------------------------------
The Company's obligation to sell and issue the Series B Preferred at the
Closing is, at the option of the Company, subject to the fulfillment of the
following conditions:
6.1 Representations. The representations made by the Purchasers in
---------------
Section 4 hereof shall be true and correct when made, and shall be true and
correct on the Closing Date.
6.2 Blue Sky. The Company shall have obtained all necessary Blue Sky Law
--------
permits and qualifications, or secured an exemption therefrom, required by any
state for the offer and sale of the Series B Preferred and the Common Stock
issuable upon conversion of the Series B Preferred.
6.3 Restated Articles. The Restated Articles shall have been filed with
-----------------
the Secretary of State of the State of California.
SECTION 7
Miscellaneous
-------------
7.1 Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of California, without giving effect to the conflicts of
laws principles thereof.
7.2 Survival. The representations, warranties, covenants, and agreements
--------
made herein shall survive any investigation made by any Purchaser and the
closing of the transactions contemplated hereby.
7.3 Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors, and administrators
-14-
<PAGE>
of the parties hereto, provided, however, that the rights of a Purchaser to
purchase Shares shall not be assignable without the written consent of the
Company.
7.4 Entire Agreement; Amendment. This Agreement and the other documents
---------------------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged,
or terminated other than by a written instrument signed by the party against
whom enforcement of any such amendment, waiver, discharge, or termination is
sought; provided, however, that holders of a majority of the shares of Common
Stock issued or issuable upon conversion of the Series B Preferred Stock and
(whether or not converted) not resold to the public may waive or amend, on
behalf of all Purchasers, any provisions hereof benefiting Purchasers in respect
of the Shares.
7.5 Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon delivery to the party to be notified in person or by courier service or
five days after deposit with the United States mail, by registered or certified
mail, postage prepaid, addressed (a) if to a Purchaser, at such Purchaser's
address set forth in Exhibit A, or at such other address as such Purchaser shall
have furnished to the Company in writing, or (b) if to any other holder of any
Shares, at such address as such holder shall have furnished the Company in
writing, or, until any such holder so furnishes an address to the Company, then
to and at the address of the last holder of such Shares who has so furnished an
address to the Company, or (c) if to the Company, one copy should be sent to its
address set forth on the cover page of this Agreement and addressed to the
attention of the Corporate Secretary, or at such other address as the Company
shall have furnished to the Purchasers.
7.6 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any holder of any Shares, upon any breach or default
of the Company under this Agreement, shall impair any such right, power or
remedy of such holder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any holder of any breach or default under this
Agreement, or any waiver on the part of any holder of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
7.7 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH
-----------------------------------
ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER
OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES
OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS
AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING
AVAILABLE.
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<PAGE>
7.8 Expenses. The Company and the Purchasers shall each bear their own
--------
expenses and legal fees with respect to this Agreement and the transactions
contemplated hereby; except that, assuming a successful completion of the
offering the Company will pay at the First Closing the reasonable legal fees (up
to a maximum of $7,500) and reasonable expenses upon receipt of a bill therefor
of special counsel to the Purchasers.
7.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be executed by less than all of the Purchasers,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
7.10 Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
7.11 Gender. The use of the neuter gender herein shall be deemed to
------
include the feminine and the masculine gender, if the context so requires.
-16-
<PAGE>
The foregoing agreement is hereby executed as of the date first above
written.
"COMPANY" MMC NETWORKS, INC.,
a California corporation
By: /s/ P. K. Dubey
---------------------------------------------
P. K. Dubey, President
"PURCHASERS" KLEINER PERKINS CAUFIELD & BYERS VII
By: KPCB VII Associates, its General Partner
By: /s/ [SIGNATURE]
---------------------------------------------
Title: General Partner
------------------------------------------
KPCB VII FOUNDERS FUND
By: KPCB VII Associates, its General Partner
By: /s/ [SIGNATURE]
---------------------------------------------
Title: General Partner
------------------------------------------
KPCB INFORMATION SCIENCES ZAIBATSU FUNDS II
By: KPCB VII Associates, its General Partner
By: /s/ [SIGNATURE]
---------------------------------------------
Title: General Partner
------------------------------------------
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<PAGE>
JAPAN ASSOCIATED FINANCE CO., LTD.
By: /s/ Masaki Yoshida
---------------------------------------------
Name: Masaki Yoshida
Title: President
JAFCO G-5 INVESTMENT ENTERPRISE
PARTNERSHIP
By: /s/ Masaki Yoshida
---------------------------------------------
Name: Masaki Yoshida
Title: President
Japan Associated Finance Co., Ltd.
Its Executive Partner
U.S. INFORMATION TECHNOLOGY INVESTMENT ENTERPRISE
PARTNERSHIP
By: /s/ Masaki Yoshida
---------------------------------------------
Name: Masaki Yoshida
Title: President
Japan Associated Finance Co., Ltd.
Its Executive Partner
INSTITUTIONAL VENTURE PARTNERS VI, L.P.
By Its General Partner
Institutional Venture Management VI
By: /s/ Geoffrey Y. Yang
---------------------------------------------
Geoffrey Y. Yang, General Partner
INSTITUTIONAL VENTURE MANAGEMENT VI, L.P.
By: /s/ Geoffrey Y. Yang
---------------------------------------------
Geoffrey Y. Yang, General Partner
-18-
<PAGE>
IVP FOUNDERS FUND I, L.P.
By Its General Partner
Institutional Venture Management VI
By: /s/ Geoffrey Y. Yang
---------------------------------------------
Geoffrey Y. Yang, General Partner
U.S. VENTURE PARTNERS IV, L.P.
By Its General Partner
Presidio Management Group IV, L.P.
By: /s/ Michael P. Maher
---------------------------------------------
General Partner
USVP ENTREPRENEUR PARTNERS II, L.P.
A Delaware Limited Partnership
By Its General Partner
Presidio Management Group IV, L.P.
By: /s/ Michael P. Maher
---------------------------------------------
General Partner
SECOND VENTURES II, L.P.
By Its General Partner
Presidio Management Group IV, L.P.
By: /s/ Michael P. Maher
---------------------------------------------
General Partner
STANFORD UNIVERSITY
By: /s/ Carol Gilmer
---------------------------------------------
Title: Assistant Secretary, The Board of
Trustees of the Leland Stanford
Junior University
-19-
<PAGE>
WS INVESTMENT COMPANY 95B
By: /s/ Robert T. Clarkson
---------------------------------------------
Title: Partner
------------------------------------------
/s/ Robert T. Clarkson
------------------------------------------------
Robert T. Clarkson
/s/ Larry W. Sonsini
------------------------------------------------
Larry W. Sonsini
/s/ John Marren
------------------------------------------------
John Marren
/s/ G. Arjavalingam
------------------------------------------------
G. Arjavalingam
/s/ Timothy M. Haley
------------------------------------------------
Timothy M. Haley
/s/ Neal Douglas
------------------------------------------------
Neal Douglas
-20-
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Aggregate Number
Name and Address of Purchaser Purchase Price of Shares
- ------------------------------------ -------------- ---------
<S> <C> <C>
Kleiner Perkins Caufield & Byers VII 2,110,587.20 398,224
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VII Founders Fund 229,410.50 43,285
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB Information Sciences 60,001.30 11,321
Zaibatsu Fund II
2750 Sand Hill Road
Menlo Park, CA 94025
Japan Associated Finance Co., Ltd. 55,999.80 10,566
Toshiba Bldg. 10F
1-1-1, Shibaura, Minato-Ku
Tokyo, Japan 105
JAFCO G-5 Investment Enterprise 223,999.20 42,264
Partnership
Toshiba Bldg. 10F
1-1-1, Shibaura, Minato-Ku
Tokyo, Japan 105
U.S. Information Technology Investment 1,119,996.00 211,320
Enterprise Partnership
Toshiba Bldg. 10F
1-1-1, Shibaura, Minato-Ku
Tokyo, Japan 105
Institutional Venture Partners VI, L.P. 1,504,002.20 283,774
3000 Sand Hill Road
Bldg. 2, Suite 290
Menlo Park, CA 94025
Institutional Venture Management VI, 32,001.40 6,038
L.P.
3000 Sand Hill Road
Bldg. 2, Suite 290
Menlo Park, CA 94025
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aggregate Number
Name and Address of Purchaser Purchase Price of Shares
- ------------------------------------ -------------- ---------
<S> <C> <C>
IVP Founders Fund I, L.P. 63,997.50 12,075
3000 Sand Hill Road
Bldg. 2, Suite 290
Menlo Park, CA 94025
U.S. Venture Partners IV, L.P. 1,383,999.60 261,132
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Second Ventures II, L.P. 167,999.40 31,698
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
USVP Entrepreneur Partners II, L.P. 48,002.10 9,057
2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Stanford University 49,994.90 9,433
Attention: Carol Gilmer
2770 Sand Hill Road
Menlo Park, CA 94025
WS Investment Company 95B 35,997.60 6,792
c/o Robert T. Clarkson
650 Page Mill Road
Palo Alto, CA 94304-1050
Robert T. Clarkson 11,999.20 2,264
650 Page Mill Road
Palo Alto, CA 94304-1050
Larry W. Sonsini 11,999.20 2,264
650 Page Mill Road
Palo Alto, CA 94304-1050
John Marren 24,994.80 4,716
Alex. Brown & Sons Incorporated
101 California St., 46th Floor
San Francisco, CA 94111
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Aggregate Number
Name and Address of Purchaser Purchase Price of Shares
- ------------------------------------ -------------- ---------
<S> <C> <C>
G. Arjavalingam 24,994.80 4,716
Needham & Company, Inc.
445 Park Avenue
New York, NY 10022
Timothy M. Haley 9,995.80 1,886
Haley Associates
526 Ramona St.
Palo Alto, CA 94301
Neal M. Douglas 49,994.90 9,433
AT&T Ventures
Bldg. 4, Suite 235
3000 Sand Hill Road
Menlo Park, CA 94025
Total $7,219,967.40 $1,362,258
============= ==========
</TABLE>
-3-
<PAGE>
EXHIBIT 10.8
FIRST AMENDED AND RESTATED SHAREHOLDER RIGHTS AGREEMENT
This First Amended and Restated Shareholder Rights Agreement (the
"Agreement") is made as of this 16th day of November 1995 by and among MMC
Networks, Inc., a California corporation (the "Company"), the purchasers of
Series A Preferred Stock of the Company pursuant to that certain Series A
Preferred Stock Purchase Agreement dated July 12, 1994 (the "Series A
Agreement") between the Company and such purchasers (the "Series A Purchasers"),
the purchasers of the Series B Preferred Stock of the Company pursuant to that
certain Series B Preferred Stock Purchase Agreement dated of even date herewith
(the "Series B Agreement") between the Company and such purchasers (the "Series
B Purchasers") (the Series A Purchasers and the Series B Purchasers being
collectively referred to herein as the "Purchasers") and Amos Wilnai, Alex Joffe
and P.K. Dubey (the "Founders") and Dominion Fund III, a California Limited
Partnership ("Dominion").
Recitals
--------
A. Pursuant to the Series A Agreement, the Series A Purchasers have
purchased shares of Series A Preferred Stock of the Company (the "Series A
Preferred") and pursuant to the Series B Agreement, the Series B Purchasers have
purchased shares of Series B Preferred Stock of the Company (the "Series B
Preferred") (the Series A Preferred and Series B Preferred are hereinafter
collectively referred to as the "Preferred Stock"). In connection with the
Series A Agreement, the Series A Purchasers, the Founders and the Company
entered into a Shareholder Rights Agreement dated July 12, 1994 (the "Prior
Shareholder Agreement") setting forth their agreement and understandings with
respect to certain rights and privileges accompanying the shares of the Series A
Preferred, and to which Prior Shareholder Rights Agreement Dominion was
subsequently added.
B. The Series A Purchasers, the Founders, the Company and Dominion desire
to amend and restate the Prior Shareholder Agreement to contain the rights
contained herein.
NOW THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Purchasers and the Company agree as follows:
Agreement
---------
1. Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
----------
successor agency.
"Demand Registrable Securities" shall mean (i) shares of the Company's
-----------------------------
Common Stock issued or issuable upon the conversion of the Series A Preferred or
Series B Preferred; (ii) any Common Stock of the Company or other securities
issued or issuable in respect of shares of the Series A Preferred or Series B
Preferred; (iii) shares of the Company's Common Stock or other securities issued
or issuable upon any conversion of the Series A Preferred or Series B Preferred
upon any stock split, stock dividend,
<PAGE>
recapitalization, or similar event; provided, however, that any shares described
-----------------
in clauses (i)-(iii) above which have been resold to the public shall cease to
be Registrable Securities upon such resale.
"Holder" shall mean Dominion, each Purchaser, Founder and any transferee of
------
Registrable Securities who, pursuant to Section 15 below, is entitled to
registration rights hereunder.
"Restricted Securities" shall mean the securities of the Company required
---------------------
to bear the legend set forth in Section 3 hereof (or any similar legend).
"Registrable Securities" shall mean (i) shares of the Company's Common
----------------------
Stock issued or issuable upon the conversion of the Series A Preferred or Series
B Preferred; (ii) any Common Stock of the Company or other securities issued or
issuable in respect of shares of the Series A Preferred or Series B Preferred;
(iii) an aggregate of 3,225,000 shares of Common Stock held by the Founders or
issuable upon exercise of stock options held by them; and (iv) shares of the
Company's Common Stock or other securities issued or issuable upon any
conversion of the Series A Preferred or Series B Preferred or in respect of the
shares described in clause (iii) upon any stock split, stock dividend,
recapitalization, or similar event; provided, however, that any shares described
-------- -------
in clauses (i)-(iv) above which have been resold to the public shall cease to be
Registrable Securities upon such resale.
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company in
---------------------
complying with Sections 5, 6 and 9 hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
reasonable fees and disbursements of one counsel to the Holders, and the expense
of any special audits incident to or required by any such registration.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders.
2. Restrictions on Transferability. The Restricted Securities shall not
-------------------------------
be transferable except upon the conditions specified in this Agreement, which
conditions are intended to ensure compliance with the provisions of the
Securities Act. Each Holder of Restricted Securities will cause any proposed
transferee of the Restricted Securities held by such Holder to agree to take and
hold such Restricted Securities subject to the provisions and upon the
conditions specified in this Agreement.
3. Restrictive Legend. Each certificate representing (i) the Series A
------------------
Preferred or Series B Preferred, (ii) shares of the Company's Common Stock
issued upon conversion of the Series A Preferred or Series B Preferred, (iii)
the Common Stock issued to the Founders and (iv) any other securities issued in
respect of the Series A Preferred, Series B Preferred or Common Stock issued
upon conversion of the
-2-
<PAGE>
Series A Preferred, Series B Preferred and Common Stock issued to the Founders
upon any stock split, stock dividend, recapitalization, merger, consolidation or
similar event, shall (unless otherwise permitted by the provisions of Section 4
below) be stamped or otherwise imprinted with a legend in the following form (in
addition to any legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THESE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE
AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR
TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER
OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE
PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.
4. Notice of Proposed Transfers. The Holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 4. Prior to any proposed transfer
of any Restricted Securities, unless there is in effect a registration statement
under the Securities Act covering the proposed transfer, the Holder thereof
shall give written notice to the Company of such Holder's intention to effect
such transfer. Each such notice shall describe the manner and circumstances of
the proposed transfer in sufficient detail, and shall, if the Company so
requests, be accompanied (except in transactions in compliance with Rule 144) by
either (i) an unqualified written opinion of legal counsel who shall be
reasonably satisfactory to the Company, addressed to the Company and reasonably
satisfactory in form and substance to the Company's counsel, to the effect that
the proposed transfer of the Restricted Securities may be effected without
registration under the Securities Act, or (ii) a "No Action" letter from the
Commission to the effect that the transfer of such securities without
registration will not result in a recommendation by the staff of the Commission
that action be taken with respect thereto, whereupon the Holder of such
Restricted Securities shall be entitled to transfer such Restricted Securities
in accordance with the terms of the notice delivered by the Holder to the
Company; provided, however, that no opinion or No Action letter need be obtained
-------- -------
with respect to a transfer to (A) a partner, active or retired, of a Holder of
Restricted Securities, (B) the estate of any such partner, (C) an "affiliate" of
a Holder of Restricted Securities as that term is defined in Rule 405
promulgated by the Commission under the Securities Act, or (D) the spouse,
children, grandchildren or spouse of such children or grandchildren of any
Holder or to trusts for the benefit of any Holder or such persons, if the
transferee agrees to be subject to the terms hereof. Each certificate
evidencing the Restricted Securities transferred as above provided shall bear
the appropriate restrictive legend set forth in Section 3 above, except that
such certificate shall not bear such restrictive legend if in the opinion of
counsel for the Company such legend is not required in order to establish
compliance with any provisions of the Securities Act.
-3-
<PAGE>
5. Requested Registration.
----------------------
(a) Request for Registration. If at any time after two years from the date
------------------------
of this Agreement, the Company shall receive from any Holder or group of Holders
holding at least 50% of the Demand Registrable Securities a written request that
the Company effect any registration, qualification or compliance with respect to
at least 1,000,000 shares of Demand Registrable Securities, or such lesser
number of shares of Demand Registrable Securities if the aggregate proceeds of
such offering (after deduction for Selling Expenses) exceed $5,000,000, the
Company will:
(x) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders holding Demand Registrable
Securities; and
(y) as soon as practicable, use its best efforts to effect such
registration, qualification or compliance (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Demand Registrable Securities as are specified in such
request, together with all or such portion of the Demand Registrable Securities
of any Holder or Holders joining in such request as are specified in a written
request received by the Company within 15 days after receipt of such written
notice from the Company;
Provided, however, that the Company shall not be obligated to take any
action to effect any such registration, qualification or compliance pursuant to
this Section 5:
(A) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
(B) After the Company has effected two such registrations pursuant
to this Section 5(a), such registrations have been declared or ordered effective
and the securities offered pursuant to such registration have been sold; or
(C) Within six months following the effective date of a
registration statement previously filed by the Company.
Subject to the foregoing clauses (A), (B) and (C), the Company shall file a
registration statement covering the Demand Registrable Securities so requested
to be registered as soon as practicable after receipt of the request or requests
of any Holder or Holders. If, however, the Company shall furnish to the Holder
or Holders requesting a registration statement pursuant to this Section 5 a
certificate signed by the President of the Company stating that, in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the
-4-
<PAGE>
Company shall have the right to defer such filing for a period of not more than
120 days after receipt of the request of the Holder or Holders requesting such
registration; provided, however, that the Company may not utilize this right
more than once in any twelve-month period.
(b) Underwriting. If the Holders intend to distribute the Demand
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
Section 5(a) and the Company shall include such information in the written
notice referred to in Section 5(a)(x). The right of any Holder to registration
pursuant to Section 5 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Demand Registrable
Securities in the underwriting to the extent requested (unless otherwise
mutually agreed by a majority in interest of the Holders) to the extent provided
herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Holders. Notwithstanding any other provision of
this Section 5, if the managing underwriter advises the Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then, subject to the provisions of Section 5(a), the Company shall
so advise all Holders and the number of shares of Demand Registrable Securities
that may be included in the registration and underwriting shall be allocated
among all Holders requesting inclusion in the registration in proportion, as
nearly as practicable, to the respective amounts of Demand Registrable
Securities held by such Holders at the time of filing the registration
statement, provided however, that the number of shares of Demand Registrable
Securities held by Holders who initiated the registration under subsection (a)
above to be included in such Underwriting shall not be reduced unless all other
Demand Registrable Securities are first entirely excluded from the Underwriting.
No Demand Registrable Securities excluded from the underwriting by reason of the
managing underwriter's marketing limitation shall be included in such
registration.
If any Holder of Demand Registrable Securities disapproves of the terms of
the underwriting, such person may elect to withdraw therefrom by written notice
to the Company, the managing underwriter and the other Holders. The Demand
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration; provided, however, that if by the withdrawal of
such Demand Registrable Securities a greater number of Registrable Securities
held by other Holders may be included in such registration (up to the maximum of
any limitation imposed by the underwriters), then the Company shall offer to all
Holders who have included Demand Registrable Securities in the registration the
right to include additional Demand Registrable Securities in the same proportion
used in determining the underwriter limitation in this Section 5(b). If the
registration does not become effective due to the withdrawal of Demand
Registrable Securities, then either (1) the Holders requesting registration
shall reimburse the Company for expenses incurred in complying with the request
or (2) the aborted registration shall be treated as effected for purposes of
Section 5(a)(B).
-5-
<PAGE>
6. Company Registration.
--------------------
(a) Notice of Registration. If the Company shall determine to
----------------------
register any of its securities, either for its own account or the account of a
security holder or holders exercising their respective demand registration
rights, other than (i) a registration relating solely to employee benefit plans
or (ii) a registration relating solely to a Commission Rule 145 transaction:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within 20 days after receipt of such written notice from the
Company, by any Holder or Holders, provided that the Company may limit, to the
-------------
extent so advised by the underwriters, the amount of Registrable Securities to
be included in the registration by the Holders, by (1) up to 100% of the
Registrable Securities sought to be included in the case of the initial public
offering of the Company and (2) up to 70% of the Registrable Securities sought
to be included in the case of any subsequent public offering.
(b) In all registered public offerings, whether underwritten or not,
the amount of Registrable Securities of Holders which are included in such
registration, in accordance with the limitations set forth in Section 6(a)(ii)
above, shall be allocated to the Holders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities which would be
held by each of such Holders assuming conversion of all outstanding Series A
Preferred and Series B Preferred as of the date of the notice given pursuant to
this Section 6.
7. Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Section 5(a), Section 6 and Section 9 shall be borne by the Company. All
Selling Expenses relating to securities registered by the Holders shall be borne
by the Holders of such securities pro rata on the basis of the number of shares
so registered.
8. Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Agreement
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Keep such registration, qualification or compliance effective for
a period of 120 days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto, whichever
first occurs;
(b) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request;
(c) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be
-6-
<PAGE>
reasonably requested by the Holders; provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions;
(d) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement;
(e) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, include an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;
(f) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which securities of the
same class issued by the Company are then listed;
(g) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration; and
(h) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to Section 5 herein, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to Section 5 herein, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
9. Registration on Form S-3. In addition to the rights set forth in
-------------------------
Section 5, if the Holders holding a majority of the Demand Registrable
Securities request that the Company file a registration statement on Form S-3
(or any successor thereto) for a public offering of shares of Demand Registrable
Securities the reasonably anticipated aggregate price to the public of which
would exceed $2,000,000, and the Company is a registrant entitled to use Form S-
3 to register securities for such an offering, the Company shall use its best
efforts to cause such shares to be registered for the offering on such form (or
any successor thereto). A Holder or group of Holders is entitled to an
unlimited number of Form S-3
-7-
<PAGE>
registrations; provided, however, that the Company shall be required to file no
more than one (1) such registration statement during any 12-month period.
10. Termination of Registration Rights. The registration rights granted
----------------------------------
pursuant to this Agreement shall terminate (i) as to all Holders on the fifth
anniversary of the closing of the Company's initial public offering and (ii) as
to any Holder, at such time after the Company's initial public offering as the
Registrable Securities held by such Holder represents 1% or less of the
outstanding Common Stock of the Company or such Holder is able to sell all
Registrable Securities held by it pursuant to Rule 144(k) promulgated under the
Securities Act.
11. Lockup Agreement. In consideration for the Company agreeing to its
----------------
obligations under this Agreement each Holder of Registrable Securities and each
transferee pursuant to Section 15 hereof agrees, in connection with the first
registration of the Company's securities, upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities, not
to sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Registrable Securities (other than those included in
the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as the Company or the
underwriters may specify. Each Holder agrees that the Company may instruct its
transfer agent to place stop transfer notations in its records to enforce the
provisions of this Section 11.
12. Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers,
directors and partners and such Holder's legal counsel and independent
accountants, and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), including any
of the foregoing incurred in settlement of any litigation, arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration, qualification or compliance, and will reimburse each such
Holder, each of its officers, directors and partners and such Holder's legal
counsel and independent accountants, and each person controlling such Holder,
each such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished
-8-
<PAGE>
to the Company by an instrument duly executed by such Holder or underwriter and
stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers and its legal counsel and independent accountants, each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, and each other such Holder, each of its
officers and directors and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such Holders, such directors,
officers, legal counsel, independent accountants, underwriters or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information furnished
to the Company by an instrument duly executed by such Holder and stated to be
specifically for use therein; provided, however, that the obligations of such
Holders hereunder shall be limited to an amount equal to the gross proceeds
before expenses and commissions to each such Holder of Registrable Securities
sold as contemplated herein.
(c) Each party entitled to indemnification under this Section 12 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense; provided, however, that the Indemnified Party (together with
all other Indemnified Parties which may be represented without conflict by one
counsel) shall have the right to retain one separate counsel, with the fees and
expenses to be paid by the Indemnifying Party, if representation of such
Indemnified Party by the counsel retained by the Indemnifying Party would be
inappropriate under the California Rules of Professional Conduct as a result of
conflicting interests between such Indemnified Party and any other party
represented by such counsel in such proceeding; and provided further that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under this Agreement, except
to the extent, but only to the extent, that the Indemnifying Party's ability to
defend against such claim or litigation is impaired as a result of such failure
to give notice. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
-9-
<PAGE>
13. Information by Holder. The Holder or Holders of Registrable
----------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Agreement.
14. Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date of the first registration under the Securities Act filed by
the Company for an offering of its securities to the general public;
(b) Use its best efforts to then file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Securities Exchange Act of 1934, as amended (at any time
after it has become subject to such reporting requirements);
(c) Furnish to Holders of Registrable Securities forthwith upon
request, a written statement by the Company as to its compliance with the
reporting requirements of Rule 144 (at any time after 90 days after the
effective date of the first registration statement filed by the Company for an
offering of its securities to the general public), and of the Securities Act and
the Securities Exchange Act of 1934 (at any time after it has become subject to
such reporting requirements), a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents of the Company as a
Holder of Registrable Securities may reasonably request in availing itself of
any rule or regulation of the Commission allowing such Holder to sell any such
securities without registration.
15. Transfer of Registration Rights. The right to cause the Company to
-------------------------------
register securities granted hereunder may be assigned to a transferee or
assignee who acquires at least fifteen percent (15%) of the then outstanding
shares of Series A Preferred or Series B Preferred (or Common Stock issued on
conversion of Series A Preferred) (adjusted for stock splits, reverse stock
splits or similar events after the date hereof) provided that the Company is
given written notice of such assignment prior to such assignment. In addition,
rights to cause the Company to register securities may be freely assigned (a) to
any constituent partner or retired partner of a Holder (or Common Stock issued
on conversion of Series A Preferred) (adjusted for stock splits, reverse stock
splits or similar events after the date hereof), where such Holder is a
partnership, (b) to any affiliate (as that term is defined in Rule 405
promulgated by the Commission under the Securities Act), (c) to any officer,
director or principal shareholder thereof, where such Holder is a corporation or
(d) to the spouse, children, grandchildren or spouse of such children or
grandchildren of any Holder or to trusts for the benefit of any Holder or such
persons where the Holder is a natural person.
16. Subsequent Grant of Registration Rights. The Company shall not grant
---------------------------------------
rights to have securities other than the Registrable Securities registered under
the Securities Act that are superior to the
-10-
<PAGE>
registration rights granted herein without the consent of the holders of a
majority of the shares of Series A Preferred and Series B Preferred (or Common
Stock issued upon conversion thereof).
17. Company Covenants. The Company hereby covenants and agrees as
-----------------
follows:
17.1 Annual Financial Information. The Company will furnish to each
----------------------------
Purchaser for so long as such Purchaser is a holder of any shares of Series A
Preferred or Series B Preferred purchased by such person pursuant to this
Agreement (or Common Stock issued upon conversion of the Series A Preferred or
Series B Preferred), as soon as practicable after the end of each fiscal year,
and in any event within 90 days thereafter, consolidated balance sheets of the
Company and its subsidiaries, if any, as of the end of such fiscal year, and
consolidated statements of income and consolidated statements of cash flows of
the Company and its subsidiaries, if any, for such year, prepared in accordance
with generally accepted accounting principles consistently applied and setting
forth in each case in comparative form the figures for the previous fiscal year,
all in reasonable detail and certified by independent public accountants of
national standing selected by the Company.
17.2 Monthly Financial Information and Financial Plan. The Company
------------------------------------------------
will furnish the following reports to each Purchaser for so long as such
Purchaser is a holder of at least 10% of the outstanding shares of Series A
Preferred or Series B Preferred (or Common Stock issued upon conversion of
Series A Preferred or Series B Preferred or a combination of such Series A
Preferred, Series B Preferred and Common Stock) (adjusted for stock splits,
reverse stock splits or similar events after the date hereof):
(a) As soon as practicable after the end of each month, and in
any event within 30 days thereafter, consolidated balance sheets of the Company
and its subsidiaries, if any, as of the end of such month, and cash flow
statements and consolidated statements of income for each month and for the
current fiscal year to date, prepared in accordance with generally accepted
accounting principles consistently applied, all in reasonable detail and signed,
subject to changes resulting from year-end audit adjustments, by the principal
financial or accounting officer of the Company, together with a comparison of
such statements to the Company's operating plan then in effect and approved by
its Board of Directors.
(b) As soon as available (but in any event within 10 days after
the commencement of its fiscal year), a summary of the financial plan of the
Company for each fiscal year, including (but not limited to) a cash flow
projection and operating budget, calculated monthly, as contained in its
operating plan approved by the Company's Board of Directors.
17.3 Assignment of Rights to Financial Information. The rights to
---------------------------------------------
receive information pursuant to Section 17.1 may be assigned or otherwise
conveyed by any Purchaser or subsequent transferee to any transferee of shares
of Series A Preferred or Series B Preferred (or Common Stock issued upon
conversion thereof). The rights specified in Section 17.2 may be assigned or
otherwise conveyed by a Purchaser or subsequent transferee only to a transferee
who acquires at least 10% of the outstanding shares of Series A Preferred or
Series B Preferred (or Common Stock issued upon conversion of Series A Preferred
or Series B Preferred or a combination of such Series A Preferred,
-11-
<PAGE>
Series B Preferred and Common Stock) (adjusted for stock splits, reverse stock
splits or similar events after the date hereof).
17.4 Proprietary Information Agreement. The Company will require each
---------------------------------
person employed by the Company, whether at present or in the future, to execute
a Proprietary Information Agreement in a form approved by the Company's Board of
Directors as a condition of such employment.
17.5 Confidentiality Agreement. Each Purchaser and any successor or
-------------------------
assign of such Purchaser, who receives from the Company or its agents, directly
or indirectly, any information which the Company has not made generally
available to the public, pursuant to the preparation and execution of this
Agreement or disclosure in connection therewith or pursuant to the provisions of
this Section 17, acknowledges and agrees that such information is confidential
and for its use only in connection with evaluating its investment in the
Company, and further agrees that it will not disseminate such information to any
person other than its accountant, investment advisor or attorney and that such
dissemination shall be only for purposes of evaluating its investment.
17.6 Key Person Insurance. The Company shall use its best efforts to
--------------------
obtain term life insurance policies on the lives of Amos Wilnai and Alex Joffe
in the amounts of $1,000,000 each with proceeds payable to the Company.
17.7 Qualified Small Business Reporting. The Company will use
----------------------------------
reasonable efforts to comply with the reporting and recordkeeping requirements
of Section 1202 of the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder.
17.8 Termination of Covenants. Notwithstanding anything to the
------------------------
contrary set forth herein, the covenants set forth in this Section 17 (except
for those set forth in Sections 17.5 and 17.7 which shall survive) shall
terminate and be of no further force or effect after the date upon which the
first registration statement filed by the Company under the Securities Act in
connection with an underwritten public offering of its securities first becomes
effective.
