<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 16, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TERAYON COMMUNICATION SYSTEMS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
CALIFORNIA (PRIOR TO 3661 77-0328533
REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DELAWARE (AFTER CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
REINCORPORATION)
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
2952 BUNKER HILL LANE
SANTA CLARA, CA 95054
(408) 727-4400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DR. ZAKI RAKIB
CHIEF EXECUTIVE OFFICER
TERAYON COMMUNICATION SYSTEMS
2952 BUNKER HILL LANE
SANTA CLARA, CA 95054
(408) 727-4400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
JAMES C. GAITHER NEIL WOLFF
KARYN R. SMITH YOICHIRO TAKU
PETER M. O. WONG NOGA DEVECSERI SPIRA
COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI
ONE MARITIME PLAZA PROFESSIONAL CORPORATION
20TH FLOOR 650 PAGE MILL ROAD
SAN FRANCISCO, CA 94111 PALO ALTO, CA 94304
(415) 693-2000 (650) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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, $.001 par value $50,000,000 $14,750
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.
----------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
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 STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
JUNE 16, 1998
SHARES
[LOGO OF TERAYON COMMUNICATION SYSTEMS APPEARS HERE]
COMMON STOCK
--------
All of the shares of Common Stock of Terayon Communication Systems ("Terayon"
or the "Company") are being sold by the Company. Prior to this offering, there
has been no public market for the Common Stock. It is currently estimated that
the initial public offering price will be between $ and $ per share.
See "Underwriting" for information relating to the method of determining the
initial public offering price.
--------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
--------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................... $ $ $
- --------------------------------------------------------------------------------
Total(3).................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information relating to indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $1,100,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to additional shares of Common Stock solely to cover over-
allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public as
shown above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1998.
BT ALEX. BROWN
HAMBRECHT & QUIST
SALOMON SMITH BARNEY
The date of this Prospectus is , 1998.
<PAGE>
[Graphic consisting of a depiction of the following components of broadband
communications solutions:
S-CDMA Cable Modem System
Standards-Based Modem System
Technology Leadership
Set-Top Boxes
IP & Circuit Telephony]
TeraComm, TeraLink, TeraPro, TeraView and Terayon are trademarks of the
Company. All other trademarks or service marks appearing in this prospectus are
the property of their respective owners.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING
SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS, IN CONNECTION WITH
THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
[Gatefold]
[graphic depicting the components of the TeraComm system and potential users of
the system]
Captions:
SYNCHRONOUS-CODE DIVISION
MULTIPLE ACCESS ("S-CDMA")
TECHNOLOGY. Terayon's S-CDMA
technology allows cable
operators to provide reliable
two-way broadband
communications utilizing more
of the existing upstream
bandwidth than alternative
broadband access technologies.
FLEXIBLE ARCHITECTURE. The
Company's system can be
deployed on any cable
infrastructure, from pure
coaxial systems to hybrid
fiber/coax ("HFC") upgraded
systems, providing cable
operators with a cost-
effective broadband access
solution.
ECONOMIC ADVANTAGE. The
Terayon system does not
require costly cable
infrastructure upgrades,
filters or new cable drops,
allowing cable operators to
provide broadband access
services with low start-up
costs.
RESIDENTIAL AND COMMERCIAL
SERVICES. The TeraComm system
allows cable operators to
provide tiered levels of
service with various access
speeds and priority
connections, from lower margin
residential Internet access to
higher margin commercial
service offerings.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus. Except as set forth in the consolidated
financial statements or as otherwise indicated herein, information in this
Prospectus (i) gives effect to the reincorporation of the Company from
California to Delaware to be effected prior to the closing of this offering,
(ii) gives effect to the conversion of all of the Company's outstanding shares
of Preferred Stock into shares of Common Stock, which will occur automatically
upon the closing of this offering and (iii) assumes that the Underwriters'
over-allotment option is not exercised. See "Description of Capital Stock" and
"Underwriting." This Prospectus contains forward-looking statements that
involve risks and uncertainties. Actual events or results could differ
materially from those expressed in or implied by these forward-looking
statements as a result of a number of factors, including those set forth under
"Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Terayon develops, markets and sells cable modem systems that enable cable
operators to cost-effectively deploy reliable two-way broadband access
services. The Company's TeraComm system is designed to allow cable operators to
minimize time-consuming and costly network infrastructure upgrades, achieve
reduced time to market and provide a wide range of service levels to
residential and commercial end users. Cable operators using the TeraComm system
are able to provide additional revenue-generating services to end users,
enabling cable operators to compete effectively in the emerging market for
broadband access services.
In recent years, the volume of bandwidth intensive data, voice and video
traffic across the Internet, corporate intranets and other public networks has
increased dramatically. International Data Corporation ("IDC") estimates that
the number of Internet users will increase from approximately 69 million at the
end of 1997 to approximately 320 million by the end of 2002. IDC also estimates
that the number of home office households will increase from approximately 35
million at the end of 1997 to approximately 40 million by the end of 1999.
Although various technologies have emerged to address the need for broadband
access, the existing cable infrastructure currently provides the highest
available two-way transmission speeds and "always-on" availability. In
addition, the existing cable infrastructure currently passes more than 95% of
homes in the U.S. and a large number of small businesses.
The Company's TeraComm system, comprised of the TeraPro cable modem, the
TeraLink 1000 Master Controller, the TeraLink Gateway and the TeraView Element
Management and Provisioning Software, is based on Terayon's Synchronous Code
Division Multiple Access ("S-CDMA") technology. S-CDMA enables reliable two-way
broadband communications over both pure coaxial and hybrid fiber/coax ("HFC")
cable infrastructure by maximizing resistance to noise that interferes with
data transmissions over previously unusable frequency spectrum. Cable operators
utilizing cable modems based on alternative technologies such as Time Division
Multiple Access must typically upgrade their networks to an HFC architecture.
The TeraComm system is designed to allow cable operators to minimize these
costly and time-consuming network upgrades.
Terayon's objective is to be the leading provider of cable modem systems to
cable operators seeking to provide broadband access services to residential and
commercial end users. Key elements of the Company's strategy are to supply
leading cable operators worldwide, establish relationships with industry
leaders, expand worldwide distribution channels, provide superior customer
service and support, adopt and advocate industry standards, and leverage its S-
CDMA technology.
Terayon sells its products to cable operators through direct sales forces in
North America, Latin America and Europe. The Company also distributes its
products via distributors and systems integrators. Companies currently using or
distributing the TeraComm system include Shaw Communications Inc., TCA Cable
Systems and Crossbeam Networks Corporation, a wholly owned subsidiary of
Sumitomo Corporation.
Terayon was incorporated in California in January 1993 and intends to
reincorporate in Delaware prior to the closing of this offering. The Company's
executive offices are located at 2952 Bunker Hill Lane, Santa Clara, California
95054 and its telephone number is (408) 727-4400.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company........ shares
Common Stock outstanding after the
offering.................................. shares (1)
Use of proceeds............................ Working capital and other general
corporate purposes
Proposed Nasdaq National Market symbol..... TERN
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------
1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $ 140 $ -- $ -- $ 2,118 $ -- $ 2,444
Cost of goods sold...... -- 676 -- 6,462 178 4,134
-------- -------- -------- -------- -------- --------
Gross profit (loss)..... 140 (676) -- (4,344) (178) (1,690)
-------- -------- -------- -------- -------- --------
Operating expenses
Research and develop-
ment.................. 235 2,028 8,020 11,319 2,580 2,305
Sales and marketing.... 17 205 1,141 4,468 529 1,140
General and administra-
tive.................. 84 825 1,789 2,546 461 505
-------- -------- -------- -------- -------- --------
Total operating ex-
penses................ 336 3,058 10,950 18,333 3,570 3,950
-------- -------- -------- -------- -------- --------
Loss from operations.... (196) (3,734) (10,950) (22,677) (3,748) (5,640)
Net interest income (ex-
pense)................. -- 68 253 128 91 (64)
-------- -------- -------- -------- -------- --------
Net loss................ $ (196) $ (3,666) $(10,697) $(22,549) $ (3,657) $ (5,704)
======== ======== ======== ======== ======== ========
Pro forma basic and di-
luted net loss per
share(2)............... $ (2.07) $ (0.48)
======== ========
Shares used in pro forma
basic and diluted net
loss
per share(2)........... 10,873 11,773
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED(3)
-------- -------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...... $ 109 $
Working capital (deficit).............................. (8,769)
Total assets........................................... 8,226
Long-term debt (less current portion).................. 34
Accumulated deficit.................................... (42,867)
Total shareholders equity (net capital deficiency)..... $ (6,821) $
</TABLE>
- --------
(1) Based on number of shares outstanding on March 31, 1998. Excludes as of
June 11, 1998 (i) 2,489,232 shares issuable upon exercise of options
outstanding at a weighted average exercise price of $2.46 per share; (ii)
38,462 shares of Common Stock issuable upon exercise of an outstanding
warrant with an exercise price of $13.00 per share; (iii) 3,000,000 shares
issuable upon exercise of an outstanding warrant with an exercise price of
$6.50 per share; (iv) 2,363,746 shares reserved for future grants under the
Company's stock option plans; and (v) 700,000 shares reserved for issuance
pursuant to the Company's 1998 Employee Stock Purchase Plan. See
"Management--Employee Benefit Plans" and Notes 8 and 13 of Notes to
Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method employed to determine the number of shares used to compute
per share amounts.
(3) As adjusted to reflect (i) the sale of shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $ per share and the application of the estimated net proceeds
therefrom and (ii) the conversion of all outstanding shares of Preferred
Stock into shares of Common Stock upon the closing of this offering. See
"Use of Proceeds."
4
<PAGE>
RISK FACTORS
The shares offered hereby involve a high degree of risk. The following risk
factors should be considered carefully in addition to the other information in
this Prospectus before purchasing the shares of Common Stock offered hereby.
The discussion in this Prospectus contains certain forward-looking statements
that involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions. The cautionary statements made
in this Prospectus should be read as being applicable to all related foward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include those discussed
below as well as those discussed elsewhere herein. See "Information Regarding
Forward-Looking Statements."
Early Stage of Development; History of Losses. The Company was incorporated
in January 1993, began shipping products commercially in June 1997 and has
only been shipping products in volume since the first quarter of 1998. Most
commercial shipments of the Company's products through December 1997 were in
limited quantities to customers deploying cable modems in pre-commercial
trials. Accordingly, the Company has a very limited operating history, which
makes the prediction of future operating results difficult. The Company has
incurred significant losses since inception, including losses of $3.7 million,
$10.7 million, $22.5 million and $5.7 million for 1995, 1996, 1997 and for the
three months ended March 31, 1998, respectively. At March 31, 1998, the
Company had an accumulated deficit of $42.9 million. The Company believes that
it will continue to experience net losses for the foreseeable future. Because
a majority of the Company's expenses are fixed in advance, the Company
generally is unable to reduce its expenses significantly in the short term to
compensate for any unexpected delay or decrease in anticipated revenues. As
the Company increases its commercialization activities, it expects to increase
expense levels in each of the next several quarters primarily to support
increased sales and marketing and technical support costs. Accordingly, any
significant delay in the Company's anticipated revenues or commercialization
of new products would have an immediate adverse effect on the Company's
business, operating results and financial condition. In addition, the Company
has had negative gross margins since inception, and there can be no assurance
that any growth in revenues will result in positive gross margins or operating
profits.
The revenue and profit potential of the Company's business and industry are
unproven, and the Company's limited operating history makes its future
operating results difficult to predict. The Company has had limited experience
selling its products to cable operators and only a limited number of cable
operators have purchased the Company's products for commercial deployment. The
market for the Company's products has only recently begun to develop, is
rapidly changing and is characterized by an increasing number of competitors
and competing technologies, as well as evolving industry standards. See "--
Market Acceptance of Cable Modems; Competing Technologies," "--Dependence on
Small Number of Customers," "--Ability to Market Effectively to Cable
Operators," "--Highly Competitive Industry; Established Competitors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Fluctuations in Operating Results. The Company's quarterly revenues will be
difficult to predict due to a number of factors and the Company expects to
experience significant fluctuations in its operating results on a quarterly
and an annual basis for the foreseeable future. Revenues will vary depending
on the timing of orders and shipments. Orders by the same customer can vary in
size over time, depending on whether the Company's products are intended for
trial or commercial deployment purposes, and depending on the geographic area
covered by the customer's deployment. Customers that have forecast deployment
plans and product orders may delay orders for many customer-specific reasons,
such as changes in customer marketing plans, delays in completing any
infrastructure or billing system upgrades required to offer new services,
variations in capital spending budgets and delays in
5
<PAGE>
obtaining regulatory approval for commercial deployment. Customers also may
delay orders for industry-wide reasons such as the adoption of new
technologies by cable operators, telephone or wireless telecommunications
companies, or changes in U.S. and international regulations. For example, the
Company's product shipments to date to a customer in Brazil have been
significantly lower than anticipated due to delays in certain regulatory
approvals in Brazil. There can be no assurance that similar delays will not
occur in other countries in which the Company is marketing or planning to
market its products. Any such delays would have a material adverse effect on
the Company's operating results for a particular period. In addition, cable
operators in certain parts of Asia are required to obtain licenses prior to
deploying data services over cable, and delays in obtaining such licenses by
the Company's customers could have an adverse impact on the Company's
operating results for a particular period. Competitive factors may affect both
Company revenues and profitability. Customers may delay orders due to new
product announcements by the Company or its competitors. The Company's average
selling prices for its products may be lower than expected as a result of
competitive pricing pressures, the Company's promotional programs and
customers who negotiate price reductions in exchange for longer term purchase
commitments. The Company's expenses generally will vary from quarter to
quarter depending on the level of actual and anticipated business activities.
Research and development expenses will vary as the Company commences
development of new products and as development programs move to wafer
fabrication, which results in higher engineering expenses.
The timing and volume of customer orders are difficult to forecast because
cable operators require a long sales cycle before placing orders. In addition,
cable operators typically require delivery of products within 90 days.
Accordingly, the Company has a limited backlog of orders, and net sales for
any future quarter are difficult to predict. Supply, manufacturing or testing
constraints could result in delays in the delivery of the Company's products.
Further, sales generally are made pursuant to purchase orders, which can be
rescheduled, reduced or cancelled with little or no penalty. Any delay in the
product deployment schedule of one or more of the cable operators targeted by
the Company would have an adverse effect on the Company's operating results
for a particular period. In addition, due to the relatively large dollar size
of the Company's typical transaction, any delay in the closing of a
transaction could have a significant impact on the Company's operating results
for a particular period. See "--Limited Manufacturing Experience and
Dependence on Contract Manufacturer" and "--Lengthy Sales Cycle."
A variety of factors affect the Company's gross margin, including average
selling prices ("ASPs") of the Company's products, the sales mix of products,
type of distribution channel, the volume of products manufactured and cost
reduction measures. Historically, ASPs in the data communications industry
have decreased over the life of individual products and technologies. The
Company anticipates that unit ASPs of its products will decline in the future,
which could cause a decrease in the gross margins for these products. The
Company's gross margin also is affected by the sales mix of TeraLink 1000
Master Controllers, TeraLink Gateways and TeraPro cable modems, as the TeraPro
cable modems have significantly lower margins than the TeraLink 1000 Master
Controller and TeraLink Gateway headend products. The Company expects to
achieve only nominal margins on the TeraPro cable modems and expects that
sales of TeraPro cable modems will continue to constitute a significant
portion of its revenues for the foreseeable future. See "--Erosion of Average
Selling Prices" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
Market Acceptance of Cable Modems; Competing Technologies. The Company's
future success, operating results and financial condition will be
substantially dependent upon whether cable modems gain widespread commercial
acceptance by cable operators and end users of broadband access services.
Because cable operators have only recently begun to deploy broadband access
services based on cable modem technology, the market for services based on
such technology has not yet developed and the Company cannot accurately
predict the future growth rate, if any, or the ultimate size of the cable
modem market. Critical issues concerning the use of cable modems, including
security, reliability, cost,
6
<PAGE>
ease of deployment and administration, and Quality of Service, remain largely
unresolved and may adversely affect the Company's growth and the market
acceptance of its products. The market for cable modems may be affected by the
development of other technologies that enable the provisioning of broadband
access services. Examples of such technologies include technologies that
increase the efficiency of digital transmission over telephone companies'
existing copper infrastructure, such as various Digital Subscriber Line
technologies ("xDSL"), as well as Integrated Service Digital Network ("ISDN").
Similarly, broadband access services may be deployed over a number of other
media, including fiber optic cable, direct broadcast satellite ("DBS"), Local
Multipoint Distribution Service ("LMDS"), Multichannel Multipoint Distribution
Service ("MMDS") and other wireless technologies. Broadband access services
based on some of these competing technologies are already available and could
materially limit acceptance of cable modem-based services. The Company also
anticipates competition from all-digital systems, which may be offered from
telecommunication or other service providers, such as the recently announced
Integrated On-Demand Network from Sprint Corporation. The Company is unable to
predict the effect of all-digital networks on competition among service
providers who are introducing broadband access, and therefore the effect on
the Company. The failure of broadband access services based on cable modem
technology to gain widespread commercial acceptance by cable operators and end
users of broadband access services would have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Industry Background."
Evolving Market; Rapid Technological Change; Market Acceptance of S-
CDMA. The markets for the Company's products are characterized by rapid
technological change, evolving industry standards, changes in end-user
requirements and frequent new product introductions and enhancements, all of
which are outside the control of the Company. The Company believes that its
future success will depend upon its ability to enhance its existing products
and to develop and introduce new products that meet a wide range of evolving
cable operator end-user needs and achieve market acceptance. There can be no
assurance that the Company's potential customers, specifically cable
operators, will not adopt alternative technologies or deploy alternative
services that are incompatible with the Company's products, which would have a
material adverse affect on the Company's business, operating results and
financial condition.
The demand for broadband access services has resulted in the development of
several competing modulation techniques. The Company's products utilize a
proprietary modulation technique known as Synchronous Code Division Multiple
Access ("S-CDMA"), while several of the Company's competitors utilize
modulation technologies known as Time Division Multiple Access ("TDMA") and
Frequency Division Multiple Access ("FDMA"). The Company's headend equipment
and cable modem products currently are not interoperable with the headend
equipment and modems of other suppliers of broadband access products. As a
result, potential customers who wish to purchase broadband access products
from multiple suppliers may be reluctant to purchase the Company's products.
While the Company believes that S-CDMA offers superior capabilities over TDMA
and FDMA, there can be no assurance that major cable operators will adopt the
Company's proprietary modulation technology. If major cable operators do not
adopt products or technologies based on S-CDMA at all, or in the time frame
anticipated by the Company, or if they adopt technologies based on competing
modulation technologies rather than the Company's S-CDMA technology, the
Company's business, operating results and financial condition would be
materially adversely affected. Further, to the extent that competitors using
TDMA or FDMA modulation technologies can incorporate functionality and
capabilities currently found in S-CDMA, the value of the Company's proprietary
S-CDMA technology would be diminished. See "Business--Industry Background."
Ability to Achieve Cost Reductions. Certain of the Company's competitors
currently offer cable modems at prices lower than those of the Company's cable
modems. Market acceptance of the Company's products, and the Company's future
success, will depend in part on reductions in the unit
7
<PAGE>
cost of the Company's products. The Company expects that as headend equipment
becomes more widely deployed, the price of cable modems and other products
will decline. In particular, Company believes that the adoption of industry
standards such as Data Over Cable Service Interface Specifications ("DOCSIS")
will cause increased price competition for cable modems. However, there can be
no assurance that the Company will be able to reduce the cost of its modems
sufficiently to enable it to compete with other cable modem suppliers. While
the Company has initiated cost reduction programs to offset pricing pressures
on its products, there can be no assurance that these cost reduction efforts
will keep pace with competitive pricing pressures or lead to improved gross
margins. If the Company is unable to obtain cost reductions, its gross margin
and profitability will be adversely affected. Many of the Company's
competitors are larger and manufacture products in significantly greater
quantities than the Company intends to for the foreseeable future.
Consequently, such competitors are likely to have more leverage in obtaining
favorable pricing from suppliers and manufacturers. In order to remain
competitive, the Company expects that it will have to significantly reduce the
cost of manufacturing its cable modems through design and engineering changes.
Reductions in such manufacturing costs will require the Company to utilize
more highly integrated components in future products and may require the
Company to enter into high volume or long-term purchase or manufacturing
agreements. For example, the Company has developed and intends to introduce a
single-board modem by the end of 1998, which the Company anticipates will
provide cost savings over its current dual-board modem. There can be no
assurance that the Company will be successful in redesigning its products,
that any such redesign will be made on a timely basis and without introducing
significant errors and product defects, or that any such redesign, including
the single board modem, would result in sufficient cost reductions to allow
the Company to significantly reduce the list price of its products or improve
its gross margin. Moreover, there can be no assurance that volume purchase or
manufacturing agreements will be available on terms that the Company considers
acceptable. To the extent that the Company enters into a high volume or long-
term purchase or manufacturing agreement and then decides that it cannot use
the products or services offered by such agreement, the Company's business,
operating results or financial condition could be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
Limited Manufacturing Experience and Dependence on Contract Manufacturer. In
the first quarter of 1998, the Company commenced volume shipments of its
products and transitioned its manufacturing operations from CMC California,
Inc. ("CMC") to Solectron Corporation ("Solectron"). The Company recorded a
charge of $1.3 million for that quarter, relating to the write-off of obsolete
inventory and the transition of manufacturing operations to a new contract
manufacturer. Any interruption in Solectron's operations could adversely
affect the Company's ability to meet its scheduled product deliveries to
customers. The Company has had only limited experience manufacturing its
products to date, and there can be no assurance that the Company, Solectron or
any other manufacturer of the Company's products will be successful in
increasing the volume of its manufacturing efforts. In addition, given the
Company's lack of manufacturing experience, together with the complexity of
the manufacturing process, there can be no assurance that the Company will not
encounter difficulty in manufacturing its products in volume. The Company's
limited operating history and the early stage of the cable modem market make
it difficult for the Company to accurately forecast demand for its products.
The Company's inability to accurately forecast the actual demand for its
products could result in supply, manufacturing or testing capacity
constraints. Such constraints could result in delays in the delivery of the
Company's products or the loss of existing or potential customers, either of
which could have a material adverse effect on the Company's business,
operating results or financial condition. See "Business--Manufacturing."
Dependence on Component Availability and Key Suppliers. The Company
manufactures all of its products using components or subassemblies procured
from third-party suppliers. Certain of these components are available from a
single source and others are available from limited sources. In addition, some
of the components are custom parts produced to the Company's specifications.
For example, the Company currently relies on VLSI Technology, Inc. ("VLSI") to
supply a custom ASIC that is used in its products. Other components, such as
the radio frequency ("RF") tuner and some surface acoustic wave
8
<PAGE>
filters are procured from sole source suppliers. Any interruption in the
operations of vendors of sole sourced parts could adversely affect the
Company's ability to meet its scheduled product deliveries to customers. There
can be no assurance that delays in key component or product deliveries will
not occur in the future due to shortages resulting from a limited number of
suppliers, the financial or other difficulties of such suppliers or the
possible limitation in component product availability due to significant
worldwide demand for such components. For example, in the second half of 1997,
the Company did not receive the full shipment of modems anticipated from its
subcontract manufacturer because of problems experienced with one component
that was not functioning according to its specifications. There can be no
assurance that the Company will not experience similar supply problems in the
future. In addition, all of the Company's sales are from products containing
one or more components that are available from single supply sources. The
Company also is dependent on semiconductor manufacturers and is affected by
worldwide conditions in the semiconductor market. If the Company were unable
to obtain a sufficient supply of components from its current sources, it could
experience difficulties in obtaining alternative sources or in altering
product designs to use alternative components. Resulting delays or reductions
in product shipments could damage customer relationships and could adversely
affect the Company's business, operating results or financial condition.
Further, a significant increase in the price of one or more of these
components could have a material adverse effect on the Company's gross margin
or operating results. See "Business--Manufacturing."
Transition to New Manufacturing Process Technologies. The Company's future
success will depend in part upon its ability to develop products that utilize
new manufacturing process technologies. Manufacturing process technologies are
subject to rapid change and require significant expenditures for research and
development. The Company continuously evaluates the benefits of redesigning
its integrated circuits using smaller geometry process technologies in order
to improve performance and reduce costs. The Company believes that the
transition of its products to integrated circuits with increasingly smaller
geometries will be important to its competitive position. Other companies have
experienced difficulty in migrating to new manufacturing processes and,
consequently, have suffered reduced yields, delays in product deliveries and
increased expense levels. Moreover, the Company is dependent on its
relationships with its third-party manufacturers to migrate to smaller
geometry processes successfully. There can be no assurance that the Company
will be able to migrate to new manufacturing process technologies successfully
or on a timely basis. Any such failure by the Company could have a material
adverse effect on its business, operating results or financial condition.
Dependence on Contract Manufacturer for Assembly and Testing. Substantially
all of the Company's products are assembled and tested by Solectron using
testing equipment produced by the Company. As a result of its dependence on
Solectron for assembly and testing of its products, the Company does not
directly control product delivery schedules or product quality. Any product
shortages or quality assurance problems could increase the costs of
manufacture, assembly or testing of the Company's products and could have a
material adverse effect on the Company's business, financial condition or
results of operation. In addition, as manufacturing volume increases, the
Company will need to procure and assemble additional testing equipment and
provide it to Solectron. Due to the amount of time typically required to
produce and assemble the testing equipment, the Company could experience
significant delays in the shipment of its products if it is unable to provide
such testing equipment to Solectron in a timely manner. Any delays in delivery
of the Company's products could have a material adverse effect on the
Company's business, operating results or financial condition. See "Business--
Manufacturing."
Evolving Industry Standards. Market acceptance of the Company's products may
be affected by the emergence and evolution of industry standards. Standards
efforts currently under way include those of the Digital Audio Video
Interactive Council ("DAVIC") in Europe and, in the United States, the
Institute of Electrical and Electronic Engineers ("IEEE") 802.14 Committee and
the Multimedia Cable Network System ("MCNS") consortium. MCNS, a consortium of
top cable operators in the U.S. and
9
<PAGE>
Canada, has been dominant in establishing cable modem standards. MCNS has
created a cable modem standard based on TDMA technology contributed by
multiple vendors to a royalty-free intellectual property pool. This standard,
known as DOCSIS, was completed in mid-1997 and was adopted as an international
standard by the International Telecommunications Union in March 1998. While no
company currently is offering DOCSIS-compliant products, current estimates
from the industry and vendors predict that products based on the DOCSIS
standard will begin to appear in mid-1998. The Company is developing a next-
generation product, the Universal Cable Modem ("UCM"), to be compliant with
the DOCSIS standard. There can be no assurance that the Company will develop
an DOCSIS-compliant product at all or in a timely manner. The Company believes
that the broad adoption of DOCSIS will cause increased competition in the
North American market, which is likely to negatively affect the Company's
gross margin. There can be no assurance that competitors will not develop
DOCSIS-compliant products more quickly than the Company. Current customers of
the Company that move to the DOCSIS platform could choose alternative cable
modem suppliers or choose to purchase DOCSIS-compliant cable modems from
multiple suppliers. Further, there can be no assurance that the DOCSIS
standard will gain industry-wide acceptance. If the Company fails to deliver a
DOCSIS-compliant product by the time DOCSIS gains industry-wide acceptance or
if DOCSIS does not gain industry-wide acceptance, the Company's business
operating results or financial condition could be adversely affected.
In addition to the current DOCSIS standard, the MCNS consortium has begun
work on DOCSIS 2.0, a next-generation standard that is intended to enhance the
current standard to include functionality already found in S-CDMA. The Company
is actively working with MCNS, and other standards committees such as the IEEE
802.14 Committee, to advocate the inclusion of S-CDMA as the platform for
DOCSIS 2.0. There can be no assurance that the Company will be successful in
advocating S-CDMA's use in the next-generation standard. If the next-
generation standard emerges without S-CDMA as its platform, and if the
standard emerges based on competing modulation technologies, S-CDMA could be
isolated as a proprietary technology and the Company's business, operating
results and financial condition would be materially adversely affected.
Dependence on Small Number of Customers. The Company's sales are highly
concentrated, with three customers accounting for approximately 73% of the
Company's revenues in 1997 and three customers accounting for approximately
62% of the Company's revenues in the first quarter of 1998. In 1997, sales to
Telegate Ltd. ("Telegate"), Sumitomo Corporation ("Sumitomo") and NET Brasil
S.A. ("NET Brasil") represented approximately 30%, 29% and 14%, respectively,
of the Company's total revenues. In the first quarter of 1998, sales to Shaw
Communications Inc. ("Shaw"), Sumitomo and Telegate represented approximately
37%, 13% and 12%, respectively, of the Company's total revenues. The Company
believes that a substantial majority of its revenues will continue to be
derived from sales to a relatively small number of customers for the
foreseeable future. In addition, the Company believes that sales to these
customers will be focused on a small number of projects. Ten cable operators
in the United States own and operate facilities passing approximately 74% of
total homes passed in 1997. Due to the concentration of the Company's market,
any reduction, delay or loss of orders from a significant customer or
customers would have a material adverse effect on the Company's business,
operating results and financial condition. Major customers also are likely to
have significant negotiating leverage and may attempt to change the terms,
including pricing, upon which the Company and such customers do business. In
addition, these customers may require longer payment terms than the Company
has anticipated, which could require the Company to raise additional capital
to meet its working capital requirements. There can be no assurance that any
such capital would be available to the Company as required on reasonable terms
or at all.
The Company markets its products to cable operators in the United States and
internationally. Due to the consolidation affecting the cable industry, with a
limited number of cable operators controlling an increasing number of cable
systems, the Company believes that its sales will be largely dependent upon
product acceptance by leading cable operators. If the Company's products are
not widely deployed, its
10
<PAGE>
business, operating results and financial condition will be materially
adversely affected. The Company's ability to increase its revenues in the
future will also depend in part upon its ability to make sales to new
customers. In the event that such sales do not occur, or if one or more of the
Company's customers elect to purchase and market competing technologies or
products, the Company's business, operating results and financial condition
would be adversely affected.
Dependence on Cable Operators and Other Service Providers. The Company
depends on cable operators to purchase its cable modem systems and to provide
its cable modems to end users. Cable operators have a limited amount of
available bandwidth over which they can offer robust data services, and there
can be no assurance that they will choose to provide Internet access. If cable
operators choose to provide such services, the Company will also be dependent
on them to market such services to cable customers, to install the Company's
equipment and to provide support to end-users. In addition, the Company will
be highly dependent on cable operators to continue to maintain their cable
infrastructure in such a manner that the Company will be able to provide
consistently high performance and reliable services. The Company's success
will also be dependent upon the acceptance of its products by other providers
of services to the cable industry, such as At Home Corporation ("@Home") and
Time Warner Cable's Road Runner ("Road Runner"). If cable operators and other
cable system service providers are unable to provide robust, high performance
and reliable services, the Company's business, operating results and financial
condition could be materially adversely affected. See "Business--Industry
Background" and "--Customers."
Dependence on the Cable Industry to Upgrade to Two-Way Cable
Infrastructure. Demand for the Company's products will depend to a significant
degree upon the magnitude and timing of capital spending by cable operators
for implementation of access systems for data transmission over cable
networks. This involves the enabling of two-way transmission over existing
coaxial cable networks and the eventual upgrade to HFC in areas of higher
penetration of data services. In addition, few businesses in the United States
currently have cable access. There can be no assurance that cable operators
will choose to upgrade existing residential cable systems or install new cable
systems to serve business locations. The success and future growth of the
Company's business will also be subject to economic and other factors
affecting the cable television industry generally, particularly its ability to
finance substantial capital expenditures. The capital spending patterns of
cable operators are dependent on a variety of factors, including availability
of financing, cable operators' annual budget cycles, the status of federal,
local and foreign government regulation and deregulation, overall demand for
cable services, competitive pressures (including the availability of
alternative data transmission and access technologies), discretionary consumer
spending patterns and general economic conditions. The failure of cable
operators to complete these upgrades in a timely and satisfactory manner, or
at all, would limit the market for the Company's products and would have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, cable spending can be subject to the effects
of seasonality, with fewer upgrade projects typically occurring in the winter
months. Capital spending levels in the cable industry in the United States
have fluctuated significantly in the past, and the Company believes that such
fluctuations will occur in the future. In recent periods, the United States
cable market has been characterized by the acquisition of smaller and
independent cable operators by large cable operators. The Company is unable to
predict the effect, if any, that consolidation in the United States cable
industry will have on overall capital spending patterns by cable operators.
The effect on the Company of further industry consolidation also is uncertain.
See "Business--Industry Background."
Ability to Market Effectively to Cable Operators. The Company believes that
its growth and future success will be substantially dependent upon its ability
to convince cable operators to adopt the Company's technologies, purchase the
Company's products and effectively market the Company's products to end users.
Cable operators are likely to prefer purchasing products from established
manufacturing companies that can demonstrate the capability to supply large
volumes of products on short notice. In addition, many cable operators may be
reluctant to adopt technologies that have not
11
<PAGE>
gained acceptance among other cable operators, and such reluctance could
result in lengthy product testing and acceptance cycles for the Company's
products. Consequently, the impediments to the Company's initial sales may be
even greater than those to later sales, if any. No established distribution
network in the cable modem industry exists that would provide easy access by
the Company to smaller or geographically diverse cable operators. Therefore,
the Company's initial sales to larger, more established cable operators are
critical to the Company's business. Although the Company intends to establish
strategic relationships with leading distributors worldwide, there can be no
assurance that Company will be successful in establishing such relationships
or that such distributors will be successful in marketing the Company's
products to cable operators. Some competitors of the Company have already
established relationships with certain cable operators, such as Motorola
Inc.'s ("Motorola") relationships with Tele-Communications, Inc. ("TCI"), Time
Warner Cable, Comcast Corporation and Cox Communications, Inc., which may
further limit the Company's ability to sell products to such cable operators.
It is likely that any such sales to cable operators will not be based on long-
term contracts and that such customers will be able to terminate their
relationships with the Company at any time. If the Company is unable to market
and sell its products to a significant number of cable operators, or if one or
more of the Company's current customers should cancel any relationship with
the Company, the Company's business, operating results and financial condition
would be materially adversely affected. See "Business--Strategy," "--
Customers" and "--Sales and Marketing."
Dependence on Products Under Development. The Company's future success will
depend in part on its ability to develop, introduce and market new products or
enhancements to existing products in a timely manner and to respond to
competitive pressures, evolving industry standards or technological advances.
For example, in November 1997, the Company announced the planned development
of its next-generation product, the UCM. The UCM is in the early stages of
design and development, and the Company does not anticipate shipment until
1999. The current design of the UCM requires ASIC fabrication at 0.2 micron
line widths, which has only recently been used by wafer fabrication facilities
for commercial production, increasing the risk that the Company's
semiconductor device will require a time-consuming redesign at a larger
geometry. The failure of the UCM or other future products to perform
acceptably in testing and development could result in major engineering
changes, increased development costs and significant delays in market
introduction. In addition, it is possible that customers may delay purchasing
the Company's current products in favor of next-generation products, which
would have an adverse impact on the Company's operating results in the near
term. There can be no assurance that the Company's engineering and product
design efforts will be successful or that the Company will be successful in
developing new products or commercializing its current or any future products.
Any failure to release new products or to upgrade or redesign products on a
timely basis could have a material adverse effect on the Company's business,
operating results or financial condition. See "--Transition to New
Manufacturing Process Technologies" and "Business--Products."
Erosion of Average Selling Prices. The cable equipment systems industry has
been characterized, and is likely to continue to be characterized by, erosion
of average selling prices due to a number of factors, including competition,
rapid technological change and price performance enhancements. The Company
anticipates that ASPs and gross margins for its products will decrease over
product life cycles, due to competitive pressures and volume pricing
agreements. Decreasing ASPs could cause the Company to experience decreased
revenue even though the number of units sold could increase. As a result, the
Company may experience substantial period-to-period fluctuations in future
operating results due to ASP erosion. Therefore, the Company must continue to
develop and introduce on a timely basis next-generation products with enhanced
functionalities that could be sold at higher gross margins. Failure to achieve
the foregoing could cause the Company's revenue and gross margin to decline,
which would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
12
<PAGE>
Ability to Provide Customer Support. The Company's ability to achieve its
planned sales growth and retain current and future customers will depend in
part upon the quality of its customer support operations. The Company's
customers generally require significant support and training with respect to
the Company's TeraComm system, particularly in the initial deployment and
implementation stage. To date, the Company has sold a limited number of
products, and such sales have been concentrated in a small number of
customers. The Company does not have any experience with widespread deployment
of its products to a diverse customer base, and there can be no assurance that
it will have adequate personnel to provide the levels of support that its
customers may require during initial product deployment or on an ongoing
basis. An inability to provide sufficient support to its customers could delay
or prevent the successful deployment of the Company's products. In addition,
failure to provide adequate support could have an adverse impact on the
Company's reputation and relationship with its customers, could prevent the
Company from gaining new customers and could have a material adverse effect on
the Company's business, operating results or financial condition. See
"Business--Customer Service and Technical Support."
Need to Develop Additional Distribution Channels. The Company presently
markets its products to cable operators and systems integrators. The Company
believes that much of the North American cable modem market may shift to a
retail distribution model. Accordingly, the Company anticipates that it may
need to redirect its marketing efforts in the future to sell its modems
directly to retail distributors and end users, which would require the
establishment of new distribution channels for its products. There can be no
assurance that the Company will be able to establish such additional
distribution channels or that, if the Company does establish additional
channels, it will have the capital required or the ability to hire the
additional personnel necessary to foster and enhance such distribution
channels. In addition, if the cable modem market shifts to a retail
distribution model, there can be no assurance that the Company will
successfully establish a retail distribution presence. Failure by the Company
to establish such distribution channels could have a material adverse affect
on the Company's business, operating results or financial condition. To the
extent that large consumer electronics companies enter the cable modem market,
their well established retail distribution capabilities would provide them
with a significant competitive advantage.
Lengthy Sales Cycle. The sales cycle associated with the Company's products
is typically lengthy, often lasting six months to a year. The Company's
customers typically conduct significant technical evaluations of competing
technologies and early-stage trials prior to the commitment of capital and
other resources. In addition, customers' internal procedures required to
approve large capital expenditures and test, accept and deploy new
technologies often delay purchasing decisions. Sales also generally are
subject to customer trials, which typically last three months. Because of the
lengthy sales cycle and the large size of customers' orders, if orders
forecasted for a specific customer for a particular quarter do not occur in
that quarter, the Company's operating results for that quarter could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
Highly Competitive Industry; Established Competitors. The market for
broadband access systems is extremely competitive and is characterized by
rapid technological change. The Company's direct competitors in the cable
modem arena include Bay Networks, Inc. ("Bay Networks"), Com21, Inc.
("Com21"), Hayes Microcomputer Products, Inc. ("Hayes"), Hybrid Networks, Inc.
("Hybrid"), Matsushita Electric Industrial Co., Ltd. (which markets products
under the brand name "Panasonic") ("Matsushita"), Motorola, Phasecom Inc.,
Thomson Consumer Electronics, Inc. (which markets products under the brand
name "RCA"), Samsung Corporation ("Samsung"), Scientific-Atlanta, Inc.
("Scientific-Atlanta"), Sony Corporation ("Sony"), 3Com Corporation ("3Com"),
Toshiba Corporation ("Toshiba") and Zenith Electronics Corporation ("Zenith"),
and there are many other potential market entrants. In addition, Bay Networks,
Com21, Hybrid and Motorola introduced cable modems prior to the Company, and
have established relationships and have worked with customers for a longer
period of time than the
13
<PAGE>
Company. The principal competitive factors in this market include: product
performance, features and reliability; price; size and stability of
operations; breadth of product line; sales and distribution capability;
technical support and service; relationships with cable operators; standards
compliance; and general industry and economic conditions. Certain of these
factors are outside of the Company's control. The existing conditions in the
broadband access market could change rapidly and significantly as a result of
technological changes, and the development and market acceptance of
alternative technologies could decrease the demand for the Company's products
or render them obsolete. There can be no assurance that these companies and
other competitors will not introduce broadband access products that will be
less costly or provide superior performance or achieve greater market
acceptance than the Company's products.
The Company sells products that also compete with existing data access and
transmission systems utilizing the telecommunications networks, such as those
of 3Com. Additionally, the Company's controller and headend system products
face intense competition from well-established companies such as Bay Networks,
Cisco Systems, Inc. ("Cisco") and 3Com. Many of the Company's current and
potential competitors have significantly greater financial, technical,
marketing, distribution, customer support and other resources, as well as
greater name recognition and access to customers than the Company. The
anticipated widespread adoption of DOCSIS is likely to cause increased price
competition in the North American market. Further, such adoption could result
in lower sales of headend products by the Company in the North American
market. Any such increased price competition or reduction in sales of headend
products would result in downward pressure on the Company's gross margin,
which could have a material adverse effect on the Company's business,
operating results or financial condition. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that the competitive pressures faced by the Company will not
have a material adverse effect on its business, operating results and
financial condition. See "--Market Acceptance of Cable Modems; Competing
Technologies."
Dependence on Effective Management of Growth. The growth in the Company's
business has placed, and is expected to continue to place, a significant
strain on the Company's limited personnel, management and other resources.
There can be no assurance that the Company's management, personnel, systems,
procedures and controls will be adequate to support the Company's existing and
future operations. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate, manage and retain
employees successfully, to integrate new employees into its overall operations
and to continue to improve its operational, financial and management systems.
The Company has hired certain key employees and officers only recently,
including its Vice President, Manufacturing Operations, and the Company filled
the position of Chief Operating Officer in February 1998. The failure to
manage its growth effectively could have a material adverse effect on the
Company's business, operating results or financial condition. See "Business--
Employees" and "Management."
Dependence on the Internet and Internet Infrastructure Development. The
commercial market for products designed for the Internet has only recently
begun to develop, and the Company's success will depend in large part on
increased use of the Internet to increase the need for high speed broadband
access networks. Critical issues concerning the commercial use of the
Internet, including security, reliability, cost, ease of access and quality of
service, remain unresolved and are likely to affect the development of the
market for the Company's products. The adoption of the Internet for commerce
and communications, particularly by enterprises that have historically relied
upon alternative means of commerce and communications, generally requires the
acceptance of a new method of conducting business and exchanging information.
In addition, the Company is dependent on the growth of the use of the Internet
by businesses, particularly for applications that utilize multimedia content
and thus require high bandwidth. The recent growth in the use of the Internet
has caused frequent periods of performance degradation, requiring the upgrade
of routers, telecommunications links and other components forming the
infrastructure of the Internet by Internet service providers and other
14
<PAGE>
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of the
Company's products. Potentially increased performance provided by the products
of the Company and others is ultimately limited by and reliant upon the speed
and reliability of the Internet backbone itself. Consequently, the emergence
and growth of the market for the Company's products will be dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. If the Internet as a commercial or business medium
fails to develop or develops more slowly than expected, the Company's business,
operating results and financial condition could be materially adversely
affected. See "Business--Industry Background."
Risks of Product Returns, Product Liability and Product Defects. Products as
complex as those offered by the Company frequently contain undetected errors or
failures, especially when first introduced or when new versions are released.
There can be no assurance that, despite testing by the Company, errors will not
occur. The occurrence of such errors could result in product returns and other
losses to the Company or its customers. Such occurrence could also result in
the loss of or delay in market acceptance of the Company's products, which
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company's products generally carry a one-
year warranty that includes factory and on-site repair services as needed for
replacement of parts. Due to the recent introduction of the Company's products,
the Company has limited experience with the problems that could arise with this
generation of products. The Company's purchase agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims, however, it is possible that the limitation
of liability provision contained in the Company's purchase agreements may not
be effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions in the United States or other countries.
Although the Company has not experienced any product liability claims to date,
the sale and support of the Company's products entails the risk of such claims.
In addition, any failure by the Company's products to properly perform could
result in claims against the Company by its customers. The Company maintains
insurance to protect against certain claims associated with the use of its
products, but there can be no assurance that its insurance coverage would
adequately cover any claim asserted against the Company. A successful claim
brought against the Company that is in excess of, or excluded from, its
insurance coverage, could have a material adverse effect on the Company's
business, operating results or financial condition. In addition, even claims
that ultimately are unsuccessful could result in the Company's expenditure of
funds in litigation and management time and resources. There can be no
assurance that the Company will not be subject to material claims in the
future, that such claims will not result in liability in excess of its
insurance coverage, that the Company's insurance will cover such claims or that
appropriate insurance will continue to be available to the Company in the
future at commercially reasonable rates.
Dependence on Proprietary Technology; Protection of Intellectual Property
Rights. The Company relies on a combination of patent, trade secret, copyright
and trademark laws and contractual restrictions to establish and protect
proprietary rights in its products. There can be no assurance that the
Company's patent applications will be granted or, if granted, that the claims
covered by the patents will not be reduced from those included in the Company's
applications. Any patent might be subject to challenge in court and, whether or
not challenged, might not be sufficiently broad to prevent third parties from
developing equivalent technologies or products. The Company has entered into
confidentiality and invention assignment agreements with its employees, and
enters into non-disclosure agreements with certain of its suppliers,
distributors and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that these statutory
and contractual arrangements will prove sufficient to prevent misappropriation
of the Company's technology or to deter independent third-party development of
similar technologies. In addition, the laws of certain foreign countries might
not protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States, and protection of such intellectual
property might not be available in every country in which the Company's
products might be manufactured, marketed or sold.
15
<PAGE>
The Company expects that developers of cable modems will increasingly be
subject to infringement claims as the number of products and competitors in
the Company's industry segment grows. The Company has received a letter from
an individual claiming that the Company's technology infringes a patent held
by such individual. The Company has reviewed the allegations made by such
individual and, after consulting with its patent counsel, does not believe
that the Company's technology infringes any valid claim of such individual's
patent. There can be no assurance that, if the issue were to be submitted to a
court, such a court would not find that the Company's products infringe the
patent, nor that the individual will not continue to assert infringement. If
the Company is found to have infringed such individual's patent, the Company
could be subject to substantial damages and/or an injunction preventing it
from conducting its proposed business. In addition, there can be no assurance
that other third parties will not assert infringement claims against the
Company in the future. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such
royalty or licensing agreements may not be available on terms acceptable to
the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition. Litigation may
also be necessary to enforce the Company's intellectual property rights. Any
infringement claim or other litigation against or by the Company could have a
material adverse effect on the Company's business, operating results or
financial condition. See "Business--Technology" and "--Intellectual Property."
Risks of Doing Business in International Markets. Sales to customers outside
of the United States accounted for approximately 88% and 90% of revenues in
1997 and the first quarter of 1998, respectively, and the Company expects
sales to customers outside of the United States to continue to represent a
significant percentage of the Company's revenues for the foreseeable future.
International sales are subject to a number of risks, including changes in
foreign government regulations and communications standards, export license
requirements, tariffs and taxes, other trade barriers, difficulty in
collecting accounts receivable, difficulty in managing foreign operations and
political and economic instability. To the extent the Company's customers may
be impacted by currency devaluations or general economic crises such as the
economic crisis currently affecting many Asian and Latin American economies,
the ability of such customers to purchase the Company's products could be
materially adversely affected. Payment cycles for international customers are
typically longer than those for customers in the United States. There also can
be no assurance that foreign markets for the Company's products will not
develop more slowly than currently anticipated. Foreign countries may decide
not to construct cable infrastructure, place moratoria on building cable
plants or terminate or delay construction of such facilities for a variety of
reasons, including environmental issues, economic downturns, the availability
of favorable pricing for other communications services or the availability and
cost of related equipment. Any such action by foreign countries would reduce
the market for the Company's products, which would materially adverse affect
the Company's business, operating results and financial condition.
The Company anticipates that its foreign sales generally will be invoiced in
U.S. dollars and, accordingly, the Company currently does not plan to engage
in foreign currency hedging transactions. However, as the Company commences
and expands its international operations, it may be paid in foreign currencies
and exposure to losses in foreign currency transactions may increase. The
Company may choose to limit such exposure by the purchase of forward foreign
exchange contracts or through similar hedging strategies. There can be no
assurance that any currency hedging strategy would be successful in avoiding
exchange-related losses. In addition, if the relative value of the U.S. dollar
in comparison to the currency of the Company's foreign customers should
increase, the resulting effective price increase of the Company's products to
such foreign customers could result in decreased sales, which could have a
material adverse impact on the Company's business, operating results and
financial condition. See "Business--Customers."
16
<PAGE>
Dependence on Key Personnel; Competitive Market for Personnel. Due to the
specialized nature of the Company's business, the Company is highly dependent
on the continued service of, and on the ability to attract and retain,
qualified engineering, sales, marketing and senior management personnel,
particularly the Company's Chairman, President and Chief Technical Officer,
Shlomo Rakib, and its Chief Executive Officer and Chief Financial Officer,
Zaki Rakib. The competition for such personnel is intense and the loss of any
such persons would have a material adverse effect on the Company's business
and operating results. In addition, an inability to hire additional qualified
personnel as needed could impair the Company's ability to adequately manage
and complete its existing sales commitments and to bid for and execute
additional sales. Further, the Company must train and manage its growing
employee base, which is likely to require increased levels of responsibility
for both existing and new management personnel. There can be no assurance that
the management personnel and systems currently in place will be adequate or
that the Company will be able to assimilate new employees successfully. Highly
skilled employees with the education and training required by the Company,
especially employees with significant experience and expertise in both data
networking and radio frequency design, are in high demand. There can be no
assurance that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. The Company
does not have "key person" insurance coverage for the loss of any of its
employees. Any officer or employee of the Company can terminate his or her
relationship with the Company at any time. See "Business--Employees" and
"Management."
Significant Future Capital Requirements. The Company will require
substantial capital resources to continue to develop, manufacture and market
its products, to expand its product line and to fund its future operations.
The Company's future capital requirements will depend on many factors,
including, but not limited to, the evolution of the market for broadband
access systems, the market acceptance of the Company's products, competitive
pressure on the price of the Company's products, the levels at which the
Company maintains inventory, the levels of promotion and marketing required to
launch such products and attain a competitive position in the marketplace, the
extent to which the Company invests in new technology and improvements on its
existing technology, and the response of competitors to the Company's
products. The Company also may require additional capital resources to enter
into corporate partnerships, strategic alliances or joint ventures. There can
be no assurance that such financing will be available when needed, if at all,
or on terms favorable to the Company. Any additional equity financings will be
dilutive to stockholders, and debt financings, if available, will affect
operating results and may require the Company to agree to restrictive
covenants. Failure to generate or raise sufficient funds may require the
Company to delay or abandon some or all of its planned future expansion or
expenditure, which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Regulation of the Communications Industry. The Company and its customers are
subject to varying degrees of federal, state and local regulation. The
jurisdiction of the Federal Communications Commission ("FCC") extends to the
communications industry, including broadband access products such as those of
the Company. The FCC has promulgated regulations that, among other things, set
installation and equipment standards for communications systems. Although FCC
regulations and other governmental regulations have not materially restricted
the Company's operations, there can be no assurance that future regulations
adopted by the FCC or other regulatory bodies will not have a material adverse
effect on the Company. Further, regulation of the Company's customers may
adversely impact the Company's business, operating results and financial
condition. For example, FCC regulatory policies affecting the availability of
cable services and other terms on which cable companies conduct their
business, may impede the Company's penetration of certain markets. In
addition, regulation of cable television rates may affect the speed at which
cable operators upgrade their cable infrastructures to two-way HFC. Changes
in, or the failure by the Company to comply with, applicable domestic and
international regulations could have a material adverse effect on the
Company's business, operating
17
<PAGE>
results and financial condition. In addition, the increasing demand for
communications systems has exerted pressure on regulatory bodies worldwide to
adopt new standards for such products and services, generally following
extensive investigation of and deliberation over competing technologies. The
delays inherent in this governmental approval process have in the past, and
may in the future, cause the cancellation, postponement or rescheduling of the
installation of communications systems by the Company's customers, which in
turn may have a material adverse effect on the sale of products by the Company
to such customers.
If other countries begin to regulate the cable modem industry more heavily
or introduce standards or specifications with which the Company's products do
not comply, the Company will be unable to offer products in those countries
until its products comply with such standards or specifications and the
Company may have to incur substantial costs in order to comply with such
standards or specifications. For instance, should the DAVIC standards for ATM-
based digital video be established internationally, the Company will be
required to conform its cable modems in order to compete. Further, many
countries do not have regulations for installation of cable modem systems or
for upgrading existing cable network systems to accommodate the Company's
products. Whether the Company currently operates in such a country or enters
into the market in a country where no such regulations exist, there can be no
assurance that such regulations will not be proposed at any time, and if
imposed, that they would not place limitations on the country's cable
operators' ability to upgrade to support the Company's products. There can be
no assurance that the cable operators in such countries would be able to
comply with such regulations or that compliance with such regulations would
not require a long, costly process.
For example, the Company experienced delays in product shipments to a
customer in Brazil due to delays in certain regulatory approvals in Brazil,
and there can be no assurance that similar delays will not occur in other
countries in which the Company markets or plans to market its products. In
addition, the Company's customers in certain parts of Asia, such as Japan, are
required to obtain licenses prior to selling the Company's products, and
delays in obtaining such licenses could have an adverse impact on the
Company's operating results. See "Business--Regulation."
Other Regulatory Approvals or Certifications. In the United States, in
addition to complying with FCC regulations, the Company's products will be
required to meet certain safety requirements. For example, the Company will be
required to have its products certified by Underwriters Laboratory ("UL") in
order to meet federal requirements relating to electrical appliances to be
used inside the home. Outside of the United States, the Company's products
will be subject to the regulatory requirements of each country in which the
products are manufactured or sold. These requirements are likely to vary
widely, and there can be no assurance that the Company will be able to obtain
on a timely basis or at all such regulatory approvals as may be required for
the manufacture, marketing and sale of its products. In addition to regulatory
compliance, some cable industry participants may require certification of
compatibility. Any delay in or failure to obtain such approvals or
certifications could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Regulation."
Year 2000 Compliance. Many existing computer systems and applications and
other control devices use only two digits to identify a year in the date
field, without considering the impact of the upcoming change in the century.
As a result, in less than two years, computer systems and applications used by
many companies may need to be upgraded to comply with Year 2000 requirements.
Significant uncertainty exists in the computer industry concerning the
potential effects associated with such compliance. The Company relies on
computer systems in operating and monitoring many significant aspects of its
business, including financial systems (such as general ledger, accounts
payable, accounts receivable, inventory and order management), customer
services, infrastructure and network and telecommunications equipment. The
Company also relies directly and indirectly on the systems of external
business enterprises such as customers, suppliers, creditors, financial
organizations and domestic
18
<PAGE>
and international governments. The Company currently estimates that its costs
associated with Year 2000 compliance, including any costs associated with the
consequences of incomplete or untimely resolution of Year 2000 compliance
issues, will not have a material adverse effect on the Company's business,
financial condition or results of operations in any given year. However, the
Company has not extensively investigated and does not believe that it has
fully identified the impact of Year 2000 compliance and has not concluded that
it can resolve any issues that may arise in connection with Year 2000
compliance without disruption of its business or without incurring significant
expense. In addition, even if the Company's internal systems are not
materially affected by Year 2000 compliance issues, the Company could be
affected through disruption in the operation of the enterprises with which the
Company interacts. There can be no assurance that the Company's products will
be Year 2000 compliant, that third-party products with which the Company's
products interface will be Year 2000 compliant or that any changes to third-
party products made in response to Year 2000 compliance issues will not render
the Company's products incompatible with such third-party products.
Control by Existing Stockholders and Management. Following the closing of
this offering, the Company's directors, officers and their respective
affiliates will beneficially own approximately % of the Company's
outstanding Common Stock ( % on a fully diluted basis). As a result, the
Company's directors, officers and their respective affiliates, if they voted
together, would be able to exercise significant influence over the election of
members of the Company's Board of Directors and other corporate actions
requiring stockholder approval have a significant impact on the management and
direction of the Company. See "Principal Stockholders."
Management's Broad Discretion Over Use Of Proceeds of the Offering. The
Company currently has no specific plans for a significant portion of the net
proceeds of this offering. Consequently, the Company's management will have
the discretion to allocate the net proceeds to uses that stockholders may not
deem desirable, and there can be no assurance that the net proceeds can or
will be invested to yield a significant return. Substantially all of the
proceeds of the offering will be invested in short-term, interest-bearing,
investment grade securities for an indefinite period of time. See "Use of
Proceeds."
Absence of Prior Trading Market; Potential Volatility of Stock Price. Prior
to this offering, there has been no public market for the Common Stock. There
can be no assurance that an active trading market will develop or, if one
develops, that it will be maintained. The initial public offering price of the
Common Stock will be established by negotiation among the Company and the
Underwriters. See "Underwriting" for factors to be considered in determining
the initial public offering price. The market price of the shares of Common
Stock could be subject to significant fluctuations in response to the
Company's operating results and other factors, including general economic and
market conditions. In addition, the stock market in recent years has
experienced and continues to experience extreme price and volume fluctuations,
which have affected the market price of the stock of many companies and which
have often been unrelated or disproportionate to the operating performance of
these companies. These fluctuations, as well as a shortfall in sales or
earnings compared to securities analysts' expectations, changes in analysts'
recommendations or projections or general economic and market conditions, may
adversely affect the market price of the Common Stock. In the past, securities
class action litigation has often been instituted following periods of
volatility in the market price for a company's securities. Such litigation
could result in substantial costs and a diversion of management attention and
resources, which could have a material adverse effect on the Company's
business, operating results and financial condition.
Anti-Takeover Provisions. The Company's Certificate of Incorporation (the
"Certificate") authorizes the Board of Directors to issue up to five million
shares of Preferred Stock and to determine the powers, designations,
preferences, rights, qualifications, limitations and restrictions, including
voting rights, of
19
<PAGE>
those shares without any further vote or action by the stockholders. The
rights of the holders of 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 Certificate and Bylaws, among other things, provide
for a classified Board of Directors, require that stockholder actions occur at
duly called meetings of the stockholders, limit who may call special meetings
of stockholders and require advance notice of stockholder proposals and
director nominations. These and other provisions 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, discourage a hostile bid or delay,
prevent or deter a merger, acquisition or tender offer in which the Company's
stockholders could receive a premium for their shares, or a proxy contest for
control of the Company or other change in the Company's management. See
"Management" and "Description of Capital Stock."
Shares Eligible for Future Sale. The sale of a substantial number of shares
of Common Stock in the public market following this offering could adversely
affect the market price of the Common Stock. Upon the closing of this
offering, the Company will have outstanding an aggregate of shares
of Common Stock, assuming no exercise of outstanding options and warrants. The
shares of Common Stock sold in this offering will be freely
tradable without restriction under the Securities Act of 1933, as amended (the
"Securities Act").
The remaining 12,575,637 shares of Common Stock are "Restricted Shares" and
are subject to restrictions under the Securities Act. All of these Restricted
Shares are subject to lock-up agreements pursuant to which the holders have
agreed not to sell or otherwise dispose of any of their shares for a period of
180 days after the date of this Prospectus without the prior written consent
of BT Alex. Brown Incorporated or, in certain instances, the Company. All or a
portion of such shares may be released at any time and without notice. The
Company has agreed with BT Alex. Brown Incorporated not to release any
stockholder from any lock-up agreement between the Company and the stockholder
without the prior written consent of BT Alex. Brown Incorporated.
Approximately 11,646,310 Restricted Shares subject to lock-up agreements will
become available for sale in the public market immediately following
expiration of the 180-day lock-up period, subject to the volume and other
limitations of Rule 144 and Rule 701 under the Securities Act, and the
remaining Restricted Shares subject to lock-up agreements and other
contractual restrictions will become eligible for sale at various times
thereafter following the expiration of their respective one-year holding
periods under Rule 144. In addition, certain stockholders of the Company have
the right to register shares of Common Stock for sale in the public market,
and the Company intends to register shares of Common Stock authorized for
issuance under the Company's equity incentive plans shortly following the
closing of this offering. See "Shares Eligible for Future Sale" and
"Description of Capital Stock--Registration Rights."
Dilution; Absence of Cash Dividends. Purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution in the
net tangible book value of their investment from the initial public offering
price. Additional dilution will occur upon exercise of outstanding options and
warrants. See "Dilution" and "Shares Eligible for Future Sale." The Company
has never paid any dividends and does not anticipate paying dividends in the
foreseeable future. See "Dividend Policy."
20
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
When used in this Prospectus, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include but are not limited to statements
under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this Prospectus as to the timing of availability of products under
development; the Company's ability to commercialize new products; the
acceptance and performance of the Company's products; demand for broadband
access services; the ability of the Company to achieve cost reductions; the
compliance of future products with various industry standards; the Company's
ability to make sales to new customers; the Company's ability to develop,
introduce and market new products in a timely manner; the Company's ability to
provide sufficient customer support; the adequacy of capital resources; future
fluctuations in operating expenses; future capital expenditures; the
sufficiency of existing and potential cash resources and the use of the
proceeds of this offering are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus. The
Company assumes no obligation to update such forward-looking statements or to
update the reasons actual results could differ materially from those
anticipated in such forward-looking statements.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company, at an assumed initial public offering price of
$ per share, are estimated to be approximately $ ($
if the Underwriters' over-allotment option is exercised in full), after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company expects to use the net proceeds
for general corporate purposes, including working capital. The amounts and
timing of the Company's actual expenditures will depend upon numerous factors,
including the status of the Company's product development and commercialization
efforts, the amount of cash generated by the Company's operations, competition
and sales and marketing activities. Pending application of the net proceeds as
described above, the Company intends to invest the net proceeds of the offering
in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock. The
Company currently anticipates that it will retain earnings to support
operations and to finance the growth and development of the Company's business
and does not anticipate paying cash dividends for the foreseeable future. In
addition, the Company's credit agreement prohibits the payment of cash
dividends without the lender's written consent.
22
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998, (i) on an actual basis and (ii) as adjusted to reflect the conversion
of all outstanding shares of Preferred Stock into Common Stock, to reflect the
reincorporation of the Company from California to Delaware and to reflect the
sale of shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $ per share and the receipt of the
estimated net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................ $ 2,518 $
======== ========
Long-term debt, less current portion..................... $ 34
Redeemable convertible preferred stock, no par value;
authorized shares included in convertible preferred
stock authorized actual, no shares authorized as
adjusted; 100,000 shares issued and outstanding actual;
no shares issued and outstanding as adjusted............ 1,494 --
Shareholders' equity (net capital deficiency) (1):
Preferred stock, $.001 par value; 5,000,000 shares
authorized as adjusted; no shares issued and
outstanding as adjusted................................ -- --
Convertible Preferred Stock, no par value; 10,000,000
shares authorized actual; no shares authorized as
adjusted; 7,131,161 shares issued and outstanding,
actual; no shares issued and outstanding, as adjusted.. 35,807 --
Common Stock, no par value; 20,000,000 shares authorized
actual; 30,000,000 shares authorized as adjusted;
4,742,190 shares issued and outstanding actual;
shares issued and outstanding as adjusted.............. 661
Accumulated deficit...................................... (42,867) (42,867)
Deferred compensation.................................... (362) (362)
Shareholders' notes receivable........................... (60) (60)
-------- --------
Total shareholders' equity (net capital deficiency).... (6,821)
-------- --------
Total capitalization (deficit)......................... $ (5,293) $
======== ========
</TABLE>
- --------
(1) Excludes as of June 11, 1998 (i) approximately 2,489,232 shares issuable
upon exercise of options outstanding at a weighted average exercise price
of $2.46 per share, (ii) 38,462 shares of issuable upon exercise of an
outstanding warrant with an exercise price of $13.00 per share, (iii)
3,000,000 shares issuable upon exercise of an outstanding warrant with an
exercise price of $6.50 per share; (iv) approximately 2,363,746 shares
reserved for future grants under the Company's stock option plans; and (v)
700,000 shares reserved for issuance pursuant to the Company's 1998
Employee Stock Purchase Plan. See "Management--Employee Benefit Plans" and
Notes 8 and 13 of Notes to Consolidated Financial Statements.
23
<PAGE>
DILUTION
The net tangible book value (deficiency) of the Company at March 31, 1998
was approximately $(5,327,000) or $(0.44) per share. Pro forma net tangible
book value (deficiency) per share is determined by dividing the Company's
tangible net worth (tangible assets less liabilities) by the number of shares
of Common Stock outstanding, after giving effect to the conversion of
Preferred Stock upon completion of this offering. After giving 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 offering expenses, the
pro forma net tangible book value of the Company as of March 31, 1998 would
have been $ , or $ per share. This represents an immediate increase
in net tangible book value of $ per share to existing stockholders and an
immediate dilution in net tangible book value of $ per share to new
investors purchasing shares at the assumed initial public offering price. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $
--------
Pro forma net tangible book value (deficiency) per
share as of March 31, 1998............................ $(0.44)
Increase per share attributable to this offering.......
------
Pro forma net tangible book value per share after
offering................................................
--------
Dilution per share to new investors...................... $
========
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by the new investors (at an assumed initial
public offering price of $ per share for shares purchased in this
offering, before deducting estimated underwriting discounts and commissions
and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
------------------------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 11,973,351 % $38,337,000 % $3.20
New investors...........
------------ ------- ----------- ----- -----
Total................. 100.0% $ 100.0%
============ ======= =========== =====
</TABLE>
- --------
(1) The foregoing computations assume no exercise of outstanding stock
options. As of June 11, 1998, options were outstanding to purchase
2,489,232 shares at a weighted average exercise price of $2.46 per share
and warrants were outstanding to purchase 3,038,462 shares at a weighted
average exercise price of $6.58 per share. To the extent that outstanding
options and warrants are exercised, there will be further dilution to new
investors. See "Management--Employee Benefit Plans" and Note 8 of Notes to
Financial Statements.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the years ended December
31, 1995, 1996 and 1997 and the consolidated balance sheet data as of December
31, 1996 and 1997, have been derived from the audited consolidated financial
statements of the Company included elsewhere in this Prospectus that have been
audited by Ernst & Young LLP, independent auditors. The consolidated statement
of operations data for the year ended December 31, 1994 and the consolidated
balance sheet data as of December 31, 1994 and 1995 have been derived from the
audited consolidated financial statements of the Company not included herein.
The consolidated statement of operations data for the period from January 20,
1993 (inception) to December 31, 1993 and the consolidated balance sheet data
at December 31, 1993 have been derived from unaudited financial statements of
the Company not included herein. The consolidated statement of operations data
for the three months ended March 31, 1997 and 1998 and the consolidated balance
sheet data at March 31, 1998 are derived from unaudited financial statements
included elsewhere in this Prospectus and contain all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the
financial position and results of operations for such periods. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of results to be expected for the full fiscal year. The data set
forth below should be read in conjunction with the consolidated financial
statements of the Company, including the notes thereto, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
JANUARY 20, ENDED
1993 (INCEPTION) YEARS ENDED DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
---------------- --------- --------- --------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $128 $ 140 $ -- $ -- $ 2,118 $ -- $ 2,444
Cost of goods sold...... -- -- 676 -- 6,462 178 4,134
---- --------- --------- --------- --------- -------- --------
Gross profit (loss)..... 128 140 (676) -- (4,344) (178) (1,690)
---- --------- --------- --------- --------- -------- --------
Operating expenses:
Research and develop-
ment.................. 157 235 2,028 8,020 11,319 2,580 2,305
Sales and marketing.... -- 17 205 1,141 4,468 529 1,140
General and administra-
tive.................. 26 84 825 1,789 2,546 461 505
---- --------- --------- --------- --------- -------- --------
Total operating ex-
penses................ 183 336 3,058 10,950 18,333 3,570 3,950
---- --------- --------- --------- --------- -------- --------
Loss from operations.... (55) (196) (3,734) (10,950) (22,677) (3,748) (5,640)
Net interest income (ex-
pense)................. -- -- 68 253 128 91 (64)
---- --------- --------- --------- --------- -------- --------
Net loss................ $(55) $ (196) $ (3,666) $ (10,697) $ (22,549) $ (3,657) $ (5,704)
==== ========= ========= ========= ========= ======== ========
Pro forma basic and di-
luted net loss per
share(1)............... $ (2.07) $ (0.48)
========= ========
Shares used in pro forma
basic and diluted net
loss per share(1)...... 10,873 11,773
========= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term invest-
ments.................. $ -- $ 27 $ 8,620 $ 12,864 $ 1,987 $ 109
Working capital (defi-
cit)................... 3 (492) 6,934 9,971 (4,847) (8,769)
Total assets............ 3 435 10,202 15,978 8,778 8,226
Long-term debt (less
current portion)....... -- 98 439 1,255 44 34
Accumulated deficit..... (55) (251) (3,917) (14,614) (37,163) (42,867)
Total shareholders' eq-
uity (net capital defi-
ciency)................ $ (6) $ (201) $ 7,955 $ 11,405 $ (1,174) $ (6,821)
</TABLE>
- --------
(1)See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method employed to determine the number of shares used to compute per
share amounts.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes included elsewhere in this Prospectus. The
discussion in this Prospectus contains forward-looking statements that involve
risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in
this Prospectus should be read as being applicable to all related forward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include those discussed in "Risk
Factors," as well as those discussed elsewhere herein. See "Risk Factors" and
"Information Regarding Forward-Looking Statements."
OVERVIEW
Terayon develops, markets and sells cable modem systems based upon its S-
CDMA technology. Since its inception in January 1993, the Company has focused
on the development of its S-CDMA technology, as well as certain other core
technologies, to enable broadband transmission of data over cable networks.
The Company commenced the specifications and design of its first ASIC in
October 1994 and produced the first version of this ASIC in June 1996. The
Company concurrently developed an end-to-end broadband access system, the
TeraComm system, around the ASIC. During late 1996 and through 1997, the
Company commenced limited field trials of the TeraComm system with several
cable operators. In the first quarter of 1998, the Company commenced volume
shipments to a small number of cable operators. The Company recognized
revenues of $2.1 million in the year ended December 31, 1997 and $2.4 million
for the three months ended March 31, 1998. The Company generally recognizes
product revenues upon shipment of products to customers. Future agreements
with certain distribution partners may contain price protection provisions and
certain return rights. The Company's existing agreements currently do not
contain such provisions.
The Company sells its products both in the United States and internationally
and markets its products primarily to cable operators and distributors. To
date, a small number of customers has accounted for all of the Company's
sales. In 1997, sales to Telegate, Sumitomo and NET Brasil represented 29.6%,
28.9% and 14.1%, respectively, of the Company's revenues. In the first quarter
of 1998, sales to Shaw, Sumitomo and Telegate represented 36.7%, 13.4% and
11.5%, respectively, of the Company's revenues. The Company expects that sales
to a limited number of customers will continue to account for a substantial
portion of the Company's for the foreseeable future. If orders from
significant customers are delayed, cancelled or otherwise fail to occur in any
particular period, or if any significant customer delays payment or fails to
pay, the Company could experience significant operating losses in such period.
As a result, the Company expects to experience significant fluctuations in its
operating results on a quarterly and annual basis. See "Risk Factors--
Dependence on Small Number of Customers," "--Dependence on Cable Industry to
Upgrade to Two-Way Cable Infrastructure" and "--Ability to Market Effectively
to Cable Operators."
The market for broadband access products and services is intensely
competitive and is characterized by rapid technological change, new product
development and product obsolescence, evolving industry standards and
significant price erosion of products over time. The Company has experienced
and expects to continue to experience downward pressure on its unit ASPs. The
Company has had negative gross margins since inception. While the Company has
initiated cost reduction programs to offset pricing pressures on its products,
there can be no assurance that these cost reduction efforts will continue to
keep pace with competitive price pressures or lead to improved gross margin.
If the Company is unable to reduce costs efficiently, its gross margin and
profitability will continue to be adversely affected. The Company's gross
margin also is affected by the sales mix of TeraLink 1000 Master Controllers,
TeraLink
26
<PAGE>
Gateways and TeraPro cable modems, as the TeraPro modems have significantly
lower margins than the TeraLink 1000 Master Controllers and TeraLink Gateway
headend products. For the foreseeable future, the Company expects to achieve
negative or nominal margins on TeraPro cable modems and expects that sales of
TeraPro cable modems will continue to constitute a significant portion of its
revenues. As a result of these factors, the Company's gross margins and
operating results are likely to be adversely affected in the near term. See
"Risk Factors--Market Acceptance of Cable Modems; Competing Technologies," "--
Ability to Achieve Cost Reductions," "--Limited Manufacturing Experience and
Dependence on Contract Manufacturer," "--Erosion of Average Selling Prices"
and "--Highly Competitive Industry; Established Competitors."
The Company's ability to generate revenues also depends on guaranteeing the
availability of supplies from its sole sources, increasing the manufacturing
and testing capacity of its products by a contractor while ensuring product
quality, and continuing deployment of its products by existing and new
customers. In the first quarter of 1998, the Company transitioned its
manufacturing operations from CMC to Solectron. The Company recorded a charge
of $1.3 million in the first quarter of 1998 relating to the write-off of
obsolete inventory and the transition of manufacturing operations to
Solectron. The Company currently tests and assembles the TeraLink 1000 Master
Controller and the TeraLink Gateway headend equipment at its Santa Clara
facility. Finished TeraPro cable modems are drop shipped by Solectron to
Terayon customers. See "Risk Factors--Limited Manufacturing Experience and
Dependence on Contract Manufacturer."
The Company sustained net losses of $3.7 million, $10.7 million, $22.5
million and $5.7 million for the years ended December 31, 1995, 1996 and 1997
and for the three months ended March 31, 1998, respectively. As a result, the
Company had an accumulated deficit of $42.9 million as of March 31, 1998. The
Company's operating expenses are based in part on its expectations of future
sales, and the Company expects that a significant portion of its expenses will
be committed in advance of sales. As a result, net income may be adversely
affected by a reduction in sales if the Company is unable to adjust expenses
quickly in response to any decrease in sales. The Company expects to increase
significantly expenditures in technical development, sales and marketing and
manufacturing as it engages in activities related to product enhancement, cost
reduction and commercialization of new products. Additionally, the Company
expects to increase capital expenditures and other operating expenses in order
to support and expand the Company's operations. As a result, the Company
expects to continue to incur losses for the foreseeable future. There can be
no assurance that the Company will achieve or sustain profitability in the
future. See "Risk Factors--Early Stage of Development; History of Losses," "--
Fluctuations in Operating Results" and "--Lengthy Sales Cycle."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
Revenues. The Company had no revenues for the three months ended March 31,
1997, as the Company did not commence selling its products until June 1997.
For the three months ended March 31, 1998, the Company had revenues of $2.4
million, primarily due to sales of headend controllers, cable modems and, to a
lesser extent, telephony modules.
Cost of Goods Sold. Cost of goods sold consists of direct product costs as
well as the cost of the Company's manufacturing operations group, which cost
consists of assembly, test and quality assurance for products, and associated
costs of personnel and equipment. For the three months ended March 31, 1997,
the Company incurred $178,000 in cost of goods sold related to the costs of
the manufacturing operations group as it prepared for commercialization of the
Company's products. The Company incurred $4.1 million in cost of goods sold
for the three months ended March 31, 1998, which included a charge of $1.3
million relating to the write-off of obsolete inventory and the transition of
manufacturing operations to Solectron.
27
<PAGE>
Gross Profit (Loss). The Company incurred a gross loss of $178,000 for the
three months ended March 31, 1997 due to costs associated with the Company's
manufacturing operations group. The Company incurred a gross loss of $1.7
million for the three months ended March 31, 1998, primarily due to
manufacturing costs spread over low volumes of products sold, together with a
charge of $1.3 million relating to the write-off of obsolete inventory and the
transition of manufacturing operations to Solectron.
Research and Development. Research and development expenses consist
primarily of personnel costs, as well as design expenditures, equipment and
supplies required to develop and enhance the Company's products. Research and
development expenses decreased from $2.6 million in the three months ended
March 31, 1997 to $2.3 million in the three months ended March 31, 1998 as a
result of timing of the Company's development projects. The Company intends to
continue to increase investment in research and development programs in future
periods for the purpose of enhancing current products, reducing the cost of
current products and developing new products.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries for sales, marketing and support personnel, and costs related to
tradeshows, consulting and travel. Sales and marketing expenses increased from
$529,000 in the three months ended March 31, 1997 to $1.1 million in the three
months ended March 31, 1998, primarily due to increased payroll costs related
to additional sales and support personnel for commercial trials and deployment
of the Company's products. The Company expects sales and marketing expenses to
increase in the future as the Company expands its customer base.
General and Administrative. General and administrative expenses primarily
consist of salary and benefits for administrative officers and support
personnel, travel expenses, legal, accounting and consulting fees. General and
administrative expenses increased from $461,000 in the three months ended
March 31, 1997 to $505,000 in the three months ended March 31, 1998. The
Company expects that general and administrative expenses will increase as a
result of the additional reporting requirements imposed on the Company as a
public company and increased infrastructure to support expanded activities of
the Company.
Net Interest Income (Expense). Net interest income was $91,000 in the three
months ended March 31, 1997 compared to net interest expense of $64,000 in the
three months ended March 31, 1998. The decrease primarily was a result of
lower interest income on lower average cash balances in the three months ended
March 31, 1998.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Revenues. The Company did not recognize any revenues from product sales in
1995 or 1996, as the Company did not commence selling its products until June
1997. The Company recognized product revenues of $1.6 million in 1997,
primarily due to sales of headend controllers and cable modems. A majority of
the products shipped during 1997 were for customer trial purposes. During
1997, the Company also recognized $480,000 of technology development revenues
pursuant to a technology development agreement (the "Development Agreement")
to provide telephony modules to a telecommunications systems manufacturer. The
Company does not expect significant revenues to be recognized pursuant to the
Development Agreement in the future.
Cost of Goods Sold. In 1995, the Company incurred $676,000 in cost of goods
sold as a result of technology development costs incurred pursuant to the
Development Agreement. The Company did not incur any cost of goods sold in
1996. The Company incurred $6.5 million in cost of goods sold in 1997,
reflecting the costs of the Company's manufacturing operations group for the
full year and direct product costs related to sales that occurred primarily in
the last six months of 1997.
28
<PAGE>
Gross Profit (Loss). The Company incurred a gross loss of $676,000 in 1995
due to technology development costs incurred pursuant to the Development
Agreement. The Company did not realize any gross profit or loss in 1996. The
Company incurred a gross loss of $4.3 million in 1997, primarily due to
manufacturing costs for the full year spread against revenues recognized
primarily in the last six months of 1997. The manufacturing costs incurred in
the first six months of 1997 consisted of pre-production activities related to
preparation for commercialization of the Company's products.
Research and Development. Research and development expenses increased from
$2.0 million in 1995 to $8.0 million in 1996, primarily due to increased
number of personnel and related labor costs and approximately $1.5 million of
prototype and non-recurring engineering costs related to the development of
the Company's initial products. Research and development expenses increased
from $8.0 million in 1996 to $11.3 million in 1997 due to increased staffing
and associated engineering costs related to new and existing product
development.
Sales and Marketing. Sales and marketing expenses increased from $205,000 in
1995 to $1.1 million in 1996, primarily as a result of increased number of
personnel and related labor costs and costs related to promotional activities
and early trials of the Company's products. Sales and marketing expenses
increased from $1.1 million in 1996 to $4.5 million in 1997, primarily due to
increased payroll costs related to additional sales and support personnel for
commercial and market trials and the commercial launch of the Company's
products.
General and Administrative. General and administrative expenses increased
from $825,000 in 1995 to $1.8 million in 1996, primarily due to increased
hiring and higher legal and travel expenses related to preparations for the
commercial release of the Company's products. General and administrative
expenses increased from $1.8 million in 1996 to $2.5 million in 1997, due to
increased number of personnel and related payroll costs and higher legal and
executive travel expenses.
Net Interest Income (Expense). Net interest income increased from $68,000 in
1995 to $253,000 in 1996, as a result of increased cash balances during 1996
resulting from the Company's financing activities during those periods. Net
interest income decreased from $253,000 in 1996 to $128,000 in 1997, primarily
as a result of higher interest expense due to larger loan balances.
29
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited consolidated statement of
operations data for each of the three month periods in the five quarters ended
March 31, 1998. The data set forth below have been derived from unaudited
consolidated financial statements of the Company and have been prepared on the
same basis as the audited consolidated financial statements contained in this
Prospectus, and in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such information for the periods presented. Such consolidated
statement of operations data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. Results of operations in any period should not be considered
indicative of the results to be expected in any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1997 1998
--------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ -- $ 93 $ 662 $ 1,363 $ 2,444
Cost of goods sold.............. 178 304 1,761 4,219 4,134
------- ------- ------- ------- -------
Gross profit (loss)........... (178) (211) (1,099) (2,856) (1,690)
------- ------- ------- ------- -------
Operating expenses:
Research and development...... 2,580 3,306 2,695 2,738 2,305
Sales and marketing........... 529 994 1,192 1,753 1,140
General and administrative.... 461 644 610 831 505
------- ------- ------- ------- -------
Total operating expenses.... 3,570 4,944 4,497 5,322 3,950
------- ------- ------- ------- -------
Loss from operations............ (3,748) (5,155) (5,596) (8,178) (5,640)
Net interest income (expense)... 91 32 7 (2) (64)
------- ------- ------- ------- -------
Net loss........................ $(3,657) $(5,123) $(5,589) $(8,180) $(5,704)
======= ======= ======= ======= =======
</TABLE>
Revenues increased in each of the consecutive three month periods due to
commencement of commercial shipment of the Company's products in June 1997. The
Company incurred increasing gross losses and declining gross margin in the
second half of 1997 as the Company commenced sales of cable modems which, due
to low volume production quantities and resulting high manufacturing costs and
per-unit overhead allocations, were sold at negative margins. Revenues for the
fourth quarter of 1997 include $480,000 of product development revenues related
to the Company's development of a telephony module for a telecommunications
system manufacturer. Gross margin improved in the first quarter of 1998 as unit
volume sales increased and unit manufacturing costs declined. Gross margin also
improved in the period due to a change in product mix, with a higher ratio of
higher margin headend products sold relative to lower margin cable modems.