18. Rights of First Refusal. The Company hereby grants to each Purchaser,
-----------------------
each Founder and Dominion the right of first refusal to purchase, pro rata, all
(or any part) of "New Securities" (as defined in this Section 18) that the
Company may, from time to time propose to sell and issue. Such pro rata share,
for purposes of this right of first refusal, is the ratio of (X) the number of
shares of Common Stock then owned by such Purchaser, Founder or Dominion or
issuable upon the conversion of the Series A Preferred or Series B Preferred
then owned by such Purchaser, Founder or Dominion (including shares issuable
upon exercise of options or warrants held by such Purchaser, Founder or
Dominion), to (Y) the total number of shares of Common Stock then outstanding,
after giving effect to the conversion of all outstanding convertible securities
(including the Series A Preferred Stock and Series B Preferred) and the exercise
of all outstanding options and Warrants. This right of first refusal shall be
subject to the following provisions:
(a) "New Securities" shall mean any Common Stock and Preferred Stock
----------------
of the Company whether or not authorized on the date hereof, and rights,
options, or warrants to purchase
-12-
<PAGE>
Common Stock or Preferred Stock and securities of any type whatsoever that are,
or may become, convertible into Common Stock or Preferred Stock; provided,
however, that "New Securities" does not include the following:
(i) shares of Common Stock, or options to purchase shares of
Common Stock, issued or granted to officers, directors and employees of, or
consultants to, the Company pursuant to a stock grant, employee restricted stock
purchase agreement, option plan or purchase plan or other stock incentive
program (collectively, the "Plans") or issuance unanimously approved by the
Board of Directors;
(ii) shares of Common Stock issuable upon conversion of the
Series A Preferred or Series B Preferred (including any Series B Preferred
issued after the date hereof at Subsequent Closings under the Purchase
Agreement);
(iii) securities of the Company offered to the public pursuant
to a registration statement filed under the Securities Act;
(iv) securities of the Company issued pursuant to the
acquisition of another corporation by the Company by merger, purchase of
substantially all of the assets, or other reorganization whereby the Company
owns more than fifty percent (50%) of the voting power of such other
corporation;
(v) securities of the Company issued in connection with
equipment lease financing transactions or bank financing transactions the
principal purpose of which is not to raise equity funding;
(vi) securities issued to corporate partners or in connection
with other strategic alliances if the Board of Directors unanimously agrees that
such transaction should be excluded from operation of this Section 18; and
(vii) shares of Common Stock or Preferred Stock issued in
connection with any stock split, stock dividend, or recapitalization by the
Company.
(b) In the event that Company proposes to undertake an issuance of New
Securities, it shall give each Purchaser, Dominion and the Founders written
notice of its intention, describing the type of New Securities, the price, and
the general terms upon which the Company proposes to issue the same. Each
Purchaser, Dominion and each Founder shall have twenty (20) business days after
receipt of such notice to agree to purchase its pro rata share of such New
Securities at the price and upon the terms specified in the notice by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased. If any Purchaser, Dominion or the Founder fails to agree to
purchase its full pro rata share within such twenty (20) business day period,
the Company will give the Purchasers, Dominion and the Founders who did so agree
(the "Electing Holders") notice of the number of shares which were not
subscribed for. Such notice may be by telephone if followed by written
confirmation within two days. The Electing Holders shall have ten (10) business
days from the date of
-13-
<PAGE>
such notice to agree to purchase pro rata all of the New Securities not
purchased by such non-purchasing Purchasers, Founders and Dominion.
(c) In the event that Purchasers Dominion, and the Founders fail to
exercise in full the right of first refusal within the twenty (20) business plus
ten (10) business day period specified above, the Company shall have one hundred
twenty (120) days thereafter to sell (or enter into an agreement pursuant to
which the sale of New Securities covered thereby shall be closed, if at all,
within sixty (60) days from the date of said agreement) the New Securities
respecting which the rights of the Purchasers, Dominion and the Founders were
not exercised at a price and upon terms no more favorable to the purchasers
thereof than specified in the Company's notice. In the event the Company has
not sold the New Securities within such one hundred twenty (120) day period (or
sold and issued New Securities in accordance with the foregoing within sixty
(60) days from the date of such agreement) the Company shall not thereafter
issue or sell any New Securities, without first offering such New Securities to
the Purchasers, Dominion and the Founders in the manner provided above.
(d) The right of first refusal granted under this Section 18 shall
expire upon the earlier of (i) five years from the date hereof, or (ii) the
first sale of Common Stock to the public that is effected pursuant to a
registration statement filed with, and declared effective by, the Commission
under the Securities Act.
(e) This right of first refusal is nonassignable except to any
transferee to whom registration rights may be transferred pursuant to Section 15
of this Agreement.
19. Governing Law. This Agreement and the legal relations between the
-------------
parties arising hereunder shall be governed by and interpreted in accordance
with the laws of the State of California. The parties hereto agree to submit to
the jurisdiction of the federal and state courts of the State of California with
respect to the breach or interpretation of this Agreement or the enforcement of
any and all rights, duties, liabilities, obligations, powers, and other
relations between the parties arising under this Agreement.
20. Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties regarding rights to
registration. Except as otherwise expressly provided herein, the provisions
hereof shall inure to the benefit of, and be binding upon, the successors,
assigns, heirs, executors and administrators of the parties hereto.
21. Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon delivery to the party to be notified in person or by courier service or
five days after deposit with the United States mail, by registered or certified
mail, postage prepaid, addressed (a) if to a Purchaser, to such Purchaser's
address set forth on Exhibit A to the Purchase Agreement, or at such other
address as such Purchaser shall have furnished to the Company in writing, (b) if
to any other holder of any Registrable Securities, to such address as such
holder shall have furnished the Company in writing, or, until any such holder so
furnishes an address to the Company, then to and at the address of the last
holder of such securities who has so furnished an address to the Company, (c) if
to the Company, to its address set forth on the signature page of this Agreement
to the
-14-
<PAGE>
attention of the Corporate Secretary, or at such other address as the Company
shall have furnished to the Holders, or (d) if to a Founder, to the address set
forth on the signature page of this Agreement, or at such other address as a
Founder shall have furnished to the Holders.
22. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
23. Amendment. Any provision of this Agreement may be amended, waived or
---------
modified upon the written consent of the (i) Company and (ii) holders of a
majority of the sum of (A) the shares of Series A Preferred and Series B
Preferred (or Common Stock issued upon conversion thereof) and (B) the
outstanding shares of Common Stock held by the Founders (excluding for all
purposes in such computation any Common Stock resold to the public), provided
--------
that any such amendment, waiver or modification applies by its terms to each
holder. Any Purchaser or Founder may waive any of his or her rights or the
Company's obligations hereunder without obtaining the consent of any other
person.
24. Waiver of Prior Shareholder Agreement. The Prior Shareholder
-------------------------------------
Agreement is hereby terminated and the Series A Purchasers, Founders and
Dominion irrevocably waive all of their rights under the Prior Shareholder
Agreement (including, but not limited to, the Rights of First Refusal contained
in Section 18 thereof) in exchange for the rights contained herein.
25. Severability. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided, that no such severability shall be effective
if it materially changes the economic benefit of this Agreement to any party.
-15-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Shareholder Rights Agreement as of the date set forth above.
"COMPANY"
MMC NETWORKS, INC.
2855 Kifer Road
Santa Clara, CA 95051
/s/ P.K. DUBEY
By: ____________________________
P.K. Dubey
President
/s/ AMOS WILNAI
________________________________
Amos Wilnai
2855 Kifer Road
Santa Clara, CA 95051
/s/ ALEX JOFFE
________________________________
Alex Joffe
2855 Kifer Road
Santa Clara, CA 95051
DOMINION FUND III
44 Montgomery Street
Suite 4200
San Francisco, CA 94104
By: Dominion Partners III
/s/ [Signature]
By: ____________________________
Title: General Partner
_________________________
-16-
<PAGE>
"PURCHASERS"
KLEINER PERKINS CAUFIELD & BYERS VII
By: KPCB VII Associates, its General Partner
By: /s/ [signature]
- ------------------------------
Title: General Partner
-----------------------
KPCB VII FOUNDERS FUND
By: KPCB VII Associates, its General Partner
By: /s/ [signature]
- ------------------------------
Title: General Partner
-----------------------
KPCB INFORMATION SCIENCES ZAIBATSU FUNDS II
By: KPCB VII Associates, its General Partner
By: /s/ [signature]
- ------------------------------
Title: General Partner
-----------------------
JAPAN ASSOCIATED FINANCE CO., LTD.
By: /s/ MASAKI YOSHIDA
- ------------------------------
Name: Masaki Yoshida
Title: President
-17-
<PAGE>
JAFCO G-5 INVESTMENT ENTERPRISE PARTNERSHIP
By: /s/ MASAKI YOSHIDA
- ------------------------------
Name: Masaki Yoshida
Title: President
Japan Associated Finance Co., Ltd.
Its Executive Partner
U.S. INFORMATION TECHNOLOGY INVESTMENT ENTERPRISE PARTNERSHIP
By: /s/ MASAKI YOSHIDA
- ------------------------------
Name: Masaki Yoshida
Title: President
Japan Associated Finance Co., Ltd.
Its Executive Partner
INSTITUTIONAL VENTURE PARTNERS VI, L.P.
By Its General Partner Institutional Venture Management VI
By: /s/ GEOFFREY Y. YANG
- ---------------------------------
Geoffrey Y. Yang, General Partner
INSTITUTIONAL VENTURE MANAGEMENT VI, L.P.
By: /s/ GEOFFREY Y. YANG
- ---------------------------------
Geoffrey Y. Yang, General Partner
IVP FOUNDERS FUND I, L.P.
By Its General Partner Institutional Venture Management VI
By: /s/ GEOFFREY Y. YANG
- ---------------------------------
Geoffrey Y. Yang, General Partner
-18-
<PAGE>
U.S. VENTURE PARTNERS IV, L.P.
By Presidio Management Group IV, L.P.,
Its General Partner
By: /s/ MICHAEL P. MAHER
- ---------------------------------
Michael P. Maher
Attorney-in-Fact
USVP ENTREPRENEUR PARTNERS II, L.P.
A Delaware Limited Partnership
By Presidio Management Group IV, L.P.
Its General Partner
By: /s/ MICHAEL P. MAHER
- ---------------------------------
Michael P. Maher
Attorney-in-Fact
SECOND VENTURES II, L.P.
By Presidio Management Group IV, L.P.
Its General Partner
By: /s/ MICHAEL P. MAHER
- ---------------------------------
Michael P. Maher
Attorney-in-Fact
STANFORD UNIVERSITY
By: /s/ CAROL GILMER
- ----------------------------------
Carol Gilmer
Title: Assistant Secretary, The Board of
Trustees of the Leland Stanford
Junior University
WS INVESTMENT COMPANY 95B
By: /s/ ROBERT T. CLARKSON
- ----------------------------------
Robert T. Clarkson
Title: Partner
/s/ ROBERT T. CLARKSON
- ----------------------------------
Robert T. Clarkson
-19-
<PAGE>
/s/ LARRY W. SONSINI
- ----------------------------------
Larry W. Sonsini
/s/ JOHN MARREN
- ----------------------------------
John Marren
/s/ G. ARJAVALINGAM
- ----------------------------------
G. Arjavalingam
/s/ TIMOTHY M. HALEY
- ----------------------------------
Timothy M. Haley
/s/ NEAL DOUGLAS
- ----------------------------------
Neal Douglas
-20-
<PAGE>
EXHIBIT 10.9
SUBLEASE
This "Sublease" is made this fourteenth day of June, 1996 by and between
Olivetti Advanced Technology Center Inc. a Delaware corporation, ("Olivetti",
including successors and assigns as "Subleasor") and MMC Networks Inc., a
California corporation ("MMC", including successors and assigns as "Subleasee").
Olivetti as "Tenant", is leasing from Herman Christensen, Jr. And Raymond P.
Christensen, jointly as "Landlord", ( the Master Lessor") those certain premises
located at 1130 East Arques Ave., Sunnyvale, California (the "Premises")
consisting of approximately 35,552 square feet pursuant to a lease dated
December 22, 1994 (the "Master Lease"). The Master Lease is attached to this
Sublease as Attachment 1. Olivetti leases to MMC and MMC leases from Olivetti
the Premises depicted on Exhibit A to the Master Lease on the terms and
conditions set forth below .
1. INCORPORATION OF MASTER LEASE PROVISIONS. This Sublease is subject to
all of the terms and conditions of the Master Lease. MMC hereby accepts, assumes
and agrees to perform all the obligations of Olivetti as Tenant under the Master
Lease and all of the terms and conditions of the Master Lease are incorporated
into this Sublease as terms and conditions (with each reference to Landlord and
Tenant deemed to refer to Olivetti and MMC respectively), excepting only
Sections 3, 4(a), 6, 7, 23, 29, 31, 33, 38, 40, 44(b), 47, 48 of the Master
Lease and Addendum One to the Master Lease. In the event of any conflict or
inconsistency between the incorporated terms of the Master Lease and the terms
of the Sublease, the terms of the Sublease will prevail as between MMC and
Olivetti. MMC will not cause or permit any act or omission which violates any
term or condition of the Master Lease. Olivetti will use all reasonable efforts
to cause Master Leasor to perform its obligations under the Master Lease. In the
event of the termination for any reason of Olivetti's interest as Tenant under
the Master Lease, then this Sublease will terminate at the same time without any
liability of Olivetti to MMC, unless the termination results from a default of
Olivetti under the Master Lease which was not caused by MMC.
2. TERM. The term of this Sublease will be from September 1, 1996 (the
"Commencement Date") through the balance of the term of the Master Lease
(estimated to be March 31, 1999). If delivery of the Premises is delayed beyond
September 1, 1996 as the result of major physical damage to the Premises caused
by Olivetti or forces beyond Olivetti's reasonable control, them Olivetti will
not be liable for any damage caused thereby, nor will this Sublease be void or
voidable nor will the term hereof be extended by such delay; provided, however,
that the Commencement Date will be deferred until the physical damage is
repaired sufficiently to allow MMC to occupy the Premises. Notwithstanding the
foregoing, if it is reasonably foreseeable that the Commencement Date will be
delayed beyond October 1, 1996, then MMC can elect to cancel this Sublease on
written notice to Olivetti within thirty days after notice of the nature of the
damage and delay. In such event the parties will have no further obligations
under this Sublease, except with respect to indemnification for third party
claims for which each would have otherwise been responsible. MMC acknowledges
that it will not be entitled to exercise either option to extend the Master
Lease. After sublease execution, MMC will have reasonable access to the Premises
on not less that twenty-four hours notice to Olivetti for the purpose of space
planning, architectural design and engineering. Additionally, after August 18,
1996, (i) MMC may begin moving its furniture and equipment and begin installing
telephone and network cabling or other preparatory measures in all parts of the
Premises not then occupied by Olivetti or ATMI (see Item
<PAGE>
9 Below) if Olivetti's and ATMI's use of the Premises is not disturbed, and (ii)
MMC can elect to occupy the Premises (other than the ATMI Spaces defined below)
if Olivetti has vacated the Premises. MMC will indemnify Olivetti from all loss,
liability and expense, including attorneys' and experts' fees and costs,
occasioned by such early access. Moreover, MMC's occupancy shall be subject to
all the terms and conditions of this Sublease except Base and Additional Rent
prior to the Commencement Date. Except as provided in the Master Lease in
connection with damage and destruction (Section 22), condemnation (Section 23)
and assignment (Section 24), Olivetti will not agree to any voluntary early
termination of the Master Lease with Master Lessor unless MMC is permitted to
continue to occupy the Premises on the same terms and conditions as this
Sublease; provided that MMC does not default on its obligations under this
Sublease in any material way.
3. BASE RENT. MMC will pay Forty-two Thousand Six Hundred Sixty-Two
Dollars and forty cents ($42,662.40) per month to Olivetti as base rent without
offset or deduction on the first day of each calendar month of the term of this
Sublease, without prior written notice or demand, from the Commencement Date to
the end of the term. The first month's base rent will be paid to Olivetti upon
the execution of this Sublease. Rent for any partial month will be prorated on
the basis of a thirty (30) day month. If MMC receives notice from Master Lessor
that Olivetti is in default for failure to pay Rent and if Olivetti does not
cure the default, then MMC, upon notice to Olivetti, may pay the actual Rent due
and offset such sum against the Base Rent otherwise payable to Olivetti, so long
as Olivetti's nonpayment was not caused by MMC's failure to pay Rent to
Olivetti.
4. SECURITY DEPOSIT. Upon the satisfaction or expiration of MMC's
environmental contingency described in Item 10 below, MMC will deposit with
Olivetti the sum of Forty-Two Thousand Six Hundred Sixty-Two Dollars and Forty
cents ($42,662.40) as a non-interest bearing security deposit for MMC's
performance under this Sublease. In the event MMC has performed all of the
terms and conditions of this Sublease throughout the term, the security deposit
will be returned to MMC upon termination of the Sublease and MMC's vacation of
the Premises after first deducting any sums owing to Olivetti pursuant to this
Sublease. In the event MMC breaches this Sublease, Olivetti can elect to use or
retain some or all of this security deposit to compensate for any loss, expense
or risk associated with the breach, all without seeking judicial relief. In the
event of such recourse to the security deposit, Olivetti is entitled to require
MMC to replenish the security deposit funds on ten days written notice. In no
event will MMC be entitled to have access to or acquire any portion of
Olivetti's deposit with the Master Lessor.
5. CONDITION OF PREMISES AND TENANT IMPROVEMENTS. Olivetti will deliver
the Premises to MMC "as is" in broom clean condition. MMC accepts the Premises
"as is". To Olivetti's knowledge, the roof, HVAC, plumbing and electrical
systems are in good working order and there are no Hazardous Materials on the
Premises as of the date of this Sublease. Repairs required prior to its vacation
of the Premises will remain Olivetti's responsibility until the Commencement
Date, unless the repair is caused by MMC or its agents. MMC shall surrender the
Premises in the same condition as received on the Commencement Date, excepting
normal wear and tear and damage resulting from factors beyond MMC's reasonable
control, such as war and earthquake, unless such damage is covered by insurance
or is the result of MMC's default, negligence or willful misconduct. In the
event MMC elects to perform tenant improvement work at the beginning of the
Sublease term, then the provisions of Section 47 of the Master Lease will govern
as though incorporated into this Sublease, substituting Olivetti for Landlord
and MMC for Tenant, subject to the
<PAGE>
following modifications: (i) the fourth and eighth sentences of the fourth
paragraph are deleted and "five business days" is replaced with "ten business
days" in the first sentence of the fourth paragraph; (ii) the sixth paragraph is
deleted; and (iii) the eighth paragraph is replaced with the following new
eighth paragraph - "MMC will bear and timely pay all Tenant Improvement Costs
and provide Olivetti with a complete set of as-built drawings of the tenant
improvements upon completion". See also Attachment 2 which depicts these changes
in red line fashion.
6. OTHER MASTER LEASE INCORPORATIONS. The provisions of Sections 13, 29,
31, 40 and 44(b) are also incorporated by reference into this Sublease
substituting only MMC for Tenant and leaving the reference to Landlord
unchanged, it being understood that the Master Lessor will arrange the insurance
described in Section 13, is the owner and borrower described in Section 29, 31,
and 40 and will arrange for the care of the Outside Area described in Section
44(b). Section 38 of the Master Lease is also incorporated by reference into
this Sublease, substituting Olivetti for Landlord and MMC for Tenant, except
that the reference to "Holcomb Realty" is replaced with "Cooper/Brady".
Finally, Paragraph 5 of Addendum One to the Master Lease is incorporated by
reference into this Sublease, substituting Olivetti for Landlord and MMC for
tenant.
7. NOTICES. All notices and demands of any kind required to be given by
Olivetti or MMC hereunder will be in writing and effective thirty-six hours
after depositing in the United States mail, postage prepaid and addressed to
Olivetti or MMC, as the case may be, at the address set forth below their
respective signatures or at such other address as they may designate from time
to time.
8. MISCELLANEOUS. Olivetti is responsible for the payment of the
brokerage commission on this transaction to Cooper/Brady Corporate Real Estate
Services per existing contract. The effectiveness of this Sublease is contingent
on MMC's timely payment of the security deposit referred to in Item 4 above, the
satisfaction or expiration of the contingencies described in Item 10 below, and
the written approval of the Master Lessor pursuant to the Master Lease. MMC can
elect to condition Master Lessor's approval on the following: (i) that MMC will
not be required to remove any improvements or alterations made by MMC at the
beginning of this Sublease and approved by Master Lessor and Olivetti; and (ii)
that Master Lessor confirms that Olivetti is in goodstanding under the Master
Lease at the time of Master Lessor's approval. MMC acknowledges that Master
Lessor may elect to recapture the Premises pursuant to the Master Lease rather
than consent to this Sublease. In such event, or if a contingency referred to
above or in Item 10 below is unsatisfied, then neither party will have any
further liability to the other except for unsatisfied, then neither party will
have any further liability to the other except for the return of the security
deposit and the indemnification undertakings described in Item 2 above (in
connection with early access). In the event Olivetti and MMC agree to the
transfer of certain personal property on the Premises, then the transfer will be
memorialized through a bill of sale in the form attached as Attachment 3. This
Sublease shall be binding on and inure to the benefit of the lawful heirs,
successors and assigns of Olivetti and MMC. Olivetti will not elect to cancel
this Sublease in connection with any future request by MMC for consent to an
assignment or sublease to a third party although Master Lessor reserves the
right to do so.
9. PRIOR SUBLEASE. This Sublease is currently subject to the provisions
of a Sublease agreement dated April 1, 1995 between Olivetti and Advanced
Telecommunications Modules, Inc. ("ATMI", including successors and assigns) by
which approximately 3000 rentable square feet of the Premises have been
subleased (the "ATMI Space"). Olivetti and ATMI have agreed to terminate such
prior sublease
<PAGE>
and ATMI has agreed to vacate the ATMI Space by September 1, 1996, although ATMI
may incur delays in relocating to new space in another building. This prior
sublease is attached as Attachment 4. If ATMI does not timely vacate the
Premises and in no event vacate later than September 30, 1996, then (i) Olivetti
shall promptly bring an unlawful detainer (or other appropriate) action to cause
ATMI to vacate the Premises and shall diligently pursue such action to
conclusion: (ii) Base Rent will be reduced to $28,441.60 (twenty-eight thousand
four hundred forty-one dollars and sixty cents) from October 1 until ATMI
vacates the Premises: and (iii) Base Rent will be reduced to $33,062.40 (thirty-
three thousand sixty-two dollars and forty cents) for the month of September if
ATMI fails to vacate by September 1. The lower rent for the month of September
will also apply if ATMI fails to confirm with Olivetti by June 30, 1996 that
ATMI expects to vacate the Premises by September 1, 1996.
10. ENVIRONMENTAL AND ADA CONTINGENCIES. MMC can elect to cause a phase
I environmental survey to be performed immediately on the Premises at its
expense as well as further study the compliance of the Premises with the
American with disabilities Act ("ADA"). Olivetti believes that the Premises are
currently in compliance with the ADA based on its own tenant improvement work
performed with the previous eighteen months. Olivetti will share this
information with MMC and its agents. If MMC reasonably objects to the
environmental condition of the Premises based on such report or reasonably
concludes that the Premises are not in substantial compliance with the ADA and
so notifies Olivetti within fifteen days after the date of this Sublease, then
neither party will have any further liability to the other under this Sublease
except as set forth in Item 3 above.
SUBLESSEE: MMC Networks, Inc. SUBLESSOR: Olivetti Advanced
Technology Center, Inc.
/s/ Amos Wilnai /s/ Ennio Ponzetto
By:________________________________ By:_________________________________
Amos Wilnai Ennio Ponzetto
Name:______________________________ Name:_______________________________
2855 Kifer Rd. 1134 E. Arques Ave.
Address:___________________________ Address:____________________________
Santa Clara, CA 95051 Sunnyvale, CA 94086
___________________________ ____________________________
Attachments:
1 - Master Lease
2 - Marked Changes to Section 47
3 - Form of Bill of Sale
4 - Prior Sublease
<PAGE>
ATTACHMENT 1 -- MASTER LEASE
(attach copy of Master Lease)
<PAGE>
ATTACHMENT 2 - MARKED CHANGES TO SECTION 47
47. TENANT IMPROVEMENTS:
Tenant shall select and retain an architect or facilities planner who shall
prepare "tenant improvement" drawings and specifications for interior revisions
to the premises which are accepted by Tenant in "AS IS" condition, subject to
the provisions of Addendum 1, Paragraph 1.
"Tenant Improvements" as stated in the Lease shall be general in nature and
shall include only those improvements within the Premises which are depicted on
the Final Plans and Specifications or described herein below.
The Tenant Improvements may include, but are not limited to:
(a) Partitioning, doors, floor coverings, finishes, ceilings, wall
coverings, and painting, millwork and similar items.
(b) Electrical wiring, lighting fixtures, outlets and switches, and
other electrical work.
(c) Duct work, terminal boxes, defusers and accessories required for
the completion of the heating, ventilation and air conditioning systems serving
the Premises, including the cost of meter and key control for after-hour air
conditioning.
(d) Any additional Tenant requirements including, but not limited to
odor control, special heating, ventilation, and air conditioning, noise or
vibration control or other special system.
(e) All fire and life safety control systems such as fire walls,
sprinklers, halon, fire alarms, including piping, wiring and accessories serving
the Premises.
(f) All plumbing, fixtures, pipes, and accessories serving the
Premises.
(g) Changes to handicapped parking or ramps.
Landlord shall provide in writing, not later than ten (10) business days
after request therefor, approval or disapproval of preliminary and Final Plans
and Specifications. Landlord and Tenant shall indicate their approval of the
Final Plans and Specifications by initialing them. Upon completion of the Final
Plans and Specifications and approval thereof by Landlord and Tenant, Tenant
will obtain general contractor bids and furnish a cost breakdown to Landlord.
Any such revisions shall be subject to Landlord's approval, and the amended
Final Plans and Specifications, as approved by Landlord and Tenant, shall
thereafter be deemed to be the Final Plans and specifications for the Tenant
Improvements. The amended Final Plans and Specifications shall be approved by
Landlord in writing, not later than five (5) business days after Tenant's
request therefor. Tenant shall thereafter submit such amended Final Plans and
Specifications to general contractors selected by Tenant and approved by
Landlord for re-bidding, and shall furnish a cost breakdown to Landlord.
When the Final Plans and Specifications (as amended, if required above)
have been approved by Landlord and Tenant, Tenant shall submit such Final Plans
and Specifications to all governmental authorities having rights of approval
over the Tenant Improvement work and shall apply for all governmental approvals
and building permits. Subject to its obligations, Tenant shall thereafter
commence and proceed to have completed construction of the Tenant Improvements
in a good and workmanlike manner by a general contractor approved by Landlord.
The Tenant Improvements Cost ("Tenant Improvements Cost") shall include all
costs and expenses associated with the design, preparation, approval and
construction of the Tenant Improvements, including, but not limited, to the
following:
(a) All costs of preliminary and final architectural and engineering
plans and specifications for the Tenant Improvements, and engineering costs
associated with completion of the State of California energy utilization
calculations under Title 24 legislation;
(b) All costs of obtaining building permits and other necessary
authorizations from local governmental authorities;
(c) All costs of interior design and finish schedule plans and
specifications including as-build drawings;
(d) All direct and indirect costs of procuring, constructing and
installing the Tenant Improvements in the Premises;
(e) Utility connection fees.
In no event shall the Tenant Improvements Cost include any costs of procuring,
constructing or installing in the Premises any of Tenant's personal property or
trade fixtures.
<PAGE>
ATTACHMENT 3 - FORM OF BILL OF SALE
For good and valuable consideration, the undersigned "Seller" transfers all of
its right, title and interest in the personal property identified on the
attached list free of all liens and encumbrances to the undersigned "Buyer".
Buyer accepts the personal property "as is" and "where is". Seller also
transfers to Buyer any of its assignable warranties from third parties on the
personal property. THERE ARE NO OTHER WARRANTIES, EXPRESS OR IMPLIED,
ASSOCIATED WITH THE PERSONAL PROPERTY AND SELLER EXPRESSLY DISCLAIMS ANY OTHER
WARRANTIES, INCLUDING THE WARRANTIES OF MERCHANTIBILITY AND FITNESS FOR A
PARTICULAR PURPOSE. Buyer accepts the transfer of personal property on these
terms and acknowledges that the consideration paid to Seller reflects a
reasonable allocation of such risks.
BUYER: MMC Networks, Inc. SELLER: Olivetti Advanced
Technology Center, Inc.
/s/ Ennio Ponzetto
By:_____________________________ By:_____________________________
Ennio Ponzetto
Name:___________________________ Name:___________________________
1134 E. Arques Ave.
Address:________________________ Address:________________________
Sunnyvale, CA 94086
________________________________ ________________________________
<PAGE>
ATTACHMENT 4 - PRIOR SUBLEASE
(attach prior Sublease with ATMI)
<PAGE>
ATTACHMENT 4 - PRIOR SUBLEASE
SUBLEASE AGREEMENT
------------------
THIS SUBLEASE AGREEMENT (the "Sublease") is entered into effective as of
April 1, 1995, between Olivetti Advanced Technology Center, Inc. ("Sublessor"),
and Advanced Telecommunications Modules, Inc. ("Sublessee").
WHEREAS, Herman Christensen, Jr. and Raymond P. Christensen, jointly,
("Lessor"), as lessor, and Sublessor, as lessee, executed a lease dated December
22, 1994, with respect to 35,552 square feet of certain real property premises
located at 1130/1134 E. Arques Ave., Sunnyvale, California 94086, ( the Leased
Space"). Said lease will be hereinafter referred to as the "Master Lease", a
copy of which is attached hereto as Exhibit "A".
NOW, THEREFORE, the parties agree as follows:
1. For and in consideration of the payment of the rental and the
performance of the covenants and agreements hereinafter set forth, Sublessor
leases to Sublessee and Sublessee leases from Sublessor premises of
approximately 3,000 rentable square feet located in the North-East corner of the
Leased Space (such space shall hereinafter be referred to as the Demised
Premises). The Demised Premises are designated on the diagram attached hereto as
Exhibit "B".
2. The term of this sublease agreement shall be for a period of 48 months
commencing on April 1, 1995, and termination on March 31, 1999.
3. Sublessee covenants and agrees to pay to Sublessor for the use and
occupancy of the Lease Premises during the term hereof, the monthly rental of
Two Thousand Five Hundred Five Dollars and no cents ($2,505). In addition,
Sublessee shall pay Sublessor, as additional rent, all operating expenses or
other charges assessed against Sublessor by Lessor pursuant to the Master Lease
attributable to the proportionate share of the Leased Space comprising the
Demised Premises. Sublessor and Sublessee hereby agree that such proportionate
share is 8.44% of the Leased Space. The monthly rental shall be paid in advance
on the first day of each calendar month. Rent for the period April 1 through
April 30 is due upon execution of this sublease.
3.1 In addition, Sublease agrees to pay Sublessor a proportionate
share of water, sewer, refuse, gas, heat, light, power, telephone service,
janitorial service, security service, and all other materials and services
supplied to the Leased Space that are paid by Sublessor. Sublessee shall
reimburse to sublessor its proportionate share of any insurance premiums Lessor
requires Sublessor to maintain as to the Leased Space. Any costs directly
attributable to Sublessee or specific requests made by Sublessee shall be passed
through for reimbursement to Sublessor to the extent such costs cannot be
invoiced directly by the vender to the Sublessee.
4. Landlord has provided to Sublessor an allowance for the planning and
construction of Tenant Improvements in the amount of Ten Dollars per square foot
for which the proportionate share of $30,000 is allocated to the Sublessee and
included in the monthly rent. Any Tenant Improvement costs associated with the
fitting-up of Sublessee's space in excess of such allowance are reimbursable to
Sublessor within 30 days after presentation of the cost break-down for the
Sublessee's area, Exhibit "C".
5. Upon execution of this Sublease, Sublessee shall deposit with Sublessor
$2,505 to be held by Sublessor as security for the performance of the
obligations of the Sublessee hereunder.
<PAGE>
6. There exists at the Demised Premises certain office furniture and/or
fixture's and/or trade fixtures that are owned by Sublessor and that are also
described in Exhibit "D" to this Sublease (collectively the "Furniture and
Fixtures"). As additional consideration hereunder, Sublessee is hereby granted a
license to use said Furniture and Fixtures so long as Sublessee is not in
default hereunder, which license is further conditioned on Sublessee at its sole
cost and expense, maintaining said Furniture and Fixtures in good condition and
repair, free of liens, at the Demised Premises throughout the Term and returning
the same to Sublessor at the end of the Term in good condition and repair, free
of liens, and as it existed on the commencement date of the Term, normal wear
and tear excepted. Sublessee accepts said Furniture and fixtures "AS IS" and
"WITH ALL FAULTS" and Sublessor shall have no liability with respect to the
condition, design or any other aspect of same; Sublessee hereby assumes all risk
associated therewith.
7. Except as modified above, the terms, conditions and covenants of the
Lease between Sublessor and Landlord are hereby incorporated and shall bind
Sublessee as Tenant and Sublessor as Landlord.
8. Sublessor shall be responsible for and shall bear all expenses for
obtaining the consent of Landlord (including Landlord's expense) to this
sublease, and this sublease shall not be effective until such consent is
obtained, and Sublessee shall sign any documents reasonable requested by
Landlord as a condition to giving such consent.
9. This sublease and all its provisions shall be binding upon the heirs,
administrators, executors, successors, and assigns of the parties hereto.
10. This Sublease include the attached Exhibits A through D as Follows:
Exhibit A Master Lease
Exhibit B Schedule of Tenant Improvement Costs
Exhibit C Floor Plan
Exhibit D Furniture and Fixtures
IN WITNESS WHEREOF, the undersigned have executed this Sublease on
May 8 1995.