Operating expenses varied in the last three quarters ended March 31, 1998 due
to the timing of research and development projects and due to a significant
trade show in the fourth quarter of 1997.
The Company has experienced, and expects to continue to experience,
fluctuations in its operating results on a quarterly and an annual basis.
Historically, the Company's quarterly revenues have been unpredictable due to a
number of factors. Factors that have influenced and will continue to influence
the Company's operating results include: a long sales cycle for the Company's
products; competitive pricing pressures; the effects of extended payment terms,
promotional pricing, service, marketing or other terms offered to customers;
accuracy of customer forecasts of end user demand; personnel changes; quality
control of products sold; and regulatory changes or delays in obtaining
required regulatory approvals. For example, the Company's product shipments to
date to a customer in Brazil have been significantly lower than anticipated,
due to delays in certain regulatory approvals in Brazil. There can be no
assurance that similar delays will not occur in other countries in which the
Company
30
<PAGE>
is marketing or plans to market its products. Any such delays would have an
adverse effect on the Company's operating results for a particular period.
Factors that may influence the Company's operating results in the future
include: the size and timing of customer orders and subsequent shipments;
customer order deferrals in anticipation of new products or technologies;
timing of product introductions or enhancements by the Company or its
competitors; market acceptance of new products; technological changes in the
cable, wireless and telecommunications industries; changes in the Company's
operating expenses; customers' capital spending; delays of orders by customers;
customers' delay in or failure to pay accounts receivable; and general economic
conditions. See "Risk Factors--Fluctuations in Operating Results."
INCOME TAXES
The Company has not generated any net income to date and therefore has not
accrued any income taxes since its inception. The Company accounts for income
taxes under Statement of Financial Accounting Standards No. 109. Realization of
deferred tax assets is dependent on future earnings, if any, the timing and
amount of which are uncertain. Accordingly, valuation allowances in amounts
equal to the net deferred tax assets as of December 31, 1997 and 1996 have been
established to reflect these uncertainties.
At December 31, 1997, the Company had federal and state net operating loss
carryforwards of $31.0 million and $15.0 million, respectively, and federal and
state tax credit carryforwards of $1.7 million and $1.2 million, respectively,
that will expire at various dates beginning in 1999 through 2012, if not
utilized. Utilization of net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating loss and tax credit carryforwards before full utilization.
STOCK-BASED COMPENSATION
With respect to certain stock option grants in 1997 and the first quarter of
1998, the Company had recorded deferred compensation of $389,000 as of March
31, 1998. The Company amortized approximately $12,000 of the deferred
compensation in 1997 and $15,000 in the first quarter of 1998, and will
amortize the remainder over the related vesting period of the stock options.
The future compensation charges are subject to reduction for any employee who
terminates employment prior to the expiration of such employee's vesting
period. See Note 8 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through March 31, 1998 the Company met its liquidity
needs primarily through private sales of preferred stock for aggregate proceeds
of $38.5 million, before deduction of issuance costs.
Since its inception, the Company has used cash in operating activities of
$33.3 million through March 31, 1998. Cash used in operating activities in
1995, 1996, 1997 and the first three months of 1998 was $2.3 million, $9.4
million, $18.8 million and $2.8 million, respectively. Cash used in investing
activities was $1.3 million in 1995 and $6.5 million in 1996. Investment
activities in 1995 consisted primarily of the purchase of hardware, software
and test equipment and in 1996 consisted primarily of the purchase of short-
term investments. Cash provided by investing activities, primarily from the
sales of short-term investments, was $1.5 million in 1997 and $158,000 in the
first three months of 1998.
At March 31, 1998 the Company had approximately $109,000 in cash and cash
equivalents and a $10.0 million revolving line of credit. At March 31, 1998,
the Company was in violation of certain covenants under its line of credit.
31
<PAGE>
The Company believes that its cash balances and funds available under an
existing bank line of credit, together with the proceeds of this offering,
will be sufficient to satisfy its cash requirements for at least the next 12
months. There can be no assurance, however, that the Company will not require
additional financing prior to such time to fund its operations and it may seek
to raise such additional funds through the sale of public or private equity or
debt financing or from other sources. The sale of additional equity or debt
securities may result in additional dilution to the Company's stockholders.
There can be no assurance that any additional financing will be available to
the Company on acceptable terms, or at all, when required by the Company. See
"Risk Factors--Significant Future Capital Requirements."
YEAR 2000
Many existing computer systems and applications and other control devices
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, in less than
two years, computer systems and applications used by many companies may need
to be upgraded to comply with Year 2000 requirements. Significant uncertainty
exists in the computer industry concerning the potential effects associated
with such compliance. The Company relies on computer systems in operating and
monitoring many significant aspects of its business, including financial
systems (such as general ledger, accounts payable, accounts receivable,
inventory and order management), customer services, infrastructure and network
and telecommunications equipment. The Company also relies directly and
indirectly on the systems of external enterprises such as customers,
suppliers, creditors, financial organizations and domestic and international
governments. The Company currently estimates that its costs associated with
Year 2000 compliance, including any costs associated with the consequences of
incomplete or untimely resolution of Year 2000 compliance issues, will not
have a material adverse effect on the Company's business, financial condition
or results of operations in any given year. However, the Company has not
extensively investigated and does not believe that it has fully identified the
impact of Year 2000 compliance and has not concluded that it can resolve any
issues that may arise in connection with Year 2000 compliance without
disruption of its business or without incurring significant expense. In
addition, even if the Company's internal systems are not materially affected
by Year 2000 compliance issues, the Company could be affected through
disruption in the operation of the enterprises with which the Company
interacts. There can be no assurance that the Company's products will be Year
2000 compliant, that third-party products with which the Company's products
interface will be Year 2000 compliant or that any changes to third-party
products made in response to Year 2000 compliance issues will not render the
Company's products incompatible with such third-party products.
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income. This statement requires
that all items that are to be required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997, and will be adopted by the Company for the year ended
December 31, 1998.
In June 1997, FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information. This statement replaces Statement No.
14, Financial Reporting for Segments of a Business Enterprise, and changes the
way public companies report segment information. This statement is effective
for fiscal years beginning after December 15, 1997 and will be adopted by the
Company for the year ended December 31, 1998.
32
<PAGE>
BUSINESS
OVERVIEW
Terayon develops, markets and sells cable modem systems that enable cable
operators to cost-effectively deploy reliable two-way broadband access
services. The Company's TeraComm system is designed to allow cable operators to
minimize time-consuming and costly network infrastructure upgrades, achieve
reduced time to market and provide a wide range of service levels to
residential and commercial end users. Cable operators using the TeraComm system
are able to provide additional revenue-generating services to end users,
enabling cable operators to compete effectively in the emerging market for
broadband access services.
The Company's TeraComm system, comprised of the TeraPro cable modem, the
TeraLink 1000 Master Controller, the TeraLink Gateway and the TeraView Element
Management and Provisioning Software, is based on Terayon's S-CDMA technology.
S-CDMA enables reliable two-way broadband communications over both pure coaxial
and HFC cable infrastructure by maximizing resistance to noise that interferes
with data transmissions over previously unusable frequency spectrum.
INDUSTRY BACKGROUND
DEMAND FOR BROADBAND ACCESS
In recent years, the volume of bandwidth intensive data, voice and video
traffic across the Internet, corporate intranets and other public networks has
increased dramatically. This demand has been driven by the proliferation of
residential and commercial computer users that are accessing networks in a
variety of applications, including communications via the Internet, electronic
commerce and telecommuting. These applications often require the transmission
of large, multimedia-intensive files. IDC estimates that the number of Internet
users will increase from approximately 69 million at the end of 1997 to
approximately 320 million by the end of 2002. IDC also estimates that the
number of home office households will increase from approximately 35 million at
the end of 1997 to approximately 40 million by the end of 1999.
Despite significant advances in the performance of computer processors and
data backbone networks, high speed data transmission has been limited by the
existing local access network infrastructure (the local loop), which is not
optimized for distribution of data-intensive multimedia content. Users of dial-
up analog modems with maximum data rates of only 28.8 Kbps to 56 Kbps often
experience frustration, as they encounter frequent and lengthy delays or
complete failures in transmission. In response to the growing demand for
increased bandwidth, the communications industry has begun to deploy new
broadband access technologies that can deliver megabit per second ("Mbps") or
better performance to end users.
ADVANTAGES OF CABLE MODEMS OVER ALTERNATIVE BROADBAND ACCESS TECHNOLOGIES
As residential and commercial demand for faster Internet access continues to
grow, particularly for applications such as streaming audio and video, IP
telephony and interactive two-way video, service providers are investing in
enabling infrastructure and technologies. Various technologies have emerged to
address the need for broadband access. The leading technologies include ISDN,
ADSL and xDSL technologies being marketed by telecommunications companies, and
cable infrastructure technologies such as cable modems being marketed by cable
operators. These digital technologies offer substantial performance increases
over traditional analog 56 Kbps dial-up modem technologies.
33
<PAGE>
The following chart depicts the maximum available throughput of various
broadband access technologies:
COMPARISON OF ALTERNATIVE BROADBAND TECHNOLOGIES
<TABLE>
<CAPTION>
MAXIMUM
AVAILABLE THROUGHPUT
------------------------
TECHNOLOGY DESCRIPTION DOWNSTREAM UPSTREAM
- ----------------------------------------------------------------------------
<C> <S> <C> <C>
Cable Modems High speed digital technology over 27.0 to 36.0 2.0 to 14.0
HFC and pure coaxial systems Mbps Mbps
- ----------------------------------------------------------------------------
ADSL High speed digital technology over 1.5 to 6.1 640 Kbps
existing copper wire Mbps
- ----------------------------------------------------------------------------
ISDN High speed digital technology over 128 Kbps 128 Kbps
existing copper wire
- ----------------------------------------------------------------------------
Dial-up Digital-to-analog conversion 56 Kbps 33 Kbps
Analog Access utilizing existing copper wire
- ----------------------------------------------------------------------------
</TABLE>
Of the digital technologies, cable modems currently provide the highest
available two-way transmission speeds and their "always on" availability
eliminates the tedious and unreliable dial-up process of other technologies.
The existing cable infrastructure offers other important advantages over
alternative broadband architectures. Currently, the cable infrastructure passes
over 95% of homes in the United States and a large number of small businesses.
In addition, the cable infrastructure has the capacity to offer a wide range of
broadband services, such as digital TV, Internet access and IP telephony. Many
cable operators have recognized the need to expand beyond broadcast and video
TV services to diversify their business and remain competitive. A growing
number of cable operators have already expanded their business to include data-
over-cable services through affiliations with service providers such as @Home
and Road Runner, and several cable operators are exploring voice-over-cable
services as well. Kinetic Strategies Inc. estimates that over 200,000 North
American homes currently have data-over-cable services.
LIMITATIONS OF EXISTING CABLE INFRASTRUCTURE
Most cable networks were designed to provide one-way video broadcast from the
cable headend to subscribers. Data-over-cable and other two-way services
require cable operators to provide an upstream return path from subscribers to
the headend. Noise interferes with upstream signal transmissions, potentially
resulting in corrupted information or service outages. Common noise problems
are (i) "ingress noise," a relatively constant level of interference resulting
from home appliances and consumer electronics leaking noise into the cable
system through imperfections in the cable plant, such as faulty connections or
cracked cable shielding and (ii) "impulse noise," which is transient,
unpredictable interference that results from home appliances switching on and
off. Noise is a particular problem in the upstream return path because each
home's noise is aggregated into the headend. In addition, the 5 to 42 MHz
frequency spectrum reserved for subscriber-to-headend transmissions is highly
susceptible to ingress and impulse noise.
CABLE OPERATOR OBJECTIVES IN DEPLOYING BROADBAND ACCESS SERVICES
In order to successfully exploit the opportunities offered by the increasing
demand for broadband access, cable operators face a number of challenges.
Cost-effectively manage system noise. Cable modems based on current-
generation TDMA technologies typically require a Signal-to-Noise Ratio ("SNR")
of 20dB or better for reliable operation. To respond to ingress noise, cable
operators using cable modems based on TDMA often must upgrade their networks to
an HFC architecture. An upgrade to an HFC system includes replacing a
substantial portion
34
<PAGE>
of the existing coaxial network with optical fiber, replacing the headend
transmission equipment with optical transmission systems and providing
additional interface layers between the optical fiber and the coaxial
connection into the home.
To further address ingress noise and attempt to prevent impulse noise
interference, cable operators must often completely rebuild their HFC network.
This entails dividing the network into smaller segments, to isolate noise and
therefore limit the aggregate noise arriving at the headend, as well as
replacing coaxial drops in the homes of subscribers for data services and
placing filters on non-subscriber homes. In addition, many TDMA-based systems
employ a frequency-agile scheme where the transmission system will shift
transmission to a pre-reserved backup channel if the primary channel is
affected by a noise event. Despite these expenditures, cable operators using
TDMA may still be required to increase routine maintenance procedures in order
to provide reliable service and to restrict two-way services to a limited
portion of the 5 to 42 MHz frequency spectrum where noise events are less
likely to occur. To reduce these costs and improve the quality of their
service, cable operators require new upstream transmission technologies that
address both ingress and impulse noise.
Minimize network capital equipment costs. Noise levels are directly related
to the number of homes passed by a network, regardless of the number of
subscribers on such network. As a result, the number of homes that can be
supported by a single TDMA-based cable modem headend is limited, even in the
early phase of deployment, when the number of subscribers may be very small.
Cable operators using TDMA technology are often required to deploy a large
number of headends to create a large service area "footprint." Minimizing
initial investments and attaining "pay-as-you-go" capability that allows
revenues to support incremental investment are vital to the ability of cable
operators to enter the broadband access market.
Time to market. As telecommunications operators move quickly to offer
broadband services, the Company believes that a cable operator's success in a
particular geographic market will be determined by being first to market with
broadband access services. Therefore, the Company believes that cable
operators will need the ability to accelerate cable modem deployments in order
to enhance their competitive position.
Ability to offer tiered services. The Company believes that cable operators
can benefit from having a network capable of offering tiered services that
allow them to maximize revenue from bandwidth allocated to those services. For
example, a residential customer who only utilizes e-mail or Internet access
may only be willing to pay a small premium over the cost of a dial-up
connection, while commercial users may be willing to pay a substantial premium
for guaranteed bandwidth. In order to offer multiple tiers of service with
varied access speeds and priority connections, cable operators need the
ability to assign a portion of shared bandwidth to individual customers.
To meet these challenges, cable operators require a highly reliable
broadband access solution that can be deployed rapidly at low initial costs,
that enables cable operators to maximize revenues from available bandwidth
capacity, and that scales as the number of broadband access subscribers
increases.
THE TERAYON SOLUTION
The Company's TeraComm system is designed to enable cable operators to
minimize time-consuming and costly network infrastructure upgrades, achieve
reduced time to market and provide a wide range of service levels to
residential and commercial end users. Cable operators using the TeraComm
system are able to provide additional revenue-generating services to end
users, enabling cable operators to compete effectively in the emerging market
for broadband access services. The Company's system is based on its spread-
spectrum technology, S-CDMA, which offers cable operators the following
advantages:
35
<PAGE>
Minimize cable infrastructure upgrades. Terayon's S-CDMA technology operates
at extremely low SNRs, which enables Terayon's cable modems to be deployed on
pure coaxial or HFC-upgraded systems, with minimal system upgrades. TDMA-based
systems, which demand higher SNRs for operation, often require costly system
upgrades or complete rebuilds to high quality HFC in order to support
comparable broadband access services.
Reduce time to market. Activating two-way transmission by installing the
TeraComm system does not require the time-consuming network upgrades or
rebuilds usually required to support TDMA-based transmission equipment. As a
result, cable operators can accelerate cable modem deployment and reduce their
time to market with broadband access services, thereby enhancing their
competitive position.
Minimize initial headend capital equipment costs. By deploying the TeraComm
system, cable operators can minimize the initial capital expense for headend
equipment. The noise-resistant properties of S-CDMA allow more cable segments
to be aggregated to form a single shared upstream channel. These properties
provide cable operators with a cost-effective solution during initial stages
of deployment even with a limited number of users. As the number of users
increases, additional Terayon equipment can be installed for a smooth
transition to a larger-scale network. For large deployments, the routed
architecture of Terayon's system will support a large number of headends,
enabling cable operators to effectively manage thousands of subscribers as a
single IP network with multiple logical sub-networks. In contrast, TDMA-based
systems only support a smaller number of homes passed per headend due to
susceptibility to noise-related service problems.
Increase signal transmission reliability. Cable operators who plan to offer
broadband access services must demonstrate the ability to provide reliable and
continuous service. S-CDMA enables cable operators to maintain signal
transmission even in high noise environments. Further, S-CDMA's rate-adaptive
response to sudden changes in plant conditions prevents even short service
outages, unlike alternative systems that utilize a frequency-agile scheme,
which can result in a loss of service.
Maximize spectrum usage. The TeraComm system is designed to operate
effectively in the lowest frequency ranges of the upstream spectrum, where
noise is too severe to allow the operation of TDMA-based systems. As a result,
cable operators who employ the TeraComm system can utilize more of the
existing upstream bandwidth than alternative broadband access technologies.
Generate additional revenue through tiered services. The high capacity and
dynamic bandwidth management capabilities of the TeraComm system are designed
to enable cable operators to offer a wide range of services at tiered prices.
Cable operators can emulate high margin commercial-service offerings such as
T-1, frame-relay and leased lines in the same network as lower margin,
residential, Internet access.
Reduce ongoing cable infrastructure maintenance costs. Cable operators
utilizing the TeraComm system can capitalize on S-CDMA's noise-resistant
properties, which enable cable operators to operate plants in a wide range of
conditions, thus reducing on-going maintenance costs and minimizing service
problems. For example, while all cable operators monitor their networks on a
regular basis, cable operators using TDMA-based systems are generally required
to take more frequent corrective action than cable operators using S-CDMA-
based systems to prevent normal "wear and tear" on the cable system from
impacting service.
36
<PAGE>
STRATEGY
The Company's objective is to be the leading provider of cable modem systems
to cable operators seeking to provide broadband access services to residential
and commercial end users. Key elements of the Company's strategy are as
follows:
Supply leading cable operators worldwide. The Company's initial target
market is the ten largest cable companies in each major geographic area. In
most markets, a small number of large cable operators often provide services
to a majority of subscribers in a specific region and thus influence the
purchase decisions of smaller cable operators. In the United States, ten cable
operators together own and operate facilities passing approximately 74% of
total homes passed. To date, two of the largest North American cable operators
are deploying the TeraComm system commercially.
Establish relationships with industry leaders. The Company seeks to provide
cable operators with a complete broadband access solution by establishing
relationships with networking companies, systems integrators and other
industry leaders. For example, the Company has a co-development agreement with
Cisco to create an integrated headend solution. Additionally, the Company and
@Home have integrated the Company's products with @Home's service. The Company
will continue to pursue strategic relationships to expand the capabilities of
its system.
Expand worldwide distribution channels. The Company intends to continue to
increase its direct sales efforts and to establish strategic relationships
with leading distributors worldwide. The Company's distribution strategy is to
customize its sales and distribution efforts to address the specific needs of
each market. For example, the Company has an agreement with Sumitomo, through
its subsidiary Crossbeam Networks Corporation ("Crossbeam"), to distribute the
Company's products in Japan. In Latin America and Europe, the Company has
appointed local distributors with expertise in their specific geographic
regions. In the United States, the Company has begun to establish distribution
relationships to provide broadband access solutions to smaller cable
operators.
Provide superior customer service and support. The Company believes that its
ability to provide consistent high quality service and support will be a key
factor in attracting and retaining customers. In addition to assigning a field
applications engineer to each customer account, the Company provides its
customers with technical support and training through customer support
representatives and representatives of distributors. The Company provides
service and support to its customers 24 hours a day, 7 days a week.
Adopt and advocate industry standards. The rapidly evolving market in which
the Company participates has recently adopted DOCSIS for cable modem
standards, and the industry has commenced discussion of a next-generation
cable modem standard, DOCSIS 2.0. The Company is developing a next-generation
product, known as the UCM, which is intended to offer a mode of operation
compliant with DOCSIS. The Company is actively participating in industry
standard-setting efforts and intends to work with the MCNS consortium to
incorporate S-CDMA into the DOCSIS 2.0 standard.
Leverage S-CDMA technology. The Company believes that S-CDMA technology
provides significant advantages over alternative broadband access
technologies. The Company's team of engineers has extensive experience in many
areas of broadband access system design, including communication systems,
ASICs, data networking, RF, software and hardware. The Company intends to
leverage these engineering capabilities to expand the features and
functionality of its S-CDMA technology, and to apply S-CDMA to additional
applications such as IP telephony, wireless communications and LMDS.
TECHNOLOGY
Terayon's products are based on the Company's S-CDMA technology. S-CDMA is
integrated into a single ASIC chip, which implements the physical ("PHY")
layer and media access control ("MAC") layer
37
<PAGE>
communication protocols in the TeraComm system. S-CDMA is the primary
differentiator between Terayon's cable modems and those of competitors who use
TDMA-based technology for the PHY and MAC layer protocols. S-CDMA is designed
to maximize resistance to noise, optimize use of network capacity and provide
cable operators with multiple revenue streams through the ability to offer
multiple Quality of Service levels.
Maximum noise resistance through spread spectrum and rate adaptive
technologies. S-CDMA, like asynchronous Code Division Multiple Access ("CDMA")
commonly used in mobile communications, is a form of spread spectrum
technology. Spread spectrum technology was originally designed for use by the
military to provide reliable and secure communications in harsh RF
environments. The RF environment is subject to a variety of noise sources that
can interfere with the transmission of data. In spread spectrum systems, data
is transmitted by spreading the information across a range of frequencies and
across a period of time, allowing sufficient information reception for the data
to be reconstructed by the receiver. Data is encoded by transmitters in unique
spreading codes that allow multiple data streams to be received and decoded by
the receiver simultaneously. Therefore, noise events that are typically
specific to a particular frequency or a period of time do not significantly
interfere with transmission
In addition to spread spectrum, S-CDMA incorporates other techniques,
including forward error correction and interleaving, that further enhance the
ability of S-CDMA to resist impulse and ingress noise. In extremely harsh noise
environments, S-CDMA incorporates a rate adaptive mode of operation that
changes modulation schemes, reducing capacity, but allowing continued reliable
transmission. This combination of techniques enables S-CDMA-based systems to
operate in SNR environments as low as 13dB at full capacity, and as low as -
13dB in rate adaptive mode.
Optimal capacity utilization through synchronization. In asynchronous CDMA
systems, codes arriving at the receiver are unaligned. This causes mutual
interference between the codes, which forces the use of lower order modulation
schemes resulting in significantly reduced data capacity. S-CDMA minimizes
mutual interference by ensuring that codes are synchronized with each other
through ranging, power management and adaptive equalization. The process of
ranging guarantees time alignment by ensuring all codes arrive at the receiver
at the same time. Power management and adaptive equalization compensate for
variables such as temperature and changes in network topology. These techniques
allow S-CDMA to utilize higher order modulation schemes providing a capacity of
14 Mbps in a 5 MHz channel in both the upstream and downstream paths. This
14 Mbps capacity is divided into 144 data streams each represented by a unique
S-CDMA spreading code.
Efficient bandwidth management for multiple levels of Quality of Service. The
TeraComm system segments each 14 Mbps upstream and downstream channel into 128
user data streams and 16 management and control data streams. Separating user
data from management and control ensures high channel efficiency under heavy
channel loading. Each of the 128 user data streams has a continuous data
payload capacity of 64 Kbps. The bandwidth manager software residing in the
system headend allocates data streams to cable modems individually or in
groups. Data streams can also be assigned on a permanent basis, or can be
multiplexed among multiple modems based on a fairness algorithm in the
bandwidth manager. This capability allows the TeraComm system to provide a
variety of Quality of Service levels. Constant Bit Rate ("CBR") services can be
provisioned in increments of 64 Kbps by continuous assignment of data streams
to a TeraPro cable modem. As a result, services such as leased lines and T-1
circuits can be emulated. Unspecified Bit Rate ("UBR") services can be
supported by allowing modems to contend for data streams on an "as requested"
basis. Because all access requests and grants are communicated through
management streams, the impact on channel efficiency is minimized as more
modems contend for bandwidth. Both CBR and UBR services can co-exist on a
single channel enabling a cable operator to create multiple service levels and
maximize revenue from the available bandwidth capacity.
38
<PAGE>
PRODUCTS
CURRENT PRODUCTS
The Company's TeraComm system enables cable operators to cost-effectively
deploy reliable two-way broadband access services. The TeraComm system is
comprised of the TeraPro cable modem, the TeraLink 1000 Master Controller, the
TeraLink Gateway and the TeraView Element Management and Provisioning
Software.
The following diagram illustrates the TeraComm system:
[Diagram of the components of the TeraComm system]
THE TERACOMM SYSTEM
TeraPro Cable Modem. The TeraPro cable modem is a data communications device
installed in a subscriber's home or business. The TeraPro cable modem connects
to the subscriber's PC via a standard 10BaseT Ethernet connector and to the
cable network via a standard coaxial cable connector. The TeraPro cable modem
automatically configures itself without user intervention, thus minimizing
modem installation time. In addition, the configuration software for the
TeraPro cable modem is downloaded remotely, allowing centralized software
upgrades directly from the headend management system.
The TeraPro cable modem delivers full two-way communication over the cable
network, with data rates of up to 14 Mbps per 5 MHz channel in both the
upstream and the downstream direction. The TeraPro cable modem operates at
full capacity at an SNR as low as 13 dB, and gradually adjusts throughput to
provide transmission at an SNR as low as -13 dB. This feature will permit the
TeraPro cable modem to operate across any portion of the 5 to 42 MHz upstream
RF spectrum.
TeraLink 1000 Master Controller. The TeraLink 1000 Master Controller is a
data channel controller and multiplexer located at the cable headend system or
distribution hub. The TeraLink 1000 Master Controller provides control,
management and data transport functions for TeraPro cable modems connected to
the cable network. It offers dynamic bandwidth management, high-speed traffic
concentration, access control to data networking resources, and data service
quality and integrity.
39
<PAGE>
The TeraLink 1000 Master Controller is a single channel, rack-mountable
controller that supports up to 2,000 cable modems per channel. Additional
TeraLink 1000 Master Controllers can be added to scale service as performance
and subscriber needs grow. The TeraLink 1000 Master Controller, with the
TeraLink Gateway, provides a 100 BaseT interface for direct connectivity to a
private backbone or any vendor's router or switch. Alternatively, the TeraLink
1000 Master Controller, with its built-in ATM OC-3 interface, can be connected
via an ATM switch, or directly to Cisco's 7500 series routers.
TeraLink Gateway. The TeraLink Gateway is a rack-mountable edge concentrator
providing end-user clients with broadband access to a remote IP backbone (e.g.,
Internet) as well as efficient communication between modems. The TeraLink
Gateway includes an ATM OC-3 interface for connectivity to up to two TeraLink
1000 Master Controllers or an ATM switch. It also provides a 10/100 BaseT
Ethernet/Fast Ethernet auto-sense interface to a headend backbone or any IP
router including the Cisco Universal Broadband Router. The TeraLink Gateway
also includes a separate 10 BaseT interface, which may be connected to a
separate management network or the headend network. The TeraLink Gateway
supports up to 2,000 cable modems per RF channel when connected to a TeraLink
1000 Master Controller. When used with the TeraLink Gateway, the TeraPro cable
modems behave as an extension of the TeraLink Gateway, providing maximum
bandwidth and privacy.
TeraView Element Management and Provisioning Software. The TeraView Element
Management and Provisioning Software is a Windows 95 and Windows NT standards-
based software application installed at the headend system or the network
operations center. The TeraView software allows cable operators to configure,
control, monitor and maintain multiple channels of the TeraComm system.
PRODUCTS UNDER DEVELOPMENT
Universal Cable Modem and TeraLink 2000 Master Controller. The Company
currently is designing and developing a next-generation system, which includes
the UCM and an accompanying headend controller, the TeraLink 2000 Master
Controller. The UCM and the TeraLink 2000 Master Controller will be designed to
be fully compliant with DOCSIS standards, while also offering additional
features and performance enabled by the use of the S-CDMA technology. The UCM
and the TeraLink 2000 Master Controller are in the early stages of development
and the Company does not anticipate commercial deployment of these products
until 1999.
The UCM will be designed to operate in any of three modes: (i) as an existing
TeraPro cable modem to ensure backward compatibility for existing TeraComm
system users; (ii) as a DOCSIS-compliant modem that will be compatible with
multiple vendors' DOCSIS-compliant systems; and (iii) as an advanced system. In
the advanced mode the UCM will be designed to offer DOCSIS-compliant 64/256 QAM
modulation downstream channels, coupled with an advanced S-CDMA upstream
channel, offering up to 40 Mbps downstream channel capacity and 30 Mbps
upstream channel capacity.
CUSTOMERS
The Company markets its products to cable operators that seek to provide
broadband access services to both residential and commercial end users. The
Company's initial target market consists of the ten largest cable companies in
each major geographic area. In most markets, a small number of large cable
operators often provide services to a majority of subscribers in a specific
region and thus influence the purchasing decisions of smaller cable operators.
In the United States, ten cable operators together own and operate facilities
passing approximately 74% of total homes passed. The Company commenced volume
shipments of its products in the first quarter of 1998. To date, two of the
largest North American cable operators are deploying the TeraComm system
commercially.
40
<PAGE>
Selected examples of the range of customers and applications for which the
TeraComm system is being commercially deployed are as follows:
Shaw Cable. Shaw is the third largest cable operator in Canada, with cable
infrastructure passing approximately 2.0 million homes. Shaw currently has the
largest cable modem deployment in Canada, with over 25,000 cable modem users.
Shaw has selected Terayon to supply cable modem systems for Shaw's @Home
service deployments in Victoria, British Columbia, Edmonton, Alberta and parts
of metropolitan Toronto, Ontario.
Sumitomo. The Company has a distribution agreement with Sumitomo under which
Crossbeam is distributing the TeraComm system to three of Japan's leading cable
operators. The TeraComm system's noise resistant properties are designed to
enable two-way broadband access over pure coaxial networks, which comprise the
majority of Japan's cable infrastructure.
TCA Cable Systems. TCA is the 15th largest cable operator in the United
States, with cable infrastructure passing approximately 940,000 homes in Texas,
Arkansas, and Louisiana. TCA has deployed the TeraComm system in Bryan/College
Station, Texas and Amarillo, Texas. TCA provides a tiered service offering,
with prices ranging from $40 per month for residential Internet access to $175
per month for commercial Internet access. TCA has announced that it intends to
leverage the noise resistant properties of Terayon's products to deploy
broadband access services on a pure coaxial network in Tyler, Texas.
Three customers accounted for approximately 73% of the Company's revenues in
1997 and for approximately 62% of the Company's revenues in the first quarter
of 1998. In 1997, sales to Telegate, Sumitomo and NET Brasil represented
approximately 30%, 29% and 14%, respectively, of the Company's revenues. In the
first quarter of 1998, sales to Shaw, Sumitomo and Telegate represented
approximately 37%, 13% and 12%, respectively, of the Company's revenues. The
Company believes that a substantial majority of its revenues will continue to
be derived from sales to a relatively small number of customers for the
foreseeable future. In addition, the Company believes that sales to these
customers will be focused on a small number of projects. See "Risk Factors--
Dependence on Small Number of Customers."
RESEARCH AND DEVELOPMENT
The Company believes that its future success will depend upon its ability to
enhance its existing products and to develop and introduce new products that
meet a wide range of evolving cable operator and end user needs. In addition,
to address competitive and pricing pressures, the Company expects that it will
have to reduce the unit cost of manufacturing its cable modems through design
and engineering changes. For example, the Company has developed and intends to
introduce a single-board modem by the end of 1998, which the Company
anticipates will provide cost savings over its current dual-board modem. There
can be no assurance that the Company will be successful in redesigning its
products, that any such redesign will be made on a timely basis and without
introducing significant errors and product defects, or that any such redesign,
including the single board modem, would result in sufficient cost reductions to
allow the Company to significantly reduce the list price of its products or
improve its gross margin.
The Company also currently is designing and developing a next-generation
system, which includes the UCM and an accompanying headend controller, the
TeraLink 2000 Master Controller. The UCM and the TeraLink 2000 Master
Controller will be designed to be fully compliant with emerging DOCSIS
standards, while also offering additional features and performance enabled by
the use of the S-CDMA technology. The UCM and the TeraLink 2000 Master
Controller are in the early stages of development and the Company does not
anticipate commercial deployment of these products until 1999. See "Risk
Factors--Evolving Market; Rapid Technological Change; Market Acceptance of S-
CDMA," "--Ability to
41
<PAGE>
Achieve Cost Reductions," "--Evolving Industry Standards" and "--Dependence on
Products Under Development."
As of May 31, 1998, the Company had 50 employees engaged in research and
development. The Company's total research and development expenses for 1995,
1996 and 1997 and the first quarter of 1998 were $2.0 million, $8.0 million,
$11.3 million and $2.3 million, respectively.
SALES AND MARKETING
Terayon has direct sales forces in North America, Latin America and Europe.
The Company also distributes its products via distributors and systems
integrators. Terayon has signed a distribution agreement with Sumitomo under
which Crossbeam is distributing the TeraComm system to three of Japan's leading
cable operators.
The Company markets its products directly to cable operators through its
sales force, key distribution and technology partners, as well as other
marketing vehicles such as industry press, trade shows and the World Wide Web.
Through its marketing efforts, the Company strives to educate cable operators
on the technological and business benefits of its system solution, as well as
the Company's ability to provide quality support and service to the customer.
Terayon participates in the major trade shows and industry events for the cable
industry in the United States and is expanding its presence in other markets
through joint participation at local events with its international sales and
marketing partners. Industry referrals and reference accounts are significant
marketing tools developed and utilized by the Company.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company believes that its ability to consistently provide high quality
service and support will be a key factor in attracting and retaining customers.
The Technical Services and Support ("TSS") organization provides support 24
hours a day, seven days per week. Prior to deployment of the Company's systems,
each cable operator's needs are assessed and proactive solutions are
implemented, including various levels of training, periodic management and
coordination meetings, and problem escalation procedures. Terayon places a
strong emphasis on technical training, both for cable operators and systems
integrators. Initial training is offered to cable operators and systems
integrators at no cost, both in Terayon's headquarters in Santa Clara and on a
cable operator's or system integrator's premises. At May 31, 1998, the TSS
organization consisted of 13 employees located in North America, Europe, Latin
America and Asia.
In addition, Terayon has developed sophisticated tools for remote diagnosis
and monitoring of the TeraComm systems deployed by cable operators. Such tools
enable the Company to monitor cable operators' installations of the TeraLink
1000 Master Controller and to proactively suggest solutions before problems
become noticeable to end users. The Company is developing a Web-based knowledge
system to provide cable operators with access to the latest technical support
information.
MANUFACTURING
The Company outsources the materials procurement, printed circuit board
assembly, and product assembly and testing to turnkey contract manufacturers.
Currently, the Company contracts with Solectron, located in Milpitas,
California, for the manufacture of the majority of its products. CMC, located
in Santa Clara, California, also manufactures certain of the Company's
products. The Company has a limited in-house manufacturing capability at its
headquarters in Santa Clara. This facility is currently used for the assembly
and final testing of TeraLink 1000 Master Controller and TeraLink Gateways,
pilot production of new modem designs, sample testing of products received from
volume modem manufacturers, developing the manufacturing process and
documentation for new products in
42
<PAGE>
preparation for outsourcing. The Company also repairs products returned from
customers with its in-house manufacturing resources.
The Company's future success will depend in significant part on its ability
to obtain high volume manufacturing at low costs. As volume increases, the
Company plans to engage additional contract manufacturers, to procure
additional manufacturing facilities and equipment, to modify existing inventory
procedures, to substantially increase its personnel and to revise its quality
assurance and testing practices. There can be no assurance that any of these
efforts will be successful. The Company anticipates that the need to reduce the
manufacturing costs of its cable modem and will continue to evaluate the use of
low cost third-party suppliers and manufacturers. See "Risk Factors--Ability to
Achieve Cost Reductions" and "--Limited Manufacturing Experience and Dependence
on Contract Manufacturer."
Subcontractors supply the Company's contract manufacturers with both standard
components and subassemblies manufactured to the Company's specifications. The
Company is dependent upon certain key suppliers for a number of the components
for its products. For example, the Company currently relies on VLSI for the
Company's S-CDMA ASIC, which is used in the Company's headend and cable modem
products. In addition, all of the Company's products contain one or more
components that are currently only available from a single source.
COMPETITION
The market for broadband access systems is extremely competitive and is
characterized by rapid technological change. The Company's direct competitors
in the cable modem arena include Bay Networks, Com21, Hayes, Hybrid,
Matsushita, Motorola, Phasecom, RCA, Samsung, Scientific-Atlanta, Sony, 3Com,
Toshiba and Zenith and there are many other potential market entrants. In
addition, Bay Networks, Com21, Hybrid and Motorola introduced cable modems
prior to the Company, and have established relationships and have worked with
customers for a longer period of time than the Company. The principal
competitive factors in this market include: product performance, features and
reliability; price; size and stability of operations; breadth of product line;
sales and distribution capability; technical support and service; relationships
with cable operators; standards compliance; and general industry and economic
conditions. Certain of these factors are outside of the Company's control. The
existing conditions in the broadband access market could change rapidly and
significantly as a result of technological changes, and the development and
market acceptance of alternative technologies could decrease the demand for the
Company's products or render them obsolete. There can be no assurance that
these companies and other competitors will not introduce broadband access
products that will be less costly or provide superior performance or achieve
greater market acceptance than the Company's products.
The Company sells products that also compete with existing data access and
transmission systems utilizing the telecommunications networks, such as those
of 3Com. Additionally, the Company's controller and headend system products
face intense competition from well-established companies such as Bay Networks,
Cisco and 3Com. Many of the Company's current and potential competitors have
significantly greater financial, technical, marketing, distribution, customer
support and other resources, as well as greater name recognition and access to
customers than the Company. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that the
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition.
The market for cable modems may be impacted by the development of other
technologies that enable the provisioning of broadband access services.
Examples of such technologies include technologies that increase the efficiency
of digital transmission over telephone companies' existing
43
<PAGE>
copper infrastructure, such as various xDSL, as well as ISDN. Similarly,
broadband access services may be deployed over a number of other media,
including fiber optic cable, DBS and other wireless technologies. Broadband
access services based on some of these competing technologies are already
available and could materially limit acceptance of cable modem-based services.
The failure of broadband access services based on cable modem technology to
gain widespread commercial acceptance by cable operators and end users of
broadband access services would have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors --
Highly Competitive Industry; Established Competitors."
REGULATION
The Company and its customers are subject to varying degrees of federal,
state and local regulation. The jurisdiction of the FCC extends to the
communications industry, including broadband access products such as those of
the Company. The FCC has promulgated regulations that, among other things, set
installation and equipment standards for communications systems. Although FCC
regulations and other governmental regulations have not materially restricted
the Company's operations, there can be no assurance that future regulations
adopted by the FCC or other regulatory bodies will not have a material adverse
effect on the Company. Further, regulation of the Company's customers may
adversely impact the Company's business, operating results and financial
condition. For example, FCC regulatory policies affecting the availability of
cable services and other terms on which cable companies conduct their business,
may impede the Company's penetration of certain markets. In addition,
regulation of cable television rates may affect the speed at which cable
operators upgrade their cable infrastructures to two-way HFC. Changes in, or
the failure by the Company to comply with, applicable domestic and
international regulations could have a material adverse effect on the Company's
business, operating results and financial condition. In addition, the
increasing demand for communications systems has exerted pressure on regulatory
bodies worldwide to adopt new standards for such products and services,
generally following extensive investigation of and deliberation over competing
technologies. The delays inherent in this governmental approval process have in
the past, and may in the future, cause the cancellation, postponement or
rescheduling of the installation of communications systems by the Company's
customers, which in turn may have a material adverse effect on the sale of
products by the Company to such customers. For example, the Company experienced
delays in product shipments to a customer in Brazil due to delays in certain
regulatory approvals in Brazil, and there can be no assurance that similar
delays will not occur in other countries in which the Company markets or plans
to market its products. In addition, the Company's customers in certain parts
of Asia, such as Japan, are required to obtain licenses prior to selling the
Company's products, and delays in obtaining such licenses could have an adverse
impact on the Company's operating results. See "Risk Factors -- Regulation of
the Communications Industry."
In the United States, in addition to complying with FCC regulations, the
Company's products will be required to meet certain safety requirements. For
example, the Company will be required to have its products certified by UL in
order to meet federal requirements relating to electrical appliances to be used
inside the home. Outside of the United States, the Company's products will be
subject the regulatory requirements of each country in which the products are
manufactured or sold. These requirements are likely to vary widely, and there
can be no assurance that the Company will be able to obtain on a timely basis
or at all such regulatory approvals as may be required for the manufacture,
marketing or sale of its products. Any delay in or failure to obtain such
approvals or meet such requirements could have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors -- Other Regulatory Approvals or Certifications."
44
<PAGE>
INTELLECTUAL PROPERTY
The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect
proprietary rights in its products. The Company has two issued patents and five
patent applications pending in the United States. The Company has seven patent
applications pending internationally. There can be no assurance that the
Company's patent applications will be granted or, if granted, that the claims
covered by the patents will not be reduced from those included in the Company's
applications. Any patent might be subject to challenge in court and, whether or
not challenged, might not be sufficiently broad to prevent third parties from
developing equivalent technologies or products. The Company has entered into
confidentiality and invention assignment agreements with its employees, and
enters into non-disclosure agreements with certain of its suppliers,
distributors and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that these statutory
and contractual arrangements will prove sufficient to prevent misappropriation
of the Company's technology or to deter independent third-party development of
similar technologies.
The Company pursues the registration of its trademarks in the United States
and has applications pending to register several of its trademarks. However,
since the laws of certain foreign countries might not protect the Company's
products or intellectual property rights to the same extent as do the laws of
the United States, effective trademark, copyright, trade secret and patent
protection might not be available in every country in which the Company's
products might be manufactured, marketed or sold.
The Company expects that developers of cable modems will increasingly be
subject to infringement claims as the number of products and competitors in the
Company's industry segment grows. The Company has received a letter from an
individual claiming that the Company's technology infringes a patent held by
such individual. The Company has reviewed the allegations made by such
individual and, after consulting with its patent counsel, does not believe that
the Company's technology infringes any valid claim of such individual's patent.
There can be no assurance that, if the issue were to be submitted to a court,
such a court would not find that the Company's products infringe the patent,
nor that the individual will not continue to assert infringement. If the
Company is found to have infringed such individual's patent, the Company could
be subject to substantial damages and/or an injunction preventing it from
conducting its proposed business, and the Company's business could be
materially and adversely affected. In addition, there can be no assurance that
other third parties will not assert infringement claims against the Company in
the future. Any such claim, whether meritorious or not, could be time-
consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements may not be available on terms acceptable to the Company
or at all, which could have a material adverse effect upon the Company's
business, operating results and financial condition. Litigation also may be
necessary to enforce the Company's intellectual property rights. Any
infringement claim or other litigation against or by the Company could have a
material adverse effect on the Company's business, operating results and
financial condition.
EMPLOYEES
As of May 31, 1998, Terayon had 104 employees, of which 50 were in the
engineering group, 27 were in marketing, sales and customer support, 14 were in
operations and 13 were in general and administrative functions. None of the
Company's employees is represented by a union. The Company believes that its
relations with its employees are good.
45
<PAGE>
PROPERTIES
The Company leases an approximately 30,000 square foot facility located in
Santa Clara, California and has an option to lease approximately 10,000
additional square feet in August 1998. The current lease for the Santa Clara
facility expires in March 2002. The Company has sales offices in Denver,
Colorado; Atlanta, Georgia; Sao Paulo, Brazil; and Brussels, Belgium. The
Company believes that its existing facilities are adequate to meet its needs
for the immediate future and that future growth can be accommodated by leasing
additional or alternative space near its current facilities.
LEGAL PROCEEDINGS
The Company is not currently a party to any material legal proceedings.
46
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Certain information regarding the Company's directors, executive officers
and key employees as of June 15, 1998 is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
EXECUTIVE OFFICERS AND DIRECTORS
Dr. Zaki Rakib(1)............... 39 Chief Executive Officer, Chief Financial
Officer and Director
Shlomo Rakib.................... 41 Chairman of the Board, President and
Chief Technical Officer
Dennis J. Picker................ 50 Chief Operating Officer
Linda R. Palmor................. 43 Vice President, Finance
Michael D'Avella................ 39 Director
Christopher J. Schaepe(1)(2).... 34 Director
Lewis Solomon(2)................ 64 Director
Mark A. Stevens(1).............. 38 Director
KEY EMPLOYEES
Brian Bentley................... 36 Vice President, Worldwide Sales
Vice President, Marketing and Business
Gary W. Law..................... 42 Development
Gershon Schatzberg.............. 43 Vice President, Customer Satisfaction
W. Lee Stalcup.................. 57 Vice President, Manufacturing Operations
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Zaki Rakib co-founded Terayon in 1993 and has served as Chief Executive
Officer and Chief Financial Officer since January 1993 and as a director since
February 1995. Prior to co-founding the Company, Dr. Rakib served as Director
of Engineering for Cadence Design Systems, an electronic design automation
software company, from 1990 to 1994. Prior to joining Cadence, Dr. Rakib was
Vice President of Engineering at Helios Software, which was acquired by
Cadence in 1990. Dr. Rakib holds B.S., M.S. and Ph.D. degrees in engineering
from Ben-Gurion University in Israel. Dr. Rakib is the brother of Shlomo
Rakib, the Company's Chairman of the Board, President and Chief Technical
Officer.
Shlomo Rakib co-founded Terayon in 1993 and has served as Chairman of the
Board and President since January 1993 and as Chief Technical Officer since
February 1995. Prior to co-founding the Company, Mr. Rakib served as Chief
Engineer at PhaseCom, Inc., a communications products company, from 1981 to
1993, where he pioneered the development of data and telephony applications
over cable. Mr. Rakib is the inventor of several patented technologies in the
area of data and telephony applications over cable. Mr. Rakib holds a B.S.E.E.
degree from Technion University in Israel. Mr. Rakib is the brother of Zaki
Rakib, the Chief Executive Officer, Chief Financial Officer and a director of
the Company.
Dennis Picker has served as Chief Operating Officer since February 1998 and
served as Vice President, Standards from October 1997 to February 1998 and
Vice President, Engineering from May 1996 to October 1997. From 1994 to April
1996, Mr. Picker was Director of the Cable Data Products Business Unit of
Motorola, Inc., an electronics company, and from 1992 to 1994, he was Senior
Director of Data Networking Products at Motorola. Mr. Picker holds a B.S.
degree in electrical engineering from the University of Pennsylvania and an
M.S. degree in electrical engineering from Northwestern University.
47
<PAGE>
Linda Palmor has served as Vice President, Finance since May 1997 and served
as Corporate Controller from February 1996 to May 1997. Prior to joining the
Company, Ms. Palmor served as the Corporate Controller of Electronic Arts
Inc., a multimedia software company, from 1995 to 1996 and held financial
positions with The Walt Disney Company, a media conglomerate, from 1991 to
1995. Ms. Palmor is a certified public accountant and holds a B.Sc. degree in
biochemistry from Manchester University in the United Kingdom.
Michael D'Avella has served as a director of the Company since April 1998.
Mr. D'Avella is the Senior Vice President, Planning for Shaw Communications
Inc. ("Shaw"), a diversified communications company and a leading cable
operator in Canada. Mr. D'Avella has held a variety of senior management
positions at Shaw since 1991. Prior to that, he held positions with the
Canadian Cable Television Association and Telesat Canada. He is a director of
several privately held companies. Mr. D'Avella holds a B.A. degree in
economics and planning from the University of Toronto in Canada.
Christopher J. Schaepe has served as a director of the Company since March
1995. Mr. Schaepe is a General Partner of Weiss, Peck & Greer Venture
Partners, L.P., a technology-focused venture capital firm, which he joined in
1991. Previously, Mr. Schaepe served in corporate finance and capital markets
roles for three years at Goldman, Sachs & Company after his employment as a
software engineer at IBM Corporation. He is a director of Galileo Technology
Ltd., a communications semiconductor company, as well as several privately
held companies. Mr. Schaepe holds B.S. and M.S. degrees in computer science
from the Massachusetts Institute of Technology and an M.B.A. degree from
Stanford Business School.
Lewis Solomon has served as a director of the Company since March 1995. Mr.
Solomon has been a principal of G&L Investments, a consulting firm, since 1989
and currently serves as the Chairman of the Board of ICTV, Inc. From 1983 to
1988, he served as Executive Vice President at Alan Patricof Associates, a
venture capital firm focused on high technology, biotechnology and
communications industries. Prior to that, Mr. Solomon served in various
capacities with General Instrument Corp., most recently as Senior Vice
President. He serves on the boards of Anadigics, Inc., a manufacturer of
integrated circuits; Anacomp, Inc., a manufacturer of data storage systems;
Artesyn Technologies, Inc., a power supply and power converter supply company;
and Microelectronic Packaging, Inc., an integrated circuit packaging
manufacturer. Mr. Solomon also serves on the boards of several privately held
companies.
Mark Stevens has served as a director of the Company since March 1995. Mr.
Stevens has been a General Partner of Sequoia Capital, a venture capital
investment fund, since March 1993. Mr. Stevens currently serves on the Board
of Directors of Aspect Development, Inc., a client/server applications
software company, and several privately held companies. Prior to joining
Sequoia in 1989, he held technical sales and marketing positions at Intel
Corporation. Mr. Stevens holds a B.S.E.E. degree, a B.A. degree in economics
and an M.S. degree in computer engineering from the University of Southern
California and an M.B.A. degree from Harvard Business School.
Brian Bentley has served as Vice President, Worldwide Sales since February
1997. From 1995 to February 1997, he served as Director of TCI Sales for
Scientific-Atlanta, Inc., a satellite manufacturer. Prior to that, Mr. Bentley
served as Vice President of MSO Sales for the Multimedia Group of Motorola
from January 1995 to November 1995, and as Vice President and General Manager
for the Optical Media Group of Antec Corporation, a fiber-optic equipment
manufacturer company, from 1992 to 1995. He holds a B.S. degree in economics
from Arizona State University.
Gary Law has served as Vice President, Marketing and Business Development
since March 1997. From August 1995 to March 1997, he was Vice President of
Marketing for the Networking Products Group of Adaptec, Inc., a hardware and
software manufacturer company. Prior to that, Mr. Law served as Director of
Market Development for Bay Networks, Inc. from 1989 to 1995 and held sales and
48
<PAGE>
marketing management positions with Hewlett-Packard Company, an electronics
company and Ungermann-Bass Inc. between 1978 and 1988. He holds a B.S. degree
in engineering from the University of Texas.
Gershon Schatzberg has served as the Company's Vice President, Customer
Satisfaction since April 1998 and served as Group Director of Technical
Support Services from August 1997 to April 1998. Prior to joining the Company,
he served as Director of Network Consulting for 3Com Corporation, a networking
hardware manufacturer company, running North American sales support operations
from 1996 to 1997. From 1989 to 1996, Mr. Schatzberg served as the President
and Vice President of Engineering for RAD Network Devices, Inc., a networking
and router manufacturer company. Prior to that, he held engineering positions
with various companies. Mr. Schatzberg holds a B.S.E.E. degree from Technion
University in Israel.
W. Lee Stalcup has served as the Company's Vice President, Manufacturing
Operations since May 1998. Prior to joining the Company, Mr. Stalcup was Vice
President of Operations for Magellan Systems Corporation, a global positioning
systems manufacturer, from October 1996 to May 1998. From May 1994 to October
1994, he served as Director of Operations at AST Research, Inc., a computer
and network server manufacturer, and from October 1994 to October 1996 he
served as its Vice President of Worldwide Materials. From 1990 to 1993, Mr.
Stalcup was Executive Vice President and Chief Operating Officer of Vitalrel
Microelectronics, a multi-chip module company.
The Company's Board of Directors (the "Board") currently is comprised of six
directors. Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. Pursuant to a voting
agreement, Messrs. Rakib, who together own 4,000,000 shares of the Company's
stock, have agreed to vote to elect a nominee of Shaw to the Company's Board
("Shaw Nominee"), currently Mr. D'Avella, until such time as Shaw own less
than 384,615 shares of the Company's stock. The Company has also agreed to use
its best efforts to nominate a Shaw Nominee to the Board. The Company's
agreement with Shaw expires on the earlier of December 31, 2000 or the date
upon which Shaw no longer holds at least 384,615 shares of the Company's
stock. The Company's Certificate of Incorporation, which will become effective
upon the completion of this offering, provides that the Board will be divided
into three classes, Class I, Class II and Class III, with each class serving
staggered three-year terms. The Class I directors, initially Messrs. Solomon
and Stevens, will stand for reelection or election at the 1999 annual meeting
of stockholders. The Class II directors, initially Mr. D'Avella and Shlomo
Rakib, will stand for reelection or election at the 2000 annual meeting of
stockholders. The Class III directors, initially Mr. Schaepe and Zaki Rakib,
will stand for reelection or election at the 2001 annual meeting of
stockholders.
ADVISORY BOARD
In early 1997, the Company established an Advisory Board, which consists of
representatives from the United States and international cable industries. The
Advisory Board currently consists of nine members: Steven Craddock, the Vice
President of New Media for Comcast Corporation; Michael D'Avella, the Senior
Vice President of Planning for Shaw and a member of the Company's Board of
Directors; David Fellows, the former Vice President of Technology for
MediaOne; George Harte, the Director of Telecom Technology for Rogers
Communications Inc.; Wilt Hildebrand, the Vice President of Technology for
Cablevision Systems Corporation; Isao Momota, the President of Crossbeam
Networks; Richard Rexroat, the Vice President, Engineering of TCI
International; J.C. Sparkman, a former Executive Vice President of TCI; and
Arthur Steiner, the Director of Business Development for NET Brasil.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to February 1998, the Company did not have a Compensation Committee of
the Board of Directors, and the entire Board participated in all compensation
decisions, except that Messrs. Rakib did
49
<PAGE>
not participate in decisions relating to their respective compensation. In
February 1998, the Board formed the Company's Compensation Committee to review
and recommend to the Board compensation and benefits for the Company's
executive officers and administer the Company's stock purchase and stock option
plans. Each of the Company's directors, or an affiliated entity, holds
securities of the Company. See "Certain Transactions" and "Principal
Stockholders."
BOARD COMMITTEES
The Audit Committee of the Board of Directors, currently consisting of
Messrs. Schaepe and Solomon, reviews the internal accounting procedures of the
Company and consults with and reviews the services provided by the Company's
independent auditors. The Compensation Committee of the Board of Directors
currently consists of Dr. Rakib and Messrs. Schaepe and Stevens. The
Compensation Committee reviews and recommends to the Board the compensation and
benefits for the Company's executive officers, except that Dr. Rakib does not
participate in decisions relating to his compensation. The Compensation
Committee also administers the issuance of stock options and other awards under
the Company's 1995 Stock Option Plan, 1997 Equity Incentive Plan, 1998 Employee
Stock Purchase Plan and 1998 Non-Employee Directors' Stock Option Plan. See "--
Employee Benefit Plans."
DIRECTOR COMPENSATION
Lewis Solomon receives $2,000 per month for his service as a member of the
Board. No other director of the Company receives cash for services provided as
a director. From time to time, certain directors who are not employees of the
Company have received grants of options to purchase shares of the Company's
Common Stock. In July 1997, Mr. Stevens was granted an option to purchase
30,000 shares of Common Stock at an exercise price of $1.25 per share and
entities affiliated with Weiss, Peck & Greer L.L.C. ("WPG") were granted
options to purchase an aggregate of 30,000 shares of Common Stock at an
exercise price of $1.25 per share. Mr. Schaepe is a partner of WPG. In May
1998, Mr. D'Avella was granted an option to purchase 30,000 shares of Common
Stock at an exercise price of $6.50 per share.
In June 1998, the Board adopted the 1998 Non-Employee Directors' Stock Option
Plan (the "Directors' Plan") to provide for the automatic grant of options to
purchase shares of Common Stock to non-employee directors of the Company who
are not employees of or consultants to the Company or of any affiliate of the
Company (a "Non-Employee Director"). The Directors' Plan is administered by the
Board, unless the Board delegates administration to a Committee comprised of
members of the Board. See "--Employee Benefit Plans--1998 Non-Employee
Directors' Stock Option Plan."
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify its
directors and executive officers to the fullest extent permitted by the
Delaware General Corporation Law, (ii) the Company may, in its discretion,
indemnify other officers, employees and agents as set forth in the Delaware
General Corporation Law, (iii) to the fullest extent permitted by the Delaware
General Corporation Law, the Company is required to advance all expenses
incurred by its directors and executive officers in connection with a legal
proceeding (subject to certain exceptions), (iv) the rights conferred in the
Bylaws are not exclusive, (v) the Company is authorized to enter into
indemnification agreements with its directors, officers, employees and agents
and (vi) the Company may not retroactively amend the Bylaws provisions relating
to indemnity. The Company intends to enter into agreements to indemnify its
officers and directors. A copy of the form of such indemnification has been
filed as an exhibit to the Registration Statement.
50
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the annualized compensation awarded or paid by
the Company during the fiscal year ended December 31, 1997 to the Company's
Chief Executive Officer and four other most highly compensated officers whose
annual salary and bonus exceeded $100,000 in fiscal 1997 (hereinafter, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS (#)
------------------ ---- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Dr. Zaki Rakib............ 1997 150,000 12,500 -- --
Chief Executive Officer
and Chief Financial
Officer
Shlomo Rakib.............. 1997 150,000 12,500 -- --
President and Chief
Technical Officer
Gary Law.................. 1997 108,333 -- -- 115,000
Vice President, Marketing
and Business Development
Linda Palmor.............. 1997 108,306 10,000 -- 35,000
Vice President, Finance
Dennis Picker............. 1997 129,000 31,800 75,166(2) --
Vice President,
Standards(1)
</TABLE>
- --------
(1) Mr. Picker has served as Chief Operating Officer since February 1998.
(2) Consists of reimbursement to Mr. Picker for travel costs.
51
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------
POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED
TOTAL OPTIONS ANNUAL RATES OF STOCK
GRANTED TO PRICE APPRECIATION FOR
NUMBER OF SECURITIES EMPLOYEES IN OPTION TERM (4)
UNDERLYING OPTIONS FISCAL YEAR EXERCISE PRICE EXPIRATION -----------------------
NAME GRANTED (#) (1) (%) (2) ($/SH) (3) DATE 5% ($) 10% ($)
---- -------------------- ------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dr. Zaki Rakib.......... -- -- -- -- -- --
Shlomo Rakib............ -- -- -- -- -- --
Gary Law................ 115,000 8.82% $1.25 03/25/07 $234,154 372,850
Linda Palmor............ 35,000 2.68% $1.25 05/05/07 $ 71,264 113,476
Dennis Picker........... -- -- -- -- -- --
</TABLE>
- --------
(1) Options generally vest at a rate 20% on the first anniversary of the
vesting commencement date and 1/48th each month thereafter. The term of
each option granted is generally the earlier of (i) ten years or (ii) 90
days after termination of the optionee's services to the Company. Options
are immediately exercisable; however, the unvested shares purchasable
under such options are subject to repurchase by the Company at the
original exercise price paid per share upon the optionee's cessation of
service prior to the vesting of such shares.
(2) Based on an aggregate of 1,304,050 options granted to employees,
consultants and directors, including the Named Executive Officers, of the
Company during the fiscal year ended December 31, 1997.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that
the fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price.
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND DECEMBER 31, 1997 OPTION VALUES
There were no exercises of options by any Named Executive Officer in the
fiscal year ended December 31, 1997.
EMPLOYEE BENEFIT PLANS
1997 Equity Incentive Plan. The Company's 1997 Equity Incentive Plan (the
"1997 Plan") was adopted in March 1997 and amended in December 1997 and June
1998. An aggregate of 3,300,000 shares of Common Stock currently are
authorized for issuance under the 1997 Plan. However, each year on January 1,
starting with January 1, 1999, the aggregate number of shares of Common Stock
that are available for issuance under the 1997 Plan will automatically be
increased to that number of shares of Common Stock that is equal to 5% of the
Company's outstanding shares of Common Stock on such date.
The 1997 Plan provides for the grant of incentive stock options, as defined
under the Internal Revenue Code of 1986, as amended (the "Code"), to employees
(including officers and employee directors) and non-statutory stock options,
restricted stock purchase awards and stock bonuses to employees (including
officers and employee directors), directors and consultants of the Company and
its affiliates. The 1997 Plan is administered by the Compensation Committee,
which determines the recipients and types of awards to be granted, including
the exercise price, number of shares subject to the award and the
exercisability thereof.
52
<PAGE>
The terms of options granted under the 1997 Plan may not exceed 10 years. The
Compensation Committee determines the exercise price of options granted under
the 1997 Plan. However, the exercise price for an incentive stock option cannot
be less than 100% of the fair market value of the Common Stock on the date of
the option grant, and the exercise price for a non-statutory stock option
cannot be less than 85% of the fair market value of the Common Stock on the
date of the option grant. Options granted under the 1997 Plan vest at the rate
specified in the option agreement. Generally, the right to exercise 20% of the
total number of shares granted vest 12 months after the date of option grant,
with the reminder vesting monthly over four years thereafter, such that an
option is fully vested on the fifth anniversary of the date of the option
grant. Generally, the optionee may not transfer a stock option other than by
will or the laws of descent or distribution. However, an optionee may designate
a beneficiary who may exercise the option in the event of the optionee's death
or disability. Unless the terms of an optionee's option agreement provide for
an earlier termination, in the event of the optionee's cessation of his or her
relationship with the Company due to death or disability, the optionee's
beneficiary may exercise any vested options up to 18 months and 12 months,
respectively, after the date of such cessation. If such optionee's relationship
with the Company ceases for any reason other than the optionee's death or
disability, the optionee may exercise any vested options during the 30 days
following such cessation.
No incentive stock option (and, prior to the Company's stock being publicly
traded, no non-statutory stock option) may be granted to any person who, at the
time of the grant, owns (or is deemed to own) stock possessing more than 10% of
the total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at lease 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the option
does not exceed five years from the date of the grant. In addition, the
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calender year (under the 1997 Plan and
all other stock plans of the Company and its affiliates) may not exceed
$100,000.
When the Company becomes subject to Section 162(m) of the Code (which denies
a deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000), no person may be granted options under the Incentive Plan
covering more than 500,000 shares of Common Stock in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the 1997 Plan. The Compensation Committee has the authority to
reprice outstanding options or to offer optionees the opportunity to replace
outstanding options with new options for the same or a different number of
shares. Both the original and new options will count toward the Code Section
162(m) limitations set forth above.
Restricted stock purchase awards granted under the 1997 Plan may be granted
pursuant to a repurchase option in favor of the Company in accordance with a
vesting schedule and at a price determined by the Compensation Committee. Stock
bonuses may be awarded in consideration of past services without a purchase
payment. Rights under a stock bonus or restricted stock bonus agreement
generally may not be transferred other than by will or the laws of descent and
distribution during such period as the stock awarded pursuant to such an
agreement remains subject to the agreement.
If there is any sale of all or substantially all of the Company's assets, any
merger or any consolidation in which the Company is not the surviving
corporation or a like transaction involving the Company, all outstanding awards
under the 1997 Plan either will be assumed or substituted for by any surviving
entity. If the surviving entity determines not to assume or substitute for such
awards, the vesting of stock awards held by persons still serving the Company
or its affiliate will be accelerated and such awards will terminate if not
exercised prior to the sale of assets, merger or consolidation.
53
<PAGE>
As of May 31, 1998, 39,250 shares of Common Stock had been issued upon the
exercise of options granted under the 1997 Plan, options to purchase 1,000,760
shares of Common Stock were outstanding and 9,990 shares remained available for
future grant. The 1997 Plan will terminate in March 2007 unless terminated by
the Board before then. As of May 31, 1998, no stock awards or restricted stock
had been granted under the 1997 Plan.
1995 Stock Option Plan. The Company also has a 1995 Stock Option Plan (the
"1995 Plan"). The 1995 Plan is administered by the Board, unless the Board
delegates administration to a committee comprised of members of the Board.
Under the 1995 Plan, stock options and awards may be granted to employees,
directors and consultants. Only employees may receive incentive stock options;
employees, directors and consultants may receive non-statutory stock options
and stock awards other than incentive stock options. The exercise price of
incentive stock options granted under the 1995 Plan must be at least equal to
the fair market value of the Common Stock on the date of grant, while the
exercise price of nonstatutory options must equal at least 85% of such market
value. Generally, the right to exercise 20% of the total number of shares
granted vest 12 months after the date of option grant, with the reminder
vesting monthly over four years thereafter, such that an option is fully vested
on the fifth anniversary of the date of the option grant. Options and awards
granted under the Plan must be exercised within ten years of the date of grant.
The other terms of the 1995 Plan are substantially similar to the terms of the
1997 Plan.
As of May 31, 1998, 724,185 shares had been issued upon the exercise of
options under the 1995 Plan, 1,341,015 shares of Common Stock were subject to
outstanding options and 49,547 shares remained available for future grant. The
1995 Plan will terminate in March 2005 unless terminated by the Board of
Directors before then.
1998 Non-Employee Directors' Stock Option Plan. In June 1998, the Board
adopted the Directors' Plan to provide for the automatic grant of options to
purchase shares of Common Stock to non-employee directors of the Company who
are not employees of or consultants to the Company or of any affiliate of the
Company (a "Non-Employee Director"). The Directors' Plan is administered by the
Board, unless the Board delegates administration to a Committee comprised of
members of the Board.
The aggregate number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 200,000 shares. Pursuant to the
terms of the Directors' Plan, after the effective date of the initial public
offering of the Company's Common Stock, each person who is elected or appointed
for the first time to be a Non-Employee Director automatically shall, upon the
date of his or her initial election or appointment to be a Non-Employee
Director by the Board or stockholders of the Company, be granted an option to
purchase 30,000 shares of Common Stock. In addition, on the day following each
Annual Meeting of Stockholders of the Company ("Annual Meeting"), commencing
with the Annual Meeting in 1999, each person who is then serving as a Non-
Employee Director automatically shall be granted an option to purchase 12,500
shares of Common Stock, which amount shall be prorated for any Non-Employee
Director who has not continuously served as a Non-Employee Director for the 12-
month period prior to the date of such Annual Meeting. In addition, on the day
following each Annual Meeting, commencing with the Annual Meeting in 1999, each
Non-Employee Director who is then serving as a member of a committee of the
Board of Directors automatically shall be granted, for each such committee, an
option to purchase 3,000 shares of Common Stock of the Company, which amount
shall be prorated for any Non-Employee Director who has not continuously served
as a member of such committee for the 12-month period prior to the date of such
Annual Meeting.
The exercise price of the options granted under the Directors' Plan will be
equal to the fair market value of the Common Stock on the date of grant. No
option granted under the Directors' Plan may be exercised after the expiration
of 10 years from the date it was granted. Options granted under the Directors'
Plan vest and become exercisable as to 33% of the shares on the first
anniversary of the date
54
<PAGE>
of grant and 1/36th of the shares monthly thereafter. Options granted under the
Directors' Plan generally are non-transferable. However, an optionee may
designate a beneficiary who may exercise the option following the optionee's
death. An optionee whose service relationship with the Company or any affiliate
(whether as a Non-Employee Director of the Company or subsequently as an
employee, director or consultant of either the Company or an affiliate) ceases
for any reason may exercise vested options for the term provided in the option
agreement (3 months generally, 12 months in the event of disability, and 18
months in the event of death).
In the event of certain changes in control of the Company, all outstanding
awards under the Directors' Plan either will be assumed or substituted for by
any surviving entity. If the surviving entity determines not to assume or
substitute for such awards, the vesting and time during which such options may
be exercised shall be accelerated prior to such event and the options will
terminate if not exercised after such acceleration and at or prior to such
event. Unless terminated sooner by the Board of Directors, the Directors' Plan
will terminate in June 2008.
1998 Employee Stock Purchase Plan. In June 1998, the Company's Board of
Directors approved the 1998 Employee Stock Purchase Plan (the "Purchase Plan"),
covering an aggregate of 700,000 shares of Common Stock. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Code. Under the Purchase Plan, the Board of Directors may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the Purchase Plan. The offering period for
any offering will be no more than 27 months.
Under the Purchase Plan, employees are eligible to participate if they are
employed by the Company or an affiliate of the Company designated by the Board
of Directors and are employed at least 20 hours per week and five months per
year. Employees who participate in an offering will have the right to purchase
up to the number of shares of Common Stock purchasable with a percentage
designated by the Board of Directors, up to 15%, of an employee's earnings
withheld pursuant to the Purchase Plan and applied, on specified dates
determined by the Board of Directors, to the purchase of shares of Common
Stock. The price of Common Stock purchased under the Purchase Plan will be
equal to 85% of the lower of the fair market value of the Common Stock on the
commencement date of each offering period or the relevant purchase date.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically on termination of
employment with the Company.
In the event of certain changes in control of the Company, the Company and
the Board of Directors have discretion to provide that each right to purchase
Common Stock will be assumed or an equivalent right will be substituted by the
successor corporation, or the Board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to the change in control. The Purchase Plan will terminate at
the Board's discretion or when all of the shares reserved for issuance under
the Purchase Plan have been issued.
401(k) Plan. The Company maintains the Terayon Corporation 401(k) Retirement
Plan (the "401(k) Plan") for eligible employees ("Participants"). A Participant
may contribute up to 15% of his or her total annual compensation to the 401(k)
Plan, or up to a statutorily prescribed annual limit, if less. The annual limit
for 1998 is $10,000. Each Participant is fully vested in his or her deferred
salary contributions. Participant contributions are held and invested by the
401(k) Plan's trustee. The Company may make discretionary contributions as a
percentage of Participant contributions, subject to established limits. To
date, the Company has made [no] contributions to the 401(k) Plan on behalf of
the Participants. The 401(k) Plan is intended to qualify under Section 401 of
the Code, so that contributions by employees or by the Company to the 401(k)
Plan, and income earned on the 401(k) Plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by
the Company, if any, will be deductible by the Company when made.
55
<PAGE>
EMPLOYMENT AGREEMENTS
In February 1993, the Company entered into an employment agreement with
Shlomo Rakib to serve as President and Chairman of the Board of Directors. The
employment agreement is for a period of seven years, terminable at will or
without cause at any time upon written notice. In February 1993, the Company
also entered into an employment agreement with Zaki Rakib to serve as Chief
Executive Officer and Chief Financial Officer. The employment agreement is not
for a specified term and is terminable at will or without cause at any time
upon written notice.
56
<PAGE>
CERTAIN TRANSACTIONS
In February 1993, the Company entered into an employment agreement with Zaki
Rakib, the Company's Chief Executive Officer and a director of the Company. Dr.
Rakib is the brother of Shlomo Rakib, the Company's Chairman of the Board,
President and Chief Technical Officer. See "Management--Employment Agreements."
In February 1993, the Company also entered into an employment agreement with
Shlomo Rakib, the Company's Chairman of the Board, President and Chief
Technical Officer. Mr. Rakib is the brother of Zaki Rakib, the Company's Chief
Executive Officer, Chief Financial Officer and director of the Company. See
"Management--Employment Agreements."
In December 1995, in connection with the purchase by Cisco of Series B
Preferred Stock of the Company, the Company granted Cisco a right of first
offer to acquire the Company in the event the Company commences a sale of fifty
percent (50%) or more of its outstanding capital stock or all of its assets.
The Company also granted Cisco the right to make an offer to purchase the
Company in the event the Company commences an initial public offering of its
securities. Cisco holds more than 5% of the outstanding equity of the Company.
Cisco also has the right to elect one director to the Company's Board of
Directors. Cisco's rights terminate upon the completion of the Company's
initial public offering.
In March 1996, the Company loaned Shlomo Rakib, the Company's Chairman of the
Board, President and Chief Technical Officer, $100,000 pursuant to an interest-
free promissory note, with the principal amount due in March 2001. The note (i)
may be extended for a longer term at the option of the Company, (ii) is secured
by 20,000 shares of Common Stock held by Mr. Rakib and (iii) will accelerate
upon termination of his employment with the Company, the initial public
offering of the Company's securities or the sale of the Company. Mr. Rakib is
the brother of Zaki Rakib, the Company's Chief Executive Officer, Chief
Financial Officer and a director of the company.
In December 1997, the Company entered into a strategic partnership and
distributorship agreement with Sumitomo, a greater than five percent
stockholder of the Company, whereby Sumitomo and the Company formed a strategic
partner relationship for the purpose of promoting Terayon's products in Japan.
Pursuant to this agreement, the Company appointed Sumitomo as its exclusive
distributor for Terayon's products in Japan and as a non-exclusive distributor
for Terayon's products in the rest of the world. Sales to Sumitomo in the first
quarter of 1998 were approximately $325,000, which represented approximately
13% of the Company's revenues for that quarter.
In the quarter ended March 31, 1998, the Company sold products to Shaw for an
aggregate of approximately $900,000. In addition, in April 1998, the Company
issued Shaw a warrant to purchase 3,000,000 shares of Common Stock at an
exercise price of $6.50 per share. Michael D'Avella, a director of the Company,
is the Senior Vice President of Planning for Shaw.
The Company has granted options to certain of its directors and executive
officers.
The Company believes that the terms of the transactions described above were
no less favorable to the Company than would have been obtained from an
unaffiliated third party. Any future transactions between the Company and any
of its officers, directors or principal stockholders will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be approved by a majority of the independent and disinterested members
of the Board of Directors.
The Company intends to enter into indemnification agreements with its
directors and executive officers for the indemnification of and advancement of
expenses to such persons to the full extent permitted by law. The Company also
intends to execute such agreements with its future directors and executive
officers. See "Management -- Limitation on Directors' and Officers' Liability."
57
<PAGE>
Holders of Preferred Stock are entitled to certain registration rights with
respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock -- Registration Rights."
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of May 31, 1998, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by
(i) each of the Company's Named Executive Officers, (ii) each of the Company's
directors, (iii) each holder of more than 5% of the Company's Common Stock,
(iv) certain other stockholders and (v) all current directors and executive
officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
SHARES ----------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNERS OWNED (1) OFFERING OFFERING
- ----------------- ------------ ----------- -----------
<S> <C> <C> <C>
Dr. Zaki Rakib (2)................... 2,000,000 15.9%
Shlomo Rakib (2)..................... 2,000,000 15.9%
Entities associated with Weiss, Peck 1,713,882 13.6%
& Greer (3).........................
555 California Street, Suite 3130
San Francisco, California 94104
Entities associated with Sequoia 1,683,882 13.4%
Capital (4).........................
3000 Sand Hill Road Suite 280,
Building 4
Menlo Park, California 94025
Cisco Systems, Inc................... 896,834 7.1%
170 West Tasman Drive
San Jose, California 95134
Entities associated with Walden 840,620 6.7%
Ventures (5)........................
750 Battery Street, 7th Floor
San Francisco, California 94111
Sumitomo Corporation................. 784,615 6.2%
2-2 Hitotsubashi 1-Chome,
Chiyoda-Ku
C.P.O. Box 1524
Tokyo, 100-91 JAPAN
Shaw Communications Inc. (6)......... 576,923 4.6%
Christopher J. Schaepe (3)........... 1,713,882 13.6%
Mark Stevens (4)(7).................. 1,713,882 13.6%
Lewis Solomon (8).................... 100,000 * *
Michael D'Avella (6)(9).............. 611,923 4.9%
Gary Law (10)........................ 120,000 * *
Linda Palmor (11).................... 90,000 * *
Dennis Picker (12)................... 240,000 1.9%
All directors and executive officers 8,589,687 40.6%
as a group (8 persons) (13).........
</TABLE>
- --------
* Less than 1%.
(1) Percentage of beneficial ownership is based on 12,575,637 shares of Common
Stock outstanding on an as-converted basis as of May 31, 1998.
(2) The address for Messrs. Rakib is c/o Terayon Communication Systems, 2952
Bunker Hill Lane, Santa Clara, CA 95054.
(3) Includes 919,400 shares held by WPG Enterprise Fund II, L.P. and 764,482
shares held by Weiss, Peck & Greer Venture Associates III, L.P. Also
includes 16,380 shares issuable to WPG Enterprise Fund II, L.P. and 13,620
shares issuable to Weiss, Peck & Greer Venture Associates III, L.P. upon
the early exercise of options vesting through July 2000. Christopher
Schaepe, a director of the Company, is a General Partner of WPG Venture
Partners III, L.P., a general partner of the entities associated with
Weiss, Peck & Greer. Mr. Schaepe may be deemed to have a voting and
investment
59
<PAGE>
power over the shares held by the entities associated with Weiss, Peck &
Greer. He disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest therein.
(4) Includes (i) 1,532,333 shares held by Sequoia Capital VI; (ii) 84,195
shares held by Sequoia Technology Partners VI; (iii) 62,860 shares held by
Sequoia XXIV; (iv) 2,296 shares held by Sequoia 1995; (v) 791 shares held
by Sequoia 1997; and (vi) 1,407 shares held by SQP 1997. Mark Stevens, a
director of the Company, is a General Partner of the entities associated
with Sequoia Capital. Mr. Stevens may be deemed to have a voting and
investment power over the shares held by the entities associated with
Sequoia Capital. He disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest therein.
(5) Includes (i) 392,270 shares held by Walden-Israel Ventures, L.P.; (ii)
392,270 shares held by Walden-SBIC, L.P.; and (iii) 56,080 shares held by
Walden Technology Ventures II, L.P.
(6) Includes 192,308 shares issued to Shaw subsequent to May 31, 1998. Does
not include 3,000,000 shares issuable pursuant to a warrant.
(7) Includes 20,000 shares subject to repurchase by the Company within 60 days
of May 31, 1998.
(8) Includes 30,000 shares issued to Mr. Solomon upon the exercise of options
subsequent to May 31, 1998 and 20,000 shares issuable upon the early
exercise of options vesting through May 2000, 2,500 of which will be fully
vested and no longer subject to repurchase within 60 days of May 31, 1998.
(9) Includes 384,615 shares held by Shaw Communications Inc. Mr. D'Avella, a
director of the Company, is the Senior Vice President, Planning for Shaw.
Also includes 35,000 shares issuable upon the early exercise of options
vesting through April 2001. Mr. D'Avella may be deemed to have a voting
and investment power over the shares held by Shaw. He disclaims beneficial
ownership as to all shares held by Shaw.
(10) Includes 120,000 shares issuable upon the early exercise of options
vesting through May 2003, 30,667, of which will be fully vested and no
longer subject to repurchase within 60 days of May 31, 1998.
(11) Includes 90,000 shares issuable upon the early exercise of options vesting
through May 2003, 25,083 of which will be fully vested and no longer
subject to repurchase within 60 days of May 31, 1998.
(12) Includes 240,000 shares issuable upon the early exercise of options
vesting through May 2003, 80,667 of which will be fully vested and no
longer subject to repurchase within 60 days of May 31, 1998.
(13) Includes 535,000 shares issuable upon the early exercise of options
vesting through May 2003, 138,917 of which will be fully vested and no
longer subject to repurchase within 60 days of May 31, 1998.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this Offering, the authorized capital stock of the
Company will consist of 30,000,000 shares of Common Stock, par value $0.001
per share, and 5,000,000 shares of Preferred Stock, par value $0.001 per share
("Preferred Stock").
COMMON STOCK
As of March 31, 1998, there were 11,973,351 shares of Common Stock
(including shares of Preferred Stock that will be converted into Common Stock
upon completion of this Offering) outstanding held of record by 93
stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of the Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are, and all shares of Common Stock to be outstanding upon the
completion of this Offering will be, fully paid and non-assessable.
PREFERRED STOCK
Pursuant to the Restated Certificate, the Board of Directors has the
authority, without further action by the stockholders, to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the
designations, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater
than the rights of the Common Stock. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting, conversion or
other rights that could adversely affect the voting power and other rights of
the holders of Common Stock. Preferred Stock could thus be issued quickly with
terms calculated to delay, defer or prevent a change in control of the Company
or make removal of management more difficult. Additionally, the issuance of
Preferred Stock may have the effect of decreasing the market price of the
Common Stock and may adversely affect the voting and other rights of the
holders of Common Stock. Upon the completion of this Offering, there will be
no shares of Preferred Stock outstanding and the Company has no current plans
to issue any shares of the Preferred Stock.
WARRANTS
In April 1998, the Company issued to Shaw a warrant ("Product Purchase
Warrant") to purchase 3,000,000 shares of Common Stock at an exercise price of
$6.50 per share. The Product Purchase Warrant is exercisable between April 6,
2003 and December 31, 2003, or earlier depending on the volume of cable modem
purchases by Shaw in 1998, 1999 and 2000. In addition, the Company issued to
Shaw a warrant ("Anti-Dilution Warrant") to purchase an indeterminate number
of shares of Common Stock for an aggregate price of $1.00. The Anti-Dilution
Warrant is exercisable from time to time when the Company issues certain new
equity securities until the date upon which Shaw ceases to own at least
384,615 shares of Common Stock.