- -----------,
OLIVETTI ADVANCED TECHNOLOGY ADVANCED TELECOMMUNICATIONS MODULES,
CENTER, INC. a Delaware INC. a Delaware corporation
cooperation
/s/ [SIGNATURE] /s/ P.A. Shearn
By:_____________________________ By:_____________________________
P.A. Shearn
________________________________ ________________________________
(print name) (print name)
Treasurer/Controller President & CEO
Title:____________________________ Title:____________________________
<PAGE>
LEASE AGREEMENT
This Lease Agreement is made and entered into by and between HERMAN
CHRISTENSEN, JR. and RAYMOND F. CHRISTENSEN, jointly, the Landlord, and OLIVETTI
ADVANCED TECHNOLOGY CENTER, INC. a Delaware Corporation, Tenant as of this 22nd
----
day of December, 1994.
1. DEMISE: In consideration of the rents and all other charges and payments
payable by Tenant, and for the agreements, terms and conditions to be performed
by Tenant in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES
HEREBY HIRE AND TAKE FROM LANDLORD, the Premises described below (the
"Premises"), upon the agreements, terms and conditions of this Lease for the
Term hereinafter stated.
2. PREMISES: The Premises demised by this Lease are approximately 35,552
square feet of space in the building at 1130 East Arques Avenue, Sunnyvale,
California as shown on attached Exhibit A being in "as is" condition together
---------
with the outside areas to the extent set forth in paragraph 44 below and parking
set forth in paragraph 45 below. No easement for light or air is incorporated in
the Premises.
The Premises demised by this Lease shall also include the Tenant Improvements
on the terms and conditions set forth.
3. TERM: The term of this Lease (the "Term") shall be for the period of 48
months commencing on April 1, 1995.
Early possession of the Premises for the purpose of constructing tenant
improvements shall be on February 1, 1995, and subject to Addendum One.
4. RENT:
(a) Base Rent. Tenant shall pay to Landlord, in advance on the first day of
---------
each calendar month, without further notice or demand and without offset or
deduction, the monthly installments of rent specified below:
Full Calendar Months Base Rental/Month/NNN
1-48 $29,685.92
Upon execution of this Lease, Tenant shall pay to Landlord base rental and
additional rent for the period April 1 through April 30, 1995 and the Security
Deposit hereafter set forth.
(b) Additional Rent. In addition to the Base Rent, Tenant shall pay to
---------------
Landlord, in accordance with this Paragraph 4, Tenant's proportionate share of
the following items related to the Building, the Property, and/or the Outside
Areas (as defined in Paragraph 4 (b) (3)) (the "Additional Rent").
(1) Taxes and Assessments. All real estate taxes and assessments
---------------------
applicable to the Term. Real estate taxes and assessments shall include any form
of assessment, license, fee, tax, levy, penalty (if a result of Tenant's
delinquency), or tax (other than net income, estate, succession, inheritance,
transfer or franchise taxes), imposed by any authority having the direct or
indirect power to tax or by any city, county, state or federal government or any
improvement or other district or division thereof, whether such tax is (i)
determined by the area of the Premises, the Building or the Property, or any
part thereof or the Rent and other sums payable
1
<PAGE>
hereunder by Tenant, including, but not limited to, any gross income or excise
tax levied by any of the foregoing authorities with respect to receipt of Rent
or other sums due under this Lease; (ii) upon any legal or equitable interest of
Landlord in the Premises, the Building or the Property, or any part thereof;
(iii) upon this transaction or any document to which Tenant is a party creating
or transferring any interest in the Premises, the Building or the Property; (iv)
levied or assessed in lieu of, in substitution for, or in addition to, existing
or additional taxes against the Premises, the Building or the Property, whether
or not now customary or within the contemplation of the parties; or (v)
surcharge against the parking area. Tenant and Landlord acknowledge that
Proposition 13 was adopted by the voters of the State of California in the June,
1978 election and that assessments, taxes, fees, levies and charges may be
imposed by governmental agencies for such purposes as fire protection, street,
sidewalk, road, utility construction and maintenance, refuse removal and for
other governmental services which may formerly have been provided without charge
to property owners or occupants. It is the intention of the parties that all new
and increased assessments, taxes, fees, levies and charges due to Proposition 13
or any other cause are to be included within the definition of real property
taxes for purposes of this Lease.
(2) Insurance. All insurance premiums, including premiums for "all
---------
risk", fire and extended coverage (including earthquake endorsements) insurance
for the Building, public liability insurance, other insurance as Landlord deems
necessary, and any deductibles paid under policies of any such insurance.
(3) Outside Areas Expenses. All costs to operate, manage, maintain,
----------------------
repair, supervise, insure (including provision of public liability insurance)
and administer the areas outside of the Building ("Outside Areas"), including
but not limited to watering, fertilizing, landscaping, tree work, spraying,
window washing of exterior window surfaces, plant and tree replacement,
lighting, building alarm system, repair of paving and sidewalks, striping,
clean-up and sweeping.
(4) Parking Charges. Any parking charges or other costs levied, assessed
---------------
or imposed by, or at the direction of, or resulting from statutes or
regulations, or interpretations thereof, promulgated by any governmental
authority or insurer in connection with the use or occupancy of the Building,
the Outside Areas and/or the Property.
(5) Maintenance and Repair of Building. All costs to maintain, repair,
----------------------------------
and replace the building, including structural portions of the roof, the roof
coverings, the foundations, the floor slab, the load bearing walls, and the
exterior walls (including the painting thereof) of the Building, and all costs
to maintain, repair and replace all utility and plumbing systems, fixtures and
equipment located outside the Building. Notwithstanding said provisions, the
cost of any improvement or replacement to the building under this sub-paragraph,
which exceeds $25,000.00 in cost and which has a useful life of more than 5
years, shall be amortized on a straight-line basis together with interest
thereon at the rate of 8-1/2% per annum, and only the amortized portion of such
cost and interest shall be included in costs recoverable by Landlord. Also
notwithstanding anything to the contrary, Landlord shall not recover any costs
in excess of $5,000.00 per repair or replacement incurred in maintaining,
repairing or replacing the exterior load bearing walls, foundation, and
structural components of the roof. The portion of any such costs up to $5,000.00
per repair or replacement, shall be passed through to Tenant.
(6) Management and Administration. All costs for management and
-----------------------------
administration of the Building and the Property, including a property management
fee, accounting, auditing, billing, postage, employee
2
<PAGE>
benefits, payroll taxes, etc. All such expenses shall be reasonable and in
accordance with good management practices and shall not exceed 2% of annual Base
Rent.
(c) Allocation of Costs.
-------------------
(1) If said real estate taxes and assessments are assessed against the
entire building and building site, each of greater extent than the "Premises",
the taxes and assessments allocated to the leased premises shall be pro-rated on
a square footage or other equitable basis, as calculated by Landlord, such as
the tax assessor's relative valuations. If the assessed value of the Landlords
premises is increased by the inclusion therein of a value placed upon the
personal property or improvements of the Tenant, and if the Landlord pays the
taxes based on such increased assessment, the Tenant shall, upon demand, repay
to the Landlord the portion of such taxes resulting from such increase in
assessment. In the event the Premises and any improvements installed therein by
Tenant or Landlord are valued by the assessor disproportionately higher or lower
than those of other Tenants in the building or parcel, Tenant's share of the
property taxes shall be readjusted upwards or downwards accordingly, and Tenant
agrees to such readjusted share. Such determination shall be made by Landlord
from the respective valuations assigned in the assessor's work sheet or such
other information as may be reasonably available. Landlord's reasonable
determination thereof, in good faith, shall be conclusive. Increase in real
estate taxes due to reappraisal because of transfer of Landlord's interest to a
third party, shall not be charged to Tenant under this sub-paragraph (c)(1).
(2) Insurance, Outside Areas Expenses, Parking Charges, Maintenance and
repair of building, and management and administration expense shall be charged
to Tenant in proportion to that portion of the total rentable building area on
the site rented by Tenant hereunder. Until further buildings on the site are
completed, Tenant's share shall be calculated as 35,552 square feet/163,706
square feet or 21.72%.
(d) Payment of Additional Rent.
--------------------------
(1) Upon execution of this Lease, Landlord shall submit to Tenant an
estimate of monthly Additional Rent for the period between April 1, 1995 and the
following December 31 and Tenant shall pay such estimated Additional Rent in
advance on a monthly basis concurrently with the payment of the Base Rent.
Tenant shall continue to make said monthly payments until notified by Landlord
of a change therein. By March 1 of each calendar year, Landlord shall endeavor
to provide to Tenant a statement showing the actual Additional Rent due to
Landlord for the prior calendar year, prorated from the Commencement Date during
the first year. If the total of the monthly payments of Additional Rent that
Tenant has made for the prior calendar year (or portion thereof during which
this Lease was in effect) is less than the actual Additional Rent chargeable to
Tenant for such prior calendar year, then Tenant shall pay the difference in a
lump sum within thirty (30) days after receipt of such statement from Landlord.
Any overpayment by Tenant of Additional Rent for the prior calendar year shall
be promptly refunded to Tenant no later than April 15.
(2) The actual Additional Rent for the prior calendar year shall be used
for purposes of calculating Tenant's monthly payment of estimated Additional
Rent for the current year, subject to adjustment as provided above, except that
in any year in which resurfacing of the parking area or material roof repairs
are planned, Landlord may include the estimated cost of such work in the
estimated monthly Additional Rent. Landlord shall make final determination of
Additional Rent for the year in which this Lease
3
<PAGE>
terminates as soon as possible after termination. Tenant shall remain
liable for payment of any amount due to Landlord in excess of the estimated
Additional Rent previously paid by Tenant, and, conversely, Landlord shall
promptly return to Tenant any overpayment, even though the Term has expired and
Tenant has vacated the Premises. Failure of Landlord to submit statements as
called for herein shall not be deemed a waiver of Tenant's obligation to pay
Additional Rent as herein provided. Tenant shall have the right to review and
audit Landlord's records relating to Additional Rent at Tenant's expense, at
Landlord's business office, provided Tenant has given Landlord reasonable prior
notice.
(e) General Payment Terms. The Base Rent, Additional Rent and all other
---------------------
sums payable by Tenant to Landlord hereunder are referred to as the "Rent". All
Rent shall be paid without deduction, offset or abatement in lawful money of the
United States of America. Rent for any partial month during the Term shall be
prorated for the portion thereof falling due within the Term.
5. LATE CHARGE: Notwithstanding any other provision of this Lease, Tenant
hereby acknowledges that late payment to Landlord of Rent, or other amounts due
hereunder will cause Landlord to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. If any Rent or
other sums due from Tenant are not received by Landlord or by Landlord's
designated agent within ten (10) days after their due date, then Tenant shall
pay to Landlord a late charge equal to six percent (6%) of such overdue amount,
plus any attorneys' fees incurred by Landlord by reason of Tenant's failure to
pay Rent and/or other charges when due hereunder. Landlord and Tenant hereby
agree that such late charges represent a fair and reasonable estimate of the
cost that Landlord will incur by reason of Tenant's late payment. Landlord's
acceptance of such late charges shall not constitute a waiver of Tenant's
default with respect to such overdue amount or estop Landlord from exercising
any of the other rights and remedies granted under this Lease.
Initials:
Landlord _________ Tenant _________
6. SECURITY DEPOSIT: Concurrently with Tenant's execution of the Lease, Tenant
shall deposit with Landlord the Security Deposit in the amount of $29,550. as
security for the full and faithful performance of each and every term, covenant
and condition of this Lease. Landlord may use, apply or retain the whole or any
part of the Security Deposit as may be reasonably necessary (a) to remedy
Tenant's default in the payment of any Rent, (b) to repair damage to the
Premises caused by Tenant, (c) to clean the Premises upon termination of this
Lease, (d) to reimburse Landlord for the payment of any amount which Landlord
may reasonably spend or be required to spend by reason of Tenant's default, or
(e) to compensate Landlord for any other loss or damage which Landlord may
suffer by reason of Tenant's default. Should Tenant faithfully and fully comply
with all of the terms, covenants and conditions of this Lease, within thirty
(30) days following the expiration of the Term, the Security Deposit or any
balance thereof shall be returned to Tenant or, at the option of Landlord, to
the last assignee of Tenant's interest in this Lease. Landlord shall deposit
said Security Deposit in a savings account in a bank or savings and loan
institution, and Tenant will be entitled to interest thereon at the rate paid by
the savings institution, payable to Tenant at the termination of the lease. If
Landlord so uses or applies all or any portion of said deposit, within ten (10)
days after written demand therefor Tenant shall deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to the full extent of the
above amount, and Tenant's failure to do so shall be a default under this Lease.
In the event Landlord transfers its interest in this Lease, Landlord shall
transfer the then remaining amount of the Security Deposit to Landlord's
successor in
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interest, and thereafter Landlord shall have no further liability to Tenant with
respect to such Security Deposit.
7. POSSESSION:
(a) Tenant's Right of Possession. Tenant shall be entitled to occupancy of
----------------------------
the Premises for fixturation commencing at the Early Occupancy Period (See
Addendum One).
(b) Delay in Delivering Possession. If Landlord cannot deliver possession
------------------------------
of the Premises to Tenant at the commencement of the Term, this Lease shall not
be void or voidable, nor shall Landlord, or Landlord's agents be liable to
Tenant for any loss or damage resulting therefrom. Tenant shall not be liable
for Rent until Landlord delivers possession of the Premises to Tenant. The
expiration date of the Term shall be extended by the same number of days that
Tenant's possession of the Premises is delayed. Tenant shall receive one day of
occupancy free of Base Rent for each day Early Occupancy is delayed beyond
February 15, 1995. If early occupancy is delayed beyond April 30, 1995, Tenant
may terminate this lease.
8. USE OF PREMISES:
(a) Permitted Uses. The Premises shall be used only for general office,
--------------
engineering, research and development, service and repair, and storage of
computer hardware and software products and components, to the extent permitted
by governmental regulations. No printed circuit board manufacture or wafer
fabrication shall be permitted, or any activities involving toxic substances,
except that Tenant shall be permitted to use customary office products and
cleansers and minor quantities of cleaners and solvents in connection with its
business, but subject to as to such cleaners and solvents, the prior written
consent of Landlord, which shall not be unreasonably withheld.
(b) Compliance with Governmental Regulations. Tenant shall, at Tenant's
----------------------------------------
expense, faithfully observe and comply with all Municipal, State and Federal
statutes, rules, regulations, ordinances, requirements, and orders, now in force
or which may hereafter be in force pertaining to the Premises or Tenant's use
thereof, including without limitation, any statutes, rules, regulations,
ordinances, requirements, or orders requiring installation of fire sprinkler
systems and removal of asbestos placed on the Premises by Tenant, whether
substantial in cost or otherwise, and all recorded covenants, conditions and
restrictions affecting the Property ("Private Restrictions") now in force or
which may hereafter be in force; provided that no such future Private
Restrictions shall materially affect Tenant's use and enjoyment of the Premises
or Property and provided, however, that Tenant shall not be required to make
structural changes to the Premises or Building not related to Tenant's specific
use of the Premises unless the requirement for such changes is imposed as a
result of any improvements or additions made or proposed to be made at Tenant's
request. The judgment of any court of competent jurisdiction, or the admission
of Tenant in any action or proceeding against Tenant, whether Landlord be a
party thereto or not, that Tenant has violated any such rule, regulation,
ordinance, statute or Private Restrictions, shall be conclusive of that fact as
between Landlord and Tenant.
9. ACCEPTANCE OF PREMISES: By execution hereof, Tenant accepts the Premises as
suitable for Tenant's intended use and as being in good and sanitary operating
order, condition and repair, AS IS, and without representation or warranty by
Landlord as to the condition, or use or occupancy which may be made thereof. Any
exceptions to the foregoing must
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be by written agreement executed by Landlord and Tenant, and specifically set
forth in Addendum One.
10. SURRENDER: Tenant agrees that on the termination of this Lease, Tenant
shall surrender the premises in the same condition as herein agreed they have
been received, damage caused by war, earthquake and ordinary wear and tear
excepted but with carpets vacuumed and other floors "broom clean". At the time
of termination of this lease, Landlord may require any or all of the alterations
or additions installed by Tenant or by Landlord for the benefit of Tenant at
Tenant's request to be removed and the premises restored to their original
condition, whether or not said alterations or additions have become part of the
premises under paragraph 11 hereof. Notwithstanding the foregoing, Tenant shall
not be required to remove the Tenant Improvements made at the commencement of
the Term, and subsequent alterations and improvements unless (I) Tenant has not
requested Landlord's consent to them (whether or not such consent is required)
or, (II) Tenant has requested such consent and Landlord has notified Tenant, at
the time of Tenant's request for consent that such removal will be required.
Upon surrender of the premises, either at the expiration of the term or
otherwise, Lessee agrees to remove all personal property and rubbish from the
premises; but if not so removed by Tenant, Landlord may have the same removed at
Tenant's expense. All property of Tenant not so removed, unless such non-removal
is consented to by Landlord, shall be deemed abandoned by Tenant, provided that
in such event Tenant shall remain liable to Landlord for all costs incurred in
storing and disposing of such abandoned property of Tenant. If the Premises are
not surrendered at the end of the term or sooner termination of this lease,
Tenant hereby indemnifies Landlord against loss or liability resulting from
delay by Tenant in so surrendering the Premises including, without limitation,
any claims made by any succeeding tenant founded on such delay. In the event of
surrender of this lease, Landlord shall have the option of terminating all
existing sub-leases or of assigning said sub-leases to Landlord.
11. ALTERATIONS AND ADDITIONS:
(a) Except for non-structural interior alterations and additions costing
less than $15,000.00 per alteration or addition, Tenant shall not make, or
permit to be made, any alteration or addition to the Premises, or any part
thereof, without the prior written consent of Landlord, such consent not to be
unreasonably withheld. Landlord's failure to disapprove proposed alterations or
additions within 10 working days after Landlord's receipt of the request for
approval, shall be deemed approval. Normal repair and maintenance work shall not
be deemed to be an alteration or addition to the Premises.
(b) Any alteration or addition to the Premises (including those in
subparagraph (a)) shall be at Tenant's sole cost and expense, in compliance with
all applicable laws and requirements requested by Landlord, and in accordance
with plans and specifications submitted in writing to Landlord and approved as
to alterations and additions costing over $15,000.00.
(c) All additions, alterations or improvements, including, but not limited
to, heating, lighting, electrical, air conditioning, fire extinguishers,
lighting fixtures, ballasts, light globes, and tubes, hot water heaters, fixed
partitioning, drapery, wall covering and paneling, built-in cabinet work and
carpeting installations made by Tenant, together with all property that has
become an integral part of the Building, shall at once be and become the
property of Landlord, and shall not be deemed trade fixtures, but any or all are
subject to removal pursuant to paragraph 10 hereof. Notwithstanding the
foregoing, the following Tenant improvements, if paid for by Tenant and not
included in the Tenant Improvement Allowance, namely
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telecommunication and computer-related equipment, including specialized
flooring, cabling, air conditioning equipment (for the sole purpose of cooling
said computers), may be removed by Tenant so long as Tenant repairs any damage
caused by such removal.
(d) Tenant agrees not to proceed to make such alterations or additions,
notwithstanding consent from Landlord to do so, until five (5) days after
Tenant's receipt of such consent
12. MAINTENANCE OF PREMISES:
(a) Maintenance by Tenant. Throughout the Term, Tenant shall, at its sole
---------------------
expense, (1) keep and maintain in good order, condition, and repair, and to
repair and to replace the Premise, and every part thereof, including glass,
windows, window frames, skylights, door closers, locks, storefronts, interior
and exterior doors and door frames, and the interior of the Premises, (excepting
only those portions of the Building to be maintained by Landlord, as provided in
Paragraph 12(c) below), (2) keep and maintain in good order and condition,
repair, and replace all utility and plumbing systems, fixtures and equipment,
including without limitation, electricity, gas, HVAC, water, and sewer, located
in or on the Premises, and furnish all expendables, including fluorescent tubes,
ballasts, light bulbs, paper goods and soaps, used in the Premises, (3) repair
all damage to the Building or the Outside Areas caused by the negligence or
willful misconduct of Tenant or its agents, employees, contractors or invitees
or other persons, including vandals. Tenant shall not do anything to cause any
damage, deterioration or unsightliness to the Building and the Outside Areas.
Tenant also agrees to maintain and pay for a bi-monthly service contract which
meets the manufacturer's recommendations of the air conditioning and heating
systems installed in the leased premises. Landlord reserves the right to approve
the contractor conducting the bi-monthly service and the Landlord shall receive
from Tenant copies of the inspection and service reports. Landlord also reserves
the right to hire a licensed HVAC contractor to inspect annually the heating and
air conditioning system. If this contractor finds deficiencies in the condition
of this system, Tenant agrees to make all repairs and corrections within a
reasonable period of time at Tenant's expense, and after 30 days notice pay the
cost of the inspections by Landlord's contractor. If no deficiencies are found,
Landlord shall pay for the cost of the inspections.
(b) Landlord's Right to Maintain and Repair at Tenant's Expense.
-----------------------------------------------------------
Notwithstanding the foregoing, Landlord shall have the right, but not the
obligation, at Tenant's expense, to enter the Premises and perform Tenant's
maintenance, repair and replacement work. Within thirty (30) days after invoice
therefor from Landlord, Tenant shall pay all reasonable costs and expenses
incurred by Landlord in connection with such maintenance, repair and replacement
work. Landlord shall have the right to perform Tenant's maintenance, repair and
replacement work only if Tenant fails to take appropriate remedial action within
ten (10) days after receiving written notice from Landlord specifying the nature
of Tenant's failure to comply with Paragraph 12(a) of the Lease. Notwithstanding
the foregoing, if Tenant's failure to maintain, repair or replace as required by
Paragraph 12(a) of the Lease creates an immediate danger of material further
damage to the Premises, Landlord shall not be required to give the notice to
Tenant set forth in the previous sentence.
(c) Maintenance by Landlord. Subject to the provisions of Paragraphs 12(a),
-----------------------
22 and 23, and further subject to Tenant's obligation under Paragraph 4 to
reimburse Landlord, in the form of Additional Rent, for Tenant's Proportionate
Share of the cost and expense of the following items, Landlord agrees to repair
and maintain the following items: the structural
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portions of the roof and the roof coverings (provided that Tenant installs no
additional air conditioning or other equipment on the roof that damages
structural portions of the roof or the roof coverings), the foundation, the
floor slab, the load bearing walls, and the exterior walls (excluding any glass
therein but including the painting thereof) of the Building; the utility and
plumbing Systems, (including fountain and sewer lines), fixtures and equipment
located outside the Building; and the parking areas, landscaping, sprinkler
systems, alarm system, sidewalks, driveways, curbs, and lighting systems in the
Outside Areas. Landlord shall not be required to repair or maintain conditions
due to any act, negligence or omission of Tenant or its agents, contractors,
employees or invitees. Landlord's obligation hereunder to repair and maintain is
subject to the condition precedent that Landlord shall have received written
notice of the need for such repairs and maintenance. Tenant shall promptly
report in writing to Landlord any defective condition known to it which Landlord
is required to repair.
(d) Tenant's Waiver of Rights. Tenant hereby expressly waives all rights to
-------------------------
make repairs at the expense of Landlord or to terminate this Lease, as provided
for in California Civil Code Sections 1941 and 1942, and 1932 (1), respectively,
and any similar or successor statute or law in effect or any amendment thereof
during the Term.
13. LANDLORD'S INSURANCE: Landlord shall purchase and keep in force fire,
extended coverage and "all risk" insurance covering the Building, and earthquake
coverage at the option of the Landlord. Tenant shall, at its sole cost and
expense, comply with any and all reasonable requirements pertaining to the
Premises of any insurer necessary for the maintenance of reasonable fire and
public liability insurance, covering Building and appurtenances. Landlord, at
Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent
will be paid in a timely manner to Landlord for a period of at least twelve (12)
months if the Premises are destroyed or rendered unusable or inaccessible by any
cause insured against under this Lease. The premium for such Loss of Rents
insurance shall be Additional Rent as set forth in Paragraph 4(b) (2).
14. TENANT'S INSURANCE:
(a) Public Liability Insurance. Tenant shall, at Tenant's expense secure
--------------------------
and keep in force a "broad form" public liability insurance and property damage
policy covering the Premises and the Outside Areas, insuring Tenant, and naming
Landlord and its lenders as additional insureds, against any liability arising
out of the ownership, use, occupancy or maintenance of the Premises and all
Outside Areas. The minimum limit of coverage of such policy shall be in the
amount of not less than One Million Dollars ($1,000,000.) for injury or death of
one person in any one accident or occurrence and in the amount of not less than
One Million Dollars ($1,000,000.) for injury or death of more than one person in
any one accident or occurrence, shall include an extended liability endorsement
providing contractual liability coverage (which shall include coverage for
Tenant's indemnification obligations in this Lease), and shall contain a
severability of interest clause or a cross liability endorsement. Such insurance
shall further insure Landlord and Tenant against liability for property damage
of at least One Million Dollars ($1,000,000.). The limit of any insurance shall
not limit the liability of Tenant hereunder. No policy shall be cancelable or
subject to reduction of coverage, without at least thirty (30) days prior
written notice to Landlord, and loss payable clauses shall be subject to
Landlord's approval. Such policies of insurance shall be issued as primary
policies and not contributing with or in excess of coverage that Landlord may
carry, by an insurance company authorized to do business in the State of
California for the issuance of such type of insurance coverage and rated A:XIII
or better in Best's Key Rating Guide. A copy of said policy or a certificate
-----------------------
evidencing to
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Landlord's reasonable satisfaction that such insurance is in effect shall be
delivered to Landlord upon commencement of the Term, and thereafter whenever
said policies are renewed or modified, and also whenever Landlord shall
reasonable request.
(b) Personal Property Insurance. Tenant shall maintain in full force and
---------------------------
effect on all outs fixtures and equipment on the Premises, a policy or policies
of fire and extended coverage insurance with standard coverage endorsement to
the extent of the full replacement cost thereon During the term of this Lease
the proceeds from any such policy or policies of insurance shall be used for the
repair or replacement of the fixtures and equipment so insured. Landlord shall
have no interest in the insurance upon Tenant's equipment and fixtures and will
sign all documents reasonably necessary in connection with the settlement of any
claim or loss by Tenant. Landlord will not carry insurance on Tenant's
possessions. Tenant shall furnish Landlord with a certificate evidencing to
Landlord's reasonable satisfaction that such insurance is currently in effect,
and whenever required, shall satisfy Landlord that such policy is in full force
and effect.
15. INDEMNIFICATION:
(a) Of Landlord. Tenant shall indemnify and hold harmless Landlord and
------------
agents, employees, partners, shareholders, directors, invitees, and independent
contractors (collectively "Agents") of Landlord against and from any and all
claims; liabilities, judgments, costs, demands, causes of action and expenses
(including, without limitation, reasonable attorneys' fees) arising from (1)
Tenant's use of the Premises or from any activity done, permitted or suffered by
Tenant, its agents, employees or independent contractors in and about the
Premises, the Building or the Property; and (2) any act, neglect, fault, willful
misconduct or omission of Tenant, or Tenant's Agents and invitees or from any
breach or default in the terms of this Lease by Tenant, and (3) any action or
proceeding brought on account of any matter in items (1) or (2). If any action
or proceeding is brought against Landlord by reason of any such claim, upon
notice from Landlord, Tenant shall defend the same at Tenant's expense by
counsel reasonably satisfactory to Landlord. As a material part of the
consideration to Landlord, Tenant hereby assumes all risk of damage to property
or injury to persons in or about the Premises from any cause whatsoever (except
that which is caused by the sole active negligence or willful misconduct by
Landlord or its Agents or by the failure of Landlord to observe any of the terms
and conditions of this Lease), if such failure has persisted for an unreasonable
period of time after written notice of such failure), and Tenant hereby waives
all claims in respect thereof against Landlord. The obligations of Tenant under
this Paragraph 15 shall survive any termination of this Lease.
(b) No Impairment of Insurance. The foregoing indemnity shall not relieve
--------------------------
any insurance carrier of its obligations under any policies required to be
carried by either party pursuant to this Lease, to the extent that such policies
cover the peril or occurrence that results in the claim that is subject to the
foregoing indemnity.
16. SUBROGATION: Landlord and Tenant hereby mutually waive any claim against
the other during the Term for any injury to person or loss or damage to any of
their property located on or about the Premises, the Building or the Property
that is caused by or results from perils covered by insurance carried by the
respective parties, to the extent of the proceeds of such insurance actually
received with respect to such injury, loss or damage, whether or not due to the
negligence of the other party or its agents. Because the foregoing waivers will
preclude the assignment of any claim by way of subrogation to an insurance
company or any other person, each party now agrees to immediately give to its
insurer written notice of the terms of these
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mutual waivers. Nothing in this Paragraph 16 shall relieve a party of liability
to the other for failure to carry insurance required by this Lease.
17. ABANDONMENT: Tenant shall not abandon the Premises at any time during the
Term. In the event of abandonment, the rights and remedies of Tenant and
Landlord shall be determined in accordance with the applicable California
statutes in effect at the time of abandonment.
16. FREE FROM LIENS: Tenant shall keep the Premises and the Property free
from any liens arising out of any work performed, materials furnished, or
obligations incurred by or for Tenant.
19. ADVERTISEMENTS AND SIGNS: Tenant shall not place or permit to be placed
in, upon, or about the Premises or the Property any signs, advertisements or
notices without obtaining Landlord's prior written consent or without complying
with applicable law, and will not conduct, or permit to be conducted, any sale
by auction on the Premises or otherwise on the Property. Tenant shall remove any
sign, advertisement or notice placed on the Premises by Tenant upon the
expiration of the Term or sooner termination of this Lease, and Tenant shall
repair any damage or injury to the Premises or the Property caused thereby, all
at Tenant's expense. If any signs are not removed, or necessary repairs not
made, Landlord shall have the right to remove the signs and repair any damage of
injury to the Premises at Tenant's sole cost and expense. Landlord hereby
consents to Tenant's installing, at its expense, such signs located either on
the Building, in front of the Building (on Arques Avenue), or on both, provided
that such signs shall be in keeping both in number and size as those currently
identifying Diamond Computer Systems. The special designs for the signs shall be
submitted to and must receive prior written approval of Landlord.
20. UTILITIES. Tenant shall pay for all water, sewer, gas, heat, light,
power, telephone service and all other materials and services supplied to the
Premises. If Tenant fails to pay for any of the foregoing when due, Landlord may
pay the same and add such amount to the Rent.
It is further understood that certain utility services, including water,
and sewer are not separately metered to the Premises, but also serve other
adjoining premises. Landlord and Tenant agree that Landlord shall submit at
regular billing intervals, when utility bills are received, an allocation of the
monthly charges applicable to each user by area occupied by each. Said allocated
charges shall constitute additional rent. Landlord and Tenant agree that such
allocation shall cease as to any service for which Landlord shall arrange for a
separate meter for the Premises. The allocated costs shall also include the
expense of maintenance, repair and replacement of equipment providing
distribution of said utility services, which shall be charged on the same area
basis.
21. ENTRY BY LANDLORD. Tenant shall permit Landlord and its Agents to
enter into and upon the Premises at all reasonable times, upon reasonable notice
of no less than twenty four (24) hours, (except in the case of an emergency, for
which no notice shall be required), and subject to Tenant's reasonable security
arrangements, for the purpose of inspecting the same or showing the Premises to
prospective purchasers, lenders or tenants or to alter, improve, maintain and
repair the Premises as required or permitted of Landlord under the terms hereof,
without any liability to Tenant for any loss of occupation or quiet enjoyment of
the Premises thereby occasioned (except for actual damages resulting from the
negligence or willful misconduct of Landlord or its agents); and Tenant shall
permit Landlord to post notices of non-responsibility and ordinary "for sale" or
"for lease" signs, provided that Landlord may post such "for lease" signs and
exhibit the Premises to prospective tenants only during the six (6) months prior
to termination of this Lease. No such entry shall be construed to be a forcible
or
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unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant
from the Premises.
22. DESTRUCTION AND DAMAGE:
(a) If the Building is damaged by fire or other perils covered by extended
coverage insurance, Landlord shall, at Landlord's option:
(1) Subject to the provisions of Paragraph 5 of Addendum One hereof in
the event of total destruction (which shall mean destruction or damage in excess
of twenty-five percent (25%) of the full insurable value thereof) of the
Building, elect either to commence promptly to repair and restore the Building
and prosecute the same diligently to completion, in which event this lease shall
remain in full force and effect; or not to repair or restore the Building, in
which event this Lease shall terminate. Landlord shall give Tenant written
notice of its intention within sixty (60) days after the occurrence of such
destruction. If Landlord elects not to restore the Building, this Lease shall be
deemed to have terminated as of the date of such total destruction.
(2) In the event of a partial destruction (which shall mean
destruction or damage to an extent not exceeding twenty-five percent (25%) of
the full insurable value thereof) or the Building for which Landlord will
receive insurance proceeds sufficient to cover the cost to repair and restore
such partial destruction and, if the damage thereto is such that the Building
may be substantially repaired or restored to its condition existing immediately
prior to such damage or destruction within one hundred eighty (180) days from
the date of such destruction, Landlord shall commence and proceed diligently
with the work of repair and restoration, in which event the Lease shall continue
in full force and effect. If such repair and restoration requires longer than
one hundred eighty (180) days or if the insurance proceeds therefor (plus any
amounts Tenant may elect or is obligated to contribute) are not sufficient to
cover the cost of such repair and restoration, Landlord may elect either to so
repair and restore, in which event the Lease shall continue in full force and
effect, or not to repair or restore, in which event the Lease shall terminate.
In either case, Landlord shall give written notice to Tenant of its intention
within sixty (60) days after the destruction occurs. If Landlord elects not to
restore the Building, this Lease shall be deemed to have terminated as of the
date of such partial destruction.
(3) Notwithstanding anything to the contrary contained in this
Paragraph 22, in the event of damage to the Building or the Premises occurring
during the last twelve (12) months of the Term, Landlord may elect to terminate
this Lease by written notice of such election given to Tenant within thirty (30)
days after the damage occurs.
(b) Subject to the provisions of Paragraph 5 of Addendum One hereon, if
the Building is damaged by any peril not covered by extended coverage insurance,
and the cost to repair such damage exceeds any amount Tenant may agree to
contribute, Landlord may elect either to commence promptly to repair and restore
the Building and prosecute the same diligently to completion, in which event
this Lease shall remain in full force and effect; or not to repair or restore
the Building, in which event this Lease shall terminate. Landlord shall give
Tenant written notice of its intention within sixty (60) days after the
occurrence of such damage. If Landlord elects not to restore the Building, this
Lease shall be deemed to have terminated as of the date on which Tenant
surrenders possession of the Premises to Landlord, except that if the damage to
the Premises materially impairs Tenant's ability to continue its business
operations in the Premises, then this Lease shall be deemed to have terminated
as of the date such damage occurred.
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(c) In the event of repair and restoration as herein provided, the
monthly installments of Base Rent shall be abated proportionately in the ratio
which Tenant's use of the Premises is impaired during the period of such repair
or restoration, unless the damage was caused by the negligent or willful acts of
omissions of Tenant, in which event there shall be abatement of Base Rent only
to the extant of rental abatement insurance proceeds received by Landlord.
Tenant shall not be entitled to any compensation or damages for loss of use of
the whole or any part of the Premises and/or any inconvenience or annoyance
occasioned by such damage, repair or restoration.
(d) If Landlord is obligated to or elects to repair or restore as herein
provided, Landlord shall repair or restore only those portions of the Building
and Premises which were originally provided at Landlord's expense, substantially
to their condition existing immediately prior to the occurrence of the damage or
destruction; and Tenant shall promptly repair and restore, at Tenant's expense,
Tenant's fixtures, improvements, alterations and additions in and to the
Premises or Building which were not provided at Landlord's expense.
(e) Tenant hereby waives the provisions of California Civil Code Section
1932(2) and Section 1933(4) which permit termination of a lease upon destruction
of the leased premises, and the provisions of any similar law now or hereinafter
in effect, and the provisions of this Paragraph 22 shall govern exclusively in
case of such destruction.
23. CONDEMNATION: If twenty-five percent (25%) or more of the Building
or the parking area for the Premises is taken for any public or quasi-public
purpose by any lawful governmental power or authority, by exercise of the right
of appropriation, inverse condemnation, condemnation or eminent domain, or sold
to prevent such taking (each such event being referred to as a "Condemnation"),
Landlord or Tenant may, at its option, terminate this Lease as of the date title
vests in the condemning party. If the Building after any Condemnation and any
repairs by Landlord would be untenantable for the conduct of Tenant's business
operations, Tenant shall have the right to terminate this Lease as of the date
title vests in the condemning party. If either party elects to terminate this
Lease as provided herein, such election shall be made by written notice to the
other party given within thirty (30) days after the nature and extent of such
Condemnation have been finally determined. Tenant shall not because of such
taking assert any claim against Landlord. Landlord shall be entitled to receive
the proceeds of all Condemnation awards, (except separate awards for trade
fixtures and relocation expense), and Tenant hereby assigns to Landlord all of
its interest in such awards. If less than twenty-five percent (25) of the
Building or the parking area is taken, Landlord at its option may terminate this
Lease. If neither Landlord nor Tenant elects to terminate this Lease to the
extent permitted above, Landlord shall promptly proceed to restore the Premises,
to the extent of any Condemnation award received by Landlord, to substantially
their same condition as existed prior to such Condemnation, allowing for the
reasonable effects of such Condemnation, and a proportionate abatement shall be
made to the Base Rent corresponding to the time during which, and to the portion
of the floor area of the Building (adjusted for any increase thereto resulting
from any reconstruction) of which, Tenant is deprived on account of such
Condemnation and restoration. The provisions of California Code of Civil
Procedure Section 1265.130, which allows either party to petition the Superior
Court to terminate the Lease in the event of a partial taking of the Premises,
and any other applicable law now or hereafter enacted, are hereby waived by
Landlord and Tenant.
24. ASSIGNMENT AND SUBLETTING
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(a) Tenant shall not voluntarily or by operation of law, (1) mortgage,
pledge, hypothecate or encumber this Lease or any interest herein, (2) assign or
transfer this Lease or any interest herein, sublet the Premises or any part
thereof, or any right or privilege appurtenant thereto, or allow any other
person (the employees, agents and invitees of Tenant excepted) to occupy or use
the Premises, or-any portion thereof, without first obtaining the written
consent of Landlord, which consent shall not be withheld unreasonably. When
Tenant requests Landlord's consent to such assignment or subletting, it shall
notify Landlord in writing of the name and address of the proposed assignee or
subtenant and the nature and character of the business of the proposed assignee
or subtenant and shall provide current financial statements for the proposed
assignee or subtenant prepared in accordance with generally accepted accounting
principles. Tenant shall also provide Landlord with a copy of the proposed
sublet or assignment agreement, including all material terms and conditions
thereof. Landlord shall have the option, to be exercised within thirty (30) days
of receipt of the foregoing, to (1) cancel this Lease as of the commencement
date stated in the proposed sublease or assignment, (2) acquire from Tenant the
interest, or any portion thereof, in this Lease and/or the Premises that Tenant
proposes to assign or sublease, on the same terms and conditions as stated in
the proposed sublet or assignment agreement, (3) consent to the proposed
assignment or sublease, or (4) refuse its consent to the proposed assignment or
sublease, providing that such consent shall not be unreasonably withheld.
(b) Without otherwise limiting the criteria upon which Landlord may
withhold its consent, Landlord may take into account the reputation and credit
worthiness of the proposed assignee or subtenant, the character of the business
proposed to be conducted in the Premises or portion thereof sought to be
subleased, and the potential impact of the proposed assignment or sublease on
the economic value of the Premises. In any event, Landlord may withhold its
consent to any assignment or sublease, if (1) the actual use proposed to be
conducted in the Premises or portion thereof conflicts with the provisions of
Paragraph 8(a) or (b) above or with any other lease which restricts the use to
which any space in the Building may be put, or (2) the proposed assignment or
sublease requires unreasonable alterations, improvements or additions to the
Premises or portions thereof.
(c) If Landlord approves an assignment or subletting as herein
provided, Tenant shall pay to Landlord, as Additional Rent, 50% of the
difference, if any, between (1) the Base Rent plus Additional Rent allocable to
that part of the Premises affected by such assignment or sublease pursuant to
the provisions of this Lease, and (2) the rent and any additional rent paid by
the assignee or sublessee to Tenant, after deducting the costs incurred by
Tenant in connection with any such assignment or sublease. The assignment or
sublease agreement, as the case may be, after approval by Landlord, shall not be
amended without Landlord's prior written consent, and shall contain a provision
directing the assignee or subtenant to pay the rent and other sums due
thereunder directly to Landlord upon receiving written notice from Landlord that
Tenant is in default under this Lease with respect to the payment of Rent.
Landlord's collection of such rent and other sums shall not constitute an
acceptance by Landlord of attornment by such assignee or subtenant. A consent to
one assignment subletting, occupation or use, and consent to any assignment or
subletting shall in no way relieve Tenant of any liability under this Lease. Any
assignment or subletting without Landlord's consent shall be void, and shall, at
the option of Landlord, constitute a Default under this Lease.
(d) Tenant shall pay Landlord's reasonable fees, not to exceed Five
Hundred Dollars ($500.00) per transaction, incurred in connection
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with Landlord's review and processing of documents regarding any proposed
assignment or sublease.
(e) Tenant acknowledges and agrees that the restrictions, conditions and
limitations imposed by this Paragraph 24 on Tenant's ability to assign or
transfer this Lease or any interest herein, to sublet the Premises or any part
thereof, to transfer or assign any right or privilege appurtenant to the
Premises, or to allow any other person to occupy or, use the Premises or any
portion thereof, are, for the purposes of California Civil Code Section 1951.4,
as amended from time to time, and for all other purposes, reasonable at the time
that the Lease was entered into, and shall be deemed to be reasonable at the
time that Tenant seeks to assign or transfer this Lease or any interest herein,
to sublet the Premises or any part thereof, to transfer or assign any right or
privilege appurtenant to the Premises, or to allow any other person to occupy or
use the Premises or any portion thereof.
(f) Notwithstanding anything to the contrary herein, Landlord's consent
shall not be required for any transfer, assignment or subletting of the Premises
(or any portion thereof) to any entity which controls, is controlled by, or is
under common control with Tenant; to any entity which results from a merger of
or consolidation with Tenant; to any entity which acquires substantially all of
the assets of Tenant, as a going concern, with respect to the business that is
being conducted in the Premises; or to entity engaged in a bona fide joint
venture with Tenant.
25. TENANT'S DEFAULT: The occurrence of any one of the following events
shall constitute an event of default on the part of Tenant ("Default"):
(a) The abandonment of the Premises by Tenant;
(b) Failure to pay any installment of Rent or any other monies due and
payable hereunder, said failure continuing for a period of 10 calendar days
after the same is due;
(c) A general assignment by Tenant for the benefit of creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant, the
filing of a voluntary petition for an arrangement, the filing of a petition,
voluntary or involuntary, for reorganization, or the filing of an involuntary
petition by Tenant's creditors, said involuntary petition remaining undischarged
for a period of sixty (60) days;
(e) Receivership, attachment, or other judicial seizure of substantially
all of Tenant's assets on the Premises, such attachment or other seizure
remaining undismissed or undischarged for a period of sixty (60) days after the
levy thereof;
(f) Failure of Tenant to execute and deliver to Landlord any estoppel
certificate, subordination agreement, or lease amendment within the time periods
and in the manner required by Paragraph 30 or 31 or 40.
(g) An assignment or sublease, or attempted assignment or sublease, of
this Lease or the Premises by Tenant contrary to the provision of Paragraph 24,
unless such assignment or sublease is expressly conditioned upon Tenant having
received Landlord's consent thereto;
(h) Failure of Tenant to restore the Security Deposit to the amount and
within the time period provided in Paragraph 6 above;
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(i) Failure in the performance of any of Tenant's covenants, agreements
or obligations hereunder (except those failures specified as events of Default
in other Paragraphs or this Paragraph 25, which shall be governed by such other
Paragraphs), which failure continues for ten (10) calendar days after written
notice thereof from Landlord to Tenant provided that, if Tenant has exercised
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reasonable diligence to cure such failure and such failure cannot be cured
within such ten (10) day period despite reasonable diligence, Tenant shall not
be in default under this subparagraph unless Tenant fails thereafter diligently
and continuously to prosecute the cure to completion; and
(j) Chronic delinquency by Tenant in the payment of Rent, or any other
periodic payments required to be paid by Tenant under this Lease. "Chronic
delinquency" shall mean failure by Tenant to pay Rent, or any other payments
required to be paid by Tenant under this Lease within (5) calendar days after
written notice thereof for any three (3) months (consecutive or non-consecutive)
during any twelve (12) month period. In the event of a Chronic Delinquency, in
addition to Landlord's other remedies for Default provided in this Lease, at
Landlord's option, Landlord shall have the right to require that Rent be paid by
Tenant quarterly, in advance.
Tenant agrees that any notice given by Landlord pursuant to Paragraph
25(b), (i) or (j) above shall satisfy the requirements for notice under
California Code of Civil Procedure Section 1161, and Landlord shall not be
required to give any additional notice in order to be entitled to commence an
unlawful detainer proceeding.
26. LANDLORD'S REMEDIES
(a) Termination. In the event of any Default by Tenant, then in addition
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to any other remedies available to Landlord at law or in equity and under this
Lease, Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder by giving written notice of such intention to
terminate. In the event that Landlord shall elect to so terminate this Lease
then Landlord may recover from Tenant:
(1) the worth at the time of award of any unpaid Rent and any other
sums due and payable which have been earned at the time of such termination;
plus
(2) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable which would have been earned after
termination until the time of award exceeds the amount of such rental loss
Tenant proves could have been reasonably avoided; plus
(3) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable for the balance of the term of this
Lease after the time of award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; plus
(4) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course would be likely to result
therefrom, including, without limitation, any costs or expenses reasonably and
necessarily incurred by Landlord (i) in retaking possession of the Premises;
(ii) in maintaining, repairing, preserving, restoring, replacing, cleaning,
altering or rehabilitating the Premises or any portion thereof, including such
acts for reletting to a new tenant or tenants; (iii) for leasing commissions; or
(iv) for any other costs necessary or appropriate to relet the Premises; plus
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(5) such reasonable attorneys fees incurred by Landlord as a result of
a Default, and costs in the event suit is tiled by Landlord to enforce such
remedy; and plus
(6) at Landlord's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable law.
As used in subparagraphs (1) and (2) above, the "worth at the time of award" is
computed by allowing interest at an annual rate equal to twelve percent (12%)
per annum or the maximum rate permitted by law, whichever is less. As used in
subparagraph (3) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award, plus one percent (1%). Tenant waives redemption
of relief from forfeiture under California Code of Civil Procedure Sections 1174
and 1179, or under any other present or future law, in the event Tenant is
evicted or Landlord takes possession of the Premises by reason of any Default or
Tenant hereunder.
(b) Continuation of Lease. In the event of any Default by Tenant, then in
---------------------
addition to any other remedies available to Landlord at law or in equity and
under this Lease, Landlord shall have the remedy described in California Civil
Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's
Default and abandonment and recover Rent as it becomes due, provided Tenant has
the right to sublet or assign, subject only to reasonable limitations).
(c) Re-entry. In the event of any Default by Tenant, Landlord shall also
--------
have the right, with or without terminating this Lease, in compliance with
applicable law, to re-enter the Premises and remove all persons and property
from the Premises; such property may be removed and stored in a public warehouse
or elsewhere at the cost of and for the account of Tenant.
(d) Reletting. In the event of the abandonment of the Premises by Tenant or
---------
in the event that Landlord shall elect to re-enter as provided in Paragraph
26(b) or shall take possession of the Premises pursuant to legal proceeding or
pursuant to any notice provided by law, then if Landlord does not elect to
terminate this Lease as provided in Paragraph 26(a), Landlord may from time to
time, without terminating this Lease, relet the Premises or any part thereof for
such term or terms and at such rental or rentals and upon such other terms and
conditions as Landlord in its sole discretion may deem advisable with the right
to make alterations and repairs to the Premises. In the event that Landlord
shall elect to so relet, then rentals received by Landlord from such reletting
shall be applied in the following order: (1) to reasonable attorneys' fees
incurred by Landlord as a result of a Default and costs in the event suit is
filed by Landlord to enforce such remedies; (2) to the payment of any
indebtedness other than Rent due hereunder from Tenant to Landlord; (3) to the
payment of any reasonable costs of such reletting; (4) to the payment of the
costs of any reasonable alterations and repairs to the Premises; (5) to the
payment of Rent due and unpaid hereunder; and (6) the residue, if any, shall be
held by Landlord and applied in payment of future Rent and other sums payable by
Tenant hereunder as the same may become due and payable hereunder. Should that
portion of such rentals received from such reletting during any month, which is
applied to the payment of Rent hereunder, be less than the Rent payable during
the month by Tenant hereunder, then Tenant shall pay such deficiency to
Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall
also pay to Landlord, as soon as ascertained, any costs and expenses reasonably
and necessarily incurred by Landlord in such reletting or
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in making such alterations and repairs not covered by the rentals received from
such reletting.
(e) Termination. No re-entry or taking of possession of the Premises by
-----------
Landlord pursuant to this Paragraph 26 shall be construed as an election to
terminate this Lease unless a written notice of such intention is given to
Tenant or unless the- termination thereof is decreed by a court of competent
jurisdiction. Notwithstanding any reletting without termination by Landlord
because of any Default by Tenant, Landlord may at any time after such reletting
elect to terminate this Lease for any such Default.
(f) Cumulative Remedies. The remedies herein provided are not exclusive
-------------------
and Landlord shall have any and all other remedies provided herein or by law or
in equity.
(g) No Surrender. No act or conduct of Landlord, whether consisting of
------------
the acceptance of the keys to the Premises, or otherwise, shall be deemed to be
or constitute an acceptance of the surrender of the Premises by Tenant prior to
the expiration of the Term, and such acceptance by Landlord of surrender by
Tenant shall only flow from and must be evidenced by a written acknowledgment of
acceptance of surrender signed by Landlord. The surrender of this Lease by
Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects
in writing that such merger takes place, but shall operate as an assignment to
Landlord of any and all existing subleases, or Landlord may, at its option,
elect in writing to treat such surrender as a merger terminating Tenant's estate
under this Lease, and thereupon Landlord may terminate any or all such subleases
by notifying the sublessee of its election so to do within (5) days after such
surrender.
27. ATTORNEY'S FEES: In the event any legal action or proceeding,
including arbitration and declaratory relief, is commenced for the purpose of
enforcing any rights or remedies pursuant to this Lease, the prevailing party
shall be entitled to recover from the non-prevailing party reasonable attorneys'
fees, as well as costs or suit, in said action or proceeding, whether or not
such action is prosecuted to judgment.
28. TAXES: Tenant shall be liable for and shall pay, prior to delinquency,
all taxes levied against personal property and trade or business fixtures of
Tenant. If any alteration, addition or improvement installed by Tenant pursuant
to Paragraph 11, or any personal property, trade fixture or other property of
Tenant, is assessed and taxed with the Property, Tenant shall pay such taxes to
Landlord within fifteen (15) days after delivery to Tenant of a statement
therefor.
29. EFFECT OF CONVEYANCE: The term "Landlord" as used in this Lease, means
only the owner for the time being of the Property containing the Building, so
that, in the event of any sale of the Property or the Building, Landlord shall
be and hereby is entirely freed and relieved of all covenants and obligations of
Landlord hereunder accruing from and after the transfer, and it shall be deemed
and construed, without further agreement between the parties and the purchaser
at any such sale, that the purchaser of the Property or the Building has assumed
and agreed to carry out any and all covenants and obligations of Landlord
hereunder, provided that new landlord has signed an agreement to assume and
perform the obligations of the Landlord under the terms of this lease.
30. TENANT'S ESTOPPEL CERTIFICATE From time to time, upon written request
of Landlord, Tenant shall execute, acknowledge and deliver to Landlord or its
designee, a written certificate stating (a) the date this Lease was executed,
the Commencement Date of the Term and the date the Term expires; (b) the date
Tenant entered into occupancy of the Premises; (c) the
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amount of Rent and the date to which such Rent has been paid; (d) that this
Lease is in full force and effect and has not been assigned, modified,
supplemented or amended in any way (or, if assigned, modified, supplemented or
amended, specifying the date and terms of any agreement so affecting this
Lease); (e) that this Lease represents the entire agreement between the parties
with respect to Tenant's right to use and occupy the Premises (or specifying
such other agreements, if any): (f) that all obligations under this Lease to be
performed by Landlord as of the date of such certificate have been satisfied (or
specifying those as to which Tenant claims that Landlord has yet to perform);
(g) that all required contributions by Landlord to Tenant on account of Tenant's
improvements have been received )or stating exceptions thereto); (h) to the best
of Tenant's knowledge that on such date there exist no defenses or offsets that
Tenant has against the enforcement of this Lease by Landlord (or stating
exceptions thereto; (i} that no Rent or other sum payable by Tenant hereunder
has been paid more than one (1) month in advance (or stating exceptions
thereto); (j) that security has been deposited with Landlord, stating the amount
thereof; and (k) any other matters evidencing the status of this Lease that may
be required either by a lender making a loan to Landlord to be secured by a deed
of trust covering the Premises or by a purchaser of the Premises. Any such
certificate delivered pursuant to this Paragraph 30 may be relied upon by a
prospective purchaser of Landlord's interest or a mortgagee of Landlord's
interest or assignee of any mortgage upon Landlord's interest in the Premises.
If Tenant shall fail to provide such certificate within ten (10) days of receipt
by Tenant of a written request by Landlord as herein provided, such failure
shall, at Landlord's election, constitute a Default under this Lease, and Tenant
shall be deemed to have given such certificate as above provided without
modification and shall be deemed to have given such certificate as above
provided without modification and shall be deemed to have admitted the accuracy
of any information supplied by Landlord to a prospective purchaser or mortgagee.
31. SUBORDINATION: Landlord shall have the right to cause this Lease
to be and remain subject and subordinate to any and all mortgages, deeds of
trust ("Encumbrances") that are now or may hereafter be executed covering the
Premises, or any renewals, modifications, consolidations, replacements or
extensions thereof, for the full amount of all advances made or to be made
thereunder and without regard to the time or character of such advances,
together with interest thereon and subject to all the terms and provisions
thereof; provided only, that in the event of the foreclosure of any such
-------------
mortgage or deed of trust, so long as Tenant is not in default, the holder
thereof ("Holder") shall agree to recognize Tenant's rights under this Lease as
long as Tenant shall pay the Rent and observe and perform all the provisions of
this Lease to be observed and performed by Tenant. Within ten (10) days after
Landlord's written request, Tenant shall execute, acknowledge and deliver any
and all reasonable documents required by Landlord or the Holder to effectuate
such subordination. If Tenant fails to do so, such failure shall constitute a
Default by Tenant under this Lease. Notwithstanding anything to the contrary set
forth in this Paragraph 31, Tenant hereby attorns and agrees to attorn to any
person or entity purchasing or otherwise acquiring the Premises at any sale or
other proceeding or pursuant to the exercise of any other rights, powers or
remedies under such Encumbrance.
32. ENVIRONMENTAL COVENANTS:
(a) As used herein, the term "Hazardous Material" shall mean any
substance or material which has been determined by any state, federal or local
governmental authority to be capable of posing a risk of injury to health,
safety or property, including all of those materials and substances designated
as hazardous or toxic by the city in which the Premises are located, the U.S.
Environmental Protection Agency, the Consumer Product
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Safety Commissions, the Food and Drug Administration, the California Water
Resources Control Board, the Regional Water Quality Control Board, San Francisco
Bay Region, the California Air Resources Board, CAL/OSHA Standards Board,
Division of Occupational Safety and Health, the California Department of Food
and Agriculture, the California Department of Health Services, and any federal
agencies that have overlapping jurisdiction with such California agencies, or
any other governmental agency now or hereafter authorized to regulate materials
and substances in the environment. Without limiting the generality of the
foregoing, the term "Hazardous Material" shall include all of those materials
and substances defined as "hazardous materials" or "hazardous waste" in Sections
66680 through 66685 of Title 22 of the California Administrative Code, Division
4, Chapter 30, as the same products, fractions, constituents and sub-
constituents of petroleum or petroleum-related substances, asbestos, and any
other materials requiring remediation now or in the future under federal, state
or local statutes, ordinances, regulations or policies.
(b) Tenant represents, warrants and covenants (i) that it will use and
store in, on or about the Premises, only those Hazardous Materials that are
necessary for Tenant to conduct its business activities on the Premises, (ii)
that, with respect to any such Hazardous Materials, Tenant shall comply with all
applicable federal, state and local laws, rules, regulations, policies and
authorities relating to the storage, use, disposal or cleanup of Hazardous
Materials, including, but not limited to, the obtaining of proper permits, and
(iii) that it will not dispose of any Hazardous Materials in, on or about the
Premises under any circumstances.
(c) Tenant shall immediately notify Landlord of any inquiry, test,
investigation or enforcement proceeding by or against Tenant, Landlord or the
Premises concerning a Hazardous Material. Tenant acknowledges that Landlord, as
the owner of the Premises, shall have the right to negotiate, defend, approve
and appeal, any action taken or order issued with regard to a Hazardous Material
by an applicable governmental authority. Landlord shall immediately notify
Tenant of any inquiry, test, investigation or enforcement proceeding against the
Premises concerning a Hazardous Material on the Premises. Tenant shall pay
Landlord's cost of negotiating, defending or appealing any action or order
issued with regard to Hazardous Material by an applicable governmental authority
if Tenant caused, permitted or suffered such Hazardous Material to come onto the
Premises. Landlord agrees to indemnify, defend and hold Tenant harmless from and
against the cost and expense of any remediation or cleanup work required by any
governmental agency to be performed on the Premises as a result of any Hazardous
Materials existing on the Premises on the date of this Lease.
(d) If Tenant's storage, use or disposal of any Hazardous Material in,
on or adjacent to the Premises results in any contamination of the Premises, the
soil or surface of groundwater (1) requiring remediation under federal, state or
local statutes, ordinances, regulations, or policies, or (2) at levels which are
unacceptable to Landlord, in Landlord's reasonable judgment, Tenant agrees to
clean up said contamination. Tenant further agrees to indemnify, defend and hold
Landlord harmless from and against any claims, liabilities, suits, causes of
action, costs, expenses or fees, including reasonable attorneys' fees and costs,
arising out of or in connection with any remediation, cleanup work, inquiry or
enforcement proceeding in connection therewith, and any Hazardous Materials
currently or hereafter used, stored or disposed of by Tenant or its agents,
employees, contractors or invitees in, on or adjacent to the Premises.
(e) Notwithstanding any other right of entry granted to Landlord under
this Lease, Landlord shall have the right upon reasonable
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prior written notice (except in an emergency or in a situation where there is a
danger of immediate further contamination, in which case no prior notice will be
required) to enter the Premises or to have consultants enter the Premises
throughout the term of this Lease for the purpose of (1) determining whether the
Premises are in conformity with federal, state and local statues, regulations,
ordinances, and policies including those pertaining to the environmental
condition of the Premises, (2) conducting an environmental audit or
investigation of the Premises for purposes of sale, transfer, conveyance or
financing, (3) determining whether Tenant has complied with this Paragraph 32,
and (4) determining the corrective measures, if any, required of Tenant to
ensure the safe use, storage and disposal of Hazardous Materials, or to remove
Hazardous Materials (except to the extent used, stored or disposed of by Tenant
or its agents, employees, contractors or invitees in compliance with applicable
law). Tenant agrees to provide access and reasonable assistance for such
inspections. Such inspections may include, but are not limited to, entering the
Premises or adjacent property with drill rigs or other machinery for the purpose
of obtaining laboratory samples. Landlord shall not be limited in the number of
such inspections during the term of this Lease. To the extent such inspection
disclose the presence of Hazardous Materials used, stored or disposed of other
than in accordance with subparagraph (b) (ii) above, Tenant shall reimburse
Landlord for the reasonable cost of such inspections within ten (10) days of
receipt of a written statement thereof. If such consultants determine that the
Premises are contaminated with Hazardous Materials used, stored or disposed of
by Tenant or its agents, employees, contractors or invitees, Tenant shall, in a
timely manner, at its expense, remove such Hazardous Materials or otherwise
comply with the recommendations of such consultants to the reasonable
satisfaction of Landlord and any applicable governmental agencies. The right
granted to Landlord herein to inspect the Premises shall not create a duty on
Landlord's part to inspect the Premises, or liability of Landlord for Tenant's
use, storage or disposal of Hazardous Materials, it being understood that Tenant
shall be solely responsible for all liability in connection therewith. Landlord
shall be liable for the gross negligence or willful misconduct of Landlord or
its agents, employees or consultants in conducting the aforementioned
inspections.
(f) Tenant shall surrender that Premises to Landlord upon the
expiration or earlier termination of this Lease free of debris, waste and
Hazardous Materials used, stored or disposed of by Tenant or its agents,
employees, contractors or invitees, and in a condition which complies with all
governmental statutes, ordinances, regulations and policies, recommendations of
consultants hired by Landlord, and such other reasonable requirements as may be
imposed by Landlord.
(g) Tenant's obligations under this Paragraph 32 shall survive termination
of this Lease, and Tenant waives the Statute of Limitations, as to Landlord,
applicable to any action brought hereunder.
(h) Landlord hereby discloses to Tenant that the Premises and the Property
are in an area in which contamination of soils or groundwater by Hazardous
Materials exist. If Tenant desires more definite information regarding the
existence or possible existence of contamination by Hazardous Materials of soils
or groundwater of or beneath the Premises, the Property, or other real property
in the general area of the Property, then Tenant shall investigate such matters.
33. NOTICES: All notices and demands which may or are to be required or
permitted to be given to either party by the other hereunder shall be in writing
and shall be sent by United States mail, postage prepaid, certified, or by
personal delivery or overnight courier, addressed to the addressee at the
address for such addressee as specified herein, or to such
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other place as such party may from time to time designate in a notice to the
other party given as provided herein. Notice shall be deemed given upon the
earlier of actual receipt or the date on which delivery was attempted if Tenant
refuses to receive.
34. WAIVER: The waiver of any breach of any term, covenant or condition of
this Lease shall-not be deemed to be a waiver of such term, covenant or
condition or any subsequent breach of the same or any other term, covenant or
condition herein contained. The subsequent acceptance of Rent by Landlord shall
not be deemed to be a waiver of any preceding breach by Tenant other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
Rent. No delay or omission in the exercise of any right or remedy of Landlord on
any Default by Tenant shall impair such a right or remedy or be construed as a
waiver. Any waiver by landlord of any Default must be in writing and shall not
be a waiver of any other Default concerning the same or any other provisions of
this Lease.
35. HOLDING OVER: Any holding over after the expiration of the Term,
without the express written consent of Landlord, shah constitute a Default and,
without limiting Landlord's remedies provided in this Lease, such holding over
shall be construed to be a tenancy at sufferance, at a rental rate of one
hundred twenty percent (120%) of the Base Rent last due in this Lease, plus
Additional Rent, and shall otherwise be on the terms and conditions herein
specified; so far as applicable.
36. SUCCESSORS AND ASSIGNS: The terms, covenants and conditions of this
Lease shall, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of all of the parties
hereto. If Tenant shall consist of more than one entity or person, the
obligations of Tenant under this Lease shall be joint and several.
37. TIME: Time is of the essence of this Lease and each and every term,
condition and provision herein.
36. BROKERS: Landlord represents and warrants to Tenant that neither it
nor its officers or agents not anyone acting on its behalf has dealt with any
real estate broker except Holcomb Realty and Tenant represents to Landlord that
Cooper/Brady is its sole real estate broker in such negotiations, and each party
agrees to indemnify and hold harmless the other from any claim or claims, and
costs and expenses, including attorney's fees, incurred by the indemnified party
in conjunction with any such claim or claims of any other broker or brokers to a
commission in connection with this Lease as a result of the actions of the
indemnifying party.
39. RULES AND REGULATIONS: Tenant agrees to comply with such reasonable
rules and regulations as Landlord may adopt from time to time for the orderly
and proper operating of the Building and parking and other common areas. Such
rules may include but shall not be limited to the following: (a) restriction of
employee parking to a limited, designated area or areas; and (b) regulation of
the removal, storage and disposal of Tenant's refuse and other rubbish at the
sole cost and expense of Tenant. The rules and regulations shall be binding upon
Tenant upon delivery of a copy of them to Tenant. Landlord shall not be
responsible to Tenant for the failure of any other person to observe and abide
by any of said rules and regulations.
40. MORTGAGEE PROTECTION:
(a) MODIFICATIONS FOR LENDER. If, in connection with obtaining financing
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for the Premises or any portion thereof, Landlord's lender shall request
reasonable modifications to this Lease as a condition to such
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financing, Tenant shall not unreasonably withhold, delay or defer its consent to
such modifications, provided such modifications do not adversely affect Tenant's
rights or increase Tenants obligations under this Lease.
(b) RIGHTS TO CURE. Tenant agrees to give to any trust deed or mortgage
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holder ("Holder"), by registered mail, at the same time as it is given to
Landlord, a copy of any notice of default given to Landlord, provided that prior
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to such notice Tenant has been notified, in writing, (by way of notice of
assignment of rents and leases, or otherwise) of the address of such Holder
Tenant further agrees that if Landlord shall have failed to cure such default
within the time provided for in this Lease, then the Holder shall have an
additional twenty (20) days after expiration of such period, or after receipt of
such notice from Tenant (if such notice to the Holder is required by this
Paragraph 42(b), whichever shall last occur, within which to cure such default
or if such default cannot be cured within that time, then such additional time
as may be necessary if within such twenty (20) days, any Holder has commenced
and is diligently pursuing the remedies necessary to cure such default
(including but not limited to commencement of foreclosure proceedings, if
necessary to effect such cure), in which event this Lease shall not be
terminated.