61
<PAGE>
REGISTRATION RIGHTS
Pursuant to an agreement between the Company and the holders (or their
permitted transferees) of approximately 8,360,635 shares of Common Stock and
Preferred Stock (which Preferred Stock will automatically be converted into
Common Stock upon the completion of this offering) and of warrants to purchase
3,038,462 shares of Common Stock ("Holders"), the Holders will be entitled to
certain rights with respect to registration of such shares for sale in the
public market. The Holders are entitled to certain rights with respect to the
registration of such shares under the Securities Act. If the Company proposes
to register its Common Stock, subject to certain exceptions, under the
Securities Act, the Holders are entitled to notice of the registration and are
entitled at the Company's expense to include such shares therein, provided that
the managing underwriters have the right to limit the number of such shares
included in the registration or exclude such shares entirely. In addition,
certain of the Holders may require the Company, at the Company's expense, on no
more than six occasions, to file a registration statement under the Securities
Act with respect to their shares of Common Stock. Such rights may not be
exercised until six months after the completion of this offering. Further,
certain Holders may require the Company at the Company's expense on no more
than four occasions, to register all or portion of their shares on Form S-3
when such form becomes available to the Company, subject to certain conditions
and limitations. Such rights expire on the seventh anniversary of completion of
this Offering.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CHARTER DOCUMENTS AND DELAWARE LAW
Charter Documents
The Restated Certificate and Restated Bylaws include a number of provisions
that may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of the Company. First, the Restated
Certificate provides that all stockholder action upon completion of this
offering must be effected at a duly called meeting of holders and not by a
consent in writing. Second, the Restated Bylaws provide that special meetings
of the holders may be called only by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer or (iii) Board of Directors
pursuant to a resolution adopted by a majority of the total number of
authorized directors. Third, the Certificate and the Bylaws provide for a
classified Board of Directors. The Certificate includes a provision requiring
cumulative voting for directors only if required by applicable California law.
Under cumulative voting, a minority stockholder holding a sufficient percentage
of a class of shares may be able to ensure the election of one or more
directors. As a result of the provisions of the Certificate and applicable
California and Delaware law, at any annual meeting whereby the Company had at
least 800 stockholders as of the end of the fiscal year prior to the record
date for such annual meeting, stockholders will not be able to cumulate votes
for directors. Finally, the Restated Bylaws establish procedures, including
advance notice procedures with regard to the nomination of candidates for
election as directors and stockholder proposals. These provisions of the
Restated Certificate and Restated Bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control or management of the
Company. Such provisions also may have the effect of preventing changes in the
management of the Company. See "Risk Factors--Anti-Takeover Provisions."
Delaware Takeover Statute
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). In general, Section 203 prohibits a
publicly held Delaware corporation, such as the Company shall become upon
completion of this Offering, from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction pursuant to which the person became an interested stockholder,
unless the business combination is approved in a manner prescribed by Delaware
law. For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and
62
<PAGE>
an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
has been appointed as the transfer agent and registrar for the
Company's Common Stock.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company, and there can be no assurance that a significant public market for the
Common Stock will develop or be sustained after this offering. Future sales of
substantial amounts of Common Stock (including shares issued upon exercise of
outstanding options and warrants) in the public market following this offering
could adversely affect market prices prevailing from time to time and could
impair the Company's ability to raise capital through sale of its equity
securities. As described below, no shares currently outstanding will be
available for sale immediately after this offering because of certain
contractual restrictions on resale. 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
shares of Common Stock (based upon shares outstanding as of May 31, 1998),
assuming no exercise of the Underwriters' over-allotment option and no exercise
of outstanding options or warrants that do not expire prior to completion of
this offering. Of these shares, the shares sold in this offering will be
freely tradable without restriction under the Securities Act except for any
shares purchased by "affiliates" of the Company as that term is defined in Rule
144 under the Securities Act. The remaining 12,575,637 shares of Common Stock
held by existing stockholders are "Restricted Shares" as that term is defined
in Rule 144. All such Restricted Shares are subject to lock-up agreements
providing that, with certain limited exceptions, the stockholder will not
offer, sell, contract to sell or otherwise dispose of any Common Stock of the
Company, including any securities that are convertible into or exchangeable
for, Common Stock for a period 180 days after the date of this Prospectus
without the prior written consent of BT Alex. Brown Incorporated or the
Company. As a result of these lock-up agreements, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701,
none of these shares will be salable until 181 days after the date of this
Prospectus. Beginning 181 days after the date of this Prospectus, 12,091,022
Restricted Shares will be eligible for sale in the public market, subject to
volume and other limitations under Rule 144. In addition, as of June 11, 1998,
there were outstanding options to purchase 2,489,232 shares and warrants to
purchase 3,038,462 shares. All such options and warrants are subject to lock-up
agreements. The Company has agreed with BT Alex. Brown Incorporated not to
release any stockholder from any lock-up agreement between the Company and the
stockholder without the prior written consent of BT Alex. Brown Incorporated.
BT Alex. Brown Incorporated may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements.
In 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 during the four
calendar weeks preceding the filing of a 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 three months 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 and affiliate),
is entitled to sell such shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of
or consultant to the Company who purchased shares pursuant to a
64
<PAGE>
written compensatory plan or contract may be entitled to rely on the resale
provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701
shares under Rule 144 without complying with the holding period requirements of
Rule 144. Rule 701 further provides that non-affiliates may sell such shares in
reliance on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling such shares. However, all Rule 701 shares are subject
to lock-up agreements and will only become eligible for sale at the expiration
of the 180-day lock-up agreements or no sooner than 90 days after the offering
upon obtaining the prior written consent of BT Alex. Brown Incorporated.
Immediately after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the 1995 Stock Option Plan, the 1997 Equity Incentive
Plan, the 1998 Employee Stock Purchase Plan and the 1998 Non-employee
Director's Stock Option Plan (collectively the "Incentive Stock Plans"). See
"Management--Equity Incentive Plans". Based on the number of shares subject to
outstanding options as of June 11, 1998 and currently reserved for issuance
under the Incentive Stock Plans, such registration statement would cover
approximately 5,600,000 shares. Such registration statement will automatically
become effective upon filing. Accordingly, shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates of the Company, be available for sale in the open market
immediately after the 180-day lock-up agreements expire.
Also beginning 180 days after the date of this offering, holders of
approximately 8,360,635 Restricted Shares and holders of warrants to purchase
3,038,462 shares of Common Stock will be entitled to certain rights with
respect to registration of such shares for sale in the public market. See
"Description of Capital Stock--Registration Rights". Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for shares
purchased by affiliates) immediately upon the effectiveness of such
registration.
65
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
through their Representatives, BT Alex. Brown Incorporated, Hambrecht & Quist
LLC and Smith Barney Inc., have severally agreed to purchase from the Company
the following respective number of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
BT Alex. Brown Incorporated.......................................
Hambrecht & Quist LLC.............................................
Smith Barney Inc. ................................................
----------
Total...........................................................
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any such shares are
purchased.
The Company has been advised by Representatives of the Underwriters that the
Underwriters propose to offer the shares of Common Stock directly to the public
at the initial offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the above table bears to the total number of shares of
Common Stock offered hereby, and the Company will be obligated, pursuant to the
option, to sell such shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same terms
as those on which the shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company and its officers, directors and stockholders have agreed not to
offer, sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
BT Alex. Brown Incorporated. Such consent may be given without any public
notice.
66
<PAGE>
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations will be prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies that the Company and the Representatives of the
Underwriters believe to be comparable to the Company, estimates of the business
potential of the Company and its industry in general and the present state of
the Company's development and other factors deemed relevant.
The Company has been advised by the Representatives that during and after
this offering, the Underwriters may purchase and sell Common Stock in the open
market. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with this offering. Stabilizing transactions consist of certain bids
or purchases for the purpose of preventing or retarding a decline in the market
price of the Common Stock; and syndicate short positions involve the sale by
the Underwriters of a greater number of shares of Common Stock than they are
required to purchase from the Company in this offering. The Underwriters also
may impose penalty bids, whereby selling concessions allowed to the syndicate
members or other broker-dealers in respect of the Common Stock sold in this
offering for their account may be reclaimed by the syndicate if such securities
are repurchased by the syndicate in stabilizing or short-covering transactions.
These activities may stabilize, maintain or otherwise affect the market price
of the Common Stock, which may be higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the Nasdaq
National Market or otherwise and these activities, if commenced, may be
discontinued at any time.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm orders to any account over which they
exercise discretionary authority.
67
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward llp ("Cooley Godward"), San Francisco, California.
Certain legal matters related to the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. As of the date of this Prospectus, certain partners and
associates of Cooley Godward own through an investment partnership an aggregate
of 36,668 shares of Common Stock of the Company.
EXPERTS
The consolidated financial statements of Terayon Communication Systems at
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is
made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to 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. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
certain fees prescribed by the Commission. The Commission also maintains a
World Wide Web site that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements certified by an independent public accounting firm
and quarterly reports containing unaudited interim financial information for
each of the first three fiscal quarters of each fiscal year of the Company.
68
<PAGE>
GLOSSARY OF TECHNICAL TERMS
<TABLE>
<C> <S>
10BASET..................... Ethernet standard which applies to the physical
layer of the OSI Reference Model for 10 Mbps
Ethernet over two pairs of category 3, 4 or 5
Unshielded Twisted Pair (UTP) wire.
100BASET.................... An extension to the 10BaseT Ethernet network
access method which operates at 100 Mbps.
56 KBPS..................... Equivalent to a single high speed telephone
service line, capable of transmitting one voice
call or 56 Kbps of data.
ADSL........................ Asymmetric Digital Subscriber Line. A high speed
technology that enables the transfer of data
over existing copper line.
ANALOG...................... A form of transmission employing a continuous
electrical signal (rather than a pulsed or
digital system) that varies in frequency and
amplitude.
ASIC........................ Application specific integrated circuit.
ASYNCHRONOUS................ A form of concurrent input and output
communication transmission with no timing
relationship between the two signals. Slower-
speed asynchronous transmission requires start
and stop bits to avoid a dependency on timing
clocks (10 bits to send an 8-bit byte).
ATM......................... Asynchronous Transfer Mode. A fixed length 53-
byte packet-based transmission technology that
may be used to transmit data, voice and video
traffic; ATM utilizes cell switching.
BANDWIDTH................... A range of signal frequencies, measured in
cycles per second or Hertz (Hz). Also refers to
the speed at which data is transmitted, measured
in bits per second (bps).
BROADBAND ACCESS............ A transmission that has a bandwidth greater than
a voice-grade line of 3KHz, usually at
transmission speeds of greater than 1.5 Mbps
(T-1).
CBR......................... Constant bit rate. A Quality of Service class
specified when service is initiated.
CDMA........................ Code Division Multiple Access. An information
transmission technology that transmits
information from multiple sources across a fixed
frequency band by encoding each in a unique
transmission code.
COAXIAL CABLE............... A large capacity data transmission medium
consisting of insulated wires grouped together
inside an insulated cable. Used for broadband
communications networks and cable TV.
DAVLC....................... Digital Audio Video Interactive Council. A
European standards setting committee.
DBS......................... Direct Broadcast Satellite. A broadband
communications technology that broadcasts
digital television programming from satellites
directly to user dish antennas.
</TABLE>
G-1
<PAGE>
<TABLE>
<C> <S>
DOWNSTREAM.................. The data path from service provider to end user.
DSL......................... Digital Subscriber Line. Point-to-point public
network access technologies that allow multiple
forms of data, voice and video to be carried
over twisted-pair copper wire on the local loop
between a network service provider's central
office and the customer site at limited
distances.
FCC......................... Federal Communications Commission.
FDMA........................ Frequency Division Multiple Access. A
transmission technology that multiplexes
information from multiple sources onto discrete
carrier frequencies over fixed time intervals.
FREQUENCY................... The number of identical cycles per second,
measured in hertz, of a periodic oscillation or
wave in radio propagation.
HDSL........................ High Bit Rate Digital Subscriber Line. A
technology that enables high speed transmission
of data over copper wires.
HEADEND..................... The central distribution point in a cable
system. Typically serves tens to hundreds of
thousands of homes.
HERTZ....................... Cycles per second.
HFC......................... Hybrid Fiber/Coax. Upgraded cable plant, which
uses a combination of fiber optic cable in the
backbone and coaxial cable in the subscriber
feeder plant.
HOMES PASSED................ Homes physically passed by a cable network.
IEEE........................ Institute of Electrical and Electronics
Engineers, Inc.
ISDN........................ Integrated Services Digital Network. An
internationally accepted standard for voice,
data and signaling that makes all transmission
circuits end-to-end digital and defines a
standard out-of-band signaling system.
KBPS........................ Kilobits per second. Thousand bits per second.
LMDS........................ Local Multipoint Distribution Service. A
broadband wireless communications network that
uses millimeter wave frequencies around 28 to 38
GHz to transmit video and data to residences
over a cellular-like network at distances under
a few miles.
MBPS........................ Megabits per second. Millions of bits per
second.
MCNS........................ Multimedia Cable Network System. Industry
consortium that defines the technical
requirement for interoperability of high speed
cable modem and headend equipment.
MHZ......................... Megahertz. Millions of cycles per second.
MMDS........................ Multichannel Multipoint Distribution Service. A
broadband wireless communications network that
uses microwave frequencies around 2.5 GHz to
transmit video to residences at distances up to
tens of miles.
</TABLE>
G-2
<PAGE>
<TABLE>
<C> <S>
OC-3........................ A specification of transmission of data over
optical cable at 155 megabits per second.
QAM......................... Quadrature Amplitude Modulation. A digital
modulation technique commonly used in broadband
networks.
RF.......................... Radio Frequency. The range of electro-magnetic
frequencies above the audio range and below
visible light.
RF MODULATION............... The transmission of a signal through a carrier
frequency.
SNR......................... Signal-to-noise ratio.
SYNCHRONOUS................. A form of communication transmission with a
direct timing relationship between input and
output signals. The transmitter and receiver are
in sync and signals are sent at a fixed rate.
Information is sent in multibyte packets.
TDMA........................ Time Division Multiple Access. An information
transmission technology that multiplexes
information from multiple sources onto a single
frequency carrier signal over discrete time
intervals.
UBR......................... Unspecified Bit Rate. A Quality of Service class
that provides no guarantee of a fixed data rate,
or bandwidth to the user. Bandwidth is provided
on a best effort basis.
UL.......................... Underwriter's Laboratory. A United States
regulatory body responsible for certification of
safety standards.
UPSTREAM.................... The data path from the end user to the service
provider.
XDSL........................ Other Digital Subscriber Line. Generic
representation of entire family of Digital
Subscriber Line technology spanning data rates
from 128 Kbps to 52 Mbps depending on the
distance between the central office and the
subscriber.
</TABLE>
G-3
<PAGE>
TERAYON COMMUNICATION SYSTEMS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity (Net Capital Deficiency)... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Terayon Communication Systems
We have audited the accompanying consolidated balance sheets of Terayon
Communication Systems as of December 31, 1996 and 1997, and the related
consolidated statements of operations, shareholders' equity (net capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Terayon Communication Systems at December 31, 1996 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
February 6, 1998,
except for Note 13, as to which
the date is June 11, 1998
F-2
<PAGE>
TERAYON COMMUNICATION SYSTEMS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, PRO FORMA
---------------- MARCH 31, SHAREHOLDERS' EQUITY
1996 1997 1998 MARCH 31, 1998
------- ------- ----------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. $ 8,356 $ 1,569 $ 109
Short-term investments.... 4,508 418 --
Accounts receivable, less
allowance for doubtful
accounts of $20 in 1997
and $70 in 1998.......... -- 574 1,601
Accounts receivable from
related party............ -- 362 552
Other receivable.......... -- -- 1,264
Inventory................. -- 1,322 380
Other current assets...... 299 690 714
------- ------- -------
Total current assets........ 13,163 4,935 4,620
Property and equipment, net. 2,572 3,615 3,373
Officer note receivable..... 100 100 100
Other assets................ 143 128 133
------- ------- -------
Total assets................ $15,978 $ 8,778 $ 8,226
======= ======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.......... $ 682 $ 2,232 $ 4,942
Accrued payroll and
related expenses......... 570 1,052 1,099
Other accrued liabilities. 450 1,526 2,735
Advance from related
party.................... -- 2,000 2,000
Deferred revenue.......... 425 95 95
Current portion of long-
term debt................ 917 2,812 2,466
Current portion of capital
lease obligations........ 148 65 52
------- ------- -------
Total current
liabilities............ 3,192 9,782 13,389
Long-term debt.............. 1,150 -- --
Long-term portion of capital
lease obligations.......... 105 44 34
Deferred rent............... 102 126 130
Other noncurrent
liabilities................ 24 -- --
Commitments and
contingencies
Redeemable convertible
preferred stock, no par
value:
Authorized shares--
included in convertible
preferred stock
authorized
Issued and outstanding
shares--100,000 in 1998,
and none pro forma,
aggregate redemption
value of $1,500;
aggregate liquidation
preference of $1,500 in
1998..................... -- -- 1,494 $ --
Shareholders' equity (net
capital deficiency):
Preferred stock, $.001 par
value:
Authorized shares--
5,000,000 pro forma
Issued and outstanding
shares--none pro forma... -- -- -- --
Convertible preferred
stock, no par value:
Authorized shares--
10,000,000 actual; none
pro forma
Issued and outstanding
shares--6,322,174 in
1996, 7,131,161 in 1997
and 1998, and none pro
forma; aggregate
liquidation preference--
$26,158 in 1996, $36,675
in 1997 and 1998......... 25,989 35,807 35,807 --
Common stock, no par
value:
Authorized shares--
20,000,000 actual;
30,000,000 pro forma
Issued and outstanding
shares--4,138,799 in
1996, 4,630,447 in 1997,
4,742,190 in 1998 and
11,973,351 pro forma
(includes 10,000 shares
subject to redemption in
1997 and 1998)........... 90 471 661 37,962
Accumulated deficit....... (14,614) (37,163) (42,867) (42,867)
Deferred compensation..... -- (216) (362) (362)
Shareholders' notes
receivable............... (60) (73) (60) (60)
------- ------- ------- -------
Total shareholders'
equity (net capital
deficiency)............ 11,405 (1,174) (6,821) $(5,327)
------- ------- ------- =======
Total liabilities and
shareholders' equity
(net capital
deficiency)............ $15,978 $ 8,778 $ 8,226
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
TERAYON COMMUNICATION SYSTEMS
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------
1995 1996 1997 1997 1998
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Product revenues.............. $ -- $ -- $ 1,021 $ -- $ 2,077
Related party revenues........ -- -- 617 -- 367
Contract consulting and
technology development
revenues..................... -- -- 480 -- --
------- -------- -------- ------- -------
Total revenues.............. -- -- 2,118 -- 2,444
COST OF GOODS SOLD:
Cost of product revenues...... -- -- 3,904 178 3,564
Cost of related party
revenues..................... -- -- 2,558 -- 570
Cost of contract consulting
and technology development
revenues..................... 676 -- -- -- --
------- -------- -------- ------- -------
Total cost of goods sold.... 676 -- 6,462 178 4,134
------- -------- -------- ------- -------
GROSS PROFIT (LOSS)............. (676) -- (4,344) (178) (1,690)
OPERATING EXPENSES:
Research and development...... 2,028 8,020 11,319 2,580 2,305
Sales and marketing........... 205 1,141 4,468 529 1,140
General and administrative.... 825 1,789 2,546 461 505
------- -------- -------- ------- -------
Total operating expenses.... 3,058 10,950 18,333 3,570 3,950
------- -------- -------- ------- -------
Loss from operations............ (3,734) (10,950) (22,677) (3,748) (5,640)
Interest income................. 110 393 396 140 14
Interest expense................ (42) (140) (268) (49) (78)
------- -------- -------- ------- -------
Net loss........................ $(3,666) $(10,697) $(22,549) $(3,657) $(5,704)
======= ======== ======== ======= =======
Pro forma basic and diluted net
loss per share................. $ (2.07) $ (0.48)
======== =======
Shares used in pro forma basic
and diluted net loss per share. 10,873 11,773
======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
TERAYON COMMUNICATION SYSTEMS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
CONVERTIBLE SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK SHAREHOLDERS' EQUITY
----------------- ---------------- ACCUMULATED DEFERRED NOTES (NET CAPITAL
SHARES AMOUNT SHARES AMOUNT DEFICIT COMPENSATION RECEIVABLE DEFICIENCY)
--------- ------- --------- ------ ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... -- $ -- 2,000,000 $ 62 $ (251) $ -- $(13) $ (202)
Exercise of option to
purchase common stock.. -- -- 2,000,000 -- -- -- -- --
Net cash proceeds from
issuance of Series A
preferred stock........ 4,077,093 3,853 -- -- -- -- -- 3,853
Issuance of Series A
preferred stock for
notes receivable....... 85,000 81 -- -- -- -- (81) --
Net cash proceeds from
issuance of Series B
preferred stock........ 896,834 7,970 -- -- -- -- -- 7,970
Net loss................ -- -- -- -- (3,666) -- -- (3,666)
--------- ------- --------- ---- -------- ----- ---- -------
BALANCE AT DECEMBER 31,
1995................... 5,058,927 11,904 4,000,000 62 (3,917) -- (94) 7,955
Net cash proceeds from
issuance of Series B-1
preferred stock........ 448,417 3,957 -- -- -- -- -- 3,957
Cash proceeds from
payment on a
shareholder note
receivable............. -- -- -- -- -- -- 34 34
Exercise of options for
cash to purchase common
stock.................. -- -- 106,219 11 -- -- -- 11
Issuance of common stock
for consulting
services............... -- -- 32,580 17 -- -- -- 17
Net cash proceeds from
issuance of Series C
preferred stock........ 814,830 10,128 -- -- -- -- -- 10,128
Net loss................ -- -- -- -- (10,697) -- -- (10,697)
--------- ------- --------- ---- -------- ----- ---- -------
BALANCE AT DECEMBER 31,
1996................... 6,322,174 25,989 4,138,799 90 (14,614) -- (60) 11,405
Exercise of options for
cash to purchase common
stock.................. -- -- 481,648 140 -- -- -- 140
Net cash proceeds from
issuance of Series D
preferred stock........ 808,987 9,818 -- -- -- -- -- 9,818
Issuance of common stock
for note receivable.... -- -- 10,000 13 -- -- (13) --
Unearned compensation
related to stock
options................ -- -- -- 228 -- (228) -- --
Amortization of unearned
compensation........... -- -- -- -- -- 12 -- 12
Net loss................ -- -- -- -- (22,549) -- -- (22,549)
--------- ------- --------- ---- -------- ----- ---- -------
BALANCE AT DECEMBER 31,
1997................... 7,131,161 35,807 4,630,447 471 (37,163) (216) (73) (1,174)
Exercise of options for
cash to purchase common
stock (unaudited)...... -- -- 111,743 29 -- -- -- 29
Cash proceeds from
payment on a
shareholder note
receivable (unaudited). -- -- -- -- -- -- 13 13
Unearned compensation
related to stock
options (unaudited).... -- -- -- 161 -- (161) -- --
Amortization of unearned
compensation
(unaudited)............ -- -- -- -- -- 15 -- 15
Net loss (unaudited).... -- -- -- -- (5,704) -- -- (5,704)
--------- ------- --------- ---- -------- ----- ---- -------
BALANCE AT MARCH 31,
1998 (UNAUDITED)....... 7,131,161 $35,807 4,742,190 $661 $(42,867) $(362) $(60) $(6,821)
========= ======= ========= ==== ======== ===== ==== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
TERAYON COMMUNICATION SYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------- --------------------
1995 1996 1997 1997 1998
------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................... $(3,666) $(10,697) $(22,549) $ (3,657) $ (5,704)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............. 203 830 1,563 304 502
Amortization of unearned
compensation related to
stock options............ -- -- 12 -- 15
Loss on disposal of fixed
assets................... -- 20 -- -- --
Issuance of common stock
for consulting services.. -- 17 -- -- --
Changes in operating
assets and liabilities:
Accounts receivable...... -- -- (574) -- (1,027)
Accounts receivable from
related party........... -- -- (362) -- (190)
Other receivable......... -- -- -- -- (1,264)
Inventory................ -- -- (1,322) -- 942
Other current assets..... (97) (177) (391) (6) (24)
Other assets............. (7) (118) 15 10 (5)
Accounts payable......... 518 8 1,550 45 2,710
Accrued payroll and
related expenses........ 212 346 482 44 47
Other accrued
liabilities............. 168 263 1,076 118 1,209
Advance from related
party................... -- -- 2,000 -- --
Deferred revenue......... 325 -- (330) 55 --
Deferred rent............ -- 102 24 9 4
Other noncurrent
liabilities............. -- 24 (24) -- --
------- -------- -------- --------- ---------
Net cash used in operating
activities................. (2,344) (9,382) (18,830) (3,078) (2,785)
INVESTING ACTIVITIES:
Purchases of short-term
investments................ -- (6,863) (10,995) (4,764) --
Proceeds from sales and
maturities of short-term
investments................ -- 2,355 15,085 1,064 418
Purchases of property and
equipment.................. (1,301) (1,892) (2,606) (385) (260)
Proceeds from sale of
assets..................... -- 42 -- -- --
Officer note receivable..... -- (100) -- -- --
------- -------- -------- --------- ---------
Net cash provided by (used
in) investing activities... (1,301) (6,458) 1,484 (4,085) 158
</TABLE>
See accompanying notes.
F-6
<PAGE>
TERAYON COMMUNICATION SYSTEMS
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------- --------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Principal payments on capital leases.... $ (82) $ (124) $ (144) $ (15) $ (23)
Principal payments on long-term debt.... (16) (273) (909) (249) (346)
Proceeds from long-term debt............ 513 1,843 1,654 -- --
Exercise of option to purchase common
stock.................................. -- 11 140 7 29
Proceeds from issuance of preferred
stock.................................. 11,823 14,085 9,818 -- --
Proceeds from issuance of redeemable
preferred stock........................ -- -- -- -- 1,494
Principal payments on shareholder note
receivable............................. -- 34 -- -- 13
------ ------ ------ ------ ------
Net cash provided by (used in)
financing activities................ 12,238 15,576 10,559 (257) 1,167
------ ------ ------ ------ ------
Net increase (decrease) in cash and cash
equivalents............................ 8,593 (264) (6,787) (7,420) (1,460)
Cash and cash equivalents at beginning
of period.............................. 27 8,620 8,356 8,356 1,569
------ ------ ------ ------ ------
Cash and cash equivalents at end of
period................................. $8,620 $8,356 $1,569 $ 936 $ 109
====== ====== ====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest.................. $ 42 $ 140 $ 268 $ 49 $ 78
SUPPLEMENTAL NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired under
capital leases......................... $ 176 $ 137 $ -- $ -- $ --
Maintenance agreement acquired under
capital lease.......................... $ 6 $ -- $ -- $ -- $ --
Issuance of convertible preferred stock
for shareholder note receivable........ $ 81 $ -- $ -- $ -- $ --
Sale of asset for decrease in accounts
payable................................ $ 210 $ -- $ -- $ -- $ --
Issuance of common stock for consulting
services............................... $ -- $ 17 $ -- $ -- $ --
Issuance of common stock for shareholder
note receivable........................ $ -- $ -- $ 13 $ -- $ --
</TABLE>
See accompanying notes.
F-7
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Terayon Communication Systems (the Company) was incorporated under the laws
of the state of California on January 20, 1993 for the purpose of developing,
producing, and marketing broadband access system products. In October 1997, the
Company changed its legal name from Terayon Corporation. Through December 31,
1996, the Company was active in product development, the acquisition of
equipment and facilities, and raising capital; accordingly, the Company was in
the development stage. The Company emerged from the development stage during
1997.
Unaudited Interim Financial Information
The accompanying consolidated financial statements at March 31, 1998 and for
the three months ended March 31, 1998 and 1997 are unaudited but include all
adjustments (consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair statement of the financial position and
the operating results and cash flows for the interim date and periods
presented. Results for the interim period ended March 31, 1998 are not
necessarily indicative of results for the entire fiscal year or future periods.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries, Terayon Communication Systems Europe and
Terayon do Brasil. The minority interests in net losses of Terayon
Communication Systems Europe and Terayon do Brasil were not significant for all
periods presented. All material intercompany balances and transactions have
been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain prior year balances have been restated to conform with current year
presentation.
Advertising Expenses
The Company accounts for advertising costs as expense in the period in which
they are incurred. Advertising expense for the years ended December 31, 1995,
1996 and 1997 and for the three months ended March 31, 1997 and 1998 were not
significant.
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with an original maturity at the time of purchase of over three months but less
than a year are classified as short-term investments. At December 31, 1996 and
1997, approximately 90% and 45%, respectively, of the Company's total cash and
short-term investment balance was placed on deposit with an affiliate of a
convertible preferred shareholder (none at March 31, 1998). Management
F-8
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
determines the appropriate classification of debt and equity securities at the
time of purchase and reevaluates such designation at the end of each period.
At December 31, 1996 and 1997, all of the Company's investments in debt
securities were classified as available-for-sale and were obligations issued by
U.S. government agencies, maturing within one year. The amortized cost, which
approximated fair value, of debt instruments classified as cash equivalents and
short-term investments was approximately $6,436,000 and $4,508,000,
respectively, at December 31, 1996 and approximately $99,000 and $418,000,
respectively, at December 31, 1997 (none at March 31, 1998). The amount of
unrealized gains or losses was not significant at December 31, 1996 or 1997.
The estimated fair values of cash equivalents and short-term investments are
based on quoted market prices. The amount of realized gains or losses for the
years ended December 31, 1995, 1996, and 1997, and for the three months ended
March 31, 1997 and 1998 were not significant.
Concentrations of Credit Risk, Customer, Supplier, and Product
The Company operates in one business segment, the development and sale of
cable modem access products, which it sells primarily to customers within the
cable and communications industries, including related parties (see Note 12).
The Company performs ongoing credit evaluations of its customers and generally
requires no collateral. A relatively small number of customers and resellers
account for a significant percentage of the Company's revenues. The Company
expects that the sale of its products to a limited number of customers and
resellers may continue to account for a high percentage of revenues for the
foreseeable future.
Currently, the Company relies on single source suppliers of materials and
labor for the significant majority of its product inventory but is actively
pursuing additional supplier alternatives. As a result, should the Company's
current suppliers not produce and deliver inventory for the Company to sell on
a timely basis, operating results may be adversely impacted.
Substantially all of the Company's revenues have been attributable to sales
of the TeraLink and the TeraPro. These products are expected to account for a
significant part of the Company's revenues for the foreseeable future. As a
result, a decline in demand for or failure to achieve broad market acceptance
of the TeraLink or the TeraPro would adversely affect operating results.
In addition, market acceptance of the Company's products may be affected by
the emergence and evolution of industry standards. While the Company expects
its products to become compliant with industry standards, its inability to do
so may adversely affect operating results.
The Company invests its excess cash in debt instruments of the U.S. Treasury,
governmental agencies, and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities that
attempt to maintain safety and liquidity. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
Other Receivable
As of March 31, 1998, the Company recorded a receivable of $1,264,000
relating to inventory components the Company was required to purchase from its
previous contract manufacturer and then subsequently sold to its current
contract manufacturer. Some of the components purchased from the previous
subcontract manufacturer were obsolete or sold to the new subcontract
manufacturer at a loss. The Company took a charge of $1,300,000 for the
obsolete and sold inventory in the three months ended March 31, 1998.
F-9
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market. The
components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
<S> <C> <C>
Inventory:
Finished goods.................................... $ 163 $143
Work-in-process................................... 366 91
Raw materials..................................... 793 146
------ ----
$1,322 $380
====== ====
</TABLE>
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. Property and equipment are depreciated for financial reporting
purposes using the straight-line method over the estimated useful lives of
three to five years. Leasehold improvements are amortized using the straight-
line method over the shorter of the useful lives of the assets or the terms of
the leases.
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------- ---------
1996 1997 1998
------- ------- ---------
<S> <C> <C> <C>
Software and computers........................... $ 2,516 $ 3,695 $ 3,812
Furniture and equipment.......................... 1,064 2,421 2,564
Leasehold improvements........................... 19 89 89
------- ------- -------
$ 3,599 $ 6,205 $ 6,465
Accumulated depreciation and amortization........ (1,027) (2,590) (3,092)
------- ------- -------
Property and equipment, net...................... $ 2,572 $ 3,615 $ 3,373
======= ======= =======
</TABLE>
Revenue Recognition
Revenues related to product sales are generally recognized when the products
are shipped to the customer. The Company has also performed some research and
product development work under best efforts technology development agreements.
Due to technological risk factors, the costs of these agreements have been
expensed as incurred and are included in cost of goods sold for the year ended
December 31, 1995. Revenues are recognized when applicable customer milestones
have been met, including deliverables and, in any case, not in excess of the
amount that would be recognized using the percentage-of-completion method. The
Company met deliverables under an agreement in the fourth quarter of the year
ended December 31, 1997 and recognized the related revenue (see Note 3).
Manufacturing Start-Up Expenses
For the three months ended March 31, 1997, the Company incurred $178,000 of
manufacturing start-up expenses related to the company's manufacturing
operations group as it prepared for
F-10
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
commercialization of the Company's products. The Company's manufacturing
operations group consists of assembly, test and quality assurance for the
products, and associated costs of personnel and equipment.
Warranty Reserves
Due to the recent introduction of the Company's products, the Company has
limited experience with warranty commitments that may arise with the current
generation of its products. The Company's products generally carry a one-year
warranty that includes factory and on-site repair services as needed for
replacement of parts. Estimated expenses for warranty obligations are accrued
as revenue is recognized. Reserve estimates are adjusted periodically to
reflect actual experience.
Stock-Based Compensation
As described in Note 8, the Company has elected to account for its employee
stock plans in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No.25), and to adopt
the disclosure-only provisions as required under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(FAS 123).
Net Loss Per Share and Unaudited Pro Forma Shareholders' Equity (Net Capital
Deficiency)
Historical basic and diluted net loss per share are computed using the
weighted average number of common shares outstanding. Options, warrants,
restricted stock and preferred stock were not included in the computation of
diluted net loss per share because the effect would be antidilutive.
Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from preferred
stock that will automatically convert upon the closing of the Company's initial
public offering (using the as-if-converted method). If the offering
contemplated by this Prospectus is consummated, all of the convertible
preferred stock and redeemable convertible preferred stock outstanding as of
the closing date will automatically be converted into an aggregate of
approximately 7,231,161 shares of common stock based on the shares of
convertible preferred stock outstanding at March 31, 1998. Unaudited pro forma
shareholders' equity (net capital deficiency) at March 31, 1998, as adjusted
for the conversion of preferred stock and redeemable preferred stock, is
disclosed on the balance sheet.
F-11
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
A reconciliation of shares used in the calculation of historical and pro
forma basic and diluted net loss per share follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- ----------------
1995 1996 1997 1997 1998
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss................ $(3,666) $(10,697) $(22,549) $(3,657) $(5,704)
======= ======== ======== ======= =======
Shares used in computing
basic and diluted net
loss per share......... 3,589 4,054 4,289 4,158 4,594
Historical basic and
diluted net loss per
share.................. $ (1.02) $ (2.64) $ (5.26) $ (0.88) $ (1.24)
======= ======== ======== ======= =======
Shares used in computing
basic and diluted net
loss per share......... 4,289 4,594
Adjustment to reflect
the effect of the
assumed conversion of
weighted average shares
of convertible
preferred stock
outstanding............ 6,584 7,179
-------- -------
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 10,873 11,773
======== =======
Pro forma basic and
diluted net loss per
share.................. $ (2.07) $ (0.48)
======== =======
</TABLE>
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 requires that all items that are to be required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. FAS 130 is effective for fiscal years beginning after
December 15, 1997 and will be adopted by the Company for the year ended
December 31, 1998. The Company's total comprehensive loss was the same as its
net loss for the three months ended March 31, 1997 and 1998.
In addition, during June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (FAS 131). FAS 131 replaces
FAS 14, "Financial Reporting for Segments of a Business Enterprise" and changes
the way public companies report segment information. FAS 131 is effective for
fiscal years beginning after December 15, 1997 and will be adopted by the
Company for the year ended December 31, 1998.
2. OFFICER NOTE RECEIVABLE
In March 1996, the Company loaned an officer $100,000 pursuant to a
promissory note. The note does not bear interest, matures in March 2001, and is
full recourse, including being collateralized by 20,000 shares of the Company's
common stock.
F-12
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. DEFERRED REVENUE
On January 4, 1995, the Company entered into a Development and Production
Agreement with a telecommunications systems manufacturer (the Manufacturer),
whereby the Company agreed to develop an enabling technology for use with
certain manufacturer technology (the Product). Pursuant to the agreement, the
Manufacturer is obligated to purchase certain minimum quantities of the
Product, and the Company has agreed to provide the Product to the Manufacturer
on favorable pricing terms for a period of four years following completion of
the Product. In addition, the Company has agreed that for the first three
months following the completion of the Product, the Company will not sell the
Product to any third party for use in the carrying of voice-over coaxial
cables.
In accordance with the agreement, the Company will receive funding from the
Manufacturer totaling $1,000,000. These payments were originally received upon
the completion of certain milestones set forth in the agreement. In March 1998,
the agreement was amended, and the Company is to receive the remaining payments
(in addition to normal Product billings) over a certain number of future unit
shipments to the Manufacturer. As of December 31, 1997, approximately $480,000
of cash advances had been received under the agreement. In the fourth quarter
of the year ended December 31, 1997, the Company delivered the Product under
the agreement and recognized the $480,000 as revenue. An additional $95,000
related to the agreement has been recorded as a receivable and deferred revenue
at December 31, 1997 and March 31, 1998.
4. COMMITMENTS
The Company leases its facility and certain equipment under operating leases.
The operating lease for the Company's facility expires in 2002. Rental expense
was approximately $114,000, $542,000, and $850,000 for the years ended December
31, 1995, 1996, and 1997, respectively, and approximately $179,000 and $227,000
for the three months ended March 31, 1997 and March 31, 1998, respectively. The
Company signed a promissory note of approximately $59,000 in connection with
the initial security deposit for the facility. The note did not bear interest
and matured in April 1997.
In March 1996, the Company subleased its former facilities to a third party
through December 1997. Sublease rental income was approximately $106,000 and
$122,000 for the years ended December 31, 1996 and 1997, respectively and
approximately $32,000 for the three months ended March 31, 1997. In October
1997, the master lease and underlying sublease for these facilities were
terminated concurrently.
The Company leases certain equipment under noncancelable lease agreements
that are accounted for as capital leases. Equipment under capital lease
arrangements and included in property and equipment aggregated approximately
$452,000 at December 31, 1996 and 1997 and March 31, 1998. Related accumulated
amortization was approximately $211,000, $337,000 and $365,000 at December 31,
1996 and 1997, and March 31, 1998, respectively. Amortization expense related
to assets under capital leases is included in depreciation expense. In
addition, the capital leases are secured by the related equipment, and the
Company is required to maintain liability and property damage insurance.
F-13
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Future minimum lease payments under noncancelable operating leases and
capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- -----------------
OPERATING CAPITAL OPERATING CAPITAL
LEASES LEASES LEASES LEASES
--------- ------- --------- -------
<S> <C> <C> <C> <C>
1998..................................... $ 610 $ 80 $ 461 $ 55
1999..................................... 666 34 666 34
2000..................................... 688 11 688 11
2001..................................... 708 4 708 4
2002..................................... 178 -- 178 --
------ ---- ------ ----
Total minimum payments................... $2,850 129 $2,701 104
====== ======
Less amount representing interest........ 20 18
---- ----
109 86
Less current portion..................... 65 52
---- ----
$ 44 $ 34
==== ====
</TABLE>
Unconditional Purchase Obligations
The Company has unconditional purchase obligations to a few of its suppliers
that support the Company's ability to manufacture its products. The obligations
require the Company to purchase minimum quantities of the suppliers' products
at a specified price. At March 31, 1998, the Company had approximately
$12,702,000 of unconditional purchase obligations ($784,000 at December 31,
1997 and none at December 31, 1996).
5. DEBT OBLIGATIONS
In April 1997, the Company amended an existing credit agreement with a bank
to provide for a revolving line of credit up to $10,000,000 and four term loans
totaling $4,250,000. Borrowings under the revolving line of credit are limited
to the lesser of a) 80% of accounts receivable less than ninety days from the
invoice date or b) $10,000,000. Borrowings under the revolving line of credit
bear interest at the bank's prime rate plus 0.50% per annum (8.75% at December
31, 1996 and 9.0% at December 31, 1997 and March 31, 1998). There were no
borrowings under the revolving line of credit at December 31, 1996 and 1997 and
March 31, 1998.
Each term loan is subject to an interest rate calculated at the bank's prime
rate plus 1.50% per annum (9.75% at December 31, 1996 and 10% at December 31,
1997 and March 31, 1998). The first term loan is payable in thirty monthly
payments consisting of six interest payments and twenty-four equal principal
and interest payments through May 1998. Borrowings under the first term loan of
approximately $303,000, $85,000 and $34,000 were outstanding at December 31,
1996 and 1997 and March 31, 1998, respectively.
The second term loan is payable in forty monthly payments of four interest
payments and thirty-six equal principal and interest payments through October
1999. Borrowings under the second term loan of approximately $944,000,
$611,000, and $528,000 were outstanding at December 31, 1996 and 1997 and March
31, 1998, respectively.
F-14
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
The third term loan is payable according to two separate payment schedules.
The first payment schedule includes thirty-six equal principal and interest
payments through November 1999. At December 31, 1996 and 1997 and March 31,
1998, borrowings under the first payment schedule were approximately $820,000,
$539,000 and $469,000, respectively. The second payment schedule consists of
thirty-one payments of one interest payment and thirty equal principal and
interest payments through December 1999. At December 31, 1997 and March 31,
1998, borrowings under the second payment schedule were approximately $119,000
and $103,000, respectively (none at December 31, 1996).
The fourth term loan is payable in forty-one monthly payments of five
interest payments and thirty-six equal principal and interest payments through
November 2000. Borrowings under the fourth term loan of approximately
$1,458,000 and $1,332,000 were outstanding at December 31, 1997 and March 31,
1998, respectively (none at December 31, 1996).
Outstanding borrowings under the credit agreement are secured by all of the
Company's assets. The credit agreement contains affirmative and negative
covenants and will, among other things, require the Company to maintain minimum
levels of investable funds and liquid assets. The credit agreement also limits
the Company's ability to incur additional debt, to pay cash dividends, or to
purchase or sell certain assets. Finally, the agreement restricts the Company
to a maximum liability to tangible net worth ratio and prohibits certain
acquisitions, mergers, consolidations, or similar transactions. At December 31,
1997 and March 31, 1998, the Company was out of compliance with certain
covenants contained within the credit agreement and therefore has classified
all outstanding borrowings as short-term at those dates.
The Company incurred interest expense related to the term loans of
approximately $18,000, $88,000, and $205,000 for the years ended December 31,
1995, 1996, and 1997, respectively and $43,000 and $68,000 for the three months
ended March 31, 1997 and 1998, respectively.
6. CONTINGENCIES
During 1997, the Company placed a noncancelable purchase order (subject to
specific delivery date requirements) with a subcontract manufacturer. As
delivery of the initial shipments was delayed by the manufacturer, the Company
subsequently canceled the purchase order without the consent of the subcontract
manufacturer. The Company has received notification from the subcontract
manufacturer that the Company is obligated to make payment for materials and
services rendered under the terms of the purchase order. While management
believes that amounts recorded on its financial statements are adequate to
cover all related risks, the subcontract manufacturer has not agreed to a
settlement with the Company. Although the ultimate outcome of this matter
cannot be determined at this time, management does not believe that the outcome
will have a material adverse effect on the Company's financial position,
results of operations, and cash flows. However, based on future developments,
the Company's estimate of the outcome of these matters could change in the near
term.
The Company has also received a letter from an individual claiming that the
Company's technology infringes a patent held by such individual. The Company
has reviewed the allegations made by such individual, and management does not
believe that the outcome will have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
In the normal course of business, the Company from time to time receives
inquiries with regard to various legal proceedings. In the opinion of
management, any liability resulting from these inquiries has
F-15
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
been accrued and will not have a material adverse effect on the Company's
financial position or results of operations.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In December 1997, the Company entered into a Series E redeemable convertible
preferred stock agreement ("the Agreement"). The Agreement calls for the
establishment of a $5,000,000 escrow account to fund the issuance of up to
333,334 shares of Series E redeemable convertible preferred stock ("the Stock")
for cash at $15.00 per share. The escrow account will release cash to the
Company as the Company reaches certain technological and customer base
milestones as defined under the Agreement. Upon the first closing, the Company
is also to issue a warrant to purchase up to an additional 33,334 shares of the
Stock at $15.00 per share. In the event the final closing of the Agreement does
not occur prior to the earlier of the (a) completion of the Company's initial
public offering of shares of its Common Stock and (b) December 31, 1998, then
any amount remaining in the escrow account will be returned to the Series E
shareholder.
The Series E shareholder also has the option to sell to the Company some or
all of the Stock held by the Series E shareholder ("the Put Right") any time
after July 1, 1998. The price paid by the Company to the Series E shareholder
for any shares of the Stock purchased pursuant to the Put Right is $15.00 per
share. In the event of the Series E shareholder's exercise of the Put Right,
the Company will apply the total amount of the Put Right toward the purchase of
the Company's products. Any of the Stock not sold back to the Company by the
Series E shareholder will retain its Put Right until the Put Termination Date
which is defined under the Agreement as the earlier of (a) February 10, 1999
and (b) the completion of the Company's initial public offering of shares of
its Common Stock.
Finally, in the event that prior to the Put Termination Date either (a) the
completion of the Company's initial public offering of shares of its Common
Stock has not occurred or (b) an acquisition of at least ninety percent of all
of the Company's capital stock has not occurred, then the Series E shareholder
has the right to receive a cash payment from the Company in an amount equal to
ten percent of the aggregate purchase price of the number of shares of the
Stock purchased by the Series E shareholder pursuant to the Agreement as of the
Put Termination Date.
In February 1998, the Company reached a milestone under the Series E
redeemable convertible preferred stock agreement and issued 100,000 shares of
Series E redeemable convertible preferred stock, resulting in cash proceeds of
approximately $1,500,000 to the Company. In conjunction with this issuance, the
Company issued a warrant to the Series E shareholder to purchase 33,334 shares
of the Company's redeemable convertible preferred stock at $15.00 per share.
In June 1998, the Company and the Series E shareholder amended the Agreement
and all of the Stock outstanding was canceled. The proceeds from the Stock were
applied toward the purchase of Series D redeemable convertible preferred stock
(see Note 13).
8. SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Convertible Preferred Stock
The following is a summary of convertible preferred stock authorized, issued,
and outstanding, including redeemable convertible preferred stock:
F-16
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
SHARES ISSUED AND
OUTSTANDING
----------------------
SHARES DECEMBER 31, MARCH 31,
SERIES AUTHORIZED 1997 1998
- ------ ---------- ------------ ---------
<S> <C> <C> <C>
A............................................. 4,162,093 4,162,093 4,162,093
B............................................. 896,834 896,834 896,834
B-1........................................... 448,417 448,417 448,417
C............................................. 814,830 814,830 814,830
D............................................. 1,500,000 808,987 808,987
E............................................. 2,000,000 -- 100,000
Undesignated.................................. 177,826 -- --
---------- --------- ---------
10,000,000 7,131,161 7,231,161
========== ========= =========
</TABLE>
Convertible preferred shareholders and redeemable convertible preferred
shareholders have the same voting rights as common shareholders. In addition,
the Series A, B, B-1, C, D and E shareholders will vote as a single class. In
the event of any voluntary or involuntary liquidation of the Company, Series A,
B, B-1, C, D and E shareholders are entitled to a per share liquidation
preference of $0.9545, $8.92, up to $17.84, $12.50, up to $19.50, and up to
$22.50, respectively, plus accrued dividends, if any. The holders of Series A,
B, B-1, C, D and E stock are entitled to per share noncumulative dividends of
$0.0764, $0.7136, $0.7136, $1.00, $1.04 and $1.20 per annum, respectively, when
and if declared by the Board of Directors.
Each share of preferred stock and redeemable preferred stock is convertible
at the option of the holder into one share of common stock, subject to
adjustments for future dilution. Each share of Series A, B, and B-1 preferred
stock automatically converts into common stock at the then applicable
conversion rate upon the earlier of (a) the public offering of the Company's
common stock with aggregate proceeds in excess of $10,000,000 or (b) the date
on which the Company obtains the consent of at least two-thirds of the shares
of Series A, B, and B-1 shareholders separately by class. Each share of Series
C preferred stock automatically converts at the earlier of (a) the public
offering of the Company's common stock at a per share price of $12.50 (b) the
end of any twenty-day period after a public offering of the Company's common
stock during which the closing sales price per share was at least $12.50, or
(c) the date on which the Company obtains the consent of at least two-thirds of
the shares of Series C shareholders, as applicable. Each share of Series D
preferred stock and Series E redeemable preferred stock automatically converts
at the earlier of (a) the public offering of the Company's common stock at a
per share price of $13.00 per share or (b) the date on which the Company
obtains the consent of at least two-thirds of the shares of Series D and Series
E shareholders, as applicable. The Company has fully reserved shares of common
stock for issuance upon the conversion of the convertible preferred stock and
redeemable convertible preferred stock.
Prior to undertaking an initial public offering of its securities or
initiating a sale of 50% or more of the Company's outstanding capital stock or
substantially all of the Company's assets to a third party, the Company must
provide written notice to one of the convertible preferred shareholders. The
investor then has the right to make the first offer to purchase the Company for
a period of up to thirty days from receipt of the Company's notice.
F-17
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
Common Stock Reserved
Common stock reserved for issuance is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
<S> <C> <C>
Convertible preferred stock.......................... 7,131,161 7,131,161
Redeemable convertible preferred stock............... -- 100,000
Common stock options................................. 2,646,880 2,535,137
Convertible preferred stock option................... 153,846 153,846
Redeemable convertible preferred stock in escrow..... 333,334 233,334
Series E preferred stock warrant..................... -- 33,334
---------- ----------
10,265,221 10,186,812
========== ==========
</TABLE>
Stock-Based Compensation
In March 1995 and February 1997, the Board of Directors approved a stock
option plan and an equity incentive plan, respectively, that authorized the
grant of options to purchase shares of the Company's common stock. At December
31, 1997, the total authorized number of shares under the 1995 and 1997 plans
was 2,114,747 and 1,050,000, respectively. The plans are administered by the
Board of Directors and provide for incentive stock options or nonqualified
stock options to be issued to employees, directors, and consultants of the
Company. Prices for incentive stock options may not be less than the fair value
of the common stock at the date of grant. Prices for nonqualified stock options
may not be less than 85% of the fair value of the common stock at the date of
grant. Options are immediately exercisable and vest over a period not to exceed
five years from the date of grant. Any unvested stock issued is subject to
repurchase by the Company at the original issuance price upon termination of
the option holder's employment. Unexercised options expire ten years after the
date of grant.
In March and July 1997, the Board of Directors authorized grants of common
stock options outside the Company's stock option plans. The options are for
70,000 shares of common stock and generally vest over a three-year period in
six equal installments occurring every six months.
During the year ended December 31, 1997 and the three months ended March 31,
1998, the Company recorded aggregate deferred compensation of approximately
$228,000 and $161,000, respectively, representing the difference between the
grant price and the deemed fair value of the Company's common stock options
granted during these periods. The amortization of deferred compensation is
being charged to operations and is being amortized over the vesting period of
the options, which is typically five years. For the year ended December 31,
1997 and the three months ended March 31, 1998, the amortized expense was
approximately $12,000 and $15,000, respectively.
F-18
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
The following is a summary of additional information with respect to the 1995
stock option plan, the 1997 equity incentive plan, and option grants made
outside the plans:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING
AND EXERCISABLE
-------------------
WEIGHTED
OPTIONS NUMBER AVERAGE
AVAILABLE OF EXERCISE
FOR GRANT SHARES PRICE
---------- --------- --------
<S> <C> <C> <C>
Options authorized on March 8, 1995........... 1,414,747 -- $ --
Options granted............................... (1,630,500) 1,630,500 $0.10
Options canceled.............................. 396,000 (396,000) $0.03
---------- ---------
Balance at December 31, 1995.................... 180,247 1,234,500 $0.10
Options authorized............................ 700,000 -- $ --
Options granted............................... (988,500) 988,500 $0.51
Options exercised............................. -- (106,219) $0.10
Options canceled.............................. 229,831 (229,831) $0.15
---------- ---------
Balance at December 31, 1996.................... 121,578 1,886,950 $0.31
Options authorized............................ 1,120,000 -- $ --
Options granted............................... (1,304,050) 1,304,050 $1.71
Options exercised............................. -- (481,648) $0.30
Options canceled.............................. 372,168 (372,168) $0.56
---------- ---------
Balance at December 31, 1997.................... 309,696 2,337,184 $1.05
Options granted (unaudited)................... (79,500) 79,500 $5.00
Options exercised (unaudited)................. -- (111,743) $0.26
Options canceled (unaudited).................. 308,151 (308,151) $2.14
---------- ---------
Balance at March 31, 1998 (unaudited)........... 538,347 1,996,790 $1.08
========== =========
</TABLE>
The following table summarizes information about stock options that were
outstanding and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------------
WEIGHTED AVERAGE
WEIGHTED REMAINING
NUMBER OF AVERAGE EXERCISE CONTRACTUAL LIFE
RANGE OF EXERCISE PRICES SHARES PRICE (IN YEARS)
------------------------ --------- ---------------- ----------------
<S> <C> <C> <C>
$0.10 - $0.50.............. 1,167,134 $0.34 8.13
$1.25 - $1.30.............. 974,800 $1.26 9.00
$3.00 - $5.00.............. 195,250 $4.26 9.90
---------
Total.................... 2,337,184 $1.05 8.64
=========
</TABLE>
F-19
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
In addition, the following table summarizes information about stock options
that were outstanding and exercisable at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------------
WEIGHTED AVERAGE
WEIGHTED REMAINING
NUMBER OF AVERAGE EXERCISE CONTRACTUAL LIFE
RANGE OF EXERCISE PRICES SHARES PRICE (IN YEARS)
------------------------ --------- ---------------- ----------------
<S> <C> <C> <C>
$0.10 -- $0.50............. 977,540 $0.37 7.94
$1.25 -- $1.30............. 841,500 $1.25 8.67
$3.00 -- $5.00............. 177,750 $4.18 9.73
---------
Total.................... 1,996,790 $1.08 8.41
=========
</TABLE>
At December 31, 1997 and March 31, 1998, 103,050 and 99,774 shares,
respectively, of common stock outstanding were subject to repurchase by the
Company.
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires the use of option valuation models that were not developed for use
in valuing employee stock options. Under APB Opinion No. 25, when the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss is required under FAS 123 and is
calculated as if the Company had accounted for its employee stock options
granted during the years ended December 31, 1995, 1996 and 1997 under the fair
value method of FAS 123. The fair value for these options was estimated at the
date of grant using the minimum value method with the following weighted
average assumptions: risk-free interest rates of 5.34%, 6.22%, and 5.75% for
1995, 1996, and 1997, respectively; no dividend yield or volatility factors of
the expected market price of the Company's common stock; and a weighted average
expected life of the option of five years.
As discussed above, the option valuation models used under FAS 123 were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected life of the option. Because the Company's employee stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
F-20
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FAS 123, the Company's net loss and loss
per share would have been increased to the pro forma amounts indicated below
(in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Pro forma net loss................................. $3,669 $10,718 $22,627
====== ======= =======
Pro forma basic and diluted net loss per share..... $(1.02) $ (2.64) $ (5.28)
====== ======= =======
</TABLE>
The pro forma impact of options on the net loss for the years ended December
31, 1995, 1996, and 1997 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of options
vesting as well as the impact of multiple years of stock option grants. The
full effect of FAS 123 will not be fully reflected until 1999.
The options' weighted average grant date fair value, which is the value
assigned to the options under FAS 123, was $0.02, $0.11, and $0.41 for options
granted during 1995, 1996, and 1997, respectively.
Shareholders' Notes Receivable
In February 1993, the Company issued common stock to a founder in return for
a full recourse note receivable for $12,500. The note bears an interest rate of
7.04% per annum and is due in February 1998.
During June and December 1995, certain officers of the Company were provided
cash advances totaling $81,133 for the purpose of purchasing the Company's
Series A preferred stock. One of the underlying full recourse notes matured and
was paid in August 1996. The outstanding note is due in June 2000, bears
interest at 10% per annum, and is secured by the purchased Series A preferred
stock.
In September 1997, the Company issued common stock to an employee in return
for a full recourse note receivable for $13,000. The note bears an interest
rate of 5.81% per annum and is due in September 1998. Pursuant to the stock
purchase agreement, the employee has the option to sell some or all of his
shares to the Company on or after September 22, 1998 at a purchase price of
$13.00 per share (the "Put Price"). Such option expires upon the earlier of
September 22, 2003 and b) the completion of the Corporation's initial public
offering of shares of its Common Stock. The Company has accrued the difference
between the note receivable's per share price and the Put Price over the
option's vesting period and included the cumulative difference in other accrued
liabilities as of March 31, 1998. The note receivable was paid in full in
January 1998.
9. INCOME TAXES
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the fiscal years ended
December 31, 1995, 1996, and 1997.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-21
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
purposes. Significant components of the Company's deferred tax assets as of
December 31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards........................ $ 4,412 $ 11,323
Tax credit carryforwards................................ 293 2,531
Capitalized research and development.................... 912 1,373
Other, net.............................................. 439 1,158
------- --------
Total deferred tax assets............................. 6,056 16,385
Valuation allowance....................................... (6,056) (16,385)
------- --------
Net deferred tax assets $ -- $ --
======= ========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and the amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax asset as of December 31,
1996 and 1997, has been established to reflect these uncertainties. The change
in the valuation allowance was a net increase of approximately $1,533,000,
$4,444,000, and $10,329,000 for the years ended December 31, 1995, 1996, and
1997, respectively.
As of December 31, 1997, the Company had federal and California net operating
loss carryforwards of approximately $31,000,000 and $15,000,000, respectively.
The Company also had federal and California research and development tax credit
carryforwards of approximately $1,700,000 and $1,200,000, respectively. The net
operating loss and credit carryforwards will expire at various dates beginning
in the years 1999 through 2012, if not utilized.
Utilization of net operating loss and tax credit carryforwards may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
loss and tax credit carryforwards before full utilization.
The reconciliation of income tax expense (benefit) attributable to continuing
operations computed at the U.S. federal statutory rates to income tax expense
(benefit) for the fiscal years ended December 31, 1995, 1996, and 1997 is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory
rate......................................... $ (1,258) $ (3,638) $ (7,667)
Loss for which no tax benefit is currently
recognizable................................. 1,258 3,638 7,667
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
F-22
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
10. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
The Company's European subsidiary accounted for approximately $407,000 of the
Company's revenues for the three months ended March 31, 1998 (none for the year
ended December 31, 1997). The net loss of the Company's European subsidiary was
approximately $107,000 after eliminations of approximately $407,000 for the
three months ended March 31, 1998. Identifiable assets of the Company's
European subsidiary were approximately $50,000 at March 31, 1998 after
eliminations of approximately $407,000.
Three of the Company's customers, Telegate Ltd., Sumitomo Corporation, and
Net Brasil S.A. accounted for 30%, 29%, and 14% of revenues, respectively, for
the year ended December 31, 1997. In addition, Shaw Communications, Inc.,
Sumitomo Corporation, and Telegate Ltd. accounted for 37%, 13%, and 12% of
revenues for the three months ended March 31, 1998. No other customer accounted
for more than 10% of revenues during these periods.
Total net export revenues to regions outside of the United States were
approximately $1,855,000 and $2,195,000 for the year ended December 31, 1997
and the three months ended March 31, 1998, respectively. Revenues by geographic
region were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------------
<S> <C> <C>
Revenues:
United States.............................. $ 263 $ 249
Canada..................................... 198 940
Asia....................................... 617 363
South America.............................. 326 205
Europe and Israel.......................... 714 687
------ ------
Total.................................... $2,118 $2,444
====== ======
</TABLE>
11. 401(K) PROFIT SHARING PLAN AND TRUST
During 1995, the Company adopted a 401(k) Profit Sharing Plan and Trust that
allows eligible employees to make contributions subject to certain limitations.
The Company may make discretionary contributions based on profitability as
determined by the Board of Directors. No amount was contributed by the Company
to the plan during the years ended December 31, 1995, 1996, and 1997 or for the
three months ended March 31, 1997 and 1998.
12. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, the Company recognized revenue of
approximately $617,000 in connection with product shipments made to a Series D
preferred shareholder. In addition, during the three months ended March 31,
1998, the Company recognized revenue of approximately $329,000 and $38,000 in
connection with product shipments made to a Series D preferred shareholder and
Series E redeemable convertible preferred shareholder, respectively. Accounts
receivable from the related parties totaled approximately $362,000 and $552,000
at December 31, 1997 and March 31, 1998, respectively.
F-23
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
In September 1997, the Company received $2,000,000 from a Series D preferred
shareholder in connection with a stock option agreement. As of December 31,
1997 and March 31, 1998, the Company has recorded the amount received as an
advance from the related party. The stock option agreement allows for the
purchase of 153,846 shares of Series D preferred stock for the $2,000,000, on
or before April 30, 1998 (see Note 13). If the option to purchase the Series D
preferred stock is not exercised, the $2,000,000 will be retained by the
Company and be applied toward the purchase of the Company's product by the
Series D preferred shareholder. Also, if the option to purchase Series D
preferred stock is not exercised, the $2,000,000, or any portion that has not
been applied toward the purchase of product, shall earn interest at 6.0% per
annum from the original date of deposit. No other amounts were payable to
related parties at December 31, 1997 or March 31, 1998.
13. SUBSEQUENT EVENTS
In April 1998, the Company issued 384,615 shares of Series F convertible
preferred stock, resulting in cash proceeds of approximately $5,000,000 to the
Company. Series F convertible preferred shareholders generally have the same
voting rights and preferences as the Series D redeemable convertible preferred
shares described below with the exception that these Series F convertible
preferred shareholders do not have the right to sell stock back to the Company.
In conjunction with the Series F convertible preferred stock sale, the Company
issued a warrant to purchase 3,000,000 shares of the Company's common stock at
an exercise price of $6.50 per share. The warrant is exercisable at any time on
or after April 6, 2003 and prior to December 31, 2003. The exercisability of
the warrant can be accelerated based upon purchases of the Company's cable
modem product by the Series F convertible preferred stockholder during the
years ended December 31, 1998, 1999, and 2000 as defined within the warrant
agreement.
In April 1998, the Company's Board of Directors approved an increase in the
authorized number of shares of convertible preferred stock to 15,000,000
shares.
In April 1998, a related party of the Company converted a $2,000,000 advance
into 153,846 shares of Series D convertible preferred stock.
In June 1998, the Company's Board of Directors (i) authorized the
reincorporation of the Company from California to Delaware, (ii) approved an
increase in the total authorized number of shares of stock to 35,000,000 shares
,consisting of 30,000,000 shares of common stock, with a par value of $.001 per
share and 5,000,000 shares of preferred stock, with a par value of $.001 per
share as to which the Board of Directors has the authority to fix or alter the
designation, powers, preferences and rights of the shares of each such series
and qualifications, limitations or restrictions to any unissued series of
preferred stock, (iii) authorized the adoption of the amended 1997 Equity
Incentive Plan pursuant to which 2,250,000 additional shares (plus an
additional 5% of the outstanding common stock at each year end) of the
Company's common stock have been reserved for future issuance to selected
employees, directors and consultants, (iv) authorized the adoption of the 1998
Non-Employee Directors' Stock Option Plan pursuant to which 200,000 additional
shares of the Company's common stock have been reserved for future issuance to
non-employee directors of the Company, and (v) authorized the adoption of the
1998 Employee Stock Purchase Plan pursuant to which 700,000 additional shares
of the Company's common stock have been reserved for future issuance to
eligible employees. These actions will be given effect prior to the effective
date of the Company's initial public offering.
F-24
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
In June 1998, the Company and a Series E shareholder amended the Series E
redeemable convertible preferred stock agreement (the "Amendment"). The
Amendment calls for the cancellation of all outstanding Series E redeemable
convertible preferred stock outstanding with the $1,500,000 of proceeds from
the cancellation being applied toward the issuance of 115,385 shares of Series
D redeemable convertible preferred stock. In addition, all future milestones
under the Series E redeemable convertible preferred stock agreement were
canceled under the Amendment and 269,231 additional shares of Series D
redeemable convertible preferred stock were issued resulting in additional
proceeds of approximately $3,500,000. The Amendment also cancels a warrant for
the purchase of 33,334 Series E redeemable convertible preferred stock at
$15.00 per share and issues a warrant for the purchase of 38,462 shares of
Series D redeemable convertible preferred stock with an exercise price of
$13.00 per share. The warrant is immediately exercisable and expires on the
earlier of the effective date of the Company's initial public offering or June
11, 2003.
The Series D redeemable convertible preferred shareholder also has the option
to sell to the Company some or all of the 384,616 redeemable shares held by the
Series D redeemable convertible preferred shareholder (the "Put Right") any
time after July 1, 1998. The price paid by the Company to the Series D
redeemable convertible preferred shareholder for any shares purchased pursuant
to the Put Right is $13.00 per share. In the event of the exercise of the Put
Right, the Company will apply the total amount of the Put Right toward the
purchase of the Company's products. Any of the redeemable shares not sold back
to the Company by the Series D redeemable convertible preferred shareholder
will retain their Put Right until the Put Termination Date which is defined
under the Agreement as the earlier of (a) February 20, 1999 and (b) the
completion of the Company's initial public offering of shares of its Common
Stock. In addition, in the event that prior to the Put Termination Date either
(a) the completion of the Company's initial public offering of shares of its
Common Stock has not occurred or (b) an acquisition of at least ninety percent
of all of the Company's capital stock has not occurred, then the Series D
redeemable convertible preferred shareholder has the right to receive a cash
payment from the Company in an amount equal to ten percent of the aggregate
purchase price of the number of redeemable shares purchased by the Series D
redeemable convertible preferred shareholder as of the Put Termination Date.
Series D redeemable convertible preferred shareholders generally have the
same voting rights as common shareholders. In the event of any voluntary or
involuntary liquidation of the Company, Series D redeemable convertible
preferred shareholders are entitled to a liquidation preference of up to $19.50
per share. Each share of Series D redeemable convertible preferred stock
automatically converts at the earlier of (a) the public offering of the
Company's Common Stock at a per share price of $13.00 or (b) the date on which
the Company obtains the consent of at least two-thirds of the shares of Series
D shareholders.
In June 1998, the Company also issued 114,089 shares of Series D convertible
preferred stock resulting in additional proceeds of approximately $1,483,000 to
the Company. The issue generally has the same rights and privileges as the
Series D redeemable convertible preferred stock described above, with the
exception of the Put Right.
In June 1998, the Company issued 192,308 shares of Series F redeemable
convertible preferred stock resulting in proceeds of approximately $2,500,000
to the Company. Series F redeemable convertible preferred stock also contains
an option that allows the Series F shareholder to sell some or all of the
redeemable shares back to the Company at a price of $13.00 per share any time
after June 1, 1999 to
F-25
<PAGE>
TERAYON COMMUNICATION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(INFORMATION PERTAINING TO MARCH 31, 1998 AND THE THREE MONTH PERIODS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
be used toward the purchase of the Company's products. Any of the redeemable
shares not sold back to the Company by the Series F shareholder will retain the
option until the completion of the Company's initial public offering of shares
of its common stock. The Series F redeemable convertible preferred stock
generally has the same rights and privileges as the Series D redeemable
convertible preferred stock described above with the exception of the option's
termination date.
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Information Regarding Forward-Looking Statements.......................... 21
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Selected Consolidated Financial Data...................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 33
Management................................................................ 47
Certain Transactions...................................................... 57
Principal Stockholders.................................................... 59
Description of Capital Stock.............................................. 61
Shares Eligible for Future Sale........................................... 64
Underwriting.............................................................. 66
Legal Matters............................................................. 68
Experts................................................................... 68
Additional Information.................................................... 68
Glossary.................................................................. G-1
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
[LOGO OF TERAYON APPEARS HERE]
Common Stock
------------
PROSPECTUS
------------
BT ALEX. BROWN
HAMBRECHT & QUIST
SALOMON SMITH BARNEY
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the shares of Common Stock being registered. All the amounts shown are
estimates except for the registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
Registration fee................................................. $ 14,750
NASD filing fee.................................................. 5,500
Nasdaq National Market listing fee............................... 95,000
Blue sky qualification fee and expenses.......................... 5,000
Printing and engraving expenses.................................. 150,000
Legal fees and expenses.......................................... 450,000
Accounting fees and expenses..................................... 150,000
Transfer agent and registrar fees................................ 10,000
Miscellaneous.................................................... 219,750
----------
Total.......................................................... $1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify its
directors and executive officers to the fullest extent permitted by the
Delaware General Corporation Law, (ii) the Company may, in its discretion,
indemnify other officers, employees and agents as set forth in the Delaware
General Corporation Law, (iii) to the fullest extent permitted by the Delaware
General Corporation Law, the Company is required to advance all expenses
incurred by its directors and executive officers in connection with a legal
proceeding (subject to certain exceptions), (iv) the rights conferred in the
Bylaws are not exclusive, (v) the Company is authorized to enter into
indemnification agreements with its directors, officers, employees and agents
and (vi) the Company may not retroactively amend the Bylaws provisions relating
to indemnity.
The Company has entered into agreements with its directors and executive
officers that require the Company to indemnify such persons against expenses,
judgments, fines, settlements and other amounts that such person becomes
legally obligated to pay (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any such
person may be made a party by reason of the fact that such person is or was a
director or officer of the Company or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Company. The
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 1, 1995, Registrant has sold and issued the following unregistered
securities:
(1) Between June 1995 and December 1995, Registrant issued and sold 160,000
shares of Series A Preferred Stock to three private investors for an
aggregate purchase price of $152,720.00.
(2) In December 1995, Registrant issued and sold 896,834 shares of Series B
Preferred Stock to Cisco Systems, Inc. for an aggregate purchase price of
$7,999,759.
(3) In February 1996, Registrant issued and sold 448,417 shares of Series B-1
Preferred Stock to Sierra Ventures for an aggregate purchase price of
$3,999,880.
(4) In April 1996, Registrant issued 32,580 shares of Common Stock to a
consultant in consideration of consulting services rendered.
(5) In December 1996, Registrant issued and sold 814,830 shares of Series C
Preferred Stock to 13 private investors for an aggregate purchase price of
$10,185,375.
(6) In September 1997, Registrant issued and sold 10,000 shares of Common Stock
to an employee for an aggregate offering price of $13,000.
(7) Between September 1997 and June 1998, Registrant issued and sold 1,461,538
shares of Series D Preferred Stock to 27 private investors for an aggregate
purchase price of $18,999,994, and issued warrants to purchase an aggregate
of 38,462 shares of Series D Preferred Stock at an exercise price of $13.00
per share to Sumitomo Corporation.
(8) In December 1997, Registrant issued 15,716 shares of Series D Preferred
Stock to an investment bank for services rendered as the exclusive
placement agent of the sale of Series D Preferred Stock.
(9) In April and June 1998, Registrant issued to Shaw Communications Inc.
("Shaw") an aggregate of 576,923 shares of Series F Preferred Stock for an
aggregate purchase price of $7,499,999. In connection with such sales to
Shaw, in April 1998 the Company issued to Shaw a warrant to purchase
3,000,000 shares of Common Stock at an exercise price of $6.50 per share
and a warrant to purchase an indeterminate amount of Common Stock for $1.00
upon the occurrence of certain events.
(10) From June 1, 1995 to June 1, 1998, Registrant granted stock options to a
total of 148 employees, directors and consultants covering an aggregate of
3,791,160 shares of Common Stock, at exercise prices varying from $.10 to
$6.50. Of such shares, 771,769 shares have been issued and sold pursuant
to the exercise of such options. Options to purchase 947,320 shares of
Common Stock have been cancelled or have lapsed without being exercised or
otherwise have been cancelled.
Registrant claimed exemptions under the Securities Act from registration
under the Securities Act for the sale and issuance of securities in the
transaction described in paragraphs (1) through (9) by virtue of Section 4(2),
Regulation D promulgated thereunder as transactions not involving a public
offering. The purchasers in each case represented their intention to acquire
the securities for investment only and not with a view to the distribution
thereof. Appropriate legends are affixed to the stock certificates issued in
such transactions. All recipients either received adequate information about
the Registrant or had access, through employment or other relationships, to
such information.
The sales and issuances in the transactions described in paragraph (10) above
were deemed to be exempt from registration under the Securities Act by virtue
of Rule 701 promulgated thereunder, in that they were issued pursuant to a
written compensatory benefit plan, as provided by Rule 701.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
3.3 Form of Certificate of Incorporation.
3.4 Form of Bylaws.
3.5 Form of Amended and Restated Certificate of Incorporation to be
filed upon consummation of the offering.
4.1 Reference is made to Exhibits 3.1 through 3.5.
4.2* Specimen Stock Certificate.
4.3 Amended and Restated Information and Registration Rights Agreement
dated April 6, 1998.
5.1* Opinion of Cooley Godward llp.
10.1 Form of Indemnity Agreement between Registration and each of its
directors and officers.
10.2 1995 Stock Option Plan, as amended on March 26, 1996.
10.3 1997 Equity Incentive Plan, as amended on June 9, 1998.
10.4 1998 Employee Stock Purchase Plan.
10.5 1998 Non-Employee Directors Stock Option Plan.
10.6** Supply Agreement between the Registrant and ECI Telecom Ltd. dated
March 3, 1998.
10.7** Strategic Partnership and Distributorship Agreement between the
Registrant and Sumitomo Corporation dated December 4, 1996.
10.8** Master Agreement between the Registrant and NET Brasil S.A. dated
June 30, 1997.
10.9 Resale and License Agreement between the Registrant and Digital
Equipment Corporation dated December 9, 1996.
10.10 Lease Agreement dated January 23, 1996 between the Registrant and
Arrillaga Family Trust and Richard T. Peery Separate Property
Trust.
10.11 Employment Agreement between the Registrant and Zaki Rakib dated
February 1993.
10.12 Employment Agreement between the Registrant and Selim Rakib dated
February 1993.
10.13 Credit Agreement between the Registrant and Imperial Bank dated
April 24, 1997.
10.14 Product Development Agreement between the Registrant and Cisco
Systems, Inc. dated July 22, 1996.
10.15 Promissory Note and Stock Pledge Agreement between the Registrant
and Shlomo Rakib dated March 6, 1996.
10.16 Stock Repurchase Agreement between the Registrant and Zaki Rakib
dated March 16, 1995.
10.17 Stock Repurchase Agreement between the Registrant and Shlomo Rakib
dated March 16, 1995.
10.18 Series A Preferred Stock Purchase Agreement between the Registrant
and Lewis Solomon dated June 16, 1995.
10.19 Promissory Note between the Registrant and Lewis Solomon dated June
16, 1997.
10.20 Stock Pledge Agreement between the Registrant and Lewis Solomon
dated June 16, 1997.
10.21 Anti-Dilution Warrant to Purchase Shares of Common Stock dated
April 6, 1998 issued to Shaw Communications Inc.
21.1 List of Subsidiaries.
23.1* Consent of Cooley Godward llp (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors. Reference is
made to page F-2.
24.1 Power of Attorney. Reference is made to page II-5.
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Confidential treatment has been requested for portions of this document.
II-3
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above are omitted because they are not required, they
are not applicable or the information is already included in the consolidated
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "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 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 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 Act, the information omitted from the form
of prospectus as filed as part of the 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 Act shall be deemed to be
part of the registration statement as of the time it was declared effective,
(2) for the purpose of determining any liability under the 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 this
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof, and (3) to remove from registration by means of a post-
effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, REGISTRANT HAS
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE COUNTY OF SANTA CLARA, STATE OF
CALIFORNIA, ON THE 15TH DAY OF JUNE, 1998.
TERAYON COMMUNICATION SYSTEMS
/s/ Zaki Rakib
By___________________________________
DR. ZAKI RAKIB CHIEF EXECUTIVE
OFFICER, CHIEF FINANCIAL OFFICER
AND DIRECTOR
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Dr. Zaki
Rakib and Shlomo Rakib as his true and lawful attorney-in-fact and agent, each
acting alone, with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to this Registration Statement
on Form S-1, and to sign any registration statement filed under Rule 462 under
the Securities Act of 1933 including post-effective amendments) thereto, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ Zaki Rakib Chief Executive June 15, 1998
- ------------------------------------- Officer, Chief
DR. ZAKI RAKIB Financial Officer
and Director
(Principal Executive
Officer and
Principal Financial
Officer)
/s/ Linda Palmor Vice President, June 15, 1998
- ------------------------------------- Finance(Principal
LINDA PALMOR Accounting Officer)
/s/ Shlomo Rakib Chairman of the June 15, 1998
- ------------------------------------- Board of Directors
SHLOMO RAKIB
/s/ Michael D'Avella Director June 15, 1998
- -------------------------------------
MICHAEL D'AVELLA
/s/ Christopher J. Schaepe Director June 15, 1998
- -------------------------------------
CHRISTOPHER J. SCHAEPE
/s/ Lewis Solomon Director June 15, 1998
- -------------------------------------
LEWIS SOLOMON
/s/ Mark Stevens Director June 15, 1998
- -------------------------------------
MARK STEVENS
II-5
<PAGE>
SCHEDULE II
<TABLE>
<S> <C>
</TABLE>
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------ ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December 31,
1995...................... $-- $-- $-- $--
Year ended December 31,
1996...................... $-- $-- $-- $--
Year ended December 31,
1997...................... $-- $ 20 $-- $ 20
Three months ended March
31, 1998 (unaudited)...... $ 20 $ 50 $-- $ 70
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ----------------------- ----
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of the
Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
3.3 Form of Certificate of Incorporation.
3.4 Form of Bylaws.
3.5 Form of Amended and Restated Certificate of Incorporation to
be filed upon consummation of the offering.
4.1 Reference is made to Exhibits 3.1 through 3.5.
4.2* Specimen Stock Certificate.
4.3 Amended and Restated Information and Registration Rights
Agreement dated April 6, 1998.
5.1* Opinion of Cooley Godward llp.
10.1 Form of Indemnity Agreement between Registration and each of
its directors and officers.
10.2 1995 Stock Option Plan, as amended on March 26, 1996.
10.3 1997 Equity Incentive Plan, as amended on June 9, 1998.
10.4 1998 Employee Stock Purchase Plan.
10.5 1998 Non-Employee Directors Stock Option Plan.
10.6** Supply Agreement between the Registrant and ECI Telecom Ltd.
dated March 3, 1998.
10.7** Strategic Partnership and Distributorship Agreement between
the Registrant and Sumitomo Corporation dated December 4,
1996.
10.8** Master Agreement between the Registrant and NET Brasil S.A.
dated June 30, 1997.
10.9 Resale and License Agreement between the Registrant and
Digital Equipment Corporation dated December 9, 1996.
10.10 Lease Agreement dated January 23, 1996 between the Registrant
and Arrillaga Family Trust and Richard T. Peery Separate
Property Trust.
10.11 Employment Agreement between the Registrant and Zaki Rakib
dated February 1993.
10.12 Employment Agreement between the Registrant and Selim Rakib
dated February 1993.
10.13 Credit Agreement between the Registrant and Imperial Bank
dated April 24, 1997.
10.14 Product Development Agreement between the Registrant and
Cisco Systems, Inc. dated July 22, 1996.
10.15 Promissory Note and Stock Pledge Agreement between the
Registrant and Shlomo Rakib dated March 6, 1996.
10.16 Stock Repurchase Agreement between the Registrant and Zaki
Rakib dated March 16, 1995.
10.17 Stock Repurchase Agreement between the Registrant and Shlomo
Rakib dated March 16, 1995.
10.18 Series A Preferred Stock Purchase Agreement between the
Registrant and Lewis Solomon dated June 16, 1995.
10.19 Promissory Note between the Registrant and Lewis Solomon
dated June 16, 1997.
10.20 Stock Pledge Agreement between the Registrant and Lewis
Solomon dated June 16, 1997.
10.21 Anti-Dilution Warrant to Purchase Shares of Common Stock
dated April 6, 1998 issued to Shaw Communications Inc.
21.1 List of Subsidiaries.
23.1* Consent of Cooley Godward llp (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors. Reference
is made to page F-2.
24.1 Power of Attorney. Reference is made to page II-5.
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Confidential treatment has been requested for portions of this document.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
TERAYON COMMUNICATION SYSTEMS
A CALIFORNIA CORPORATION
The undersigned, SHLOMO RAKIB and ZAKI RAKIB, hereby certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of TERAYON COMMUNICATION SYSTEMS, a California corporation.
TWO: The Articles of said corporation shall be amended and restated to
read in full as follows:
I.
The name of this corporation is TERAYON COMMUNICATION SYSTEMS.
II.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is Thirty-Five
Million (35,000,000) shares. Twenty Million (20,000,000) shares shall be Common
Stock. Fifteen Million (15,000,000) shares shall be Preferred Stock.
The Preferred Stock may be issued from time to time in one or more series.
Except as provided below, the Board of Directors is hereby authorized to fix or
alter the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking
1.