41. ENTIRE AGREEMENT: This Lease, including the Exhibits and any Addenda
attached hereto, which are hereby incorporated herein by this reference,
contains the entire agreement of the parties hereto, and no representations,
inducements, promises or agreements, oral or otherwise, between the parties, not
embodied herein or therein, shall be of any force and effect.
42. CONSTRUCTION: This Lease shall be construed and interpreted in accordance
with the laws of the State of California. The parties acknowledge and agree that
no rule of construction to the effect that any ambiguities are to be resolved
against the drafting party shall be employed in the interpretation of this
Lease, including the Exhibits and any Addenda attached hereto. All captions in
this Lease are for reference only and shall not be used in the interpretation of
this Lease. Whenever required by the context of this Lease, the singular shall
include the plural, the masculine shall include the feminine, and vice versa. If
any provision of this Lease shall be determined to be illegal or unenforceable,
such determination shall not affect any other provision of this Lease and all
such other provisions shall remain in full force and effect.
43. REPRESENTATIONS AND WARRANTIES OF TENANT: Tenant hereby makes the
following representations and warranties, each of which is material and being
relied upon by Landlord, is true in all respects as of the date of this Lease,
and shall survive the expiration or termination of the Lease.
(a) If Tenant is an entity, Tenant is duly organized, validly existing
and in good standing under the laws of the state of its organization and the
persons executing this Lease on behalf of Tenant have the full right and
authority to execute this Lease on behalf of Tenant and to bind Tenant without
the consent or approval of any other person or entity. Tenant has full power,
capacity, authority and legal right to execute and deliver this Lease and to
perform all of its obligations hereunder. This Lease is a legal, valid and
binding obligation of Tenant, enforceable in accordance with its terms.
(b) Tenant has not (1) made a general assignment for the benefit of
creditors, (2) filed any voluntary petition in bankruptcy or suffered the filing
of an involuntary petition by any creditors, (3) suffered the appointment of a
receiver to take possession of all or substantially all of its assets, (4)
suffered the attachment or other judicial seizure of all or
22
<PAGE>
substantially all of its assets, (5) admitted in writing its inability to pay
its debts as they come due, or (6) made an offer of settlement, extension or
composition to its creditors generally.
Landlord and Tenant have executed and delivered this Lease as of the date
first hereinabove set forth.
44. OUTSIDE AREAS.
(a) Subject to the terms and conditions of this lease and such rules and
regulations as Landlord may from time to time prescribe, Tenant and Tenant's
employees, invitees, guests and customers shall have the nonexclusive right to
use the access roads, parking areas, and facilities provided and designated by
Landlord for the general use and convenience of the occupants of the building in
which the premises are located, which areas and facilities are referred to
herein at "Outside Area", This right shall terminate upon the termination of
this lease. Landlord reserves the right from time to time to make changes in the
he shape, size, location, amount and extent of "Outside Area:, and in painting
of exterior walls, Landlord further reserves the right to promulgate such
reasonable rules and regulations relating to the use of the "Outside Area", and
any part or parts thereof, as Landlord may deem appropriate for the best
interests of the occupants of the building. The rules and regulations shall be
binding upon Tenant upon delivery of a copy of them to Tenant and Tenant shall
abide by them and cooperate in their observance. Such rules and regulations may
be amended by Landlord from time to time, with or without advance notice, and
all amendments shall be effective upon delivery of a copy to Tenant. Tenant
agrees to require its employees, executives, invitees, guests and customers to
abide by such rules and regulations including parking regulations.
(b) Landlord shall operate, manage and maintain the "Outside Area", and
landscaping and the surface of the exterior walls. The manner in which the
"Outside Area" shall be maintained and the expenditures for such maintenance
shall be at the discretion of Lessor.
(c) No materials, supplies, equipment, finished products or semi-finished
products, raw materials or articles of any nature shall be stored upon or
permitted to remain on any portion of the leased premises outside of the
building constructed thereon, except with the prior written consent of the
Landlord. No waste materials or refuse shall be dumped upon or permitted to
remain unreasonable upon any part of the leased premises outside of building
proper, unless approved by Landlord.
(d) Tenant shall not use solid hard tires on any fork lifts or dollies on
paved parking, truck loading or driveway areas, and in the event Tenant violates
this provision, Tenant shall be responsible for the cost of resurfacing the
entire area.
45. PARKING. Motor vehicle parking shall be non-exclusive, subject to
reallocation by Landlord from time to time. Landlord reserves the right to
designate from time to time the parking spaces for vehicles of Tenant and its
guests and invitees. Said spaces shall total 137, less the number eliminated by
revisions to existing handicap parking. The current designation of 137 spaces is
shown on attached Exhibit B. Tenant agrees that Landlord shall have no
responsibility for policing these parking spaces or seeing that they are used
exclusively by Tenant's employees, guests, or invitees. Tenant shall not at any
time park or permit the parking of Tenant's trucks or other vehicles, or the
trucks or other vehicles of others in driveways or adjacent to loading areas as
to interfere in any way with the use of such areas, nor shall Tenant at any time
park or permit the parking of Tenant vehicles or trucks, or the vehicles or
trucks of Tenant's suppliers or invitees
23
<PAGE>
in any portion of the "Parking Area" not designated by Landlord for such use by
Tenant. Tenant shall not park or permit to be parked inoperative vehicles or
equipment on any portion of the "Outside Area" and agrees that no vehicle will
be parked on the "Outside Area" for longer than eighteen (18) hours in any
twenty-four (24) hour period.
46. CALCULATION OF AREA:
The square footage of the leased premises (approximately 35,552 square
feet as set forth in Paragraph 2) has been calculated in this manner: the area
of the leased building, measured from the outer extent (drip line) of metal and
built-up roofed areas, or the outer walls. The Premises shall be deemed for all
purposes and agreed to consist of 35,552 square feet.
47. TENANT IMPROVEMENTS:
Tenant shall select and retain an architect or facilities planner who
shall prepare "tenant improvement" drawings and specifications for interior
revisions to the premises which are accepted by Tenant in "AS IS" condition,
subject to the provisions of Addendum 1, Paragraph 1
"Tenant Improvements" as stated in the Lease shall be general in
nature and shall include only those improvements within the Premises which are
depicted on the Final Plans and Specifications or described herein below.
The Tenant Improvements may include, but are not limited to:
(a) Partitioning, doors, floor coverings, finishes, ceilings, wall
coverings and painting, millwork and similar items.
(b) Electrical wiring, lighting fixtures, outlets and switches, and
other electrical work.
(c) Duct work, terminal boxes, defusers and accessories required for
the completion of the heating, ventilation and air conditioning systems serving
the Premises, including the cost of meter and key control for after-hour air
conditioning.
(d) Any additional Tenant requirements including, but not limited to
odor control, special heating, ventilation and air conditioning, noise or
vibration control or other special system.
(e) All fire and life safety control systems such as fire walls,
sprinklers, halon, fire alarms, including piping, wiring and accessories serving
the Premises.
(f) All plumbing, fixtures, pipes, and accessories serving the
Premises.
(g) Changes to handicapped parking or ramps.
Landlord shall provide in writing, not later than five (5) business days after
request therefor, approval or disapproval of preliminary and Final Plans and
Specifications. Landlord and Tenant shall indicate their approval of the Final
Plans and Specifications by initialing them. Upon completion of the Final Plans
and Specifications and approval thereof by Landlord and Tenant, Tenant will
obtain general contractor bids and furnish a cost breakdown to Landlord. In the
event the estimated Tenant Improvements Cost, based on such bids and the
reasonably anticipated costs of other items constituting the Tenant Improvement
Cost, exceeds the sum of the Tenant Improvements
24
<PAGE>
Allowance plus any amounts which Tenant desires to pay as an Excess Tenant
Improvements Costs, the Final Plans and Specifications may be revised, at
Tenant's cost and expense. Any such revisions shall be subject to Landlord's
approval, and the amended Final Plans and Specifications, as approved by
Landlord and Tenant, shall thereafter be deemed to be the Final Plans and
specifications for the Tenant Improvements. The amended Final Plans and
Specifications shall be approved by Landlord in writing, not later than five (5)
business days after Tenant's request therefor. Tenant shall thereafter submit
such amended Final Plans and Specifications to general contractors selected by
Tenant and approved by Landlord for re-bidding, and shall furnish a cost
breakdown to Landlord If the estimated Tenant Improvements Cost, as determined
by the bids based on the amended Final Plans and Specifications and the
reasonably anticipated costs or other items constituting the Tenant Improvements
Cost, result in an Excess Tenant Improvements Cost, then Tenant may make further
revisions as required to delete such items from the Final Plans and
Specifications in order to eliminate any Excess Tenant Improvements Cost or, if
Tenant does not elect to make further revisions, Tenant shall pay such Excess
Tenant Improvements Cost as and when required below.
When the Final Plans and Specifications (as amended, if required above) have
been approved by Landlord and Tenant, Tenant shall submit such Final Plans and
Specifications to all governmental authorities having rights of approval over
the Tenant Improvement work and shall apply for all governmental approvals and
building permits. Subject to its obligations, Tenant shall thereafter commence
and proceed to have completed construction of the Tenant Improvements in a good
and workmanlike manner by a general contractor approved by Landlord.
Landlord shall provide an allowance for the planning and construction of
Tenant Improvements in the amount of Ten Dollars per square foot ($355,520). In
addition, Landlord shall provide $25,000. to be matched by equal amounts from
the above Ten Dollar per square foot tenant improvement allowance to correct
non-conformities with current codes as required by governmental authorities.
This total amount ($380,520.) shall be known as the Tenant Improvement Allowance
and shall be the maximum contribution by Landlord for Tenant Improvement Costs
including correcting any non-conformities to codes or any other deficiencies.
Should the Tenant contribute funds to reduce Landlord's contribution to the
Tenant Improvement Allowance and/or should the actual cost of planning and
constructing those Tenant Improvements depicted on the Final Plans and
Specifications be less than the Tenant Improvement Allowance, the Tenant
Improvement Allowance shall be reduced to an amount equal to said actual
contribution by Landlord and the base monthly rent shall be reduced by $.02585
for each $1.00 less than $355,520. contributed by Landlord as part of the Tenant
Improvement Allowance. Any reduction in the aforesaid $25,000. to be contributed
by Landlord to correct code non-conformities shall not reduce the base monthly
rent. A memorandum to this Lease shall be executed by Landlord and Tenant
setting forth the amount by which Base Rent has been decreased.
The Tenant Improvements Cost ("Tenant Improvements Cost") shall include all
costs and expenses associated with the design, preparation, approval and
construction of the Tenant Improvements, including, but not limited, to the
following:
(a) All costs of preliminary and final architectural and engineering
plans and specifications for the Tenant Improvements, and engineering costs
associated with completion of the State of California energy utilization
calculations under Title 24 legislation;
25
<PAGE>
(b) All costs of obtaining building permits and other necessary
authorizations from local governmental authorities;
(c) All costs of interior design and finish schedule plans and
specifications including as-build drawings;
(d) All direct-and indirect costs of procuring, constructing and installing
the Tenant Improvements in the Premises;
(e) Utility connection fees.
In no event shall the Tenant Improvements Cost include any costs of procuring,
constructing or installing in the Premises any of Tenant's personal property or
trade fixtures.
Landlord shall reimburse Tenant for Tenant Improvement Costs (up to the sum of
the Tenant Improvement Allowance) within 10 days after presentation of invoices
therefor and proof that such invoices have been paid by Tenant. Tenant shall be
entitled to submit paid invoices to Landlord from time to time but not more
frequently than once every (30 days) during construction. Tenant also shall give
Landlord a full and complete set of "As Built" Drawings of the tenant
improvements within thirty days of tenant improvement completion and occupancy
by Tenant.
48. OPTION TO EXTEND: Landlord grants to Tenant two options to extend the
term of this lease for a period of three years each subject to all terms and
conditions herein contained except this paragraph, paragraph 47 - Tenant
Improvements, and monthly rental which shall be determined as set forth below.
In order to exercise this option, Tenant must have performed all the covenants
and obligations of Tenant herein and at least six months before the ending date
of the initial term of this lease or of the first extended term of three years,
must have delivered to Landlord written notice of the exercise of this option.
As of the date of exercise by Tenant of its option to extend, the monthly base
rental for the Extended Term of three years shall be subject to negotiation
between the Landlord and Tenant. Not later than five (5) full calendar months
prior to the expiration date of the Initial Term, or of the extended term as the
case may be, Landlord and Tenant shall meet and endeavor to agree between
themselves as to the fair market base monthly rental of the premises, as of the
commencement of the Extended Term. If the parties are able to agree on such fair
market base monthly rental, said base monthly rent shall be the rental for the
premises during the Extended Term. In the event the parties fail to agree upon
said amounts for the Extended Term, at least four (4) full calendar months
prior to commencement thereof, the base monthly rental for the Extended Term,
shall be determined by appraisal in the manner hereafter set forth.
In the event it becomes necessary under this subparagraph to determine the
fair market base monthly rental of the premises by appraisal, Landlord and
Tenant, no later than three (3) full calendar months prior to commencement of
the Extended Term, each shall appoint an experienced real estate appraiser with
at least five (5) years experience in the leasing of industrial office property
in the general vicinity of the premises. The two appraisers so selected shall
each determine the fair market base monthly rental for the premises taking into
account the value of the property and comparable prevailing rentals including
escalations for a three (3)year term in that area. Such appraisers shall, within
twenty (20) business days after their appointment, complete their appraisals and
submit their appraisal reports to Landlord and Tenant. If the fair market
monthly base rental of the premises established in the two (2) appraisals varies
by ten percent (10%) or less of the
26
<PAGE>
higher rental, the average of the two shall be controlling. If said fair
market monthly base rental varies by more than ten percent (10%) of the higher
rental, said appraisers, within ten (10) days after the submission of the last
appraisal, shall appoint a third appraiser who shall also meet the
qualifications set forth above. Such third appraiser shall, within twenty (20)
business days after his appointment, determine by appraisal the fair market
monthly base rental of the-premises, taking into account the same factors
referred to above, and submit his appraisal report to Landlord and Tenant. The
fair market monthly base rental determined by the third appraiser for the
premises shall be controlling, unless it is less than that set forth in the
lower appraisal previously obtained, in which case the value set forth in said
lower appraisal shall be controlling, or unless it is greater than that set
forth in the higher appraisal previously obtained, in which case the base
rental set forth in said higher appraisal shall be controlling. If either
Landlord or Tenant fails to appoint an appraiser or if an appraiser appointed
by either of them fails, after his appointment, to submit his appraisal within
the required period in accordance with the foregoing, the appraisal submitted
by the other appraiser shall be controlling. The term "fair market monthly
base rental" used for all purposes of this paragraph, shall include escalation
over the three year term. The cost of all appraisals under this subparagraph
shall be borne equally by Landlord and Tenant. Upon determination of the fair
market base monthly rental by appraisal, the parties hereto shall immediately
execute an addendum to this Lease stating the fair market base monthly rental
so determined.
In the event of exercise of the option to extend, the security deposit shall
continue to be held under the provisions of the lease, to be returned to Tenant
to the extent therein set forth, within 30 days after the termination of the
extension period and vacation of the premises by Tenant.
It is agreed that this Option to Extend is personal to Tenant, and has been
granted because of specific use of the premises by Tenant and agreements in the
lease concerning Tenant's improvements. In the event this lease is assigned or
sublet to any third party or entity other than to successor tenant as defined by
paragraph 24 (f), this Option to Extend shall be null and void.
Landlord and Tenant have executed and delivered this Lease as of the date
first hereinabove set forth.
LANDLORD TENANT
Herman Christensen, Jr. and Olivetti Advanced Technology
Raymond P. Christensen Center, Inc.
/s/ Herman Christensen, Jr. /s/ J.P. Belshaw
___________________________ By ______________________
Herman Christensen, Jr.
/s/ Raymond P. Christensen
__________________________ Printed
Raymond P. Christensen J.P. Belshaw
Name: _____________________
Treasurer/Controller
Title: ______________________
801 American St.
San Carlos, CA 94070
By: ________________________
Printed
Name:______________________
Title: ______________________
27
<PAGE>
ADDENDUM ONE
TO
LEASE AGREEMENT
dated
by and between
HERMAN CHRISTENSEN, JR. and RAYMOND P. CHRISTENSEN
as Landlord,
and
OLIIVETTI ADVANCED TECHNOLOGY CENTER, INC., as Tenant
MODIFICATIONS, ADDITIONS AND AMENDMENTS TO LEASE
The provisions of this Addendum One shall modify, amend and be in addition to
the provisions of the Lease. Where the provisions of this Addendum One are
inconsistent with the provisions of the Lease, the provisions of this Addendum
One shall govern.
1. Tenant has inspected the premises and accepts the premises in "As Is"
condition with the following exceptions:
1) The roof shall be inspected by a reputable roofing contractor
selected by Landlord and approved by Tenant, which approval shall
not be unreasonably withheld. Repairs recommended by this
inspection to place the roof in good condition prior to the lease
commencement date shall be accomplished with the cost to be borne
by Landlord.
2) The HVAC equipment on the roof shall be inspected by a reputable
HVAC contractor selected by Landlord and approved by Tenant,
which approval shall not be unreasonably withheld. Repairs or
replacements recommended by this inspection to place this
equipment in good condition prior to the lease commencement date
shall be accomplished with the cost to be borne by Landlord.
2. Tenant may for the purpose of installing Tenant Improvements, occupy
the Premises prior to the Commencement date of the Lease (Early Occupancy) on
February 1, 1995. If Tenant Improvements are completed prior to the Lease
Commencement date, Tenant may occupy the premises and carry on its business.
Said Early Occupancy shall be under all terms and provisions of this lease
except that no Base rent and Additional Rent shall be payable for this period.
Prior to February 1, 1995, subject to the approval of Diamond Computer Systems,
Tenant shall have reasonable access to the Premises for the purpose of
architectural and engineering planning.
3. Landlord warrants and represents to Tenant that to the best of
Landlord's knowledge on the date this Lease is executed there is no asbestos on
the Premises. Tenant shall not bring nor permit asbestos to be brought onto the
Premises.
4. In the event Tenant wishes to install additional air conditioning or
other equipment on the roof, Tenant shall furnish an engineer's report
certifying that the structural integrity of the roof and roof covering will not
be adversely affected by the proposed addition.
5. Notwithstanding the provisions of Paragraph 22 of the Lease to the
contrary, in the event Landlord elects to repair or restore the Premises and
such repair or restoration is reasonably estimated by Landlord to require
more than one hundred eighty (180) days from the date of destruction, Landlord
shall notify Tenant and Tenant shall have ten (10) days after receipt of such
notice to elect to terminate the Lease by giving written notice of such election
to Landlord. If Tenant so elects to terminate the Lease, such termination shall
be effective as of (i) if Tenant is in possession of the Premises following such
damage or destruction, the date Tenant surrenders possession of the Premises to
Landlord following Tenant's election to terminate the Lease or (ii) if Tenant is
unable to occupy the Premises following such damage and destruction, the date on
which the damage or destruction occurred.
<PAGE>
[MAP APPEARS HERE]
EXHIBIT A
BLDG. "B"
(NORTH WING)
<PAGE>
[MAP APPEARS HERE]
EXHIBIT B
(ARQUES)
<PAGE>
[MAP APPEARS HERE]
EXHIBIT C
1130 East Arques
Sunnyvale, CA
<PAGE>
EXHIBIT 10.10
DEVELOPMENT, LICENSE AND PURCHASE AGREEMENT
THIS DEVELOPMENT, LICENSE AND PURCHASE AGREEMENT, including the attached
Exhibits ("Agreement"), effective as of the 19th day of December, 1994
("Effective Date"), is hereby made by and between Cisco Systems, Inc., a
California corporation, having principal offices at 170 West Tasman Drive, San
Jose, California 95134-1706 ("Cisco"), and Multimedia Communications, Inc., a
California corporation, having a place of business at 2855 Kifer Road, Santa
Clara, California, 95051 ("MMC").
RECITALS
WHEREAS, the parties desire that MMC support Cisco in its design of the
Cisco Chip Set pursuant to the Statement of Work; and
WHEREAS, Cisco desires that MMC grant certain licenses to Cisco, as
specified below, to enable Cisco to develop the Cisco Chip Set.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. DEFINITIONS
1.1 "Application Development Software System" means MMC's software known
---------------------------------------
as the Application Development Software System, as further described in Exhibit
-------
C. Item 3.
- ---------
1.2 "Cisco Chip Set" means the companion chip set to be developed by
--------------
Cisco, which interfaces with the MMC Chip Set, pursuant to the MMC Chip Set
license granted by MMC to Cisco hereunder.
1.3 "Deliverables" means the items to be delivered by MMC hereunder
------------
pursuant to the milestone schedule as specified in the Statement of Work.
1.4 "MMC Chip Design" means MMC's design of the MMC Chip Set, as more
---------------
fully described in Exhibit B
1.5 "MMC Chip Set" means the ATM switch chip set which meets the
------------
Specifications set forth in Exhibit B, designed and developed by MMC.
1.6 "MC Source Code" means the high-level description of the MMC Chip Set
--------------
in Verilog format.
1.7 "Proprietary Rights" means all worldwide ideas, know-how, trade
------------------
secrets, inventions, technology, designs, copyrights, patents, trade names,
trademarks, audio visual rights and all other intellectual property rights
including without limitation all moral rights therein and thereto and all
applications and registrations with respect thereto.
1.8 "Specifications" means the functional, technical and other
--------------
specifications for the MMC Chip Set set forth in Exhibit B. which may be
-----------
modified from time to time by prior written mutual agreement of the parties.
1.9 "Statement of Work" means that document specifying the milestone
-----------------
schedule for the development work to be undertaken under this Agreement, as set
forth in Exhibit A, which may be modified from time to time by prior mutual
---------
written agreement of the parties.
1
<PAGE>
1.10 "Switch Design and Software" means MMC's Electrical board-level Design
--------------------------
of the Switch and the Basic Switch Driver Software, as further described in
Exhibit C, Item 2.
- -----------------
2. DEVELOPMENT
2.1 Development. On the terms and conditions set forth in this Agreement,
-----------
MMC agrees to deliver to Cisco the Deliverables in a professional and competent
manner according to the Specifications and schedule and milestones set forth in
the Statement of Work.
2.2 Project Managers. Each party will appoint a single project manager
----------------
("Project Manager") and provide written notification to the other party of the
name of the Project Manager within five (5) days of the Effective Date. The
Project Managers will act as a liaison with the other party with respect to the
design and development of the MMC Chip Set. In the event that either party
appoints a new Project Manager, such party will promptly notify the other.
2.3 Modifications. During the development specified in Section 2.1 above,
-------------
the parties agree to reasonably modify the Statement of Work at the request of
either party, provided that the modifications do not materially increase either
party's obligations under this Agreement. If the modifications would materially
increase any such obligations, MMC and Cisco shall use their respective good
faith efforts to agree on terms under which such changes shall be incorporated
into the Statement of Work and this Agreement. Changes to the Statement of Work
will be made only upon written agreement, including electronic mail, of each
party's Project Manager.
2.4 Cisco's Obligations.
-------------------
(a) Cisco will provide certain materials, proprietary information and
technology ("Cisco Materials") to MMC for MMC's use in the development
contemplated hereunder as identified in Exhibit D. Cisco hereby grants MMC a
---------
nonexclusive, nontransferable license to use the Cisco Materials solely for use
in fulfilling MMC's obligations under the development to be performed hereunder.
Unless otherwise agreed, upon request by Cisco (and at Cisco's expense and
direction) MMC will return all Cisco Materials to Cisco.
(b) Cisco agrees to perform the tasks specified in Exhibit D to facilitate
---------
MMC's performance of its development obligations hereunder.
2.5 Delivery and Acceptance.
-----------------------
(a) Upon completion of a milestone called for under the Statement of Work,
MMC will deliver to Cisco the Deliverables for such milestone identified in the
Statement of Work, which will include MMC Source Code.
(b) Cisco shall promptly review, test and evaluate each Deliverable in
accordance with the requirements and acceptance criteria for such Deliverable
contained in the Statement of Work. Cisco shall provide MMC with a written
acceptance of a Deliverable, or a written statement of defects to be corrected.
MMC shall promptly correct such defects, if any, and return the Deliverable to
Cisco for retesting, review and reevaluation. The foregoing procedure shall he
repeated until acceptance of each Deliverable by Cisco; provided, that if such
Deliverable is not accepted within forty-five (45) days of the original
applicable milestone schedule date for its delivery, Cisco will have the right
to immediately terminate this Agreement notwithstanding anything to the contrary
in Section 10 (Term and Termination). In no event shall Cisco's right to
terminate this Agreement prior to Acceptance include future rights to
manufacture described in Section 4.5.
2.6 Advance Payment. In consideration for MMC's support in the development
---------------
of the Cisco Chip Set hereunder, Cisco agrees to pay to MMC an advance against
the Unit Price (defined below) due hereunder equal to the amount of (*), due and
payable in accordance with the following schedule: 50% at contract signing, and;
remaining balance at Cisco Acceptance of the samples (see 2.5 (b).
__________________________
(*) Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
2
<PAGE>
2.7 MMC Source Code and Network Access. The parties agree that, during the
----------------------------------
development contemplated hereunder, MMC will provide Cisco with the MMC source
code in order to support Cisco in the design of the Cisco Chip Set. Cisco
acknowledges that the Source Code and any information disclosed to Cisco on the
MMC network is highly Confidential Information. Therefore, in addition to the
obligations of nondisclosure set forth in Section 9 below, Cisco agrees to keep
the computers on which the Source Code is stored locked in Cisco's server room;
such computers shall be password protected with limited access to Cisco
designers, and managers working with the designers, and the system
administrators) and other authorized personnel (a) who have a need to use such
Source Code or have access to the MMC network to perform hereunder, and (b) who
have signed agreements (in the form attached hereto as Exhibit D) obligating
---------
them to maintain the confidence of the Source Code disclosed to them.
3. OWNERSHIP AND GRANT OF RIGHTS AND LICENSES
3.1 MMC Chip Set Ownership. The MMC Chip Set, and all Proprietary Rights
----------------------
therein and thereto, is owned by MMC.
3.2 MMC Source Code License. Subject to the terms and conditions of this
-----------------------
Agreement, MMC hereby grants Cisco a non-exclusive, worldwide, perpetual,
irrevocable license, under MMC's Proprietary Rights, to the MMC Source Code to
(a) use the MMC Source Code to create the Cisco Chip Set, (b) make, have made,
sell and distribute the Cisco Chip Set and (c) modify, make derivative works of,
sell and distribute such modifications and derivative works of the Cisco Chip
Set.
3.3 Cisco Chip Set Ownership. Subject to MMC's ownership of the MMC Chip
------------------------
Design, the Cisco Chip Set, and all Proprietary Rights therein and thereto,
which Cisco develops pursuant to this license shall be owned by Cisco.
3.4 MMC Switch Design and Software License. Subject to the terms and
--------------------------------------
conditions of this Agreement, MMC hereby grants Cisco a non-exclusive,
worldwide, perpetual, irrevocable license, under MMC's Proprietary Rights, to
the Switch Design and Software to use, make, have made, modify, make derivative
works of, sell, distribute and otherwise exploit. This does not imply the
license to use MMC's proprietary Shared Memory Architecture in any other
application.
3.5 MMC Site License. Subject to the terms and conditions of this
----------------
Agreement, MMC hereby grants Cisco a non-exclusive, worldwide, perpetual,
irrevocable, royalty-free license, not for resale and for internal use only,
under MMC's Proprietary Rights, to the Application Development Software System
to enable Cisco to develop application software in parallel to hardware
development.
3.6 Further Assurances. At any time or from time to time on and after the
------------------
date of this Agreement, at the request of either party, the other party shall
(a) deliver such records, data or other documents consistent with the provisions
of this Agreement, (b) execute, and deliver or cause to be delivered, all such
assignments, consents, documents or further instruments of transfer or license
and (c) take or cause to be taken all such other actions, as the requesting
party may reasonably deem necessary or desirable in order for the requesting
party to obtain the full benefits of this Agreement and the transactions
contemplated hereby, including ensuring all employees participating in the
developments hereunder have executed agreements assigning all inventions such
employee may develop or conceive to such employee's employer.
3.7 (*)
3.8 No Other Rights. Except as expressly provided in this Agreement,
---------------
neither party shall have any license, expressed or implied, to use any
technology or Proprietary Rights owned solely by the other party.
_____________________
(*) Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
3
<PAGE>
4. MANUFACTURING
4.1 Agreement to Manufacture. Upon receipt of orders therefor, MMC agrees
------------------------
to have the MMC Chip Sets manufactured and to sell such MMC Chip Sets to Cisco
at prices determined as set forth in Section 5 below, and Cisco agrees to
purchase such MMC Chip Sets from MMC on the terms and conditions set forth
herein.
4.2 MMC's Obligations. MMC agrees to hold finished goods inventory of the
-----------------
MMC chipset (at Cisco's expense; value to be mutually agreed upon within 30 days
following the signing of this Agreement) in quantities sufficient to cover their
quoted manufacturing leadtime plus one month. The quantity is determined by the
open purchase orders and the 9 (nine) month rolling forecast (section 5.2).
4.3 Quality. MMC agrees that the MMC Chip Sets manufactured and delivered
-------
hereunder will meet the quality requirements set forth in Exhibit G.
---------
4.4 Regulatory Approvals. Cisco will be responsible for the MMC Chip Set's
--------------------
compliance with all applicable UL, CSA, FCC and other approvals, standards and
regulations, provided that the MMC Chip Sets are manufactured in accordance with
the Specifications. Cisco may designate any approved third party hereunder as
the manufacturing location for the purposes of such approvals. MMC will
cooperate, and require such approved third parties to cooperate, with public and
private regulatory agencies and organizations to allow periodic inspections at
mutually agreeable times to maintain such approvals.
4.5 Cisco's Right to Manufacture. MMC agrees that it shall grant Cisco the
----------------------------
right to manufacture, and hereby does grant Cisco the worldwide, nonexclusive,
nontransferable, perpetual, irrevocable right and license, without the right to
sub-license, under MMC's Proprietary Rights, to manufacture or have
manufactured, use sell or otherwise distribute the MMC Chip Set upon the
occurrence of the following events or circumstances:
(a) MMC assigns, transfers or delegates its rights and obligations
under this Agreement to another party without Cisco's prior written consent,
including without limitation any transfer by sale, merger or other business
combination of ownership of or control over more than fifty percent (50%) of the
voting securities or control of MMC; Cisco will not unreasonably withhold its
consent provided that the assignee can carry out the obligations under this
Agreement.
(b) MMC fails consistently to supply Cisco with MMC Chip Sets meeting
the applicable quality standards in the quantities required in accordance with
the capacity requirements set forth in section 4.2. For purposes of this
paragraph (b), MMC shall be deemed to have failed consistently in performing its
obligations to supply MMC Chip Sets if over a twelve month period, three
occurrences in which (i) MMC fails to ship at least ninety percent (90%) of the
scheduled quantities of the MMC Chip Set for any two (2) month period on or
before the ship dates scheduled in accordance with this Agreement, or (ii) more
than .4 percent (or 4000 DPM) as a Cisco Chip Set (see Exhibit G) delivered are
defective in any material respect with regard to materials and workmanship
(excluding design defects, software bugs and other defects which are not related
to manufacturing operations).
(c) Cisco reasonably deems itself insecure with respect to MMC's
capacity to continue to supply MMC Chip Sets in accordance with this Agreement
because MMC is experiencing financial distress as evidenced by the occurrence of
all of the following: (i) MMC has experienced losses for the two preceding
fiscal quarters, (ii) MMC has working capital on hand that is inadequate to fund
MMC's operations for the following three months at the same level as the prior
three months and (iii) MMC fails to obtain sufficient working capital for such
following three months within 30 days after receiving written notice from Cisco
that Cisco intends to exercise its right to manufacture MMC Chip Sets. Cisco and
MMC agree that, if MMC recovers from its financial distress and can demonstrate
that it has working capital on hand sufficient to fund operations at the level
sufficient to find operations at Cisco's then current demand for at least six
months, Cisco and MMC will negotiate in good faith for an arrangement under
which MMC will again manufacture MMC Chip Sets for Cisco and which takes into
account the investment Cisco makes to begin manufacturing MMC Chip Sets itself.
4
<PAGE>
(d) MMC refuses to make the MMC Chip Sets available to Cisco at or
below the maximum applicable price levels agreed to in writing by the parties
for the MMC Chip Sets; or
(e) Cisco terminates this Agreement by reason of any other material
breach by MMC of its obligations hereunder which remain uncured thirty (30) days
after MMC's receipt of written acceptance thereof by Cisco.