<PAGE>
fund provisions), redemption price or prices, and the liquidation preferences of
any wholly unissued series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or any of them; and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status that
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
Four Million One Hundred Sixty-Two Thousand Ninety-Three (4,162,093) shares
of Preferred Stock are designated "Series A Preferred Stock," Eight Hundred
Ninety-Six Thousand Eight Hundred Thirty-Four (896,834) shares of Preferred
Stock are designated "Series B Preferred Stock," Four Hundred Forty-Eight
Thousand Four Hundred Seventeen (448,417) shares of Preferred Stock are
designated "Series B-1 Preferred Stock," Eight Hundred Fourteen Thousand Eight
Hundred Thirty (814,830) shares of Preferred Stock are designated "Series C
Preferred Stock," One Million Five Hundred Thousand (1,500,000) shares of
Preferred Stock are designated "Series D Preferred Stock," Two Million
(2,000,000) shares of Preferred Stock are designated "Series E Preferred Stock"
and Five Hundred Seventy-Six Thousand Nine Hundred Twenty-Three (576,923) shares
of Preferred Stock are designated "Series F Preferred Stock." The respective
rights, preferences, privileges and restrictions of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock are specified below.
1. DIVIDENDS. The holders of Series A Preferred Stock, Series B Preferred
Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock shall be entitled
to receive dividends at the rate of:
2.
<PAGE>
(a) $0.0764 per annum on each outstanding share of Series A Preferred
(as adjusted for any stock dividends, combinations or splits with respect
to such shares);
(b) $0.7136 per annum on each outstanding share of Series B Preferred
Stock (as adjusted for any stock dividends, combinations or splits with
respect to such shares);
(c) $0.7136 per annum on each outstanding share of Series B-1 Preferred
Stock (as adjusted for any stock dividends, combinations or splits with
respect to such shares);
(d) $1.00 per annum on each outstanding share of Series C Preferred
Stock (as adjusted for any stock dividends, combinations or splits with
respect to such shares);
(e) $1.04 per annum on each outstanding share of Series D Preferred
Stock (as adjusted for any stock dividends, combinations or splits with
respect to such shares);
(f) $1.20 per annum on each outstanding share of Series E Preferred
Stock (as adjusted for any stock dividends, combinations or splits with
respect to such shares); and
(g) $1.04 per annum on each outstanding share of Series F Preferred
Stock (as adjusted for any stock dividends, combinations or splits with
respect to such shares);
payable out of funds legally available therefor. Such dividends shall be
payable only when, as and if declared by the board of directors and shall be
noncumulative. No dividends (other than those payable solely in the Common
Stock of the corporation) shall be paid on any Series C Preferred Stock, Series
B-1 Preferred Stock, Series B Preferred Stock, Series A Preferred Stock or
Common Stock during any fiscal year of the corporation until dividends in the
total amount of (i) $1.04 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares) on the
3.
<PAGE>
Series D Preferred Stock and Series F Preferred Stock and (ii) $1.20 per share
(as adjusted for any stock dividends, combinations or splits with respect to
such shares) on the Series E Preferred shall have been paid or declared and set
apart during that fiscal year. Payments of any dividends to the holders of
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
shall be paid pro rata, on an equal priority, pari passu basis according to
their respective dividend rates set forth herein. No dividends (other than those
payable solely in the Common Stock of the corporation) shall be paid on any
Series B-1 Preferred Stock, Series B Preferred Stock, Series A Preferred Stock
or Common Stock during any fiscal year of the corporation until dividends in the
total amount of $1.00 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares) on the Series C Preferred
Stock shall have been paid or declared and set apart during that fiscal year. No
dividends (other than those payable solely in the Common Stock of the
corporation) shall be paid on any Series B Preferred Stock, Series A Preferred
Stock or Common Stock of the corporation during any fiscal year of the
corporation until dividends in the total amount of $0.7136 per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) on the Series B-1 Preferred Stock shall have been paid or declared and
set apart during that fiscal year. No dividends (other than those payable solely
in the Common Stock of the corporation) shall be paid on any Series A Preferred
Stock or Common Stock of the corporation during any fiscal year of the
corporation until dividends in the total amount of $0.7136 per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) on the Series B Preferred Stock shall have been paid or declared and set
apart during that fiscal year. No dividends (other than those payable solely in
the Common Stock of the corporation) shall be paid on any Common Stock of the
corporation during any fiscal year of the corporation until dividends in the
total amount of $0.0764 per share (as adjusted for any stock dividends,
combinations or splits with
4.
<PAGE>
respect to such shares) on the Series A Preferred Stock shall have been paid or
declared and set apart during that fiscal year. No right shall accrue to holders
of shares of Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock or Series F Preferred Stock by reason of the fact that dividends
on said shares are not declared in any prior year, nor shall any undeclared or
unpaid dividend bear or accrue any interest.
2. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding up of the corporation, whether voluntary or involuntary, distributions
to the shareholders of the corporation shall be made in the following manner:
(a) The holders of the Series A Preferred Stock, Series B Preferred
Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
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 amount of
$0.9545 per share of Series A Preferred Stock, $8.92 per share of Series B
Preferred Stock, $8.92 per share of Series B-1 Preferred Stock, $12.50 per
share of Series C Preferred Stock, $13.00 per share of Series D Preferred
Stock, $15.00 per share of Series E Preferred Stock and $13.00 per share of
Series F Preferred Stock (each as adjusted for any stock dividends,
combinations or splits with respect to such shares) plus all declared but
unpaid dividends on such share for each share of Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock on the liquidation date. If, upon the occurrence of such
event, the assets and funds thus distributed among the holders of the
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential
amount, then the entire assets and funds of the corporation legally
available for distribution shall be distributed ratably among the holders
of the Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock,
5.
<PAGE>
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock in proportion to the preferential amount each such holder is
otherwise entitled to receive.
(b) After payment to the holders of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock of the full amounts to which they shall be entitled as
provided in Section 2(a) above, the holders of the Series F Preferred
Stock, Series E Preferred Stock, Series D Preferred Stock, Series B-1
Preferred Stock and Common Stock shall be entitled to receive ratably on a
per share basis (based upon the number of shares of Common Stock into which
each share of Series F Preferred Stock, Series E Preferred Stock, Series D
Preferred Stock and Series B-1 Preferred Stock is then convertible) all the
remaining assets until, as to the holders of Series F Preferred Stock, such
holders have received pursuant to this Section 2(b) (excluding all amounts
received pursuant to Section 2(a) above) an additional amount of $6.50 per
share then held by them, adjusted for any stock dividends,
6.
<PAGE>
combinations or splits with respect to such shares, as to the holders of
Series E Preferred Stock, such holders have received pursuant to this
Section 2(b) (excluding all amounts received pursuant to Section 2(a)
above) an additional amount of $7.50 per share then held by them, adjusted
for any stock dividends, combinations or splits with respect to such
shares, as to the holders of Series D Preferred Stock, such holders have
received pursuant to this Section 2(b) (excluding all amounts received
pursuant to Section 2(a) above) an additional amount of $6.50 per share
then held by them, adjusted for any stock dividends, combinations or splits
with respect to such shares and, as to the holders of Series B-1 Preferred
Stock, such holders have received pursuant to this Section 2(b) (excluding
all amounts received pursuant to Section 2(a) above) an additional amount
of $8.92 per share then held by them, adjusted for any stock dividends,
combinations or splits with respect to such shares.
(c) After payment to the holders of the Series F Preferred Stock,
Series E Preferred Stock, Series D Preferred Stock, Series C Preferred
Stock, Series B-1 Preferred Stock, Series B Preferred Stock, Series A
Preferred Stock and the Common Stock of the full amounts to which they
shall be entitled as provided in Sections 2(a) and (b) above, the entire
remaining assets and funds of the corporation legally available for
distribution shall be distributed among the holders of the Common Stock in
proportion to the shares of Common Stock then held by them.
(d) For purposes of this Section 2, any acquisition of the corporation
by means of a merger or other form of corporate reorganization in which
outstanding shares of the corporation are exchanged for securities or other
consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary (other than a mere reincorporation transaction), or a
sale of all or substantially all of the assets of the corporation, or any
transaction or series of related transactions by the corporation in which
in excess of fifty percent (50%) of the corporation's voting power is
transferred, shall be treated as a liquidation, dissolution or winding up
of the corporation.
3. CONVERSION. The holders of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall
have conversion rights as follows:
(a) RIGHT TO CONVERT. Each share of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock,
7.
<PAGE>
Series E Preferred Stock and Series F Preferred Stock shall be convertible,
at the option of the holder thereof, at the office of the corporation or
any transfer agent for such stock. The number of shares of Common Stock to
which a holder of Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock or Series F Preferred Stock shall be
entitled upon conversion shall be the product obtained by multiplying the
applicable "Conversion Rate," determined as hereinafter provided, then in
effect by the number of shares of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred
Stock being converted by such holder.
The conversion rate in effect at any time for conversion of the shares of
Series A Preferred (the "Series A Conversion Rate") shall be the quotient
obtained by dividing $0.9545 by the "Series A Conversion Price," determined as
hereinafter provided, in effect on the date the certificate is surrendered for
conversion. The conversion rate in effect at any time for conversion of the
shares of Series B Preferred (the "Series B Conversion Rate") shall be the
quotient obtained by dividing $8.92 by the "Series B Conversion Price,"
determined as hereinafter provided, in effect on the date the certificate is
surrendered for conversion. The conversion rate in effect at any time for
conversion of the shares of Series B-1 Preferred (the "Series B-1 Conversion
Rate") shall be the quotient obtained by dividing $8.92 by the "Series B-1
Conversion Price," determined as hereinafter provided, in effect on the date the
certificate is surrendered for conversion. The conversion rate in effect at any
time for conversion of the shares of Series C Preferred (the "Series C
Conversion Rate") shall be the quotient obtained by dividing $12.50 by the
"Series C Conversion Price" determined as hereinafter provided, in effect on the
date the certificate is surrendered for conversion. The conversion rate in
effect at any time for conversion of the shares of Series D
8.
<PAGE>
Preferred (the "Series D Conversion Rate") shall be the quotient obtained by
dividing $13.00 by the "Series D Conversion Price" determined as hereinafter
provided, in effect on the date the certificate is surrendered for conversion.
The conversion rate in effect at any time for conversion of the shares of Series
E Preferred (the "Series E Conversion Rate") shall be the quotient obtained by
dividing $15.00 by the "Series E Conversion Price" determined as hereinafter
provided, in effect on the date the certificate is surrendered for conversion.
The conversion rate in effect at any time for conversion of the shares of Series
F Preferred (the "Series F Conversion Rate") shall be the quotient obtained by
dividing $13.00 by the "Series F Conversion Price" determined as hereinafter
provided, in effect on the date the certificate is surrendered for conversion.
The conversion price for the Series A Preferred Stock (the "Series A
Conversion Price") shall initially be $0.9545. The conversion price for the
Series B Preferred Stock (the "Series B Conversion Price") shall initially be
$8.92. The conversion price for the Series B-1 Preferred Stock (the "Series B-1
Conversion Price") shall initially be $8.92. The conversion price for the
Series C Preferred Stock (the "Series C Conversion Price") shall initially be
$12.50. The conversion price for the Series D Preferred Stock (the "Series D
Conversion Price") shall initially be $13.00. The conversion price for the
Series E Preferred Stock (the "Series E Conversion Price") shall initially be
$15.00. The conversion price for the Series F Preferred Stock (the "Series F
Conversion Price") shall initially be $13.00. The initial Series A Conversion
Price, Series B Conversion Price, Series B-1 Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price and
Series F Conversion Price shall be adjusted as hereinafter provided.
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock at the then-
effective Series A Conversion Rate upon the date specified by vote or
written consent of holders of at least two-thirds of the shares
9.
<PAGE>
of the Series A Preferred Stock; each share of Series B Preferred Stock
shall automatically be converted into shares of Common Stock at the then-
effective Series B Conversion rate upon the date specified by vote or
written consent of holders of at least two-thirds of the shares of the
Series B Preferred Stock; each share of Series B-1 Preferred Stock shall
automatically be converted into shares of Common Stock at the then-
effective Series B-1 Conversion Rate upon the date specified by vote or
written consent of holders of at least two-thirds of the shares of the
Series B-1 Preferred Stock; each share of Series C Preferred Stock shall
automatically be converted into shares of Common Stock at the then-
effective Series C Conversion Rate upon the date specified by vote or
written consent of holders of at least two-thirds of the shares of the
Series C Preferred Stock; each share of Series D Preferred Stock shall
automatically be converted into shares of Common Stock at the then-
effective Series D Conversion Rate upon the date specified by vote or
written consent of holders of at least two-thirds of the shares of the
Series D Preferred Stock; each share of Series E Preferred Stock shall
automatically be converted into shares of Common Stock at the then-
effective Series E Conversion Price upon the date specified by vote or
written consent of holders of at least two-thirds of the shares of Series E
Preferred Stock; and each share of Series F Preferred Stock shall
automatically be converted into shares of Common Stock at the then-
effective Series F Conversion Rate upon the date specified by vote or
written consent of holders of at least two-thirds of the shares of the
Series F Preferred Stock. Each share of Series A Preferred Stock, Series B
Preferred Stock and Series B-1 Preferred Stock shall automatically be
converted into shares of Common Stock at the then-effective Conversion Rate
for such series immediately upon the closing of the sale of the
corporation's Common Stock in a firm commitment, underwritten public
offering registered under the Securities Act of 1933, as amended (the
"Securities Act"), other than a registration relating solely to a
transaction under Rule 145 under such Act (or any successor thereto) or to
an employee
10.
<PAGE>
benefit plan of the corporation, the aggregate proceeds to the corporation
and/or any selling shareholders (after deduction for underwriters'
discounts) of which exceed $10,000,000 (a "Qualified Public Offering").
Each share of Series C Preferred Stock shall automatically be converted
into shares of Common Stock at the then-effective Series C Conversion Rate
immediately upon the earlier of (i) the closing of the sale of the
corporation's Common Stock in a Qualified Public Offering at a price per
share equal to or exceeding $12.50 (as adjusted for any stock dividends,
combinations or splits with respect to such shares) or (ii) the end of any
twenty (20) day period after a Qualified Public Offering during which the
closing sales price per share (or closing bid, if no sales were reported)
of the Common Stock of the corporation as quoted on any established stock
exchange or a national market system, including, without limitation, the
Nasdaq National Market or the Nasdaq SmallCap, was at least $12.50 (as
adjusted for any stock dividends, combinations or splits with respect to
such shares) for each day during such period. Each share of Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
shall automatically be converted into shares of Common Stock at the then-
effective Series D Conversion Rate, Series E Conversion Rate or Series F
Conversion Rate, as the case may be, immediately upon the closing of the
sale of the corporation's Common Stock in a Qualified Public Offering at a
price per share equal to or exceeding $13.00 (as adjusted for any stock
dividends, combinations or splits with respect to such shares).
(c) MECHANICS OF CONVERSION. Before any holder of Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
Series F Preferred Stock shall be entitled to convert the same into shares
of Common Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the corporation or
any transfer agent for such stock, and shall give written
11.
<PAGE>
notice to the corporation at such office that such holder elects to convert
the same and shall state therein the name or names in which such holder
wishes the certificate or certificates for shares of Common Stock to be
issued. The corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred
Stock a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Such conversion
shall be deemed to have been made immediately prior to the close of
business on the date of 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.
(d) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND FOR
COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this
corporation shall declare or pay, without consideration, any dividend on
the Common Stock payable in Common Stock or in any right to acquire Common
Stock for no consideration, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of
Common Stock (by stock split, reclassification or otherwise than by payment
of a dividend in Common Stock or in any right to acquire Common Stock), or
in the event the outstanding shares of Common Stock shall be combined or
consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, then the Series A Conversion Price, Series B
Conversion Price, Series B-1 Conversion Price, Series C Conversion Price,
Series D Conversion Price, Series E Conversion Price and Series F
Conversion Price in effect immediately prior to such event shall,
concurrently with the effectiveness of such event, be proportionately
decreased or increased, as appropriate. In the event
12.
<PAGE>
that this corporation shall declare or pay, without consideration, any
dividend on the Common Stock payable in any right to acquire Common Stock
for no consideration, then the corporation shall be deemed to have made a
dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire
Common Stock.
(e) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the Common
Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock shall be changed into the same or a different number of shares of any
other class of classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of
shares provided for in Section 3(d) above or a merger or other
reorganization referred to in Section 2(d) above), the Series A Conversion
Price, the Series B Conversion Price, Series B-1 Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price and
Series F Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock shall be convertible into, in lieu of the number of shares of Common
Stock which the holders would otherwise have been entitled to receive, a
number of shares of such other class of classes of stock equivalent to the
number of shares of Common Stock that would have been subject to receipt by
the holders upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock immediately before that change.
13.
<PAGE>
(f) ADJUSTMENT TO SERIES C CONVERSION PRICE, SERIES D CONVERSION
PRICE, SERIES E CONVERSION PRICE AND SERIES F CONVERSION PRICE.
(1) SALE OF SHARES BELOW SERIES C CONVERSION PRICE. If at any
time or from time to time the corporation issues or sells, or is deemed by
the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock (as hereinafter defined), other than as a
dividend or other distribution on any class of stock as provided in Section
3(d) above, and other than a subdivision or combination of shares of Common
Stock as provided in Section 3(d) above, for an Effective Price (as
hereinafter defined) less than the then effective Conversion Price for the
Series C Preferred Stock, then, and in each such case, such Conversion
Price shall be reduced, as of the opening of business on the date of such
issue or sale, to a price determined by multiplying such Conversion Price
by a fraction (i) the numerator of which shall be (A) the number of shares
of Common Stock issued or issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock outstanding (as defined below)
immediately prior to such issue or sale, plus (B) the number of shares of
Common Stock which the aggregate consideration received (as defined in
subsection (f)(5)) by the corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price,
and (ii) the denominator of which shall be the number of shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock outstanding immediately prior to such issue or sale plus
the total number of Additional Shares of Common Stock so issued. For the
purposes of the preceding sentence, the number of shares of Common Stock
14.
<PAGE>
issued or issuable upon conversion of the Series A Preferred Stock, Series
B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock outstanding as of a given date shall be the sum of (A) the number of
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock actually outstanding, (B) the number of shares of
Common Stock that have been issued upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock, and (C) the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock, which Preferred Stock could be obtained through the exercise or
conversion of all other rights, options, warrants and convertible
securities on the day immediately preceding the given date.
(2) SALE OF SHARES BELOW SERIES D CONVERSION PRICE. If at any
time or from time to time the corporation issues or sells, or is deemed by
the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock, other than as a dividend or other
distribution on any class of stock as provided in Section 3(d) above, and
other than a subdivision or combination of shares of Common Stock as
provided in Section 3(d) above, for an Effective Price less than the then
effective Conversion Price for the Series D Preferred Stock, then, and in
each such case, such Conversion Price shall be reduced, as of the opening
of business on the date of such issue or sale, to a price determined by
multiplying such Conversion Price by a fraction (i) the numerator of which
shall be (A) the number of shares of Common Stock issued or issuable
15.
<PAGE>
upon conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock outstanding
immediately prior to such issue or sale, plus (B) the number of shares of
Common Stock which the aggregate consideration received (as defined in
subsection (f)(5)) by the corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price,
and (ii) the denominator of which shall be the number of shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock outstanding immediately prior to such issue or sale plus
the total number of Additional Shares of Common Stock so issued. For the
purposes of the preceding sentence, the number of shares of Common Stock
issued or issuable upon conversion of the Series A Preferred Stock, Series
B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock outstanding as of a given date shall be the sum of (A) the number of
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock actually outstanding, (B) the number of shares of
Common Stock that have been issued upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock, and (C) the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock,
16.
<PAGE>
which Preferred Stock could be obtained through the exercise or conversion
of all other rights, options, warrants and convertible securities on the
day immediately preceding the given date.
(3) SALE OF SHARES BELOW SERIeS E CONVERSION PRICE. If at any
time or from time to time the corporation issues or sells, or is deemed by
the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock, other than as a dividend or other
distribution on any class of stock as provided in Section 3(d) above, and
other than a subdivision or combination of shares of Common Stock as
provided in Section 3(d) above, for an Effective Price less than the then
effective Conversion Price for the Series E Preferred Stock, then, and in
each such case, such Conversion Price shall be reduced, as of the opening
of business on the date of such issue or sale, to a price determined by
multiplying such Conversion Price by a fraction (i) the numerator of which
shall be (A) the number of shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock outstanding
immediately prior to such issue or sale, plus (B) the number of shares of
Common Stock which the aggregate consideration received (as defined in
subsection (f)(5)) by the corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price,
and (ii) the denominator of which shall be the number of shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock outstanding immediately prior to such issue or sale plus
the total number of Additional Shares of Common Stock so issued. For the
purposes of the preceding sentence, the number of shares of Common Stock
issued or issuable upon conversion of the Series A Preferred Stock, Series
B Preferred Stock, Series B-1 Preferred Stock, Series C
17.
<PAGE>
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock outstanding as of a given date shall be the sum of
(A) the number of shares of Common Stock issuable upon conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock actually outstanding, (B) the
number of shares of Common Stock that have been issued upon conversion of
the Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock and Series F Preferred Stock, and (C) the number of
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock, which Preferred Stock could be obtained through
the exercise or conversion of all other rights, options, warrants and
convertible securities on the day immediately preceding the given date.
(4) SALE OF SHARES BELOW SERIES F CONVERSION PRICE. If at any
time or from time to time the corporation issues or sells, or is deemed by
the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock, other than as a dividend or other
distribution on any class of stock as provided in Section 3(d) above, and
other than a subdivision or combination of shares of Common Stock as
provided in Section 3(d) above, for an Effective Price less than the then
effective Conversion Price for the Series F Preferred Stock, then, and in
each such case, such Conversion Price shall be reduced, as of the opening
of business on the date of such issue or sale, to a price determined by
multiplying such Conversion Price by a fraction (i) the numerator of which
shall be (A) the number of shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F
18.
<PAGE>
Preferred Stock outstanding immediately prior to such issue or sale, plus
(B) the number of shares of Common Stock which the aggregate consideration
received (as defined in subsection (f)(5)) by the corporation for the total
number of Additional Shares of Common Stock so issued would purchase at
such Conversion Price, and (ii) the denominator of which shall be the
number of shares of Common Stock issued or issuable upon conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock outstanding immediately prior
to such issue or sale plus the total number of Additional Shares of Common
Stock so issued. For the purposes of the preceding sentence, the number of
shares of Common Stock issued or issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock outstanding as of a given date shall be
the sum of (A) the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock actually
outstanding, (B) the number of shares of Common Stock that have been issued
upon conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock, and (C) the
number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock, which Preferred Stock could be obtained
through the exercise or conversion of all other rights, options, warrants
and convertible securities on the day immediately preceding the given date.
19.
<PAGE>
(5) For the purpose of making any adjustment required under
Section 3(f)(1), (2), (3) or (4) the consideration received by the
corporation for any issue or sale of securities shall (A) to the extent it
consists of cash, be computed at the net amount of cash received by the
corporation after deduction of any underwriting or similar commissions,
compensation or concessions paid or allowed by the corporation in
connection with such issue or sale but without deduction of any expenses
payable by the corporation, (B) to the extent it consists of property other
than cash, be computed at the fair value of that property as determined in
good faith by the Board of Directors, and (C) if Additional Shares of
Common Stock, Convertible Securities (as hereinafter defined) or rights,
options or warrants to purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the corporation for a consideration which
covers both, be computed as the portion of the consideration so received
that may be reasonably determined in good faith by the Board of Directors
to be allocable to such Additional Shares of Common Stock, Convertible
Securities, rights, options or warrants.
(6) For the purpose of any adjustment required under Section
3(f)(1), (2), (3) or (4) if the corporation issues or sells any rights,
options or warrants for the purchase of Common Stock or Preferred Stock, or
stock or other securities convertible, exercisable or exchangeable into
Common Stock or Preferred Stock (such rights, options or warrants for the
purchase of Common Stock or Preferred Stock, or stock or other securities
convertible, exercisable or exchangeable into Common Stock or Preferred
Stock being herein referred to as "Convertible Securities"), and if the
Effective Price of such Convertible Securities is less than the Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price or
Series F Conversion Price, as applicable, in each case, the maximum number
of shares of Common Stock issuable upon
20.
<PAGE>
exercise, exchange and/or conversion thereof shall be deemed to be
Additional Shares of Common Stock as of the date of issuance of the
Convertible Securities and the corporation shall be deemed to have received
as consideration for the issuance of such shares an amount equal to the
total amount of the consideration, if any, received by the corporation for
the issuance of such Convertible Securities, plus the minimum amount of
consideration, if any, payable to the corporation upon the exercise,
exchange or conversion of the Convertible Securities; provided that if the
minimum amounts of such consideration cannot be ascertained, but are a
function of antidilution or similar protective clauses, the corporation
shall be deemed to have received the minimum amounts of consideration
without reference to such clauses; provided further that if the minimum
amount of consideration payable to the corporation upon the exercise,
exchange or conversion of Convertible Securities is reduced over time or on
the occurrence or non-occurrence of specified events other than by reason
of antidilution adjustments, the Effective Price shall be recalculated
using the figure to which such minimum amount of consideration is reduced;
provided further that if the minimum amount of consideration payable to the
corporation upon the exercise, exchange or conversion of such Convertible
Securities is subsequently increased, the Effective Price shall be again
recalculated using the increased minimum amount of consideration payable to
the corporation upon the exercise, exchange or conversion of such
Convertible Securities. No further adjustment of the Series C Conversion
Price, Series D Conversion Price, Series E Conversion Price or Series F
Conversion Price, as applicable, as adjusted upon the issuance of such
Convertible Securities, shall be made as a result of the actual issuance of
Additional Shares of Common Stock on the exercise, exchange or conversion
of any such Convertible Securities. If any such exercise, exchange or
conversion privilege represented by any such Convertible Securities shall
expire without having been exercised, exchanged or converted, the Series C
Conversion Price, Series D Conversion Price, Series E
21.
<PAGE>
Conversion Price or Series F Conversion Price, as applicable, as adjusted
upon the issuance of such Convertible Securities, shall be readjusted to
the Series C Conversion Price, Series D Conversion Price, Series E
Conversion Price or Series F Conversion Price, as applicable, that would
have been in effect had an adjustment been made on the basis that the only
Additional Shares of Common Stock so issued were the Additional Shares of
Common Stock, if any, actually issued or sold on the exercise, exchange or
conversion of such Convertible Securities, and such Additional Shares of
Common Stock, if any, were issued or sold for the consideration actually
received by the corporation upon such exercise, exchange or conversion,
plus the consideration, if any, actually received by the corporation for
the issuance of such Convertible Securities whether or not exercised,
exchanged or converted; provided that such readjustment shall not apply to
prior conversions of Series C Preferred Stock, Series D Preferred Stock,
Series E Conversion Price or Series F Conversion Price, as applicable.
(7) "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued by the corporation or deemed to be issued pursuant to
this Section 3(f), whether or not subsequently reacquired or retired by the
corporation other than (1) shares of Common Stock issued upon conversion of
the Series A, Series B, Series B-1, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock; (2)
shares of Common Stock and/or options, warrants or other Common Stock
purchase rights and the Common Stock issued pursuant to such options,
warrants or other rights issued or to be issued to employees, officers or
directors of, or consultants or advisors to the corporation or any
subsidiary in connection with the provision of the services to the same
pursuant to stock purchase or stock option plans or other arrangements that
are approved by the Board; (3) shares of Common Stock issued pursuant to
the Company's acquisition of another corporation by merger, purchase of
substantially all assets or
22.
<PAGE>
other reorganization; (4) shares of Common Stock issued in connection with
equipment lease financing arrangements, credit agreements or other
commercial transactions approved by the Board of Directors; and (5) shares
of Common Stock issued pursuant to a corporate strategic partner
transaction involving the license of technology, establishment of a joint
venture, research and development agreement, product development or
marketing agreement, or other similar arrangement.
(8) The "Effective Price" of Additional Shares of Common Stock or
Convertible Securities, as applicable, shall mean the quotient determined
by dividing the total number of Additional Shares of Common Stock or
Convertible Securities, as applicable, issued or sold, or deemed to have
been issued or sold by the corporation under this Section 3(f), into the
aggregate consideration received, or deemed to have been received by the
corporation for such issue under this Section 3(f), for such Additional
Shares of Common Stock or Convertible Securities, as applicable.
(g) NO IMPAIRMENT. The corporation will not, by amendment of its
articles of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the corporation, but will at all times in good faith assist in the carrying
out of all the provisions of this Section 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 Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock against impairment.
23.
<PAGE>
(h) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this Section
3, the corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series A Preferred Stock, Series B Preferred Stock, Series
B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock a certificate
executed by the corporation's chief financial officer setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The corporation shall, upon the
written request at any time of any holder of Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Series A Conversion Price, Series B Conversion Price, Series B-1 Conversion
Price, Series C Conversion Price, Series D Conversion Price, Series E
Conversion Price and Series F Conversion Price at the time in effect and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event that the corporation shall
propose at any time: (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
24.
<PAGE>
Common Stock; or (iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all of its
assets, or to liquidate, dissolve or wind up; then, in connection with each
such event, the corporation shall send to the holders of Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock:
(1) 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, if any,
in respect of the matters referred to in (iii) and (iv) above; and
(2) 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).
(j) ISSUE TAXES. The corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series A Preferred Stock, Series B Preferred
Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
pursuant hereto; provided, however, that the corporation shall not be
obligated to pay any transfer taxes resulting from any transfer requested
by any holder in connection with any such conversion.
(k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The corporation
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock,
25.
<PAGE>
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding
shares of the Series A Preferred Stock, Series B Preferred Stock, Series B-
1 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock, the corporation will take
such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in best efforts to obtain the requisite
shareholder approval of any necessary amendment to these articles.
(l) FRACTIONAL SHARES. No fractional share shall be issued upon the
conversion of any share or shares of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred
Stock. All shares of Common Stock (including fractions thereof) issuable
upon conversion of more than one share of Series A Preferred Stock, Series
B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred
Stock by a holder thereof shall be aggregated for purposes of determining
whether the conversion would result in the issuance of any fractional
share. If, after the aforementioned aggregation, the conversion would
result in the issuance of a fraction of a share of Common Stock, the
corporation shall, in lieu of issuing any fractional share, pay the holder
26.
<PAGE>
otherwise entitled to such fraction a sum in cash equal to the fair market
value of such fraction on the date of conversion (as determined in good
faith by the Board of Directors).
(m) NOTICES. Any notice required by the provisions of this Section 3
to be given to the holder of shares of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred
Stock shall be deemed given if deposited in the United States mail, postage
prepaid, and addressed to each holder of record at the address for such
holder appearing on the books of the corporation.
4. VOTING RIGHTS. Each holder of shares of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock
shall be entitled to the number of votes equal to the number of shares of Common
Stock into which such shares of Series A Preferred Stock, Series B Preferred
Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock or Series F Preferred Stock could be converted
and shall have voting rights and powers equal to the voting rights and powers of
the Common Stock (except as otherwise expressly provided herein or as required
by law, voting together with the Common Stock as a single class) and shall be
entitled to notice of any shareholders' meeting in accordance with the Bylaws of
the corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock held by each holder could
be converted) shall be rounded to the nearest whole
27.
<PAGE>
number (with one-half being rounded upward). Each holder of Common Stock shall
be entitled to one (1) vote for each share of Common Stock held.
5. NO REISSUANCE OF SERIES A PREFERRED STOCK, SERIES B PREFERRED STOCK,
SERIES B-1 PREFERRED STOCK, SERIES C PREFERRED STOCK, SERIES D PREFERRED STOCK,
SERIES E PREFERRED STOCK OR SERIES F PREFERRED STOCK. No share or shares of
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
Series F Preferred Stock acquired by the corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares that the corporation shall
be authorized to issue.
6. COVENANTS. In addition to any other rights provided by law, so long as
shares of Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock or Series F Preferred Stock are outstanding, the corporation
shall not, without first obtaining the affirmative vote or written consent of
the holders of not less than a majority of the outstanding shares of the Series
A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series
F Preferred Stock, voting together as a single class and on an as-converted
basis:
(a) amend or repeal any provision of, or add any provision to, this
corporation's Articles of Incorporation if such action would adversely
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock;
28.
<PAGE>
(b) create (by reclassification or otherwise) or issue shares of any
class or series of stock having preferences prior to or on a parity with
the Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock or Series F Preferred Stock with respect to voting,
dividends or upon liquidation;
(c) declare or pay a cash dividend on the Common Stock; or
(d) sell, lease, convey or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate
with any other corporation immediately after which merger or consolidation
(including any series of related transactions) the shareholders of the
corporation shall hold less than fifty percent (50%) of the voting power of
the surviving corporation.
IV.
1. The liability of the directors of this corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
2. This corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) for breach of duty
to the corporation and its shareholders through bylaw provisions or through
agreements with the agents, or through shareholder resolutions, or otherwise, in
excess of the indemnification otherwise permitted by Section 317 of the
Corporations Code, subject to the limits on such excess indemnification set
forth in Section 204 of the Corporations Code.
29.
<PAGE>
3. Any repeal or modification of this Article shall only be prospective
and shall not affect the rights under this Article in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
THREE: The foregoing amendment and restatement has been duly approved by
the Board of Directors of said corporation.
FOUR: The foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the required vote of shareholders in accordance with
Sections 902 and 903 of the California Corporations Code. The corporation has
six classes or series of shares outstanding that are entitled to vote with
respect to the amendment and restatement. There are Four Million Seven Hundred
Thirty-Six One Hundred Ninety (4,736,190) shares of Common Stock outstanding,
Four Million One Hundred Sixty-Two Thousand Ninety-Three (4,162,093) shares of
Series A Preferred Stock outstanding, Eight Hundred Ninety-Six Thousand Eight
Hundred Thirty-Four (896,834) shares of Series B Preferred Stock outstanding,
Four Hundred Forty-Eight Thousand Four Hundred Seventeen (448,417) shares of
Series B-1 Preferred Stock outstanding, Eight Hundred Fourteen Thousand Eight
Hundred Thirty (814,830) shares of Series C Preferred Stock outstanding, Eight
Hundred Eight Thousand Nine Hundred Eighty-Seven (808,987) shares of Series D
Preferred Stock outstanding and One Hundred Thousand (100,000) shares of Series
E Preferred Stock outstanding. The number of shares voting in favor of the
amendment and restatement equaled or exceeded the vote required. The percentage
vote required was more than fifty percent (50%) of the outstanding shares, more
than fifty percent (50%) of the outstanding shares of Series E Preferred Stock,
Series D Preferred Stock, Series C Preferred Stock, Series B-1 Preferred Stock,
Series B Preferred Stock and Series A Preferred Stock as a class, more than
fifty percent (50%) of the outstanding shares of Series C Preferred Stock,
Series B-1 Preferred Stock, Series B Preferred Stock and Series A Preferred
Stock as a class and more than fifty percent (50%) of the outstanding shares of
Common Stock as a class.
30.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this certificate on March
__, 1998.
________________________________
SHLOMO RAKIB
President
________________________________
ZAKI RAKIB
Secretary
The undersigned certify under penalty of perjury that they have read the
foregoing Amended and Restated Articles of Incorporation and they know the
contents thereof, and that the statements therein are true. Executed at Santa
Clara, California on March __, 1998.
________________________________
SHLOMO RAKIB
President
________________________________
ZAKI RAKIB
Secretary
31.
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
TERAYON CORPORATION
(A CALIFORNIA CORPORATION)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I OFFICES.................................................... 1
Section 1. Principal Office........................................... 1
Section 2. Other Offices.............................................. 1
ARTICLE II CORPORATE SEAL............................................. 1
Section 3. Corporate Seal............................................. 1
ARTICLE III SHAREHOLDERS' MEETINGS AND VOTING RIGHTS................... 1
Section 4. Place of Meetings.......................................... 1
Section 5. Annual Meeting............................................. 2
Section 6. Postponement of Annual Meeting............................. 2
Section 7. Special Meetings........................................... 2
Section 8. Notice of Meetings......................................... 2
Section 9. Manner of Giving Notice.................................... 3
Section 10. Quorum and Transaction of Business......................... 4
Section 11. Adjournment and Notice of Adjourned Meetings............... 4
Section 12. Waiver of Notice, Consent to Meeting or Approval of Minutes 5
Section 13. Action by Written Consent Without a Meeting................ 5
Section 14. Voting..................................................... 6
Section 15. Persons Entitled to Vote or Consent........................ 7
Section 16. Proxies.................................................... 7
Section 17. Inspectors of Election..................................... 7
ARTICLE IV BOARD OF DIRECTORS......................................... 8
Section 18. Powers..................................................... 8
Section 19. Number of Directors........................................ 8
Section 20. Election Of Directors, Term, Qualifications................ 9
Section 21. Resignations............................................... 9
Section 22. Removal.................................................... 9
Section 23. Vacancies.................................................. 10
Section 24. Regular Meetings........................................... 10
Section 25. Participation by Telephone................................. 10
Section 26. Special Meetings........................................... 10
Section 27. Notice of Meetings......................................... 10
Section 28. Place of Meetings.......................................... 11
Section 29. Action by Written Consent Without a Meeting................ 11
Section 30. Quorum and Transaction of Business......................... 11
</TABLE>
i.
<PAGE>
TABLE OF CONTENTS
-----------------
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 31. Adjournment................................................ 11
Section 32. Organization............................................... 11
Section 33. Compensation............................................... 12
Section 34. Committees................................................. 12
ARTICLE V OFFICERS................................................... 13
Section 35. Officers................................................... 13
Section 36. Appointment................................................ 13
Section 37. Inability to Act........................................... 13
Section 38. Resignations............................................... 13
Section 39. Removal.................................................... 13
Section 40. Vacancies.................................................. 13
Section 41. Chairman of the Board...................................... 13
Section 42. Chief Executive Officer.................................... 14
Section 43. President.................................................. 14
Section 44. Vice Presidents............................................ 14
Section 45. Secretary.................................................. 15
Section 46. Chief Financial Officer.................................... 15
Section 47. Compensation............................................... 16
ARTICLE VI CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS......... 16
Section 48. Execution of Contracts and Other Instruments............... 16
Section 49. Loans...................................................... 16
Section 50. Bank Accounts.............................................. 17
Section 51. Checks, Drafts, Etc........................................ 17
ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER................. 17
Section 52. Certificate for Shares..................................... 17
Section 53. Transfer on the Books...................................... 18
Section 54. Lost, Destroyed and Stolen Certificates.................... 18
Section 55. Issuance, Transfer and Registration of Shares.............. 18
</TABLE>
ii.
<PAGE>
TABLE OF CONTENTS
-----------------
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VIII INSPECTION OF CORPORATE RECORDS............................ 19
Section 56. Inspection by Directors.................................... 19
Section 57. Inspection by Shareholders................................. 19
(a) Inspection of Corporate Records............................ 19
(b) Inspection of Bylaws....................................... 20
Section 58. Written Form............................................... 20
ARTICLE IX MISCELLANEOUS.............................................. 20
Section 59. Fiscal Year................................................ 20
Section 60. Annual Report.............................................. 20
Section 61. Record Date................................................ 20
Section 62. Bylaw Amendments........................................... 21
Section 63. Construction and Definition................................ 21
ARTICLE X INDEMNIFICATION............................................ 21
Section 64. Indemnification of Directors, Officers, Employees And Other
Agents..................................................... 21
(a) Directors and Executive Officers........................... 21
(b) Other Officers, Employees and Other Agents................. 22
(c) Determination by the Corporation........................... 22
(d) Good Faith................................................. 22
(e) Expenses................................................... 23
(f) Enforcement................................................ 23
(g) Non-Exclusivity of Rights.................................. 24
(h) Survival of Rights......................................... 24
(i) Insurance.................................................. 24
(j) Amendments................................................. 24
(k) Employee Benefit Plans..................................... 24
(l) Saving Clause.............................................. 24
(m) Certain Definitions........................................ 25
ARTICLE XI RIGHT OF FIRST REFUSAL..................................... 25
Section 65. Right of First Refusal....................................... 25
</TABLE>
iii.
<PAGE>
BYLAWS
OF
TERAYON CORPORATION
(A CALIFORNIA CORPORATION)
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal executive office of the
corporation shall be located at such place as the Board of Directors may from
time to time authorize. If the principal executive office is located outside
this state, and the corporation has one or more business offices in this state,
the Board of Directors shall fix and designate a principal business office in
the State of California.
SECTION 2. OTHER OFFICES. Additional offices of the corporation shall be
located at such place or places, within or outside the State of California, as
the Board of Directors may from time to time authorize.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. If the Board of Directors adopts a corporate
seal, such seal shall have inscribed thereon the name of the corporation and the
state and date of its incorporation. If and when a seal is adopted by the Board
of Directors, such seal may be engraved, lithographed, printed, stamped,
impressed upon or affixed to any contract, conveyance, certificate for shares or
other instrument executed by the corporation.
ARTICLE III
SHAREHOLDERS' MEETINGS AND VOTING RIGHTS
SECTION 4. PLACE OF MEETINGS. Meetings of shareholders shall be held at
the principal executive office of the corporation, or at any other place, within
or outside the State of California, which may be fixed either by the Board of
Directors or by the written consent of all persons entitled to vote at such
meeting, given either before or after the meeting and filed with the Secretary
of the Corporation.
1.
<PAGE>
SECTION 5. ANNUAL MEETING. The annual meeting of the shareholders of the
corporation shall be held on any date and time that may from time to time be
designated by the Board of Directors. At such annual meeting, directors shall
be elected and any other business may be transacted which may properly come
before the meeting.
SECTION 6. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and the
President shall each have authority to hold at an earlier date and/or time, or
to postpone to a later date and/or time, the annual meeting of shareholders.
SECTION 7. SPECIAL MEETINGS.
(a) Special meetings of the shareholders, for any purpose or purposes,
may be called by the Board of Directors, the Chairman of the Board of Directors,
the President, or the holders of shares entitled to cast not less than ten
percent (10%) of the votes at the meeting.
(b) Upon written request to the Chairman of the Board of Directors,
the President, any vice president or the Secretary of the corporation by any
person or persons (other than the Board of Directors) entitled to call a special
meeting of the shareholders, such officer forthwith shall cause notice to be
given to the shareholders entitled to vote, that a meeting will be held at a
time requested by the person or persons calling the meeting, such time to be not
less than thirty-five (35) nor more than sixty (60) days after receipt of such
request. If such notice is not given within twenty (20) days after receipt of
such request, the person or persons calling the meeting may give notice thereof
in the manner provided by law or in these bylaws. Nothing contained in this
Section 7 shall be construed as limiting, fixing or affecting the time or date
when a meeting of shareholders called by action of the Board of Directors may be
held.
SECTION 8. NOTICE OF MEETINGS. Except as otherwise may be required by
law, and subject to subsection 7(b) above, written notice of each meeting of
shareholders shall be given to each shareholder entitled to vote at that meeting
(see Section 15 below), by the Secretary, Assistant Secretary or other person
charged with that duty, not less than ten (10) (or, if sent by third class mail,
thirty (30)) nor more than sixty (60) days before such meeting.
Notice of any meeting of shareholders shall state the date, place and hour
of the meeting and,
(a) in the case of a special meeting, the general nature of the
business to be transacted, and no other business may be transacted at such
meeting;
(b) in the case of an annual meeting, the general nature of matters
which the Board of Directors, at the time the notice is given, intends to
present for action by the shareholders;
(c) in the case of any meeting at which directors are to be elected,
the names of the nominees intended at the time of the notice to be presented by
management for election; and
2.
<PAGE>
(d) in the case of any meeting, if action is to be taken on any of the
following proposals, the general nature of such proposal:
(1) a proposal to approve a transaction within the provisions of
California Corporations Code, Section 310 (relating to certain transactions in
which a director has a direct or indirect financial interest);
(2) a proposal to approve a transaction within the provisions of
California Corporations Code, Section 902 (relating to amending the Articles of
Incorporation of the corporation);
(3) a proposal to approve a transaction within the provisions of
California Corporations Code, Sections 181 and 1201 (relating to
reorganization);
(4) a proposal to approve a transaction within the provisions of
California Corporations Code, Section 1900 (winding up and dissolution);
(5) a proposal to approve a plan of distribution within the
provisions of California Corporations Code, Section 2007 (relating to certain
plans providing for distribu tion not in accordance with the liquidation rights
of preferred shares, if any).
At a special meeting, notice of which has been given in accordance with
this Section, action may not be taken with respect to business, the general
nature of which has not been stated in such notice. At an annual meeting,
action may be taken with respect to business stated in the notice of such
meeting, given in accordance with this Section, and, subject to subsection 8(d)
above, with respect to any other business as may properly come before the
meeting.
SECTION 9. MANNER OF GIVING NOTICE. Notice of any meeting of shareholders
shall be given either personally or by first-class mail, or, if the corporation
has outstanding shares held of record by 500 or more persons (determined as
provided in California Corporations Code Section 605) on the record date for
such meeting, third-class mail, or telegraphic or other written communication,
addressed to the shareholder at the address of that shareholder appearing on the
books of the corporation or given by the shareholder to the corporation for the
purpose of notice. If no such address appears on the corporation's books or is
given, notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the
corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county where that office is located.
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at that address, all
future notices shall be deemed to have been duly given without further mailing
if these shall be available to the shareholder on written demand by the
3.
<PAGE>
shareholder at the principal executive office of the corporation for a period of
one year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 9, executed by the Secretary, Assistant Secretary or
any transfer agent, shall be prima facie evidence of the giving of the notice.
SECTION 10. QUORUM AND TRANSACTION OF BUSINESS.
(a) At any meeting of the shareholders, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, the affirmative vote of the majority of shares
represented at the meeting and entitled to vote on any matter shall be the act
of the shareholders, unless the vote of a greater number or voting by classes is
required by law or by the Articles of Incorporation, and except as provided in
subsection (b) below.
(b) The shareholders present at a duly called or held meeting of the
shareholders at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, provided that any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
(c) In the absence of a quorum, no business other than adjournment may
be transacted, except as described in subsection (b) above.
SECTION 11. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of shareholders may be adjourned from time to time, whether or not a quorum is
present, by the affirmative vote of a majority of shares represented at such
meeting either in person or by proxy and entitled to vote at such meeting.
In the event any meeting is adjourned, it shall not be necessary to give
notice of the time and place of such adjourned meeting pursuant to Sections 8
and 9 of these bylaws; provided that if any of the following three events occur,
such notice must be given:
(a) announcement of the adjourned meeting's time and place is not made
at the original meeting which it continues; or
(b) such meeting is adjourned for more than forty- five (45) days from
the date set for the original meeting; or
(c) a new record date is fixed for the adjourned meeting.
At the adjourned meeting, the corporation may transact any business which
might have been transacted at the original meeting.
4.
<PAGE>
SECTION 12. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF MINUTES.
(a) Subject to subsection (b) of this Section, the transactions of any
meeting of shareholders, however called and noticed, and wherever held, shall be
as valid as though made at a meeting duly held after regular call and notice, if
a quorum is present either in person or by proxy, and if, either before or after
the meeting, each of the persons entitled to vote but not present in person or
by proxy signs a written waiver of notice or a consent to holding of the meeting
or an approval of the minutes thereof.
(b) A waiver of notice, consent to the holding of a meeting or
approval of the minutes thereof need not specify the business to be transacted
or transacted at nor the purpose of the meeting; provided that in the case of
proposals described in subsection (d) of Section 8 of these bylaws, the general
nature of such proposals must be described in any such waiver of notice and such
proposals can only be approved by waiver of notice, not by consent to holding of
the meeting or approval of the minutes.
(c) All waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
(d) A person's attendance at a meeting shall constitute waiver of
notice of and presence at such meeting, except when such person objects at the
beginning of the meeting to transaction of any business because the meeting is
not lawfully called or convened and except that attendance at a meeting is not a
waiver of any right to object to the consideration of matters which are required
by law or these bylaws to be in such notice (including those matters described
in subsection (d) of Section 8 of these bylaws), but are not so included if such
person expressly objects to consideration of such matter or matters at any time
during the meeting.
SECTION 13. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action
that may be taken at any meeting of shareholders may be taken without a meeting
and without prior notice if written consents setting forth the action so taken
are signed by the holders of the outstanding shares 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.
Directors may not be elected by written consent except by unanimous written
consent of all shares entitled to vote for the election of directors; provided
that any vacancy on the Board of Directors (other than a vacancy created by
removal) which has not been filled by the board of directors may be filled by
the written consent of a majority of outstanding shares entitled to vote for the
election of directors.
Any written consent may be revoked pursuant to California Corporations Code
Section 603(c) prior to the time that written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary.
Such revocation must be in writing and will be effective upon its receipt by the
Secretary.
5.
<PAGE>
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of any corporate action approved by the shareholders without a meeting to
those shareholders entitled to vote on such matters who have not consented
thereto in writing. This notice shall be given in the manner specified in
Section 9 of these bylaws. In the case of approval of (i) a transaction within
the provisions of California Corporations Code, Section 310 (relating to certain
transactions in which a director has an interest), (ii) a transaction within the
provisions of California Corporations Code, Section 317 (relating to
indemnification of agents of the corporation), (iii) a transaction within the
provisions of California Corporations Code, Sections 181 and 1201 (relating to
reorganization), and (iv) a plan of distribution within the provisions of
California Corporations Code, Section 2007 (relating to certain plans providing
for distribution not in accordance with the liquidation rights of preferred
shares, if any), the notice shall be given at least ten (10) days before the
consummation of any action authorized by that approval.
SECTION 14. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 15
of these bylaws, subject to the provisions of Sections 702 through 704 of the
California Corporations Code (relating to voting shares held by a fiduciary, in
the name of a corporation, or in joint ownership). Voting at any meeting of
shareholders need not be by ballot; provided, however, that elections for
directors must be by ballot if balloting is demanded by a shareholder at the
meeting and before the voting begins.
Every person entitled to vote at an election for directors may cumulate the
votes to which such person is entitled, i.e., such person may cast a total
number of votes equal to the number of directors to be elected multiplied by the
number of votes to which such person's shares are entitled, and may cast said
total number of votes for one or more candidates in such proportions as such
person thinks fit; provided, however, that no shareholder shall be entitled to
-----------------
so cumulate such shareholder's votes unless the candidates for which such
shareholder is voting have been placed in nomination prior to the voting and a
shareholder has given notice at the meeting, prior to the vote, of an intention
to cumulate votes. In any election of directors, the candidates receiving the
highest number of votes, up to the number of directors to be elected, are
elected.
Except as may be otherwise provided in the Articles of Incorporation or by
law, and subject to the foregoing provisions regarding the cumulation of votes,
each shareholder shall be entitled to one vote for each share held.
Any shareholder may vote part of such shareholder's shares in favor of a
proposal and refrain from voting the remaining shares or vote them against the
proposal, other than elections to office, but, if the shareholder fails to
specify the number of shares such shareholder is voting affirmatively, it will
be conclusively presumed that the shareholder's approving vote is with respect
to all shares such shareholder is entitled to vote.
6.
<PAGE>
No shareholder approval, other than unanimous approval of those entitled to
vote, will be valid as to proposals described in subsection 8(d) of these bylaws
unless the general nature of such business was stated in the notice of meeting
or in any written waiver of notice.
SECTION 15. PERSONS ENTITLED TO VOTE OR CONSENT. The Board of Directors
may fix a record date pursuant to Section 60 of these bylaws to determine which
shareholders are entitled to notice of and to vote at a meeting or consent to
corporate actions, as provided in Sections 13 and 14 of these bylaws. Only
persons in whose name shares otherwise entitled to vote stand on the stock
records of the corporation on such date shall be entitled to vote or consent.
If no record date is fixed:
(a) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day notice is given or, if notice is waived, at
the close of business on the business day next preceding the day on which the
meeting is held;
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors has been taken, shall be the day on which the first
written consent is given;
(c) The record date for determining shareholders 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, or the sixtieth (60th) day prior to the
date of such other action, whichever is later.
A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting;
provided, however, that the Board of Directors shall fix a new record date if
- -----------------
the meeting is adjourned for more than forty-five (45) days from the date set
for the original meeting.
Shares of the corporation held by its subsidiary or subsidiaries (as
defined in California Corporations Code, Section 189(b)) are not entitled to
vote in any matter.
SECTION 16. PROXIES. Every person entitled to vote or execute consents
may do so either in person or by one or more agents authorized to act by a
written proxy executed by the person or such person's duly authorized agent and
filed with the Secretary of the corporation; provided that no such proxy shall
be valid after the expiration of eleven (11) months from the date of its
execution unless otherwise provided in the proxy. The manner of execution,
suspension, revocation, exercise and effect of proxies is governed by law.
SECTION 17. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the Board of Directors may appoint any persons, other than nominees for office,
to act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the
7.
<PAGE>
chairman of the meeting may, and on the request of any shareholder or a
shareholder's proxy shall, appoint inspectors of election at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting on the request of one or more shareholders or proxies,
the majority of shares represented in person or proxy shall determine whether
one (1) or three (3) inspectors are to be appointed. If any person appointed as
inspector fails to appear or fails or refuses to act, the chairman of the
meeting may, and upon the request of any shareholder or a shareholder's proxy
shall, appoint a person to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Perform any other acts that may be proper to conduct the election
or vote with fairness to all shareholders.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 18. POWERS. Subject to the provisions of law or any limitations
in the Articles of Incorporation or these bylaws, as to action required to be
approved by the shareholders 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. The Board of
Directors may delegate the management of the day-to-day operation of the
business of the corporation to a management company or other person, provided
that the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised under the ultimate direction of the Board of
Directors.
SECTION 19. NUMBER OF DIRECTORS. The authorized number of directors of
the corporation shall be not less than a minimum of five (5) nor more than a
maximum of nine (9) (which maximum number in no case shall be greater than two
times said minimum, minus one)
8.
<PAGE>
and the number of directors presently authorized is six (6). The exact number
of directors shall be set within these limits from time to time (a) by approval
of the Board of Directors, or (b) by the affirmative vote of a majority of the
shares represented and voting at a duly held meeting at which a quorum is
present (which shares voting affirmatively also constitute at least a majority
of the required quorum) or by the written consent of shareholders pursuant to
Section 13 hereinabove.
Any amendment of these bylaws changing the maximum or minimum number of
directors may be adopted only by the affirmative vote of a majority of the
outstanding shares entitled to vote; provided, an amendment reducing the minimum
number of directors to less than five (5), cannot be adopted if votes cast
against its adoption at a meeting or the shares not consenting to it in the case
of action by written consent are equal to more than 16-2/3 percent of the
outstanding shares entitled to vote.
No reduction of the authorized number of directors shall remove any
director prior to the expiration of such director's term of office.
SECTION 20. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors
shall be elected at each annual meeting of shareholders to hold office until the
next annual meeting. Each director, including a director elected or appointed
to fill a vacancy, shall hold office either until the expiration of the term for
which elected or appointed and until a successor has been elected and qualified,
or until his death, resignation or removal. Directors need not be shareholders
of the corporation.
SECTION 21. RESIGNATIONS. Any director of the corporation may resign
effective upon giving written notice to the Chairman of the Board, the
President, the Secretary or the Board of Directors of the corporation, unless
the notice specifies a later time for the effectiveness of such resignation. If
the resignation specifies effectiveness at a future time, a successor may be
elected pursuant to Section 23 of these bylaws to take office on the date that
the resignation becomes effective.
SECTION 22. REMOVAL. The Board of Directors may declare vacant the
office of a director who has been declared of unsound mind by an order of court
or who has been convicted of a felony.
The entire Board of Directors or any individual director may be removed
from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on such removal; provided, however, that
-----------------
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.
9.
<PAGE>
SECTION 23. VACANCIES. A vacancy or vacancies on the Board of Directors
shall be deemed to exist in case of the death, resignation or removal of any
director, or upon increase in the authorized number of directors or if
shareholders fail to elect the full authorized number of directors at an annual
meeting of shareholders or if, for whatever reason, there are fewer directors on
the Board of Directors, than the full number authorized. Such vacancy or
vacancies, other than a vacancy created by the removal of a director, may be
filled by a majority of the remaining directors, though less than a quorum, or
by a sole remaining director. A vacancy created by the removal of a director
may be filled only by the affirmative vote of a majority of the shares
represented and voting at a duly held meeting at which a quorum is present
(which shares voting affirmatively also constitute at least a majority of the
required quorum) or by the written consent of shareholders pursuant to Section
13 hereinabove. The shareholders may elect a director at any time to fill any
vacancy not filled by the directors. Any such election by written consent
other than to fill a vacancy created by removal, requires the consent of a
majority of the outstanding shares entitled to vote. Any such election by
written consent to fill a vacancy created by removal requires the consent of all
of the outstanding shares entitled to vote.
If, after the filling of any vacancy by the directors, the directors then
in office who have been elected by the shareholders constitute less than a
majority of the directors then in office, any holder or holders of an aggregate
of five percent (5%) or more of the shares outstanding at that time and having
the right to vote for such directors may call a special meeting of shareholders
to be held to elect the entire Board of Directors. The term of office of any
director shall terminate upon such election of a successor.
SECTION 24. REGULAR MEETINGS. Immediately after each annual meeting of
shareholders, and at such place fixed by the Board of Directors, or if no such
place is fixed at the place of the annual meeting, the Board of Directors shall
hold a regular meeting for the purposes of organization, the appointment of
officers and the transaction of other business. Other regular meetings of the
Board of Directors shall be held at such times, places and dates as fixed in
these bylaws or by the Board of Directors; provided, however, that if the date
-----------------
for such a meeting falls on a legal holiday, then the meeting shall be held at
the same time on the next succeeding full business day. Regular meetings of the
Board of Directors held pursuant to this Section 24 may be held without notice.
SECTION 25. PARTICIPATION BY TELEPHONE. Members of the Board of
Directors may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another. Such participation constitutes presence in person
at such meeting.
SECTION 26. SPECIAL MEETINGS. Special meetings of the Board of
Directors for any purpose may be called by the Chairman of the Board or the
President or any vice president or the Secretary of the corporation or any two
(2) directors.
SECTION 27. NOTICE OF MEETINGS. Notice of the date, time and place of
all meetings of the Board of Directors, other than regular meetings held
pursuant to Section 24 above shall
10.
<PAGE>
be delivered personally, orally or in writing, or by telephone or telegraph to
each director, at least forty-eight (48) hours before the meeting, or sent in
writing to each director by first-class mail, charges prepaid, at least four (4)
days before the meeting. Such notice may be given by the Secretary of the
corporation or by the person or persons who called a meeting. Such notice need
not specify the purpose of the meeting. Notice of any meeting of the Board of
Directors need not be given to any director who signs a waiver of notice of such
meeting, or a consent to holding the meeting or an approval of the minutes
thereof, either before or after the meeting, or who attends the meeting without
protesting prior thereto or at its commencement such director's lack of notice.
All such waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
SECTION 28. PLACE OF MEETINGS. Meetings of the Board of Directors may
be held at any place within or without the state which has been designated in
the notice of the meeting or, if not stated in the notice or there is no notice,
designated in the bylaws or by resolution of the Board of Directors.
SECTION 29. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action
required or permitted to be taken by the Board of Directors may be taken without
a meeting, if all members of the Board of Directors individually or collectively
consent in writing to such action. Such written consent or consents shall be
filed with the minutes of the proceedings of the Board of Directors. Such
action by written consent shall have the same force and effect as a unanimous
vote of such directors.
SECTION 30. QUORUM AND TRANSACTION OF BUSINESS. A majority of the
authorized number of directors shall constitute a quorum for the transaction of
business. Every act or decision done or made by a majority of the authorized
number of directors present at a meeting duly held at which a quorum is present
shall be the act of the Board of Directors, unless the law, the Articles of
Incorporation or these bylaws specifically require a greater number. A meeting
at which a quorum is initially present may continue to transact business,
notwithstanding withdrawal of directors, if any action taken is approved by at
least a majority of the number of directors constituting a quorum for such
meeting. In the absence of a quorum at any meeting of the Board of Directors, a
majority of the directors present may adjourn the meeting, as provided in
Section 31 of these bylaws.
SECTION 31. ADJOURNMENT. Any meeting of the Board of Directors, whether
or not a quorum is present, may be adjourned to another time and place by the
affirmative vote of a majority of the directors present. If the meeting is
adjourned for more than twenty-four (24) hours, notice of such adjournment to
another time or place shall be given prior to the time of the adjourned meeting
to the directors who were not present at the time of the adjournment.
SECTION 32. ORGANIZATION. The Chairman of the Board shall preside at
every meeting of the Board of Directors, if present. If there is no Chairman of
the Board or if the Chairman is not present, a Chairman chosen by a majority of
the directors present shall act as chairman. The Secretary of the corporation
or, in the absence of the Secretary, any person appointed by the Chairman shall
act as secretary of the meeting.
11.
<PAGE>
SECTION 33. COMPENSATION. Directors and members of committees may receive
such compensation, if any, for their services, and such reimbursement for
expenses, as may be fixed or determined by the Board of Directors.
SECTION 34. COMMITTEES. The Board of Directors may, by resolution
adopted by a majority of the authorized number of directors, designate one or
more committees, each consisting of two (2) or more directors, to serve at the
pleasure of the Board of Directors. The Board of Directors, by a vote of the
majority of authorized directors, may designate one or more directors as
alternate members of any committee, to replace any absent member at any meeting
of such committee. Any such committee shall have authority to act in the manner
and to the extent provided in the resolution of the Board of Directors, and may
have all the authority of the Board of Directors in the management of the
business and affairs of the corporation, except with respect to:
(a) the approval of any action for which shareholders' approval or
approval of the outstanding shares also is required by the California
Corporations Code;
(b) the filling of vacancies on the Board of Directors or any of its
committees;
(c) the fixing of compensation of directors for serving on the Board
of Directors or any of its committees;
(d) the adoption, amendment or repeal of these bylaws;
(e) the amendment or repeal of any resolution of the Board of
Directors which by its express terms is not so amendable or repealable;
(f) a distribution to shareholders, except at a rate or in a periodic
amount or within a price range determined by the Board of Directors; or
(g) the appointment of other committees of the Board of Directors or
the members thereof.
Any committee may from time to time provide by resolution for regular
meetings at specified times and places. If the date of such a meeting falls on
a legal holiday, then the meeting shall be held at the same time on the next
succeeding full business day. No notice of such a meeting need be given. Such
regular meetings need not be held if the committee shall so determine at any
time before or after the time when such meeting would otherwise have taken
place. Special meetings may be called at any time in the same manner and by the
same persons as stated in Sections 26 and 27 of these bylaws for meetings of the
Board of Directors. The provisions of Sections 25, 28, 29, 30, 31 and 32 of
these bylaws shall apply to committees, committee members and committee meetings
as if the words "committee" and "committee member" were substituted for the word
"Board of Directors", and "director", respectively, throughout such sections.
12.
<PAGE>
ARTICLE V
OFFICERS
SECTION 35. OFFICERS. The corporation shall have a Chairman of the
Board, a Chief Executive Officer, a President, a Secretary, a Chief Financial
Officer and such other officers with such titles and duties as the Board of
Directors may determine. Any two or more offices may be held by the same person.
SECTION 36. APPOINTMENT. All officers shall be chosen and appointed by
the Board of Directors; provided, however, the Board of Directors may empower
-----------------
the Chief Executive Officer of the corporation to appoint such officers, other
than Chairman of the Board, President, Secretary or Chief Financial Officer, as
the business of the corporation may require. All officers shall serve at the
pleasure of the Board of Directors, subject to the rights, if any, of an officer
under a contract of employment.
SECTION 37. INABILITY TO ACT. In the case of absence or inability to
act of any officer of the corporation or of any person authorized by these
bylaws to act in such officer's place, the Board of Directors may from time to
time delegate the powers or duties of such officer to any other officer, or any
director or other person whom it may select, for such period of time as the
Board of Directors deems necessary.
SECTION 38. RESIGNATIONS. Any officer may resign at any time upon
written notice to the corporation, without prejudice to the rights, if any, of
the corporation under any contract to which such officer is a party. Such
resignation shall be effective upon its receipt by the Chairman of the Board,
the Chief Executive Officer, the President, the Secretary or the Board of
Directors, unless a different time is specified in the notice for effectiveness
of such resignation. The acceptance of any such resignation shall not be
necessary to make it effective unless otherwise specified in such notice.
SECTION 39. REMOVAL. Any officer may be removed from office at any
time, with or without cause, but subject to the rights, if any, of such officer
under any contract of employment, by the Board of Directors or by any committee
to whom such power of removal has been duly delegated, or, with regard to any
officer who has been appointed by the Chief Executive Officer pursuant to
Section 36 above, by the Chief Executive Officer or any other officer upon whom
such power of removal may be conferred by the Board of Directors.
SECTION 40. VACANCIES. A vacancy occurring in any office for any cause
may be filled by the Board of Directors, in the manner prescribed by this
Article V for initial appointment to such office.
SECTION 41. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there
be such an officer, shall, if present, preside at all meetings of the Board of
Directors and shall exercise and perform such other powers and duties as may be
assigned from time to time by the Board of Directors or prescribed by these
bylaws. If neither a President nor a Chief Executive Officer
13.
<PAGE>
is appointed, the Chairman of the Board is the general manager and chief
executive officer of the corporation, and shall exercise all powers of the Chief
Executive Officer described in Section 42 below.
SECTION 42. CHIEF EXECUTIVE OFFICER. Subject to such supervisory
powers, if any, as may be given by the Board of Directors to the Chairman of the
Board, if there be such an officer, the Chief Executive Officer shall, subject
to the control of the Board of Directors, have general supervision, direction
and control of the business, strategic direction and affairs of the corporation.
The Chief Executive Officer may sign and execute, in the name of the
corporation, any instrument authorized by the Board of Directors, except when
the signing and execution thereof shall have been expressly delegated by the
Board of Directors or by these bylaws to some other officer or agent of the
corporation. The Chief Executive Officer shall have all the general powers and
duties of management usually vested in the chief executive officer of a
corporation, and shall have such other powers and duties as may be prescribed
from time to time by the Board of Directors or these bylaws. The Chief
Executive Officer shall have discretion to prescribe the duties of other
officers and employees of the corporation in a manner not inconsistent with the
provisions of these bylaws and the directions of the Board of Directors.
SECTION 43. PRESIDENT. The President shall, subject to the control of
the Board of Directors, report to the Chief Executive Officer and have general
supervision, direction and control of the business and departmental officers of
the corporation. The President may sign and execute, in the name of the
corporation, any instrument authorized by the Board of Directors, except when
the signing and execution thereof shall have been expressly delegated by the
Board of Directors or by these bylaws to some other officer or agent of the
corporation. The President shall have all the general powers and duties of
management usually vested in the president of a corporation, and shall have such
other powers and duties as may be prescribed from time to time by the Board of
Directors, the Chief Executive Officer or these bylaws. The President shall
have discretion to prescribe the duties of other departmental officers and
employees of the corporation in a manner not inconsistent with the provisions of
these bylaws and the directions of the Board of Directors or the Chief Executive
Officer.
SECTION 44. VICE PRESIDENTS. In the absence or disability of the
President, in the event of a vacancy in the office of President, or in the event
such officer refuses to act, the Vice President shall perform all the duties of
the President and, when so acting, shall have all the powers of, and be subject
to all the restrictions on, the President. If at any such time the corporation
has more than one vice president, the duties and powers of the President shall
pass to each vice president in order of such vice president's rank as fixed by
the Board of Directors or, if the vice presidents are not so ranked, to the vice
president designated by the Board of Directors. The vice presidents shall have
such other powers and perform such other duties as may be prescribed for them
from time to time by the Board of Directors or pursuant to Sections 35 and 36 of
these bylaws or otherwise pursuant to these bylaws.
14.
<PAGE>
SECTION 45. SECRETARY. The Secretary shall:
(a) Keep, or cause to be kept, minutes of all meetings of the
corporation's shareholders, Board of Directors, and committees of the Board of
Directors, if any. Such minutes shall be kept in written form.
(b) Keep, or cause to be kept, at the principal executive office of
the corporation, or at the office of its transfer agent or registrar, if any, a
record of the corporation's shareholders, showing the names and addresses of
all shareholders, and the number and classes of shares held by each. Such
records shall be kept in written form or any other form capable of being
converted into written form.
(c) Keep, or cause to be kept, at the principal executive office of
the corporation, or if the principal executive office is not in California, at
its principal business office in California, an original or copy of these
bylaws, as amended.
(d) Give, or cause to be given, notice of all meetings of
shareholders, directors and committees of the Board of Directors, as required by
law or by these bylaws.
(e) Keep the seal of the corporation, if any, in safe custody.
(f) Exercise such powers and perform such duties as are usually vested
in the office of secretary of a corporation, and exercise such other powers and
perform such other duties as may be prescribed from time to time by the Board of
Directors or these bylaws.
If any assistant secretaries are appointed, the assistant secretary, or one
of the assistant secretaries in the order of their rank as fixed by the Board of
Directors or, if they are not so ranked, the assistant secretary designated by
the Board of Directors, in the absence or disability of the Secretary or in the
event of such officer's refusal to act or if a vacancy exists in the office of
Secretary, shall perform the duties and exercise the powers of the Secretary and
discharge such duties as may be assigned from time to time pursuant to these
bylaws or by the Board of Directors.
SECTION 46. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall:
(a) Be responsible for all functions and duties of the treasurer of
the corporation.
(b) Keep and maintain, or cause to be kept and maintained, adequate
and correct books and records of account for the corporation.
(c) Receive or be responsible for receipt of all monies due and
payable to the corporation from any source whatsoever; have charge and custody
of, and be responsible for, all monies and other valuables of the corporation
and be responsible for deposit of all such monies in the name and to the credit
of the corporation with such depositaries as may be
15.
<PAGE>
designated by the Board of Directors or a duly appointed and authorized
committee of the Board of Directors.
(d) Disburse or be responsible for the disbursement of the funds of
the corporation as may be ordered by the Board of Directors or a duly appointed
and authorized committee of the Board of Directors.
(e) Render to the Chief Executive Officer and the Board of Directors a
statement of the financial condition of the corporation if called upon to do so.
(f) Exercise such powers and perform such duties as are usually vested
in the office of chief financial officer of a corporation, and exercise such
other powers and perform such other duties as may be prescribed by the Board of
Directors or these bylaws.
If any assistant financial officer is appointed, the assistant financial
officer, or one of the assistant financial officers, if there are more than one,
in the order of their rank as fixed by the Board of Directors or, if they are
not so ranked, the assistant financial officer designated by the Board of
Directors, shall, in the absence or disability of the Chief Financial Officer or
in the event of such officer's refusal to act, perform the duties and exercise
the powers of the Chief Financial Officer, and shall have such powers and
discharge such duties as may be assigned from time to time pursuant to these
bylaws or by the Board of Directors.
SECTION 47. COMPENSATION. The compensation of the officers shall be
fixed from time to time by the Board of Directors, and no officer shall be
prevented from receiving such compensation by reason of the fact that such
officer is also a director of the corporation.
ARTICLE VI
CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS
SECTION 48. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as
these bylaws may otherwise provide, the Board of Directors or its duly appointed
and authorized committee may authorize any officer or officers, agent or agents,
to enter into any contract or execute and deliver any instrument in the name of
and on behalf of the corporation, and such authorization may be general or
confined to specific instances. Except as so authorized or otherwise expressly
provided in these bylaws, 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 in any amount.
SECTION 49. LOANS. No loans shall be contracted on behalf of the
corporation and no negotiable paper shall be issued in its name, unless and
except as authorized by the Board of Directors or its duly appointed and
authorized committee. When so authorized by the Board of Directors or such
committee, any officer or agent of the corporation may effect loans and advances
at any time for the corporation from any bank, trust company, or other
institution, or
16.
<PAGE>
from any firm, corporation or individual, and for such loans and advances may
make, execute and deliver promissory notes, bonds or other evidences of
indebtedness of the corporation and, when authorized as aforesaid, may mortgage,
pledge, hypothecate or transfer any and all stocks, securities and other
property, real or personal, at any time held by the corporation, and to that end
endorse, assign and deliver the same as security for the payment of any and all
loans, advances, indebtedness, and liabilities of the corporation. Such
authorization may be general or confined to specific instances.
SECTION 50. BANK ACCOUNTS. The Board of Directors or its duly appointed
and authorized committee from time to time may authorize the opening and keeping
of general and/or special bank accounts with such banks, trust companies, or
other depositaries as may be selected by the Board of Directors, its duly
appointed and authorized committee or by any officer or officers, agent or
agents, of the corporation to whom such power may be delegated from time to time
by the Board of Directors. The Board of Directors or its duly appointed and
authorized committee may make such rules and regulations with respect to said
bank accounts, not inconsistent with the provisions of these bylaws, as are
deemed advisable.
SECTION 51. CHECKS, DRAFTS, ETC. All checks, drafts or other orders
for the payment of money, notes, acceptances or other evidences of indebtedness
issued in the name of the corporation shall be signed by such officer or
officers, agent or agents, of the corporation, and in such manner, as shall be
determined from time to time by resolution of the Board of Directors or its duly
appointed and authorized committee. Endorsements for deposit to the credit of
the corporation in any of its duly authorized depositaries may be made, without
counter-signature, by the President or any vice president or the Chief Financial
Officer or any assistant financial officer or by any other officer or agent of
the corporation to whom the Board of Directors or its duly appointed and
authorized committee, by resolution, shall have delegated such power or by hand-
stamped impression in the name of the corporation.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 52. CERTIFICATE FOR SHARES. Every holder of shares in the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the Chairman or Vice Chairman of the Board or the President or a
Vice President and by the Chief Financial Officer or an assistant financial
officer or by the Secretary or an assistant secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all
of the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have 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 such person were an officer, transfer
agent or registrar at the date of issue.
17.
<PAGE>
In the event that the corporation shall issue any shares as only partly
paid, the certificate issued to represent such partly paid shares shall have
stated thereon the total consideration to be paid for such shares and the amount
paid thereon.
SECTION 53. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or
transfer agent (if any) of the corporation of a certificate for shares of the
corporation duly endorsed, with reasonable assurance that the endorsement is
genuine and effective, or accompanied by proper evidence of succession,
assignment or authority to transfer and upon compliance with applicable federal
and state securities laws and if the corporation has no statutory duty to
inquire into adverse claims or has discharged any such duty and if any
applicable law relating to the collection of taxes has been complied with, it
shall be the duty of the corporation, by its Secretary or transfer agent, to
cancel the old certificate, to issue a new certificate to the person entitled
thereto and to record the transaction on the books of the corporation.
SECTION 54. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any
certificate for shares of the corporation alleged to have been lost, destroyed
or stolen shall notify the corporation by making a written affidavit or
affirmation of such fact. Upon receipt of said affidavit or affirmation the
Board of Directors, or its duly appointed and authorized committee or any
officer or officers authorized by the Board so to do, may order the issuance of
a new certificate for shares in the place of any certificate previously issued
by the corporation and which is alleged to have been lost, destroyed or stolen.
However, the Board of Directors or such authorized committee, officer or
officers may require the owner of the allegedly lost, destroyed or stolen
certificate, or such owner's legal representative, to give the corporation a
bond or other adequate security sufficient to indemnify the corporation and its
transfer agent and/or registrar, if any, against any claim that may be made
against it or them on account of such allegedly lost, destroyed or stolen
certificate or the replacement thereof. Said bond or other security shall be in
such amount, on such terms and conditions and, in the case of a bond, with such
surety or sureties as may be acceptable to the Board of Directors or to its duly
appointed and authorized committee or any officer or officers authorized by the
Board of Directors to determine the sufficiency thereof. The requirement of a
bond or other security may be waived in particular cases at the discretion of
the Board of Directors or its duly appointed and authorized committee or any
officer or officers authorized by the Board of Directors so to do.
SECTION 55. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of
Directors may make such rules and regulations, not inconsistent with law or with
these bylaws, as it may deem advisable concerning the issuance, transfer and
registration of certificates for shares of the capital stock of the corporation.
The Board of Directors may appoint a transfer agent or registrar of transfers,
or both, and may require all certificates for shares of the corporation to bear
the signature of either or both.
18.
<PAGE>
ARTICLE VIII
INSPECTION OF CORPORATE RECORDS
SECTION 56. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect and copy all books, records,
and documents of every kind of the corporation and any of its subsidiaries and
to inspect the physical properties of the corporation and any of its
subsidiaries. Such inspection may be made by the director in person or by agent
or attorney, and the right of inspection includes the right to copy and make
extracts.
SECTION 57. INSPECTION BY SHAREHOLDERS.
(a) INSPECTION OF CORPORATE RECORDS.
(1) A shareholder or shareholders holding at least five (5%)
percent in the aggregate of the outstanding voting shares of the corporation or
who hold at least one percent of such voting shares and have filed a Schedule
14B with the United States Securities and Exchange Commission relating to the
election of directors of the corporation shall have an absolute right to do
either or both of the following:
(i) Inspect and copy the record of shareholders' names and
addresses and shareholdings during usual business hours upon five (5) business
days' prior written demand upon the corporation; or
(ii) Obtain from the transfer agent, if any, for the
corporation, upon five business days' prior written demand and upon the tender
of its usual charges for such a list (the amount of which charges shall be
stated to the shareholder by the transfer agent upon request), a list of the
shareholders' names and addresses who are entitled to vote for the election of
directors and their shareholdings, as of the most recent record date for which
it has been compiled or as of a date specified by the shareholder subsequent to
the date of demand.
(2) The record of shareholders shall also be open to inspection
and copying by any shareholder or holder of a voting trust certificate at any
time during usual business hours upon written demand on the corporation, for a
purpose reasonably related to such holder's interest as a shareholder or holder
of a voting trust certificate.
(3) The accounting books and records and minutes of proceedings of
the shareholders and the Board of Directors and of any committees of the Board
of Directors of the corporation and of each of its subsidiaries shall be open to
inspection, copying and making extracts upon written demand on the corporation
of any shareholder or holder of a voting trust certificate at any reasonable
time during usual business hours, for a purpose reasonably related to such
holder's interests as a shareholder or as a holder of such voting trust
certificate.
(4) Any inspection, copying, and making of extracts under this
subsection (a) may be done in person or by agent or attorney.
19.
<PAGE>
(b) INSPECTION OF BYLAWS. The original or a copy of these bylaws
shall be kept as provided in Section 44 of these bylaws and shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is not in California, and the
corporation has no principal business office in the state of California, a
current copy of these bylaws shall be furnished to any shareholder upon written
request.
SECTION 58. WRITTEN FORM. If any record subject to inspection
pursuant to Section 56 above is not maintained in written form, a request for
inspection is not complied with unless and until the corporation at its expense
makes such record available in written form.
ARTICLE IX
MISCELLANEOUS
SECTION 59. FISCAL YEAR. Unless otherwise fixed by resolution of the
Board of Directors, the fiscal year of the corporation shall end on the 31st day
of December in each calendar year.
SECTION 60. ANNUAL REPORT.
(a) Subject to the provisions of Section 60(b) below, the Board of
Directors shall cause an annual report to be sent to each shareholder of the
corporation in the manner provided in Section 9 of these bylaws not later than
one hundred twenty (120) days after the close of the corporation's fiscal year.
Such report shall include a balance sheet as of the end of such fiscal year and
an income statement and statement of changes in financial position for such
fiscal year, accompanied by any report thereon of independent accountants or, if
there is no such report, the certificate of an authorized officer of the
corporation that such statements were prepared without audit from the books and
records of the corporation. When there are more than 100 shareholders of record
of the corporation's shares, as determined by Section 605 of the California
Corporations Code, additional information as required by Section 1501(b) of the
California Corporations Code shall also be contained in such report, provided
that if the corporation has a class of securities registered under Section 12 of
the United States Securities Exchange Act of 1934, that Act shall take
precedence. Such report shall be sent to shareholders at least fifteen (15)
(or, if sent by third-class mail, thirty-five (35)) days prior to the next
annual meeting of shareholders after the end of the fiscal year to which it
relates.
(b) If and so long as there are fewer than 100 holders of record of
the corporation's shares, the requirement of sending of an annual report to the
shareholders of the corporation is hereby expressly waived.
SECTION 61. RECORD DATE. The Board of Directors may fix a time in the
future as a record date for the determination of the shareholders entitled to
notice of or to vote at any meeting or entitled to receive payment of any
dividend or other distribution or allotment of any
20.
<PAGE>
rights or entitled to exercise any rights in respect of any change, conversion
or exchange of shares or entitled to exercise any rights in respect of any other
lawful action. The record date so fixed shall not be more than sixty (60) days
nor less than ten (10) days prior to the date of the meeting nor more than sixty
(60) days prior to any other action or event for the purpose of which it is
fixed. If no record date is fixed, the provisions of Section 15 of these bylaws
shall apply with respect to notice of meetings, votes, and consents and the
record date for determining shareholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolutions relating thereto, or the sixtieth (60th) day prior to the date of
such other action or event, whichever is later.
Only shareholders of record at the close of business on the record date
shall be entitled to notice and to vote or to receive the dividend, distribution
or allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the Articles of Incorporation,
by agreement or by law.
SECTION 62. BYLAW AMENDMENTS. Except as otherwise provided by law or
Section 19 of these bylaws, these bylaws may be amended or repealed by the Board
of Directors or by the affirmative vote of a majority of the outstanding shares
entitled to vote, including, if applicable, the affirmative vote of a majority
of the outstanding shares of each class or series entitled by law or the
Articles of Incorporation to vote as a class or series on the amendment or
repeal or adoption of any bylaw or bylaws; provided, however, after issuance of
-----------------
shares, a bylaw specifying or changing a fixed number of directors or the
maximum or minimum number or changing from a fixed to a variable board or vice
versa may only be adopted by approval of the outstanding shares as provided
herein.