4.6 Royalties and License Fees.
---------------------------
(a) In the event Cisco exercises its right to manufacture the Chip
Sets, Cisco agrees to pay MMC royalties on all Cisco products using the MMC Chip
Sets manufactured and distributed by Cisco hereunder at royalties to be mutually
agreed upon (e.g., based on a win/win principle) at a later date. Such royalties
will be computed on a per unit basis and paid quarterly within forty-five (45)
days following the end of each Cisco quarter.
(b) MMC shall be obligated to pay all license fees and royalties, if
any, with respect to any third party technologies which are required for the
exercise of Cisco's manufacturing rights.
4.7 Audit Rights. In the event Cisco exercises its right to manufacture
------------
the MMC Chip Set as provided hereunder, Cisco agrees to keep and maintain, for a
period of two (2) years after the end of the year to which they pertain,
complete and accurate records of the MMC Chip Sets manufactured and distributed
by Cisco in order to calculate and confirm Cisco's royalty obligations under
Section 4.6 above. Upon reasonable prior notice, MMC will have the right,
exercisable not more than once every twelve (12) months, to appoint an
independent accounting firm, at MMC's expense, to examine such books, records
and accounts during Cisco's normal business hours to verify the royalties due by
Cisco to MMC under Section 4.7 above, subject to such independent accounting
firm's execution of Cisco's standard confidentiality agreement; provided that
execution of such agreement will not preclude such firm from reporting its
results to MMC. In the event such audit discloses an underpayment or overpayment
of royalties due hereunder, the appropriate party will promptly remit the
amounts due to the other party. In the event the audit reveals underpayments
greater than five percent (5%), Cisco will pay all reasonable fees submitted by
the independent accounting firm.
4.8 Manufacturing Information Escrow.
--------------------------------
(a) MMC agrees, at Cisco's expense, to place in escrow all information
that is reasonably required in order for Cisco to manufacture the MMC Chip Set
meeting the Specifications and shall include at least the information listed in
Exhibit H ("Manufacturing Information"). MMC shall place the Manufacturing
- ---------
Information in escrow, with an escrow agent selected by Cisco, as soon as is
reasonably practicable following the Effective Date of this Agreement. The
"Escrow Agreement" will provide that the Manufacturing Information will only be
released to Cisco, subject to the terms and conditions hereof, only after notice
to MMC and only under circumstances in which Cisco would otherwise be entitled
to exercise the manufacturing rights. MMC agrees to promptly deposit, but not
more often than four (4) times per year, into escrow any and all updates,
enhancements and modifications to the Manufacturing Information.
(b) In the event Cisco exercises its manufacturing rights hereunder,
MMC shall provide Cisco such technical support and assistance as Cisco may
reasonably request in connection with the manufacture and testing of the MMC
Chip Set.
(c) Cisco agrees that it will maintain the Manufacturing Information
delivered to it under this Agreement in strict confidence and will require its
contractors to do the same. Any source code which is delivered as part of the
Manufacturing Information will be subject to Cisco's obligations set forth in
Section 9.3 below.
5
<PAGE>
5. TERMS OF PURCHASE
5.1 Terms and Conditions. Cisco agrees to purchase and MMC agrees to sell
--------------------
to Cisco units of the MMC Chip Set. All orders for MMC Chip Sets by Cisco will
be initiated by Cisco's issuance of written purchase orders sent to MMC (via
mail, telecopier, or telefax). Such orders shall state unit quantities,
requested delivery dates, and shipping instructions. Such purchase orders will
be deemed accepted upon receipt by MMC, unless Cisco is notified otherwise
within seven business days. No terms on purchase orders, invoices or like
documents by MMC or Cisco will serve to alter or add to the terms of this
Agreement.
5.2 Leadtime. MMC agrees to work with Cisco to develop a rapid fulfillment
--------
capacity in order to meet demand with shortest lead-times.
5.3 Unit Price.
----------
(a) The prices to Cisco for each MMC Chip Set as well as individual
chips are contained in EXHIBIT J, Pricing.
---------
(b) Notwithstanding anything to the contrary in paragraph (a) above,
MMC agrees that it shall pass through to Cisco one hundred percent (100%) of any
third party foundry price reductions for manufacture of the MMC Chip Sets.
(c) Notwithstanding anything to the contrary herein, MMC agrees that
the Unit Price paid by Cisco hereunder shall not be greater than the unit price
MMC charges any other customer for the MMC Chip Set for all Agreements signed on
or after this Agreement.
5.4 Initial Purchase Order. Within five (5) days after the Effective Date
----------------------
of this Agreement, Cisco agrees to place a purchase order for (*) MMC Chip
Sets. In consideration for the Advance Payment paid by Cisco to MMC
under Section 2.6 above, MMC agrees that the Unit Price to Cisco for this
initial order shall be reduced by (*) (i.e. (*) per MMC Chip Set). The
Deliverables delivered under Section 2 above (including without
limitation the prototypes of the MMC Chip Set) will not be counted as part of
the initial purchase order placed by Cisco.
5.5 Payment Terms. MMC shall submit an invoice to Cisco upon each shipment
-------------
of MMC Chip Sets ordered by Cisco. The full invoiced amount shall be paid by
Cisco within thirty (30) days of the date of invoice. Cisco shall be entitled
to a one percent (1%) discount if payment is made within ten (10) days of the
date of invoice.
5.6 Taxes. All stated prices are exclusive of any taxes, fees and duties
-----
including any value added or withholding taxes. Any taxes related to MMC Chip
Sets purchased or licensed pursuant to this Agreement shall be paid by Cisco or
Cisco shall present an exemption certificate acceptable to the taxing
authorities. Applicable taxes may be billed as a separate item on the invoice.
6
________________________________
(*) Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
5.7 Increasing, Rescheduling and Canceling Orders. Cisco may cancel to
---------------------------------------------
reschedule shipments in accordance with the following table by providing MMC
with a written order for such cancellation or reschedule. The time periods
specified in the following table are the number of days after receipt by MMC of
the written order for cancellation or reschedule that the MMC Chip Set was
originally scheduled to be shipped. Cancellations will be subject to a
cancellation charge based on a percentage of the charges for the complete
cancelled shipment. The MMC Chip Set may be rescheduled only one time per line
item. Product which has been rescheduled may not be subsequently cancelled
without cancellation charges. Cancellation charges shall be computed based on
the originally scheduled delivery date.
<TABLE>
<CAPTION>
Time Cancellation Charges Reschedule Option
------ -------------------- -----------------
<S> <C> <C>
> 120 days None At Cisco's Option
91 - 120 days 25% At Cisco's option but new shipment date must be
within 90 days of the original shipment date.
61 - 90 days 80% At Cisco's option but new shipment date must be
within 60 days of the original shipment date.
0 - 60 days 100% No reschedules permitted
</TABLE>
Upon request by Cisco, MMC agrees to increase scheduled deliveries as follows:
<TABLE>
<CAPTION>
Number of days prior to the Maximum percentage of MMC Chip
original scheduled delivery Sets by which the schedule can be
date that written notice of increased
an increase is received by
MMC
- --------------------------- -----------------------------------
<S> <C>
0 - 30 days To be determined at point of request by
Cisco and MMC
31 - 60 days 50%
61 - 120 days 100%
>120 days no limit
</TABLE>
MMC agrees to use commercially reasonable efforts to meet Cisco's requested
schedule and order changes, and Cisco agrees to use commercially reasonable
efforts to minimize the number and frequency of such requested changes.
5.8 Shipping. Shipment will be F.O.B. MMC's distribution facility
--------
("F.O.B. Point"), and all freight, insurance and other shipping expenses shall
be borne by Cisco. All MMC Chip Sets delivered pursuant to the terms of this
Agreement shall be suitably packed for shipment in MMC's standard shipping
cartons, marked for shipment at Cisco's address set forth above, or as otherwise
designated by Cisco, and delivered to Cisco or its designated carrier agent at
the F.O.B. Point, at which time risk of loss shall pass to Cisco.
7
<PAGE>
5.9 Acceptance. Cisco shall inspect all MMC Chip Set lots promptly upon
----------
receipt thereof and may reject any MMC Chip Set lot which is visibly damaged or
of which .4 percent (or 4000 DPM) of the lot fails to meet the warranty set
forth in Section 7.1(d) below. To reject a MMC Chip Set lot, Cisco shall (a)
within sixty (60) days of receipt of such MMC Chip Set lot notify MMC of its
rejection and (b) within ten (10) days of such notice MMC shall instruct Cisco
either to dispose of such MMC Chip Set lot (in any manner deemed appropriate by
Cisco) or to return an agreed upon number of MMC Chip Sets from such lot to MMC,
freight prepaid and properly insured. In the event that MMC instructs Cisco to
dispose of such MMC Chip Set lot or determines that the returned MMC Chip Sets
were properly rejected by Cisco, Cisco shall not be required to remit payment
therefor until a replacement MMC Chip Set lot is shipped to Cisco, upon which
full payment shall be made in accordance with Section 5.5 above.
6. SUPPORT
MMC agrees to provide Cisco, for a period of one (1) year after the
Effective Date of this Agreement, with support reasonably requested by Cisco
with regard to use, modification, enhancement and support of the MMC Source
Code. MMC's support services will consist of assisting Cisco, by telephone or
electronic mail (with information related to equipment system use, configuration
and troubleshooting), and providing updates, minor enhancements, problem
prioritization, bug fixes and work-around solutions to reported problems. Cisco
will provide support to its end users, including 1st and 2nd level support, for
Cisco's products which include the MMC Chip Set. MMC will provide 3rd level
support for the MMC Chip Set directly to Cisco as defined in Exhibit I.
---------
7. REPRESENTATIONS AND WARRANTIES
7.1 MMC Representations and Warranties.
----------------------------------
(a) MMC represents and warrants that (i) all materials and services
provided hereunder including, without limitation, the MMC Chip Set, are either
owned or properly licensed by MMC or are in the public domain and that the use
thereof by Cisco or its customers, representatives, distributors or dealers will
not infringe any Proprietary Rights of any third party, (ii) each of MMC's
employees, consultants, contractors, partners or agents who has been or will be
involved in the development activities set forth in the Statement of Work, has
signed an agreement that conveys all Proprietary Rights in the MMC Chip Set to
MMC and requires such person to maintain in confidence all trade secrets
embodied in the MMC Chip Set, and (iii) MMC has the full power to enter into
this Agreement, to carry out its obligations under this Agreement and to grant
the rights granted to Cisco in this Agreement including, without limitation, the
transfers and assignments made to Cisco.
(b) MMC represents and warrants that MMC, during the term of this
Agreement, will not improperly use or disclose any proprietary information or
trade secrets of any other person or entity with which MMC has an agreement or
duty to keep in confidence information acquired by MMC in confidence, if any.
(c) MMC represents and warrants that MMC has no outstanding agreement
or obligation that is in conflict with any of the provisions of this Agreement,
or that would adversely affect MMC's performance hereunder, and MMC agrees that
MMC shall not enter into any such conflicting agreement during the term of this
Agreement.
(d) MMC further represents and warrants that (i) the MMC Chip Set
developed, manufactured and delivered hereunder will conform to the
Specifications and will be free from defects in design, material and workmanship
for a period of twelve (12) months from the date of acceptance by Cisco, (ii)
the MMC Chip Sets developed, manufactured and delivered hereunder will meet the
quality requirements set forth in Exhibit G and (iii) that MMC shall perform its
---------
obligations hereunder in a professional and workmanlike manner.
8
<PAGE>
7.2 Cisco Representations and Warranties.
-------------------------------------
(a) Cisco represents and warrants that Cisco has no outstanding
agreement or obligation that is in conflict with any of the provisions of this
Agreement or that would adversely affect Cisco's performance hereunder, and
Cisco agrees that Cisco shall not enter into any such conflicting agreement
during the term of this Agreement.
(b) Cisco further represents and warrants that (i) each of Cisco's
employees, consultants, contractors, partners or agents who has been or will be
involved in the development activities set forth in the Statement of Work, has
signed an agreement that requires such person to maintain in confidence all
Confidential Information (defined below) of MMC, and (ii) Cisco has the full
power to enter into this Agreement, to carry out its obligations under this
Agreement and to grant the rights granted to MMC in this Agreement.
EACH PARTY DISCLAIMS ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING THOSE
OF MERCHANTABILITY, AND FITNESS FOR A PARTICULAR PURPOSE, OR ARISING FROM A
COURSE OF DEALING, USAGE OR TRADE PRACTICE.
8. INDEMNIFICATION
MMC will defend, indemnify and hold Cisco harmless from and against any
claim, suit or proceeding brought against Cisco alleging that the MMC Chip Set
or any Deliverables developed or supplied hereunder infringes any third party
patent, copyright or any other Proprietary Right if notified promptly in writing
of the claim, and if MMC is given full authority, information and assistance
from Cisco for the defense. MMC agrees to pay all damages, costs, expenses
(including without limitation reasonable fees of attorneys and professionals)
which may be incurred or assessed against Cisco under any such claim. If such
claim has occurred, or in MMC's opinion is likely to occur, Cisco agrees to
permit MMC at its option and expense, either to procure for Cisco the right to
continue using the MMC Chip Set or Deliverable, as applicable, to replace or
modify the same so that it becomes non-infringing, or in the event neither the
foregoing alternatives is reasonably available to MMC, refund to Cisco all
amounts paid by Cisco to MMC hereunder and terminate this Agreement. THE
FOREGOING STATES THE ENTIRE OBLIGATION OF MMC WITH RESPECT TO INFRINGEMENT OF
PROPRIETARY RIGHTS.
9. CONFIDENTIALITY
9.1 Confidentiality. "Confidential Information" consists of (a) any
---------------
information designated as confidential, (b) the Statement of Work, (c) the
Specifications, (d) the Deliverables, (e) the MMC Source Code (defined in
Section 2.7 above), (f) the Manufacturing Information (defined in EXHIBIT H),
----------
(g) any information relating to MMC's or Cisco's purchase orders and delivery
schedules (including quantities), product plans, product designs, product costs,
product prices, product names, finances, marketing plans, business
opportunities, personnel, research, development or know-how except such
information which the parties agree in writing is not confidential. Cisco agrees
that MMC may disclose information on Cisco's purchase orders, and delivery
schedules to financial investors, banks, and other related concerns.
Confidential Information in oral form shall be considered proprietary only to
the extent it is reduced to writing and transmitted to the receiving party,
identified as proprietary, within thirty (30) days after the oral disclosure.
Notwithstanding the foregoing, the disclosing party shall not be required to
reduce to writing any Confidential Information presented in oral form which is
otherwise referenced in materials provided by one party to the other party
marked as containing proprietary information. Each party shall use Confidential
Information owned by the other solely for implementing its respective
obligations and express rights under this Agreement.
9
<PAGE>
9.2 Limitations on Access. Any Confidential Information owned by a party
---------------------
shall be protected by the other party from disclosure to others with at least
the same degree of care as that which is accorded to its own proprietary
information, but in no event with less than reasonable care. Each party hereby
consents to the disclosure of its Confidential Information to the employees of
the other as is necessary in order to allow the other party to perform this
Agreement and obtain the benefits hereof, provided that each such employee is
bound by a written confidentiality agreement protecting such Confidential
information.
9.3 MMC Source Code. Cisco will protect the MMC Source Code in accordance
---------------
with Section 2.7 herein.
9.4 Exceptions. The foregoing restrictions will not apply to information
----------
that (a) is known to the receiving party at the time of disclosure to the
receiving party (provided that this exclusion will not apply to Confidential
Information which will become the property of Cisco pursuant to this Agreement),
(b) has become publicly known through no wrongful act of the receiving party,
(c) has been rightfully received from a third party authorized to make such
disclosure without restriction, (d) has been approved for release by written
authorization of the disclosing party, or (e) is required by law to be
disclosed, after securing available confidential treatment and notifying the
disclosing party prior to such disclosure to allow the disclosing party
sufficient time to secure confidential treatment.
9.5 Remedies. Any breach of the restrictions contained in this Section 9
--------
is a breach of this Agreement which may cause irreparable harm to the non-
breaching party entitling the non-breaching party to injunctive relief in
addition to all legal remedies.
10. TERM AND TERMINATION
10.1 Term. This Agreement shall commence on the Effective Date and shall
----
continue in force for a period of three (3) years ("Initial Term") unless
terminated earlier under the provisions of this Section 10. This Agreement will
automatically be renewed for additional one (1) year terms (each a "Renewal
Term"), unless at least sixty (60) days prior to the expiration of the Initial
Term or any Renewal Term, Cisco notifies MMC of Cisco's intent to not renew this
Agreement.
10.2 Termination for Cause.
----------------------
(a) Either party may terminate this Agreement upon notice to the other
if the other becomes the subject of a voluntary or involuntary petition in
bankruptcy or any proceeding relating to insolvency, receivership, liquidation,
or composition for the benefit of creditors, if that petition or proceeding is
not dismissed with prejudice within sixty (60) days after filing.
(b) Either party (the "non-breaching party") will have the right to
terminate this Agreement upon written notice to the other party (the "breaching
party") if the breaching party breaches any material term or condition of this
Agreement and fails to cure such breach within thirty (30) days after having
been given written notice of such breach; provided, that if during such thirty-
day period the breaching party has provided the non-breaching party with a plan
reasonably acceptable to the non-breaching party to correct such breach, the
non-breaching party will have the right to terminate this Agreement if the
breaching party fails to cure such breach within sixty (60) days after having
been given written notice of such breach.
10.3 Return of Materials. Subject to Cisco's right-to manufacture hereunder
-------------------
and Cisco's right to use the Manufacturing Information as provided herein,
within thirty (30) days after the termination of this Agreement, each party
shall deliver to the other party, at the other party's expense and direction,
all designs, drawings, formulas or other data, software, demonstrators,
literature, Confidential Information and information of every kind provided by
one party to the other for purposes of the development contemplated herein.
Neither party shall make or retain any copies of any confidential items or
information that may have been entrusted to it.
10.4 Survival of Provisions. The rights and obligations of the parties
----------------------
pursuant to Sections 3, 4.5, 4.6, 4.7, 4.8, 6, 7.1, 8, 9, 10.3 and 11 will
survive any expiration or termination of this Agreement.
10
<PAGE>
11. GENERAL PROVISIONS
11.1 Independent Contractors. The relationship of the parties hereto is
-----------------------
that of independent contractors, and neither party is an employee, agent,
partner or joint venturer of the other.
11.2 Governing Law. This Agreement will be governed by, and interpreted
-------------
under, the laws of the State of California, without reference to conflict of
laws principles.
11.3 Confidentiality of Agreement. Each party agrees that the terms and
------------------ ---------
conditions of this Agreement shall be treated as Confidential Information and
that the terms and conditions of this Agreement or to activities pertaining
thereto cannot be disclosed in any form without the prior written consent of the
other party; provided, however, that each party may disclose the terms and
conditions of this Agreement:
(a) as required by any court or other governmental body after seeking
any available confidential treatment;
(b) as otherwise required by law after seeking any available
confidential treatment, including a requirement to file this
Agreement with the Securities and Exchange Commission in
connection with a decision by MMC to file a registration
statement under the Securities Act of 1933, as amended,
(c) to legal counsel of the parties;
(d) in confidence to accountants, banks, and financing sources and
their advisors;
(e) in confidence in connection with the enforcement of this
Agreement or rights under this Agreement; or
(f) in confidence, in connection with a merger or acquisition or
proposed merger or acquisition, or the like.
11.4 Public Disclosure. Neither party will disclose any terms or the
-----------------
existence of this Agreement, except as required pursuant to this Agreement, or
pursuant to a mutually agreeable press release or as otherwise required by law.
Both parties agree to submit to the other party for approval any advertising,
press releases, sales promotions or other publicity relating to this Agreement
which references the other party prior to releasing such publicity.
11.5 Force Majeure. Neither party will be liable for any loss, damage or
-------------
penalty resulting from delays or failures in performance resulting from acts of
God or other causes beyond its control. If there is a delay in the performance
of this Agreement due to any of the events specified in this Section 11.5, the
party who has been so affected immediately shall give written notice to the
other party and shall do everything reasonably possible to resume performance.
Upon receipt of such written notice, this Agreement shall immediately be
suspended and all scheduled deadlines and time limitations specified in the
Agreement will be extended by an amount of time equal to such delay; provided,
however, in the event such delay extends for more than thirty (30) days, the
party whose ability to perform has not been so affected may, by written notice,
terminate this Agreement. Such termination will be in addition to any legal or
equitable remedies to which such party may be entitled.
11
<PAGE>
11.6 Assignment. A mutually agreed consideration for Cisco entering into
----------
this Agreement is the reputation, business standing, and goodwill already
honored and enjoyed by MMC under its present ownership, and accordingly, neither
party may assign or delegate this Agreement or any of its rights or duties under
this Agreement, whether by operation of law or otherwise, without the prior
written consent of Cisco, except to a person or entity into which it has merged
or which has otherwise succeeded to all or substantially all of its business and
assets to which this Agreement pertains, by merger, reorganization or otherwise,
and which has assumed in writing or by operation of law its obligations under
this Agreement. Additionally, any permitted assignment will be subject to MMC's
permitted assignee or transferee agreeing in writing to comply with all the
terms and restrictions contained in this Agreement. Any attempted assignment in
violation of the provisions of this Section 11.6 will be void. Subject to the
foregoing, the rights and liabilities of the parties hereto will bind and inure
to the benefit of their successors, executors or administrators.
11.7 Limitation of Liability. IN NO EVENT SHALL EITHER PARTY HAVE ANY
-----------------------
LIABILITY FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES INCLUDING, WITHOUT
LIMITATION ON, DAMAGES FOR LOST PROFITS, LOSS OF DATA OR COSTS OF PROCUREMENT OF
SUBSTITUTE GOODS OR SERVICES, ARISING IN ANY WAY OUT OF THIS AGREEMENT UNDER ANY
CAUSE OF ACTION, WHETHER OR NOT A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING THE FAILURE OF THE
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
11.8 Modification. No modification to this Agreement, nor any waiver of any
-------------
rights, will be effective unless agreed in writing by the party to be charged
and the waiver of any breach or default will not constitute a waiver of any
other right hereunder or any subsequent breach or default.
11.9 Partial Invalidity. If any provision of this Agreement is held to be
------------------
invalid by a court of competent jurisdiction, then the remaining provisions
shall nevertheless remain in full force and effect. The parties agree to
renegotiate in good faith a substitute, valid and enforceable provision which
most nearly effects the parties' intent in entering into this Agreement.
11.10 Notices. All notices required or permitted under this Agreement will
-------
be in writing and will be deemed given when: (a) delivered personally; (b) sent
by confirmed telex or facsimile; (c) three (3) days after having been sent by
registered or certified mail, return receipt requested, postage prepaid; or (d)
one (1) day after deposit with a commercial overnight carrier specifying next
day delivery, with written verification of receipt. All communications will be
sent to the addresses set forth below or to such other address as may be
designated by a party by giving written notice to the other party pursuant to
this Section 11.10.
Cisco MMC
- ----- ---
Name: Mario Mazzola Name: P.K. Dubey
----------------- -----------------
Title: VP & GM Title: President & CEO
---------------- ----------------
Cisco Systems, Inc. Multimedia Communications, Inc.
170 West Tasman Drive 2855 Kifer Road
San Jose, CA 95134 Santa Clara, CA 95051
11.11 Descriptive Headings. The headings of the several sections of this
--------------------
Agreement are inserted for convenience of reference only and are not intended to
be apart of or to affect the meaning or interpretation of this Agreement.
11.12 Entire Agreement. This Agreement, including all Exhibits,
----------------
constitutes the entire and exclusive Agreement between the parties hereto with
respect to its subject matter and supersedes and cancels all previous
registrations, agreement, commitments and writings in respect thereof.
12
<PAGE>
11.13 Counterparts. This Agreement may be executed in counterpart, each of
-------------
which will be deemed an original but both of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
CISCO SYSTEMS MULTIMEDIA COMMUNICATIONS, INC.
By: /s/ Mario Mazzola By: /s/ Amos Wilnai
------------------------- -------------------------
Name: Mario Mazzola Name: Amos Wilnai
----------------------- -----------------------
(Print) (Print)
Title: V.P. & General Manager Title: Chairman
---------------------- ----------------------
Date: 12/19/94 Date: 12/19/94
------------------------ ------------------------
13
<PAGE>
EXHIBIT A
STATEMENT OF WORK
-----------------
<TABLE>
<CAPTION>
<S> <C>
1. Contract signed December 19, 1994
2. Hand over MMC Source Code to Cisco November 14, 1994
3. ADSS (Software development system) delivery December 19, 1994
The ADSS should be fully functional, and should accurately represent the switch design. A model for MMC's SAR chip
should be included along with the switch model.
4. All chips released to layout (1st signoff) December 30, 1994
All chip designs are released to the chip foundry for layout.
5. All chips post layout timing complete (2nd signoff) January 13, 1995
All chip designs are approved for fabrication by the chip foundry. This is a formal signoff between MMC and their chip foundry.
6. First samples delivered February 28, 1995
Samples of all four chips are received by Cisco.
</TABLE>
14
<PAGE>
EXHIBIT B
SPECIFICATIONS
--------------
ATMS 2000 Chip Set Specifications, dated 12/O5/94.
MMC Chip set to have IEEE 1149.lA - 1993 version of the boundary scan
incorporated. Boundary scan implementation to function with no defects with
industry standard Hewlett-Packard ICT software (or a mutually agreed upon
compliance verification).
<PAGE>
EXHIBIT C
MMC CHIP DESIGN, SWITCH DESIGN AND SOFTWARE AND
-----------------------------------------------
THE APPLICATION DEVELOPMENT SOFTWARE SYSTEM
-------------------------------------------
1. Description of the MMC Chip Set:
-------------------------------
The MMC Chip Set is a set of four chips, which can be used with standard SRAM
and logic components to build a 5 Gb/s ATM switch.
The four chips are:
- - The Port Interface Controller
- - The Memory Buffer
- - The Switch Controller Grey
- - The Switch Controller White
An ATM switch implemented using the MMC Chip Set would include several
instantiations of the Port Interface Controller and the Memory Buffer, and one
instantiation each of the Switch Controller Grey and the Switch Controller
White.
The MMC Chip Set is described in the MMC document in EXHIBIT B.
----------
2. Description of the Switch Design and Software:
---------------------------------------------
The switch electrical design is a board-level design of an ATM switch utilizing
the MMC Chip Set, together with other standard electronic components. The switch
electrical design includes board-level schematics, a bill of materials, a set of
board level electrical design rules defining trace delays and skews, and any
other information which is appropriate and useful in designing a product based
on the MMC Chip Set.
The switch software is sample software code for interacting with the MMC Chip
Set. This code will include routines for initialization of the MMC Chip Set,
control of the MMC Chip Set under standard operational conditions, and recovery
from any exception conditions to which the MMC Chip Set is subject. The switch
software shall also include any workarounds required for any problems found in
any version of the MMC Chip Set.
3. Description of the Application Development Software System:
-----------------------------------------------------------
The Application Development Software System is a software tool which allows
development of software to interact with the MMC Chip Set with no dependency on
the availability of the actual [MMC] Chip Set or source code of the [MMC] Chip
Set. The Application Development Software System has a graphical user interface
and runs under the X-window system.
The Application Development Software System runs on Sparc-based workstations.
Documentation for users of the tool is included.
<PAGE>
EXHIBIT D
CISCO MATERIALS TO BE PROVIDED BY CISCO
---------------------------------------
Cisco will provide the switch fabric board for testing of the MMC chip set by
2/28/95. The schematics and board layouts of the switch will be included.
Cisco will provide the software tools for testing the MMC Chip Set on the above
mentioned board.
<PAGE>
EXHIBIT E
INDIVIDUAL NONDISCLOSURE AGREEMENT
----------------------------------
CISCO SYSTEMS, INC.
NON-DISCLOSURE AGREEMENT
This Non-Disclosure Agreement ("Agreement") is entered into as of _____,
199__ by the individual named below ("Recipient") who is an employee, agent or
contractor of Cisco Systems, Inc. ("Cisco").
In connection with that certain Proprietary Information Non-Disclosure
Agreement entered into between Cisco and Multimedia Communications, Inc.
("MMC"), the parties have agreed that certain employees of Cisco will have
access to MMC's computer network and certain source code of MMC which are
proprietary to MMC ("MMC Proprietary Information"). In consideration for such
access by Recipient, Recipient agrees as follows:
1. Recipient understands and agrees that the MMC Proprietary Information
to which Recipient will have access is the confidential and proprietary
information of MMC. Recipient agrees to hold the MMC Proprietary Information in
strict confidence, not to disclose the MMC Proprietary Information to any
persons (except Cisco employees, agents or contractors who have signed an
agreement in a form similar to this Agreement), and not to use the MMC
Proprietary Information for any purpose except to evaluate the business
opportunity which is the subject of the Proprietary Information Non-Disclosure
Agreement and to perform Cisco's obligations under a resulting agreement, if
any, into which Cisco and MMC may enter.
2. Recipient agrees to comply with all of the security procedures
enforced by MMC to protect the MMC Proprietary Information as in effect from
time-to-time. Notwithstanding the foregoing, any of the MMC Proprietary
Information which enters the public domain through no fault of Recipient (or
Cisco or any of its other employees, agents or contractors) will not be deemed
to be MMC Proprietary Information under this Agreement. This Agreement will be
governed under the laws of the State of California.
3. Recipient agrees that any violation or threatened violation of this
Agreement may cause irreparable harm to MMC, entitling MMC the right to obtain
injunctive relief to enforce this Agreement in addition to all legal remedies.
ACCEPTED AND AGREED BY:
___________________________________
Signature
___________________________________
Name
___________________________________
Date
<PAGE>
EXHIBIT F
(*)
_____________________
(*) Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
EXHIBIT G
QUALITY CONFORMANCE REQUIREMENTS
--------------------------------
MMC agrees to guarantee its quality to conform to applicable industry standards.
Where MMC is providing products procured from sources specified by Cisco, MMC
guarantees that the material procured will conform to Cisco's approved vendor
listing. No changes will be made without prior approval from Cisco, even if the
change is to another vendor listed on Cisco's approved vendor listing.
MMC agrees to supply materials acceptable to Cisco's Specifications. Cisco may,
during the performance of this Agreement, request changes to the Specifications.
Such changes will be requested in writing, and shall be implemented upon mutual
agreement of the parties. However, the parties recognize that occasional minor
modifications may be required to enhance the manufacturability and agree that
such changes may be made provided that prior written notification is given to
the other party. If any change causes an increase or decrease in price of,
and/or the time required for the performance of any part of the Statement of
Work under this Agreement, pricing will be reviewed and modified to reflect an
equitable adjustment.
Note: The chips and Chip Sets delivered to Cisco will adhere to the following
DPM requirements shown below:
1. Quality to be measured as a % yield per Cisco Chip Set implementation:
Cisco Chip Set implementation = 1 Grey, 1 White, 6 Mbuf, S Pif.
2. Total Cisco Chip Set % yield not to be below 99.6% or the following
Defect Per Million (DPM) per individual chip:
- Grey and White 4000
- Mbuf = 670
- Pif = 500
<PAGE>
EXHIBIT H
MANUFACTURING INFORMATION
-------------------------
List of all information Cisco would need to manufacture the MMC Chip Set:
1. MMC Chip Set net-list, electronic format to be agreed upon by the parties
2. test vectors
3. list of ASIC vendors
4. letters of authorization to the suppliers of MMC Chip Set
<PAGE>
EXHIBIT I
PROBLEM PRIORITIZATON AND ESCALATION GUIDELINE
----------------------------------------------
MMC CHIP SET PROBLEM PRIORITIES DEFINITIONS:
PRIORITY 1: Critical impact to Cisco products and Cisco end users if MMC Chip
Set problem not fixed quickly. No workaround is available. Cisco is
willing to commit substantial resources around the clock to resolve
the situation.
PRIORITY 2: Severe degradation impacting significant aspects of Cisco products
and Cisco end users. No workaround is available. Cisco is willing
to commit full-time resources during business hours to resolve
situation.
PRIORITY 3: Degradation in which functionality of Cisco products are noticeably
impaired but most business operations of Cisco and Cisco's end
users continue.
PRIORITY 4: End user requires information or assistance on Cisco product
capabilities, installation, or configuration.
NOTE: Priority 1 problem escalation times are measured in calendar hours 24
hours per day, 7 days per week. Priority 2, 3 and 4 escalation times
during business hours, 6 A.M. to 6 P.M. Pacific Time, Monday through
Friday, excluding holidays.