SECTION 63. CONSTRUCTION AND DEFINITION. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions
contained in the California Corporations Code shall govern the construction of
these bylaws.
Without limiting the foregoing, "shall" is mandatory and "may" is
permissive.
ARTICLE X
INDEMNIFICATION
SECTION 64. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall indemnify
its directors and executive officers to the fullest extent not prohibited by the
California General Corporation Law; provided, however, that the corporation may
-----------------
limit the extent of such indemnification by individual contracts with its
directors and executive officers; and, provided, further, that the corporation
-----------------
shall not be required to indemnify any director or executive officer
21.
<PAGE>
in connection with any proceeding (or part thereof) initiated by such person or
any proceeding by such person against the corporation or its directors,
officers, employees or other agents unless (i) such indemnification is expressly
required to be made by law, (ii) the proceeding was authorized by the board of
directors of the corporation or (iii) such indemnification is provided by the
corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the California General Corporation Law.
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation shall
have the power to indemnify its other officers, employees and other agents as
set forth in the California General Corporation Law.
(c) DETERMINATION BY THE CORPORATION. Promptly after receipt of a
request for indemnification hereunder (and in any event within 90 days thereof)
a reasonable, good faith determination as to whether indemnification of the
director or executive officer is proper under the circumstances because such
director or executive officer has met the applicable standard of care shall be
made by:
(1) a majority vote of a quorum consisting of directors who are
not parties to such proceeding;
(2) if such quorum is not obtainable, by independent legal
counsel in a written opinion; or
(3) approval or ratification by the affirmative vote of a majority
of the shares of this corporation represented and voting at a duly held meeting
at which a quorum is present (which shares voting affirmatively also constitute
at least a majority of the required quorum) or by written consent of a majority
of the outstanding shares entitled to vote; where in each case the shares owned
by the person to be indemnified shall not be considered entitled to vote
thereon.
(d) GOOD FAITH.
(1) For purposes of any determination under this bylaw, a director
or executive officer shall be deemed to have acted in good faith and in a manner
he reasonably believed to be in the best interests of the corporation and its
shareholders, and, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe that his conduct was unlawful, if his action
is based on information, opinions, reports and statements, including financial
statements and other financial data, in each case prepared or presented by:
(i) one or more officers or employees of the corporation whom
the director or executive officer believed to be reliable and competent in the
matters presented;
(ii) counsel, independent accountants or other persons as to
matters which the director or executive officer believed to be within such
person's professional competence; and
22.
<PAGE>
(iii) with respect to a director, a committee of the Board
upon which such director does not serve, as to matters within such committee's
designated authority, which committee the director believes to merit confidence;
so long as, in each case, the director or executive officer acts without
knowledge that would cause such reliance to be unwarranted.
(2) The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in good faith
and in a manner which he reasonably believed to be in the best interests of the
corporation and its shareholders or that he had reasonable cause to believe that
his conduct was unlawful.
(3) The provisions of this paragraph (d) shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the
California General Corporation Law.
(e) EXPENSES. The corporation shall advance, prior to the final
disposition of any proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it shall be determined ultimately that such person is not entitled to
be indemnified under this bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (f) of this bylaw, no advance shall be made by the corporation if a
determination is reasonably and promptly made by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to the
proceeding (or, if no such quorum exists, by independent legal counsel in a
written opinion) that the facts known to the decision making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in the
best interests of the corporation and its shareholders.
(f) ENFORCEMENT. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in the forum in
which the proceeding is or was pending or, if such forum is not available or a
determination is made that such forum is not convenient, in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. The corporation shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under the California General Corporation Law
for the corporation to indemnify the claimant for the amount claimed. Neither
the failure of the corporation (including its board of directors, independent
legal counsel or its
23.
<PAGE>
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in the
California General Corporation Law, nor an actual determination by the
corporation (including its board of directors, independent legal counsel or its
shareholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
(g) NON-EXCLUSIVITY OF RIGHTS. To the fullest extent permitted by the
corporation's Articles of Incorporation and the California General Corporation
Law, the rights conferred on any person by this bylaw shall not be exclusive of
any other right which such person may have or hereafter acquire under any
statute, provision of the Articles of Incorporation, bylaws, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding office.
The corporation is specifically authorized to enter into individual contracts
with any or all of its directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent permitted by the California
General Corporation Law and the corporation's Articles of Incorporation.
(h) SURVIVAL OF RIGHTS. The rights conferred on any person by this
bylaw shall continue as to a person who has ceased to be a director or executive
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(i) INSURANCE. The corporation, upon approval by the board of
directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this bylaw.
(j) AMENDMENTS. Any repeal or modification of this bylaw shall only
be prospective and shall not affect the rights under this bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(k) EMPLOYEE BENEFIT PLANS. The corporation shall indemnify the
directors and officers of the corporation who serve at the request of the
corporation as trustees, investment managers or other fiduciaries of employee
benefit plans to the fullest extent permitted by the California General
Corporation Law.
(l) SAVING CLAUSE. If this bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the fullest extent permitted by any applicable portion of this bylaw that shall
not have been invalidated, or by any other applicable law.
24.
<PAGE>
(m) CERTAIN DEFINITIONS. For the purposes of this bylaw, the
following definitions shall apply:
(1) The term "PROCEEDING" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement and appeal of any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, arbitrative or
investigative.
(2) The term "EXPENSES" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding, including expenses of
establishing a right to indemnification under this bylaw or any applicable law.
(3) The term the "CORPORATION" 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 any person who 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, shall stand in the same position under the provisions
of this bylaw with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
(4) References to a "DIRECTOR," "OFFICER," "EMPLOYEE," or "AGENT"
of the corporation shall include, without limitation, situations where such
person is or was serving at the request of the corporation as a director,
officer, employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
ARTICLE XI
RIGHT OF FIRST REFUSAL
SECTION 65. RIGHT OF FIRST REFUSAL. No holder of Common Stock shall sell,
assign, pledge, or in any manner transfer any of the shares of Common Stock of
the corporation or any right or interest therein, whether voluntarily or by
operation of law, or by gift or otherwise, except by a transfer which meets the
requirements hereinafter set forth in this bylaw:
(a) If the shareholder desires to sell or otherwise transfer any of
his shares of stock, then the shareholder shall first give written notice
thereof to the corporation. The notice shall name the proposed transferee and
state the number of shares to be transferred, the proposed consideration, and
all other terms and conditions of the proposed transfer.
25.
<PAGE>
(b) For thirty (30) days following receipt of such notice, the
corporation shall have the option to purchase all (but not less than all) of the
shares specified in the notice at the price and upon the terms set forth in such
notice; provided, however, that, with the consent of the shareholder, the
-----------------
corporation shall have the option to purchase a lesser portion of the shares
specified in said notice at the price and upon the terms set forth therein. In
the event of a gift, property settlement or other transfer in which the proposed
transferee is not paying the full price for the shares, and that is not
otherwise exempted from the provisions of this Section 64, the price shall be
deemed to be the fair market value of the stock at such time as determined in
good faith by the Board of Directors. In the event the corporation elects to
purchase all of the shares or, with consent of the shareholder, a lesser portion
of the shares, it shall give written notice to the transferring shareholder of
its election and settlement for said shares shall be made as provided below in
paragraph (d).
(c) The corporation may assign its rights hereunder.
(d) In the event the corporation and/or its assignee(s) elect to
acquire any of the shares of the transferring shareholder as specified in said
transferring shareholder's notice, the Secretary of the corporation shall so
notify the transferring shareholder and settlement thereof shall be made in cash
within thirty (30) days after the Secretary of the corporation receives said
transferring shareholder's notice; provided that if the terms of payment set
forth in said transferring shareholder's notice were other than cash against
delivery, the corporation and/or its assignee(s) shall pay for said shares on
the same terms and conditions set forth in said transferring shareholder's
notice.
(e) In the event the corporation and/or its assignees(s) do not elect
to acquire all of the shares specified in the transferring shareholder's notice,
said transferring shareholder may, within the sixty-day period following the
expiration of the option rights granted to the corporation and/or its
assignees(s) herein, transfer the shares specified in said transferring
shareholder's notice which were not acquired by the corporation and/or its
assignees(s) as specified in said transferring shareholder's notice. All shares
so sold by said transferring shareholder shall continue to be subject to the
provisions of this bylaw in the same manner as before said transfer.
(f) Anything to the contrary contained herein notwithstanding, the
following transactions shall be exempt from the provisions of this bylaw:
(1) A shareholder's transfer of any or all shares held either
during such shareholder's lifetime or on death by will or intestacy to such
shareholder's immediate family or to any custodian or trustee for the account of
such shareholder or such shareholder's immediate family. "Immediate family" as
used herein shall mean spouse, lineal descendant, father, mother, brother, or
sister of the shareholder making such transfer.
(2) A shareholder's bona fide pledge or mortgage of any shares
with a commercial lending institution, provided that any subsequent transfer of
said shares by said institution shall be conducted in the manner set forth in
this bylaw.
26.
<PAGE>
(3) A shareholder's transfer of any or all of such shareholder's
shares to the corporation or to any other shareholder of the corporation.
(4) A shareholder's transfer of any or all of such shareholder's
shares to a person who, at the time of such transfer, is an officer or director
of the corporation.
(5) A corporate shareholder's transfer of any or all of its shares
pursuant to and in accordance with the terms of any merger, consolidation,
reclassification of shares or capital reorganization of the corporate
shareholder, or pursuant to a sale of all or substantially all of the stock or
assets of a corporate shareholder.
(6) A corporate shareholder's transfer of any or all of its
shares to any or all of its shareholders.
(7) A transfer by a shareholder which is a limited or general
partnership to any or all of its partners or former partners.
In any such case, the transferee, assignee, or other recipient shall
receive and hold such stock subject to the provisions of this bylaw, and there
shall be no further transfer of such stock except in accord with this bylaw.
(g) The provisions of this bylaw may be waived with respect to any
transfer either by the corporation, upon duly authorized action of its Board of
Directors, or by the share holders, upon the express written consent of the
owners of a majority of the voting power of the corporation (excluding the votes
represented by those shares to be transferred by the transferring shareholder).
This bylaw may be amended or repealed either by a duly authorized action of the
Board of Directors or by the shareholders, upon the express written consent of
the owners of a majority of the voting power of the corporation.
(h) Any sale or transfer, or purported sale or transfer, of securities
of the corporation shall be null and void unless the terms, conditions, and
provisions of this bylaw are strictly observed and followed.
(i) The foregoing right of first refusal shall terminate on either of
the following dates, whichever shall first occur:
(1) On February 1, 2000; or
(2) Upon the date securities of the corporation are first offered
to the public pursuant to a registration statement filed with, and declared
effective by, the United States Securities and Exchange Commission under the
Securities Act of 1933, as amended.
27.
<PAGE>
(j) The certificates representing shares of stock of the corporation
shall bear on their face the following legend so long as the foregoing right of
first refusal remains in effect:
"the shares represented by this Certificate are subject to a right of
first refusal option in favor of the Corporation and/or its Assignee(s), as
provided in the Bylaws of the Corporation."
28.
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF INCORPORATION OF
TERAYON MERGER CORPORATION
The undersigned, a natural person (the "Sole Incorporator"), for the
purpose of organizing a corporation to conduct the business and promote the
purposes hereinafter stated, under the provisions and subject to the
requirements of the laws of the State of Delaware hereby certifies that:
I.
The name of this corporation is TERAYON MERGER CORPORATION.
II.
The address, including street, number, city, and county, of the registered
office of the Corporation in the State of Delaware is 1013 Centre Road, City of
Wilmington, 19805, County of New Castle; and the name of the registered agent of
the corporation in the State of Delaware at such address is The Prentice-Hall
Corporation System, Inc.
III.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the Delaware General Corporation
Law.
IV.
This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the corporation is authorized to issue is Fifty Million
(50,000,000) shares. Thirty-Five Million (35,000,000) shares shall be Common
Stock. Fifteen Million (15,000,000) shares shall be Preferred Stock.
The Preferred Stock may be issued from time to time in one or more series.
Except as provided below, the Board of Directors is hereby authorized to fix or
alter the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), redemption
price or prices, and the liquidation preferences of any wholly unissued series
of Preferred Stock, and the number of shares constituting any such series and
the designation thereof, or any of them; and to increase or decrease the number
of shares of any series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
Four Million One Hundred Sixty-Two Thousand Ninety-Three (4,162,093) shares
of Preferred Stock are designated "Series A Preferred Stock," Eight Hundred
Ninety-Six Thousand Eight Hundred Thirty-Four (896,834) shares of Preferred
Stock are designated "Series B Preferred
1.
<PAGE>
Stock," Four Hundred Forty-Eight Thousand Four Hundred Seventeen (448,417)
shares of Preferred Stock are designated "Series B-1 Preferred Stock," Eight
Hundred Fourteen Thousand Eight Hundred Thirty (814,830) shares of Preferred
Stock are designated "Series C Preferred Stock," One Million Five Hundred
Thousand (1,500,000) shares of Preferred Stock are designated "Series D
Preferred Stock", Two Million (2,000,000) shares of Preferred Stock are
designated "Series E Preferred Stock" and Five Hundred Seventy-Six Thousand Nine
Hundred Twenty-Three (576,923) shares of Preferred Stock are designated Series F
Preferred Stock. The respective rights, preferences, privileges and restrictions
of the Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock are specified below.
1. DIVIDENDS. The holders of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be
entitled to receive dividends at the rate of:
(a) $0.0764 per annum on each outstanding share of Series A
Preferred (as adjusted for any stock dividends, combinations or splits with
respect to such shares);
(b) $0.7136 per annum on each outstanding share of Series B
Preferred Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares);
(c) $0.7136 per annum on each outstanding share of Series B-1
Preferred Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares);
(d) $1.00 per annum on each outstanding share of Series C
Preferred Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares);
(e) $1.04 per annum on each outstanding share of Series D
Preferred Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares); and
(f) $1.20 per annum on each outstanding share of Series E
Preferred Stock;
(g) $1.04 per annum on each outstanding share of Series F
Preferred Stock;
payable out of funds legally available therefor. Such dividends shall be
payable only when, as and if declared by the board of directors and shall be
noncumulative. No dividends (other than those payable solely in the Common
Stock of the corporation) shall be paid on any Series C Preferred Stock, Series
B-1 Preferred Stock, Series B Preferred Stock, Series A Preferred Stock or
Common Stock during any fiscal year of the corporation until dividends in the
total amount of (i) $1.04 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares) on the Series D Preferred
Stock and Series F Preferred Stock (ii) $1.20 per share (as adjusted for any
stock dividends, contributions or splits with respect to such shares) on the
Series E Preferred Stock shall have been paid or declared and set apart during
that fiscal year. Payments of any dividends to the holders of Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be
paid pro rata, on an equal priority, pari passu basis according to their
respective dividend rates set forth herein. No dividends (other than those
payable solely in the Common Stock of the corporation) shall be paid on any
Series B-1 Preferred Stock, Series B Preferred Stock, Series A Preferred Stock
or Common Stock during any fiscal year of the corporation until dividends in the
2.
<PAGE>
total amount of $1.00 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares) on the Series C Preferred
Stock shall have been paid or declared and set apart during that fiscal year.
No dividends (other than those payable solely in the Common Stock of the
corporation) shall be paid on any Series B Preferred Stock, Series A Preferred
Stock or Common Stock of the corporation during any fiscal year of the
corporation until dividends in the total amount of $0.7136 per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) on the Series B-1 Preferred Stock shall have been paid or declared and
set apart during that fiscal year. No dividends (other than those payable
solely in the Common Stock of the corporation) shall be paid on any Series A
Preferred Stock or Common Stock of the corporation during any fiscal year of the
corporation until dividends in the total amount of $0.7136 per share (as
adjusted for any stock dividends, combinations or splits with respect to such
shares) on the Series B Preferred Stock shall have been paid or declared and set
apart during that fiscal year. No dividends (other than those payable solely in
the Common Stock of the corporation) shall be paid on any Common Stock of the
corporation during any fiscal year of the corporation until dividends in the
total amount of $0.0764 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares) on the Series A Preferred
Stock shall have been paid or declared and set apart during that fiscal year.
No right shall accrue to holders of shares of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or Series F Preferred Stock by reason
of the fact that dividends on said shares are not declared in any prior year,
nor shall any undeclared or unpaid dividend bear or accrue any interest.
2. LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution, or winding up of the corporation, whether voluntary or involuntary,
distributions to the stockholders of the corporation shall be made in the
following manner:
(a) The holders of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock 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
amount of $0.9545 per share of Series A Preferred Stock, $8.92 per share of
Series B Preferred Stock, $8.92 per share of Series B-1 Preferred Stock,
$12.50 per share of Series C Preferred Stock, $13.00 per share of Series D
Preferred Stock, $15.00 per share of Series E Preferred Stock and $13.00
per share of Series F Preferred Stock (each as adjusted for any stock
dividends, combinations or splits with respect to such shares) plus all
declared but unpaid dividends on such share for each share of Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock on the liquidation date. If, upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock, Series B Preferred Stock, Series
B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock shall be insufficient
to permit the payment to such holders of the full aforesaid preferential
amount, then the entire assets and funds of the corporation legally
available for distribution shall be distributed ratably among the holders
of the Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock and Series F Preferred Stock in proportion to the
preferential amount each such holder is otherwise entitled to receive.
3.
<PAGE>
(b) After payment to the holders of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock of the full amounts to which they shall be
entitled as provided in Section 2(a) above, the holders of the Series F
Preferred Stock, Series E Preferred Stock, Series D Preferred Stock, Series
B-1 Preferred Stock and Common Stock shall be entitled to receive ratably
on a per share basis (based upon the number of shares of Common Stock into
which each share of Series F Preferred Stock, Series E Preferred Stock,
Series D Preferred Stock and Series B-1 Preferred Stock is then
convertible) all the remaining assets until, as to the holders of Series F
Preferred Stock, such holders have received pursuant to this Section 2(b)
(excluding all amounts received pursuant to Section 2(a) above) an
additional amount of $6.50 per share then held by them, adjusted for any
stock dividends, combinations or splits with respect to such shares, as to
the holders of Series E Preferred Stock, such holders have received
pursuant to this Section 2(b) (excluding all amounts received pursuant to
Section 2(a) above) an additional amount of $7.50 per share then held by
them, adjusted for any stock dividends, combinations or splits with respect
to such shares, as to the holders of Series D Preferred Stock, such holders
have received pursuant to this Section 2(b) (excluding all amounts received
pursuant to Section 2(a) above) an additional amount of $6.50 per share
then held by them, adjusted for any stock dividends, combinations or splits
with respect to such shares and, as to the holders of Series B-1 Preferred
Stock, such holders have received pursuant to this Section 2(b) (excluding
all amounts received pursuant to Section 2(a) above) an additional amount
of $8.92 per share then held by them, adjusted for any stock dividends,
combinations or splits with respect to such shares.
(c) After payment to the holders of the Series F Preferred
Stock, Series E Preferred Stock, Series D Preferred Stock, Series C
Preferred Stock, Series B-1 Preferred Stock, Series B Preferred Stock,
Series A Preferred Stock and the Common Stock of the full amounts to which
they shall be entitled as provided in Sections 2(a) and (b) above, the
entire remaining assets and funds of the corporation legally available for
distribution shall be distributed among the holders of the Common Stock in
proportion to the shares of Common Stock then held by them.
(d) For purposes of this Section 2, any acquisition of the
corporation by means of a merger or other form of corporate reorganization
in which outstanding shares of the corporation are exchanged for securities
or other consideration issued, or caused to be issued, by the acquiring
corporation or its subsidiary (other than a mere reincorporation
transaction), or a sale of all or substantially all of the assets of the
corporation, or any transaction or series of related transactions by the
corporation in which in excess of fifty percent (50%) of the corporation's
voting power is transferred, shall be treated as a liquidation, dissolution
or winding up of the corporation.
3. CONVERSION. The holders of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall
have conversion rights as follows:
(a) RIGHT TO CONVERT. Each share of Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock shall be convertible, at the option of the holder thereof,
at the office of the corporation or any transfer agent for such stock. The
number of shares of Common Stock to which a holder of Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred
4.
<PAGE>
Stock or Series F Preferred Stock shall be entitled upon conversion shall
be the product obtained by multiplying the applicable "Conversion Rate,"
determined as hereinafter provided, then in effect by the number of shares
of Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock or Series F Preferred Stock being converted by such holder.
The conversion rate in effect at any time for conversion of the shares of
Series A Preferred (the "Series A Conversion Rate") shall be the quotient
obtained by dividing $0.9545 by the "Series A Conversion Price," determined as
hereinafter provided, in effect on the date the certificate is surrendered for
conversion. The conversion rate in effect at any time for conversion of the
shares of Series B Preferred (the "Series B Conversion Rate") shall be the
quotient obtained by dividing $8.92 by the "Series B Conversion Price,"
determined as hereinafter provided, in effect on the date the certificate is
surrendered for conversion. The conversion rate in effect at any time for
conversion of the shares of Series B-1 Preferred (the "Series B-1 Conversion
Rate") shall be the quotient obtained by dividing $8.92 by the "Series B-1
Conversion Price," determined as hereinafter provided, in effect on the date the
certificate is surrendered for conversion. The conversion rate in effect at any
time for conversion of the shares of Series C Preferred (the "Series C
Conversion Rate") shall be the quotient obtained by dividing $12.50 by the
"Series C Conversion Price" determined as hereinafter provided, in effect on the
date the certificate is surrendered for conversion. The conversion rate in
effect at any time for conversion of the shares of Series D Preferred (the
"Series D Conversion Rate") shall be the quotient obtained by dividing $13.00 by
the "Series D Conversion Price" determined as hereinafter provided, in effect on
the date the certificate is surrendered for conversion. The conversion rate in
effect at any time for conversion of the shares of Series E Preferred (the
"Series E Conversion Rate") shall be the quotient obtained by dividing $15.00 by
the "Series E Conversion Price" determined as hereinafter provided, in effect on
the date the certificate is surrendered for conversion. The conversion rate in
effect at any time for conversion of the shares of Series F Preferred (the
"Series F Conversion Rate") shall be the quotient obtained by dividing $13.00 by
the "Series F Conversion Price" determined as hereinafter provided, in effect on
the date the certificate is surrendered for conversion.
The conversion price for the Series A Preferred Stock (the "Series A
Conversion Price") shall initially be $0.9545. The conversion price for the
Series B Preferred Stock (the "Series B Conversion Price") shall initially be
$8.92. The conversion price for the Series B-1 Preferred Stock (the "Series B-1
Conversion Price") shall initially be $8.92. The conversion price for the
Series C Preferred Stock (the "Series C Conversion Price") shall initially be
$12.50. The conversion price for the Series D Preferred Stock (the "Series D
Conversion Price") shall initially be $13.00. The conversion price for the
Series E Preferred Stock (the "Series E Conversion Price") shall initially be
$15.00. The conversion price for the Series F Preferred Stock (the "Series F
Conversion Price") shall initially be $13.00. The initial Series A Conversion
Price, Series B Conversion Price, Series B-1 Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price and
Series F Conversion Price shall be adjusted as hereinafter provided.
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred
Stock shall automatically be converted into shares of Common Stock at the
then-effective Series A Conversion Rate upon the date specified by vote or
written consent of holders of at least two-thirds of the shares of the
Series A Preferred Stock; each share of Series B Preferred Stock shall
automatically be converted into shares of Common Stock at the then-
effective Series B Conversion rate upon the date
5.
<PAGE>
specified by vote or written consent of holders of at least two-thirds of
the shares of the Series B Preferred Stock; each share of Series B-1
Preferred Stock shall automatically be converted into shares of Common
Stock at the then-effective Series B-1 Conversion Rate upon the date
specified by vote or written consent of holders of at least two-thirds of
the shares of the Series B-1 Preferred Stock; each share of Series C
Preferred Stock shall automatically be converted into shares of Common
Stock at the then-effective Series C Conversion Rate upon the date
specified by vote or written consent of holders of at least two-thirds of
the shares of the Series C Preferred Stock; each share of Series D
Preferred Stock shall automatically be converted into shares of Common
Stock at the then-effective Series D Conversion Rate upon the date
specified by vote or written consent of holders of at least two-thirds of
the shares of the Series D Preferred Stock; each share of Series E
Preferred Stock shall automatically be converted into shares of Common
Stock at the then-effective Series E Conversion Price upon the date
specified by vote or written consent of holders of at least two-thirds of
the shares of Series E Preferred Stock and each share of Series F Preferred
Stock shall automatically be converted into shares of Common Stock at the
then-effective Series F Conversion Price upon the date specified by vote or
written consent of holders of at least two-thirds of the shares of Series F
Preferred Stock. Each share of Series A Preferred Stock, Series B Preferred
Stock and Series B-1 Preferred Stock shall automatically be converted into
shares of Common Stock at the then-effective Conversion Rate for such
series immediately upon the closing of the sale of the corporation's Common
Stock in a firm commitment, underwritten public offering registered under
the Securities Act of 1933, as amended (the "Securities Act"), other than a
registration relating solely to a transaction under Rule 145 under such Act
(or any successor thereto) or to an employee benefit plan of the
corporation, the aggregate proceeds to the corporation and/or any selling
stockholders (after deduction for underwriters' discounts) of which exceed
$10,000,000 (a "Qualified Public Offering"). Each share of Series C
Preferred Stock shall automatically be converted into shares of Common
Stock at the then-effective Series C Conversion Rate immediately upon the
earlier of (i) the closing of the sale of the corporation's Common Stock in
a Qualified Public Offering at a price per share equal to or exceeding
$12.50 (as adjusted for any stock dividends, combinations or splits with
respect to such shares) or (ii) the end of any twenty (20) day period after
a Qualified Public Offering during which the closing sales price per share
(or closing bid, if no sales were reported) of the Common Stock of the
corporation as quoted on any established stock exchange or a national
market system, including, without limitation, the Nasdaq National Market or
the Nasdaq SmallCap, was at least $12.50 (as adjusted for any stock
dividends, combinations or splits with respect to such shares) for each day
during such period. Each share of Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock shall automatically be
converted into shares of Common Stock at the then-effective Series D
Conversion Rate , Series E Conversion Rate or Series F Conversion Rate, as
the case may be, immediately upon the closing of the sale of the
corporation's Common Stock in a Qualified Public Offering at a price per
share equal to or exceeding $13.00 (as adjusted for any stock dividends,
combinations or splits with respect to such shares).
(c) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock or Series F Preferred Stock shall be entitled to convert the same
into shares of Common Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the corporation or
any transfer agent for such stock, and shall give written notice to the
corporation at such office that such holder elects to convert the same and
shall state therein the name or names in which such holder wishes the
certificate or certificates for shares of
6.
<PAGE>
Common Stock to be issued. The corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock or Series F Preferred Stock a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of 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.
(d) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND
FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this
corporation shall declare or pay, without consideration, any dividend on
the Common Stock payable in Common Stock or in any right to acquire Common
Stock for no consideration, or shall effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of
Common Stock (by stock split, reclassification or otherwise than by payment
of a dividend in Common Stock or in any right to acquire Common Stock), or
in the event the outstanding shares of Common Stock shall be combined or
consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, then the Series A Conversion Price, Series B
Conversion Price, Series B-1 Conversion Price, Series C Conversion Price,
Series D Conversion Price, Series E Preferred Conversion Price and Series F
Conversion Price in effect immediately prior to such event shall,
concurrently with the effectiveness of such event, be proportionately
decreased or increased, as appropriate. In the event that this corporation
shall declare or pay, without consideration, any dividend on the Common
Stock payable in any right to acquire Common Stock for no consideration,
then the corporation shall be deemed to have made a dividend payable in
Common Stock in an amount of shares equal to the maximum number of shares
issuable upon exercise of such rights to acquire Common Stock.
(e) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the
Common Stock issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock shall be changed into the same or a different number of
shares of any other class of classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for in Section 3(d) above or a merger or
other reorganization referred to in Section 2(d) above), the Series A
Conversion Price, the Series B Conversion Price, Series B-1 Conversion
Price, Series C Conversion Price, Series D Conversion Price, Series E
Conversion Price and Series F Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted so that the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock shall be convertible into, in lieu of
the number of shares of Common Stock which the holders would otherwise have
been entitled to receive, a number of shares of such other class of classes
of stock equivalent to the number of shares of Common Stock that would have
been subject to receipt by the holders upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock immediately before that change.
7.
<PAGE>
(f) ADJUSTMENT TO SERIES C CONVERSION PRICE, SERIES D
CONVERSION PRICE SERIES E CONVERSION PRICE AND SERIES F CONVERSION PRICE.
(1) SALE OF SHARES BELOW SERIES C CONVERSION PRICE. If at
any time or from time to time the corporation issues or sells, or is deemed
by the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock (as hereinafter defined), other than as a
dividend or other distribution on any class of stock as provided in Section
3(d) above, and other than a subdivision or combination of shares of Common
Stock as provided in Section 3(d) above, for an Effective Price (as
hereinafter defined) less than the then effective Conversion Price for the
Series C Preferred Stock, then, and in each such case, such Conversion
Price shall be reduced, as of the opening of business on the date of such
issue or sale, to a price determined by multiplying such Conversion Price
by a fraction (i) the numerator of which shall be (A) the number of shares
of Common Stock issued or issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock outstanding (as defined below)
immediately prior to such issue or sale, plus (B) the number of shares of
Common Stock which the aggregate consideration received (as defined in
subsection (f)(4)) by the corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price,
and (ii) the denominator of which shall be the number of shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock outstanding immediately prior to such issue or sale plus
the total number of Additional Shares of Common Stock so issued. For the
purposes of the preceding sentence, the number of shares of Common Stock
issued or issuable upon conversion of the Series A Preferred Stock, Series
B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock outstanding as of a given date shall be the sum of (A) the number of
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock actually outstanding, (B) the number of shares of
Common Stock that have been issued upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock, and (C) the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock, which Preferred Stock could be obtained through the exercise or
conversion of all other rights, options, warrants and convertible
securities on the day immediately preceding the given date.
(2) SALE OF SHARES BELOW SERIES D CONVERSION PRICE. If at
any time or from time to time the corporation issues or sells, or is deemed
by the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock, other than as a dividend or other
distribution on any class of stock as provided in Section 3(d) above, and
other than a subdivision or combination of shares of Common Stock as
provided in Section 3(d) above, for an Effective Price less than the then
effective Conversion Price for the Series D Preferred Stock, then, and in
each such case, such Conversion Price shall be reduced, as of the opening
of business on the date of such issue or sale, to a price determined by
multiplying such Conversion Price by a fraction
8.
<PAGE>
(i) the numerator of which shall be (A) the number of shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock outstanding immediately prior to such issue or sale, plus
(B) the number of shares of Common Stock which the aggregate consideration
received (as defined in subsection (f)(4)) by the corporation for the total
number of Additional Shares of Common Stock so issued would purchase at
such Conversion Price, and (ii) the denominator of which shall be the
number of shares of Common Stock issued or issuable upon conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock outstanding immediately prior
to such issue or sale plus the total number of Additional Shares of Common
Stock so issued. For the purposes of the preceding sentence, the number of
shares of Common Stock issued or issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock outstanding as of a given date shall be
the sum of (A) the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock actually
outstanding, (B) the number of shares of Common Stock that have been issued
upon conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock, and (C) the
number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock, which Preferred Stock could be obtained
through the exercise or conversion of all other rights, options, warrants
and convertible securities on the day immediately preceding the given date.
(3) SALE OF SHARES BELOW SERIeS E CONVERSION PRICE. If at
any time or from time to time the corporation issues or sells, or is deemed
by the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock, other than as a dividend or other
distribution on any class of stock as provided in Section 3(d) above, and
other than a subdivision or combination of shares of Common Stock as
provided in Section 3(d) above, for an Effective Price less than the then
effective Conversion Price for the Series E Preferred Stock, then, and in
each such case, such Conversion Price shall be reduced, as of the opening
of business on the date of such issue or sale, to a price determined by
multiplying such Conversion Price by a fraction (i) the numerator of which
shall be (A) the number of shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock outstanding
immediately prior to such issue or sale, plus (B) the number of shares of
Common Stock which the aggregate consideration received (as defined in
subsection (f)(4)) by the corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price,
and (ii) the denominator of which shall be the number of shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C
9.
<PAGE>
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock outstanding immediately prior to such issue or
sale plus the total number of Additional Shares of Common Stock so issued.
For the purposes of the preceding sentence, the number of shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock outstanding as of a given date shall be the sum of (A) the
number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock actually outstanding, (B) the number of
shares of Common Stock that have been issued upon conversion of the Series
A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock, and (C) the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock, which Preferred Stock could be obtained through the exercise or
conversion of all other rights, options, warrants and convertible
securities on the day immediately preceding the given date.
(4) SALE OF SHARES BELOW SERIES F CONVERSION PRICE. If at
any time or from time to time the corporation issues or sells, or is deemed
by the express provisions of this subsection (f) to have issued or sold,
Additional Shares of Common Stock, other than as a dividend or other
distribution on any class of stock as provided in Section 3(d) above, and
other than a subdivision or combination of shares of Common Stock as
provided in Section 3(d) above, for an Effective Price less than the then
effective Conversion Price for the Series F Preferred Stock, then, and in
each such case, such Conversion Price shall be reduced, as of the opening
of business on the date of such issue or sale, to a price determined by
multiplying such Conversion Price by a fraction (i) the numerator of which
shall be (A) the number of shares of Common Stock issued or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock and Series F Preferred Stock outstanding
immediately prior to such issue or sale, plus (B) the number of shares of
Common Stock which the aggregate consideration received (as defined in
subsection (f)(4)) by the corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price,
and (ii) the denominator of which shall be the number of shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock outstanding immediately prior to such issue or sale plus
the total number of Additional Shares of Common Stock so issued. For the
purposes of the preceding sentence, the number of shares of Common Stock
issued or issuable upon conversion of the Series A Preferred Stock, Series
B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock outstanding as of a given date shall be the sum of (A) the number of
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock actually outstanding, (B) the number of shares of
Common Stock that have been issued upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Series F Preferred Stock, and (C) the number of shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock, which Preferred Stock could be obtained through the exercise or
conversion of all other rights, options, warrants and convertible
securities on the day immediately preceding the given date.
10.
<PAGE>
(5) For the purpose of making any adjustment required
under Section 3(f)(1), (2), or (3) the consideration received by the
corporation for any issue or sale of securities shall (A) to the extent it
consists of cash, be computed at the net amount of cash received by the
corporation after deduction of any underwriting or similar commissions,
compensation or concessions paid or allowed by the corporation in
connection with such issue or sale but without deduction of any expenses
payable by the corporation, (B) to the extent it consists of property other
than cash, be computed at the fair value of that property as determined in
good faith by the Board of Directors, and (C) if Additional Shares of
Common Stock, Convertible Securities (as hereinafter defined) or rights,
options or warrants to purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the corporation for a consideration which
covers both, be computed as the portion of the consideration so received
that may be reasonably determined in good faith by the Board of Directors
to be allocable to such Additional Shares of Common Stock, Convertible
Securities, rights, options or warrants.
(6) For the purpose of any adjustment required under
Section 3(f)(1), (2), or (3) if the corporation issues or sells any rights,
options or warrants for the purchase of Common Stock or Preferred Stock, or
stock or other securities convertible, exercisable or exchangeable into
Common Stock or Preferred Stock (such rights, options or warrants for the
purchase of Common Stock or Preferred Stock, or stock or other securities
convertible, exercisable or exchangeable into Common Stock or Preferred
Stock being herein referred to as "Convertible Securities"), and if the
Effective Price of such Convertible Securities is less than the Series C
Conversion Price, the Series D Conversion Price, the Series E Conversion
Price or the Series F Conversion Price, as applicable, in each case, the
maximum number of shares of Common Stock issuable upon exercise, exchange
and/or conversion thereof shall be deemed to be Additional Shares of Common
Stock as of the date of issuance of the Convertible Securities and the
corporation shall be deemed to have received as consideration for the
issuance of such shares an amount equal to the total amount of the
consideration, if any, received by the corporation for the issuance of such
Convertible Securities, plus the minimum amount of consideration, if any,
payable to the corporation upon the exercise, exchange or conversion of the
Convertible Securities; provided that if the minimum amounts of such
consideration cannot be ascertained, but are a function of antidilution or
similar protective clauses, the corporation shall be deemed to have
received the minimum amounts of consideration without reference to such
clauses; provided further that if the minimum amount of consideration
payable to the corporation upon the exercise, exchange or conversion of
Convertible Securities is reduced over time or on the occurrence or non-
occurrence of specified events other than by reason of antidilution
adjustments, the Effective Price shall be recalculated using the figure to
which such minimum amount of consideration is reduced; provided further
that if the minimum amount of consideration payable to the corporation upon
the exercise, exchange or conversion of such Convertible Securities is
subsequently increased, the Effective Price shall be again recalculated
using the increased minimum amount of consideration payable to the
corporation upon the exercise, exchange or conversion of such Convertible
Securities. No further adjustment of the Series C Conversion Price, Series
D Conversion Price , Series E Conversion Price or Series F Conversion
Price, as applicable, as adjusted upon the issuance of such Convertible
Securities, shall be made as a result of the actual issuance of Additional
Shares of Common Stock on the exercise, exchange or conversion of any such
Convertible Securities. If any such exercise, exchange or conversion
privilege represented by any such Convertible Securities shall expire
without having been exercised, exchanged or converted, the Series C
Conversion Price, Series D
11.
<PAGE>
Conversion Price, Series E Conversion Price or Series F Conversion Price,
as applicable, as adjusted upon the issuance of such Convertible
Securities, shall be readjusted to the Series C Conversion Price, Series D
Conversion Price, Series E Conversion Price or Series F Conversion Price,
as applicable, that would have been in effect had an adjustment been made
on the basis that the only Additional Shares of Common Stock so issued were
the Additional Shares of Common Stock, if any, actually issued or sold on
the exercise, exchange or conversion of such Convertible Securities, and
such Additional Shares of Common Stock, if any, were issued or sold for the
consideration actually received by the corporation upon such exercise,
exchange or conversion, plus the consideration, if any, actually received
by the corporation for the issuance of such Convertible Securities whether
or not exercised, exchanged or converted; provided that such readjustment
shall not apply to prior conversions of Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or Series F Preferred Stock, as
applicable.
(7) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the corporation or deemed to be issued
pursuant to this Section 3(f), whether or not subsequently reacquired or
retired by the corporation other than (1) shares of Common Stock issued
upon conversion of the Series A, Series B, Series B-1, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock; (2) shares of Common Stock and/or options, warrants or
other Common Stock purchase rights and the Common Stock issued pursuant to
such options, warrants or other rights issued or to be issued to employees,
officers or directors of, or consultants or advisors to the corporation or
any subsidiary in connection with the provision of the services to the same
pursuant to stock purchase or stock option plans or other arrangements that
are approved by the Board; (3) shares of Common Stock issued pursuant to
the Company's acquisition of another corporation by merger, purchase of
substantially all assets or other reorganization; (4) shares of Common
Stock issued in connection with equipment lease financing arrangements,
credit agreements or other commercial transactions approved by the Board of
Directors; and (5) shares of Common Stock issued pursuant to a corporate
strategic partner transaction involving the license of technology,
establishment of a joint venture, research and development agreement,
product development or marketing agreement, or other similar arrangement.
(8) The "Effective Price" of Additional Shares of Common
Stock or Convertible Securities, as applicable, shall mean the quotient
determined by dividing the total number of Additional Shares of Common
Stock or Convertible Securities, as applicable, issued or sold, or deemed
to have been issued or sold by the corporation under this Section 3(f),
into the aggregate consideration received, or deemed to have been received
by the corporation for such issue under this Section 3(f), for such
Additional Shares of Common Stock or Convertible Securities, as applicable.
(g) NO IMPAIRMENT. The corporation will not, by amendment of
its certificate of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by
the corporation, but will at all times in good faith assist in the carrying
out of all the provisions of this Section 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 Series A Preferred
12.
<PAGE>
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock against impairment.
(h) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this Section
3, the corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series A Preferred Stock, Series B Preferred Stock, Series
B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock a certificate
executed by the corporation's chief financial officer setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The corporation shall, upon the
written request at any time of any holder of Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Series A Conversion Price, Series B Conversion Price, Series B-1 Conversion
Price, Series C Conversion Price, Series D Conversion Price, Series E
Conversion Price and Series F Conversion Price at the time in effect and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock.
(i) NOTICES OF RECORD DATE. In the event that the corporation
shall propose at any time: (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 (iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all of its
assets, or to liquidate, dissolve or wind up; then, in connection with each
such event, the corporation shall send to the holders of Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock:
(1) 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, if any,
in respect of the matters referred to in (iii) and (iv) above; and
(2) 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).
(j) ISSUE TAXES. The corporation shall pay any and all issue
and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock pursuant
13.
<PAGE>
hereto; provided, however, that the corporation shall not be obligated to
pay any transfer taxes resulting from any transfer requested by any holder
in connection with any such conversion.
(k) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding
shares of the Series A Preferred Stock, Series B Preferred Stock, Series B-
1 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock, the corporation will take
such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to these certificate.
(l) FRACTIONAL SHARES. No fractional share shall be issued upon
the conversion of any share or shares of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred
Stock. All shares of Common Stock (including fractions thereof) issuable
upon conversion of more than one share of Series A Preferred Stock, Series
B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock or Series F Preferred
Stock by a holder thereof shall be aggregated for purposes of determining
whether the conversion would result in the issuance of any fractional
share. If, after the aforementioned aggregation, the conversion would
result in the issuance of a fraction of a share of Common Stock, the
corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair market
value of such fraction on the date of conversion (as determined in good
faith by the Board of Directors).
(m) NOTICES. Any notice required by the provisions of this
Section 3 to be given to the holder of shares of Series A Preferred Stock,
Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock shall be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each holder of record at the
address for such holder appearing on the books of the corporation.
4. VOTING RIGHTS. Each holder of shares of the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred
Stock shall be entitled to the number of votes equal to the number of shares of
Common Stock into which such shares of Series A Preferred Stock, Series B
Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or Series F Preferred Stock could be
converted and shall have voting rights and powers equal to the voting rights and
powers of the Common Stock
14.
<PAGE>
(except as otherwise expressly provided herein or as required by law, voting
together with the Common Stock as a single class) and shall be entitled to
notice of any stockholders' meeting in accordance with the Bylaws of the
corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Series A Preferred Stock, Series B Preferred Stock,
Series B-1 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock and Series F Preferred Stock held by each holder could
be converted) shall be rounded to the nearest whole number (with one-half being
rounded upward). Each holder of Common Stock shall be entitled to one (1) vote
for each share of Common Stock held.
5. NO REISSUANCE OF SERIES A PREFERRED STOCK, SERIES B PREFERRED STOCK,
SERIES B-1 PREFERRED STOCK, SERIES C PREFERRED STOCK, SERIES D PREFERRED STOCK,
SERIES E PREFERRED STOCK OR SERIES F PREFERRED STOCK. No share or shares of
Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
Series F Preferred Stock acquired by the corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be canceled, retired and eliminated from the shares that the corporation shall
be authorized to issue.
6. COVENANTS. In addition to any other rights provided by law, so long
as shares of Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock or Series F Preferred Stock are outstanding, the corporation
shall not, without first obtaining the affirmative vote or written consent of
the holders of not less than a majority of the outstanding shares of the Series
A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series
F Preferred Stock, voting together as a single class and on an as-converted
basis:
(a) amend or repeal any provision of, or add any provision to,
this corporation's Certificate of Incorporation if such action would
adversely alter or change the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, the Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
Series F Preferred Stock;
(b) create (by reclassification or otherwise) or issue shares
of any class or series of stock having preferences prior to or on a parity
with the Series A Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series
E Preferred Stock or Series F Preferred Stock with respect to voting,
dividends or upon liquidation;
(c) declare or pay a cash dividend on the Common Stock; or
(d) sell, lease, convey or otherwise dispose of or encumber all
or substantially all of its property or business or merge into or
consolidate with any other corporation immediately after which merger or
consolidation (including any series of related transactions) the
stockholders of the corporation shall hold less than fifty percent (50%) of
the voting power of the surviving corporation.
15.
<PAGE>
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed exclusively
by one or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, following the
closing of the initial public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended (the "1933 Act"),
covering the offer and sale of Common Stock to the public (the "Initial Public
Offering"), the directors shall be divided into three classes designated as
Class I , Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the Closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the Closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3. Subject to the rights of the holders of any series of Preferred
Stock, the Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the holders of a
majority of the voting power of all of the then outstanding stock of voting
stock of the Corporation, entitled to vote at an election of directors (the
"Voting Stock").
4. Subject to the rights of the holders of any series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director
16.
<PAGE>
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been elected and
qualified.
5. In the event that Section 2115(a) of the California Corporations
Code is applicable to this corporation, then the following shall apply:
(a) Every stockholder entitled to vote in any election of
directors of this corporation may cumulate such stockholder's votes and
give one candidate a number of votes equal to the number of directors to be
elected multiplied by the number of votes to which the stockholder's shares
are otherwise entitled, or distribute the stockholder's votes on the same
principle among as many candidates as such stockholder thinks fit;
(b) No stockholder, however, may cumulate such stockholder's
votes for one or more candidates unless (i) the names of such candidates
have been properly placed in nomination, in accordance with the Bylaws of
the corporation, prior to the voting, (ii) the stockholder has given
advance notice to the corporation of the intention to cumulative votes
pursuant to the Bylaws, and (iii) the stockholder has given proper notice
to the other stockholders at the meeting, prior to voting, of such
stockholder's intention to cumulate such stockholder's votes; and
(c) If any stockholder has given proper notice, all
stockholders may cumulate their votes for any candidates who have been
properly placed in nomination. The candidates receiving the highest number
of votes of the shares entitled to be voted for them up to the number of
directors to be elected by such shares shall be declared elected.
6. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may
be altered or amended or new Bylaws adopted by the affirmative vote of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock. The Board of Directors shall also
have the power to adopt, amend or repeal Bylaws.
(a) The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
(b) No action shall be taken by the stockholders of the
corporation except at an annual or special meeting of stockholders called
in accordance with the Bylaws or by written consent of the stockholders in
accordance with the Bylaws prior to the closing of the Initial Public
Offering and following the closing of the Initial Public Offering no action
shall be taken by the stockholders by written consent.
(c) Advance notice of stockholder nominations for the election
of directors and of business to be brought by stockholders before any
meeting of the stockholders of the corporation shall be given in the manner
provided in the Bylaws of the corporation.
VI.
1. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for
17.
<PAGE>
liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit. If the Delaware
General Corporation Law is amended after approval by the stockholders of this
Article to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
2. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
1. 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, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
2. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI
and VII.
VIII.
The name and the mailing address of the Sole Incorporator is as follows:
Angelique Tremble
Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, CA 94111
IN WITNESS WHEREOF, this Certificate has been subscribed this ____ day
of June, 1998 by the undersigned who affirms that the statements made herein are
true and correct.
_______________________________
ANGELIQUE TREMBLE
SOLE INCORPORATOR
18.
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
TERAYON COMMUNICATION SYSTEMS, INC.
(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I OFFICES..................................................................................... 1
Section 1. Registered Office........................................................................... 1
Section 2. Other Offices............................................................................... 1
ARTICLE II CORPORATE SEAL.............................................................................. 1
Section 3. Corporate Seal.............................................................................. 1
ARTICLE III STOCKHOLDERS' MEETINGS...................................................................... 1
Section 4. Place Of Meetings........................................................................... 1
Section 5. Annual Meeting.............................................................................. 1
Section 6. Special Meetings............................................................................ 3
Section 7. Notice Of Meetings.......................................................................... 4
Section 8. Quorum...................................................................................... 4
Section 9. Adjournment And Notice Of Adjourned Meetings................................................ 4
Section 10. Voting Rights............................................................................... 5
Section 11. Joint Owners Of Stock....................................................................... 5
Section 12. List Of Stockholders........................................................................ 5
Section 13. Action Without Meeting...................................................................... 5
Section 14. Organization................................................................................ 6
ARTICLE IV DIRECTORS................................................................................... 7
Section 15. Number And Term Of Office................................................................... 7
Section 16. Powers...................................................................................... 7
Section 17. Classes Of Directors........................................................................ 7
Section 18. Vacancies................................................................................... 7
Section 19. Resignation................................................................................. 8
Section 20. Removal..................................................................................... 8
Section 21. Meetings.................................................................................... 8
Section 22. Quorum And Voting........................................................................... 9
Section 23. Action Without Meeting...................................................................... 9
Section 24. Fees And Compensation....................................................................... 9
Section 25. Committees.................................................................................. 10
Section 26. Organization................................................................................ 11
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE V OFFICERS.................................................................................... 11
Section 27. Officers Designated......................................................................... 11
Section 28. Tenure And Duties Of Officers............................................................... 11
Section 29. Delegation Of Authority..................................................................... 12
Section 30. Resignations................................................................................ 13
Section 31. Removal..................................................................................... 13
OF SECURITIES OWNED BY THE CORPORATION......................................................................... 13
Section 32. Execution Of Corporate Instruments.......................................................... 13
Section 33. Voting Of Securities Owned By The Corporation............................................... 13
ARTICLE VII SHARES OF STOCK............................................................................. 14
Section 34. Form And Execution Of Certificates.......................................................... 14
Section 35. Lost Certificates........................................................................... 14
Section 36. Transfers................................................................................... 14
Section 37. Fixing Record Dates......................................................................... 15
Section 38. Registered Stockholders..................................................................... 16
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION......................................................... 16
Section 39. Execution Of Other Securities............................................................... 16
ARTICLE IX DIVIDENDS................................................................................... 16
Section 40. Declaration Of Dividends.................................................................... 16
Section 41. Dividend Reserve............................................................................ 17
ARTICLE X FISCAL YEAR................................................................................. 17
Section 42. Fiscal Year................................................................................. 17
ARTICLE XI INDEMNIFICATION............................................................................. 17
Section 43. Indemnification Of Directors, Executive Officers, Other Officers, Employees And Other Agents 17
ARTICLE XII NOTICES..................................................................................... 20
Section 44. Notices..................................................................................... 20
ARTICLE XIII AMENDMENTS.................................................................................. 21
Section 45. Amendments.................................................................................. 21
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE XIV LOANS TO OFFICERS........................................................................... 22
Section 46. Loans To Officers........................................................................... 22
</TABLE>
iii
<PAGE>
BYLAWS
OF
TERAYON COMMUNICATION SYSTEMS, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation
in the State of Delaware shall be in the City of Wilmington, County of Kent.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain
an office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate Seal-
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
SECTION 5. ANNUAL MEETING.
(a) The annual meeting of the stockholders of the corporation,
for the purpose of election of directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as may
be designated from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be:
(A) specified in the notice of meeting (or any supplement thereto) given by
or at the direction of the Board of Directors, (B) otherwise properly
1.
<PAGE>
brought before the meeting by or at the direction of the Board of
Directors, or (C) otherwise properly brought before the meeting by a
stockholder. For business to be properly brought before an annual meeting
by a stockholder, the stockholder must have given timely notice thereof in
writing to the Secretary of the corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal
executive offices of the corporation not later than the close of business
on the sixtieth (60th) day nor earlier than the close of business on the
ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting
was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the
time of the previous year's proxy statement, notice by the stockholder to
be timely must be so received not earlier than the close of business on the
ninetieth (90th) day prior to such annual meeting and not later than the
close of business on the later of the sixtieth (60th) day prior to such
annual meeting or, in the event public announcement of the date of such
annual meeting is first made by the corporation fewer than seventy (70)
days prior to the date of such annual meeting, the close of business on the
tenth (10th) day following the day on which public announcement of the date
of such meeting is first made by the corporation. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual meeting: (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and address,
as they appear on the corporation's books, of the stockholder proposing
such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, (iv) any material interest
of the stockholder in such business and (v) any other information that is
required to be provided by the stockholder pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his
capacity as a proponent to a stockholder proposal. Notwithstanding the
foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's
meeting, stockholders must provide notice as required by the regulations
promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to
the contrary, no business shall be conducted at any annual meeting except
in accordance with the procedures set forth in this paragraph (b). The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this paragraph (b), and,
if he should so determine, he shall so declare at the meeting that any such
business not properly brought before the meeting shall not be transacted.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election
as directors. Nominations of persons for election to the Board of Directors
of the corporation may be made at a meeting of stockholders by or at the
direction of the Board of Directors or by any stockholder of the
corporation entitled to vote in the election of directors at the meeting
who complies with the notice procedures set forth in this paragraph (c).
Such nominations, other than those made by or at the direction of the Board
of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the corporation in accordance with the provisions of paragraph
(b) of this Section 5. Such stockholder's notice shall set forth (i) as to
each person, if any, whom the stockholder proposes to nominate for election
or re-election as a director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or
employment of such person, (C) the class and number of shares of the
corporation which are beneficially owned by such
2.
<PAGE>
person, (D) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nominations are to be made by the
stockholder, and (E) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation
14A under the 1934 Act (including without limitation such person's written
consent to being named in the proxy statement, if any, as a nominee and to
serving as a director if elected); and (ii) as to such stockholder giving
notice, the information required to be provided pursuant to paragraph (b)
of this Section 5. At the request of the Board of Directors, any person
nominated by a stockholder for election as a director shall furnish to the
Secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. No
person shall be eligible for election as a director of the corporation
unless nominated in accordance with the procedures set forth in this
paragraph (c). The chairman of the meeting shall, if the facts warrant,
determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he should
so determine, he shall so declare at the meeting, and the defective
nomination shall be disregarded.
(d) For purposes of this Section 5, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may
be called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, (iii) the Board of
Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is
presented to the Board of Directors for adoption), or (iv) for so long as
Section 2115(a) of the California Corporations Code is applicable to the
corporation, by the holders of shares entitled to cast not less than fifty
percent (50%) of the votes at the meeting, and shall be held at such place,
on such date, and at such time as the Board of Directors, shall fix.
(b) If a special meeting is called by any person or persons
other than the Board of Directors, the request shall be in writing,
specifying the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by
telegraphic or other facsimile transmission to the Chairman of the Board of
Directors, the Chief Executive Officer, or the Secretary of the
corporation. No business may be transacted at such special meeting
otherwise than specified in such notice. The Board of Directors shall
determine the time and place of such special meeting, which shall be held
not less than thirty-five (35) nor more than one hundred twenty (120) days
after the date of the receipt of the request. Upon determination of the
time and place of the meeting, the officer receiving the request shall
cause notice to be given to the stockholders entitled to vote, in
accordance with the provisions of Section 7 of these Bylaws. If the notice
is not given within sixty (60) days after the receipt of the request, the
person or persons requesting the meeting may set the time and place of the
meeting and give the notice. Nothing contained in this paragraph (b) shall
be construed as limiting, fixing, or affecting the time when a meeting of
stockholders called by action of the Board of Directors may be held.
3.
<PAGE>
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of stockholders
shall be given 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, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
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. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a quorum,
any meeting of stockholders may be adjourned, from time to time, either by the
chairman of the meeting or by vote of the holders of a majority of the shares
represented thereat, but no other business shall be transacted at such meeting.
The stockholders present at a duly called or convened meeting, at which a quorum
is present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
action taken by the holders of a majority of the vote cast, excluding
abstentions, at any meeting at which a quorum is present shall be valid and
binding upon the corporation; provided, however, that directors shall be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors. Where a
separate vote by a class or classes or series is required, except where
otherwise provided by the statute or by the Certificate of Incorporation or
these Bylaws, a majority of the outstanding shares of such class or classes or
series, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter and, except
where otherwise provided by the statute or by the Certificate of Incorporation
or these Bylaws, the affirmative vote of the majority (plurality, in the case of
the election of directors) of the votes cast, including abstentions, by the
holders of shares of such class or classes or series shall be the act of such
class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, 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 which 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.
4.
<PAGE>
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote or execute consents shall have the right to do so either
in person or by an agent or agents authorized by a proxy granted in accordance
with Delaware law. An agent so appointed need not be a stockholder. No proxy
shall be voted after three (3) years from its date of creation unless the proxy
provides for a longer period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities
having voting power stand of record in the names of two (2) or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety, or otherwise, or if two (2) or more persons have the
same fiduciary relationship respecting the same shares, unless the Secretary is
given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(a) if only one (1) votes, his act binds all; (b) if more than one (1) votes,
the act of the majority so voting binds all; (c) if more than one (1) votes, but
the vote is evenly split on any particular matter, each faction may vote the
securities in question proportionally, or may apply to the Delaware Court of
Chancery for relief as provided in the General Corporation Law of Delaware,
Section 217(b). If the instrument filed with the Secretary shows that any such
tenancy is held in unequal interests, a majority or even-split for the purpose
of subsection (c) shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and
make, at least ten (10) days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at said meeting, arranged in
alphabetical order, 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 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
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.
SECTION 13. ACTION WITHOUT MEETING.
(a) Unless otherwise provided in the Certificate of
Incorporation, any action required by statute to be taken at any annual or
special meeting of the stockholders, or any action which may be taken at
any annual or special meeting of the 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, shall be 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.
(b) Every written consent shall bear the date of signature of
each stockholder who signs the consent, and no written consent shall be
effective to take the corporate action referred to therein unless, within
sixty (60) days of the earliest dated consent delivered to the corporation
in the manner herein required, written consents signed by a sufficient
number of
5.
<PAGE>
stockholders to take action are delivered to the corporation by delivery to
its registered office in the State of Delaware, its principal place of
business or an officer or agent of the corporation having custody of the
book in which proceedings of meetings of stockholders are recorded.
Delivery made to a corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested.
(c) 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 the State 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 consent has been given in accordance with Section 228 of the
General Corporation Law of Delaware.
(d) Notwithstanding the foregoing, no such action by written
consent may be taken following the closing of the initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), covering the offer and sale of Common
Stock of the corporation (the "Initial Public Offering").
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board
of Directors, or, if a Chairman has not been appointed or is absent, the
President, or, if the President is absent, a chairman of the meeting chosen
by a majority in interest of the stockholders entitled to vote, present in
person or by proxy, shall act as chairman. The Secretary, or, in his
absence, an Assistant Secretary directed to do so by the President, shall
act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled
to make such rules or regulations for the conduct of meetings of
stockholders as it shall deem necessary, appropriate or convenient. Subject
to such rules and regulations of the Board of Directors, if any, the
chairman of the meeting shall have the right and authority to prescribe
such rules, regulations and procedures and to do all such acts as, in the
judgment of such chairman, are necessary, appropriate or convenient for the
proper conduct of the meeting, including, without limitation, establishing
an agenda or order of business for the meeting, rules and procedures for
maintaining order at the meeting and the safety of those present,
limitations on participation in such meeting to stockholders of record of
the corporation and their duly authorized and constituted proxies and such
other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on
the time allotted to questions or comments by participants and regulation
of the opening and closing of the polls for balloting on matters which are
to be voted on by ballot. Unless and to the extent determined by the Board
of Directors or the chairman of the meeting, meetings of stockholders shall
not be required to be held in accordance with rules of parliamentary
procedure.
6.
<PAGE>
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed in accordance with the Certificate
of Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
SECTION 16. POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders
of any series of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the Initial Public Offering, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class I directors shall expire and
Class I directors shall be elected for a full term of three years. At the second
annual meeting of stockholders following the Closing of the Initial Public
Offering, the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three years. At the third annual
meeting of stockholders following the Closing of the Initial Public Offering,
the term of office of the Class III directors shall expire and Class III
directors shall be elected for a full term of three years. At each succeeding
annual meeting of stockholders, directors shall be elected for a full term of
three years to succeed the directors of the class whose terms expire at such
annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A
vacancy in the Board of Directors shall be deemed to exist under this Bylaw in
the case of the death, removal or resignation of any director.
7.
<PAGE>
SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When one
or more directors shall resign from the Board of Directors, 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 for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
SECTION 20. REMOVAL.
Subject to the rights of the holders of any series of Preferred Stock,
no director shall be removed without cause. Subject to any limitations imposed
by law, the Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the holders of a
majority of the voting power of all the then-outstanding shares of voting stock
of the corporation, entitled to vote at an election of directors (the "Voting
Stock").
(a) After the Record Date and subject to any limitations
imposed by law, Section A(3)(a) above shall no longer apply and subject to
the rights of the holders of any series of Preferred Stock, no director
shall be removed without cause. Subject to any limitations imposed by law,
the Board of Directors or any individual director may be removed from
office at any time with cause by the affirmative vote of the holders of a
majority of the Voting Stock.
SECTION 21. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of
Directors shall be held immediately before or after the annual meeting of
stockholders and at the place where such meeting is held. No notice of an
annual meeting of the Board of Directors shall be necessary and such
meeting shall be held for the purpose of electing officers and transacting
such other business as may lawfully come before it.
(b) REGULAR MEETINGS. Except as hereinafter otherwise
provided, regular meetings of the Board of Directors shall be held in the
office of the corporation required to be maintained pursuant to Section 2
hereof. Unless otherwise restricted by the Certificate of Incorporation,
regular meetings of the Board of Directors may also be held at any place
within or without the State of Delaware which has been designated by
resolution of the Board of Directors or the written consent of all
directors.
(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors
may be held at any time and place within or without the State of Delaware
whenever called by the Chairman of the Board, the President or any two of
the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors,
or of any committee thereof, may participate in a meeting by means of
conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear
8.
<PAGE>
each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all
special meetings of the Board of Directors shall be orally or in writing,
by telephone, including a voice messaging system or other system or
technology designed to record and communicate messages, facsimile,
telegraph or telex, or by electronic mail or other electronic means, during
normal business hours, at least twenty-four (24) hours before the date and
time of the meeting, or sent in writing to each director by first class
mail, charges prepaid, at least three (3) days before the date of the
meeting. Notice of any meeting may be waived in writing at any time before
or after the meeting and will be waived by any director by attendance
thereat, except when the director attends the 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.
(f) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called
or noticed, or wherever held, shall be as valid as though had at a meeting
duly held after regular call and notice, if a quorum be present and if,
either before or after the meeting, each of the directors not present shall
sign a written waiver of notice. All such waivers shall be filed with the
corporate records or made a part of the minutes of the meeting.
SECTION 22. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 43 hereof, for which a quorum shall be one-third of the exact
number of directors fixed from time to time in accordance with the
Certificate of Incorporation, a quorum of the Board of Directors shall
consist of a majority of the exact number of directors fixed from time to
time by the Board of Directors in accordance with the Certificate of
Incorporation; provided, however, at any meeting, whether a quorum be
present or otherwise, a majority of the directors present may adjourn from
time to time until the time fixed for the next regular meeting of the Board
of Directors, without notice other than by announcement at the meeting.
(b) At each meeting of the Board of Directors at which a quorum
is present, all questions and business shall be determined by the
affirmative vote of a majority of the directors present, unless a different
vote be required by law, the Certificate of Incorporation or these Bylaws.
SECTION 23. ACTION WITHOUT 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 of
Directors or committee, as the case may be, consent thereto in writing, and such
writing or writings are filed with the minutes of proceedings of the Board of
Directors or committee.
SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to
such compensation for their services as may be approved by the Board of
Directors, including, if so approved, by resolution of the Board of Directors, a
fixed sum and expenses of attendance, if
9.
<PAGE>
any, for attendance at each regular or special meeting of the Board of Directors
and at any meeting of a committee of the Board of Directors. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee, or otherwise
and receiving compensation therefor.
SECTION 25. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may appoint an
Executive Committee to consist of one (1) or more members of the Board of
Directors. The Executive Committee, to the extent permitted by law and
provided in the resolution of the Board of Directors 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 corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in
reference to (i) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by the Delaware
General Corporation Law to be submitted to stockholders for approval, or
(ii) adopting, amending or repealing any bylaw of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, from time to
time, appoint such other committees as may be permitted by law. Such other
committees appointed by the Board of Directors shall consist of one (1) or
more members of the Board of Directors and shall have such powers and
perform such duties as may be prescribed by the resolution or resolutions
creating such committees, but in no event shall any such committee have the
powers denied to the Executive Committee in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors
shall serve a term on the committee coexistent with such member's term on
the Board of Directors. The Board of Directors, subject to the provisions
of subsections (a) or (b) of this Bylaw may at any time increase or
decrease the number of members of a committee or terminate the existence of
a committee. The membership of a committee member shall terminate on the
date of his death or voluntary resignation from the committee or from the
Board of Directors. The Board of Directors may at any time for any reason
remove any individual committee member and the Board of Directors may fill
any committee vacancy created by death, resignation, removal or increase in
the number of members of the committee. The Board of Directors may
designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the
committee, and, in addition, in the absence or disqualification of any
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.
(d) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 25 shall be held at such times and
places as are determined by the Board of Directors, or by any such
committee, and when notice thereof has been given to each member of such
committee, no further notice of such regular meetings need be given
thereafter. Special meetings of any such committee may be held at any place
which has been determined from time to time by such committee, and may be
called by any director who is a member of such committee, upon
10.
<PAGE>
written notice to the members of such committee of the time and place of
such special meeting given in the manner provided for the giving of written
notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting
of any committee may be waived in writing at any time before or after the
meeting and will be waived by any director by attendance thereat, except
when the director attends such special 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. A majority
of the authorized number of members of any such committee shall constitute
a quorum for the transaction of business, and the act of a majority of
those present at any meeting at which a quorum is present shall be the act
of such committee.
SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the President, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer and the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the
officers of the corporation shall be fixed by or in the manner designated by the
Board of Directors.
SECTION 28. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duly
elected and qualified, unless sooner removed. Any officer elected or
appointed by the Board of Directors may be removed at any time by the Board
of Directors. If the office of any officer becomes vacant for any reason,
the vacancy may be filled by the Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman
of the Board of Directors, when present, shall preside at all meetings of
the stockholders and the Board of Directors. The Chairman of the Board of
Directors shall perform other duties commonly incident to his office and
shall also perform such other duties and have such other powers as the
Board of Directors shall designate from time to time. If there is no
President, then the Chairman
11.
<PAGE>
of the Board of Directors shall also serve as the Chief Executive Officer
of the corporation and shall have the powers and duties prescribed in
paragraph (c) of this Section 28.
(c) DUTIES OF PRESIDENT. The President shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors,
unless the Chairman of the Board of Directors has been appointed and is
present. Unless some other officer has been elected Chief Executive Officer
of the corporation, the President shall be the chief executive officer of
the corporation and shall, subject to the control of the Board of
Directors, have general supervision, direction and control of the business
and officers of the corporation. The President shall perform other duties
commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors shall designate from
time to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume
and perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice
Presidents shall perform other duties commonly incident to their office and
shall also perform such other duties and have such other powers as the
Board of Directors or the President shall designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all
meetings of the stockholders and of the Board of Directors and shall record
all acts and proceedings thereof in the minute book of the corporation. The
Secretary shall give notice in conformity with these Bylaws of all meetings
of the stockholders and of all meetings of the Board of Directors and any
committee thereof requiring notice. The Secretary shall perform all other
duties given him in these Bylaws and other duties commonly incident to his
office and shall also perform such other duties and have such other powers
as the Board of Directors shall designate from time to time. The President
may direct any Assistant Secretary to assume and perform the duties of the
Secretary in the absence or disability of the Secretary, and each Assistant
Secretary shall perform other duties commonly incident to his office and
shall also perform such other duties and have such other powers as the
Board of Directors or the President shall designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall keep or cause to be kept the books of account of the
corporation in a thorough and proper manner and shall render statements of
the financial affairs of the corporation in such form and as often as
required by the Board of Directors or the President. The Chief Financial
Officer, subject to the order of the Board of Directors, shall have the
custody of all funds and securities of the corporation. The Chief Financial
Officer shall perform other duties commonly incident to his office and
shall also perform such other duties and have such other powers as the
Board of Directors or the President shall designate from time to time. The
President may direct the Treasurer or any Assistant Treasurer, or the
Controller or any Assistant Controller to assume and perform the duties of
the Chief Financial Officer in the absence or disability of the Chief
Financial Officer, and each Treasurer and Assistant Treasurer and each
Controller and Assistant Controller shall perform other duties commonly
incident to his office and shall also perform such other duties and have
such other powers as the Board of Directors or the President shall
designate from time to time.
SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
12.
<PAGE>
SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 31. REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, or the President or any Vice President, and by the
Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All
other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to
the credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless 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.
SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such
13.
<PAGE>
authorization, by the Chairman of the Board of Directors, the Chief Executive
Officer, the President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the powers,
designations, preferences, and rights, and the limitations or restrictions of
the shares authorized to be issued or shall, except as otherwise required by
law, set forth on the face or back a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional, or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
SECTION 35. LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
SECTION 36. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
14.
<PAGE>
(b) 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.
SECTION 37. FIXING RECORD DATES.
(a) 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, the Board of Directors may fix, in
advance, a record date, which record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than sixty (60) nor less
than ten (10) days before the date of such meeting. If no record date is
fixed by the Board of Directors, 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. 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.
(b) Prior to the Initial Public Offering, in order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which
the resolution fixing the record date is adopted by the Board of Directors.
Any stockholder of record seeking to have the stockholders authorize or
take corporate action by written consent shall, by written notice to the
Secretary, request the Board of Directors to fix a record date. The Board
of Directors shall promptly, but in all events within ten (10) days after
the date on which such a request is received, adopt a resolution fixing the
record date. If no record date has been fixed by the Board of Directors
within ten (10) days of the date on which such a request is received, the
record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation by delivery to its registered office
in the State of Delaware, its principal place of business or an officer or
agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the corporation's
registered office shall be by hand or by certified or registered mail,
return receipt requested. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required by law,
the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of
business on the day on which the Board of Directors adopts the resolution
taking such prior action.
(c) In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders 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
15.
<PAGE>
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted, and which record date shall
be not more than sixty (60) days prior to such action. If no record date is
fixed, the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
SECTION 38. 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, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chairman of the Board of
Directors, the President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal impressed thereon
or a facsimile of such seal imprinted thereon and attested by the signature of
the Secretary or an Assistant Secretary, or the Chief Financial Officer or
Treasurer or an Assistant Treasurer; provided, however, that where any such
bond, debenture or other corporate security shall be authenticated by the manual
signature, or where permissible facsimile signature, of a trustee under an
indenture pursuant to which such bond, debenture or other corporate security
shall be issued, the signatures of the persons signing and attesting the
corporate seal on such bond, debenture or other corporate security may be the
imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.
16.
<PAGE>
SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there
may be set aside out of any funds of the corporation available for dividends
such sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this
Article XI, "executive officers" shall have the meaning defined in Rule 3b-
7 promulgated under the 1934 Act) to the fullest extent not prohibited by
the Delaware General Corporation Law; provided, however, that the
corporation may modify the extent of such indemnification by individual
contracts with its directors or executive officer; and, provided, further,
that the corporation shall not be required to indemnify any director or
executive officer in connection with any proceeding (or part thereof)
initiated by such person unless (i) such indemnification is expressly
required to be made by law, (ii) the proceeding was authorized by the Board
of Directors of the corporation, (iii) such indemnification is provided by
the corporation, in its sole discretion, pursuant to the powers vested in
the corporation under the Delaware General Corporation Law or (iv) such
indemnification is required to be made under subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other
agents as set forth in the Delaware General Corporation Law.
(c) EXPENSES. The corporation shall advance to any person who
was or is 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, by reason of the fact that he is or was a
director or executive officer, of the corporation, or is or was serving at
the request of the corporation as a director or executive officer of
another corporation, partnership, joint venture, trust or other enterprise,
prior to the final disposition of the proceeding, promptly following
request therefor, all expenses incurred by any director or executive
officer in connection with such proceeding upon receipt of an undertaking
by or on behalf of such person
17.
<PAGE>
to repay said amounts if it should be determined ultimately that such
person is not entitled to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph
(e) of this Bylaw, no advance shall be made by the corporation to an executive
officer of the corporation (except by reason of the fact that such executive
officer is or was a director of the corporation in which event this paragraph
shall not apply) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, if a determination is reasonably and promptly
made (i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to the proceeding, or (ii) if such quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, that the facts known
to the decision-making party at the time such determination is made demonstrate
clearly and convincingly that such person acted in bad faith or in a manner that
such person did not believe to be in or not opposed to the best interests of the
corporation.
(d) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors
and executive officers under this Bylaw shall be deemed to be contractual
rights and be effective to the same extent and as if provided for in a
contract between the corporation and the director or executive officer. Any
right to indemnification or advances granted by this Bylaw to a director or
executive officer shall be enforceable by or on behalf of the person
holding such right in any court of competent jurisdiction if (i) the claim
for indemnification or advances is denied, in whole or in part, or (ii) no
disposition of such claim is made within ninety (90) days of request
therefor. The claimant in such enforcement action, if successful in whole
or in part, shall be entitled to be paid also the expense of prosecuting
his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that
the claimant has not met the standards of conduct that make it permissible
under the Delaware General Corporation Law for the corporation to indemnify
the claimant for the amount claimed. In connection with any claim by an
executive officer of the corporation (except in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such executive officer is or was a director of the
corporation) for advances, the corporation shall be entitled to raise a
defense as to any such action clear and convincing evidence that such
person acted in bad faith or in a manner that such person did not believe
to be in or not opposed to the best interests of the corporation, or with
respect to any criminal action or proceeding that such person acted without
reasonable cause to believe that his conduct was lawful. Neither the
failure of the corporation (including its Board of Directors, independent
legal counsel or its stockholders) to have made a determination prior to
the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of Directors,
independent legal counsel or its stockholders) that the claimant has not
met such applicable standard of conduct, shall be a defense to the action
or create a presumption that claimant has not met the applicable standard
of conduct. In any suit brought by a director or executive officer to
enforce a right to indemnification or to an advancement of expenses
hereunder, the burden of proving that the director or executive officer is
not entitled to be indemnified, or to such advancement of expenses, under
this Article XI or otherwise shall be on the corporation.
18.
<PAGE>
(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any
person by this Bylaw shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding office. The
corporation is specifically authorized to enter into individual contracts
with any or all of its directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent not prohibited by the
Delaware General Corporation Law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by
this Bylaw shall continue as to a person who has ceased to be a director,
officer, employee or other agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or
permitted to be indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw shall
only be prospective and shall not affect the rights under this Bylaw in
effect at the time of the alleged occurrence of any action or omission to
act that is the cause of any proceeding against any agent of the
corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive
officer to the full extent not prohibited by any applicable portion of this
Bylaw that shall not have been invalidated, or by any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
(1) The term "proceeding" shall be broadly construed and
shall include, without limitation, the investigation, preparation,
prosecution, defense, settlement, arbitration and appeal of, and the giving
of testimony in, any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative.
(2) The term "expenses" shall be broadly construed and
shall include, without limitation, court costs, attorneys' fees, witness
fees, fines, amounts paid in settlement or judgment and any other costs and
expenses of any nature or kind incurred in connection with any proceeding.
(3) The term the "corporation" 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 any
person who 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,
shall stand in
19.
<PAGE>
the same position under the provisions of this Bylaw with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(4) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer, officer,
employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
(5) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation 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 a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the corporation" as
referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 44. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it shall
be given in writing, timely and duly deposited in the United States mail,
postage prepaid, and addressed to his last known post office address as
shown by the stock record of the corporation or its transfer agent.
(b) NOTICE TO DIRECTORS. Any notice required to be given to
any director may be given by the method stated in subsection (a), or by
facsimile, telex or telegram, except that such notice other than one which
is delivered personally shall be sent to such address as such director
shall have filed in writing with the Secretary, or, in the absence of such
filing, to the last known post office address of such director.
(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by
a duly authorized and competent employee of the corporation or its transfer
agent appointed with respect to the class of stock affected, specifying the
name and address or the names and addresses of the stockholder or
stockholders, or director or directors, to whom any such notice or notices
was or were given, and the time and method of giving the same, shall in the
absence of fraud, be prima facie evidence of the facts therein contained.
(d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as
above provided, shall be deemed to have been given as at the time of
mailing, and all notices given by facsimile, telex or telegram shall be
deemed to have been given as of the sending time recorded at time of
transmission.
20.
<PAGE>
(e) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any
other permissible method or methods may be employed in respect of any other
or others.
(f) FAILURE TO RECEIVE NOTICE. The period or limitation of
time within which any stockholder may exercise any option or right, or
enjoy any privilege or benefit, or be required to act, or within which any
director may exercise any power or right, or enjoy any privilege, pursuant
to any notice sent him in the manner above provided, shall not be affected
or extended in any manner by the failure of such stockholder or such
director to receive such notice.
(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of
the Certificate of Incorporation or Bylaws of the corporation, to any
person with whom communication is unlawful, the giving of such notice to
such person shall not be required and there shall be no duty to apply to
any governmental authority or agency for a license or permit to give such
notice to such person. Any action or meeting which shall be taken or held
without notice to any such person with whom communication is unlawful shall
have the same force and effect as if such notice had been duly given. In
the event that the action taken by the corporation is such as to require
the filing of a certificate under any provision of the Delaware General
Corporation Law, the certificate shall state, if such is the fact and if
notice is required, that notice was given to all persons entitled to
receive notice except such persons with whom communication is unlawful.
(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever
notice is required to be given, under any provision of law or the
Certificate of Incorporation or Bylaws of the corporation, to any
stockholder to whom (i) notice of two consecutive annual meetings, and all
notices of meetings or of the taking of action by written consent without a
meeting to such person during the period between such two consecutive
annual meetings, or (ii) all, and at least two, payments (if sent by first
class mail) of dividends or interest on securities during a twelve-month
period, have been mailed addressed to such person at his address as shown
on the records of the corporation and have been returned undeliverable, the
giving of such notice to such person shall not be required. Any action or
meeting which shall be taken or held without notice to such person shall
have the same force and effect as if such notice had been duly given. If
any such person shall deliver to the corporation a written notice setting
forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required
to be given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 45. AMENDMENTS.
Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be
altered or amended or new Bylaws adopted by the affirmative vote of at least
sixty-six and two-thirds
21.
<PAGE>
percent (66-2/3%) of the voting power of all of the then-outstanding shares of
the Voting Stock. The Board of Directors shall also have the power to adopt,
amend, or repeal Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 46. 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 subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee 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 these Bylaws shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.
22.
<PAGE>
AMENDED AND RESTATED Exhibit 3.5
CERTIFICATE OF INCORPORATION
OF
TERAYON COMMUNICATION SYSTEMS, INC.
I.
The name of this corporation is Terayon Communication Systems, Inc.
II.
The address of the registered office of the corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, 19805, County of New Castle
and the name of the registered agent of the corporation in the State of Delaware
at such address is The Prentice-Hall Corporation System, Inc.
III.
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
the State of Delaware.
IV.
This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is Thirty-Five Million
(35,000,000) shares. Thirty Million (30,000,000) shares shall be Common Stock,
each having a par value of one tenth of one cent ($.001). Five Million
(5,000,000) shares shall be Preferred Stock, each having a par value of one
tenth of one cent ($.001).
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
<PAGE>
V.
A. For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
(1) The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
(2) Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, and to any
restrictions or limitations of applicable law, following the closing of the
initial public offering pursuant to an effective registration statement under
the Securities Act of 1933, as amended, covering the offer and sale of Common
Stock to the public (the "Initial Public Offering"), the directors shall be
divided into three classes designated as Class I, Class II and Class III,
respectively. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At the first annual
meeting of stockholders following the closing of the Initial Public Offering,
the term of office of the Class I directors shall expire and Class I directors
shall be elected for a full term of three years. At the second annual meeting of
stockholders following the Closing of the Initial Public Offering, the term of
office of the Class II directors shall expire and Class II directors shall be
elected for a full term of three years. At the third annual meeting of
stockholders following the Closing of the Initial Public Offering, the term of
office of the Class III directors shall expire and Class III directors shall be
elected for a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
(3) Subject to the rights of the holders of any series of Preferred
Stock, the Board of Directors or any individual director may be removed from
office at any time (i) with cause by the affirmative vote of the holders of a
majority of the voting power of all then-outstanding shares of voting stock of
the Corporation, entitled to vote at an election of directors (the "Voting
Stock") or (ii) without cause by the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the voting power of all the
then-outstanding shares of the Voting Stock.
(4) Subject to the rights of the holders of any series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of
2
<PAGE>
directors, shall, unless the Board of Directors determines by resolution that
any such vacancies or newly created directorships shall be filled by the
stockholders, except as otherwise provided by law, be filled only by the
affirmative vote of a majority of the directors then in office, even though less
than a quorum of the Board of Directors, and not by the stockholders. Any
director elected in accordance with the preceding sentence shall hold office for
the remainder of the full term of the director for which the vacancy was created
or occurred and until such director's successor shall have been elected and
qualified.
(5) In the event that Section 2115(a) of the California
Corporations Code is applicable to this corporation, then the following shall
apply:
(a) Every stockholder entitled to vote in any election of
directors of this corporation may cumulate such stockholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the stockholder's shares are
otherwise entitled, or distribute the stockholder's votes on the same principle
among as many candidates as such stockholder thinks fit;
(b) No stockholder, however, may cumulate such stockholder's
votes for one or more candidates unless (i) the names of such candidates have
been properly placed in nomination, in accordance with the Bylaws of the
corporation, prior to the voting, (ii) the stockholder has given advance notice
to the corporation of the intention to cumulative votes pursuant to the Bylaws,
and (iii) the stockholder has given proper notice to the other stockholders at
the meeting, prior to voting, of such stockholder's intention to cumulate such
stockholder's votes; and
(c) If any stockholder has given proper notice, all
stockholders may cumulate their votes for any candidates who have been properly
placed in nomination. The candidates receiving the highest number of votes of
the shares entitled to be voted for them up to the number of directors to be
elected by such shares shall be declared elected.