CUSTOMER ESCALATION GUIDELINE:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
ELAPSED TIME PRIORITY 1 PRIORITY 2 PRIORITY 3 PRIORITY 4
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
End User
1-Hour Engineering
Manager
- ----------------------------------------------------------------------------------------------------
Technical End User
4-Hour Support Engineering
Director Manager
- ----------------------------------------------------------------------------------------------------
Vice President Technical Support
24-Hour Cust. Advocacy Director
- ----------------------------------------------------------------------------------------------------
48-Hour President (CEO) Vice President
Cust. Advocacy
- ----------------------------------------------------------------------------------------------------
72-Hour End User
Engineering
Manager
- ----------------------------------------------------------------------------------------------------
96-Hour President (CEO) Technical Support End User
Director Engineering
Manager
- ----------------------------------------------------------------------------------------------------
</TABLE>
REQUESTING ESCALATION:
If Cisco feels that adequate forward progress or the quality of service is not
satisfactory, Cisco may escalate by asking for the President and CEO at:
1-408-653-1810
<PAGE>
EXHIBIT J
PRICING
-------
A. The price to Cisco for each MMC Chip Set (the "Unit Price") ordered during
the first year of this Agreement shall not exceed the following amounts:
(i) First (*) MMC Chip Sets at (*) per set ((*) per Mbps port)
(ii) (*) MMC Chip Sets at (*) per set ((*) per Mbps port)
B. The price to Cisco for each individual chip is:
<TABLE>
<CAPTION>
First (*) (*) - (*)
-----------------------------
<S> <C> <C>
Port Interface Controller (*) (*)
Memory Access Buffer (*) (*)
Switch Controller (Grey) (*) (*)
Switch Controller (White) (*) (*)
</TABLE>
If Cisco orders, or forecasts orders, for MMC Chip Sets in volumes significantly
greater than (*) units in any Contract Year of this Agreement, MMC agrees to
negotiate in good faith with Cisco to reduce the Unit Price accordingly.
_____________________________
(*) Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
FIRST AMENDMENT TO DEVELOPMENT
LICENSE AND PURCHASE AGREEMENT BETWEEN MMC
NETWORKS, INC. AND CISCO SYSTEMS, INC.
This Amendment (the "Amendment") is entered into effective as of January
30, 1996, between Cisco Systems, Inc., a California, corporation (the "Cisco")
and MMC Networks, Inc., a California corporation ("MMC"), and amends that
certain Development, License and Purchase Agreement (the "Agreement"), dated as
of December 19, 1994, between MMC and Cisco.
RECITALS
WHEREAS Cisco has expertise in the field of network systems design, and is
a leader in the provision of network systems; and,
WHEREAS MMC has expertise in the field of ATM switch technology; and,
WHEREAS Cisco and MMC desire to supply their respective expertise and
certain proprietary information so as to design certain companion chips to MMC's
basic ATM switch fabric,
WHEREAS the parties desire to amend the Agreement to include the
development and supply of such companion chips,
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, the amount and sufficiency of which is acknowledged by both
parties, the parties hereby agree to amend the Agreement as follows:
1. Development. MMC agrees to undertake and complete development of chip
specifications ("Specifications") for the products described in Exhibit A
("Products") in accordance with and on the schedule specified in Exhibit B
("Schedule"). However, Cisco understands that MMC's performance is dependent in
part on Cisco providing MMC with the equipment, proprietary information, and
technical design assistance described in Exhibit C ("Cisco Expertise").
Accordingly, any dates or time periods relevant to performance by MMC hereunder
shall be appropriately and equitably extended to account for any delays in
providing Cisco Expertise that are due to Cisco. MMC acknowledges that Cisco
relies on the timely completion of the Specifications according to the Schedule;
and that delays in such timely completion will cause Cisco to suffer substantial
harm due to the unavailability of the Products.
<PAGE>
2. Project Management.
a. John Kennedy from MMC and Prem Jain from Cisco will be the initial
"Project Coordinators" under this Amendment. The Project Coordinators will be
responsible for day-to-day communications between the parties regarding the
subject matter of this Amendment.
b. Either party may change its Project Coordinator at any time and from
time to time by giving the other party written notice.
c. Each Project Coordinator will be responsible for (i) monitoring the
schedules and progress of work pursuant to this Amendment; (ii) receiving and
submitting requests for information and/or assistance; (iii) determining whether
a request he or she receives for information and/or assistance from the other
Project Coordinator is necessary for the other party to complete the
Specifications; (iv) receiving and submitting Specifications; (v) cooperating
with the other Project Coordinator to implement acceptance testing; and (vi)
supervising and recording the exchange of confidential information pursuant to
this Amendment.
d. The Project Coordinators will meet periodically to discuss the
progress of the development effort and, if applicable, to exchange information.
e. The Project Coordinators will reasonably and in good faith consider
and discuss with any proposed change to the Products, Schedule, or Cisco
Expertise, provided, however, that all such changes must be approved by the
parties before implementation.
f. Neither party's Project Coordinator is authorized to amend, alter or
extend this Amendment in any manner.
3. Acceptance. When MMC believes it has appropriately completed the
Specifications (for one or more Products), MMC will deliver them to Cisco's
Project Coordinator. Cisco will accept or reject the Specifications within five
(5) business days after delivery; failure to give notice of acceptance or
rejection within that period will constitute acceptance. If Cisco rejects the
Specifications, MMC will promptly correct the failures specified in the
rejection notice. When it believes that it has made the necessary corrections,
MMC will again deliver the Specifications to Cisco's Project Coordinator and the
acceptance-rejection-correction provisions above shall be reapplied until the
Specifications are accepted; provided, however, that upon the third or any
subsequent rejection, Cisco may terminate this Amendment by ten (10) business
days notice unless the Specifications are accepted during the notice period.
Page 2
<PAGE>
4. Ownership.
a. As between the parties, (i) MMC shall have all right, title and
interest (including all patent rights, copyrights, trade secret rights, mask
work rights and other rights throughout the world) in any inventions, works-of-
authorship, mask works, ideas or information made or conceived or reduced to
practice by MMC, and (ii) Cisco shall have all right, title and interest
(including all patent rights, copyrights, trade secret rights, mask work rights
and other rights throughout the world) in any inventions, works-of-authorship,
mask works, ideas or information made or conceived or reduced to practice by
Cisco. MMC hereby grants Cisco a worldwide, perpetual, royalty-free, non-
transferable, non-sublicensable, non-exclusive license under the preceding
rights and developments to use, reproduce, distribute, make, have made, sell,
offer for sale, import, or export the Products, provided that Cisco's
manufacturing rights shall only be effected through MMC unless Cisco exercises
its rights under Section 4.5 of the Agreement.
b. The parties hereby make any assignments necessary to accomplish the
foregoing ownership provisions.
5. Confidentiality. Each party agrees that all information provided
pursuant to this Agreement, including without limitation designs, layouts, mask
works, pinout descriptions, register assignments, timing charts, code,
inventions, algorithms, know-how and ideas and all other business, technical and
financial information, is the confidential property of the disclosing party
("Proprietary Information" of the disclosing party). Except as expressly and
unambiguously allowed herein, the receiving party will hold in confidence and
not use or disclose any Proprietary Information of the disclosing party and
shall similarly bind its employees in writing. The receiving party shall not be
obligated under this Section 5 with respect to information the receiving party
can document:
(1) is or has become readily publicly available without restriction
through no fault of the receiving party or its employees or
agents; or
(2) is received without restriction from a third party lawfully in
possession of such information and lawfully empowered to disclose such
information; or
(3) was rightfully in the possession of the receiving party without
restriction prior to its disclosure by the other party; or
(4) was independently developed by employees or consultants of the
receiving party without access to such Proprietary
Information.
Page 3
<PAGE>
6. Use of Specifications.
a. For 5 months after notice of acceptance of the final Specification
pursuant to Section 3 of this Amendment, MMC shall refrain from releasing,
distributing, disclosing, licensing, or otherwise using the Specifications in
any manner except for the benefit of, and with the approval of, Cisco; provided,
however, that MMC may prepare a summary of the functionality of the
Specifications or the Products ("Data Sheet") for marketing purposes, but may
only distribute such Data Sheets after Cisco has approved them (which approval
shall not be unreasonably withheld).
b. (*)
c. In addition to the other use restrictions, MMC shall not release,
distribute, disclose, license, or otherwise use any portion of the
Specifications, Products, or products based on or incorporating the
Specifications, that contain, arise out of, or depend on Proprietary Information
of Cisco that has been clearly identified by Cisco in writing on or before the
date of final acceptance of the Specifications pursuant to Section 3 of this
Amendment, in any manner except for the benefit of, and with the approval of,
Cisco.
7. Warranty and Disclaimer.
a. Specifications and Company Expertise. MMC warrants (i) that the work
under this Amendment will be performed in a professional and workmanlike manner;
(ii) that the work performed under this Amendment by MMC will be MMC's original
work and it owns, will own, or will secure all rights, title, and interest in
such work; and, (iii) that it has and will obtain agreements with its employees
and contractors sufficient to allow it to provide Cisco with the licenses
provided for herein. EXCEPT FOR THE WARRANTIES MADE HEREIN, NEITHER PARTY MAKES
ANY WARRANTIES TO THE OTHER PARTY WITH RESPECT TO THE SPECIFICATIONS OR THE
COMPANY EXPERTISE, AND EACH PARTY HEREBY DISCLAIMS ALL IMPLIED WARRANTIES,
INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
b. Products. The parties hereby agree that the warranties set forth in
Section 7.1 (and the disclaimer set forth in Section 7.2) are hereby extended to
include the Products.
_____________________
(*) Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 4
<PAGE>
8. Indemnification.
a. Subject to Section 8 b. below, MMC shall hold Cisco and its officers,
directors, agents and employees harmless from liability resulting from
infringement by the Specifications and the Products of any patent, copyright, or
misappropriation of any trade secret or violation of other third party
proprietary rights, provided MMC is promptly notified of any and all threats,
claims and proceedings related thereto and given reasonable assistance at MMC's
cost and the opportunity to assume sole control over the defense and all
negotiations for a settlement or compromise.
b. Cisco shall hold MMC and its officers, directors, agents and employees
harmless from liability resulting from infringement by the Company Expertise of
any copyright, or misappropriation of any trade secret or violation of other
third party proprietary rights, provided Cisco is promptly notified of any and
all threats, claims and proceedings related thereto and given reasonable
assistance at Cisco's cost and the opportunity to assume sole control over the
defense and all negotiations for a settlement or compromise.
9. Manufacturing Terms.
a. Supply of Product. Subject to the terms of this Section 9, the
Products shall be manufactured and purchased in accordance with Sections 4
through 6 of the Agreement. The parties shall mutually agree upon acceptance
criteria with respect to the Products that is substantially similar to the
criteria set forth in Section 5.9 of the Agreement.
b. Most Favored Customer Status. MMC shall treat Cisco as MMC's "most
favored customer" in the following respects: (i) the prices with respect to the
Product shall at all times be the lowest price charged to any third party; and
(ii) MMC shall ensure that at all times Cisco has first priority with respect to
the allocation of Products and/or manufacturing capacity of MMC. MMC will (i)
maintain accurate books and records relating to its sales of the Products, and
(ii) permit Cisco through independent certified accountants to audit such books
and records from time to time upon reasonable notice to MMC.
c. WAN Switch Partners. Cisco agrees to notify MMC no later than January
31, 1996 of its plans to utilize MMC's switch fabric and chip sets for the
purposes of building an enterprise WAN switch. (*)
Page 5
_______________________
(*) Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE>
d. Recovery of NRE's. Cisco agrees to reimburse MMC for the fully
documented and reasonable NRE's, including but not limited to labor, NRE
payments to the ASIC vendor, constructing a specific test environment, etc., for
the chips specifically identified on Exhibit A hereto.
10. Termination of Amendment. Cisco may terminate this Amendment at any
time without cause upon 120 days notice provided that Cisco shall upon
termination pay MMC a termination payment covering MMC's direct costs incurred
in performance of the additional obligations incurred under this Amendment to
the date of such notice. In the event of termination of this Amendment or the
Agreement, Sections 4 through 9 of this Amendment shall survive termination. In
the specific event Cisco terminates without cause this Amendment or the
Agreement prior to July 31, 1996, then section 11. Volume Commitments will
------------------------------
survive.
11. Volume Commitments. Provided that MMC fulfills its obligations under
the Agreement including (without limitation the following: Product development,
manufacture, bug fixes, cost reduction, and the like) Cisco hereby agrees to
procure a minimum quantity of 5000 chipsets over the 24 month period commencing
August 1, 1996 through July 1998.
12. Rights in the Event the Company Seeks or Receives an Offer to be
Acquired. In the event that the Company decides to seek an offer from a third
party to acquire all or substantially all the business of the Company, or enters
into serious negotiations with another parry for that party to acquire the
Company, the Company will inform Cisco in writing that it is seeking such an
offer or has entered into such serious negotiations and, if Cisco so desires,
will, for a period of 20 days following the Company's notice to Cisco, negotiate
with Cisco in good faith an arrangement pursuant to which Cisco would acquire
the Company. The Company will refrain from executing any definitive agreement
with a party other than Cisco during such 20 day negotiating period. If the
Company and Cisco have not executed a definitive agreement under which Cisco
agrees to acquire the Company within such 20 day period, the Company shall be
free, for a period of 180 days, to negotiate and execute an agreement with
another party for that other party to acquire the Company.
If Cisco has made the Company a written offer to acquire the Company during the
20 day period, the Company shall not agree to be acquired by such other party at
a price which is less than the midpoint between the last price offered by Cisco
to the Company and the last price offered by the Company to Cisco. If Cisco has
not made a written offer to acquire the Company for a stated price during such
negotiations, the Company shall be free to agree to be acquired by such other
party during such 180 day period at any price. If Cisco makes a written offer to
acquire the Company during the negotiating period, the Company shall be
obligated to provide Cisco with the Company's written asking price before the
Company makes any agreement to be acquired by another party. Cisco and the
Company agree that any offered price provided by either of them to the other
shall be held
Page 6
<PAGE>
confidential and shall not be disclosed to any person other than Cisco, the
Company and their respective advisors. For purposes of the notice contemplated
by the first two sentences of this paragraph, the Company's Board of Directors
shall determine when the Company is in serious negotiations, thereby triggering
the Company's obligation to provide such notice to Cisco. The Company shall have
no obligation to inform Cisco of the price or terms of any offer received by the
Company from any other party.
The provisions of this section shall expire on the date a registration statement
filed by the Company under the Securities Act of 1933, as amended, first becomes
effective.
13. Publicity and Press Releases. Except to the extent necessary under
applicable laws the parties agree that no press releases or other publicity
relating to the existence or substance of the matters contained herein will be
made without joint approval.
14. Precedence. With respect to the Products, Specifications and Company
Expertise, in the event of any conflict between the terms of this Amendment and
the Agreement, the terms of this Amendment shall take precedence; in all other
respects, the Agreement shall remain in full force and effect as supplemented by
this Amendment. This Amendment does not affect the parties rights or obligations
with respect to the Chip Sets.
IN WITNESS WHEREOF, the parties hereto, by their authorized
representatives, have affixed their signatures as of the date first set forth
above.
Cisco Systems, Inc. (Cisco) MMC Networks, Inc. (MMC)
By: /s/ Mark Farino By: /s/ Amos Wilnai
--------------------- ----------------------
Name: Mark Farino Name: Amos Wilnai
------------------- --------------------
Title: Director WBV Title: Chairman
------------------ -------------------
Page 7
<PAGE>
EXHIBIT A
PRODUCTS
1. Per-VC queuing and fair scheduling algorithms
2. Explicit rate ABR functionality
Page 8
<PAGE>
EXHIBIT B
DEVELOPMENT SCHEDULE
Page 9
<PAGE>
EXHIBIT C
CISCO EXPERTISE
- - ATM systems architecture, design, implementation
- - Simulation environment
- - Test bed for testing and debugging
- - Building systems model for software development
Page 10
<PAGE>
EXHIBIT D
(*)
_____________________
(*) Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 11
<PAGE>
AMENDMENT NUMBER 2 TO
DEVELOPMENT LICENSE AND PURCHASE AGREEMENT
BETWEEN
CISCO SYSTEMS, INC.
AND
MMC NETWORKS, INC.
This Amendment No. 2 ("Amendment #2") is made in California by and between
Cisco Systems, Inc., a California corporation having its principal place of
business at 170 West Tasman Drive, San Jose, CA 95134-1706, U.S.A. ("Cisco"),
and MMC Networks, Inc., a California corporation having its principal place of
business at 1134 E. Arques Avenue, Sunnyvale, CA 94086-4602 ("MMC").
WHEREAS, Cisco and MMC entered into the Development, License and Purchase
Agreement dated December 19, 1994, as amended on January 30, 1996 ("Amendment
#1"); and
WHEREAS, the parties desire to amend the Agreement and Amendment #1
(collectively, the "Agreement") to include the development and supply of the
Modular ATM Switch Engine and the Ethernet Port InterFace as specified below,
including the following Exhibits which are included in and made a part of this
Agreement:
Exhibit 'A' - Specifications
Exhibit 'B' - Development Schedule and Definitions
Exhibit 'C' - Pricing
NOW THEREFORE, in consideration of the covenants and conditions contained
herein, the parties agree as follows:
1. Definitions
"MASC Chip Set" means the Modular ATM Switch Controller chip set which meets
the Specifications.
"Ethernet PIF", means the Ethernet Port InterFace chip which meets the
Specifications.
"Specifications" means the functional, technical and other specifications for
the MASC Chip Set and the Ethernet PIF set forth in Exhibit A to Amendment #2,
which may be modified from time to time by written mutual agreement of the
parties.
<PAGE>
2. Development.
MMC agrees to apply commercially best efforts to complete development of the
MASC Chip Set and the Ethernet PIF according to the Specifications and in
accordance with and on the schedule specified in Exhibit B ("Schedule").
3. Pricing and Definitions
See Exhibit C
4. Volume Commitments.
None
5. Precedence. Terms capitalized shall have the meaning assigned to them in the
Agreement unless specifically defined herein. If conflicts exist between the
terms specifically addressed in this Amendment #2 and the Agreement, the terms
of this Amendment shall take precedence. All other terms and conditions of the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment #2 to be executed by
their duly authorized representatives.
Cisco Systems Inc. (Cisco) MMC Networks, Inc. (MMC)
By: /s/ Prem Chand Jain By: /s/ Amos Wilnai
----------------------- ---------------------
Name: Prem Jain Name: Amos Wilnai
--------------------- -------------------
Title: VP of Engineering Title: Chairman
-------------------- ------------------
Date: July 6, 1997 Date: July 7, 1997
--------------------- -------------------
Page 2
<PAGE>
EXHIBIT A
MASC CHIP SET AND ETHERNET PORT INTERFACE SPECIFICATIONS
1. Modular ATM Switch Controller as defined by the MMC Engineering
Specification, Version 2.2, dated June 11, 1997.
2. Ethernet Port InterFace as defined by the MMC Engineering Specification,
Version 1.2, dated June 20, 1997.
Page 3
<PAGE>
EXHIBIT B
DEVELOPMENT SCHEDULE AND DEFINITIONS
<TABLE>
<CAPTION>
Device Tapeout Prototypes Production
- --------------------------------------------------
<S> <C> <C> <C>
A2301 EPIF 8/6 9/1 2/28/98
A2302 GPIF 10/31 11/30 3/31/98
A2401 MBUF2 8/6 9/1 2/28/98
A2402 PIF2 8/5 9/1 2/28/98
A2403 MSC1 8/7 9/4 2/28/98
A2404 MSC2 8/1 8/29 2/28/98
A2405 XQC2 8/11 9/8 2/28/98
A2406 CMI 8/14 9/11 2/28/98
</TABLE>
DEFINITIONS:
- ------------
TAPEOUT:
- -------
Tapeout is when the netlist is released to mask generation. It is the point in
the design cycle when post-layout functional and timing simulations are
available and predict a fully functional device.
PROTOTYPE:
- ---------
These parts are the from the first silicon for these devices. Product
availability is limited. Prototypes must be ordered in advance of tapeout as the
prototypes are built in the first run of silicon. Prototype orders are non-
refundable and non-cancelable. Prototype leadtime is 4 weeks after tapeout.
Prototypes are not intended for production and may skip some of the production
process steps to expedite product delivery.
RISK PRODUCTION:
- ---------------
Risk production parts are ordered before Cisco and MMC have completely verified
the full functionality of the silicon. Risk production orders may be placed at
any time including prior to tapeout. As the Risk Production material is ordered
prior to full verification there is limited liability that a Risk Production
part is proven to not be fully functional. If a Risk Production part is
determined to be non-functional as related to the device specification, Cisco
will be invoiced at only 70% of the price. If it is determined that the devices
are non functional within a period no greater than 6 weeks after the placement
of the order then the cancellation fee will be no greater than 50% of the
original quoted price. Leadtime for Risk Production is the same as for
Production.
PRODUCTION:
- ----------
These parts are purchased after MMC and Cisco have agreed in writing that the
devices meet all specifications and are fully functional. Production devices are
subject to the normal terms and condition of sale.
Page 4
<PAGE>
EXHIBIT C
PRICING
PRICING
For comparison purposes, pricing for the 5G System including PerVC Queuing
is (*) + (*) per system; or (*) Per OC-3 Port. Budgetary component
pricing is as follows:
1) COMPONENT PRICING
Pricing for Cougar, EPIF and PIF will be step pricing allowing Cisco to achieve
lower pricing as the product volumes increase. This component pricing is valid
for 1997 and 1998 calendar years.
A) COUGAR FABRIC PRICING FOR PRODUCTION, RISK-PRODUCTION AND PROTOTYPES:
<TABLE>
<CAPTION>
DEVICE # A2403 A2404 A2406 A2205 A2401 A2405 TOTAL 20G
- -----------------------------------------------------------------------------------------
NAME MSC1 MSC2 XQC2 XS MBUF2 CMI FABRIC
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
QTY / 20GIG 8 8 8 8 12 4 48
PROTOTYPES (*) (*) (*) (*) (*) (*) (*)
RISK PRODUCTION (*) (*) (*) (*) (*) (*) (*)
FIRST 5K SYSTEMS (*) (*) (*) (*) (*) (*) (*)
5K - 10K SYSTEMS (*) (*) (*) (*) (*) (*) (*)
- -----------------------------------------------------------------------------------------
> 10K SYSTEMS (*) (*) (*) (*) (*) (*) (*)
- -----------------------------------------------------------------------------------------
</TABLE>
B) PIF PRICING FOR PRODUCTION, RISK-PRODUCTION AND PROTOTYPES:
<TABLE>
<CAPTION>
DEVICE # A2402 TOTAL 20 G
- -----------------------------------------------------------
NAME PIF2 32 OC-12 PORTS
- -----------------------------------------------------------
<S> <C> <C>
QTY / 32 OC-12 PORTS (20 GIG) 12 12
PROTOTYPES (*) (*)
RISK PRODUCTION (*) (*)
0-50K UNITS (FIRST 50K) (*) (*)
50K-100K UNITS (NEXT 50K) (*) (*)
100K-125K UNITS (NEXT 25K) (*) (*)
- -----------------------------------------------------------
125K+ UNITS (REST) (*) (*)
- -----------------------------------------------------------
</TABLE>
____________________
(*) Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 5
<PAGE>
C) EPIF PRICING FOR PRODUCTION, RISK-PRODUCTION AND PROTOTYPES:
<TABLE>
<CAPTION>
DEVICE # A2301 TOTAL 20 G
- -------------------------------------------------------------
NAME EPIF 128 FAST ENET PORTS
- -------------------------------------------------------------
<S> <C> <C>
QTY / 128 FE PORTS (20 GIG) 12 12
PROTOTYPES (*) (*)
RISK PRODUCTION (*) (*)
0-24K UNITS (FIRST 24K) (*) (*)
24K-120K UNITS (NEXT 96K) (*) (*)
120K-240K UNITS (NEXT 120K) (*) (*)
- -------------------------------------------------------------
240K+ UNITS (REST) (*) (*)
- -------------------------------------------------------------
</TABLE>
____________________
(*) Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 6
<PAGE>
EXHIBIT 10.11
SUPPLIER ESCROW AGREEMENT
This Agreement, made and entered into this 21 day of April, 1997, by and
between MMC Networks, Inc., a corporation organized and existing under the laws
of the State of California with its principal office at 1134 E. Arques Avenue,
Sunnyvale, CA 94086 ("MMC"), Hitachi Computer Products (America), Inc., a
corporation organized and existing under the laws of the State of Delaware with
an office at 3101 Tasman Drive, Santa Clara, CA 95054 ("HICAM") and SourceFile,
a with an address at 1350 W. Grand Avenue, Oakland CA (the
--------------
"Escrow Agent").
WHEREAS, HICAM and MMC have entered into an agreement pursuant to which HICAM
agreed to purchase (under the terms and conditions of a Purchase Order, a sample
of which is attached hereto as Exhibit A) on a continuing basis from MMC the
PS1000 chip set ("Chip Set") for use in HICAM products; and
WHEREAS, pursuant to the Agreement, MMC has certain continuing supply, warranty,
support and maintenance obligations; and
WHEREAS, MMC and HICAM have agreed to place copies of the documentation required
for the manufacture and testing of the Chip Set, a copy of a Purchase Order and
letters of authorization to suppliers of the Chip Set in escrow to be released
to HICAM upon any discontinuation of certain obligations of supply, warranty,
support and maintenance of the Chip Set undertaken by MMC;
NOW THEREFORE, in consideration of the mutual promises and undertakings
hereafter set forth, the parties hereto do hereby covenant and agree as follows:
ARTICLE 1. ESCROW DOCUMENTS.
- ---------------------------
1.1 The Letters of Authorization authorizing the existing vendors and suppliers
of the Chip Set to accept purchase orders from HICAM and to ship production
units of the Chip Set directly to HICAM, and any documents, drawings, design
specifications, bills of materials and other information necessary to
manufacture the Chip Set without undue experimentation on the part of vendors
and suppliers of the Chip Set, HICAM or its agents and suppliers, shall be
placed in escrow, including any exhibits, addenda, amendments and modifications
thereto, whether presently existing or created hereafter. The documents existing
as of the date of execution of this Agreement are listed in Exhibit B hereto.
1.2 A fully executed original License Agreement (the "License Agreement") by and
between MMC and HICAM, a copy of which is attached as Exhibit "C" shall be
placed in escrow and will be delivered to HICAM concurrent with the delivery of
the Escrow Documents pursuant to Article 5 below.
<PAGE>
ARTICLE 2. PURPOSE OF AGREEMENT; DEPOSIT OF DOCUMENTATION.
- ---------------------------------------------------------
2.1 Deposit. The deposit of the Documentation and the license thereof pursuant
-------
to Article 3.1 is intended to provide assurance to HICAM OF access and right of
use of such Documentation in the event that MMC discontinues its supply of the
Chip Sets to HICAM. In connection therewith, the Escrow Agent agrees to accept
from MMC and MMC agrees to deposit with Escrow Agent, within ten (10) calendar
days of the date of this Agreement, a copy of the Documentation. MMC will
furnish to Escrow Agent a list describing all items deposited. MMC shall also
furnish to HICAM a copy of such list so that HICAM can insure that all required
items are included. The Documentation to be initially deposited with Escrow
Agent is described in Exhibit B hereto, and such descriptions will be
supplemented and updated by MMC with each subsequent deposit. For each deposit,
Escrow Agent will issue receipts to MMC, and will send to HICAM copies of such
receipts.
2.2 Update and Maintenance. During the term of this Agreement MMC shall keep the
----------------------
Documentation in escrow fully current by depositing the documentation and
related materials for each and every correction, modification or new release of
the Documentation.
2.3 Verification and Testing. HICAM may appoint an independent consultant to
------------------------
inspect, test and review the Documentation (under obligations of
confidentiality) at the time of the initial deposit and at the time of each
subsequent deposit in escrow in order to verify that it corresponds to the
Exhibit hereto, and the Escrow Agent shall permit such inspections and testing
of the same promptly upon request.
ARTICLE 3. LICENSE.
- ------------------
3.1 In the event that the Documentation shall be delivered out of escrow to
HICAM pursuant to the terms of this Agreement, HICAM shall be licensed by MMC,
and MMC does so hereby license HICAM, subject to the terms and conditions of the
License Agreement attached hereto as Exhibit C, to use, modify, maintain and
update the Documentation in all such respects as may be necessary for HICAM to
manufacture, use, copy, distribute and sell the Chip Set as part of HICAM's
packet switch system products. HICAM may sublicense its rights in the Chip Set
to purchasers of HICAM's products so that they may exploit the same.
ARTICLE 4. TITLE TO DOCUMENTATION.
- ---------------------------------
4.1 Title to the Documentation shall remain in MMC, but title of the copy
thereof to be deposited in escrow hereunder shall pass to and vest in the Escrow
Agent and, in the event the Documentation shall he delivered to HICAM pursuant
hereto, pass to and vest in HICAM.
2
<PAGE>
Notwithstanding its ownership of a copy the Documentation in such event, HICAM
shall remain subject to the terms of the license granted pursuant to Article
3.1 hereof with respect to the use thereof.
ARTICLE 5. RELEASE OF DOCUMENTATION TO HICAM.
- --------------------------------------------
5.1 Release. The Documentation to be deposited in escrow pursuant to this
-------
Agreement shall be released to HICAM only in accordance with the terms of this
Agreement.
5.2 Notice of Default; Cure Period. If MMC discontinues its obligation to supply
------------------------------
HICAM with the Chip Sets or is in breach of any of its obligations under the
terms and conditions set forth in a Purchase Order, HICAM shall so notify MMC in
writing, specifying in reasonable detail. A copy of such notice will be served
simultaneously upon the Escrow Agent. For a period of ten days after service of
such notice, MMC shall have the right to resume its supply of the Chip Sets or
cure the identified breaches, whichever the case may be. In the event that, at
the conclusion of such cure period, MMC does not resume supply of the Chip Sets
to HICAM, or HICAM shall conclude in good faith that the identified breaches
have not been cured, HICAM may so notify both MMC and the Escrow Agent, and such
notice shall include a demand that the Escrow Agent release the Documentation to
HICAM pursuant to the terms hereof.
5.3 Dispute by MMC. In the case where MMC disagrees that it has discontinued its
--------------
obligation to supply HICAM with the Chip Sets or that its obligations have been
breached, MMC shall, within five (5) days after receipt of HICAM's notice and
demand for release, notify both the Escrow Agent and HICAM that it objects to
release of the Documentation. Failure of MMC to furnish timely notice objecting
to release of Documentation shall conclusively establish its consent to the
immediate release of the Documentation to HICAM under the terms of this
Agreement, and the Escrow Agent shall release such Documentation to HICAM.
5.4 Injunctive Relief. MMC and HICAM acknowledge and agree that HICAM will
-----------------
suffer irreparable harm to its business and operations in the event that release
of the Documentation to HICAM is wrongfully delayed by MMC, and that HICAM may
petition for injunctive relief to prevent MMC from seeking to delay such a
release.
5.5 Payment to MMC. HICAM shall pay to MMC, in the event that the Documents are
--------------
released to HICAM and HICAM manufactures and sells the Chip Sets, the amount of
MMC's price to HICAM for the purchase of the Chip Set above the cost of
manufacture of the Chip Set by HICAM, as set forth in detail in the License
Agreement attached hereto as Exhibit C.
3
<PAGE>
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF MMC.
- ------------------------------------------------
6.1 Ownership. MMC warrants and represents to HICAM that it is the owner of and
---------
holder of all rights in the Documentation and that MMC has the right to grant to
HICAM the license rights pursuant to Article 3.1 hereof and to deposit the
Documentation with the Escrow Agent pursuant to the terms hereof.
6.2 Current Version. MMC warrants and represents to HICAM that the Documentation
---------------
to be deposited with the Escrow Agent is the most current version of such
Documentation and conforms to the descriptions set forth in Exhibit B hereto.
ARTICLE 7. BREACH BY MMC.
- ------------------------
7.1 MMC shall be deemed to be in breach of its obligations and under this
Agreement should any of the following events occur:
(1) MMC discontinues its obligation to supply HICAM with the Chip Sets;
(2) MMC advertises for the sale of all or substantially all of its assets
or negotiates or signs an agreement providing for the sale of all or
substantially all of its assets, and such sale threatens, in HICAM's
discretion, to disrupt MMC's obligation to supply HICAM with the Chip
Set;
(3) MMC admits in writing its inability to pay its debts generally as
they become due;
(4) MMC makes a general assignment for the benefit of creditors;
(5) MMC voluntarily institutes proceedings to be adjudicated as bankrupt;
(6) MMC consents to the filing of a petition of bankruptcy against it;
(7) a petition of bankruptcy is filed against MMC and remains unstayed or
is not dismissed within ten (10) days after such filing;
(8) MMC is adjudicated by a court of competent jurisdiction as being
bankrupt or insolvent;
(9) MMC seeks reorganization under any bankruptcy act or law of debtor's
moratorium or consents to the filing of a petition seeking such a
reorganization; or
(10) MMC has a decree entered against it by a court of competent
jurisdiction appointing a receiver, liquidator, trustee or assignee
in bankruptcy or insolvency covering all or substantially all MMC's
property or providing for the liquidation of MMC's property or
business affairs.