B. (1) Subject to paragraph (h) of Section 43 of the Bylaws, the
Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote
of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of the Voting Stock. The Board of Directors
shall also have the power to adopt, amend, or repeal Bylaws.
(2) The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
(3) No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws and following the closing of the Initial Public Offering no action
shall be taken by the stockholders by written consent.
(4) Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
3
<PAGE>
VI.
A. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective and
shall not affect the rights under this Article VI in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. 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, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any or other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI,
and VII.
4
<PAGE>
EXHIBIT 4.3
AMENDED AND RESTATED INFORMATION AND
REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INFORMATION AND REGISTRATION RIGHTS AGREEMENT
(the "Agreement") is made as of April 6, 1998, by and among TERAYON
COMMUNICATION SYSTEMS, a California corporation (the "Company"), the individuals
and entities listed on Schedule A hereto (collectively, the "Investors"), and
the persons listed on Schedule B hereto (collectively, the "Founders").
RECITALS
A. Certain of the Investors (the "Prior Investors") were parties to that
certain Amended and Restated Information and Registration Rights Agreement dated
as of December 26, 1997 by and among the Company and the Prior Investors (the
"Prior Agreement"), pursuant to which the Company granted such Prior Investors
certain registration rights, information rights, rights of participation and
certain other rights set forth in the Prior Agreement;
B. In connection with the Company's issuance of Series F Preferred Stock
pursuant to the Series F Preferred Stock Purchase Agreement dated as of the date
hereof by and among the Company and Shaw Communications Inc. ("New Investor"),
the Company and the Prior Investors wish to amend and replace the Prior
Agreement with this Agreement and to include New Investor as a party to this
Agreement; and
C. New Investor desires to become a party to this Agreement.
In consideration of the mutual covenants set forth herein, the parties
hereto agree that the Prior Agreement shall be amended and replaced with this
Agreement and the parties hereto agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following respective meanings:
(a) "COMMISSION" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act (as
hereinafter defined).
(b) "CONVERTIBLE SECURITIES" shall mean securities of the Company
convertible into or exchangeable for Registrable Securities, including the
Series A Preferred Stock, the Series B Preferred Stock, the Series B-1 Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E
Preferred Stock, the Series F Preferred Stock and any other securities of the
Company convertible into or exchangeable for Registrable Securities included in
this Agreement pursuant to Section 12.
(c) "FORM S-3" shall mean Form S-3 issued by the Commission or any
substantially similar form then in effect.
(d) "FOUNDERS' STOCK" shall mean all Common Stock of the Company held
by the Founders as of the date of this Agreement, and any Common Stock issued or
issuable with
1.
<PAGE>
respect to such Common Stock upon any recapitalizations, stock splits, stock
dividends or similar distributions.
(e) "HOLDER" shall mean any holder of outstanding Registrable
Securities which have not been sold to the public, but only if such holder is an
Investor (or, solely with regard to Sections 7, 11 and 14, a Founder) or an
assignee or transferee of registration rights as permitted by Section 17.
(f) "INITIATING HOLDERS" shall mean the Holders who in the aggregate
hold at least:
(i) fifty percent (50%) of the Registrable Securities that
consist of Common Stock of the Company issued or issuable upon conversion of the
Company's Series A Preferred Stock purchased by or issued to the Investors,
(ii) fifty percent (50%) of the Registrable Securities that
consist of Common Stock of the Company issued or issuable upon conversion of the
Company's Series B Preferred Stock purchased by or issued to the Investors,
(iii) fifty percent (50%) of the Registrable Securities that
consist of Common Stock of the Company issued or issuable upon conversion of the
Company's Series B-1 Preferred Stock purchased by or issued to the Investors,
(iv) fifty percent (50%) of the Registrable Securities that
consist of Common Stock of the Company issued or issuable upon conversion of the
Company's Series C Preferred Stock purchased by or issued to the Investors,
(v) fifty percent (50%) of the Registrable Securities that
consist of Common Stock of the Company issued or issuable upon conversion of the
Company's Series D Preferred Stock purchased by or issued to the Investors,
(vi) fifty percent (50%) of the Registrable Securities that
consist of Common Stock of the Company issued or issuable upon conversion of the
Company's Series E Preferred Stock purchased by or issued to the Investors, or
(vii) fifty percent (50%) of the Registrable Securities that
consist of Common Stock of the Company issued or issuable upon conversion of the
Company's Series F Preferred Stock purchased by or issued to the Investors.
in each case including Common Stock issued pursuant to recapitalizations, stock
splits, stock dividends and similar distributions with respect to such shares,
and any securities of the Company granted registration rights pursuant to
Section 12 of this Agreement, and provided that such shares have not previously
been sold to the public.
(g) "MATERIAL ADVERSE EVENT" shall mean an occurrence having a
consequence that either (a) is materially adverse as to the business,
properties, prospects or financial condition of the Company or (b) is reasonably
foreseeable, has a reasonable likelihood of occurring, and, if it
2.
<PAGE>
were to occur, would materially adversely affect the business, properties,
prospects or financial condition of the Company.
(h) The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act ("Registration Statement"), and the
declaration or ordering of the effectiveness of such Registration Statement.
(i) "REGISTRABLE SECURITIES" shall mean all Common Stock of the
Company issued or issuable upon conversion of the Company's Series A Preferred
Stock, Series B Preferred Stock, Series B-1 Preferred Stock, the Series C
Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock and
the Series F Preferred Stock purchased by or issued to the Investors, including
Common Stock issued pursuant to recapitalizations, stock splits, stock dividends
and similar distributions with respect to such shares, and any securities of the
Company granted registration rights pursuant to Section 12 of this Agreement,
provided that such shares have not previously been sold to the public. For
purposes of the registration rights granted to holders of Company securities
pursuant to Section 7 hereof and for purposes of the obligations imposed upon
holders of Registrable Securities under Sections 11 and 14, but not for the
definition of Initiating Holders or for purposes of Section 18.6, "Registrable
Securities" shall include Founders' Stock.
(j) "REGISTRATION EXPENSES" shall mean all expenses incurred in
complying with Sections 6 or 7 of this Agreement, including, without limitation,
all federal and state registration, qualification and filing fees, printing
expenses, fees and disbursements of counsel for the Company, reasonable fees and
disbursements not to exceed ten thousand dollars ($10,000) of a single special
counsel for the Holders, blue sky fees and expenses, and the expense of any
special audits or other accounting-related fees incident to or required by any
such registration, other than Selling Expenses.
(k) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
or any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
(l) "SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities pursuant to
this Agreement, as well as fees and disbursements of legal counsel for the
selling Holders, except as to legal fees and expenses otherwise provided for
pursuant to Section 1(j) of this Agreement.
2. INFORMATION RIGHTS.
2.1 FINANCIAL STATEMENTS. The Company shall deliver to the Investors
as soon as practicable after the end of each fiscal year of the Company, and in
any event within 90 days thereafter, an audited consolidated balance sheet of
the Company as of the end of such year and audited consolidated statements of
income, stockholders' equity and cash flows for such year, which year-end
financial reports shall be in reasonable detail and shall be prepared in
accordance with generally accepted accounting principles and be accompanied by
the opinion of independent public accountants of recognized standing selected by
the Board of Directors of the Company.
3.
<PAGE>
2.2 ADDITIONAL INFORMATION. As long as an Investor holds not less than
the lesser of (i) 100% of the Convertible Securities and/or Registrable
Securities originally acquired by such Investor or (ii) 120,000 shares of
Convertible Securities and/or Registrable Securities, as adjusted for
recapitalizations, stock splits, stock dividends and the like, the Company will
deliver to such Investor as soon as practicable after the end of each fiscal
quarter, and in any event within 30 days thereafter, (i) consolidated balance
sheets of the Company and its subsidiaries, if any, as of the end of such
quarter; (ii) consolidated statements of income and cash flow for such quarter
and for the current fiscal year to date, including a comparison between the
actual quarterly financial statements and the projected figures for such
quarterly periods; and (iii) a statement of stockholders' equity as of the end
of such fiscal quarter and a statement showing the number of shares of each
class and series of capital stock and securities convertible into or exercisable
for shares of capital stock outstanding at the end of the period, the number of
shares of Common Stock issuable upon conversion or exercise of any outstanding
securities convertible or exercisable for shares of Common Stock and the
exchange ratio or exercise price applicable thereto, all in sufficient detail as
to permit the Investor to calculate its percentage equity ownership in the
Company.
3. INSPECTION. The Company shall permit each Investor holding the number
of shares set forth in Section 2.2 hereof, at such Investor's expense, to visit
and inspect the Company's properties, to examine its books of account and
records and to discuss the Company's affairs, finances and accounts with its
officers, all at such reasonable times as may be requested by each such
Investor; provided, however, that the Company shall not be obligated pursuant to
this Section 3 to provide any information which it reasonably considers to be a
trade secret or confidential information, unless the Investor requesting such
information has executed a form of confidentiality agreement acceptable to the
Company.
4. RIGHT TO MAINTAIN INTEREST. The Company hereby grants to each
Investor the right to purchase its Pro Rata Amount (as defined below) of any New
Securities (as defined in this Section 4) that the Company may, from time to
time, propose to sell and issue. The Company may, at its election, sell such
Investor its Pro Rata Amount of New Securities at the initial closing of the
sale of New Securities or at a subsequent closing, which shall take place within
90 days of the initial closing. An Investor's Pro Rata Amount shall be the
ratio of (i) the number of issued and outstanding shares (on an as-converted
basis) of Convertible Securities and/or Registrable Securities held by such
Investor immediately prior to the initial closing of the sale of such New
Securities to (ii) the total number of shares of Common Stock of the Company
outstanding (on an as-converted basis) immediately prior to the initial closing
of the sale of such New Securities, including all outstanding securities
convertible into, exchangeable for or exercisable for Common Stock on an as-
converted or exercised basis (including but not limited to the Convertible
Securities and outstanding options exercisable for Common Stock). This right to
maintain interest shall be subject to the following provisions:
(a) "NEW SECURITIES" shall mean any capital stock of the Company,
whether or not now authorized, any rights, options or warrants to purchase
capital stock, and securities of any type whatsoever that are, or may become,
convertible into capital stock; provided that the term "New Securities" does not
include (i) securities issuable upon exercise or conversion of securities
outstanding as of the date of this Agreement; (ii) the Series F Preferred Stock
(or the Common Stock issuable upon conversion thereof); (iii) securities issued
pursuant to an underwritten public offering pursuant to an effective
Registration Statement; (iv) securities issued pursuant to the
4.
<PAGE>
Company's acquisition of another corporation by merger, purchase of
substantially all assets or other reorganization; (v) securities issued to
employees, officers, directors or consultants of the Company pursuant to plans
and arrangements approved by the Board of Directors; (vi) securities issued in
connection with equipment lease financing arrangements, credit agreements or
other commercial transactions approved by the Board of Directors; (vii)
securities issued pursuant to a corporate strategic partner transaction
involving the license of technology, establishment of a joint venture, research
and development agreement, product development or marketing agreement, or other
similar arrangement; and (viii) securities issued in connection with any stock
split, stock dividend or recapitalization of the Company.
(b) In the event the Company issues New Securities, it shall give each
Investor written notice before such issuance or within ten (10) days thereafter,
describing the type of New Securities, the price and number of shares and the
general terms upon which the Company proposes to issue or issued the same. Each
Investor shall have ten (10) business days from the date of receipt of any such
notice to agree to purchase up to the amount of New Securities equal to the
Investor's Pro Rata Amount of such New Securities for the price and upon the
general terms specified in the notice by giving written notice to the Company at
the initial closing of the sale of New Securities or, at the Company's election,
at a subsequent closing within ninety (90) days of the initial closing.
(c) In the event an Investor fails to exercise in full the right to
maintain its interest within said ten (10) day period as set forth in Section
4(b) above, the Company shall have ninety (90) days thereafter to sell
additional amounts of New Securities respecting which the Investor's option was
not exercised, at the price and upon the terms specified in the Company's
notice. The Company shall not issue or sell any additional amounts of New
Securities after the expiration of such 90-day period without first offering
such securities to the Investors in the manner provided above.
(d) The right of participation set forth in this Section 4, including
the notice provisions relating thereto, may be waived, as to the holders of each
series of Preferred Stock, by the holders of more than fifty percent (50%) of
the then-outstanding shares of such series of Preferred Stock.
5. TERMINATION OF COVENANTS. Except as otherwise provided herein, the
covenants of the Company set forth in Sections 2, 3 and 4 shall be terminated
and be of no further force or effect upon the closing of the Company's initial
public offering of its Common Stock at an aggregate offering price to the public
of $10,000,000 or more (prior to deduction of underwriter commissions and
offering expenses) pursuant to a Registration Statement filed by the Company
under the Securities Act ("IPO").
6. DEMAND REGISTRATION.
6.1 REQUEST FOR REGISTRATION ON FORM OTHER THAN FORM S-3. Subject to
the terms of this Agreement, in the event that the Company shall receive from
the Initiating Holders at any time six (6) months after the effective date of
the IPO, a written request that the Company effect any Registration with respect
to all or a part of the Registrable Securities on a Form other than Form S-3 for
an offering covering the registration of Registrable Securities having a
reasonably anticipated aggregate offering price to the public in excess of five
million dollars ($5,000,000), the
5.
<PAGE>
Company shall (i) promptly give written notice of the proposed Registration to
all other Holders and (ii) as soon as practicable, and in any event within
ninety (90) days of such request, use its best efforts to effect registration of
the Registrable Securities specified in such request, together with any
Registrable Securities of any Holder joining in such request as are specified in
a written request given within twenty (20) days after written notice from the
Company. The Company shall not be obligated to take any action to effect any
such registration pursuant to this Section 6.1 within ninety (90) days of the
effective date of a registration initiated by the Company. The Company shall be
obligated to take action to effect only one such registration requested by the
Initiating Holders described in Section 1(f)(i), one such registration requested
by the Initiating Holders described in Section 1(f)(ii), one such registration
requested by the Initiating Holders described in Section 1(f)(iii), one such
registration requested by the Initiating Holders described in Section 1(f)(iv),
one such registration requested by the Initiating Holders described in Section
1(f)(v), one such registration requested by the Initiating Holders described in
Section 1(f)(vi) and one such registration requested by the Initiating Holders
described in Section 1(f)(vii) where such registrations have been declared
effective and, if underwritten, have closed.
6.2 RIGHT OF DEFERRAL OF REGISTRATION ON FORM OTHER THAN FORM S-3.
If the Company shall furnish to all such Holders who joined in the request
pursuant to Section 6.1 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 for any registration
to be effected as requested under Section 6.1, the Company shall have the right
to defer the filing of a Registration Statement with respect to such offering
for a period of not more than six (6) months from delivery of the request of the
Initiating Holders; provided, however, that the Company may not utilize this
right more than once in any 12-month period.
6.3 REQUEST FOR REGISTRATION ON FORM S-3. Subject to the terms of
this Agreement, in the event that the Company receives from Holders a written
request that the Company effect any registration on Form S-3 (or any successor
form to Form S-3, regardless of its designation) at a time when the Company is
eligible to register securities on Form S-3 (or any successor form to Form S-3,
regardless of its designation) for an offering of Registrable Securities the
reasonably anticipated aggregate offering price to the public of which would
exceed $1,000,000 the Company will promptly give written notice of the proposed
registration to all the Holders and will, as soon as practicable, use its best
efforts to effect registration of the Registrable Securities specified in such
request, together with all or such portion of the Registrable Securities of any
Holder joining in such request as are specified in a written request delivered
to the Company within thirty (30) days after written notice from the Company of
the proposed registration.
6.4 REGISTRATION OF OTHER SECURITIES IN DEMAND REGISTRATION. Any
Registration Statement filed pursuant to the request of the Initiating Holders
under this Section 6 may, subject to the provisions of Section 6.5, include
securities of the Company other than Registrable Securities.
6.5 UNDERWRITING IN DEMAND REGISTRATION.
6.5.1 NOTICE OF UNDERWRITING. If the Initiating Holders intend
to distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their request made
pursuant to this Section 6, and the Company
6.
<PAGE>
shall include such information in the written notice referred to in Section 6.1
or 6.3. The right of any Holder to registration pursuant to Section 6.1 shall be
conditioned upon such Holder's agreement to participate in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting
(unless otherwise mutually agreed by a majority in interest of the Initiating
Holders and such Holder with respect to such participation and inclusion).
6.5.2 INCLUSION OF OTHER HOLDERS IN DEMAND REGISTRATION. If the
Company, officers or directors of the Company holding Common Stock other than
Registrable Securities or holders of securities other than Registrable
Securities, request inclusion in such registration, the Initiating Holders, to
the extent they deem advisable and consistent with the goals of such
registration and subject to the allocation provisions of Section 6.5.4 below,
shall, on behalf of all Holders, offer to any or all of the Company, such
officers or directors and such holders of securities other than Registrable
Securities, that such securities other than Registrable Securities be included
in the underwriting and may condition such offer on the acceptance by such
persons of the terms of this Section 6.
6.5.3 SELECTION OF UNDERWRITER IN DEMAND REGISTRATION. The
Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into and perform its obligations
under an underwriting agreement in usual and customary form with the
representative of the underwriter or underwriters (the "Underwriter's
Representative") selected for such underwriting by the Holders of a majority of
the Registrable Securities being registered by the Initiating Holders and
consented to by the Company (which consent shall not be unreasonably withheld).
6.5.4 MARKETING LIMITATION IN DEMAND REGISTRATION. In the event
the Underwriter's Representative advises the Initiating Holders in writing that
market factors (including, without limitation, the aggregate number of shares of
Common Stock requested to be registered, the general condition of the market,
and the status of the persons proposing to sell securities pursuant to the
registration) require a limitation of the number of shares to be underwritten,
then the Initiating Holders shall so advise all Holders, and the number of
shares of Registrable Securities that may be included in the registration and
underwriting shall be allocated among all Holders in proportion, as nearly as
practicable, to the number of shares held by such Holder at the time of filing
the Registration Statement; provided, however, that the number of shares of
Registrable Securities to be included in such underwriting shall not be reduced
unless all other securities (including those proposed to be included by the
Company) are first entirely excluded from the underwriting. No Registrable
Securities or other securities excluded from the underwriting by reason of this
Section 6.5.4 shall be included in such Registration Statement.
6.5.5 RIGHT OF WITHDRAWAL IN DEMAND REGISTRATION. If any Holder
of Registrable Securities, or a holder of other securities entitled (upon
request) to be included in such registration, disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the underwriter and the Initiating Holders delivered at least seven
(7) days prior to the effective date of the Registration Statement. The
securities so withdrawn shall also be withdrawn from the Registration Statement.
6.6 BLUE SKY IN DEMAND REGISTRATION. In the event of any
registration pursuant to this Section 6, the Company will exercise its best
efforts to register and qualify the
7.
<PAGE>
securities covered by the Registration Statement under such other securities or
Blue Sky laws of such jurisdictions as the Holders shall reasonably request and
as shall be reasonably appropriate for the distribution of such securities;
provided, however, that the Company shall not be required to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
7. PIGGYBACK REGISTRATION.
7.1 NOTICE OF PIGGYBACK REGISTRATION AND INCLUSION OF REGISTRABLE
SECURITIES. Subject to the terms of this Agreement, in the event the Company
decides to register any of its Common Stock (either for its own account or the
account of a security holder or holders exercising their respective demand
registration rights) on a form that would be suitable for a registration
involving Registrable Securities, the Company will: (i) promptly give each
Holder written notice thereof (which shall include a list of the jurisdictions
in which the Company intends to attempt to qualify such securities under the
applicable Blue Sky or other state securities laws) 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 delivered to the Company by any Holder
within twenty (20) days after delivery of such written notice from the Company.
7.2 UNDERWRITING IN PIGGYBACK REGISTRATION.
7.2.1 NOTICE OF UNDERWRITING IN PIGGYBACK REGISTRATION. If the
registration of which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise the Holders as a
part of the written notice given pursuant to Section 7.1. In such event the
right of any Holder to registration shall be conditioned upon such underwriting
and the inclusion of such Holder's Registrable Securities in such underwriting
to the extent provided in this Section 7. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company and
the other holders distributing their securities through such underwriting) enter
into an underwriting agreement with the Underwriter's Representative for such
offering. The Holders shall have no right to participate in the selection of
the underwriters for an offering pursuant to this Section 7.
7.2.2 MARKETING LIMITATION IN PIGGYBACK REGISTRATION. In the
event the Underwriter's Representative advises the Holders seeking registration
of Registrable Securities pursuant to this Section 7 in writing that market
factors (including, without limitation, the aggregate number of shares of Common
Stock requested to be registered, the general condition of the market, and the
status of the persons proposing to sell securities pursuant to the registration)
require a limitation of the number of shares to be underwritten, the
Underwriter's Representative may:
(a) in the case of the Company's initial public offering,
exclude some or all Registrable Securities from such registration and
underwriting; and
(b) in the case of any registered public offering
subsequent to the Company's initial public offering, limit the number of shares
of Registrable Securities to be included in such registration and underwriting
to not less than twenty-five percent (25%) of the total amount of securities
included in such registration.
8.
<PAGE>
In such event, the Underwriter's Representative shall so advise all Holders and
the number of shares of Registrable Securities that may be included in the
registration and underwriting (if any) shall be allocated among all Holders of
Registrable Securities that desire to participate in the registration in
proportion, as nearly as practicable, to the number of Registrable Securities
held by such Holder at the time of filing of the Registration Statement. The
number of shares of Registrable Securities to be included in such underwriting
shall not be reduced unless all other securities (other than those to be sold by
the Company) are first entirely excluded from the underwriting. No Registrable
Securities or other securities excluded from the underwriting by reason of this
Section 7.2.2 shall be included in such Registration Statement.
7.2.3 WITHDRAWAL IN PIGGYBACK REGISTRATION. If any Holder, or a
holder of other securities entitled (upon request) to be included in such
registration, disapproves of the terms of any such underwriting, such Holder may
elect to withdraw therefrom by written notice to the Company and the underwriter
delivered at least seven (7) days prior to the effective date of the
Registration Statement. Any Registrable Securities or other securities excluded
or withdrawn from such underwriting shall be withdrawn from such registration.
7.3 BLUE SKY IN PIGGYBACK REGISTRATION. In the event of any
registration of Registrable Securities pursuant to Section 7, the Company will
exercise its best efforts to register and qualify the securities covered by the
Registration Statement under such other securities or Blue Sky laws of such
jurisdictions as the Holders shall reasonably request and as shall be reasonably
appropriate for the distribution of such securities; provided, however, that the
Company shall not be required to qualify to do business or to file a general
consent to service of process in any such states or jurisdictions.
8. EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with seven registrations pursuant to Section 6.1, up to four
registrations on Form S-3 pursuant to Section 6.3, and all registrations
pursuant to Section 7 shall be borne by the Company. All Registration Expenses
incurred in connection with any other registration, qualification or compliance
shall be apportioned among the Holders and other holders of the securities so
registered on the basis of the number of shares so registered. Notwithstanding
the above, the Company shall not be required to pay for any expenses of Holders
in connection with any registration proceeding begun pursuant to Section 6.1 if
the registration request is subsequently withdrawn at the request of the Holders
of a majority of the Registrable Securities to be registered (which Holders
shall bear such expenses), unless the Holders of a majority of the Registrable
Securities of the Initiating Holders agree to forfeit the right of such
Initiating Holders to one demand registration pursuant to Section 6.1; provided
further, however, that (i) if at the time of such withdrawal, the Holders have
learned of a Material Adverse Event with respect to the condition, business or
prospects of the Company not known to the Holders at the time of their request
or (ii) such withdrawal is made after a deferral of such registration by the
Company pursuant to Section 6.2, then the Holders shall not be required to pay
any of such expenses and shall retain their rights pursuant to Section 6.1. All
Selling Expenses shall be borne by the holders of the securities registered pro
rata on the basis of the number of shares registered.
9. REGISTRATION PROCEDURES. The Company will keep each Holder whose
Registrable Securities are included in any registration pursuant to this
Agreement advised as to the initiation and completion of such registration. At
its expense the Company will: (a) use its best efforts to keep
9.
<PAGE>
such registration effective for a period of 180 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 (including preliminary prospectuses) and other documents as a
Holder from time to time may reasonably request; (c) prepare and file with the
SEC such amendments and supplements to such Registration Statement and the
prospectus used in connection with such Registration Statement as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such Registration Statement; and
(d) 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,
includes 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.
10. INFORMATION FURNISHED BY HOLDER. It shall be a condition precedent of
the Company's obligations under this Agreement that each Holder of Registrable
Securities included in any registration furnish to the Company such information
regarding such Holder and the distribution proposed by such Holder or Holders as
the Company may reasonably request.
11. INDEMNIFICATION.
11.1 COMPANY'S INDEMNIFICATION OF HOLDERS. To the extent permitted
by law, the Company will indemnify each Holder, each of its officers, directors
and constituent partners, legal counsel for the Holders, and each person
controlling such Holder, with respect to which registration, qualification or
compliance of Registrable Securities has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls any
underwriter against all claims, losses, damages or liabilities (or actions in
respect thereof) to the extent such claims, losses, damages or liabilities arise
out of or are based upon any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus or other document (including any
related Registration Statement) incident to any such registration, qualification
or compliance, or are based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any state securities law, or any rule or regulation promulgated under
the Securities Act, the Exchange Act or any state securities law, applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance; and the
Company will reimburse each such Holder, each of its officers, directors and
constituent partners, and legal counsel, each such underwriter, and each person
who controls any such Holder or underwriter, for any legal and any other
expenses reasonably incurred, as incurred, in connection with investigating or
defending any such claim, loss, damage, liability or action; provided, however,
that the indemnity contained in this Section 11.1 shall not apply to amounts
paid in settlement of any such claim, loss, damage, liability or action if
settlement is effected without the consent of the Company (which consent shall
not unreasonably be withheld); and provided, further, 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 upon any untrue statement or
omission based upon written information furnished to the Company by such Holder,
its officers, directors, constituent partners, or legal counsel,
10.
<PAGE>
underwriter, or controlling person and stated to be for use in connection with
the offering of securities of the Company.
11.2 HOLDER'S INDEMNIFICATION OF COMPANY. To the extent permitted by
law, 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 pursuant to this Agreement, indemnify the Company,
each of its directors and officers, each legal counsel and independent
accountant of the Company, 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 the Securities Act, and each other
such Holder, each of its officers, directors and constituent partners and each
person controlling such other Holder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based upon any
untrue statement (or alleged untrue statement) of a material fact contained in
any such Registration Statement, prospectus, offering circular or other document
(including any related Registration Statement) incident to any such
registration, qualification or compliance, 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, or any violation by such Holder of
the Securities Act, the Exchange Act or any state securities law, or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities law, applicable to such Holder and relating to action or inaction
required of such Holder in connection with any such registration, qualification
or compliance, and will reimburse the Company, such Holders, such directors,
officers, partners, persons, law and accounting firms, underwriters or control
persons for any legal and any other expenses reasonably incurred, as 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 such Holder and stated to be specifically for use in
connection with the offering of securities of the Company; provided, however,
that each Holder's liability under this Section 11.2 shall not exceed such
Holder's proceeds from the offering of securities made in connection with such
Registration; and provided, further, that the indemnity contained in this
Section 11.2 shall not apply to amounts paid in settlement of any such claim,
loss, damage, liability or action if settlement is effected without the consent
of the Holder (which consent shall not unreasonably be withheld).
11.3 INDEMNIFICATION PROCEDURE. Promptly after receipt by an
indemnified party under this Section 11 of notice of the commencement of any
action, such indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party under this Section 11, notify the indemnifying
party in writing of the commencement thereof and generally summarize such
action. The indemnifying party shall have the right to participate in and to
assume the defense of such claim, jointly with any other indemnifying party
similarly noticed; provided, however, that the indemnifying party shall be
entitled to select counsel for the defense of such claim with the approval of
any parties entitled to indemnification, which approval shall not be
unreasonably withheld; provided further, however, that if either party
reasonably determines that there may be a conflict between the position of the
Company and the Investors in conducting the defense of such action, suit or
proceeding by reason of recognized claims for indemnity under this Section 11,
then counsel for such party shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interest of such party. The failure to notify an indemnifying
11.
<PAGE>
party promptly of the commencement of any such action, if prejudicial to the
ability of the indemnifying party to defend such action, shall relieve such
indemnifying party, to the extent so prejudiced, of any liability to the
indemnified party under this Section 11, but the omission so to notify the
indemnifying party will not relieve such party of any liability that such party
may have to any indemnified party otherwise other than under this Section 11.
12. LIMITATIONS ON REGISTRATION RIGHTS GRANTED TO OTHER SECURITIES. From
and after the date of this Agreement, the Company shall not enter into any
agreement with any holder or prospective holder of any securities of the Company
providing for the granting to such holder of any registration rights unless such
rights are subordinate to the registration rights set forth herein, except that,
with the consent of the Holders of fifty percent (50%) of the aggregate of the
Convertible Securities and Registrable Securities then outstanding, additional
holders may be added as parties to this Agreement with regard to any or all
securities of the Company held by them. Any such additional parties shall
execute a counterpart of this Agreement, and upon execution by such additional
parties and by the Company, shall be considered an Investor for all purposes of
this Agreement. The additional parties and the additional Registrable
Securities shall be identified in an amendment to Schedule A hereto.
13. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Investors the benefits of Rule 144 and any other rule or
regulation of the Commission that may at any time permit an Investor to sell
securities of the Company to the public without registration or pursuant to a
Registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
defined in Rule 144, at all times after ninety (90) days after the effective
date of the first Registration Statement filed by the Company for the offering
of its securities to the general public;
(b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to any Investor, so long as such Investor owns any
Convertible Securities or Registrable Securities, forthwith upon request (i) a
written statement by the Company that it has complied with the reporting
requirements of Rule 144 (at any time after ninety (90) days after the
effective date of the first registration statement filed by the Company), the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements), or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company and (iii)
such other information as may be reasonably requested in availing any Investor
of any rule or regulation of the Commission which permits the selling of any
such securities without registration.
14. MARKET STAND-OFF. Each Holder hereby agrees that, if so requested by
the Company and the Underwriter's Representative (if any), such Holder shall not
sell or otherwise transfer (other than to donees who agree to be similarly
bound) any Registrable Securities or other securities of the Company during the
one hundred eighty (180) day period following the effective date of a
Registration Statement of the Company filed under the Securities Act; provided
that such restriction shall only apply to the first two Registration Statements
of the Company to become effective which
12.
<PAGE>
include securities to be sold on behalf of the Company to the public in an
underwritten offering; and provided, further, that all officers and directors of
the Company and all other persons with registration rights (whether or not
pursuant to this Agreement) enter into similar agreements.
15. CONVERSION OF PREFERRED STOCK. The registration rights of the Holders
of the Registrable Securities set forth in this Agreement are conditioned upon
the conversion of the Registrable Securities with respect to which registration
is sought into Common Stock prior to the closing date of the public offering
effected pursuant to such Registration Statement.
16. TERMINATION OF REGISTRATION RIGHTS. The right to cause the Company to
register securities granted by the Company to the Investors under the Agreement
shall terminate as to each Investor on the earlier of (a) seven (7) years after
the date of the closing of the Company's initial public offering of its
securities or (b) such time as such Investor owns less than one percent (1%) of
the outstanding stock of the Company and is free to sell all of such stock to
the public pursuant to Rule 144 (including Rule 144(k)).
17. TRANSFER OF RIGHTS. The rights to information under Sections 2 and 3,
the right of first refusal set forth in Section 4 and the registration rights of
the Investors set forth in Sections 6, 7, 8 and 9 may be assigned by any Holder
to a transferee or assignee of any Convertible Securities or Registrable
Securities not sold to the public acquiring at least the lesser of (i) 100% of
the Convertible Securities and/or Registrable Securities originally acquired by
such Holder or (ii) 120,000 shares of such Holder's Convertible Securities or
Registrable Securities (equitably adjusted for any recapitalizations, stock
splits, combinations and the like) or acquiring all of the Convertible
Securities and Registrable Securities held by such Holder if transferred to a
single entity; provided, however, that (i) the Company must receive written
notice prior to the time of said transfer, stating the name and address of said
transferee or assignee and identifying the securities with respect to which such
information and registration rights are being assigned and (ii) the transferee
or assignee of such rights must not be a person deemed by the Board of Directors
of the Company to be a competitor or potential competitor of the Company.
Notwithstanding the limitation set forth in the foregoing sentence respecting
the minimum number of shares that must be transferred, any Holder may transfer
such Holder's Registration rights to any subsidiary, parent, affiliate, general
partner or limited partner of such Holder (or may transfer to their heirs in the
case of individuals) without restriction as to the number or percentage of
shares acquired by any such entity (or heirs).
18. MISCELLANEOUS.
18.1 ENTIRE AGREEMENT; SUCCESSORS AND ASSIGNS. This Agreement
constitutes the entire contract between the Company, the Investors and the
Founders relative to the subject matter hereof. Any previous agreement between
the Company and the Investors or the Founders concerning information rights,
rights of first refusal or registration rights is superseded by this Agreement.
Subject to the exceptions specifically set forth in this Agreement, the terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the respective executors, administrators, heirs, successors and assigns of
the parties.
18.2 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts entered into and wholly to be performed within the State of California
by California residents.
13.
<PAGE>
18.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
18.4 HEADINGS. The headings of the Sections of this Agreement are
for convenience and shall not by themselves determine the interpretation of this
Agreement.
18.5 NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be conclusively deemed effectively given upon
personal delivery, or five (5) days after deposit in the United States mail, by
first class mail, postage prepaid, or upon sending if sent by commercial
overnight delivery service addressed (i) if to the Company, as set forth below
the Company's name on the signature page of this Agreement and (ii) if to an
Investor or a Founder, at such Investor's or Founder's address as set forth in
the Company's shareholder records, or at such other address as the Company or
such Investor or Founder may designate by ten (10) days advance written notice
to the Investors and Founders or to the Company, respectively.
18.6 AMENDMENT OF AGREEMENT. Except as otherwise specifically
provided herein, any provision of this Agreement may be amended and any
obligations of the Company and the rights of the Holders under this Agreement
may be waived by a written instrument signed by the Company and by persons
holding more than fifty (50%) of the then-outstanding Convertible Securities and
Registrable Securities (calculated on an as-converted basis).
18.7 AGGREGATION OF STOCK. All Convertible Securities and
Registrable Securities held or acquired by affiliated entities or persons shall
be aggregated together for the purpose of determining the availability of any
rights under this Agreement.
18.8 SEVERABILITY. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, in order to achieve the intent of the parties to the extent possible.
In any event, all other provisions of this Agreement shall be deemed valid and
enforceable to the full extent possible.
14.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Information and Registration Rights Agreement as of the day and year
first above written.
COMPANY:
TERAYON COMMUNICATION SYSTEMS
By:____________________________________________
Zaki Rakib
Chief Executive Officer
Address: 2952 Bunker Hill Lane
Santa Clara, CA 95054
FOUNDERS:
____________________________________ ________________________________
SHLOMO RAKIB ZAKI RAKIB
INVESTORS:
____________________________________
Signature
Name:_______________________________
By:_________________________________
Its:________________________________
AMENDED AND RESTATED
INFORMATION AND REGISTRATION RIGHTS
<PAGE>
SCHEDULE A
INVESTORS
Attractor LP
Attractor Dearborn Partners LP
Attractor Institutional LP, Inc.
BancAmerica Robertson Stephens
Bayview Investors, Ltd.
CDC - Valeurs de Croissance
Cisco Systems, Inc.
Clariden Bank
GC&H Investments
Globo Radio and Television Network International Co.
Kistler Associates
Korea Technology Banking Corporation
Gary M. Lauder
Lauder Partners
Closefire Ltd.
Sequoia Capital VI
Sequoia 1995
Sequoia 1997
Sequoia Technology Partners VI
Sequoia XXIV
Shaw Communications Inc.
Sierra Ventures V, L.P.
SQP 1997
Stanford University
Sumitomo Corporation
Tower Financial Ltd.
Walden-Israel Ventures, L.P.
Walden-SBIC, L.P.
Walden Technology Ventures II, L.P.
WPG Enterprise Fund II, L.P.
Weiss, Peck & Greer Venture Associates III, L.P.
AMENDED AND RESTATED
INFORMATION AND REGISTRATION RIGHTS
<PAGE>
SCHEDULE B
FOUNDERS
Shlomo Rakib
Zaki Rakib
AMENDED AND RESTATED
INFORMATION AND REGISTRATION RIGHTS
<PAGE>
EXHIBIT 10.1
INDEMNITY AGREEMENT
THIS AGREEMENT is made and entered into this ____ day of _________, 1998 by
and between TERAYON COMMUNICATION SYSTEMS, INC. a Delaware corporation (the
"Corporation"), and ____________ ("Agent").
RECITALS
WHEREAS, Agent performs a valuable service to the Corporation in his/her
capacity as _______________ of the Corporation;
WHEREAS, the stockholders of the Corporation have adopted bylaws (the
"Bylaws") providing for the indemnification of the directors, officers,
employees and other agents of the Corporation, including persons serving at the
request of the Corporation in such capacities with other corporations or
enterprises, as authorized by the Delaware General Corporation Law, as amended
(the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature, permit
contracts between the Corporation and its agents, officers, employees and other
agents with respect to indemnification of such persons; and
WHEREAS, in order to induce Agent to continue to serve as ______________ of
the Corporation, the Corporation has determined and agreed to enter into this
Agreement with Agent;
NOW, THEREFORE, in consideration of Agent's continued service as
_______________ after the date hereof, the parties hereto agree as follows:
AGREEMENT
1. SERVICES TO THE CORPORATION. Agent will serve, at the will of the
Corporation or under separate contract, if any such contract exists, as
______________ of the Corporation or as a director, officer or other fiduciary
of an affiliate of the Corporation (including any employee benefit plan of the
Corporation) faithfully and to the best of his ability so long as he is duly
elected and qualified in accordance with the provisions of the Bylaws or other
applicable charter documents of the Corporation or such affiliate; provided,
however, that Agent may at any time and for any reason resign from such position
(subject to any contractual obligation that Agent may have assumed apart from
this Agreement) and that the Corporation or any affiliate shall have no
obligation under this Agreement to continue Agent in any such position.
2. INDEMNITY OF AGENT. The Corporation hereby agrees to hold harmless and
indemnify Agent to the fullest extent authorized or permitted by the provisions
of the Bylaws and the Code, as the same may be amended from time to time (but,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than the Bylaws or the Code permitted prior to
adoption of such amendment).
1.
<PAGE>
3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the
indemnification otherwise provided for herein, and subject only to the
exclusions set forth in Section 4 hereof, the Corporation hereby further agrees
to hold harmless and indemnify Agent:
(a) against any and all expenses (including attorneys' fees), witness
fees, damages, judgments, fines and amounts paid in settlement and any
other amounts that Agent becomes legally obligated to pay because of any
claim or claims made against or by him in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
arbitrational, administrative or investigative (including an action by or
in the right of the Corporation) to which Agent is, was or at any time
becomes a party, or is threatened to be made a party, by reason of the fact
that Agent is, was or at any time becomes a director, officer, employee or
other agent of Corporation, or is or was serving or at any time serves at
the request of the Corporation as a director, officer, employee or other
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise; and
(b) otherwise to the fullest extent as may be provided to Agent by the
Corporation under the non-exclusivity provisions of the Code and Section 43
of the Bylaws.
4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section 3
hereof shall be paid by the Corporation:
(a) on account of any claim against Agent for an accounting of profits
made from the purchase or sale by Agent of securities of the Corporation
pursuant to the provisions of Section 16(b) of the Securities Exchange Act
of 1934 and amendments thereto or similar provisions of any federal, state
or local statutory law;
(b) on account of Agent's conduct that was knowingly fraudulent or
deliberately dishonest or that constituted willful misconduct;
(c) on account of Agent's conduct that constituted a breach of Agent's
duty of loyalty to the Corporation or resulted in any personal profit or
advantage to which Agent was not legally entitled;
(d) for which payment is actually made to Agent under a valid and
collectible insurance policy or under a valid and enforceable indemnity
clause, bylaw or agreement, except in respect of any excess beyond payment
under such insurance, clause, bylaw or agreement;
(e) if indemnification is not lawful (and, in this respect, both the
Corporation and Agent have been advised that the Securities and Exchange
Commission believes that indemnification for liabilities arising under the
federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication); or
(f) in connection with any proceeding (or part thereof) initiated by
Agent, or any proceeding by Agent against the Corporation or its directors,
officers, employees or other agents, unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by
the Board of Directors of the Corporation, (iii) such indemnification is
provided by the Corporation, in its sole discretion, pursuant to the powers
2.
<PAGE>
vested in the Corporation under the Code, or (iv) the proceeding is
initiated pursuant to Section 9 hereof.
5. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Agent is a
director, officer, employee or other agent of the Corporation (or is or was
serving at the request of the Corporation as a director, officer, employee or
other agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise) and shall continue thereafter so long as Agent
shall be subject to any possible claim or threatened, pending or completed
action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative, by reason of the fact that Agent was serving in
the capacity referred to herein.
6. PARTIAL INDEMNIFICATION. Agent shall be entitled under this Agreement
to indemnification by the Corporation for a portion of the expenses (including
attorneys' fees), witness fees, damages, judgments, fines and amounts paid in
settlement and any other amounts that Agent becomes legally obligated to pay in
connection with any action, suit or proceeding referred to in Section 3 hereof
even if not entitled hereunder to indemnification for the total amount thereof,
and the Corporation shall indemnify Agent for the portion thereof to which Agent
is entitled.
7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days
after receipt by Agent of notice of the commencement of any action, suit or
proceeding, Agent will, if a claim in respect thereof is to be made against the
Corporation under this Agreement, notify the Corporation of the commencement
thereof; but the omission so to notify the Corporation will not relieve it from
any liability which it may have to Agent otherwise than under this Agreement.
With respect to any such action, suit or proceeding as to which Agent notifies
the Corporation of the commencement thereof:
(a) the Corporation will be entitled to participate therein at its own
expense;
(b) except as otherwise provided below, the Corporation may, at its
option and jointly with any other indemnifying party similarly notified and
electing to assume such defense, assume the defense thereof, with counsel
reasonably satisfactory to Agent. After notice from the Corporation to
Agent of its election to assume the defense thereof, the Corporation will
not be liable to Agent under this Agreement for any legal or other expenses
subsequently incurred by Agent in connection with the defense thereof
except for reasonable costs of investigation or otherwise as provided
below. Agent shall have the right to employ separate counsel in such
action, suit or proceeding but the fees and expenses of such counsel
incurred after notice from the Corporation of its assumption of the defense
thereof shall be at the expense of Agent unless (i) the employment of
counsel by Agent has been authorized by the Corporation, (ii) Agent shall
have reasonably concluded that there may be a conflict of interest between
the Corporation and Agent in the conduct of the defense of such action or
(iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of
Agent's separate counsel shall be at the expense of the Corporation. The
Corporation shall not be entitled to assume the defense of any action, suit
or proceeding brought by or on behalf of the Corporation or as to which
Agent shall have made the conclusion provided for in clause (ii) above; and
3.
<PAGE>
(c) the Corporation shall not be liable to indemnify Agent under this
Agreement for any amounts paid in settlement of any action or claim
effected without its written consent, which shall not be unreasonably
withheld. The Corporation shall be permitted to settle any action except
that it shall not settle any action or claim in any manner which would
impose any penalty or limitation on Agent without Agent's written consent,
which may be given or withheld in Agent's sole discretion.
8. EXPENSES. The Corporation shall advance, prior to the final disposition
of any proceeding, promptly following request therefor, all expenses incurred by
Agent in connection with such proceeding upon receipt of an undertaking by or on
behalf of Agent to repay said amounts if it shall be determined ultimately that
Agent is not entitled to be indemnified under the provisions of this Agreement,
the Bylaws, the Code or otherwise.
9. ENFORCEMENT. Any right to indemnification or advances granted by this
Agreement to Agent shall be enforceable by or on behalf of Agent in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. Agent, in such enforcement action, if
successful in whole or in part, shall be entitled to be paid also the expense of
prosecuting his claim. It shall be a defense to any action for which a claim
for indemnification is made under Section 3 hereof (other than an action brought
to enforce a claim for expenses pursuant to Section 8 hereof, provided that the
required undertaking has been tendered to the Corporation) that Agent is not
entitled to indemnification because of the limitations set forth in Section 4
hereof. Neither the failure of the Corporation (including its Board of
Directors or its stockholders) to have made a determination prior to the
commencement of such enforcement action that indemnification of Agent is proper
in the circumstances, nor an actual determination by the Corporation (including
its Board of Directors or its stockholders) that such indemnification is
improper shall be a defense to the action or create a presumption that Agent is
not entitled to indemnification under this Agreement or otherwise.
10. SUBROGATION. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Agent, who shall execute all documents required and shall
do all acts that may be necessary to secure such rights and to enable the
Corporation effectively to bring suit to enforce such rights.
11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent by this
Agreement shall not be exclusive of any other right which Agent may have or
hereafter acquire under any statute, provision of the Corporation's Certificate
of Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding office.
4.
<PAGE>
12. SURVIVAL OF RIGHTS.
(a) The rights conferred on Agent by this Agreement shall continue
after Agent has ceased to be a director, officer, employee or other agent
of the Corporation or to serve at the request of the Corporation as a
director, officer, employee or other agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise and shall inure to the benefit of Agent's heirs, executors and
administrators.
(b) The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Corporation, expressly
to assume and agree to perform this Agreement in the same manner and to the
same extent that the Corporation would be required to perform if no such
succession had taken place.
13. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid for any reason, such invalidity or
unenforceability shall not affect the validity or enforceability of the other
provisions hereof. Furthermore, if this Agreement shall be invalidated in its
entirety on any ground, then the Corporation shall nevertheless indemnify Agent
to the fullest extent provided by the Bylaws, the Code or any other applicable
law.
14. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Delaware.
15. AMENDMENT AND TERMINATION. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
16. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute but one and the same Agreement. Only
one such counterpart need be produced to evidence the existence of this
Agreement.
17. HEADINGS. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction hereof.
18. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given (i)
upon delivery if delivered by hand to the party to whom such communication was
directed or (ii) upon the third business day after the date on which such
communication was mailed if mailed by certified or registered mail with postage
prepaid:
(a) If to Agent, at the address indicated on the signature page
hereof.
5.
<PAGE>
(b) If to the Corporation, to
Terayon Communication Systems, Inc.
2952 Bunker Hill Lane
Santa Clara, CA 95054
or to such other address as may have been furnished to Agent by the Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
TERAYON COMMUNICATION SYSTEMS, INC.
By:_________________________________________
Title:______________________________________
AGENT
____________________________________________
Address:
____________________________________________
____________________________________________
6.
<PAGE>
Exhibit 10.2
TERAYON CORPORATION
1995 STOCK OPTION PLAN
ADOPTED MARCH 8, 1995
AMENDED BY THE BOARD ON MARCH 26, 1996
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company or
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall, in
the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either Incentive Stock Options or Nonstatutory Stock Options. All Options shall
be separately designated Incentive Stock Options or Nonstatutory Stock Options
at the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.
1.
<PAGE>
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(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 in accordance with
subsection 3(c) of the Plan.
(e) "COMPANY" means Terayon Corporation, a California corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave, or any other personal leave; or (ii) transfers between
locations of the Company or between the Company, Affiliates or their successors.
(h) "COVERED EMPLOYEE" means the Chief Executive Officer and the four (4)
other highest compensated officers of the Company.
(i) "DIRECTOR" means a member of the Board.
2.
<PAGE>
(j) "DISINTERESTED PERSON" means a Director who either (i) was not during
the one year prior to service as an administrator of the Plan granted or awarded
equity securities pursuant to the Plan or any other plan of the Company or any
of its affiliates entitling the participants therein to acquire equity
securities of the Company or any of its affiliates except as permitted by Rule
16b-3(c)(2)(i); or (ii) is otherwise considered to be a "disinterested person"
in accordance with Rule 16b-3(c)(2)(i), or any other applicable rules,
regulations or interpretations of the Securities and Exchange Commission.
(k) "EMPLOYEE" means any person, including Officers and Directors, employed
by the Company or any Affiliate of the Company. 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 the value of the common stock as determined
in good faith by the Board and in a manner consistent with Section 260.140.50 of
Title 10 of the California Code of Regulations.
(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.
(p) "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.
(q) "OPTION" means a stock option granted pursuant to the Plan.
3.
<PAGE>
(r) "OPTION AGREEMENT" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(s) "OPTIONEE" means an Employee, Director or Consultant who holds an
outstanding Option.
(t) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (as defined in the
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an affiliated corporation receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an affiliated corporation at
any time, and is not currently receiving compensation for personal services in
any capacity other than as a Director, or (ii) is otherwise considered an
"outside director" for purposes of Section 162(m) of the Code.
(u) "PLAN" means this 1995 Stock Option Plan.
(v) "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.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible under
the Plan shall be granted Options; when and how each Option shall be granted;
whether an Option
4.
<PAGE>
will be an Incentive Stock Option or a Nonstatutory Stock Option; the provisions
of each Option granted (which need not be identical), including the time or
times such Option may be exercised in whole or in part; and the number of shares
for which an Option shall be granted to each such person.
(2) To construe and interpret the Plan and Options granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any Option Agreement, in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective.
(3) To amend the Plan as provided in Section 11.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members (the "Committee"), all of the members
of which Committee shall be Disinterested Persons and may also be, in the
discretion of the Board, Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board (and references in this
Plan to the Board shall thereafter be to the Committee), subject, however, to
such resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish the Committee at
any time and revest in the Board the administration of the Plan. Additionally,
prior to the date of the first registration of an equity security of the Company
under Section 12 of the Exchange Act, and notwithstanding anything to the
contrary contained herein, the Board may delegate administration of the Plan to
any person or persons and the term "Committee" shall apply to any person or
persons to whom such authority has been delegated. Notwithstanding anything in
this Section 3 to the contrary,
5.
<PAGE>
the Board or the Committee may delegate to a committee of one or more members of
the Board the authority to grant Options to eligible persons who (1) are not
then subject to Section 16 of the Exchange Act and/or (2) are either (i) not
then Covered Employees and are not expected to be Covered Employees at the time
of recognition of income resulting from such Option, or (ii) not persons with
respect to whom the Company wishes to comply with Section 162(m) of the Code.
(d) Any requirement that an administrator of the Plan be a Disinterested
Person shall not apply (i) prior to the date of the first registration of an
equity security of the Company under Section 12 of the Exchange Act, or (ii) if
the Board or the Committee expressly declares that such requirement shall not
apply. Any Disinterested Person shall otherwise comply with the requirements of
Rule 16b-3.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to Options shall not
exceed in the aggregate Two Million One Hundred Fourteen Thousand Seven Hundred
Forty-Seven (2,114,747) shares of the Company's common stock. If any Option
shall for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full, the stock not purchased under such Option shall
revert to and again become available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees. Nonstatutory
Stock Options may be granted only to Employees, Directors or Consultants.
6.
<PAGE>
(b) A Director shall in no event be eligible for the benefits of the Plan
unless at the time discretion is exercised in the selection of the Director as a
person to whom Options may be granted, or in the determination of the number of
shares which may be covered by Options granted to the Director: (i) the Board
has delegated its discretionary authority over the Plan to a Committee which
consists solely of Disinterested Persons; or (ii) the Plan otherwise complies
with the requirements of Rule 16b-3. The Board shall otherwise comply with the
requirements of Rule 16b-3. This subsection 5(b) shall not apply (i) prior to
the date of the first registration of an equity security of the Company under
Section 12 of the Exchange Act, or (ii) if the Board or Committee expressly
declares that it shall not apply.
(c) No person shall be eligible for the grant of an Option if, at the time
of grant, such person owns (or is deemed to own pursuant to Section 424(d) of
the Code) stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or of any of its Affiliates
unless the exercise price of such Option is at least one hundred ten percent
(110%) of the Fair Market Value of such stock at the date of grant and the
Option is not exercisable after the expiration of five (5) years from the date
of grant.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
7.
<PAGE>
(b) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. The exercise price of
each Nonstatutory Stock Option shall be not less than eighty-five percent (85%)
of the Fair Market Value of the stock subject to the Option on the date the
Option is granted.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option, (A) by delivery to the Company of other common stock of
the Company, (B) according to a deferred payment or other arrangement (which may
include, without limiting the generality of the foregoing, the use of other
common stock of the Company) with the person to whom the Option is granted or to
whom the Option is transferred pursuant to subsection 6(d), or (C) in any other
form of legal consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be payable
at least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions of the Code,
of any amounts other than amounts stated to be interest under the deferred
payment arrangement.
(d) TRANSFERABILITY. An Option shall not be transferable except by will or
by the laws of descent and distribution, and shall be exercisable during the
lifetime of the person to whom the Option is granted only by such person. The
person to whom the Option is granted may, by delivering written notice to the
Company, in a form satisfactory to the Company,
8.
<PAGE>
designate a third party who, in the event of the death of the Optionee, shall
thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option may,
but need not, be allotted in periodic installments (which may, but need not, be
equal). The Option Agreement may provide that from time to time during each of
such installment periods, the Option may become exercisable ("vest") with
respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The vesting provisions of
individual Options may vary but in each case will provide for vesting of at
least twenty percent (20%) per year of the total number of shares subject to the
Option. The provisions of this subsection 6(e) are subject to any Option
provisions governing the minimum number of shares as to which an Option may be
exercised.
(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or
any person to whom an Option is transferred under subsection 6(d), as a
condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the Option; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the Option
for such person's own account and not with any present intention of selling
9.
<PAGE>
or otherwise distributing the stock. The foregoing requirements, and any
assurances given pursuant to such requirements, shall be inoperative if (i) the
issuance of the shares upon the exercise of the Option has been registered under
a then currently effective registration statement under the Securities Act of
1933, as amended (the "Securities Act"), or (ii) as to any particular
requirement, a determination is made by counsel for the Company that such
requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the stock.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or disability), the
Optionee may exercise his or her Option (to the extent that the Optionee was
entitled to exercise it at the date of termination) but only within such period
of time ending on the earlier of (i) the date three (3) months after the
termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer or shorter period, which in no event shall be less
than thirty (30) days, specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
after termination, the Optionee does not exercise his or her Option within the
time specified in the Option Agreement, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise
10.
<PAGE>
it at the date of termination), but only within such period of time ending on
the earlier of (i) the date twelve (12) months following such termination (or
such longer or shorter period, which in no event shall be less than six (6)
months, specified in the Option Agreement), or (ii) the expiration of the term
of the Option as set forth in the Option Agreement. If, at the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the shares covered by the unexercisable portion of the Option shall revert to
and again become available for issuance under 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 and again become available for issuance under the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a period specified in the Option after the termination of, the
Optionee's Continuous Status as an Employee, Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the Option
at the date of death) by the Optionee's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the option upon the Optionee's death pursuant to subsection 6(d),
but only within the period ending on the earlier of (i) the date eighteen (18)
months following the date of death (or such longer or shorter period, which in
no event shall be less than six (6) months, specified in the Option Agreement),
or (ii) the expiration of the term of such Option as set forth in the Option
Agreement. 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 revert to and again become available for issuance under the Plan.
If, after death, the Option is not exercised within the time specified herein,
the Option shall terminate, and the shares covered by such Option shall revert
to and again become available for issuance under the Plan.
11.
<PAGE>
(j) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
(k) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such Option by any of the following means
or by a combination of such means: (1) tendering a cash payment; (2)
authorizing the Company to withhold shares from the shares of the common stock
otherwise issuable to the participant as a result of the exercise of the Option;
or (3) delivering to the Company owned and unencumbered shares of the common
stock of the Company.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep available at
all times the number of shares of stock required to satisfy such Options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Option or any stock issued or issuable
pursuant to any such Option. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the
12.
<PAGE>
Company shall be relieved from any liability for failure to issue and sell stock
upon exercise of such Options unless and until such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an Optionee nor any person to whom an Option is transferred
under subsection 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such Option unless and
until such person has satisfied all requirements for exercise of the Option
pursuant to its terms.
(b) Throughout the term of any Option, the Company shall deliver to the
holder of such Option, not later than one hundred twenty (120) days after the
close of each of the Company's fiscal years during the Option term, a balance
sheet and an income statement. This section shall not apply when issuance is
limited to key employees whose duties in connection with the Company assure them
access to equivalent information.
(c) Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Employee, Director, Consultant or
Optionee any right to continue in the employ of the Company or any Affiliate (or
to continue acting as a Director or Consultant) or shall affect the right of the
Company or any Affiliate to terminate the employment or relationship as a
Director or Consultant of any Employee, Director, Consultant or Optionee with or
without cause.
(d) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options granted
after 1986 are exercisable
13.
<PAGE>
for the first time by any Optionee during any calendar year under all plans of
the Company and its Affiliates exceeds one hundred thousand dollars ($100,000),
the Options or portions thereof which exceed such limit (according to the order
in which they were granted) shall be treated as Nonstatutory Stock Options.
(e) (1) The Board or the Committee shall have the authority to effect, at
any time and from time to time (i) the repricing of any outstanding Options
under the Plan and/or (ii) with the consent of the affected holders of
Options, the cancellation of any outstanding Options and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of Common Stock, but having an exercise price per
share not less than eighty-five percent (85%) of the Fair Market Value (one
hundred percent (100%) of the Fair Market Value in the case of an Incentive
Stock Option or, in the case of a ten percent (10%) stockholder (as defined in
subsection 5(c)), not less than one hundred and ten percent (110%) of the Fair
Market Value) per share of Common Stock on the new grant date.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any Option (through merger, consolidation, reorganization, recapitalization,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or otherwise), the Plan will be appropriately adjusted in the
class(es) and maximum number of shares subject to the Plan pursuant to
subsection 4(a), and the outstanding Options will be appropriately adjusted in
the class(es) and number of shares and price per share of stock subject to such
outstanding Options.
(b) In the event of: (1) a merger or consolidation in which the Company is
not the surviving corporation or (2) a reverse merger in which the Company is
the surviving corporation
14.
<PAGE>
but the shares of the Company's common stock outstanding immediately preceding
the merger are converted by virtue of the merger into other property, whether in
the form of securities, cash or otherwise then to the extent permitted by
applicable law: (i) any surviving corporation shall assume any Options
outstanding under the Plan or shall substitute similar Options for those
outstanding under the Plan, or (ii) such Options shall continue in full force
and effect. In the event any surviving corporation refuses to assume or
continue such Options, or to substitute similar options for those outstanding
under the Plan, then such Options shall be terminated if not exercised prior to
such event. In the event of a dissolution or liquidation of the Company, any
Options outstanding under the Plan shall terminate if not exercised prior to
such event.
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 10 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(1) Increase the number of shares reserved for Options under the
Plan;
(2) Modify the requirements as to eligibility for participation in the
Plan (to the extent such modification requires stockholder approval in order for
the Plan to satisfy the requirements of Section 422 of the Code); or
(3) Modify the Plan in any other way if such modification requires
stockholder approval in order for the Plan to satisfy the requirements of
Section 422 of the Code or to comply with the requirements of Rule 16b-3.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy
15.
<PAGE>
the requirements of Section 162(m) of the Code and the regulations promulgated
thereunder regarding the exclusion of performance-based compensation from the
limit on corporate deductibility of compensation paid to certain executive
officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide Optionees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Incentive Stock Options
and/or to bring the Plan and/or Incentive Stock Options granted under it into
compliance therewith.
(d) Rights and obligations under any Option granted before amendment of the
Plan shall not be altered or impaired by any amendment of the Plan unless (i)
the Company requests the consent of the person to whom the Option was granted
and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on March 7, 2005, which shall be within ten
(10) years from the date the Plan is adopted by the Board or approved by the
stockholders of the Company, whichever is earlier. No Options may be granted
under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom the Option was granted.
16.
<PAGE>
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Options
granted under the Plan shall be exercised unless and until the Plan has been
approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board,
and, if required, an appropriate permit has been issued by the Commissioner of
Corporations of the State of California.
17.
<PAGE>
EXHIBIT 10.3
TERAYON COMMUNICATION SYSTEMS
1997 EQUITY INCENTIVE PLAN
Adopted March 26, 1997
APPROVED BY SHAREHOLDERS JULY 27, 1997
Amended June 9, 1998
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to benefit from increases in value of the stock of
the Company through the granting of (i) Incentive Stock Options, (ii)
Nonstatutory Stock Options, (iii) stock bonuses, and (iv) rights to purchase
restricted stock, all as defined below.
The Company, by means of the Plan, seeks to retain the services of persons
who are now Employees or Directors of or Consultants to the Company or its
Affiliates, to secure and retain the services of new Employees, Directors and
Consultants, and to provide incentives for such persons to exert maximum efforts
for the success of the Company and its Affiliates.
The Company intends that the Stock Awards issued under the Plan shall, in
the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options or (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and in such form as issued pursuant to Section 6,
and a separate certificate or certificates will be issued for shares purchased
on exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections
424(e) and (f) respectively, of the Code.
(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 in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means Terayon Communication Systems, a California
corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated
for such services, provided
1
<PAGE>
that the term "Consultant" shall not include Directors who are paid only a
director's fee by the Company or who are not compensated by the Company for
their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means that
the service of an individual to the Company, whether as an Employee, Director
or Consultant, is not interrupted or terminated. The Board or the chief
executive officer of the Company may determine, in that party's sole
discretion, whether Continuous Status as an Employee, Director or Consultant
shall be considered interrupted in the case of: (i) any leave of absence
approved by the Board or the chief executive officer of the Company, including
sick leave, military leave, or any other personal leave; or (ii) transfers
between the Company, Affiliates or their successors.
(h) "COVERED EMPLOYEE" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation
is required to be reported to shareholders under the Exchange Act, as
determined for purposes of Section 162(m) of the Code.
(i) "DIRECTOR" means a member of the Board.
(j) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(l) "FAIR MARKET VALUE" means, as of any date, the value of the common
stock of the Company determined as follows (and in each case prior to the
Listing Date, in a manner consistent with Section 260.140.50 of Title 10 of
the California Code of Regulations).
(1) If the common stock is listed on any established stock exchange or
traded on the Nasdaq National Market or The Nasdaq SmallCap Market, the Fair
Market Value of a share of common stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in the Company's 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 Board deems reliable.
(2) In the absence of such markets for the common stock, the Fair
Market Value shall be determined in good faith by the Board.
(m) "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.
(n) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange, or designated (or approved for designation) upon notice
of issuance as a national market security on an interdealer quotation system
if such securities exchange or interdealer quotation system has been
2
<PAGE>
certified in accordance with the provisions of Section 25100(o) of the
California Corporate Securities Law of 1968.
(o) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does
not receive compensation (directly or indirectly) from the Company or its
parent or subsidiary for services rendered as a consultant or in any capacity
other than as a Director (except for an amount as to which disclosure would
not be required under Item 404(a) of Regulation S-K promulgated pursuant to
the Securities Act ("Regulation S-K")), does not possess an interest in any
other transaction as to which disclosure would be required under Item 404(a)
of Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(q) "OFFICER" means (i) prior to the Listing Date, any person designated
by the Company as an officer and (ii) from and after the Listing Date, 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 a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(t) "OPTIONEE" means a person to whom an Option is granted pursuant to the
Plan or, if applicable, such other person who holds an outstanding Option.
(u) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
the Treasury regulations promulgated under Section 162(m) of the Code), is not
a former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated
corporation" at any time, and is not currently receiving direct or indirect
remuneration from the Company or an "affiliated corporation" for services in
any capacity other than as a Director, or (ii) is otherwise considered an
"outside director" for purposes of Section 162(m) of the Code.
(v) "PLAN" means this 1997 Equity Incentive Plan.
(w) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect with respect to the Company at the time discretion is
being exercised regarding the Plan.
(x) "SECURITIES ACT" means the Securities Act of 1933, as amended.
3
<PAGE>
(y) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, and any right to purchase restricted stock.
(z) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted
stock, or a combination of the foregoing; the provisions of each Stock Award
granted (which need not be identical), including the time or times when a
person shall be permitted to receive stock pursuant to a Stock Award; and the
number of shares with respect to which a Stock Award shall be granted to each
such person.
(2) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in Section 13.
(4) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee of
the Board composed of two (2) or more members (the "Committee"), all of the
members of which Committee may be, in the discretion of the Board, Non-
Employee Directors and/or Outside Directors. If administration is delegated to
a Committee, the Committee shall have, in connection with the administration
of the Plan, the powers theretofore possessed by the Board, including the
power to delegate to a subcommittee of two (2) or more Outside Directors any
of the administrative powers the Committee is authorized to exercise (and
references in this Plan to the Board shall thereafter be to the Committee or
such a subcommittee), subject, however, to such resolutions, not inconsistent
with the provisions of the Plan, as may be adopted from time to time by the
Board. The Board may abolish the Committee at any time and revest in the Board
the administration of the Plan. Additionally, prior to the Listing Date, and
notwithstanding anything to the contrary contained herein, the Board may
delegate administration of the Plan to a committee of one or more members of
the Board and the term "Committee" shall apply to any
4
<PAGE>
person or persons to whom such authority has been delegated. In addition,
notwithstanding anything in this Section 3 to the contrary, the Board or the
Committee may delegate to a committee of one or more members of the Board the
authority to grant Stock Awards to eligible persons who (x) are not then
subject to Section 16 of the Exchange Act and/or (y) are either (i) not then
Covered Employees and are not expected to be Covered Employees at the time of
recognition of income resulting from such Stock Award, or (ii) not persons
with respect to whom the Company wishes to comply with Section 162(m) of the
Code.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 12 relating to adjustments upon
changes in stock, the stock that may be issued pursuant to Stock Awards shall
not exceed in the aggregate Three Million Three Hundred Thousand (3,300,000)
shares of the Company's Common Stock. Notwithstanding the foregoing, on each
January 1, commencing with January 1, 1999, if the number of shares of Common
Stock that equals five percent (5%) of the Company's outstanding Common Stock
is greater than the aggregate number of shares of Common Stock that may be
issued pursuant to Stock Awards, then the aggregate number of shares of Common
Stock that may be issued pursuant to Stock Awards under the Plan shall
automatically be increased to that number of shares of Common Stock that is
equal to five percent (5%) of the Company's outstanding shares of Common Stock
on that date. If any Stock Award shall for any reason expire or otherwise
terminate, in whole or in part, without having been exercised in full, the
stock not acquired under such Stock Award shall revert to and again become
available for issuance under the Plan.
(b) Except as adjusted pursuant to Section 12 of the Plan, however, no
more than Three Million Three Hundred Thousand (3,300,000) of the shares
eligible for issuance under the Plan shall be issued upon the exercise of
Incentive Stock Options under the Plan.
(c) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
(d) Prior to the Listing Date, at no time shall the total number of shares
issuable upon exercise of all outstanding Options and the total number of
shares provided for under any stock bonus or similar plan of the Company
exceed the applicable percentage as calculated in accordance with the
conditions and exclusions of Section 260.140.45 of Title 10 of the California
Code of Regulations, based on the shares of the Company which are outstanding
at the time the calculation is made.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees. Stock Awards
other than Incentive Stock Options may be granted only to Employees, Directors
or Consultants.
(b) No person shall be eligible for the grant of an Option or an award to
purchase restricted stock if, at the time of grant, such person owns (or is
deemed to own pursuant to Section 424(d) of the Code) stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of any of its Affiliates unless the exercise price of
such Option is at least one hundred ten percent (110%) of the Fair Market
Value of such
5
<PAGE>
stock at the date of grant and the Option is not exercisable after the
expiration of five (5) years from the date of grant, or in the case of a
restricted stock purchase award, the purchase price is at least one hundred
percent (100%) of the Fair Market Value of such stock at the date of grant.
From and after the Listing Date this provision shall apply only to Incentive
Stock Options.
(c) Subject to the provisions of Section 12 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Options covering
more than Five Hundred Thousand (500,000) shares of the Company's common stock
in any calendar year. This subsection 5(c) shall not apply prior to the
Listing Date and, following the Listing Date, shall not apply until (i) the
earliest of: (A) the first material modification of the Plan (including any
increase to the number of shares reserved for issuance under the Plan in
accordance with Section 4); (B) the issuance of all of the shares of common
stock reserved for issuance under the Plan; (C) the expiration of the Plan; or
(D) the first meeting of shareholders at which directors are to be elected
that occurs after the close of the third calendar year following the calendar
year in which occurred the first registration of an equity security under
Section 12 of the Exchange Act; or (ii) such other date required by Section
162(m) of the Code and the rules and regulations promulgated thereunder.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Incentive Stock Option on the date of grant; the exercise price
of each Nonstatutory Stock Option shall be not less than eighty-five percent
(85%) of the Fair Market Value of the stock subject to the Nonstatutory Stock
Option on the date of grant. Notwithstanding the foregoing, an Option (whether
an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with
an exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii)
at the discretion of the Board or the Committee, at the time of the grant of
the Option, (A) by delivery to the Company of other common stock of the
Company, (B) according to a deferred payment arrangement (however, in the
event the Company is then incorporated in the state of Delaware, then payment
of the common stock's "par value" as defined in the Delaware General
Corporation Law shall not be made by deferred payment), or other arrangement
(which may include, without limiting the generality of the foregoing, the use
of other common stock of the Company) with the person to whom the Option is
granted or to
6
<PAGE>
whom the Option is transferred pursuant to subsection 6(d), or (C) in any
other form of legal consideration that may be acceptable to the Board. In the
case of any deferred payment arrangement, interest shall be compounded at
least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions of the
Code, of any amounts other than amounts stated to be interest under the
deferred payment arrangement.
(d) TRANSFERABILITY. Prior to the Listing Date, an Option (whether an
Incentive Stock Option or a Nonstatutory Stock Option) shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Option is
granted only by such person. From and after the Listing Date, a Nonstatutory
Stock Option may be transferable to the extent provided in the Option
Agreement; provided, however, that if the Option Agreement does not
specifically provide for transferability, then such Nonstatutory Stock Option
shall not be transferable except by will or by the laws of descent and
distribution. Notwithstanding the foregoing, the person to whom the Option is
granted may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionee, shall thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option may,
but need not, be allotted in periodic installments (which may, but need not,
be equal). The Option Agreement may provide that from time to time during each
of such installment periods, the Option may become exercisable ("vest") with
respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. Prior to the Listing Date,
the vesting provisions of individual Options may vary but in each case will
provide for vesting of at least twenty percent (20%) per year of the total
number of shares subject to the Option; provided, however, that an Option
granted to an Officer, Director or Consultant may become fully exercisable,
subject to reasonable conditions such as continued employment, at any time or
during any period established by the Company or of any of its Affiliates. The
provisions of this subsection 6(e) are subject to any Option provisions
governing the minimum number of shares as to which an Option may be exercised.
(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or disability),
the Optionee may exercise the Option (to the extent that the Optionee was
entitled to exercise it as of the date of termination) but only within such
period of time ending on the earlier of (i) the date thirty (30) days
following the termination of the Optionee's Continuous Status as an Employee,
Director or Consultant (or such longer period as specified in the Option
Agreement), or (ii) the expiration of the term of the Option as set forth in
the Option Agreement; provided, however, if the Optionee is terminated for
cause, then the Option shall terminate on the date Optionee's Continuous
Status as an Employee, Director or Consultant ceases. If, at the date of
termination, the Optionee is not entitled to exercise the entire Option, the
shares covered by the unexercisable portion of the Option shall revert to and
again become available for issuance under the Plan. If, after termination, the
7
<PAGE>
Optionee does not exercise the Option within the time specified in the Option
Agreement, the Option shall terminate, and the shares covered by such Option
shall revert to and again become available for issuance under the Plan.
An Optionee's Option Agreement may also provide that if the exercise of the
Option following the termination of the Optionee's Continuous Status as an
Employee, Director, or Consultant (other than upon the Optionee's death or
disability) would result in liability under Section 16(b) of the Exchange Act,
then the Option shall terminate on the earlier of (i) the expiration of the term
of the Option set forth in the Option Agreement, or (ii) the tenth (10th) day
after the last date on which such exercise would result in such liability under
Section 16(b) of the Exchange Act. Finally, an Optionee's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionee's Continuous Status as an Employee, Director or Consultant (other than
upon the Optionee's death or disability) would be prohibited at any time solely
because the issuance of shares would violate the registration requirements under
the Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in the first paragraph of this
subsection 6(f), or (ii) the expiration of a period of three (3) months after
the termination of the Optionee's Continuous Status as an Employee, Director or
Consultant during which the exercise of the Option would not be in violation of
such registration requirements.
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise the Option (to the extent
that the Optionee was entitled to exercise it as of the date of termination),
but only within such period of time ending on the earlier of (i) the date
twelve (12) months following such termination (or such longer or shorter
period, which prior to the Listing Date shall not be less than six (6) months,
specified in the Option Agreement), or (ii) the expiration of the term of the
Option as set forth in the Option Agreement. If, at the date of termination,
the Optionee is not entitled to exercise the entire Option, the shares covered
by the unexercisable portion of the Option shall revert to and again become
available for issuance under the Plan. If, after termination, the Optionee
does not exercise the Option within the time specified herein, the Option
shall terminate, and the shares covered by such Option shall revert to and
again become available for issuance under the Plan.
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or
within a period specified in the Option Agreement after the termination of,
the Optionee's Continuous Status as an Employee, Director or Consultant, the
Option may be exercised (to the extent the Optionee was entitled to exercise
the Option as of the date of death) by the Optionee's estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the option upon the Optionee's death pursuant to
subsection 6(d), but only within the period ending on the earlier of (i) the
date eighteen (18) months following the date of death (or such longer or
shorter period, which prior to the Listing Date shall not be less than six (6)
months, specified in the Option Agreement), or (ii) the expiration of the term
of such Option as set forth in the Option Agreement. If, at the time of death,
the Optionee was not entitled to exercise the entire Option, the shares
covered by the unexercisable portion of the Option shall revert to and again
become available for issuance under the Plan. If, after death, the Option is
not exercised within the time specified herein, the Option shall terminate,
and the shares covered by such Option shall revert to and again become
available for issuance under the Plan.
8
<PAGE>
(i) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject
to the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to
any other restriction the Board determines to be appropriate. Prior to the
Listing Date, however, any unvested shares so purchased shall be subject to a
repurchase right in favor of the Company, with the repurchase price to be
equal to the original purchase price of the stock, or to any other restriction
the Board determines to be appropriate; provided, however, that (i) the right
to repurchase at the original purchase price shall lapse at a minimum rate of
twenty percent (20%) per year over five (5) years from the date the Option was
granted, and (ii) such right shall be exercisable only within (A) the 90-day
period following the termination of employment or the relationship as a
Director or Consultant, or (B) such longer period as may be agreed to by the
Company and the Optionee (for example, for purposes of satisfying the
requirements of Section 1202(c)(3) of the Code (regarding "qualified small
business stock")), and (iii) such right shall be exercisable only for cash or
cancellation of purchase money indebtedness for the shares. Notwithstanding
the foregoing, shares received on exercise of an Option by an Officer,
Director or Consultant may be subject to additional or greater restrictions.
(j) RIGHT OF REPURCHASE. The Option may, but need not, include a provision
whereby the Company may elect, prior to the Listing Date, to repurchase all or
any part of the vested shares exercised pursuant to the Option; provided,
however, that (i) such repurchase right shall be exercisable only within (A)
the 90-day period following the termination of employment or the relationship
as a Director or Consultant (or in the case of a post-termination exercise of
the Option, the 90-day period following such post-termination exercise), or
(B) such longer period as may be agreed to by the Company and the Optionee
(for example, for purposes of satisfying the requirements of Section
1202(c)(3) of the Code (regarding "qualified small business stock")), (ii)
such repurchase right shall be exercisable for less than all of the vested
shares only with the Optionee's consent, and (iii) such right shall be
exercisable only for cash or cancellation of purchase money indebtedness for
the shares at a repurchase price equal to the stock's Fair Market Value at the
time of such termination. Notwithstanding the foregoing, shares received on
exercise of an Option by an Officer, Director or Consultant may be subject to
additional or greater restrictions specified in the Option Agreement.
(k) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to
exercise a right of first refusal following receipt of notice from the
Optionee of the intent to transfer all or any part of the shares exercised
pursuant to the Option. Such right of first refusal shall be exercised by the
Company no more than thirty (30) days following receipt of notice of the
Optionee's intent to transfer shares and must be exercised as to all the
shares the Optionee intends to transfer unless the Optionee consents to
exercise for less than all the shares offered. The purchase of the shares
following exercise shall be completed within thirty (30) days of the Company's
receipt of notice of the Optionee's intent to transfer shares, or such longer
period of time as has been offered by the person to whom the Optionee intends
to transfer the shares, or as may be agreed to by the Company and the Optionee
(for example, for purposes of satisfying the requirements of Section
1202(c)(3) of the Code (regarding "qualified small business stock").
9
<PAGE>
(l) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board or Committee to make or not to make grants of Options hereunder, the
Board or Committee shall have the authority (but not an obligation) to include
as part of any Option Agreement a provision entitling the Optionee to a
further Option (a "Re-Load Option") in the event the Optionee exercises the
Option evidenced by the Option Agreement, in whole or in part, by surrendering
other shares of common stock in accordance with this Plan and the terms and
conditions of the Option Agreement. Any such Re-Load Option (i) shall be for a
number of shares equal to the number of shares surrendered as part or all of
the exercise price of such Option; (ii) shall have an expiration date which is
the same as the expiration date of the Option the exercise of which gave rise
to such Re-Load Option; and (iii) shall have an exercise price which is equal
to one hundred percent (100%) of the Fair Market Value of the stock subject to
the Re-Load Option on the date of exercise of the original Option.
Notwithstanding the foregoing, a Re-Load Option which is granted to a 10%
shareholder (as described in subsection 5(b)), shall have an exercise price
which is equal to one hundred ten percent (110%) of the Fair Market Value of
the stock subject to the Re-Load Option on the date of exercise of the
original Option and shall have a term which is no longer than five (5) years.
Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory
Stock Option, as the Board or Committee may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on exercisability of Incentive Stock Options
described in subsection 11(e) of the Plan and in Section 422(d) of the Code.
There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option
shall be subject to the availability of sufficient shares under subsection 4(a)
and the limits on the grants of Options under subsection 5(c) and shall be
subject to such other terms and conditions as the Board or Committee may
determine which are not inconsistent with the express provisions of the Plan
regarding the terms of Options.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board or the Committee
shall deem appropriate. The terms and conditions of stock bonus or restricted
stock purchase agreements may change from time to time, and the terms and
conditions of separate agreements need not be identical, but each stock bonus or
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions as appropriate:
(a) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such Stock Award Agreement, but in no event shall
the purchase price be less than eighty-five percent (85%) of the stock's Fair
Market Value on the date such Stock Award is made. Notwithstanding the
foregoing, the Board or the Committee may determine that eligible participants
in the Plan may be awarded stock pursuant to a stock bonus agreement in
consideration for past services actually rendered to the Company or for its
benefit.
10
<PAGE>
(b) TRANSFERABILITY. Rights under a stock bonus or restricted stock purchase
agreement shall be transferable only by will or the laws of descent and
distribution, so long as stock awarded under such Stock Award Agreement
remains subject to the terms of the agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to a
deferred payment arrangement (however, in the event the Company is then
incorporated in the state of Delaware, then payment of the common stock's "par
value" as defined in the Delaware General Corporation Law shall not be made by
deferred payment), or other arrangement with the person to whom the stock is
sold; or (iii) in any other form of legal consideration that may be acceptable
to the Board or the Committee in its discretion. Notwithstanding the
foregoing, the Board or the Committee to which administration of the Plan has
been delegated may award stock pursuant to a stock bonus agreement in
consideration for past services actually rendered to the Company or for its
benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but need
not, be subject to a repurchase option in favor of the Company in accordance
with a vesting schedule to be determined by the Board or the Committee. Prior
to the Listing Date, the applicable agreement shall provide (i) that the right
to repurchase at the original purchase price shall lapse at a minimum rate of
twenty percent (20%) per year over five (5) years from the date the Stock
Award was granted (except that a Stock Award granted to an Officer, Director
or Consultant may become fully vested, subject to reasonable conditions such
as continued employment, at any time or during any period established by the
Company or of any of its Affiliates), and (ii) such right shall be exercisable
only (A) within the ninety (90)-day period following the termination of
employment or the relationship as a Director or Consultant, or (B) such longer
period as may be agreed to by the Company and the holder of the Stock Award
(for example, for purposes of satisfying the requirements of Section
1202(c)(3) of the Code (regarding "qualified small business stock")), and
(iii) such right shall be exercisable only for cash or cancellation of
purchase money indebtedness for the shares.
(e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event a Participant's Continuous Status as an Employee, Director or
Consultant terminates, the Company may repurchase or otherwise reacquire,
subject to the limitations described in subsection 7(d), any or all of the
shares of stock held by that person which have not vested as of the date of
termination under the terms of the stock bonus or restricted stock purchase
agreement between the Company and such person.