Upon occurrence of any of the above events, HICAM may thereupon so notify Escrow
Agent in writing and provide evidence of the same. In such event, Escrow Agent
shall promptly release and deliver the Documentation to HICAM pursuant to the
terms hereof.
4
<PAGE>
ARTICLE 8. LIMITATION ON OBLIGATION OF ESCROW AGENT.
- --------------------------------------------------
8.1 Escrow Agent shall not be required to inquire into the truth of any
statements or representations contained in any notices, certificates or other
documents required or otherwise provided hereunder, and it shall be entitled to
assume that the signatures on such documents are genuine, that the person
signing on behalf of any party thereto are duly authorized to execute the same,
and that all actions necessary to render any such documents binding on the party
purporting to be executing the same have been duly undertaken. Without limiting
the foregoing, Escrow Agent may in its discretion require from MMC or HICAM
additional documents that it deems to be necessary or desirable to aid it in the
course of performing its obligations hereunder.
ARTICLE 9. RELEASE AND INDEMNIFICATION OF ESCROW AGENT.
- ------------------------------------------------------
9.1 MMC and HICAM, severally, hereby do release Escrow Agent from any and all
liability for losses and damages that may be incurred on account of any action
taken by Escrow Agent in good faith pursuant to this Agreement (excluding acts
of negligence by Escrow Agent), and (the parties do hereby severally indemnify
Escrow Agent and undertake to hold harmless Escrow Agent from and against any
and all claims, demands or actions arising out of or resulting from such
performance by Escrow Agent under this Agreement.
ARTICLE 10. ESCROW AGENT FEES.
- -----------------------------
10.01 HICAM hereby acknowledges and agrees that it shall pay the escrow fees
related to this Agreement as set forth in Exhibit D attached hereto and made a
part hereof. Escrow Agent shall invoice HICAM directly for all such fees. Escrow
Agent shall notify HICAM at least ninety (90) days prior to any renewal of this
Agreement of any increase in Escrow Agent's fees, which increase will not be in
an amount greater than 10% of the fees in effect prior to any such renewal.
ARTICLE 11. CONFIDENTIALITY AND USE OF THE DOCUMENTATION.
- --------------------------------------------------------
11.1 Confidentiality. The Documentation released to HICAM pursuant to this
---------------
Agreement shall be used by HICAM solely for the purposes permitted by this
Agreement. HICAM shall treat and preserve the Documentation as a trade secret of
MMC in accordance with the same practices employed by HICAM to safeguard its own
trade secrets against unauthorized use and disclosure. MMC hereby acknowledges
that HICAM may disclose the Documentation to its authorized agents, affiliates
(including Hitachi, Ltd. and its affiliates) and suppliers of the Chip Set as
needed by HICAM in order to manufacture, distribute and sell the Chip Sets.
Nothing in this Agreement is intended to limit the disclosure of technical or
other information as needed for HICAM's customers to effectively deploy properly
licensed Chip Sets.
5
<PAGE>
11.2 Survival of Obligations. The obligations of this Article 11 shall survive
-----------------------
the termination of this Agreement for any reason and shall continue for as long
as the Documentation continues to embody trade secrets of MMC, but in any event
no longer than five(5) years from the date of its disclosure to HICAM.
ARTICLE 12. TERM OF AGREEMENT.
- -----------------------------
12.1 The term of this Agreement shall commence on the effective date hereof and
shall continue until the Documentation shall be transferred to HICAM pursuant to
the terms hereof, or, if such transfer shall not have so occurred, the Agreement
shall terminate and the Documentation shall be returned to MMC upon termination
of MMC's supply and support obligations to HICAM.
ARTICLE 13. MISCELLANEOUS.
- -------------------------
13.1 Independent Contractors. The parties hereto are and shall be independent
-----------------------
contractors under this Agreement, and nothing herein shall be construed to
create a partnership, joint venture or agency relationship between the parties
hereto. No party shall have the authority to enter into agreements of any kind
on behalf of the other parties in any manner.
13.2 Authority. The parties hereto represent and warrant that they have full
---------
power and authority to undertake the obligations set forth in this Agreement and
that they have not entered into any other agreements nor will they enter into
any other agreements that would render them incapable of satisfactorily
performing their respective obligations hereunder.
13.3 No Agency; No Assignment; No Amendment. HICAM and MMC each represents that
--------------------------------------
it is acting on its own behalf and is not acting as an agent for or on behalf of
any third party and agrees that it may not assign its rights or obligations
under this Agreement, or amend this Agreement, without the prior written consent
of the other party hereto, which consent shall not be unreasonably withheld or
delayed.
13.4 Waiver. No party shall, by mere lapse of time, be deemed to have waived any
------
breach by the other party or parties of any provisions of this Agreement. The
waiver of any party of a particular breach of this Agreement by any other party
shall not be construed as or constitute a continuing waiver of such breach or of
other breaches of the same or other provisions of this Agreement unless in
writing by the waiving party.
13.5 Notices. All notices and other communications required or permitted to be
-------
given under this Agreement shall be in writing and shall be considered effective
when sent by facsimile, courier, or when deposited in the U.S. Mail, postage
prepaid, and addressed to the respective party at the address noted above,
unless by such notice a different address shall have been designated.
6
<PAGE>
13.6 Governing Law. The construction and interpretation of this Agreement shall
-------------
be governed by the law of the State of California, with the exception of its
provisions regarding conflicts of law.
13.7 Force Majeure. No party shall be in default if failure to perform any
-------------
obligation hereunder is caused solely by supervening conditions beyond such
party's control, including acts of God, civil commotion or governmental demands
or requirements.
13.8 Partial Invalidity. if any part, term or provision of this Agreement shall
------------------
be held illegal, unenforceable or in conflict with any law, the validity of the
remaining portions or provisions hereof shall not be affected thereby.
13.9 Complete Agreement. The parties hereto acknowledge that each has read this
------------------
Agreement, understands it and agrees to be bound by its terms. The parties
further agree that this Agreement, incorporating all Exhibits hereto, is the
complete and exclusive statement of their agreement and supersedes all prior
proposals, understandings, representations, conditions, warranties, covenants
and all other communications between the parties relating hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized representatives as set forth below:
MMC Networks Hitachi Computer Products (America), Inc.
By: /s/ Amos Wilnai by: /s/ Takeaki Matsuoka
----------------------- --------------------------
Title: Chairman Title: Senior Vice President
----------------------- -----------------------
& General Manager
-----------------------
Date: 4/11/97 Date: April 16, 1997
----------------------- -----------------------
Escrow Agent
By: /s/ [SIGNATURE]
-----------------------
Title: President
-----------------------
Date: 4-21-97
-----------------------
7
<PAGE>
EXHIBIT A
HITACHI COMPUTER PRODUCTS (AMERICA), INC.
TERMS AND CONDITIONS
1) FORMATION OF CONTRACT
The Purchase Order ("Order") is Buyer's offer to purchase the goods and/or
services (herein after referred to as "goods") described from the Seller and
does not constitute an acceptance by Buyer, of any offer to sell, quotation of
proposal by the Seller. This Order shall become a binding contract under the
conditions set forth herein only when the Seller acknowledges in writing the
acceptance of the Order. Buyer's placement of this Order is expressly
conditioned upon acceptance by Seller of all of the terms contained herein and
on the face of this Order and any supplements, specifications of documents
incorporated herein by reference.
Any additional or different terms or conditions which may appear in any
communication from Seller are hereby expressly objected to and shall not be
affective or binding unless specifically agreed to in writing by Buyer's
Purchasing Department.
Seller expressly acknowledges that Buyer is purchasing the goods covered by
this Order for internal use.
2) PRICE AND PAYMENT
All prices shall be firm and fixed unless otherwise agreed in writing.
However, if Seller reduces its published or standard prices for goods or
services covered by the contract before Seller completes his performance
thereunder, such reduced prices shall apply to any goods or services undelivered
at the time.
Payment terms shall be net 30 days unless otherwise specified. Seller agrees
not to deliver goods on sight draft basis.
Except as otherwise provided herein, Seller shall pay all taxes that may
arise of its sale of the goods and services to the Buyer. Buyer agrees to
provide Seller with a Tax Exemption Certificate if required.
3) WORK BY SELLER ON BUYER PREMISES
In the event Seller, its officers, employees and agents or any of them enter
premises owned, leased, occupied or under the control or Buyer in the
performance of or in connection with this order, Seller agrees to indemnify and
hold harmless Buyer, its officers, agents and employees from any loss, costs,
damages, or bodily injury (including death) or whatsoever kind or nature arising
out of or incidental to the performance of delivery of installation of this
order occasioned in whole or in part by the actions or omissions of Seller, its
employees, officers and agents or any of them. Seller shall maintain public
liability, property damage and automobile liability insurance in reasonable
amounts covering the obligations set forth and upon request will provide Buyer
with a Certificate of Insurance indicating the amount of such insurance.
4) PACKING
Seller shall include shipping marks, as specified by Buyer on all packing.
Unless otherwise specified, Seller shall pack the goods in such a manner as to
be safe from damage or deterioration while in transit or storage under
foreseeable circumstances.
No charges of any kind, including charges for boxing or cartage, will be
allowed unless specifically agreed to by Buyer in writing.
5) DELIVERY
Unless otherwise stated on this Order, all goods are to be shipped freight
prepaid, F.O.B. Seller's factory. Buyer will advise the Seller of the
destination, and has the option to specify routing and method of shipment.
Time is of the essence, and this Order may be terminated if delivery is not
made or services not performed by the date specified on the Order. No change in
the scheduled date or performance will be permitted without Buyer's written
consent. No acceptance of goods or services after the scheduled delivery date
shall be deemed a waiver of future compliance with the terms hereof. If the
materials cannot be delivered within the time specified in the Order. Seller
must notify Buyer immediately in writing of the earliest possible delivery date.
6) INSPECTION
Seller shall thoroughly inspect all and every part of the goods and shall
conduct running and performance tests before shipment and send Buyer a record of
such tests. Buyer and/or its designee shall have the right and opportunity to
witness such inspection and/or test. Seller shall furnish without additional
charge, all reasonable facilities and assistance for the safety and convenience
of Buyer and/or as designee in the performance of such inspection and/or test.
Witnessing or failure to witness such inspection and/or tests by Buyer and/or
its designee shall in no way impact Buyer's or its designee's rights in the
case of nonconforming or defective goods.
All goods furnished under this Order by Seller to Buyer or its designee may,
at its option, (1) reject the goods and return it to Seller at Seller's risk and
expense or (2) arrange for repair or make the goods otherwise acceptable at
Seller's expense in accordance with Seller's timely instructions, or in
accordance with Buyer's or the designee's best judgement (at Seller's risk and
expense). If Seller does not provide such instructions or make such repairs
within a reasonable time, or (3) accept the goods at a reasonably reduced price.
Freight costs for rejected goods shall include all freight charges from the
point of which the goods are rejected. If rejection occurs outside of the U.S.,
Buyer will bear any taxes and/or duties incurred in the transportation of the
goods to the Seller.
Seller shall provide Buyer with appropriate material certifications,
including but to limited to material, physical and/or chemical analysis
certifications.
7) WARRANTIES
A. Seller warrants to the Buyer and its designee that the goods supplied
and work of services performed under this Order conform to the specifications
herein.
B. Seller further warrants to the Buyer and its designee that all goods
under this Order will be free from defects in material and workmanship and
will conform to applicable specifications, drawings, samples and descriptions.
Buyer's or the designee's written approval of the designs furnished by Seller
shall not relieve Seller of its obligations under this warranty.
C. Unless otherwise specified, Seller's warranty shall extend for a period
of twelve (12) months after the goods are accepted by Buyer's designee. Buyer
and its designee shall have the benefit of any other warranties which may be
applicable.
D. In the event Buyer or its designee discovers a breach of any kind of the
warranties specified herein with respect to any goods or part thereof within the
warranty period, Buyer or its designee may at its option, (1) return such goods
to Seller's at Sellers' risk and expense; or (2) arrange for repair or make the
goods otherwise conform to the warranties at Seller's risk and expense in
accordance with the Seller's timely instructions, or in accordance with Buyer's
or its designee's best judgement (at Seller's risk and expense) if Seller does
not provide such instructions or make such repairs within a reasonable time.
E. In addition to the other remedies provided herein, Seller shall be
liable for all damages both to Buyer and/or its designee, incurred as a result
of any defect or breach of warranty in any item covered by this Order.
F. the warranties of the Seller shall survive the termination of this
contract.
8) ASSIGNMENT
Seller shall not assign this contract, or the right to payment due
hereunder, without Buyer's prior written consent.
9) LIENS, CLAIMS AND ENCUMBRANCES
Seller warrants and represents that all the goods will, when delivered
hereunder, be free and clear of all liens, claims or encumbrances of every kind.
10) DEFAULT AND TERMINATION
Buyer may cancel the whole or any part of this Order or exercise any other
remedy provided buyers of goods by law or in equity including any remedy under
the Uniform Commercial Code, in any of the following circumstance:
1. If Seller fails to make delivery of the goods or to perform the services
within the time specified herein or any extension thereof;
2. If, in Buyer's good faith judgement, the Seller fails to perform any of
the other provisions of this Order or fails to make progress as to endanger
performance of this Order in accordance with its terms and does not cure such
failure within a period of ten days, or such longer period as Buyer may
authorize in writing, after receipt of notice from Buyer specifying such
failure:
3. Seller is in breach of any of the terms or conditions of the Order;
4. Seller becomes insolvent, makes a general assignment for the benefit of
creditors, or is subject of proceeding under any law relating to bankruptcy,
insolvency or relief of debtors, however designated.
The failure of the Buyer to insist upon strict performance of any of the
terms of this Order of to exercise any rights hereunder shall not be construed
as a waiver of the rights of the Buyer or designee.
11) INFRINGEMENTS
Seller warrants the Buyer's and/or its designee's purchase, installation,
and/or use of the goods covered hereby will not result in any claim of
infringement, or actual infringement, of any patent, trademark, copyright, or
other intellectual property right. Seller agrees to defend any action brought
against the Buyer and/or its designee arising out of such infringement and
Seller shall indemnify and hold buyer and/or its designee harmless from and
against all claims, losses, expenses, damages, causes of action and liabilities
of every kind and nature, including without limitation, reasonable attorney's
fees (without waiver of Seller's obligation to indemnify Buyers and/or its
designee hereunder), arising from or out of any breach of the foregoing
warranty. The rights granted hereunder shall survive termination of this
contract.
12) FORCE MAJEURE
Neither party shall be responsible for any delay or failure in performance
of any part of this Order to the extent that such delay or failure is caused by
events beyond its control and without its negligence ("force majeure
conditions"). If any force majeure condition occurs, the party delayed or unable
to perform shall give immediate notice to the other party, and the party
affected by the others delay or inability to perform may elect to: (1) suspend
this Order for the duration of the force majeure condition, buy elsewhere, goods
to be bought under this Order, and deduct from any commitment the quantity
bought for which commitments have been made elsewhere, and resume performance of
this Order once the force majeure condition ceases with an option in the
affected party to extend the period of this Order up to the length of time the
forced majeure condition endured; or (2) terminated this Order or the part of it
relating to goods not already shipped if the force majeure condition continues
for more than thirty (30) days.
13) CHANGES
Buyer shall have the right to make changes in this Order. If such changes
affect shipment of delivery or the amount to be paid by Buyer, Seller shall
immediately notify Buyer in writing. Upon such notification, the parties shall
enter into negotiation for and adjustment.
14) EXPORT RESTRICTIONS
Seller agrees to comply, and do all things necessary for Buyer to comply
with all applicable federal, state and local laws and regulations, including
regulations of the United States Departments of Commerce and State relating to
the export of technical data and commodities insofar as they relate to the
transactions contemplated herein. Seller agrees to advise Buyer of any and all
export restrictions and/or requirements concerning the goods covered by this
Order and to obtain the required government documents and approvals prior to
export from the United States of any such technical data or commodity.
15) COMPLIANCE
The Seller shall warrant that the goods called for by this order have been
or will be produced in compliance with Fair Labor Standards Act of 1939 (29 U.S.
Code 210-219) and any amendments thereto, and insofar as applicable to this
Order, the Walsh-Healy Public Contracts Acts (41 U.S. Code 35-45) and any
amendments thereto, as well as with the provision of any other Federal Law
enacted including P.L. 87-851 WORK HOURS ACT OF 1962-Overtime Compensation, and
with any and all rules and regulations issued under each and every such act. The
Seller agrees that this warranty may be considered as the certificate
contemplated by the amendment dated October 26, 1949, to the Fair Labor Standard
Act of 1938. Seller of goods and or services herein listed on this purchase
order, asserts and warrants to the Buyer that the goods and/or services complies
with all applicable standards of the Williams-Steiger Occupational Safety and
Health Act of 1970.
Seller shall comply with all applicable Federal, State or local laws,
rulings, regulations, and orders pertaining thereof in effect on the date of
this Order.
16) APPLICABLE LAW
The validity, interpretation, and performance of this order shall be
governed by the laws of the State of California.
<PAGE>
EXHIBIT B(1)
LETTER OF AUTHORIZATION TO MOTOROLA SEMICONDUCTOR
_____________, 1997
Motorola Semiconductor
1300 N. Alma School Road
Chandler, AZ 85224
RE: Authorization to Supply
To whom it may concern:
You are a party to that certain Development and Purchase Agreement with MMC
Networks, Inc. ("MMC") pursuant to which you agree to provide certain [foundry]
supply services to MMC with respect to the supply of the MMC product known as
the PS1000 chip set (the "Chip Set"). Effective upon delivery of this letter to
you and notwithstanding anything to the contrary in any document given to you or
executed by MMC, MMC and its successors and assigns, hereby authorize and grant
to you an irrevocable and non-exclusive right and license to sell quantities of
the Chip Set to Hitachi Computer Products (America), Inc. as Hitachi Computer
Products (America), Inc. may from time to time order.
Very truly yours,
MMC Networks, Inc.
By:_________________________
Its:________________________
<PAGE>
EXHIBIT B (2)
LETTER OF AUTHORIZATION TO NEC CORP.
______________, 1997
NEC Corp.
2880 Scott Blvd.
P.O. Box 58062
Santa Clara, CA 95052-8062
RE: Authorization to Supply
To whom it may concern:
You are a party to that certain Development and Purchase Agreement with MMC
Networks, Inc. ("MMC") pursuant to which you agree to provide certain [foundry]
supply services to MMC with respect to the supply of the MMC product known as
the PS1000 chip set (the "Chip Set"). Effective upon delivery of this letter to
you and notwithstanding anything to the contrary in any document given to you or
executed by MMC, MMC and its successors and assigns, hereby authorize and grant
to you an irrevocable and non-exclusive right and license to sell quantities of
the Chip Set to Hitachi Computer Products (America), Inc. as Hitachi Computer
Products (America), Inc. may from time to time order.
Very truly yours,
MMC Networks, Inc.
By:_________________________
Its:________________________
<PAGE>
EXHIBIT B(3)
DESCRIPTION OF DEPOSITED MATERIAL
---------------------------------
1. For each of the following products:
. PS1001 . Packet Switch Processor
. PS1002 - Fast Ethernet Interface Unit
. PS1003 - Ethernet Interface Unit
a) Verilog source code
b) EDIF files
c) Test vectors
2. Letter of Authorization to the Chip Vendor(s)
<PAGE>
Exhibit C
License Agreement
-----------------
This LICENSE AGREEMENT (the "Agreement") is entered into and effective as
of the date this fully executed original copy is delivered to Hitachi Computer
Products (America), Inc., a Delaware corporation ("HICAM"), having offices at
3101 Tasman Drive, Santa Clara, CA 95054, this Agreement being by and between
HICAM and MMC Networks, Inc., a California corporation ("MMC"), having offices
at 1134 E. Arques Avenue, Sunnyvale, CA 94086, on the basis of the following
facts:
R E C I T A L S
---------------
WHEREAS, MMC designs, manufactures, has manufactured, markets and sells a
chip set currently known as the PS1000 chip set (the "Chip Set").
WHEREAS, MMC and HICAM from time to time conduct business pursuant to which
MMC supplies quantities of the Chip Set to HICAM.
WHEREAS, MMC desires to (i) ensure the availability to HICAM of certain
proprietary materials relating to the Chip Set (collectively the "Source
Material") in the event certain conditions set forth in Section 7 of the Escrow
Agreement (a "Release Event") should occur, and (ii) grant to HICAM and HICAM
desires to acquire from MMC a license to make, use and sell the Chip Set for the
consideration and upon the terms and subject to the condition set forth in this
Agreement.
LICENSE AGREEMENT
-----------------
IT IS HEREBY AGREED, on the basis of the foregoing facts and in
consideration of the respective covenants set forth in this Agreement, as
follows:
1. Grant of License. MMC hereby grants to HICAM a perpetual, non-
----------------
exclusive, worldwide right and license, without the right to
sublicense, under all of its intellectual property rights to directly
and indirectly make, use, test, sell, market and distribute the Chip
Set, but only as part of an HICAM's packet switch system products and
only pursuant to the terms stated in section 3.1 of the Escrow
Agreement.
2. Consideration. In consideration of the License granted hereunder HICAM
-------------
shall pay to MMC a royalty (the "Royalties") for each Chip Set
manufactured and sold by HICAM as part of HICAM's packet switch system
products, equal to the Production Margin. For the purposes of this
Agreement, the "Production Margin" for each Chip Set shall he
determined by subtracting the
10
<PAGE>
cost that HICAM pays to the ASIC supplier for such Chip Set, from the
average, pre-tax, FOB point of manufacture price at which HICAM
purchased Chip Set from MMC during the three month period immediately
preceding notice of a Release Event.
3. Payment Terms for Royalties. The Royalties attributable to the sale of
---------------------------
a Chip Set, as part of HICAM's packet switch system products, shall be
payable on the last day of the month following the month in which the
Chip Set is actually received by HICAM.
4. Royalties Mistakenly Paid on Returned Products. If HICAM pays to MMC a
Royalty on the sales of a product which includes the Chip Set that is
subsequently returned to HICAM, the amount of the Royalty so paid shall
be deemed a credit against future royalties payable by HICAM. If no
future Royalties are payable, the remaining balance of such credits
shall be refunded to HICAM within thirty (30) days after the expiration
or termination of HICAM's obligation to pay Royalties or the expiration
or termination of this Agreement.
5. Warranty and Indemnification. MMC warrants that HICAM's manufacture,
use, sale, reproduction and distribution of the Chip Set shall be free
of rightful claims of any third person of infringement of any
intellectual property rights. MMC agrees to defend, at its expense, the
part of any suit or proceeding brought against HICAM or HICAM's
suppliers based in whole or in part upon any claims which, would
constitute a violation of the foregoing intellectual property rights
indemnification. HICAM agrees to notify MMC in writing of any such
claim, give MMC sole control of the defense and settlement thereof; and
provide all reasonable assistance, at MMC's expense, in connection
therewith. If any Chip Set products are claimed to so infringe, MMC
shall, at its option, (a) procure for HICAM the right to continue using
the Chip Set; (b) modify or replace the Chip Set, without materially
impairing the performance or functions of the product, so there is no
infringement; or (c) compensate HICAM for the purchase price paid by
HICAM for the Chip Set. MMC shall have no liability regarding any claim
arising out of the use of the Chip Set in combination with other goods
if the infringement would not occur but for such combination.
6. Term of License. This Agreement shall commence and be effective on the
---------------
date on which a copy of the Agreement is delivered to MMC by the Escrow
Agent and shall continue in full force and effect thereafter, subject
to termination by (a) HICAM for any reason on thirty (30) days prior
written notice to MMC, and (b) MMC for failure to pay Royalties when
due, unless HICAM pays such Royalties within thirty (30) days of
receipt of notice from MMC. In the event
11
<PAGE>
of a Change in control of HICAM, provided that HICAM has not first
obtained MMC's written consent as to a Change in Control, which consent
shall not be unreasonably withheld or delayed, MMC may, upon thirty (30)
days written notice to HICAM, terminate HICAM's right to purchase ASICs
from the ASIC vendor. A Change in Control is defined as a sale of
substantially all of HICAM's assets, a merger involving HICAM whereby
HICAM is not the surviving corporate entity or any other changes of
control of HICAM in which more than 50 percent of the voting power of
HICAM no longer resides in HICAM's shareholders as constituted
immediately prior to such transactions.
7.Confidential Information. HICAM agrees that MMC has a proprietary
------------------------
interest in the Source Materials. All disclosures to HICAM, its agents
and employees shall be held in strict confidence by HICAM, its agents and
employees. HICAM shall disclose the Source Materials only to those of its
agents and employees to whom it is necessary in order properly to carry
out their duties as limited by the terms and conditions hereof. HICAM
shall not use the Source Materials except for the purposes of exercising
its rights and carrying out its duties hereunder.
The obligations foregoing obligations of confidentiality shall not apply
to any particular portion of any Confidential Information that: (i) now
or subsequently becomes generally known or available through no act or
omission of the receiving party; (ii) is known to the receiving party at
the time of receipt of same from the furnishing party; (iii) is provided
by the furnishing party to a third party without restriction on
disclosure; (iv) is subsequently rightfully provided to the receiving
party by a third party without restriction on disclosure; or (v) is
independently developed by the receiving party and as can be demonstrated
from the receiving party's business records and documentation, provided
the person or persons developing same have not had access to the
Confidential Information of the furnishing party.
8.Audit Rights. HICAM agrees to make and keep full and accurate books and
------------
records in sufficient detail to enable Royalties payable hereunder to be
determined. On thirty (30) days' prior written notice to HICAM and not
more than two times within a calendar year, MMC's independent firm of
certified public accountants shall have access to the books and records
of HICAM pertaining to net proceeds received by HICAM for its
sublicensing and assigning of its rights and licenses under this
Agreement and shall have the right to make copies therefrom at MMC's
expense. In the event that the audit shows that HICAM under compensated
MMC by greater than 10% of the total amount due to MMC for the period
audited, the costs of the audit shall be paid by HICAM. Such firm of
independent certified public
12
<PAGE>
accountants shall have such access at all reasonable times and from time
to time during normal business hours. Prompt adjustment shall be made by
the proper party to compensate for any errors or omissions disclosed by
such audit. The firm of independent certified public accountants shall
execute a confidentiality agreement with HICAM advance of receiving such
access, whereby such firm shall agree to hold confidential all
information learned in the course of any examination of HICAM's books and
records hereunder, except that it may report to MMC the extent of any
error or omission and the general basis therefor. All reports and
payments not disputed as to correctness by MMC within two (2) year after
receipt thereof shall thereafter conclusively be deemed correct for all
purposes.
9.Miscellaneous.
-------------
(a)This Agreement shall be governed by the internal laws of the State of
California as if made and performed within the State.
(b)Any dispute, controversy or claim arising out of or relating to this
Agreement or breach thereof shall be exclusively and finally resolved
by arbitration pursuant to the rules of the American Arbitration
Association, which shall administer the arbitration and act as
appointing authority. The decision of the arbitrators shall be final
and binding upon the parties hereto, and shall be executory. Judgment
based on the decision of the arbitrators may be entered by any court
of competent jurisdiction. Notwithstanding this, judgment upon the
award of the arbitration may be entered in any court where the
arbitration takes place or any court having jurisdiction thereof, and
application may be made to any court for a judicial acceptance of the
award or order of enforcement. Notwithstanding anything contained in
this section to the contrary, each party shall have the right to
institute judicial proceedings against the other party or anyone
acting by, through or under such other party in order to enforce the
instituting party's rights hereunder through reformation of contract,
specific performance, injunction or similar equitable relief.
(c)A waiver of any breach of any provision of this Agreement shall not be
construed as a continuing waiver of other breaches of the same or
other provisions of this Agreement.
(d)Nothing herein contained shall be deemed to create an agency, joint
venture or partnership relationship between the parties hereto.
Neither party shall have any power to bind the other party in any
respect whatsoever.
13
<PAGE>
(e)Any amendment or modification of any provision of this Agreement must
be in writing, dated and signed by both parties hereto.
(f)This Agreement may be executed in any number of counterparts and each
such counterpart shall be deemed to be an original.
(g)If any provision of this Agreement is declared invalid or
unenforceable by a court having competent jurisdiction, it is mutually
agreed that this Agreement shall endure except for the part declared
invalid or unenforceable by order of such court. The parties shall
consult and use their best efforts to agree upon a valid and
enforceable provision which shall be a reasonable substitute for such
invalid or unenforceable provision in light of the intent of this
Agreement.
(h)Any headings contained herein are for directory purposes only, do not
constitute a part of this Agreement, and shall not be employed in
interpreting this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
personally or by agents or officers thereunto duly authorized.
"HICAM" Hitachi Computer Products (America), Inc.
TAKEAKI MATSUOKA
--------------------------------
By: /s/ Takeaki Matsuoka
----------------------------
Date: April 16, 1997
--------------------------
"MMC" MMC Networks, Inc.
/s/ Amos Wilnai
--------------------------------
By: Amos Wilnai
----------------------------
Date: 4/11/97
--------------------------
14
<PAGE>
EXHIBIT D
SOURCEFILE'S ESCROW SERVICES
1997 FEE SCHEDULE
ESCROW SERVICES
Includes climate controlled storage, certified letters of notification, and
custom agreements.
<TABLE>
<S> <C> <C>
. Initial set-up $1,000.00*
. Annual Maintenance per Deposit or Product $1,100.00
(Includes 2 deposit updates per year)
. Annual Race per Beneficiary $ 300.00
SourceFile invoices Depositor
. Annual Rate per Beneficiary $ 500.00
SourceFile Invoices Beneficiary directly
</TABLE>
ADDITIONAL SERVICES
<TABLE>
<S> <C> <C>
. Technical Verification starts at $145.00/hour
. SourceLink on-line account status please call for estimate
. Source Material Updates $150.00
. Escrow Release Beneficiary Request $800.00
. Escrow Release Depositor Request $200.00
. Pick-Up and Delivery Service per year $200.00
</TABLE>
*Due when agreement is customized or signed.
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1997
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net income...................................... $ 702 $ 326 $ 434
======= ======== ========
Weighted average shares outstanding:
Common stock.................................. 10,723 10,507 11,370
Common stock issuable upon exercise of options
granted through July 31, 1996................ 2,236 2,226 1,797
Common stock issuable upon exercise of options
granted subsequent to July 31, 1996(2)....... 2,600 2,600 2,600
Warrants...................................... 147 147 147
Convertible preferred stock................... 13,342 13,342 13,342
------- -------- --------
Weighted average common shares and equivalents.. 29,048 28,822 29,256
------- -------- --------
Net income per share............................ $ .02 $ .01 $ .01
======= ======== ========
</TABLE>
- --------
(1) This exhibit should be read in conjunction with Note 2 of Notes to
Financial Statements.
(2) Stock options granted (using the treasury stock method and an assumed
initial public offering price of $10 per share) have been included in the
calculation of the common equivalent shares as if they were outstanding
for all periods presented.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 14, 1997, except
for Note 9, which is as of August 15, 1997, relating to the financial
statements of MMC Networks, Inc., which appears in such Prospectus. We also
consent to the application of such report to the Financial Statement Schedules
for the three years ended December 31, 1996 listed under item 16(b) of this
Registration Statement when such schedules are read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included these schedules. We also consent to the references to us
under the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse LLP has not prepared or
certified such "Selected Financial Data".
PRICE WATERHOUSE LLP
San Jose, California
August 19, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF DERGOSITS & NOAH, LLP
We consent to the reference to our firm under the captions "Risk Factors--
Protection of Intellectual Property," "Business--Intellectual Property" and
"Experts" in the Registration Statement on Form S-1 and related Prospectus of
MMC Networks, Inc.
/s/ Todd A. Noah
-------------------------------------
Todd A. Noah for
Dergosits & Noah LLP
San Francisco, California
August 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 JUN-30-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 4,809 2,953
<SECURITIES> 1,509 2,609
<RECEIVABLES> 2,158 3,508
<ALLOWANCES> 133 165
<INVENTORY> 511 231
<CURRENT-ASSETS> 8,976 9,413
<PP&E> 2,207 3,212
<DEPRECIATION> 591 977
<TOTAL-ASSETS> 10,676 11,732
<CURRENT-LIABILITIES> 1,863 2,562
<BONDS> 636 447
0 0
10,247 10,247
<COMMON> 256 438
<OTHER-SE> (225) (295)
<TOTAL-LIABILITY-AND-EQUITY> 10,676 11,732
<SALES> 10,515 8,201
<TOTAL-REVENUES> 10,515 8,201
<CGS> 3,576 2,535
<TOTAL-COSTS> 10,113 7,845
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 110 68
<INCOME-PRETAX> 719 443
<INCOME-TAX> 17 9
<INCOME-CONTINUING> 702 434
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 0 0
<EPS-PRIMARY> .02 .01
<EPS-DILUTED> 0 0
</TABLE>