8. CANCELLATION AND RE-GRANT OF OPTIONS.
(a) The Board or the Committee shall have the authority to effect, at any
time and from time to time, (i) the repricing of any outstanding Options under
the Plan and/or (ii) with the consent of the affected holders of Options, the
cancellation of any outstanding Options under the Plan and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of stock, but having an exercise price per share
not less than eighty-five percent (85%) of the Fair Market Value (one hundred
percent (100%) of the Fair Market Value in the case of an Incentive Stock
Option) or, in the case of a 10% shareholder (as
11
<PAGE>
described in subsection 5(b)) receiving a new grant of an Incentive Stock
Option (any Option if the cancellation or repricing takes place prior to the
Listing Date), not less than one hundred ten percent (110%) of the Fair Market
Value) per share of stock on the new grant date. Notwithstanding the
foregoing, the Board or the Committee may grant an Option with an exercise
price lower than that set forth above if such Option is granted as part of a
transaction to which section 424(a) of the Code applies.
(b) Shares subject to an Option canceled under this Section 8 shall
continue to be counted against the maximum award of Options permitted to be
granted pursuant to subsection 5(c) of the Plan. The repricing of an Option
under this Section 8, resulting in a reduction of the exercise price, shall be
deemed to be a cancellation of the original Option and the grant of a
substitute Option; in the event of such repricing, both the original and the
substituted Options shall be counted against the maximum awards of Options
permitted to be granted pursuant to subsection 5(c) of the Plan. The
provisions of this subsection 8(b) shall be applicable only to the extent
required by Section 162(m) of the Code.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of stock required to satisfy such Stock
Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Stock Award; provided,
however, that this undertaking shall not require the Company to register under
the Securities Act either the Plan, any Stock Award or any stock issued or
issuable pursuant to any such Stock Award. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful
issuance and sale of stock under the Plan, the Company shall be relieved from
any liability for failure to issue and sell stock upon exercise of such Stock
Awards unless and until such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall constitute
general funds of the Company.
11. MISCELLANEOUS.
(a) Subject to any applicable provisions of the California Corporate
Securities Law of 1968 and related regulations relied upon prior to the
Listing Date as a condition of issuing securities pursuant to the Plan, the
Board shall have the power to accelerate the time at which a Stock Award may
first be exercised or the time during which a Stock Award or any part thereof
will vest pursuant to subsection 6(e) or 7(d), notwithstanding the provisions
in the Stock Award stating the time at which it may first be exercised or the
time during which it will vest.
(b) Neither an Employee, Director or Consultant nor any person to whom a
Stock Award is transferred under subsection 6(d) or 7(b) shall be deemed to be
the holder of, or to have any of the rights of a holder with respect to, any
shares subject to such Stock Award unless and
12
<PAGE>
until such person has satisfied all requirements for exercise of the Stock
Award pursuant to its terms.
(c) Throughout the term of any Stock Award, the Company shall deliver to
the holder of such Stock Award, not later than one hundred twenty (120) days
after the close of each of the Company's fiscal years during the term of such
Stock Award, a balance sheet and an income statement. This subsection shall
not apply (i) after the Listing Date, or (ii) when issuance is limited to key
employees whose duties in connection with the Company assure them access to
equivalent information.
(d) Nothing in the Plan or any instrument executed or Stock Award granted
pursuant thereto shall confer upon any Employee, Director, Consultant or other
holder of Stock Awards any right to continue in the employ of the Company or
any Affiliate (or to continue serving as a Director or Consultant) or shall
affect the right of the Company or any Affiliate to terminate the employment
of any Employee with or without cause, the right of the Company's Board of
Directors and/or the Company's shareholders to remove any Director as provided
in the Company's Bylaws and the provisions of the applicable laws of the
Company's state of incorporation, or the right to terminate the relationship
of any Consultant subject to the terms of such Consultant's agreement with the
Company or any Affiliate.
(e) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
the Plan and all other stock plans of the Company and its Affiliates exceeds
one hundred thousand dollars ($100,000), the Options or portions thereof which
exceed such limit (according to the order in which they were granted) shall be
treated as Nonstatutory Stock Options.
(f) The Company may require any person to whom a Stock Award is granted, or
any person to whom a Stock Award is transferred pursuant to subsection 6(d) or
7(b), as a condition of exercising or acquiring stock under any Stock Award,
(1) to give written assurances satisfactory to the Company as to such person's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he
or she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (2) to
give written assurances satisfactory to the Company stating that such person
is acquiring the stock subject to the Stock Award for such person's own
account and not with any present intention of selling or otherwise
distributing the stock. The foregoing requirements, and any assurances given
pursuant to such requirements, shall be inoperative if (i) the issuance of the
shares upon the exercise or acquisition of stock under the Stock Award has
been registered under a then currently effective registration statement under
the Securities Act, or (ii) as to any particular requirement, a determination
is made by counsel for the Company that such requirement need not be met in
the circumstances under the then applicable securities laws. The Company may,
upon advice of counsel to the Company, place legends on stock certificates
issued under the Plan as such counsel deems necessary or appropriate in order
to comply with applicable securities laws, including, but not limited to,
legends restricting the transfer of the stock.
13
<PAGE>
(g) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or
local tax withholding obligation relating to the exercise or acquisition of
stock under a Stock Award by any of the following means or by a combination of
such means: (1) tendering a cash payment; (2) authorizing the Company to
withhold shares from the shares of the common stock otherwise issuable to the
participant as a result of the exercise or acquisition of stock under the
Stock Award; or (3) delivering to the Company owned and unencumbered shares of
Company common stock.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any Stock Award (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange
of shares, change in corporate structure or other transaction not involving
the receipt of consideration by the Company), the Plan will be appropriately
adjusted in the type(s) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person during any calendar year pursuant to subsection 5(c), and
the outstanding Stock Awards will be appropriately adjusted in the type(s) and
number of securities and price per share of stock subject to such outstanding
Stock Awards. Such adjustments shall be made by the Board or the Committee,
the determination of which shall be final, binding and conclusive. (The
conversion of any convertible securities of the Company shall not be treated
as a "transaction not involving the receipt of consideration by the Company.")
(b) In the event of a Change in Control (as defined herein): (i) any
surviving corporation or acquiring corporation shall assume any Stock Awards
outstanding under the Plan or shall substitute similar stock awards (including
an award to acquire the same consideration paid to the shareholders in a
Change in Control) for those outstanding under the Plan, or (ii) in the event
any surviving corporation or acquiring corporation refuses to assume such
Stock Awards or to substitute similar stock awards for those outstanding under
the Plan, (A) with respect to Stock Awards held by persons then performing
services as Employees, Directors or Consultants (and subject to any applicable
provisions of the California Corporate Securities Law of 1968 and related
regulations), the vesting (and, if applicable, the exercisability) of such
Stock Awards shall be accelerated prior to such event and the Stock Awards
terminated if not exercised at or prior to such event, and (B) with respect to
any other Stock Awards outstanding under the Plan, such Stock Awards shall be
terminated if not exercised prior to such event.
(c) For purposes of the Plan, a "Change in Control" shall mean: (1) a
dissolution, liquidation or sale of all or substantially all of the assets of
the Company; (2) a merger or consolidation in which the Company is not the
surviving corporation; (3) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's common stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise; or (4)
from and after the Listing Date, the acquisition by any person, entity or
group within the meaning of Section 13(d) or 14(d) of the Exchange Act, or any
comparable successor provisions (excluding any employee benefit plan, or
related trust, sponsored or maintained by the Company or any Affiliate of the
Company) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange
14
<PAGE>
Act, or comparable successor rule) of securities of the Company representing
at least fifty percent (50%) of the combined voting power entitled to vote in
the election of directors.
13. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the shareholders
of the Company to the extent shareholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 under the
Exchange Act or any Nasdaq or securities exchange listing requirements.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for shareholder approval, including, but not limited to, amendments to
the Plan intended to satisfy the requirements of Section 162(m) of the Code
and the regulations promulgated thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible Employees
with the maximum benefits provided or to be provided under the provisions of
the Code and the regulations promulgated thereunder relating to Incentive
Stock Options and/or to bring the Plan and/or Incentive Stock Options granted
under it into compliance therewith.
(d) Rights and obligations under any Stock Award granted before amendment
of the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; provided, however, that the rights and
obligations under any Stock Award shall not be impaired by any such amendment
unless (i) the Company requests the consent of the person to whom the Stock
Award was granted and (ii) such person consents in writing.
14. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on March 25, 2007, which is the day prior
to the tenth anniversary of the date the Plan was adopted by the Board or
approved by the shareholders of the Company, whichever is earlier. No Stock
Awards may be granted under the Plan while the Plan is suspended or after it
is terminated.
(b) Rights and obligations under any Stock Award granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan,
except with the written consent of the person to whom the Stock Award was
granted.
15
<PAGE>
15. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Awards granted under the Plan shall be exercised unless and until the Plan has
been approved by the shareholders of the Company, which approval shall be
within twelve (12) months before or after the date the Plan is adopted by the
Board, and, if required, the Stock Awards have been qualified or exempted from
qualification under the laws of the State of California.
16
<PAGE>
EXHIBIT 10.4
TERAYON COMMUNICATION SYSTEMS
1998 EMPLOYEE STOCK PURCHASE PLAN
Adopted June 9, 1998
Approved by Shareholders on ___________, 1998
1. PURPOSE.
(a) The purpose of the Employee Stock Purchase Plan (the "Plan") is to
provide a means by which employees of Terayon Communication Systems a California
corporation (the "Company"), and its Affiliates, as defined in subparagraph
1(b), which are designated as provided in subparagraph 2(b), may be given an
opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company, as those terms are defined in
Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of its
employees, to secure and retain the services of new employees, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
(d) The Company intends that the rights to purchase stock of the Company
granted under the Plan be considered options issued under an "employee stock
purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (the "Board")
of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine
all questions of policy and expediency that may arise in the administration of
the Plan.
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of the Company
shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted under it,
and to establish, amend and revoke rules and regulations for its
administration. The Board, in the
1.
<PAGE>
exercise of this power, may correct any defect, omission or inconsistency in
the Plan, in a manner and to the extent it shall deem necessary or expedient
to make the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 13.
(v) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company.
(c) The Board may delegate administration of the Plan to a Committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore
possessed by the Board, subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest
in the Board the administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 12 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to rights granted under
the Plan shall not exceed in the aggregate seven hundred thousand (700,000)
shares of the Company's common stock (the "Common Stock"). If any right
granted under the Plan shall for any reason terminate without having been
exercised, the Common Stock not purchased under such right shall again become
available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
The Board or the Committee may from time to time grant or provide for the
grant of rights to purchase Common Stock of the Company under the Plan to
eligible employees (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate. The provisions of separate Offerings need not be identical, but
each Offering shall include (through incorporation of the provisions of this
Plan by reference in the Offering or otherwise) the substance of the provisions
contained in paragraphs 5 through 8, inclusive.
5. ELIGIBILITY.
(a) Rights may be granted only to employees of the Company or, as the
Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except as provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan, unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no
event shall the required period of continuous employment be equal to or
greater than two (2) years. In addition,
2.
<PAGE>
unless otherwise determined by the Board or the Committee and set forth in the
terms of the applicable Offering, no employee of the Company or any Affiliate
shall be eligible to be granted rights under the Plan, unless, on the Offering
Date, such employee's customary employment with the Company or such Affiliate
is at least twenty (20) hours per week and at least five (5) months per
calendar year.
(b) The Board or the Committee may provide that each person who, during the
course of an Offering, first becomes an eligible employee of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person becomes an eligible employee or
occurs thereafter, receive a right under that Offering, which right shall
thereafter be deemed to be a part of that Offering. Such right shall have the
same characteristics as any rights originally granted under that Offering, as
described herein, except that:
(i) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right;
(ii) the Offering Period for such right shall begin on its Offering
Date and end coincident with the end of such Offering; and
(iii) the Board or the Committee may provide that if such person
first becomes an eligible employee within a specified period of time before
the end of the Offering Period for such Offering, he or she will not receive
any right under that Offering.
(c) No employee shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such employee owns
stock possessing five percent (5%) or more of the total combined voting power
or value of all classes of stock of the Company or of any Affiliate. For
purposes of this subparagraph 5(c), the rules of Section 424(d) of the Code
shall apply in determining the stock ownership of any employee, and stock
which such employee may purchase under all outstanding rights and options
shall be treated as stock owned by such employee.
(d) An eligible employee may be granted rights under the Plan only if such
rights, together with any other rights granted under "employee stock purchase
plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of
the Code, do not permit such employee's rights to purchase stock of the
Company or any Affiliate to accrue at a rate which exceeds twenty-five
thousand dollars ($25,000) of fair market value of such stock (determined at
the time such rights are granted) for each calendar year in which such rights
are outstanding at any time.
(e) Officers of the Company and any designated Affiliate shall be eligible
to participate in Offerings under the Plan, provided, however, that the Board
may provide in an Offering that certain employees who are highly compensated
employees within the meaning of Section 423(b)(4)(D) of the Code shall not be
eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each eligible employee, pursuant to an Offering
made under the Plan, shall be granted the right to purchase up to the number of
shares of Common
3.
<PAGE>
Stock of the Company purchasable with a percentage designated by the Board or
the Committee not exceeding fifteen percent (15%) of such employee's Earnings
(as defined in Section 7(a)) during the period which begins on the Offering
Date (or such later date as the Board or the Committee determines for a
particular Offering) and ends on the date stated in the Offering, which date
shall be no more than twenty-seven (27) months after the Offering Date (the
"Offering Period"). In connection with each Offering made under this Plan, the
Board or the Committee shall specify a maximum number of shares which may be
purchased by any employee as well as a maximum aggregate number of shares
which may be purchased by all eligible employees pursuant to such Offering. In
addition, in connection with each Offering which contains more than one
Purchase Date (as defined in the Offering), the Board or the Committee may
specify a maximum aggregate number of shares which may be purchased by all
eligible employees on any given Purchase Date under the Offering. If the
aggregate purchase of shares upon exercise of rights granted under the
Offering would exceed any such maximum aggregate number, the Board or the
Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(b) The purchase price of stock acquired pursuant to rights granted under
the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Purchase Date.
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An eligible employee may become a participant in an Offering by
delivering a participation agreement to the Company within the time specified
in the Offering, in such form as the Company provides. Each such agreement
shall authorize payroll deductions of up to the maximum percentage specified
by the Board or the Committee of such employee's Earnings during the Offering
Period. "Earnings" is defined as the total compensation paid to an employee,
including all salary, wages (including amounts elected to be deferred by the
employee, that would otherwise have been paid, under any cash or deferred
arrangement established by the Company), overtime pay, commissions, bonuses,
and other remuneration paid directly to the employee, but excluding profit
sharing, the cost of employee benefits paid for by the Company, education or
tuition reimbursements, imputed income arising under any Company group
insurance or benefit program, traveling expenses, business and moving expense
reimbursements, income received in connection with stock options,
contributions made by the Company under any employee benefit plan, and similar
items of compensation. The payroll deductions made for each participant shall
be credited to an account for such participant under the Plan and shall be
deposited with the general funds of the Company. A participant may reduce
(including to zero), increase or begin such payroll deductions after the
beginning of any Purchase Period only as provided for in the Offering.
4.
<PAGE>
(b) At any time during an Offering Period a participant may terminate his
or her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering Period except as provided by the Board or the Committee in the
Offering. Upon such withdrawal from the Offering by a participant, the Company
shall distribute to such participant all of his or her accumulated payroll
deductions (reduced to the extent, if any, such deductions have been used to
acquire stock for the participant) under the Offering, without interest, and
such participant's interest in that Offering shall be automatically
terminated. A participant's withdrawal from an Offering will have no effect
upon such participant's eligibility to participate in any other Offerings
under the Plan but such participant will be required to deliver a new
participation agreement in order to participate in subsequent Offerings under
the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall terminate
immediately upon cessation of any participating employee's employment with the
Company and any designated Affiliate, for any reason, and the Company shall
distribute to such terminated employee all of his or her accumulated payroll
deductions (reduced to the extent, if any, such deductions have been used to
acquire stock for the terminated employee), under the Offering, without
interest.
(d) Rights granted under the Plan shall not be transferable, and, except as
provided in Section 14, shall be exercisable only by the person to whom such
rights are granted.
8. EXERCISE.
(a) On each purchase date, as defined in the relevant Offering (a "Purchase
Date"), each participant's accumulated payroll deductions and other additional
payments specifically provided for in the Offering (without any increase for
interest) will be applied to the purchase of whole shares of stock of the
Company, up to the maximum number of shares permitted pursuant to the terms of
the Plan and the applicable Offering, at the purchase price specified in the
Offering. No fractional shares shall be issued upon the exercise of rights
granted under the Plan. The amount, if any, of accumulated payroll deductions
remaining in each participant's account after the purchase of shares which is
less than the amount required to purchase one share of stock on the final
Purchase Date of an Offering shall be held in each such participant's account
for the purchase of shares under the next Offering under the Plan, unless such
participant withdraws from such next Offering, as provided in subparagraph
7(b), or is no longer eligible to be granted rights under the Plan, as
provided in paragraph 5, in which case such amount shall be distributed to the
participant after the final Purchase Date of the Offering, without interest.
The amount, if any, of accumulated payroll deductions remaining in any
participant's account after the purchase of shares which is equal to the
amount required to purchase whole shares of stock on the final Purchase Date
of an Offering shall be distributed in full to the participant after such
Purchase Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent unless
the Plan (including rights granted thereunder) is covered by an effective
registration statement pursuant to the Securities Act of 1933, as amended (the
"Securities Act"). If on a Purchase Date of any Offering hereunder the Plan is
not so registered, no rights granted under the Plan or any Offering
5.
<PAGE>
shall be exercised on said Purchase Date and the Purchase Date shall be
delayed until the Plan is subject to such an effective registration statement,
except that the Purchase Date shall not be delayed more than two (2) months
and the Purchase Date shall in no event be more than twenty-seven (27) months
from the Offering Date. If on the Purchase Date of any Offering hereunder, as
delayed to the maximum extent permissible, the Plan is not registered, no
rights granted under the Plan or any Offering shall be exercised and all
payroll deductions accumulated during the Offering Period (reduced to the
extent, if any, such deductions have been used to acquire stock) shall be
distributed to the participants, without interest.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the rights granted under the
Plan. If, after reasonable efforts, the Company is unable to obtain from any
such regulatory commission or agency the authority which counsel for the
Company deems necessary for the lawful issuance and sale of stock under the
Plan, the Company shall be relieved from any liability for failure to issue
and sell stock upon exercise of such rights unless and until such authority is
obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to rights granted under the Plan
shall constitute general funds of the Company.
11. RIGHTS AS A STOCKHOLDER.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shareholdings acquired upon
exercise of rights hereunder are recorded in the books of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange
of shares, change in corporate structure or otherwise), the Plan and
outstanding rights will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan and the class(es) and number of shares
and price per share of stock subject to outstanding rights.
(b) In the event of: (1) a dissolution or liquidation of the Company;
(2) a merger or consolidation in which the Company is not the surviving
corporation; (3) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's Common Stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other
6.
<PAGE>
property, whether in the form of securities, cash or otherwise; or (4) any
other capital reorganization in which more than fifty percent (50%) of the
shares of the Company entitled to vote are exchanged, then, as determined by
the Board in its sole discretion (i) any surviving corporation may assume
outstanding rights or substitute similar rights for those under the Plan, (ii)
such rights may continue in full force and effect, or (iii) participants'
accumulated payroll deductions may be used to purchase Common Stock
immediately prior to the transaction described above and the participants'
rights under the ongoing Offering terminated.
13. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 12 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company within twelve (12) months before or after the
adoption of the amendment, where the amendment will:
(i) Increase the number of shares reserved for rights under the
Plan;
(ii) Modify the provisions as to eligibility for participation in
the Plan (to the extent such modification requires stockholder approval in
order for the Plan to obtain employee stock purchase plan treatment under
Section 423 of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended ("Rule 16b-
3")); or
(iii) Modify the Plan in any other way if such modification requires
stockholder approval in order for the Plan to obtain employee stock purchase
plan treatment under Section 423 of the Code or to comply with the requirements
of Rule 16b-3.
It is expressly contemplated that the Board may amend the Plan in any respect
the Board deems necessary or advisable to provide eligible employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to employee stock purchase plans
and/or to bring the Plan and/or rights granted under it into compliance
therewith.
(b) Rights and obligations under any rights granted before amendment of
the Plan shall not be altered or impaired by any amendment of the Plan, except
with the consent of the person to whom such rights were granted or except as
necessary to comply with any laws or governmental regulation.
14. 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 the end of an
Offering but prior to delivery to him 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 during an Offering Period.
7.
<PAGE>
(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.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on June 8, 2008. No rights may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom such rights were granted
or except as necessary to comply with any laws or governmental regulation.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no rights
granted under the Plan shall be exercised unless and until the Plan has been
approved by the stockholders of the Company.
8.
<PAGE>
EXHIBIT 10.5
TERAYON COMMUNICATION SYSTEMS
1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED BY THE BOARD OF DIRECTORS ON JUNE 9, 1998
APPROVED BY SHAREHOLDERS ON _____________, 1998
1. PURPOSE.
(A) The purpose of the 1998 Non-Employee Directors' Stock Option Plan (the
"Plan") is to provide a means by which each director of Terayon Communication
Systems (the "Company") who is not otherwise at the time of grant an employee
of or consultant to the Company or of any Affiliate of the Company (each such
person being hereafter referred to as a "Non-Employee Director") will be given
an opportunity to purchase stock of the Company.
(B) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company as those terms are defined in
Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended from time to time (the "Code").
(C) The Company, by means of the Plan, seeks to retain the services of
persons now serving as Non-Employee Directors of the Company, to secure and
retain the services of persons capable of serving in such capacity, and to
provide incentives for such persons to exert maximum efforts for the success
of the Company.
2. ADMINISTRATION.
(A) The Plan shall be administered by the Board of Directors of the
Company (the "Board") unless and until the Board delegates administration to a
committee of the Board, as provided in subparagraph 2(b).
(B) The Board may delegate administration of the Plan to a committee
composed of two (2) or more members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore
possessed by the Board, subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest
in the Board the administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(A) Subject to the provisions of paragraph 10 relating to adjustments upon
changes in stock, the stock that may be issued pursuant to options granted
under the Plan shall not exceed in the aggregate two hundred thousand
(200,000) shares of the Company's common stock. If any option granted under
the Plan shall for any reason expire or otherwise terminate without having
been exercised in full, the stock not purchased under such option shall again
become available for the Plan. If any shares of the Company's common stock
1
<PAGE>
acquired pursuant to the exercise of an option shall for any reason be
repurchased by the Company under a repurchase option provided under the Plan,
the stock repurchased by the Company under such repurchase option shall revert
to and again become available for issuance under the Plan.
(B) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors of the Company.
5. NON-DISCRETIONARY GRANTS.
(A) Each person who is first elected or appointed to the Board as a Non-
Employee Director after the Effective Date automatically shall, on the date of
such initial election or appointment, be granted an option to purchase Thirty
Thousand (30,000) shares of common stock of the Company on the terms and
conditions set forth herein.
(B) Each Non-Employee Director who is serving as a Non-Employee Director
immediately following each Annual Meeting of Shareholders, commencing with the
Annual Meeting of Shareholders occurring in calendar year 1998, automatically
shall be granted on such date an option to purchase Twelve Thousand Five
Hundred (12,500) shares of common stock of the Company, which amount shall be
pro-rated for any Non-Employee Director who has not continuously served as a
Non-Employee Director for the twelve (12)-month period prior to the date of
such Annual Meeting of Shareholders, on the terms and conditions set forth
herein.
(C) Each Non-Employee Director who is serving as a member of a committee
of the Board immediately following each Annual Meeting of Shareholders,
commencing with the Annual Meeting of Shareholders occurring in calendar year
1999, automatically shall be granted, for each such committee, an option to
purchase Three Thousand (3,000) shares of common stock of the Company, which
amount shall be pro-rated for any Non-Employee Director who has not
continuously served as a Non-Employee Director for the twelve (12)-month
period prior to the date of such Annual Meeting of Shareholders, on the terms
and conditions set forth herein.
6. OPTION PROVISIONS.
Each option shall be subject to the following terms and conditions:
(A) The term of each option commences on the date it is granted and,
unless sooner terminated as set forth herein, expires on the date ("Expiration
Date") ten (10) years from the date of grant. If the optionee's service as a
Non-Employee Director or employee of or consultant to the Company or any
Affiliate terminates for any reason or for no reason, the option shall
terminate on the earlier of the Expiration Date or the date three (3) months
following the date of termination of such service; provided, however, that (i)
if such termination of service is due to the optionee's death, the option
shall terminate on the earlier
2
<PAGE>
of the Expiration Date or eighteen (18) months following the date of the
optionee's death or (ii) if such termination of service is due to the
optionee's permanent and total disability within the meaning of Section
22(e)(3) of the Code ("Disability"), the option shall terminate on the earlier
of the Expiration Date or twelve (12) months following the date of the
optionee's Disability. In any and all circumstances, an option may be
exercised following termination of the optionee's service as a Non-Employee
Director of the Company or any Affiliate only as to that number of shares as
to which it was exercisable as of the date of termination of such service
under the provisions of subparagraph 6(e).
(B) The exercise price of each option shall be one hundred percent (100%)
of the Fair Market Value of the stock (as defined in subsection 9(d)) subject
to such option on the date such option is granted.
(C) The optionee may elect to make payment of the exercise price under one
of the following alternatives:
(I) In cash (or check) at the time of exercise;
(II) Provided that at the time of the exercise the Company's common
stock is publicly traded and quoted regularly in The Wall Street Journal,
payment by delivery of shares of common stock of the Company already owned by
the optionee, held for the period required to avoid a charge to the Company's
reported earnings, and owned free and clear of any liens, claims, encumbrances
or security interest, which common stock shall be valued at its Fair Market
Value on the date immediately preceding the date of exercise;
(III) Pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board which results in the receipt of cash
(or check) by the Company either prior to the issuance of shares of the
Company's common stock or pursuant to the terms of irrevocable instructions
issued by the optionee prior to the issuance of shares of the Company's common
stock; or
(IV) Payment by a combination of the methods of payment specified in
subparagraph 6(c)(i) through 6(c)(iii) above.
(D) An option shall be transferable only to the extent specifically
provided in the option agreement; provided, however, that if the option
agreement does not specifically provide for the transferability of the option,
then the option shall not be transferable except by will or by the laws of
descent and distribution, and shall be exercisable during the lifetime of the
person to whom the option is granted only by such person or transferee
pursuant to such an order. Notwithstanding the foregoing, the optionee may, by
delivering written notice to the Company in a form satisfactory to the
Company, designate a third party who, in the event of the death of the
optionee, shall thereafter be entitled to exercise the option.
(I) Options granted pursuant to Section 5 shall vest and become
exercisable as to thirty-three percent (33%) of the shares on the first
anniversary of the date of grant and one-thirty-sixth (1/36) of the shares
monthly thereafter over the next 24 months, provided that the optionee has,
during the entire period prior to each such vesting
3
<PAGE>
installment date, continuously served as a director or employee of or
consultant to the Company or any Affiliate of the Company, whereupon such
option shall become fully vested and exercisable in accordance with its terms
with respect to that portion of the shares represented by that installment.
(E) The Company may require any optionee, or any person to whom an option
is transferred under subparagraph 6(d), as a condition of exercising any such
option: (i) to give written assurances satisfactory to the Company as to the
optionee's knowledge and experience in financial and business matters; and
(ii) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the option for such person's own
account and not with any present intention of selling or otherwise
distributing the stock. These requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (x) the issuance of the shares
upon the exercise of the option has been registered under a then currently
effective registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), or (y), as to any particular requirement, a
determination is made by counsel for the Company that such requirement need
not be met in the circumstances under the then applicable securities laws. The
Company may require any optionee to provide such other representations,
written assurances or information which the Company shall determine is
necessary, desirable or appropriate to comply with applicable securities laws
as a condition of granting an option to the optionee or permitting the
optionee to exercise the option. The Company may, upon advice of counsel to
the Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the
transfer of the stock.
(F) Notwithstanding anything to the contrary contained herein, an option may
not be exercised unless the shares issuable upon exercise of such option are
then registered under the Securities Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would
be exempt from the registration requirements of the Securities Act.
(G) The option may, but need not, include a provision whereby the optionee
may elect at any time before the optionee's service as a Non-Employee Director
or employee of or consultant to the Company or any Affiliate terminates to
exercise the option as to any part or all of the shares subject to the option
prior to the full vesting of the option. Any unvested shares so purchased
shall be subject to a repurchase right in favor of the Company or any other
restriction the Board determines appropriate.
7. COVENANTS OF THE COMPANY.
(A) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of common stock
required to satisfy such options.
(B) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; provided, however, that
4
<PAGE>
this undertaking shall not require the Company to register under the
Securities Act either the Plan, any option granted under the Plan, or any
stock issued or issuable pursuant to any such option. If, after reasonable
efforts, the Company is unable to obtain from any such regulatory commission
or agency the authority which counsel for the Company deems necessary for the
lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise
of such options.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the Plan
shall constitute general funds of the Company.
9. MISCELLANEOUS.
(A) Neither an optionee nor any person to whom an option is transferred
under subparagraph 6(d) shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such option
unless and until such person has satisfied all requirements for exercise of
the option pursuant to its terms.
(B) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Non-Employee Director any right to continue in the
service of the Company or any Affiliate in any capacity or shall affect any
right of the Company, its Board or shareholders or any Affiliate to remove any
Non-Employee Director pursuant to the Company's Bylaws and the provisions of
the applicable laws of the Company's state of incorporation.
(C) No Non-Employee Director, individually or as a member of a group, and
no beneficiary or other person claiming under or through him, shall have any
right, title or interest in or to any option reserved for the purposes of the
Plan except as to such shares of common stock, if any, as shall have been
reserved for him pursuant to an option granted to him.
(D) As used in this Plan, "Fair Market Value" means, as of any date, the
value of the common stock of the Company 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, the Fair Market Value of a share of
common stock shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such exchange or market (or the
exchange or market with the greatest volume of trading in 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 Board deems reliable; or
(II) In the absence of an established market for the common stock,
the Fair Market Value shall be determined in good faith by the Board.
5
<PAGE>
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(A) If any change is made in the stock subject to the Plan, or subject to
any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange
of shares, change in corporate structure or other transaction not involving
the receipt of consideration by the Company), the Plan and outstanding options
will be appropriately adjusted in the class(es) and maximum number of shares
subject to the Plan and the class(es) and number of shares and price per share
of stock subject to outstanding options. Such adjustments shall be made by the
Board, the determination of which shall be final, binding and conclusive. (The
conversion of any convertible securities of the Company shall not be treated
as a "transaction not involving the receipt of consideration by the Company.")
(B) In the event of a Change in Control (as defined herein): (i) any
surviving corporation or acquiring corporation shall assume any options
outstanding under the Plan or shall substitute similar stock options
(including an option to acquire the same consideration paid to the
shareholders in a Change in Control) for those outstanding under the Plan, or
(ii) such options shall continue in full force and effect. In the event any
surviving or acquiring corporation refuses to assume such options, or to
substitute similar options for those outstanding under the Plan, the vesting
and time during which such options may be exercised shall be accelerated prior
to such event and the options terminated if not exercised after such
acceleration and at or prior to such event.
(C) For purposes of the Plan, a "Change in Control" shall mean: (1) a
dissolution, liquidation or sale of all or substantially all of the assets of
the Company; (2) a merger or consolidation in which the Company is not the
surviving corporation; (3) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's common stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise; or (4)
the acquisition by any person, entity or group within the meaning of Section
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or any comparable successor provisions (excluding any employee
benefit plan, or related trust, sponsored or maintained by the Company or any
Affiliate of the Company) of the beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule)
of securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of directors.
11. AMENDMENT OF THE PLAN OR OPTIONS.
(A) The Board at any time, and from time to time, may amend the Plan and/or
some or all outstanding options granted under the Plan. However, no amendment
to the Plan, including an amendment to increase the size of the share reserve
(except as provided in paragraph 10 relating to adjustments upon changes in
stock), shall be effective unless approved by the shareholders of the Company
to the extent shareholder approval is necessary for the Plan to satisfy the
requirements of Rule 16b-3 promulgated under the Exchange Act or any Nasdaq or
securities exchange listing requirements.
6
<PAGE>
(B) Rights and obligations under any option granted before any amendment
of the Plan or the agreement documenting such option shall not be impaired by
such amendment unless (i) the Company requests the consent of the person to
whom the option was granted and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(A) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate ten (10) years after the date adopted by
the Board. No options may be granted under the Plan while the Plan is
suspended or after it is terminated.
(B) The Plan shall terminate upon the occurrence of a Change in Control.
(C) Rights and obligations under any option granted while the Plan is in
effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the option was granted.
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
(A) The Plan shall become effective on the first date upon which any
security of the Company is listed (or approved for listing) upon notice of
issuance on any securities exchange, or designated (or approved for
designation) upon notice of issuance as a national market security on an
interdealer quotation system (the "Effective Date").
(B) Notwithstanding any other provision in the Plan to the contrary, no
option otherwise authorized under the Plan shall be granted unless and until
sufficient shares of the Company's common stock to be issued under the Plan
have been approved by the shareholders of the Company.
7
<PAGE>
Exhibit 10.6
SUPPLY AGREEMENT
Table of Contents
1. GENERAL........................................................ 1
2. SELLER'S REPRESENTATIONS....................................... 3
3. ACCESS TO SELLER'S SUBCONTRACTORS.............................. 3
4. KNOW-HOW AND SUPPORT........................................... 4
5. SALE AND PURCHASE OF PRODUCTS.................................. 5
6. INITIAL ORDER AND FEE PAYMENT.................................. 7
7. TERM; TERMINATION; RIGHTS AND OBLIGATIONS UPON TERMINATION..... 8
8. PRODUCT WARRANTY............................................... 10
9. PATENT INDEMNITY............................................... 11
10. DEFAULT........................................................ 12
11. POST WARRANTY OBLIGATIONS...................................... 13
12. FORCE MAJEURE.................................................. 14
13. MISCELLANEOUS.................................................. 15
14. APPLICABLE LAW; DISPUTES....................................... 17
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
1.
<PAGE>
SUPPLY AGREEMENT
This Supply Agreement ("Agreement") is entered as of March 3, 1998 (the
"Effective Date"), by and between Terayon Communication Systems ("Terayon" or
"Seller"), having its principal place of business at Bunker Hill Lane, Santa
Clara, California and ECI Telecom Ltd. ("ECI"), having its principal place at 30
Hasivim Street Petah Tikva, Israel.
WHEREAS, Seller is engaged in, among other things, the supply of production
grade modem modules or boards for cable telephony systems for transmission of
digital bit streams over coaxial or hybrid fiber/coax ("HFC") distribution
plants ("Modems");
WHEREAS, Buyer desires to purchase certain quantities of such Modem
subassemblies from Seller, and Seller is willing to supply such quantities of
such Modems subassemblies to Buyer, subject to the terms and conditions of this
Agreement and;
WHEREAS, ECI and some of its affiliated companies are engaged in sales of
HFC access platforms and such sales depend on the supply of Terayon modems, and
ECI has specific undertaking to a strategic customer (Telenet Flanders) with
which ECI has signed a supply agreement and which needs systems for deployment
at the end of March 1998;
WHEREAS, Seller and Telegate are parties to a "Development and Production
Agreement" dated January 4, 1995 and a subsequent "Amendment Agreement" dated
June 4, 1996 (collectively, the "Prior Agreements"); and
WHEREAS, it is the intention of the parties to terminate the Prior
Agreements, including all rights and obligations arising under the Prior
Agreements, as set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual promises
and
covenants set forth below, the parties agree as follows:
1. GENERAL
1.1 DEFINITIONS.
DEFINITIONS. In addition to the terms defined elsewhere in this Agreement and
its Annexes, the following terms shall have the meaning set forth below:
(a) THE SYSTEM means a cable access platform for carrying telecommunication
services over coaxial or HFC distribution plants, developed or being
developed by or for Buyer and/or Telegate; provided, however, any other
-------- -------
provision of this Agreement notwithstanding, Seller shall be obligated to
provide support to Buyer only with respect to modem issues related to
telephony applications.
(b) THE PRODUCT means a physical layer ("PHY") including a modem and radio
frequency ("RF") front end subsystem of the System, for transmission of
digital bit streams over coaxial or hybrid fiber/coax ("HFC") distribution
plants.
1.
<PAGE>
The Product includes the following main functional building blocks:.
(c) CENTRAL UNIT ("CU") MODEM - including: Down Stream - ("DS") data
transmitter, Up Stream - ("US") data receiver, DS and US synchronizer,
Control & Logic, Handling of all physical layer functionalities between
modems, e.g.: Channel coding, US Ranging control (timing and power),
Received chips alignments, End-to-End connection set- up etc., R.F/IF
interface, Medium Access Control - ("MAC") interface, interface to Host, RF
module, filters for all signals (including for RF and clock signals),
Built-in testing capability. The CU Modem shall be implemented either on a
single 6U VME board, or two 6U VME boards. If CU modem consists of two
boards, than the definition extends to include interconnecting accessories
(e.g. cables) as well as on board linear supply voltage regulator.
(d) REMOTE UNIT ("RU") MODEM - including: US data transmitter, DS data
receiver, Control & Logic, DS Synchronizer, Handling of all physical layer
functionalities between modems, e.g.: channel coding, US Ranging (timing
and power), Transmit chips timing, End-to-End connection set-up etc., RF/IF
interface, MAC interface, CPU interface, RF module, Built-in testing
capability. The baseband functions excluding RF module shall be implemented
in a single low cost ASIC.
(e) PRODUCT SPECIFICATIONS means the specification of the Product as defined in
Annex B hereto.
(f) $ means dollar of the United States of America.
(g) SUBCONTRACTORS means all third party entities selling materials (except
standard off-the-shelf components) and/or performing other services (e.g.
assembly, testing, engineering) which are used for manufacturing and supply
of the CU and/or RU Modems.
(h) BUYER includes Telegate, provided Telegate has written permission from ECI
to act as a Buyer under the provisions of this Agreement, and further
provided Telegate undertakes to comply with the relevant provisions of this
Agreement.
(i) INTELLECTUAL PROPERTY RIGHTS in this Agreement shall be defined as set
forth in Section 4.3 of Annex B attached hereto.
(j) DELIVERABLE ITEMS means any item, or parts thereof, that Seller is
obligated to provide under this Supply Agreement including but not limited
to Products, documentation, know how, information.
1.2 ANNEXES. All the Annexes (and the Appendices thereto) enumerated
bellow shall be integral parts of this Agreement:
ANNEX A Product Pricing
ANNEX B Prior Agreements
ANNEX C Annex C- Technical Documentation
2.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
In the event that discrepancies exist between this Agreement and any Annex
hereto, the provisions of this Agreement shall prevail. An Appendix to any
of the Annexes will be considered to be an inseparable part thereof.
1.3 HEADINGS. The headings in this Agreement are for convenience only and
shall not be regarded in the interpretation hereof.
1.4 Notwithstanding anything in this Supply Agreement, if any of the
following activities are not fully completed before March 13, 1998
(except for items identified elsewhere in this Supply Agreement for
later delivery, and for such items the condition will apply with the
date specified for them), this Supply Agreement shall be void and
null, and any fees paid under the terms of this Agreement to Seller by
Buyer or Telegate shall be immediately returned.
(a) Know-how transfer as defined in section 4;
(b) Delivery of documentation as defined in Annex C attached hereto;
and
(c) Signed agreements with all Subcontractors as defined in Section
3.
1.5 The Prior Agreements shall be terminated when the Product is
commercially deployed at the Buyer's first customer (Telnet Flanders)
in quantities of no less than [*****] RU units, that were commissioned
and expressly accepted by Telenet Flanders, and provided that Terayon
has timely met all of its undertakings to supply Deliverable Items
that are scheduled prior to the occurrence of the Event mentioned
above in this provision 1.5 (hereafter "Event"), in accordance with
the provisions of ANNEX B attached hereto.
1.6 CHANGES TO PRODUCT SPECIFICATIONS. Changes to the Product
Specifications shall be made by the written agreement of ECI and
Terayon.
2. SELLER'S REPRESENTATIONS.
2.1 INTELLECTUAL PROPERTIES; NO INFRINGEMENT. Seller represents and
warrants that it owns or has the right to use the intellectual
property and know how currently being used in the Product and to be
used in the development of the Product, and that in undertaking and
performing its obligations hereunder, it will not use the intellectual
property of third parties in the development of the Product. Such
intellectual property and know-how do not infringe on the proprietary
rights of any third parties, nor does any third party have any rights
to such intellectual property or know-how that have not been assigned
to Seller. In the event of a breach of this provision, Buyer's sole
and exclusive remedy shall be the Patent Indemnity set forth in
Section 9.
3. ACCESS TO SELLER'S SUBCONTRACTORS.
3.1 Immediately following the signing of this Agreement and in no event
later than March 5, 1998. Seller shall provide to Buyer a complete
list of Seller's Subcontractors who contribute to the manufacture,
production and/or assembling
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
3.
<PAGE>
of the Product. together with the name and telephone number of a
contact person at each such Subcontractor and a description of the
service performed by each such Subcontractor with respect to the
Product.
3.2 By March 18, 1998, Seller shall use its best efforts to amend its
agreements with all existing Subcontractors to provide for the
automatic and royalty-free assignment to Buyer of Seller's rights
under such agreements in the event that a Seller Triggering Event (as
defined in Section 7.3) occurs, and Seller shall keep Buyer apprised
of the results of such efforts and shall permit Buyer to participate
in all such discussions with existing Subcontractors regarding such
amendments. Seller hereby undertakes to use its best efforts to
include a substantially similar provision in each of its agreements
with its future Subcontractors. In the event that one or more
Subcontractors are unwilling to amend their agreements as set forth
above (the "Unwilling Subcontractors"), Seller shall use its best
efforts to locate a replacement source (the "Replacement Source") by
April 15, 1998 for the work to be performed by the Unwilling
Subcontractors. Seller shall be responsible for any increase in costs
of the Product to Buyer resulting from any Seller Triggering Event as
defined in Section 7.3. By April 30, 1998, Seller shall provide to
Buyer all know-how, documentation and setups for testing debugging and
integration and support of Subcontractors, as defined in Section 4.2,
for all phases of manufacturing and supply which are performed by
Seller.
4. KNOW-HOW AND SUPPORT.
4.1 Before March 13, 1998 (except for items identified elsewhere in this
agreement for later delivery, and for such items the condition will
apply with the date specified for them), Seller shall transfer
sufficient know-how to Buyer and Telegate, by way of frontal meetings
with relevant engineers and documentation, to enable Buyer and
Telegate to support the RU & CU Modems (Product), and Seller shall use
its best efforts to support Buyer's and Telegate's efforts to ensure
the successful interoperability of such Products with all other
elements of the System, independent of Seller. Time is of the essence
with respect to this provision.
4.2 The know how set forth in Section 3.2 and in this Section 4 shall
include all the details of modem functionality and design required for
detection and correction of all bugs or failures. In addition, this
know how shall enable Telegate to independently integrate and support
the Products themselves or other system functions related to or
affecting the Products, including engineering support to
Subcontractors.
4.3 This know how shall be accompanied by documentation (TECHNICAL
DOCUMENTATION) sufficient to enable independent and complete
purchasing of all components required for the manufacture and support
of CU and RU modems production, as well as full independent
maintenance, testing and integration of the Products alone and with
the System, including but not limited to the list of Technical
Documentation defined in ANNEX C.
4.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
This transfer of Technical Documentation and know how shall be deemed
to be complete only upon written approval by Telegate, which shall not
be unreasonably withheld. Notwithstanding the aforementioned, the
Technical Documentation and the know-how shall be deemed complete upon
the occurrence of the Event as set forth in Section 1.5 above.
4.4 Terayon will provide technical support during the term of this
Agreement in accordance with the terms of this Agreement for so long
as Buyer does not request any change in the Product Specifications as
set at the time the Event occurs.
5. SALE AND PURCHASE OF PRODUCTS.
5.1 ORDERS. Buyer shall purchase Products by submitting written purchase
order(s) ("PO(s)") to Seller. Any terms or conditions contained on any
Buyer purchase order that contradict the terms of this Agreement shall
be deemed rejected and shall be of no force or effect. Any additional
purchase commitment by Buyer, of cumulative quantities ordered beyond
[****], shall be valid only after the Event has been completed.
Prices for each item shall be determined in accordance with ANNEX A.
The final acceptance of Products shall be effective only after the
Event has been completed. Until that time, all acceptance shall be
provisional; provided, however, that in the event that Products
provided by Seller hereunder prior to the time the Event have been
completed are not accepted due to a reason that is unrelated to the
quality or working condition of such Products, such Products will be
deemed accepted when the Event have been completed.
5.2 DELIVERY AND TITLE. All Products will be delivered to Buyer in the
country of destination. However, it is agreed that the prices of the
Products are FOB United States airport. Seller will arrange in
coordination with Buyer for the air carriage insurance and freight
from such United States airport to country of destination, and the CIF
cost will be borne by Buyer. Buyer may itself make the arrangement
with the carrier, if it so chooses, and in such event, Seller will
coordinate, facilitate and effect the delivery as instructed by Buyer
from time to time.
5.3 ACCEPTANCE TESTING.
5.3.1 DEFINITION OF ACCEPTANCE TESTING. Acceptance testing is the
process of demonstrating and proving that the Product as a whole,
and/or any part of the Product, complies with all applicable
requirements of the Product Specifications.
5.3.2 TESTING REQUIRED. Acceptance testing shall be conducted by
Seller on each deliverable Product. Such acceptance testing shall
be successfully completed prior to delivery. Buyer shall be
permitted to witness all
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
5.
<PAGE>
acceptance tests and shall have access to all acceptance data.
Should the results of any of the tests performed by Seller prove
unsatisfactory, Seller shall immediately take all necessary steps
to rectify faults so as to bring the respective Products into
complete conformance with the Product Specifications and other
agreed upon requirements, and to obtain satisfactory results at
repeat tests that will be performed by Seller.
5.3.3 ACCEPTANCE TEST PROCEDURES.
(a) Seller shall prepare and submit to Buyer for approval Acceptance
Test Procedures ("ATP").
(b) ATP shall define comprehensive and sufficient tests to prove and
demonstrate that items passing the test meet all the requirements
of the Product Specifications.
(c) ATP shall define, among other things, the tests, signals inputs
and outputs, nominal values and tolerances, and the procedure
where test sequence is significant. Test equipment configuration,
test set-up, accuracy, loading and other arrangements shall be
defined for these tests.
5.4 CONFIGURATION MANAGEMENT.
Seller shall submit to Buyer a configuration management plan for approval.
An agreed upon document shall be released and implemented no later than
March 15,1998.
5.5 QUALITY ASSURANCE.
5.5.1 QUALITY SYSTEM. Seller shall use its best efforts to obtain ISO 9000
certification for the Quality System as soon as possible and shall
comply with the requirements of the Product Specifications.
5.5.2 QUALITY DOCUMENTATION. Drawings, procurement and process
documentation shall show evidence of Buyer's quality review by stamp,
signature or other means.
5.5.3 SERIALIZATION. All deliverable Products shall be serialized with
regard to the base part number. No two deliverable Products shall have
the same serial number. Serial numbers shall remain the same
regardless of configuration changes subsequent to acceptance testing.
Serial numbers of Products returned and subsequently not resubmitted
shall not be re-assigned.
5.5.4 SOURCE INSPECTION. Buyer shall have the option to perform source
inspection at Seller's facilities and/or Seller's Subcontractors;
provided such Subcontractors have consented to such source inspection.
Seller shall use its best efforts to obtain the consent of its
Subcontractors for such source inspection. The inspection shall be
performed by Buyer's
6.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
inspectors or by inspectors delegated by Buyer to perform the
source inspection by subcontracting. Seller shall give Buyer
access to all test equipment and facilities required to perform
the source inspection.
5.6 MAXIMUM DELIVERY TIME. Delivery dates in respect of each PO will be
agreed to by the parties from time to time, but in no event will
delivery exceed three months after the date a PO is issued.
5.7 MARKS AND PACKAGING. All Products will be packaged according to
standards of trade generally applicable to similar products shipped on
a global basis. Packaging and Marking shall be in accordance with the
laws of the country of destination. Any additional packaging requested
by Buyer shall be provided at Buyer's expense.
5.8 NOTIFICATION. Upon each shipment, Terayon shall notify Buyer
immediately of the identity of the carrier and expected time of
arrival to an international airport in the country of destination.
5.9 WARRANTIES. Acceptance of a Product shall not relieve Terayon from its
obligations thereunder with respect to warranties under section 8
below.
5.10 EXPEDITED DELIVERIES OR INCREASED ORDERS. Buyer may increase the order
for any particular Product by written notice received by Seller and in
accordance with Seller's lead-time schedule and charges (charges are
based on the price of the portion of the order that is changed or
increased). Seller will use reasonable commercial efforts to meet
Buyers requests for increases in orders or expedited delivery for less
than Seller's normal lead-times.
5.10A. TITLE; RISK OF LOSS. Title to Deliverable Items covered by this
Agreement shall pass to Buyer upon delivery of the Deliverable Items
FOB to a United States airport. Risk of loss of or damage to
Deliverable Items shall remain with Seller until delivery FOB to a
United States airport. This provision shall not derogate from Seller's
responsibilities related to Purchase Orders and Warranties under this
Agreement.
5.11 ADVERSE RESULTS; GOVERNMENT ACTION. Each party agrees to promptly
notify the other party of any adverse or unexpected results or any
actual or potential government action relevant to a Product of which
it becomes aware.
6. INITIAL ORDER AND FEE PAYMENT.
6.1 INITIAL ORDER. Buyer will issue a firm purchase order for a certain
quantity of CU and RU modems (the "Product") upon execution of this
Agreement the value of which order shall be [$*********] (the "Initial
Order") Upon the receipt by Buyer of a signed purchase order by Seller
reflecting the Initial Order, Buyer will pay to Seller a down-payment
of [$*******] (the "Down Payment") against the Initial Order which
will shall be used to pay for Buyer's purchase of the first [$*******]
worth of Products from Seller.
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
7.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
6.2 SECURITY FOR DOWN PAYMENT. As security for the Down Payment, within
ten (10 business days following any issuance and sale of Seller's
capital stock, whether in a public offering or in a private
transaction, Terayon shall provide to Buyer one of the following,
which shall be determined by Seller: (i) a guarantee to Buyer in the
amount of [********] (or, if any of such amount has been used by Buyer
to purchase the Products, the unused portion of the [********]) issued
by an FDIC-recognized financial institution as a performance bond or
(ii) immediate repayment of the then outstanding Down Payment which
has not been used by Buyer to purchase the Products.
6.3 PAYMENTS. Buyer shall make payments due to Terayon for Deliverable
Items either directly to Terayon or to such bank as Terayon may
designate in writing. All invoices received within a month shall be
paid before the end of the following month, except in the event that
Buyer protests or disputes an invoice during such period.
6.4 INVOICES; ERRORS. Invoices shall be submitted by Terayon in duplicate
(original and one copy) for each shipment and will enclose as an
integral part thereof documentary proof of delivery of the Deliverable
Items FOB United States airport, according to commercially accepted
standards for exports. Delays in invoices as well as errors and
omissions regarding Deliverable Items actually delivered, will be
considered just cause for withholding payment until such time as the
delay, errors or omission is remedied. Any such withholding pursuant
to this Section 6. 4 shall not be deemed a breach of this Agreement.
In no event shall Buyer have an obligation to pay for Deliverable
Items until such time as said Deliverable Items have been actually
delivered to Buyer and Buyer has been properly billed therefor.
6.5 TAXES. The prices of all Products and Deliverable Items hereunder are
inclusive of all taxes, duties, fees, excises and/or charges which are
now and may hereafter be directly imposed on the Products or
Deliverable Items or on Terayon with respect thereto at any time.
Notwithstanding the foregoing, Buyer shall bear the responsibility for
any taxes or duties imposed on Deliverable Items in Israel or other
country of destination, including, for example, taxes imposed on the
sale by Buyer of a System that includes Terayon products.
7. TERM; TERMINATION; RIGHTS AND OBLIGATIONS UPON TERMINATION.
7.1 The term of this Agreement, unless otherwise determined elsewhere in
this Agreement, shall be for two (2) years from the Effective Date,
unless terminated earlier by either party pursuant to the provisions
of this Section or extended by mutual written agreement of the
parties.
7.2 Notwithstanding the provisions of the previous paragraph 7.1 the
following provisions shall continue in effect after termination of
this Agreement in accordance with their terms:
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
8.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
(a) Payment provisions: any payment due at the time of termination shall
be paid in accordance with the terms of this Agreement.
(b) All warranties specified in the Agreement in accordance with their
terms.
(c) All Patent Indemnity obligations.
(d) Sections 14.1 and 14.2 (Applicable Law; Disputes) shall survive
termination and shall govern any dispute between the parties under the
Agreement that may subsequently arise.
(e) Sections 13 land 13.2 (Confidentiality and Advertising).
(f) Section 11.3 (Spare Parts).
7.3 BUYER'S RIGHT TO TERMINATE. Buyer shall have the right, by providing Seller
with written notice, to immediately terminate this Agreement upon the
occurrence of any of the following events, any one of which shall be
considered a "Seller Triggering Event:"
(a) Seller fails to make payments as provided in this Agreement, unless
such failure is cured within thirty (30) days from receipt of written
demand for such payment. Any late payments shall bear interest at the
annual rate of LIBOR plus 2%;
(b) Seller discontinues the Product;
(c) Seller is adjudged bankrupt;
(d) Seller files a voluntary petition in bankruptcy or liquidation or for
the appointment of a receiver;
(e) Filing of an involuntary petition to have Seller declared bankrupt, or
subject to receivership, provided that such petition is not vacated or
set aside within ninety (90) days from the date of filing;
(f) The execution by Seller of any assignment for the benefit of
creditors;
(g) Seller breaches any material provision of this Agreement and fails to
cure such material breach within [*****] from receipt of written
notice describing the breach; and
(h) Breach by Seller of the Confidentiality Agreement or the Proprietary
Information Mutual Non Disclosure Agreement.
7.4 SELLER'S RIGHT TO TERMINATE. Seller shall have the right, by providing
Buyer with written notice, to immediately terminate this Agreement upon the
occurrence of any of the following events, any one of which shall be
considered a "Buyer Triggering Event:"
(a) Buyer fails to make payments as provided in this Agreement, unless
such failure is cured within thirty (30) days from receipt of written
demand for such payment. Any late payments shall bear interest at the
annual rate of LIBOR plus 2%;
(b) Buyer is adjudged bankrupt;
(c) Buyer files a voluntary petition in bankruptcy or liquidation or for
the appointment of a receiver;
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
9.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
(d) Filing of an involuntary petition to have Buyer declared bankrupt, or
subject to receivership, provided that such petition is not vacated or
set aside within ninety (90) days from the date of filing;
(e) The execution by Buyer of any assignment for the benefit of creditors;
(f) Buyer breaches any material provision of this Agreement and fails to
cure such material breach within [*******] from receipt of written
notice describing the breach; and
(g) Breach by Buyer of the Confidentiality Agreement or the Proprietary
Information Mutual Non Disclosure Agreement.
8. PRODUCT WARRANTY.
8.1 PRODUCT WARRANTY. The following items 8.l through 8.6 refer only to
Product Warranty.
(a) Terayon warrants that all Products, including components thereof, to
be delivered hereunder, will conform to the Product Specifications, be
free from defects in and malfunctions arising from workmanship,
material and design. Provided Buyer gives written notice of any
defect, deficiency or non-conformance of any Product, or parts
thereof, within: (i) 12 months from the date on which the
end-customer, the operator or network provider who uses the system for
providing services accepts an item of Product with respect to the
first [*****] units delivered hereunder; and (ii) 15 months from the
date on shipment date (airwaybill date) of an item of Product with
respect to subsequent units delivered hereunder (the "Warranty
Period") Seller shall, at no cost to Buyer, and within the
"Turn-Around Time" as defined in Section 8.2(a) below, repair or
furnish replacements for all such defective, deficient or
non-conforming items or parts thereof or accept their return and
provide a credit for their purchase amount.
(b) The above warranty shall not apply:
(i) if the Product or Deliverable Item is not used for its intended
purpose or is misused or abused;
(ii) if the nonconformity is caused by a modification to the Product
or Deliverable Item made by Buyer or a third party which was not
approved by Seller.
8.2 TURN-AROUND TIME.
(a) "Turn-Around Time" for the purposes of this Section 8 means
[********************] from the date on which such defective item, or
defective or non- conforming part thereof, is furnished to Terayon at
port of entry in the USA, for repair or replacement until the date on
which such replaced or repaired item is returned to Buyer in Israel or
to such other location specified by Buyer.
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
10.
<PAGE>
(b) Terayon shall bear air shipment costs of the deficient, repaired
or replaced item as well as the risk or loss or damage to the
item or its replacement throughout the period between the
shipment of the defective item and the receipt of the repaired or
replaced item. Repaired or replaced items shall be subject to the
warranty provided on the original Product only (the time during
which Seller repairs or replaces the item shall not be considered
as part of the warranty period), in accordance with this Section
8. Notwithstanding the above Buyer shall bear all expenses if no
fault was found in the items returned for repair; provided that
there is an identical test setup for such items at Seller and
Telegate.
8.3 INSPECTION; ACCEPTANCE. This warranty shall survive inspection,
acceptance, or payments by Buyer and is provided for the sole and
exclusive benefit of Buyer and shall not extend to any third party,
including, without limitation, any reseller or end-user.
8.4 EXCLUSIVE REMEDY. The warranty granted in this Section 8sets forth
Buyer's sole and exclusive remedies and Seller's sole and exclusive
liability for any claim of warranty for any product produced delivered
by Seller.
8.5 NO AUTHORITY. Buyer acknowledges that it is not authorized to make any
warranty or representation on behalf of Terayon or its suppliers
regarding the Product, whether express or implied, other than the
warranty terms set forth in this Section 8.
8.6 NO IMPLIED WARRANTY. The foregoing warranties are the sole and
exclusive warranties, whether express or implied, given by Seller in
connection with the product, and Seller disclaims implied warranties.
Except as expressly provided herein, Seller makes no additional
warranties, express, implied, arising from course of dealing or usage
of trade as to any matter whatsoever.
9. PATENT INDEMNITY.
9.1 PATENT INDEMNITY Seller shall, at its sole cost and expense,
indemnify, defend and hold Buyer harmless from and against any claims,
demands, liability or suit, including costs and expenses, for or by
reason of any actual or alleged infringement of any third party
patent, trademark, or copyright resulting from the design,
development, manufacture, use, sale or disposal of any Product or
Deliverable Items furnished hereunder. Buyer shall promptly notify
Seller in writing of any such infringement claim after Buyer first
learns of such claim, and shall provide Seller with such assistance
and cooperation as Seller may reasonably request from time to time in
connection with the defense thereof. In the event Buyer determines
that Seller is unable or unwilling to defend the claim, Buyer may
assume control of the defense of any infringement claim; provided that
under such circumstance Buyer shall bear all costs of such defense
(but not of any consequent judgment or liability). If any settlement
requires an affirmative obligation of, results in any ongoing
liability to, or prejudices or detrimentally
11.
<PAGE>
impacts in any way, Buyer, then such settlement shall require Buyer's
written consent.
9.2 RIGHT TO SUBSTITUTE. Should Buyer be prevented as a result of such
claims, actions, or suits regarding infringement, from utilizing the
Product or Deliverable Items in question, or if Seller believes such a
claim is likely, then Seller shall, at Seller's expense, either
substitute an equivalent non- infringing item, or modify the item so
that same no longer infringes but remains equivalent, or obtain (at
its own expense) for Buyer the right to continue use of the item in
accordance with the terms of this Agreement.
9.3 PROCEDURE. Seller's obligation to indemnify will be subject to the
following terms and conditions:
(a) The obligation will arise only if Seller receives prompt written
notice of the infringement claim.
(b) The parties recognize that the Product or Deliverable Item will
be used within the System. The obligation will not cover any
claim that the Product infringes any third party's rights only as
used in combination with any soft-ware or hardware not supplied
by Seller, if that claim could have been avoided by the use of
the Product in combination with equivalent other available
software or hardware. The foregoing exclusion applies only if the
Product is used outside the System.
10. DEFAULT
10.1 Remedy Upon Occurrence of Triggering Event. In the event that this
Agreement is terminated pursuant to Section 7.3 above, Buyer shall
have the right to:
(a) Use the Know how in accordance with the terms and provisions of
Section 4;
(b) Obtain access to the Subcontractors and payment by Seller for any
increase in costs of the Product to Buyer resulting from any such
Seller Triggering Event;
(c) Exercise any and all financial guaranties provided by Seller; and
(d) Exercise any and all rights surviving such termination pursuant
to Section 7.2.
The foregoing expresses Buyer's sole remedy and Seller's sole liability in
the event of such occurrence.
10.2 SUBCONTRACTORS TRIGGERING EVENT. Subject to the terms of this
Agreement (including Seller's responsibility for any increase in costs
of the Product resulting from the Unwilling Subcontractors' refusal to
amend their agreements as set forth
12.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
in Section 3.2 above), Seller hereby grants Buyer, so that
Telegate may utilize a second source from which to purchase its
requirements of the Product, a worldwide, nonexclusive,
nontransferable, nonsublicensable, personal right and license
(the "License") to use in accordance with Section 4.1 above
Seller's INTELLECTUAL PROPERTY RIGHTS as defined in Section 4.3
of Annex B to modify, maintain, upgrade, support, manufacture and
distribute the Product only as part of Telegate's System, which
Telegate may exercise only after the occurrence of any of the
following events (collectively, "Subcontractors Triggering
Events"): (i) Seller's failure to support the Product in
accordance with this Agreement within thirty (30) days after
receipt of written notice from Telegate; (ii) Seller's failure to
supply Buyer with a reasonable supply of the Product within
ninety (90) days after receipt of a PO from Buyer; or (iii) Buyer
terminates this Agreement based upon a Triggering Event as
defined in Section 7.3 above; or (iv) in the event of Force
Majeure as defined in Section 12, which prevents Terayon from
performing its obligations.
Notwithstanding the foregoing, Buyer shall be entitled as and
from the occurrence of a "Subcontractors Triggering Event" to
sublicense the License as defined herein above to the extent
required to enable a second source to modify, maintain, upgrade,
support, manufacture and distribute the Product only as part of
Telegate's System.
11A. LIMITATION OF LIABILITY.
11A1. IN NO EVENT SHALL SELLER'S AGGREGATE LIABILITY TO BUYER OR ANY
OTHER PARTY ARISING HEREUNDER OR IN CONNECTION WITH THE PRODUCTS,
HARDWARE, SOFTWARE OR DOCUMENTATION PROVIDED BY SELLER UNDER THIS
AGREEMENT EXCEED A SUM EQUAL TO U.S. [***********]. THIS
LIMITATION IS CUMLATIVE, WITH ALL PAYMENTS BY SELLER BEING
AGGREGATED TO SATISFY THE LIMIT. THE EXISTENCE OF ONE OF MORE
CLAIMS WILL NOT ENLARGE THE LIMIT.
11A2. NEITHER PARTY SHALL BE LIABLE FOR ANY SPECIAL, INCIDENTAL,
CONSEQUENTIAL, INDIRECT OR PUNITIVE DAMAGES (INCLUDING LOST
REVENUES OR PROFITS), REGARDLESS OF WHETHER SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
11. POST WARRANTY OBLIGATIONS
11.1 SUPPORT. Seller agrees that for the term of this Agreement, plus
the warranty period, it will retain at its offices, a staff of
technical personnel who are expert in the design, manufacture and
trouble-shooting of the Product and Deliverable Items supplied
under this Agreement. This staff will be available to render
assistance to Buyer upon request and will respond to Buyer's need
for special technical assistance regarding the Product or a
Deliverable Item and will provide such assistance as may be
required to support systems integration, system debug,
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
13.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
basic parameter changes in the Product, Product modification, Product
upgrades, customer and production support in accordance with the
provisions of Section 4 ("Know-How and Support").
11.2 REPAIR. During the term of this Agreement, in the event that Buyer
requires repair of the Product, or any part thereof, after the date of
completion of Seller's warranty obligations under this Agreement,
Seller will perform such repairs on terms at and prices in accordance
with its standard support and maintenance fees, or at a fair and
reasonable prices if standard fees have not been set.
11.3 SPARE PARTS. Terayon undertakes, for a period of [*******] after the
completion Seller's warranty obligations under this Agreement, to
supply Buyer with spare parts for the Product and the Deliverable
Items as Buyer may request from time to time, at prices that are fair
and reasonable, considering prevailing market prices at the time said
items are ordered, and which in no event shall exceed the prices
charged by Seller to its most-favored customers purchasing the same
items in comparable quantities on equivalent terms.
11.4 The above does not derogate from all other warranties defined
elsewhere in this Agreement.
12. FORCE MAJEURE
12.1 EVENTS OF FORCE MAJEURE. Neither party shall be liable for a default
or delay in the performance under this Agreement if and to the extent
such default or delay is caused, directly or indirectly, by (i) fire,
flood, natural disturbances or other acts of God; (ii) any outbreak or
escalation of hostilities, war, civil commotion, riot or insurrection;
(iii) any act or omission of the other party or any governmental
authority; or (iv) any other similar causes beyond the control of such
party that arise without the fault or negligence of such party. Any
delay resulting from such events shall be referred to herein as a
"Force Majeure", shall not constitute a default by such party under
this Agreement and shall entitle the delayed party to a corresponding
extension of its delayed obligation. The party whose performance will
be delayed by such events will use its best efforts to notify the
other party within three (3) days after delayed party becomes aware of
such event, as well as the cessation thereof.
12.2 SUBCONTRACTOR'S DEFAULT. With respect to delays in performance by
Seller's semiconductor or fabrication subcontractors or suppliers,
such delays shall be deemed excusable delays with respect to Terayon
only if (i) such subcontractor's non-performance is caused by Force
Majeure and (ii) Seller could not have obtained the supplies or
services of such subcontractor from other sources in sufficient time
to prevent interruption of' Seller's performance of this Agreement.
12.3 TERMINATION.
(a) If Force Majeure results in the extending of any delivery under
this Agreement by more than sixty (60) days, Buyer may terminate
this
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
14.
<PAGE>
Agreement in whole or in part of the PO's delayed and such
termination shall not be deemed a breach of this agreement.
(b) If Buyer does not terminate by the said 60 days, and the Force
Majeure prevails for further 45 days Buyer may terminate this
agreement in whole or in pan of the PO's delayed, and will be
entitled to use the Know how in accordance with the provisions of
Section 4.2 and access to Subcontractors pursuant to Section 3,
but it shall have no right to claim damages from Terayon for
breach of the agreement. The foregoing expresses Buyer's sole
remedy and Seller's sole liability for such termination resulting
from Force Majeure.
13. MISCELLANEOUS
13.1 CONFIDENTIALITY OF AGREEMENT; PERMITTED DISCLOSURES. Throughout the
term of this Agreement, each party agrees that the terms of this
Agreement shall be kept confidential. No disclosure as to Buyer's
customers' or end-users' identity or other information concerning this
Agreement shall be released by Seller or its subcontractors without
the prior written consent of Buyer except (i) in Seller's or Buyer's
communication with its respective shareholders, investors or potential
investors, provided any such disclosure is made in confidence and (ii)
as to such advertising or other marketing in which Seller may engage
in the ordinary course of business.
13.2 REQUIRED DISCLOSURES; ADVERTISING. Notwithstanding Section 13.1 above:
(a) Each party may divulge information hereunder as is reasonably
required for the performance of the Agreement or as is required
by law; and
(b) Each party shall have the right to list any other party as a
customer or supplier (as the case may be) in its advertising
material.
13.3 EXPORT LICENSES; COMPLIANCE WITH EXPORT LAWS. Buyer's obligations
under this Agreement are conditional upon Seller obtaining valid
export license(s) from its government for shipment of the Product (if
required). If such licenses are not obtainable by Seller or are
revoked at any time prior to a scheduled shipment, Buyer shall have
the right to terminate this Agreement or cancel any purchase order for
which a license was refused, and such termination or cancellation
shall not be deemed to be a breach of this Agreement by Buyer. In the
event of such a termination, all payments paid by Buyer to Seller in
respect of untilled purchase orders will be refunded within thirty
(30) days of notice of such termination together with interest, using
the then current LIBOR plus 2% interest rate, thereon, to be
calculated from the date each such payment was made until the date
such payment is repaid in full. At their own expense, Seller and Buyer
shall comply with all applicable laws, regulations, rules, ordinances
and orders regarding their respective activities related to this
Agreement. Without limiting the foregoing, Seller and Buyer shall (i)
comply with the relevant export
15.
<PAGE>
administration and control laws and regulations, as may be amended
from time to time, to ensure that the Products are not exported
(directly or indirectly) in violation of United States law and (ii)
comply with the U.S. Foreign Corrupt Practices Act and shall not make
any payments to third parties which would cause Seller or Buyer to
violate such law. In addition, Buyer shall obtain any required Israeli
governmental authorizations including, without limitation, any import
licenses and foreign exchange permits.
13.4 SEVERABILITY. If any provision of this Agreement shall be held illegal
or unenforceable, that provision shall be limited or eliminated to the
minimum extent necessary so that this Agreement shall otherwise remain
in full force and effect and enforceable.
13.5 ASSIGNMENT. Neither Seller nor Buyer may assign this Agreement in
whole or in part, or any rights hereunder without the prior written
consent of the other, except to (i) a wholly owned subsidiary of such
party, (ii) a successor in interest of all or substantially all of
such party's assets or business or (iii) a bank trust company or other
financial institution for money due or to become due under this
Agreement (iv) an assignment by Buyer to Telegate. In the event of any
assignment, the assigning party shall promptly supply the other party
with two (2) copies of such assignment and, in the instance of an
assignment pursuant to this Section 13.6, shall indicate on each
invoice to whom payment is to be made. In the event of any assignment
pursuant to this Section 13.6, the assigning party also shall provide
a written guarantee by such party of the obligations assigned to such
party's subsidiary.
13.6 RELATIONS OF THE PARTIES. Nothing in this Agreement shall be construed
as creating relationship of principal and agent or of employer and
employee between the parties. Furthermore, nothing in this Agreement
is intended to constitute, create, give effect to or otherwise
contemplate a joint venture, partnership or formal business entity of
any kind. The rights and obligations of the parties with respect to
this Agreement shall not be construed as providing for sharing of
profits or losses arising out of the effort of either of the parties.
The parties shall not incur any liability on behalf of the other.
13.7 WAIVER. No waiver by either Seller or Buyer of any breach of this
Agreement shall be held to be a waiver of any other subsequent breach.
No waiver or time extension given by either Seller or Buyer shall have
effect unless made expressly and in writing.
13.8 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties, supersedes and cancels any previous
understandings or agreements between all the parties relating to the
provisions hereof, and expresses the complete and final understanding
of the parties in respect thereto. This Agreement may not be changed,
modified, amended or supplemented except by a written instrument
signed by the parties. This Agreement shall supersede the
16.
<PAGE>
Prior Agreements in their entirety upon the occurrence of the Event
identified in Section 1.5.
13.9 GOOD FAITH. Each party undertakes to carry out all its undertakings
hereunder in good faith and not to act in any way - directly or
indirectly and whether itself or with or through any third party -
which may breach or be incompatible with any of its undertakings
under this Agreement.
13.10 NOTICES. Any notice contemplated by or made pursuant to this
Agreement shall be in writing and shall be deemed delivered on the
date of delivery if delivered personally or by commercial overnight
courier with tracking capabilities or by fax, or five (5) days after
mailing if placed in the mail, postage prepaid, registered or
certified mail, return receipt requested, addressed to Buyer or
Seller (as the case may be). Any change of address shall be
designated by at least ten (10) days prior written notice.
Company ECI Telecom Ltd.
Attention Uri Kashti
Address 30 Hasivim Street
Petach Tikva 49130
Fax Number (972-3) 926-6400
Company TERAYON COMMUNICATION SYSTEMS INC.
Attention Dr. Zaki Rakib
Address 2952 Bunker Hill Lane
Santa Clara, CA 95054
Fax Number (408) 727-6205
Company Telegate Ltd.
Attention Ehud Iloni
Address 7 Haplada Street
Or-Yehuda 60218
Fax Number (972-3) 533-5877
14. APPLICABLE LAW; DISPUTES
14.1 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of Israel, providing the performance by
Seller hereunder does not result in any violation of the laws of the
state of California USA.
14.2 DISPUTES. It is the intent of the parties to settle all disputes
within the scope of this Agreement amicably by discussion and
negotiation. If, despite the parties' best efforts, the parties are
not able to settle a dispute, such dispute shall be resolved before
the courts of Tel-Aviv Israel. The parties hereby consent to the
exclusive jurisdiction of such courts for the purpose of resolving
disputes hereunder.
17.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the Effective Date written above.
SELLER: TERAYON COMMUNICATION SYSTEMS
By:
-----------------------------------
Printed Name:
-------------------------
Title:
--------------------------------
BUYER: ECI TELECOM LTD.
By:
-----------------------------------
Printed Name:
-------------------------
Title:
--------------------------------
TELEGATE
By:
-----------------------------------
Printed Name:
-------------------------
Title:
--------------------------------
18.
<PAGE>
Supply Agreement Between:
ECI Telecom Ltd. And Terayon Corporation
March 3, 1998
ANNEX A
PRODUCT PRICING
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
Product Pricing
---------------
The following units and pricing tables shall govern sales of the modems by
Seller to Buyer:
1. RU MODEM PRICE
RU Modem selling price to Buyer shall be fixed according to the following table:
All time-slots will be available to Buyer without any limit or additional
payment.
Cumulative Units Per [********]* Price Per Unit (US$)
- ------------------------------------------------------------------------
Up to [******] [***]
- ------------------------------------------------------------------------
From [****************] [***]
- ------------------------------------------------------------------------
From [****************] [***]
- ------------------------------------------------------------------------
Cumulative Units Per [********]* Price Per Unit (US$)
- ------------------------------------------------------------------------
Up to [******] [***]
- ------------------------------------------------------------------------
From [****************] [***]
- ------------------------------------------------------------------------
From [****************] [***]
- ------------------------------------------------------------------------
*) The first [*********************] from the Effective Date of this
Agreement.
**) The second [*********************].
Note.
For the first [*****] RU modems of [********] there will be an additional
fee of [****] for each deliverable RU modem.
2. CU MODEM PRICE
CU Modem selling price to Buyer shall be fixed according to the following table:
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
- -------------------------------------------------------------------
For Any Quantity Price Per Unit (US$)
- -------------------------------------------------------------------
First [***] [****]
- -------------------------------------------------------------------
From [**********] [****]
- -------------------------------------------------------------------
All modem time slots will be available to Buyer without any limit or additional
payment.
4. OTHER TERMS
a) The parties to this Agreement agree that these tables reflect the prices to
be paid for the number of units to be sold to Buyer, if any. Buyer may
order any quantity of these units at its sole discretion, in accordance
with these tables and the limitations set forth therein.
b) There will not be any additional fees and/or payments in the [*********],
associated with any item or service (such as for: licensing, maintenance
and maintenance support, integration support, production license etc.;
herein, "Support Services") for so long as Buyer does not request any
change in the Product Specifications as set at the time the Event is
completed.
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
Supply Agreement Between:
ECI Telecom Ltd. And Terayon Corporation
March 3, 1998
ANNEX B
PRIOR AGREEMENTS
4.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
PRIOR AGREEMENTS
The Prior Agreements shall be terminated upon the successful and timely
fulfillment of the Event under the terms agreed between Seller Telegate and ECI
in this Annex B.
1. COMPLETION OF DEVELOPMENT
1.1. Terayon undertakes to complete the design, development, testing and
manufacture of the Product in accordance with this Agreement;
1.2. The development of the Product shall be deemed to be complete when all of
the Events set forth in Section 1.5 of the Supply Agreement have been
completed.
1.3. Following the completion of all of the Events, the parties agree that
Telegate shall not be entitled to demand from Terayon any feature,
component or functionality in the Product which exceeds the Product
Specifications that specify the latest production version at the date upon
which completion of development has been achieved.
1.4. Currently the tasks ("Tasks") known to be required for the system to be
qualified for deployment are detailed in Appendix 1 of this Annex B. These
Tasks must be completed in accordance with the technical requirements of
Telegate and on time as agreed in Appendix 1 of this Annex B (and time is
of the essence)
1.5. TERAYON'S SOLE RESPONSIBILITY. It is hereby declared and agreed by the
parties that Terayon alone shall be responsible to Telegate for completing
the development and production of the Product and for the performance of
all its undertakings hereunder, whether performed by itself and/or
Terayon's subcontractors, and that Telegate's participation, approvals,
observation or inspection as provided for hereunder shall not be construed
in any way as derogating from or minimizing Terayon's obligations
hereunder; provided that Terayon's performance is not prevent, delayed or
hampered by an act or omission of Telegate and/or Buyer.
2. PRODUCT SPECIFICATIONS
2.1. Within five (5) days following the date on which [****] RU modems were
shipped, Seller shall update the Product Specifications to reflect the then
current production version of the Product and the then latest design
version of the Product, and such update shall be the final Product
Specifications.
2.2. This final Product Specifications shall be the applicable specifications
for the purpose of this Supply Agreement and changes to the Product
Specifications shall be made only by mutual agreement between the Parties.
2.3. Until such final Product Specifications exists the Product Specifications
pursuant to the Prior Agreements shall prevail.
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
5.
<PAGE>
3. CONSIDERATION
3.1. It is agreed that the payments in this Agreement are in complete
replacement of all NRE payments, that have not been paid yet, by Telegate
listed in the Prior Agreements.
4. TERMS OF TERMINATION
4.1. Seller and Telegate mutually agree to extinguish the Prior Agreements
referred to above. Agreements in accordance with paragraph 1.5 and other
terms of the Supply Agreement.
4.2. EXPLICIT WAIVER AND CONSENT. Upon completion of the Event as set forth in
Section 1.5 of the Supply Agreement, Telegate hereby knowingly and
explicitly waives any and all rights it has or may have had against Seller
in the Prior Agreements. Seller hereby knowingly and explicitly waives any
and all rights it has or may have had against Telegate in the Prior.
Agreements. The above waiver shall mean a full waiver and release of each,
every and all claims, demands, actions and causes of action, of every kind
and nature arising out of or relating to the Prior Agreements, which either
Telegate or Seller ever had, now has or may in the future have; and no such
claim, demand, action or cause of action, whether known or unknown or
suspected or unsuspected to Telegate or Seller.
4.3. Intellectual Property Rights. Intellectual Property Rights in the Prior
Agreements shall be amended as follows:
Section 14 of Prior Agreement shall read in its entirety as follows:
INTELECTUAL PROPERTY RIGHTS
The ownership of all intellectual property rights arising out of the performance
of this Agreement and all intellectual property rights owned by or licensed to
either of the parties hereto and required to carry out the terms of this
Agreement and/or to design, manufacture, sell, use and maintain Products (and
parts) produced, including without limitation, all related patent rights,
designs, copyrights, mask works, and applications therefor and trade secrets,
hereinafter the "INTELLECTUAL PROPERTY RIGHTS," falls into only one of the
following two categories:
1. Terayon shall own all rights, title and interest in and to the INTELLECTUAL
PROPERTY RIGHTS to all Product and parts thereof and software drivers of
the Product delivered by Terayon and design tools and technology therefor
(except as provided in category 2 below); and
2. Terayon and Telegate shall jointly own all rights, title and interest in
and to the INTELLECTUAL PROPERTY RIGHTS to interfaces between the System
and the Product and protocols for communicating between them, and protocols
for monitoring or controlling the Product.
Terayon hereby grants to Telegate an irrevocable, fully paid-up, non-
exclusive, non-transferable, non sublicensable license to use the Product
only within Telegate's System."
6.
<PAGE>
4.4 PROVISIONS SURVIVING THE TERMINATION OF PRIOR AGREEMENTS
Notwithstanding anything in this Supply Agreement the following provisions
shall continue in effect after termination of this Agreement in accordance
with their terms for any Products provided to Buyer under the Prior
Agreements:
a) Payment provisions: any payment due at the time of termination shall
be paid in accordance with the terms of this Agreement.
b) All warranties specified in the Prior Agreement.
c) All Patent Indemnity obligations.
d) All Intellectual Property Rights (Section 14) as amended above unless
otherwise specified in the Prior Agreements.
e) Section 26 (Applicable Law; Disputes) shall survive termination and
shall govern any dispute between the parties under the Agreement that
may subsequently arise.
f) The signed Non-Disclosure Agreement dated September 26, 1994.
g) Section 19 (Confidentiality and Advertising).
SELLER: TERAYON COMMUNICATION SYSTEMS
By:
-----------------------------------
Printed Name:
-------------------------
Title:
--------------------------------
BUYER: ECI TELECOM LTD.
By:
-----------------------------------
Printed Name:
-------------------------
Title:
--------------------------------
TELEGATE
By:
-----------------------------------
Printed Name:
-------------------------
7.
<PAGE>
APPENDIX 1 OF ANNEX B
The Tasks listed below, for technical development, as a result of
deviations from the Product Specification are the currently known minimum
required corrections to the modems as supplied on December 1997 that are
required for deployment. In the event that additional Tasks become required in
the course of testing and deploying the System, Telegate will notify Terayon,
and the parties shall promptly and jointly pursue a solution to the Task.
LIST OF TASKS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NO. TOPIC REQUIREMENT NOTES DATE
- -------------------------------------------------------------------------------------------------------
1 Spectral Characteristics: a) 48dbc Customer requires -- 1/98
adjacent channels b) all other channels 55dbc 60 dbc
- -------------------------------------------------------------------------------------------------------
2 Spectral Characteristics: c) US 50dbc Customer requires -- 1/98
Spurious & Hum d) DS 55dbc 60 dbc
- -------------------------------------------------------------------------------------------------------
3 Support of APP-CMC Ongoing until event occurs Now to
integration Event
- -------------------------------------------------------------------------------------------------------
4 Frame Shift Fix bug 31/3/98
- -------------------------------------------------------------------------------------------------------
5 Performance Monitoring a) Specifications 17/2/98
b) SW delivery 30/4/98
- -------------------------------------------------------------------------------------------------------
6 Time slot SNR status c) Specifications 17/2/98
d) SW delivery 30/4/98
- -------------------------------------------------------------------------------------------------------
7 Fall back on individual Specification 17/3/98
codes S/W Delivery 30/4/98
- -------------------------------------------------------------------------------------------------------
8 Recovery time 250 RU in 5 min or less 17/2/98
a) Specifications 31/3/98
b) SW delivery
- -------------------------------------------------------------------------------------------------------
9 Linear Regulatory on PCB layout and testing Delivery 3 month after 3 month
CU-RF receiving definition
from Telegate and
Telegate sign-off
- -------------------------------------------------------------------------------------------------------
10 Channel setup time 130ms concurrent on 6 Required by 28/2/98 TR Prop.
channels 31/3/98
- -------------------------------------------------------------------------------------------------------
11 Channel deactivations Non-sequential and less than Required by 28/2/98 TR Prop.
10ms for 6 channels 31/3/98
- -------------------------------------------------------------------------------------------------------
12 CU SW Source Code Delivery a) Required now for 13/3/98
integration
b) TR to support CMC
& APP SW merge
- -------------------------------------------------------------------------------------------------------
13 Recovery from TR to participate in finding a TF plant problem (50 30/3/98
intermittent DS solution to the problem to 100ms)
connection loss
- -------------------------------------------------------------------------------------------------------
</TABLE>
8.
<PAGE>
Supply Agreement Between:
ECI Telecom Ltd. And Terayon Corporation
March 3, 1998
ANNEX C
TECHNICAL DOCUMENTATION
9.
<PAGE>
TECHNICAL DOCUMENTATION
-----------------------
NEED TO SPECIFY DATES
1. The following documentation as defined below will be generated and provided
to Telegate during the development of the Product. This documentation
shall be under full configuration control and updates will be provided as
required.:
<TABLE>
<CAPTION>
<S> <C> <C>
NO. DESCRIPTION DATE
- --------------------------------------------------------------------------------------------------
1 Detailed Product Specifications Delivered
- --------------------------------------------------------------------------------------------------
2 Detailed block diagrams, released schematics including pin 10/2/98
out, connectors, released mechanical drawings, released
printed circuit boards assembly drawings and component
placement, bill of material.
- --------------------------------------------------------------------------------------------------
3 Test points module signals, description, level, waveform 28/2/98
or spectrum and expected level. See details below.
- --------------------------------------------------------------------------------------------------
4 Existing released Internal S/W documentation delivery 20/2/98
including functional specifications, memory maps, H/W
S/W interface document.
- --------------------------------------------------------------------------------------------------
5 Face to face meetings at Terayon. March 2nd 1998 to
March 13 1998
- Terayon will present the functional description of the CU
PHY S/W including functional modules and subsystems,
interrupt and service routines, tasks, inter-task
communications, inter-working with the operating system,
changes to the operating system, boot ROM S/W, real time
requirements and constrains, etc.
- Terayon will present the physical implementation of the PHY
S/W (source file structure, include file structure, make
files structure etc.)
- Terayon will present the CU PHY S/W build process.
- Terayon will transfer all source and any auxiliary files to
a Telegate's supplied.
SUN work station with installed WRS Tornado environment.
The build process will be executed at this work station to
obtain identical to current production operation executable
files. The process of delivery of the CU PHY S/W will be
deemed complete only after the successful completion of
activities as defined in this paragraph.
- --------------------------------------------------------------------------------------------------
6 Terayon will support e-mail and phone Q&A's regarding As required
</TABLE>
10.
<PAGE>
<TABLE>
<CAPTION>
CU PHY S/W as it should be necessary.
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
7 If required another three day meeting will be held at TBD
Terayon to complete the process of S/W transfer
- --------------------------------------------------------------------------------------------------
8 Terayon will deliver to Telegate the technical 20/2/98
documentation as defined in paragraph 4 and Annex C
(defined content of principle of operation).
- --------------------------------------------------------------------------------------------------
9 Terayon will deliver test points document describing: 28/2/98
module signals description, level, waveform or spectrum and
expected level as defined explicitly in Annex C.
- --------------------------------------------------------------------------------------------------
10 A face to face meeting will be held at Terayon. During March 2nd 1998 to
this meeting the following topics will be covered: March 13 1998
- Terayon will present the functional description of the
test points of CU and RU modems and provide measurement
interpretation and explanation.
- Principle of operation explanation as defined in
Annex C of the Supply Agreement.
- --------------------------------------------------------------------------------------------------
11 Terayon will support by e-mail and phone Q&A's regarding As required
principle of operation issues as it shall be necessary.
- --------------------------------------------------------------------------------------------------
12 If required another three day meeting will be held at TBD
Terayon to complete the process of principle of operation
and performance transfer.
- --------------------------------------------------------------------------------------------------
13 Register contents, description, functionality, 20/2/98
initialization and expected ranges.
- --------------------------------------------------------------------------------------------------
14 Released test procedures and test set-ups for ATP and VTP. 28/2/98
Relevant S/W for special test procedures. System level
tests.
- --------------------------------------------------------------------------------------------------
15 QA plans and procedures. 7/3/98
- --------------------------------------------------------------------------------------------------
16 MTBF analysis. 2/4/98
- --------------------------------------------------------------------------------------------------
17 Presentation of regulatory and environment issues: 17/2/98
Temperature, Cooling, Safety, EMC/EMI, handling --
vibration as performed on Seller's system
- --------------------------------------------------------------------------------------------------
</TABLE>
2. TEST POINTS
Test points places shall be indicated on the board layout and schematics.
2.1 CU
. TX signal D/A output, expected analogue level voltage output, noise level,
DC offset, clock frequency
. RX signal A/D input & clock frequency - same, (analogue input for A/D)
. TX CU analogue IF connection (after BPF)- (spectrum measurement): expected
level, min/max, spectrum mask, spur, harmonics, RF module gain, intermod
11.
<PAGE>
. TX HW ALC attenuation: min/max attenuation, min/max control voltage.
. RX CU analogue IF connection (atter BPF)- expected level, rain/max,
spurious rejection , noise level, RF module gain, intermod
. RX HW AGC attenuation: min/max attenuation, min/max control voltage.
. Synthesizers freq.- spur, noise (spectrum measurement), locking scheme
(i.e. reference freq., step, range), lock range after unlock, VCO control
voltage range
. Clock - frequency, level, timing, reference to other clocks/data: delays,
min/max PW
. Synthesizers freq. (or equivalently part mane/number): control signals,
timing, bit meaning.
. VCC (supply) voltage: level min/max, peak/RMS ripple, if filtered at
specific pin same
. Peak power consumption from each board at each voltage. (Expected power
consumption for each voltage measured already)
2.2 RU
. TX signal D/A output & clock frequency, expected analogue level voltage
output, noise level, DC offset,
. RX signal A/D input & clock frequency - same, (analogue input for A/D)
. TX RU RF output (after BPF) (spectrum measurement): expected level,
min/max, spectrum mask, spat, harmonics, m6dule gain: nominal, rain/max,
intermod
. TX HW ALC attenuation: min/max attenuation, min/max control voltage.
. RX RU analogue 12F (after BPF) -level expected, min/max: spurious
rejection, noise level, module gain: nominal, min/max, intermod
. RX HW AGC attenuation: min/max attenuation, min/max control voltage.
. Synthesizers freq.- spur, noise (spectrum measurement), locking scheme
(i.e. reference freq., step, range), lock range after unlock, VCO control
voltage range
. Clock - frequency, level, timing, reference to other clocks/data: delays,
min/max PW
. Synthesizers freq. (or equivalently part mane/number): control signals,
timing, bit meaning.
. Synthesizers freq. control signals, timing, bit meaning.
. VCC (supply) voltage: level min/max, peak/RMS ripple, if filtered at
specific pin same
12.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
. Peak power consumption at each voltage. (Expected power consumption for
each voltage measured already)
4 PRINCIPLE OF OPERATION
Note: Some of the data is given in the "Telegate external SW spec" dated 2/25/97
[****************************************.]
. CU initialization scheme, step from switch on to full operational- wait
time and conditions for each step.
. ame as in 1 above in case of recovery from any event such as long
intermittence. Time to detect synchronization or comm. Loss, time to
declare recovery is done.
. AGC process- internal/external partition, lock time & preferred
programmable parameters, lock in speed, controlled level variation,
expected error.
. ALC process (RU) - internal/ external partition, lock time & preferred
programmable parameters, lock in speed, controlled level variation,
expected error, activation rate.
. GAP processor- status timing, meaning, windows, missing relation of gap
detection thresholds to real world and level.
. CU Time base generator- status meaning, offset
. Non applicable
. Clock recovery - - lock time & preferred programmable parameters , lock
range, jitter on Clock recovery, freq. offset lock in range loop values -
clock recovery error, VCXO control voltage.
. Equalizer Upstream - process steps, timing, interval between step/process,
equalizer factor values, gain factor (LMS) recommended , success criteria,
pre-equalizer programming , including register descriptions.
. Equalizer downstream - - process steps, timing , interval between step/
process, equalizer factor values , gain factor (LMS) recommended , success
criteria, including register descriptions.
. R.X noise power, RX noise power- relationship, accepted level, integration
time, reset
. Non applicable
. Non applicable
. Ranging - sequences, process steps both CU and RU, timing, interval between
step/process, level/timing factor values: success criteria to pass from
step to step.
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
13.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
. Performance monitoring- meaning of each parameters, update rate, min/max
expected values.
. Access process collision detection and connection setup- update of
document.
. There is a "RACM" rotator amplifier [*****]
Non applicable
4 Terayon hereby undertakes to deliver to Telegate two sets of the Product
related documentation listed here above. Terayon undertakes to update said
documentation within 30 days after incorporation of any modifications in
the Product and to provide Telegate with copies as specified above of any
said updates.
Any documentation distribution, such as but not limited to: schematics,
drawings, specifications, software etc. related to the Product, shall be
limited as defined in the Non Disclosure Agreement dated 26 September 1994.
All documents shall be numbered and any additional copies shall be
destroyed after use.
5. Each item of the Product supplied (on or after January 31,1998) by Seller
shall be accompanied by individual ATP results and Certificate Of
Compliance (COC) both approved by signature of Seller's QA tester.
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
14.
<PAGE>
Exhibit 10.7
STRATEGIC PARTNERSHIP AND DISTRIBUTORSHIP AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this 4th day of
December, 1996, by and between: TERAYON CORPORATION (hereinafter called
"TERAYON"), a corporation organized and existing under the laws of California,
having its principal business office at 2952 Bunker Hill Lane, Santa Clara, CA,
USA and SUMITOMO CORPORATION, Information and Telecommunications Business Dept.
(hereinafter called "SUMITOMO"), a corporation organized and existing under the
laws of Japan, having its principal business office at 2-2, Hitotsubashi 1-
chome, Chiyoda-ku, Tokyo, Japan.
RECITALS:
WHEREAS, TERAYON has developed "S-CDMA" modulation and CATV/Internet
products which use S-CDMA as a result of its research and development efforts;
and
WHEREAS, SUMITOMO has promoted CATV and Internet related businesses in
Japan as a result of its efforts; and
WHEREAS, TERAYON is engaged in the business of manufacturing, selling and
exporting the products described herein; and
WHEREAS, TERAYON desires to promote the sales of such products in the
territory described herein; and
WHEREAS, TERAYON desires to appoint SUMITOMO as a strategic partner for
entering CATV/Internet products distribution business in accordance with the
terms and conditions of this Agreement; and
WHEREAS, SUMITOMO desires to obtain an exclusive right to market such
products in Japan and a non-exclusive right to market such products in the rest
of the world, and to obtain an option to manufacture TERAYON'S products for
resale.
NOW THEREFORE, the parties hereto, in consideration of the premises and
covenants and undertakings herein contained, mutually agree as follows:
ARTICLE 1
APPOINTMENT
1.1 Subject to the terms and conditions of this Agreement, TERAYON and
SUMITOMO hereby agree to become strategic partner for promoting CATV/Internet
products and TERAYON hereby appoints SUMITOMO as the exclusive distributor for
TERAYON'S CATV/Internet products described in Schedule A (hereinafter
----------
"PRODUCTS") in Japan (hereinafter "TERRITORY") and
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
1.
<PAGE>
as the non-exclusive distributor for PRODUCTS in the rest of the world
(hereinafter "NON-EXCLUSIVE TERRITORY").
1.2 Subject to the terms and conditions of this Agreement, TERAYON hereby
grants SUMITOMO an option to manufacture PRODUCTS for resale during the course
of this Agreement on terms and conditions to be agreed upon by the parties.
ARTICLE 2
DUTIES OF SUMITOMO
2.1 SUMITOMO hereby accepts such appointment as the exclusive distributor
for PRODUCTS in TERRITORY and the non-exclusive distributor for PRODUCTS in the
NON- EXCLUSIVE TERRITORY, and represents that it has reasonably adequate
facilities and personnel to perform the services hereinafter set forth, and
agrees to the following:
(a) It shall use its efforts through its sales and merchandising
programs to promote the sales of PRODUCTS within the TERRITORY and NON-EXCLUSIVE
TERRITORY.
(b) It shall solicit orders for and sell PRODUCTS within TERRITORY and
NON- EXCLUSIVE TERRITORY.
(c) SUMITOMO shall perform its own trial of PRODUCTS within TERRITORY
at its own expense.
(d) SUMITOMO shall demonstrate PRODUCTS at its booth in trade shows.
(e) It shall at all times conduct its affairs under this Agreement in
accordance with the high standards of business ethics and propriety.
(f) SUMITOMO shall provide sales support and front-line post-sales
support of PRODUCTS . TERAYON shall not be responsible for providing any support
for any PRODUCTS sold by SUMITOMO. In addition, SUMITOMO shall prepare Japanese
manuals and sales documents for PRODUCTS. TERAYON hereby grants SUMITOMO a
limited copyright license to use, modify, translate, create derivative works of,
reproduce and distribute, through multiple tiers of distribution, PRODUCT
documentation and sales literature produced by TERAYON for the purpose of
creating appropriate Japanese-language manuals and sales literature. SUMITOMO
will make copies of the Japanese-language manuals and sales literature available
to TERAYON at TERAYON'S request, and agrees to make any changes to these
materials required for technical accuracy.
(g) SUMITOMO shall cooperate with TERAYON to determine technical
specifications required for PRODUCTS to be successfully installed and work with
2.
<PAGE>
CATV/Internet systems in the TERRITORY and NON-EXCLUSIVE TERRITORY, and shall
communicate any modifications of the PRODUCTS required to conform to such
technical specifications to TERAYON with sufficient lead time to permit TERAYON
to make such modifications in a timely manner to fill SUMITOMO's orders for such
modified PRODUCTS.
ARTICLE 3
DUTIES OF TERAYON
3.1 During the term of this Agreement, TERAYON agrees as follows:
(a) TERAYON shall refer to SUMITOMO all inquiries or orders for
PRODUCTS which TERAYON receives directly from potential customers in the
TERRITORY as long as SUMITOMO is the exclusive distributor of PRODUCTS in the
TERRITORY.
(b) TERAYON shall use its best commercial efforts to produce PRODUCTS
suitable for installation and use in the TERRITORY pursuant to SUMITOMO's
requests for modifications as set forth in Section 2.1(g).
(c) TERAYON shall furnish to SUMITOMO, at no cost, a reasonable
quantity of available catalogues, quotation sheets, specifications and technical
data for the promotion of sales of the PRODUCTS in the TERRITORY and NON-
EXCLUSIVE TERRITORY.
(d) TERAYON shall provide reasonable technical sales assistance and
technical advice for use of PRODUCTS in combination with other products,
equipment, devices, software, systems, data or services not supplied by TERAYON
at any locations requested by SUMITOMO under terms and conditions to be agreed
upon by TERAYON and SUMITOMO.
(e) TERAYON shall provide initial training in the installation and use
of PRODUCTS at TERAYON'S California facilities and TERAYON'S field trial
location free of charge.
(f) TERAYON will use its best commercial efforts to supply PRODUCTS
according to all reasonable requirements of SUMITOMO in the TERRITORY and NON-
EXCLUSIVE TERRITORY, subject to the provisions of Article 5 ("Sale of
Products").
ARTICLE 4
PROHIBITION OF SALES IN TERRITORY
4.1 As long as SUMITOMO is the exclusive distributor of PRODUCTS in the
TERRITORY, TERAYON shall not sell any PRODUCTS to any person, firm or
corporation in TERRITORY other than SUMITOMO.
3.
<PAGE>
ARTICLE 5
SALES OF PRODUCTS
5.1 All sales of PRODUCTS hereunder shall be made by TERAYON to SUMITOMO
for SUMITOMO's resale to its customers. SUMITOMO shall be free to resell
PRODUCTS purchased from TERAYON to customers within TERRITORY and NON-EXCLUSIVE
TERRITORY at whatever prices and on whatever terms and conditions SUMITOMO
determines shall best promote the purpose of this Agreement.
5.2 SUMITOMO's purchase orders for SUMITOMO Products shall contain the
quantity to be purchased, the delivery destinations, the requested delivery
dates, any special shipping or delivery instructions, billing instructions and
any other special information required by this Agreement. The terms and
conditions of this Agreement with respect to the purchase and distribution of
SUMITOMO Products shall be incorporated into and made a part of each SUMITOMO
purchase order and each amendment thereto agreed on by the parties. TERAYON
reserves the right to reject any purchase order that is not consistent with the
terms of this Agreement The terms and conditions of this Agreement shall
supersede any terms set forth in any purchase order or other SUMITOMO document
delivered in connection with SUMITOMO's purchases under this Agreement, and any
terms and conditions appearing in any purchase order that are inconsistent with
or in addition to the terms and conditions of this Agreement shall be of no
force and effect. No general or form acknowledgment by TERAYON of any SUMITOMO
purchase order or any communications with respect to such an order, or the
making of deliveries with respect thereto, shall in any case be construed as
acceptance or approval of any change in the terms or conditions of this
Agreement.
5.3 Shipping terms shall be F.O.B. (INCOTERMS 1990) TERAYON'S manufacturing
facilities. SUMITOMO shall be responsible for all freight and related costs for
shipment to SUMITOMO's specified destinations.
5.4 All purchase orders shall be issued at least ninety (90) days before
the stated delivery date. Should urgent delivery be required, however, Terayon
will endeavor to expedite shipment in order to fulfill the order.
5.5 TERAYON will endeavor to fill all SUMITOMO orders for PRODUCTS insofar
as it is practicable and consistent with its production schedules to do so, but
in the event of its failure to fill all or part of any order, TERAYON shall not
be to any extent liable or responsible therefor. No SUMITOMO purchase order will
become fixed and binding on TERAYON unless and until accepted by TERAYON.
TERAYON may reject any purchase order that is not consistent with the terms of
this Agreement.
5.6 Payment for all PRODUCTS will be made in US Dollars within sixty (60)
days of TERAYON'S presentation of the applicable invoice and relevant shipping
documents.
4.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
5.7 Risk of loss from any cause whatsoever shall be borne by SUMITOMO from
the time of delivery of PRODUCTS to a carrier by TERAYON at the F.O.B. point
(INCOTERMS 1990). Unless otherwise instructed by SUMITOMO in writing, shipment
will be made by the means and carrier selected by TERAYON.
5.8 Title to all PRODUCTS will remain with TERAYON until full payment
therefor is made by SUMITOMO, provided that at no time will title to any
software or firmware included in or with the PRODUCTS pass to SUMITOMO.
5.9 TERAYON shall provide a limited warranty for the PRODUCTS as set forth
in Schedule B.
----------
ARTICLE 6
MINIMUM QUANTITY
6.1 SUMITOMO agrees to purchase from TERAYON the minimum annual quantities
of PRODUCTS set forth below (each year being measured from the date of TERAYON'S
first PRODUCTS shipment to SUMITOMO's end users, except shipments to SUMITOMO
for its field trial in the TERRITORY) without any penalty.
First Year: [*****] Quantity of "TeraPro" modems
Second Year: [******] Quantity of "TeraPro" modems
Third Year: [******] Quantity of "TeraPro" modems
Provided, however, that prior to the commencement of each of the Second and
Third Years, both parties hereto shall discuss the sales forecast for such
Second and Third Year and consider making a reasonable adjustment of the minimum
annual quantity as set forth above if required by business conditions in the
TERRITORY.
6.2 If SUMITOMO does not purchase a total of [**********************] units
by the end of the first year or [************************] units by the end of
the Second Year, Sumitomo shall continue to use its best commercial efforts to
improve the promotion and secure sales of the PRODUCTS in the TERRITORY and
shall present to TERAYON its improved promotion and support plans for the
following year.
ARTICLE 7
PRICE
7.1 The prices to be payable by SUMITOMO for PRODUCTS under this Agreement
shall be those established in the price list and discount schedule set forth in
Schedule C hereto.
- ----------
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
5.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
TERAYON reserves the right to change the price list on one hundred and twenty
(120) days prior notice to SUMITOMO.
ARTICLE 8
TRADE NAMES AND TRADEMARKS
8.1 SUMITOMO shall have the right to use TERAYON'S trade names and
trademarks in the promotion and sales of PRODUCTS under this Agreement,
provided, however, that TERAYON reserves the right to restrict any such use
which is detrimental to the names or marks, and to require SUMITOMO to cease use
of any mark which is, or in TERAYON'S opinion is likely to become, subject to a
claim of infringement.
8.2 SUMITOMO shall not remove, alter or obliterate any trade name or
trademark affixed to PRODUCTS, nor shall it add any other names or marks, except
with the prior written consent of TERAYON. SUMITOMO agrees to display the
following notices of trademark status adjacent to and with the first or most
prominent use of a TERAYON trademark in each piece of advertising or printed
materials in which such trademark appears and includes the respective legends
adjacent to or as a footnote to the trademarks as follows:
(a) [********] is a trademark of Terayon Corporation, which may be
registered in certain jurisdictions; and
(b) Such other symbols and notices as may be prescribed by TERAYON from
time to time.
ARTICLE 9
INDEMNITY
9.1 Subject to the limit of liability in Article 18 ("Limitation of
Liability"), TERAYON shall indemnify and hold harmless SUMITOMO from and against
all actions, proceedings, claims, damages, costs and demands which may arise out
of or in connection with any claims of infringement of patent, copyright,
trademark or other intellectual property rights, provided, however, that
SUMITOMO shall in every instance refrain from making any admission of liability,
shall give TERAYON a notice of any claim made, shall give TERAYON sole and
exclusive control of the defense or settlement of any such claim and shall
assist in the defense of such claim. TERAYON shall have no liability to for any
action or claim alleging infringement or misappropriation based upon (a)
TERAYON'S compliance with SUMITOMO's instructions, drawings, designs or
functional specifications; (b) any use of the PRODUCTS in a manner other than as
specified by TERAYON; (c) any use of the products in combination with other
products, equipment, devices, software, systems, data or services not supplied
by TERAYON to the extent that the such claim is directed against such
combination; or (d) any alteration or modification of the products by anyone
other than TERAYON. if any PRODUCTS supplied
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
6.
<PAGE>
by TERAYON to SUMITOMO shall be held to directly infringe any valid intellectual
property right in the TERRITORY or NON-EXCLUSIVE TERRITORY and the use of same
is enjoined, or if TERAYON believes such a holding is likely, terayon shall, at
its option and its expense, have the right: (i) to procure for SUMITOMO the
right to use such products free of liability for infringement, or (ii) to
replace (or modify) the products with a non-infringing substitute otherwise
complying substantially with all the requirements of this agreement, or (iii)
upon return of the PRODUCTS, refund the purchase price and the transportation
costs of the products. if the infringement is alleged prior to completion of
delivery of the PRODUCTS, TERAYON shall have the right to decline to make
further shipments without being in breach of the agreement.
9.2 SUMITOMO shall indemnify TERAYON for (i) failure to pay taxes and (ii)
for all actions, proceedings, claims, damages, costs and demands which may arise
out of or in connection with any unauthorized warranties made to customers by
SUMITOMO with respect to the PRODUCTS or TERAYON. TERAYON authorizes SUMITOMO to
make warranties to customers with respect to the PRODUCTS which are the same as
the warranties made by TERAYON to SUMITOMO with respect to such PRODUCTS.
ARTICLE 10
CONFIDENTIALITY
10.1 The terms and conditions of the confidentiality agreement between the
parties dated October 16.1996 are incorporated into this Agreement by reference
and shall govern the exchange of confidential information between the parties
during and after the term of the Agreement.
10.2 Notwithstanding the Article 10.1 above, either of the parties may
disclose such information if required by laws, regulations or orders of the
Government of Japan or the United states Government, or any of their competent
agencies.
ARTICLE 11
INDEPENDENT CONTRACTOR
11.1 The relationship between TERAYON and SUMITOMO shall be that of seller
and buyer. Neither party shall be deemed or construed the legal agent of the
other for any purpose whatsoever, and neither party shall have any right or
authority to make or undertake any promise, warranty or representation, to
execute any contract or otherwise to assume any obligation or responsibility in
the name of or on behalf of the other party, except to the extent specifically
authorized in writing by the other party.
7.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
ARTICLE 12
TERM
12.1 Unless sooner terminated pursuant to the other provisions of this
Agreement, the term of this Agreement shall be a three (3) year period
commencing on the date hereof. This Agreement shall be subject to automatic
extension for additional one (1) year period unless either party, with or
without cause, shall give written notice of termination to the other not less
than ninety (90) days prior to the end of the initial term of this Agreement or
any extension thereof.
ARTICLE 13
TERMINATION
13.1 Either of the parties hereto may terminate this Agreement by giving a
written notice of termination to the other party:
(a) if the other party breaches any of the provisions of this Agreement
and does not remedy the breach within thirty (30) days after a written notice is
given requesting such party to remedy the breach; and
(b) if the other party becomes insolvent, or any voluntary or
involuntary petition in bankruptcy or for corporate reorganization is filed by
or against the other party, or a receiver is appointed with respect to any of
the assets of the other party, or a liquidation proceeding is commenced by or
against the other party.
13.2 Nothing in this Article 13 shall affect, be construed, or operate as a
waiver of any right of the party aggrieved by any breach of this Agreement to
recover any loss or damage incurred as a result of such breach, either before or
after the termination hereof.
13.3 TERAYON commits to [*******] to insure that PRODUCTS [******] in the
TERRITORY. SUMITOMO may terminate the Agreement [***********] notice to TERAYON
[***********]
ARTICLE 14
EFFECT OF TERMINATION
14.1 Upon the termination of this Agreement for any reason, other than with
respect to the liquidation of the inventory which is then in the possession of
SUMITOMO and will not be repurchased by TERAYON, SUMITOMO shall discontinue the
use of TERAYON'S names and trade-marks, labels, copyrights, and other
advertising media and shall remove all signs and displays relating thereto and
return to TERAYON any material labeled "Confidential" received
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
8.
<PAGE>
from TERAYON, except for those materials necessary for the provision of support
to the installed base of PRODUCTS as of the termination date. SUMITOMO will
continue to provide support for PRODUCTS in the field unless otherwise agreed by
the parties.
14.2 Upon the termination of this Agreement for any reason, TERAYON shall
have the option to repurchase PRODUCTS then in the possession of SUMITOMO and
available for sales, at the prices originally billed to SUMITOMO.
14.3 No termination of this Agreement shall release either party from any
liability or obligation which has therefore accrued and remains to be performed
as of the date of such termination.
14.4 The following Articles and Sections of this Agreement shall survive
termination: Article 10 ("Confidentiality"), Section 5.7, Section 5.8, Article 9
("Indemnity"), Article 14 ("Effect of Termination"), Article 16 ("Governing
Law"), Article 18 ("Limitation of Liability"), Article 19 ("Assignment"),
Article 22 ("Entire Agreement"), and Article 25 ("Notice").
ARTICLE 15
FORCE MAJEURE
15.1 Any other provision contained herein to the contrary notwithstanding,
neither party hereto shall be liable to the other party for any delay or failure
to perform any of its obligations hereunder caused due to governmental
regulations or directions, outbreak of a state of emergency, Act of God, war,
warlike hostilities, civil commotions, riots, epidemics, storms, fires, strikes,
lockouts, and any other similar cause or causes beyond the reasonable control of
such party.
ARTICLE 16
GOVERNING LAW
16.1 This Agreement shall be construed in accordance with and governed by
the laws of the State of California as those laws are applied to contracts
entered into and to be performed entirely in California by California residents.
The parties agree to submit to the non-exclusive jurisdiction and venue of the
federal and state courts of the State of California. The parties agree that the
United Nations Convention on Contracts for the International Sale of Goods is
specifically excluded from application to this Agreement.
ARTICLE 17
ARBITRATION
9.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
17.1 All disputes, controversies or differences which may arise between the
parties out of or in relation to or in connection with the AGREEMENT shall be
settled amicably. If settlement is not reached between the parties hereto, it
shall be exclusively submitted to and finally settled by arbitration to be
conducted in Tokyo, Japan or in California, USA in accordance with the Rules of
Conciliation and Arbitration of the International Chamber of Commerce. The
arbitration shall be held in English, and subject to California law, in Tokyo
when it is requested by TERAYON, or in California when it is requested by
SUMITOMO. The award shall be final and binding upon both parties. Any dispute
concerning the ownership of intellectual property shall not be subject to
arbitration.
ARTICLE 18
LIMIT OF LIABILITY
18.1 TERAYON'S AGGREGATE LIABILITY IN CONNECTION WITH THIS AGREEMENT,
REGARDLESS OF THE FORM OF ACTION GIVING RISE TO SUCH LIABILITY (WHETHER IN
CONTRACT, TORT OR OTHERWISE), AND INCLUDING ANY LIABILITY UNDER SECTION 5.9
("LIMITED WARRANTY") AND ARTICLE 9 ("INDEMNITY"), SHALL NOT EXCEED [*******].
NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, EXEMPLARY, SPECIAL,
CONSEQUENTIAL OR INCIDENTAL DAMAGES OF ANY KIND (INCLUDING WITHOUT LIMITATION
LOST PROFITS), EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES,
EXCEPT FOR A BREACH EITHER PARTY'S OBLIGATIONS WITH RESPECT TO ARTICLE 10
("CONFIDENTIALITY"). THE LIMITATIONS OF LIABILITY CONTAINED IN THIS AGREEMENT
ARE A FUNDAMENTAL PART OF THE BASIS OF EACH PARTY'S BARGAIN HEREUNDER, AND
NEITHER PARTY WOULD ENTER INTO THIS AGREEMENT ABSENT SUCH LIMITATIONS.
ARTICLE 19
ASSIGNMENT
19.1 Neither of the parties hereto shall assign, pledge, delegate or
otherwise dispose of any of its rights or its duties under this Agreement
without the prior written consent of the other party hereto.
ARTICLE 20
WAIVER
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
10.
<PAGE>
20.1 Waiver of any default in the performance of any part of this Agreement
shall not apply to or be deemed a waiver of any other or further default
hereunder or thereunder. Similarly, no waiver of any condition shall operate
thereafter as a waiver of the same or any other condition.
ARTICLE 21
AMENDMENT
21.1 No oral explanation or oral information by either party hereto shall
alter the meaning or interpretation of this Agreement. No modifications,
alterations, additions or changes in the terms hereof shall be binding on either
party hereto unless reduced to writing and executed by the duly authorized
representative of each party.
ARTICLE 22
ENTIRE AGREEMENT
22.1 This Agreement shall supersede any and all prior agreements,
understandings, arrangements, promises, representations, warranties, and/or any
contracts of any form or nature whatsoever, whether oral or in writing and
whether explicit or implicit, which may have been entered into prior to the
execution hereof between the parties, their officers, directors, or employees as
to the subject matter hereof. Neither of the parties hereto has relied upon any
oral representation of the other party.
ARTICLE 23
SEVERABILITY
23.1 In the event that any term or provision of this Agreement shall, for
any reason, be held to be invalid, illegal, or unenforceable in any respect, and
either party shall determine that such invalidity, illegality, or
unenforceability goes to the heart of this Agreement, then that party shall have
the right to terminate this Agreement upon sixty (60) days' prior written notice
to the other party. In the event either party does not so terminate this
Agreement, this Agreement shall continue in full force and effect, except that
it shall be interpreted and construed as if such term or provision, to the
extent the same shall have been held to be invalid, illegal or unenforceable,
had never been contained herein.
ARTICLE 24
SUCCESSORS AND ASSIGNEES
11.
<PAGE>
24.1 This Agreement shall inure to the benefit of and be binding upon the
successors and permitted assignees of the parties hereof. ARTICLE 25
NOTICE
25.1 Any notice or communication required or permitted to be given by
either party to the other pursuant to this Agreement shall be sent to the
following address and may be given by fax or by prepaid airmail post and shall
be deemed to have been given:
(a) in the case of notice by fax, when dispatched; or
(b) in the case of notice by prepaid airmail post, ten (10) full
calendar days after posting; and in proving the giving of such notice it shall
be sufficient to prove that the fax was duly dispatched or the letter was duly
posted.
TERAYON:
Terayon Corporation
2952 Bunker Hill Lane
Santa Clara, CA 95054
attention: President
fax: (408) 727-6205
SUMITOMO:
2-2, Hitotsubashi 1-chome, Chiyoda-ku,
C.P.O.Box 1524 Tokyo, 100-91 Japan
Information and Telecommunications Business (ELF'S) Dept. Attn : Mr.Shin
Kinoashita
Fax No. +81-3-3217-7027
25.2 Either party may at any time and from time to time change its address
and fax number for the purpose of this Article 24 by giving notice to the other
pursuant to this Article. ARTICLE 26
HEADINGS
26.1 Headings included in this Agreement are included for the purpose of
convenience only and shall not affect the construction or interpretation of any
of its provisions.
12.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the day and year first above
written.
TERAYON CORPORATION
By: ZAKI RAKIB [s/s]
Name: Zaki Rakib
Title: Chief Executive Officer
SUMITOMO CORPORATION
By: ISAO MOMOTA
Name: Isao Momota
Title: Deputy General Manager
13.
<PAGE>
SCHEDULE A
TERAYON PRODUCTS
1. TeraLink 1000 head-end controller and data multiplexer
2. TeraPro Cable Modem
<PAGE>
SCHEDULE B
TERAYON LIMITED WARRANTY AND PRODUCT LIABILITY INDEMNITY
1. All PRODUCTS shall be deemed accepted by SUMITOMO upon delivery.
2. TERAYON warrants, to SUMITOMO only, that all PRODUCTS shall substantially
conform to the specifications established for the PRODUCTS under normal use and
service for ninety (90) days after delivery to SUMITOMO ("the Warranty Period").
During the Warranty Period, if any product fails to substantially conform to the
applicable specifications, SUMITOMO shall notify TERAYON in writing of such non-
conformance as soon as SUMITOMO becomes aware of it. If requested by TERAYON,
SUMITOMO agrees to return the defective PRODUCTS to TERAYON, at TERAYON'S
expense, with packaging and shipping documents bearing a returned materials
authorization ("RMA") number or code assigned by TERAYON.
3. SUMITOMO's sole and exclusive remedy for any PRODUCTS which do not conform
to the warranty in the preceding Paragraph 2 of this Exhibit will be for
TERAYON, at TERAYON'S option, to repair or replace the PRODUCT or, if neither of
these are commercially feasible, then to refund the purchase price therefor.
4. TERAYON agrees to defend SUMITOMO against all third party claims that the
PRODUCTS are the sole cause of any personal injury or property damage and will
pay any damages and costs (including reasonable attorney fees) finally awarded
by a court of competent jurisdiction or arbitrators, provided that SUMITOMO
shall in all instances refrain from making any admission of liability, shall
give TERAYON a notice of any claim made, shall give TERAYON sole and exclusive
control of the defense and settlement of any such claim and shall assist in the
defense of such claim.
5. TERAYON DISCLAIMS ALL OTHER EXPRESS AND IMPLIED WARRANTIES INCLUDING BUT NOT
LIMITED TO MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-
INFRINGEMENT.
6. All of the foregoing obligations in this Exhibit are subject to the limit of
liability as set out in Article 18 of the Agreement.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE C
PRODUCT PRICES [****]
1. SUMITOMO will be entitled to purchase PRODUCTS [**********] as follows:
[****] [*******************] [**%]
[********************] [**%]
[**********] [***********************] [**%]
[***************] [**%]
[****************] [**%]
[**********] [**%]
[***************************] [**%]
[**********************] [**%]
[**********************] [**%]
[*************] [**%]
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
Exhibit 10.8
MASTER AGREEMENT
BETWEEN
TERAYON CORPORATION
AND
NET BRASIL S.A.
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
MASTER AGREEMENT BETWEEN TERAYON CORPORATION AND NET BRASIL S.A.
The parties to this Agreement, dated as of June 30, 1997 for reference only,
are:
TERAYON CORPORATION, hereinafter "TERAYON", a company organized under the laws
of California, USA, with its principal offices located at 2952, Bunker Hill
Lane, Santa Clara CA 95054, hereafter duly represented by the undersigned;
and
NET BRASIL S.A., hereinafter "NET BR", a company organized under the laws of
Brazil, with its principal offices located at Avenida Miruna 168, Sao Paulo-SP,
Brazil, hereafter duly represented by the undersigned;
RECITALS
WHEREAS TERAYON has developed and desires to avail to NET BR a Proprietary
Technology which has oriented and has also been incorporated to TERAYON's
TeraPro(TM) Cable Modem and the TeraLink 1000 Master Controller projects;
WHEREAS TERAYON has developed and desires to avail to NET BR the complementary
headend equipment and is hereby desiring to sell and license to NET BR for its
marketing, use and sale all Product deriving from such Proprietary Technology
and softwares so related;
WHEREAS TERAYON has elected and hereby desires to appoint NET BR as its
Distributor for Product and softwares as mentioned hereinabove in the territory
of Mercosul more specifically Argentina, Paraguay, Uruguay , Bolivia and other
countries to be agreed upon in writing by the parties;
WHEREAS TERAYON has elected and hereby desires to appoint NET BR as its Most
Preferred Distributor for Product and softwares as mentioned hereinabove in the
territory of Brazil.
WHEREAS NET BR under the conditions stated hereinunder is willing to accept the
appointment to act as a Distributor in the territory of Mercosul and, to act as
Most Preferred Distributor of TERAYON in the Territory of Brazil;
WHEREAS NET BR, upon mutual agreement with its NACS has performed tests and
completed a thorough evaluation of the platforms designed by TERAYON in
accordance to its Proprietary Technology;
WHEREAS NET BR as requested by the NACS will coordinate the purchase from
TERAYON; of TeraPro, TeraLink and the correspondent headend equipment as
resulting from the Technology herein;
2
<PAGE>
WHEREAS TERAYON as hereinunder set forth is to provide warranty and supporting
services related to maintenance, installation assistance and training to allow
the achievement of the Product's capabilities, performance and duration as
expected by NET BR.
WHEREAS TERAYON, NET BR and its NACS shall use their best efforts in the
performance of their obligations under this Agreement;
NOW, THEREFORE, TERAYON and NET BR agree to enter into this Master Agreement,
subject to the following covenants and conditions:
1. DEFINITIONS
As used in the Agreement, the expressions hereunder shall have the following
---------
meanings:
1.1. The term Agreement shall apply to this Master Agreement and to all
---------
statements, attachments, exhibits and amendments attached hereto made in
strict accordance with the business reflected hereto.
1.2. The following expressions shall mean:
a) NACS (NET Affiliate Cable System) - any operating company so
----
designated by NET BR in writing which is or becomes under agreement
with NET BR and which will be jointly responsible with NET BR under
the terms of the Agreement herein;
---------
b) Related Company - a company in any way related to TERAYON and/or NET
---------------
BR with regard to the Agreement herein;
c) Receiving Party - the party receiving Confidential Information;
---------------
d) Disclosing Party - the party disclosing Confidential Information;
----------------
e) Receiver - NET BR or its NACS personnel or TERAYON personnel receiving
--------
Confidential Information
1.3. Product (collectively) - the Products listed in Attachment A and described
-------
by their respective technical and functional characteristics also listed
in Attachment A, as amended by mutual agreement of the parties from time
to time.
1.4. Optional (s) - the addition to the Product by TERAYON upon NET BR's
-------- -------
written request of certain features as either a different release
hereinafter "DR" of the Product or an additional module hereinafter "AM"
to such Product as described in Attachment A, and as amended by mutual
-------
Agreement from time to time.
---------
3
<PAGE>
1.5. Improvements - modifications made or acquired by TERAYON in accordance to
------------
the technical changes either requested by NET BR or as a result of
TERAYON's engineering and development
1.6. Spare Parts - any part related to Product hereinabove which are defined in
----------- -------
accordance with the Attachment A to be used by TERAYON either in Product
-------
repair or maintenance.
1.7. Technology - the knowledge possessed and known by TERAYON as necessary to
----------
meet specifications and applications for the Product.
-------
1.8. Acceptance Test Plan hereinafter ATP - the defined criteria and process
--------------------
mutually agreed upon by the parties in writing in Attachment B which are
necessary to evaluate and demonstrate that Product listed in Attachment A
-------
provides the features and conforms to specifications required by NET BR,
as listed in Attachment A, in all material respects.
1.9. Technology Verification hereinafter TCVN - the test, as set forth in
-----------------------
Attachment B, performed on prototype and Product as provided by TERAYON
-------
for installation on a target hybrid fiber coax plant, for verification by
NET BR and the NACS of the basic technological capability of TERAYON to
provide the functions and features as defined in Attachment A.
1.10. Effective Date - the date of the last signature to this Agreement in
-------------- ---------
strict accordance of the terms of Section 21.1.
1.11. Initial Date - the date of the written approval by NET BR of the final
------------
results of the first TCVN as conducted in accordance to Attachment B.
4
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
2. OBJECT
2.1. TERAYON hereby agrees to sell Product to NET BR or to NET BR's NACS as
-------
duly assigned in writing by NET BR through the correspondent purchase
order. The minimum purchase requirements of Product shall be set forth
-------
in Attachment C.
2.2. TERAYON hereby grants NET BR, [*****************************************
****************************************], as set forth in Attachment C.
------------
2.3. TERAYON hereby grants NET BR, [****************************************
*********************************************************************].
------------
2.4. TERAYON is hereby committed to NET BR and its NACS not to sell Product
-------
or Spare Parts to any other like customer in the Territory of Brazil on
----- -----
terms that, when compared to conditions expressed in the Agreement
---------
hereinunder, are more favorable.
3. PURCHASE PRICE
3.1. The purchase price for the volume of Product is listed in Attachment C.
-------
3.1.1. Nevertheless Product price shall [**********************] between the
-------
parties aiming [************], previously to any [*****************
******] either within the original term of the Agreement or any eventual
---------
term therefrom.
3.1.2. Product price will be [*****] according to [**************], related
-------
to Product [**************************] and [*********************]:
-------
3.2. Product unit pricing, as stated in Attachment C, is assignable to NET
-------
BR's NACS and shall be recalculated every [**************] as of the
date of the first shipment. Resulting credits will be due and paid to
NET BR by TERAYON in a mechanism to be agreed upon by and between the
parties.
3.3. All payments under this Agreement shall be made either by the wire
---------
transfer or by irrevocable letter of credit in U.S. Dollars to TERAYON
in Santa Clara CA, for the supply of Product.
-------
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
5
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
3.4. The minimum volume purchase requirements of Product stated in Attachment
-------
C will be [****************************************************
*********************
*******************************.
-------
************************************************************************
-------
********************************************************.]
4. TERMS OF PAYMENT
NET BR shall cause payments to be made to TERAYON in accordance to NET
BR's assignment of the purchase order and shall always be accomplished
within thirty (30) calendar days after receipt of the Proforma invoice
from TERAYON.
5. PURCHASE ORDERS AND ROLLING FORECAST
5.1. All purchase orders will be placed by NET BR or its NACS with TERAYON
ninety (90) days in advance of the requested date of the shipment.
5.2. Simultaneously to a NACS written acceptance of the assignment (an
Assignee) of any purchase order so assigned by NET BR (an Assignor),
NACS will declare in writing on the text of each and all correspondent
purchase order to abide by the entirety of the terms and commercial
conditions of both the purchase order and the Agreement hereinunder.
---------
5.3. Any and all purchase orders assigned by NET BR to its NACS in accordance
to the Section 5.2. hereinabove shall be unconditionally accepted by
TERAYON as per the entirety of its original terms and commercial
conditions like any other valid and binding purchase order solely
submitted to TERAYON by NET BR within the Agreement herein.
---------
5.4. NET BR and its NACS will jointly define, upon TERAYON advise, the type,
volume or percentage of Spare Parts to be informed to TERAYON by
-----------
purchase orders. Spare Parts will be produced, supplied and shipped on a
-----------
firm condition by TERAYON, as specified in the in the purchase orders
and in strict accordance to the Attachment C hereto.
5.5. NET BR shall quarterly provide TERAYON no later than the tenth (10th)
day of each month with a twelve (12) month rolling forecast for the
supply of the Product. The starting date of the rolling forecast will be
-------
adjusted upon mutual Agreement between the parties in writing.
---------
5.5.1. The first three (3) months of the forecast shall be considered to be one
hundred per cent (100%) accurate and shall be a release for the quantity
of the Product stated therein.
-------
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
6
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
5.5.2. The second three (3) months of the forecast shall have at least seventy
five (75%) accuracy and the last six (6) months shall be the best
available estimate.
5.5.3. The initial three (3) months of the forecast will placed by NET BR with
TERAYON. The first forecast will be sent by NET BR to TERAYON on a date
previous to the Initial Date.
------------
5.5.4. Delivery dates as stated in the forecasts shall be deemed to have been
accepted by TERAYON unless no later than ten (10) calendar days after
TERAYON's receipt of a six-month forecast, TERAYON notifies NET BR in
writing of its inability to meet the required shipping schedule and
notifies NET BR of the shipment schedule it can achieve which will be
subjected to NET BR's written approval.
5.5.5. The schedule sent by TERAYON to NET BR as per Section 5.5.4. hereinabove
shall be deemed to have been accepted by NET BR unless NET BR provides
notice to TERAYON within ten (10) calendar days of the receipt of such
amended schedule that the schedule is not acceptable.
5.6. NET BR or its assigned NACS may, at any time, cancel the purchase of the
Product or services hereinunder in whole or in part, but only by paying:
-------
(I) [**********************] of the purchase price if such cancellation
is received by TERAYON more than [****************] before the scheduled
delivery date; (II) [********************] of the purchase price if such
cancellation is received more than [********************], but less than
[****************] before the schedule delivery date; (III) [*******
*******************] of the purchase price if such cancellation is
received more than [*****************], but less than [***************]
before the schedule delivery date; and (IV) [********************] if
such cancellation is received less than [*****************] before the
schedule delivery date.
5.7. NET BR shall allow TERAYON and/or its duly authorized representatives
reasonable access to the premises and personnel of NET BR for the
purpose of acquainting themselves with the quality of sales, licensing
and service to customers carried out by NET BR as a Most Preferred
Distributor in the territory of Brazil.
5.7.1. NET BR shall maintain accurate records of its sales and/or sublicenses
of the Product for a period of two (2) years after the issuance of the
-------
corresponding fiscal documentation for the specific sale.
5.8. NET BR shall at its own expense obtain all required government import
approvals or other permits, customs clearances, or authorizations
required for the shipment and sale of Product into and within the
-------
Territory of Brazil.
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
7
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
6. DISTRIBUTIONSHIP
6.1. At such time as the market opportunities represent the purchase of an
aggregate of [******************************] units of Product NET BR
-------
shall, by writing notice to TERAYON within sixty (60) days, have the
option, directly or indirectly, by an appointment of a third party under
mutual written agreement with TERAYON, to promote, develop a market for,
sell and distribute the Product and Spare Parts for use in the Territory
------- -----------
of Brazil. In furtherance of such undertakings, NET BR shall:
a) maintain a qualified distributor organization employing such
technical sales and service personnel, including without limitation
technical specialists specifically trained to support the Product,
-------
as reasonably necessary to fully develop and support the market
potential for the Product, and ensure that at all times the Product
------- -------
are sold or supported only by such personnel;
b) assign a technically competent sales engineer or product manager to
the marketing and distribution of the Product, and ensure that such
-------
individual attends, at NET BR's expense, the periodic training
sessions sponsored by TERAYON;
c) at its own expense, participate in at least two exhibitions and
trade fair shows within the Territory of Brazil at which the Product
-------
may reasonably be displayed and demonstrated;
d) provide adequate promotion of the Product, including sales promotion
-------
materials in the language or languages necessary for proper
marketing of the Product in the Territory of Brazil, and send copies
-------
of all promotional materials to TERAYON for its written approval
prior to use or distribution of such materials; and
e) provide a written marketing plan to TERAYON which plan shall include
trial locations, market potential for the Product, strategy and
-------
tactics by territory, key or target accounts and a one (1) year
estimate of business by calendar quarter commencing with the quarter
within which this Agreement is signed.
---------
6.2. NET BR shall effect all sales of the Product to customers of NET BR upon
-------
NET BR's standard terms and conditions for sales and/or sublicenses
attached hereto as Exhibit D (if NET BR's standard terms and conditions
is in a language other than English, an English translation thereof
shall also be attached hereto as Exhibit D), with such changes thereto
as may be necessary to conform to the provisions of this Agreement and
---------
other reasonable minimum terms and conditions requested by TERAYON. In
the event that NET BR proposes to sell Product to a customer on terms
-------
materially different from those set forth on Exhibits C, NET BR shall
give written notice to TERAYON of such proposed non-standard terms prior
to completing such sale or sublicense.
6.3. NET BR shall not solicit sales or accept orders for the Product, create
-------
branch establishments, or maintain warehouses for delivery purposes
outside the Territory of Brazil without the prior written approval of
TERAYON.
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
8
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
6.4. NET BR shall keep TERAYON fully informed of all governmental,
commercial, and industrial activities and plans which do or reasonably
could affect the Product in the Territory.
-------
6.5. The parties hereto agree that, due to the close relationship involved in
a distributorship agreement, TERAYON must necessarily rely on NET BR's
business experience and good reputation to ensure the protection of
TERAYON's trademarks and reputation and good will.
7. LOGO
The parties hereby agree that TERAYON labeling shall only be affixed on
the back of the Product. In line with the specifications and design, to
-------
be mutually agreed upon in writing, at the time and in accordance with
the placement of the P.O. by either NET BR or its NACS, TERAYON shall
provide for to allow NET BR's labeling to be exhibited as per
instructions, mutually agreed upon in writing, on whatever surfaces that
may be indicated by NET BR of each TeraPro unit console and consistent
with the requirements of Section 12.
8. CONFORMANCE AND ACCEPTANCE
8.1. TERAYON hereby agrees that only Product which is in conformance with the
-------
specifications set forth in Attachment A and as had been verified
through the ATP will be accepted by NET BR and/or its NACS and shall be
subject to payments.
8.2. In case non-conforming TCVN Product is indicated by NET BR or its NACS
-------
after a laboratory testing agreed upon by and between NET BR and TERAYON
to exceed [****************] of the total volume of a specific shipment,
NET BR or its NACS are hereby entitled, after initial training and
optimization of the said laboratory tests, to refuse acceptance of the
entirety of the lot of that specific shipment, given that the parties on
a good faith basis have mutually conducted unsuccessful reasonable
attempts to overcome and remedy the failure as mentioned above.
8.3. TERAYON will be liable for the cost of the return shipment of the
Product which is not accepted by NET BR and/or its NACS as a result of
-------
the procedures stated in Section 8.2. hereinabove. Upon mutual consent
in writing TERAYON and NET BR may agree on a different solution.
8.4. Upon the occurrence of the event mentioned in Section 8.2, TERAYON shall
provide a new shipment not less than within 45 days effective from the
TCVN.
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
9
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
9. DISCONTINUANCE
9.1. TERAYON is hereby allowed to unilaterally discontinue the Product or
-------
its production line if NET BR or its NACS have not purchased in the
previous calendar year at least [********************] of the units
forecast volume stated in Attachment C or upon giving a twelve (12)
months advance written notice to NET BR.
9.2. TERAYON hereby agrees to supply Spare Parts in sufficient number to
-----------
allow the Product's normal use during [five years] after the last
---------
delivery of the Product. NET BR may only use such parts as replacements
-------
parts for damaged Product previously supplied by TERAYON within the
-------
terms of the Agreement. The confidentiality, ownership, and license
---------
provisions of this Agreement shall remain in effect with respect to
---------
such Spare Parts, including those purchased following termination of
-----------
this Agreement.
---------
10. WARRANTY AND LIMITATION OF LIABILITY
10.1. TERAYON hereby warrants the Product to be free from manufacturing and
-------
material defects for a period of one (1) year effective from the TCVN
after delivery, and also to be conforming to specifications as
contained in Attachment A.
10.1.1. It is explicitly excluded from any warranty, damages to the external
parts of the Product such as cabinets, panels, finishing and buttons
-------
unless originated by a material defect.
10.1.2. Burnt or damaged components in the power supply circuit, input stage of
the tuner shall be assumed to be result of electrical stress.
[*] - Indicates confidential information that has been omitted and
filed separately with the Securities and Exchange Commission.
10
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
10.2. TERAYON is hereby committed to directly or indirectly, by an appointment
of a third party under mutual written agreement with NET BR to repair
without charge or replace without charge, at its option, to NET BR's
NACS, if NACS within one year after delivery of the Product to the NACS,
-------
notifies TERAYON of a claimed defect in workmanship or materials. This
promise does not cover damage caused by misuse, negligence, accident, or
Product that have been tampered with, or subjected to unusual physical or
-------
electrical stress or atmospheric discharges or any other cause of damage
other than defect in material or workmanship. If during such one year
period (I) TERAYON is notified promptly in writing upon discovery of any
defect in the goods, including a detailed description of such defect,
(II) after first having obtained written consent to send them, such goods
are sent to TERAYON, and (III) TERAYON's examination of such goods
discloses to its satisfaction that such goods are defective and such
defect is not the result of any damage caused by misuse, negligence,
accident, improper installation, repair or alteration by someone other
than TERAYON, improper testing, or use contrary to any instructions
issued by TERAYON, or Product that have been tampered with, or subjected
-------
to unusual physical or electrical stress or atmospheric discharges or any
other cause of damage other than defect in material or workmanship then
Product purchased from TERAYON as covered by this warranty, will be
-------
repaired within thirty (30) days from receipt by TERAYON, TeraPro and
TeraLink, covered by this warranty, will be either repaired or
temporarily replaced, while repair takes place within sixty (60) days,
TERAYON shall only charge the cost of freight, package and in-transit
insurance to and from TERAYON.
10.3. NET BR's sole and exclusive remedy and TERAYON's sole and exclusive
obligation for a breach of such warranty will be timely repair or
replacement of the defective Product or refund of the applicable purchase
-------
price, all in accordance with TERAYON's then-standard warranty policy.
EXCEPT AS EXPRESSLY SET FORTH HEREIN, TERAYON EXPRESSLY DISCLAIMS ALL
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE
AND NON-INFRINGEMENT. NET BR shall make no additional warranties on
behalf of TERAYON and agrees to indemnify and hold TERAYON harmless from
any claims based on warranties given in violation of this Agreement.
---------
10.4. IN NO EVENT SHALL TERAYON BE LIABLE TO NET BR FOR ANY INDIRECT, SPECIAL,
OR CONSEQUENTIAL DAMAGES, EVEN IF TERAYON HAS BEEN ADVISED OF THE
POSSIBILITY THEREOF. In addition, in no event shall any direct damages
from TERAYON to NET BR exceed [*****************************************]
the amounts paid by NET BR to TERAYON hereunder. NET BR acknowledges that
these limitations of liability are an essential element of the bargain
between the parties and that in the absence of such limitations of
liability, the economic terms of this Agreement would be substantially
---------
different. This Section shall survive termination or expiration of the
Agreement.
---------
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
11
<PAGE>
11. INDEMNITY
11.1. In addition to any other indemnities set forth in this Agreement, NET BR
---------
hereby agrees to indemnify, defend and hold TERAYON harmless from any
claim, lawsuit, legal proceeding, settlement or judgment, including,
without limitation, TERAYON's reasonable attorneys' fees and costs
incurred in the defense of the same, resulting from or arising out of (a)
any acts or omissions of NET BR, its employees or its agents, including
without limitation any representations or warranties and Product
-------
warranties made by NET BR, its employees or agents regarding the Product,
-------
(b) any death of or personal injury to any person or damage to property
due to negligence, recklessness, or willful misconduct of NET BR or NET
BR's officers, employees, agents or customers, or (c) failure of NET BR
to obtain any governmental authorization.
11.2. TERAYON agrees to indemnify and hold NET BR harmless from any and all
damages, loss, demands, fees, expenses, fines, penalties, and costs
(including without limitation reasonable attorney's fees, costs and
disbursements) finally awarded against NET BR and arising from any United
States claims, suits, actions or proceedings brought against NET BR by
any third party that alleges that the Product infringe any United States
-------
patent, copyright, trademark or other intellectual property right of a
third party or misappropriate any third party trade secret; provided that
NET BR provides TERAYON (i) prompt written notice of the existence of
such claim, suit, action or proceeding, (ii) sole control over the
defense or settlement of such claim, and (iii) assistance at TERAYON's
request to the extent reasonably necessary for the defense of such claim
or suit.
11.3. Upon notice of any claim of infringement or upon reasonable belief of the
likelihood of such a claim, TERAYON shall have the right, at its option,
(i) to obtain the rights to continued use of any Product, (ii) substitute
-------
other suitable, functionally equivalent, non-infringing equipment,
hardware and/or software, (iii) replace or modify the Product or its
-------
design so that it is no longer infringing, or (iv) refund to NET BR or
its customers the purchase price of such Product upon its return.
-------
11.4. Notwithstanding the foregoing, TERAYON shall not indemnify NET BR for any
claims based on (a) any non-TERAYON intellectual property incorporated in
or combined with a Product where in the absence of such incorporated
-------
intellectual property, the Product would not have been infringing, (b)
-------
Product that have been altered or modified by NET BR or any third party
-------
where in the absence of such alteration or modification the Product would
-------
not be infringing; (c) any combinations of the Product with any product
-------
or services not supplied or authorized by TERAYON where in the absence of
such combination, the Product would not have been infringing; and (d) any
-------
use of an outmoded version of the Product for which NET BR has been
-------
supplied an updated, revised or repaired Product which is not infringing.
-------
12
<PAGE>
12. TRADEMARK AND TRADE NAMES
12.1. It is hereby acknowledged that neither NET BR itself nor NET BR's NACS
have any interest in TERAYON's trademarks or trade names, patents or
copyrights and that cooperation will be extended to TERAYON to secure
TERAYON's registration of such trademarks, trade names, patents or
copyrights in Brazil.
12.2. NET BR recognizes that TERAYON utilizes a combination of acronyms,
trademarks, trade names and other marketing names, a current list of
which is set forth on Exhibit E hereto Trademarks. NET BR acknowledges
the validity of the Trademarks and TERAYON's ownership thereof. NET BR
shall not challenge TERAYON's rights to use the Trademarks which TERAYON
may apply to or use in connection with the Product. TERAYON may from time
-------
to time attach other or additional marks or names to Product, and NET BR
-------
shall be deemed to have waived any challenge of TERAYON's rights thereto,
unless NET BR gives written notice of an objection to such use within
thirty (30) days after the first sale of such Product by NET BR.
-------
12.3. If NET BR in the course of its business in the sale of the Product
-------
acquires any goodwill or reputation in any of the Trademarks of TERAYON
applied thereto, then at the expiration or termination of this Agreement
all such goodwill or reputation automatically shall vest in TERAYON
without any separate payment or other consideration of any kind to NET
BR.
12.4. NET BR shall, at the request and expense of TERAYON, do such acts or
things as TERAYON may reasonably require for the purpose of obtaining,
maintaining, enforcing and preserving any of the Trademarks, or other
property right of TERAYON in the Territory, provided, however, that NET
BR agrees that only TERAYON has the right to enjoin any infringement or
registration by a third party of the Trademarks or similar rights.
12.5. NET BR shall not adopt, use, or register any acronym, trademark,
tradename or other marketing name of TERAYON or any confusingly similar
work or symbol as part of NET BR's own name or the name of any of its
NACS or the name of the Product it markets.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
13. SOFTWARE LICENSE AND OWNERSHIP
13.1. Certain proprietary TERAYON software or firmware may be incorporated in
the Product. Such software or firmware (collectively, "Software") is
-------
licensed, not sold to NET BR. Subject to the terms and conditions of this
Agreement, TERAYON grants to NET BR during the term of this Agreement a
--------- ---------
nonexclusive, nontransferable, royalty-free license in the Territory to
distribute through NET BR's ordinary sales channels any Software
incorporated in the Product solely as incorporated in executable code or
-------
firmware format therein, and to permit end users of the Product to use
-------
the Software solely as incorporated in the Product. To the extent
-------
permissible by applicable law, NET BR shall not itself, or permit others
to, reverse compile, reverse engineer or otherwise disassemble the
Software. To the extent permissible by applicable law, no rights to copy,
prepare derivative works or to publicly perform or display any Software
are granted to NET BR or end users hereunder.
13.2. By granting licenses to NET BR hereunder, TERAYON does not in any way
grant any ownership interest in any TERAYON intellectual property rights.
All rights not expressly granted herein by TERAYON to NET BR are reserved
by TERAYON.
13.3. NET BR shall not alter, obscure or remove any copyright notices or any
other proprietary rights notices placed on the Product.
-------
13.4. All Product marketed by NET BR shall be sold only in the form shipped by
-------
TERAYON, and NET BR shall not alter, modify, or change any Product or its
-------
package or use in relation to any Product.
-------
13.5. TERAYON represents that the Product were developed by TERAYON and its
-------
licensors and that TERAYON possesses all rights and licenses necessary to
grant the license rights set forth herein.
14. [********************]
At such time as NET BR has purchased an aggregate of [******************]
units of Product from TERAYON, TERAYON shall use diligent and
-------
commercially reasonable efforts to [************************************
**************************************************************
**********]. TERAYON shall give written information to NET BR on the
[*************], within six (6) months. [*****************] to be timely
[*********] by TERAYON to NET BR shall be entitled by TERAYON to be a
[**********************] of TERAYON [********************] hereinunder if
TERAYON: [***************************************************] (other
-------
than as a result of alleged infringement); or (ii) files for or is placed
in bankruptcy or (iii) makes an arrangement for the benefit if creditors
(files for Chapter 11 protection).
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
15. TECHNICAL ASSISTANCE
15.1. Technical assistance will be provided at TERAYON facilities unless
otherwise agreed to in writing by the parties.
15.2. Assistance to designated personnel for the understanding of the
Technical Data and the Product will be supplied by TERAYON's
-------
supervision and responsibility by way of:
15.2.1. Assistance with the solution of problems encountered by designated
personnel for the general understanding of the technical data and
Product hereinunder;
-------
15.2.2. Details on technical standards and interpretation of symbolic
representations used; and
15.2.3. Information on possible sources of supplementary documentation, useful
for the clarification of specific details of the technical data and
Product hereinunder.
-------
15.3. Assistance to designated personnel in understanding the theory of the
operation and the adequacy of the Product including interaction with
-------
the designated personnel on NET BR or NET BR's NACS actual or intended
methods and procedures to be used in the integration of the Product.
-------
15.4. NET BR and/or its NACS will pay and be responsible for all travel and
living expenses of its corresponding personnel, as well as for the
technical personnel appointed by TERAYON, TO PROVIDE FOR THE TECHNICAL
ASSISTANCE GIVEN WITHIN THE TERMS OF THIS SECTION.
15.5. Direct engineering and technical assistance will be rendered by TERAYON
at standard customers assistance fees, subject to availability of
resources. It is understood, however, that there will be no additional
charge for reasonable follow up inquiries not directly involving
meeting or further training through common media regarding the contents
of the Product.
-------
15.6. First training related to TeraPro and TeraLink Installation will be
------- --------
made by TERAYON at no additional cost. Any extra training will be
offered at TERAYON's then-standard rates plus travel and related
expenses.
16. TRAINING AND PRE-REQUESTS FOR TRAINING
16.1. TERAYON will develop a training program either for NET BR or its NACS
personnel as contained in Attachment D. During such training program,
designated personnel will abide by all TERAYON internal rules and
regulations, and the facilities' regulations.
<PAGE>
16.2. NET BR's NACS shall bear the entire expense of all salaries, fringe
benefits, travel and living expenses of its personnel in training and
all travel and living expenses of technical staff appointed by TERAYON
TO GIVE SUCH TRAINING TO THE DESIGNATED PERSONNEL IN BRAZIL IN A PLACE
DESIGNATED AND AGREED TO BETWEEN NET BR OR ITS NACS. TERAYON PERSONNEL
REQUIREMENTS TO MEET THE ASSISTANCE REQUIRED SHALL BE ARRIVED AT BY
MUTUAL NEGOTIATION AND IN ALL EVENTS SUBJECT TO REASONABLE USE OF
TERAYON'S PERSONNEL.
16.3. The training by TERAYON OF THE TECHNICIANS INDICATED BY NET BR OR ITS
NACS WILL ENCOMPASS THE ENTIRETY OF THE SUBJECTS LISTED IN ATTACHMENT D
HERETO. TERAYON ACKNOWLEDGES THAT SAID TRAINING IS OF THE NATURE AND
TYPE USED TO TRAIN ITS LIKE CUSTOMERS AND TERAYON ACKNOWLEDGES THAT
SAID TRAINING IS DESIGNED TO ENABLE SUCH CUSTOMERS TO CLEARLY
UNDERSTAND THE PRODUCT. IF ADDITIONAL TRAINING IS REQUIRED, TERAYON
-------
AGREES TO GIVE EXTRA TRAINING ON TERAYON'S NORMAL CUSTOMERS TRAINING
FEES PLUS ALL REQUIRED TRAVEL AND RELATED EXPENSES IF ANY.
17. CONFIDENTIAL INFORMATION
17.1. NET BR shall not, at any time, except as required in connection with
the performance of its duties hereunder, directly or indirectly, use,
disseminate, disclose or publish any confidential information (as
defined in Section 17.2 below) obtained from TERAYON or obtained from
other sources with respect to TERAYON. NET BR further agrees that it
will use its best efforts to obtain agreement from each of its
employees or agents who perform duties in connection with this
Agreement that they will conform to the above, and further that they
will not violate NET BR's duties with respect to the confidential
information in which TERAYON has reserved proprietary rights.
Notwithstanding the foregoing, NET BR shall have no liability for use,
reproduction or disclosure of confidential information obtained from
TERAYON if:
a) TERAYON gives its prior express written consent thereto;
b) NET BR establishes that the confidential information was already
known to NET BR, without obligation to keep it confidential, at the
time of its receipt from TERAYON, as evidenced by documents in the
possession of NET BR prepared or received prior to TERAYON's
disclosure;
c) NET BR establishes that the confidential information was received
d) by NET BR in good faith from a third party lawfully in possession
thereof and having no obligation to keep such information
confidential; or
e) NET BR establishes that the confidential information was publicly
known at the time of its receipt by NET BR from TERAYON or has
become publicly known other than by a breach of this Agreement or
other action by NET BR.
<PAGE>
17.2. For purposes of this Section, confidential information shall
include, but not be limited to, any information, data, process,
technique, program, computer software, design, drawing, formula,
test data, work- in-process, future development, engineering,
manufacturing, marketing, financial or personnel matter relating to
the TERAYON, its research, development, present or future Product,
-------
sales, customers, employees, opportunities, markets, or business,
whether in oral, written, graphic or electronic form.
17.3. The obligations of NET BR under this Section 17 shall continue
notwithstanding any termination or expiration of this Agreement.
---------
18. TITLE, RISK OF LOSS AND DELIVERY
18.1. Title to the Product and risk of loss of the Product shall pass to
------- -------
NET BR or to its assigned NACS when TERAYON delivers such Product
-------
to a common carrier or NET BR's agent so designated in writing.
Delivery shall be ex TERAYON's factory.
18.2. The delivery dates agreed to by TERAYON are in accordance to the
shipment schedule, and TERAYON shall be liable and in breach of its
obligations to NET BR due to late deliveries.
18.3. TERAYON may, upon NET BR prior written approval on TERAYON's
written notice, change the shipment schedule previously to a
certain shipment, and such change shall be mutually agreed between
the parties, and shall incorporate the current shipment schedule so
as to become the new shipment schedule, unless NET BR objects to
such schedule change in writing within ten (10) calendar days of
receipt of TERAYON's notice.
19. TRIBUTES OR TAXATION
All Brazilian taxes and/or any other government charges applicable
to the sale of product including those applicable to the sale of
products to distributor due as a consequence of this Agreement
---------
shall be paid by NET BR, and all taxes, assessments and levies
either on the receipt of the remuneration by TERAYON or directly
related government charges in connection with the manufacturing
activities in he US shall to be paid by TERAYON. The parties shall
indemnify and hold each harmless against any tax liability
therefor. The parties shall receive no compensation from each other
in the form of money commissions or the like.
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
20. BREACH
20.1. Any of the following acts by the parties shall constitute a
breach of the parties obligations hereunder:
a) failure to manufacture conforming and quality Product under
the Agreement herein;
b) failure to accept conforming Product as supplied hereunder as
-------
well as to return such conforming Product as previously agreed
-------
in writing.
c) failure to supply warranty, supporting services, maintenance,
installation assistance and training as agreed upon in Sections
hereinabove.
d) failure to make payment for the Product and services related to
-------
the Agreement when due;
---------
e) the filing of a voluntary or involuntary petition in
bankruptcy against the parties, the institution of any
proceeding in insolvency or bankruptcy against the parties,
including reorganization and assignment and/or arrangement for
the benefit of creditors, the appointment of a trustee or
Receiver of the parties.
f) any other act by the parties in violation of any provision
hereof.
21. TERM
21.1. This Agreement shall only be effective upon previous NET BR and
---------
TERAYON mutual and written approval of Attachments A and B terms
what shall occur no later than (30) days as of the last
signature of the Agreement hereinunder.
---------
21.2. This Agreement will terminate on the last day of its term which
---------
shall occur DECEMBER 31, 1999. However, this Agreement will be
---------
extended for additional one (1) year terms upon mutual notice in
writing ninety (90) days prior to either the date of termination
of the first term of the Agreement or to any of the subsequent
---------
terms thereof, (the "Term").
21.3. in the event that NET BR desires to renew this Agreement for
---------
successive periods to be defined by the parties upon mutual
agreement in writing, TERAYON is hereby committed to NET BR and
its NACS to sell the Product or its Spare Parts to them [*****]
------- -----------
when compared to TERAYON's standard pricing policy for the sale
of the same Product [******].
-------
22. TERMINATION
22.1. This Agreement may be terminated by written notice at the option
---------
of a party having such right, as provided hereunder:
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
22.1.1. By NET BR in case of Product lack of performance and/or
-------
governmental act or legislation;
22.1.2. By either party in case of bankruptcy, receivership, concordat,
reorganization and assignment and/or arrangement for the benefit
of creditors, the appointment of a trustee or Receiver, or
liquidation of the other party; or
22.1.3. By both parties mutual written Agreement in case of occurrence
---------
of a specific Act of God or a specific event of Force Majeure
which continues for more than three (3) months; or
22.1.4. By the non-defaulting party if the other party fails to perform
any of its obligations under this Agreement and does not remedy
---------
such default within thirty (30) calendar days following receipt
of a written notice from the non-defaulting party requesting such
remedy, then the non-defaulting party shall have the right by
notice in writing to terminate this Agreement and thereupon all
---------
rights of the defaulting party hereunder shall cease without
prejudice to the remedy of either party against the other in
respect of any previous breach of any of the provisions
hereinunder; or
22.1.5. By either party in the case of disclosure by the other party of
proprietary information or of this Agreement without the explicit
---------
written consent by the Disclosing Party.
22.2. If this Agreement is terminated by TERAYON due to NET BR's
---------
failure to pay or failure to cause an assigned NACS to pay or due
to an effective lack of payment of any amounts due, the
correspondent NACS will:
22.2.1. Not disclose any of the Technical Data or any other information
hereunder received through NET BR or TERAYON;
22.2.2. Pay TERAYON through NET BR all amounts due and unpaid hereunder,
including reasonable expenses.
22.3. If TERAYON terminates the Agreement for reasons other than
---------
resulting from NET BR's breach, then:
22.3.1. NET BR and/or its assigned NACS will be free to use the
Technical Data already provided under the terms of this Agreement
---------
as it relates to the continuous proper functioning and operation
of the TERAYON equipment as supplied by TERAYON or the Second
Source Supply defined in section 14 hereinabove.
22.4. The termination of this Agreement will not prejudice any claim
---------
of TERAYON or NET BR as the same may be accrued or to accrue on
account of any default by NET BR or TERAYON as the case may be.
<PAGE>
22.5. Upon termination or expiration of this agreement, TERAYON shall have the
right, but not the obligation , to repurchase from NET BR all products
and spare parts for products then in NET BR's inventory or in transit.
Any products or spare parts not so repurchased may be disposed of by NET
BR without prejudice or charge back to TERAYON.
22.6. Upon expiration or termination of this agreement for reasons other than
those contemplated in this Agreement, NET BR agrees to do the following:
---------
a) Deliver to TERAYON all records related to services, sales and
licenses which pertain to the product.
b) Refrain thereafter from representing itself as a TERAYON distributor
or using any trade names or trademarks of TERAYON.
c) If applicable, change within ninety (90) days, its name to any other
name which do not incorporate the trademarks or trade names of
TERAYON.
d) Return to TERAYON or immediately destroy all stationary, advertising
mater or any other printed material in its possession under its
control containing or bearing any trademark or trade name of TERAYON;
and
e) Take all appropriate steps to remove and cancel its listing in
telephone books, directories, public records or elsewhere which state
or indicate that NET BR is a distributor of TERAYON.
22.7. This Agreement will terminate on the last day of its Term.
---------
22.8. If the parties hereafter agree to conduct future TCVN trials or
Commercial Verification trials, the TCVN for each such trial shall be the
one jointly developed by the parties for that trial, as stated
hereinunder.
23. WAIVER
The waiver of any default by either of the parties of any of the terms and
conditions of this Agreement, will not represent the waiving of any other
---------
default related to any other term or condition, but will apply solely in
cases where such waiver is conceded.
24. ASSIGNMENT OF THE AGREEMENT
24.1. Neither of the parties may cede, transfer or assign the Agreement
---------
hereunder or its rights in whole or in part to any third parties except
for NET BR's purchase orders assignment to its NACS, without prior written
notice of such transaction, which shall be subject to previous approval by
the other party in writing except to NET BR's NACS as above.
20
<PAGE>
24.2. This Agreement shall endure to the benefit of and be binding upon the
---------
parties hereto and their respective successors and assigns.
25. FORCE MAJEURE
Force Majeure shall mean any event or condition, not existing as of
date of signature of this Agreement not reasonably foreseeable as of
---------
such date and not reasonably within the control of either party, which
prevents in whole or in material part the performance by one of the
parties of its obligations hereunder. Without limiting the foregoing,
the following shall constitute events or conditions of Force Majeure:
act of State or Governmental action, riots, disturbances, civil war,
war, strikes, lockouts, slowdowns, prolonged shortage of energy
supplies, material shortages, epidemics, fire, flood, earthquake,
lightning and explosion.
26. GOVERNING LAW
26.1. Any dispute in connection with this Agreement shall be finally settled
---------
by arbitration in accordance with the laws of the State of
California - USA.
26.2. The arbitration shall be held in Los Angeles, before three arbitrators.
TERAYON and NET BR shall be entitled to appoint one arbitrator each and
the third arbitrator shall be appointed jointly by the two arbitrators
appointed by TERAYON and NET BR except for any law conflicts.
26.2.1. The arbitration proceedings shall be in English and shall be conducted
on a confidential basis.
26.3. Any award, order or judgment pursuant to such arbitration shall be
deemed final and may be entered and enforced according to the law each
party agrees for the purpose of the enforcement of the arbitration to
be bound either by the award and the corresponding law.
26.4. New York, NY, shall be the appropriate venue for the resolution of
disputes hereunder, given that nothing contained in the Agreement
---------
herein shall neither infringe nor be construed to infringe or adversely
affect the enforcement of any applicable law or regulation of Brazil.
21
<PAGE>
26.5. The parties shall not engage in any business practice which is illegal
under the laws of any jurisdiction within the Territory of Brazil.
Without limiting the foregoing, the parties hereby agree to abide by
and comply with the export control laws of the United States of
America, as such laws may be amended from time to time. In addition,
the parties hereby agree that they shall comply with the requirements
of the U.S. Foreign Corrupt Practices Act (the "Act") and shall refrain
from any payments to third parties which would cause the other party to
violate the Act. The parties hereby agree to indemnify and hold the
other party harmless from any breach of this Section .
27. NOTICES AND NOTIFICATIONS
27.1. All notices, notifications, requests and any other form of
communication required under this Agreement, will be sent by Telefax or
---------
registered air mail to the addresses of the Parties mentioned in this
Agreement, or to other addresses specified by notices in writing, and a
---------
copy will be addressed separately to the "attention of the Agreement
---------
Administrator", at the address hereunder defined.
27.2. Within fifteen (15) days from the Effective Date, each of the parties
--------------
will appoint its Agreement Administrator and will notify the other
---------
party with the name and address of the Administrator who will be fully
authorized to take all measures necessary for the implementation of
this Agreement.
---------
27.3. The parties may appoint a different Agreement Administrator at any
---------
time, upon written notice to the other party.
27.4. The Agreement Administrator's responsibilities include the obligation
---------
to analyze and coordinate solutions to problems as soon as they are
brought to the parties' attention and to notify the appropriate
personnel of the party in order to solve any such problems promptly.
27.5. NET BR shall promptly give TERAYON written notice of any transaction
affecting either the control of its capital stock, or any material
change in the respective interest of any partners. In the event that
TERAYON in its reasonable discretion determines that the continuation
of this Agreement subsequent to such a transaction or change would be
detrimental to TERAYON's original interests deriving herefrom, then
TERAYON upon mutual Agreement with NET BR may terminate this Agreement
effective ninety (90) days after written notice thereof.
28. AGREEMENT AND MODIFICATION
28.1. This Agreement and the attachments and exhibits are the sole statement
---------
of the terms and conditions applicable to the subject matter herein.
22
<PAGE>
28.2. This Agreement may only be modified by a written amendment signed by
---------
representatives duly authorized to so bind TERAYON and NET BR. This
Agreement shall not be supplemented or modified by a course of
---------
performance or trade usage.
28.3. Independent parties. The parties shall act as independent contractors
under the terms of this agreement. The parties are not and shall not be
deemed to be employees, agents, co-venturers or legal representatives
of each other for any purpose. The parties shall not be entitled to
enter into any contracts in the name of, or on behalf of each other,
nor shall they be entitled to pledge the other party's credit in any
way or hold themselves out as having authority to do so.
30.2. Severability. All provisions of this Agreement shall be considered as
---------
separate terms and conditions; and in the event that anyone shall be
held illegal; invalid; or unenforceable; all other provisions hereof
shall remain in full force and effect as if the illegal; invalid; or
unenforceable provision were not a part thereof. Should any such
provision reasonably be considered by either party as an essential
element of this agreement, the parties hereto shall negotiate a
replacement provision in good faith through an adequate amendment to
the contract. If the parties are unable to agree upon the terms of such
replacement provision within ninety (90) days of the contravening
provisions termination; then this agreement may be terminated at the
option of the party reasonably considering such contravening provision
to be an essential element of this Agreement effective upon the giving
---------
of a thirty (30) days written notice to the other party to such effect.
23
<PAGE>
IN WITNESS WHEREOF, the Parties have entered into this Agreement on the basis of
---------
good-will and with the intention to cooperate for the mutual benefit and
consider the Agreement effective as an entire Agreement between themselves in
--------- ---------
respect to its subject matter.
AGREED TO:
TERAYON CORPORATION LTD. NET BRASIL S.A.
BY: BY:
-------------------------- --------------------------
SIGNATURE: SIGNATURE:
------------------- -------------------
TITLE: TITLE:
----------------------- -----------------------
BY: BY:
-------------------------- --------------------------
SIGNATURE: SIGNATURE:
------------------- -------------------
TITLE: TITLE:
----------------------- -----------------------
SANTA CLARA, JULY 1997. SAO PAULO, 30 JUNE 1997.
WITNESSES
1. 2.
--------------------------- ---------------------------
FOR TERAYON FOR NET BRASIL
24
<PAGE>
ATTACHMENT A
PRODUCT LIST
PRODUCT FUNCTIONALITY
PRODUCT TECHNICAL DATA AND SPECIFICATIONS
25
<PAGE>
ATTACHMENT B
ACCEPTANCE TEST PLAN
26
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
ATTACHMENT C
VOLUME COMMITMENT
NET BR and NACS [******]
---------------------------------
[************] [*************]
---------------------------------
[*******] [****]
---------------------------------
[*******] [****]
---------------------------------
[*******] [*****]
---------------------------------
[*******] [*****]
---------------------------------
[*******] [*****]
---------------------------------
[*******] [*****]
---------------------------------
[**** (********)] [******]
---------------------------------
[*******]
[********] [*****]
- -----------------------------------------------------------------------------
[*********] [***************] [******************]
- -----------------------------------------------------------------------------
[*******] [********] [********] [********]
- -----------------------------------------------------------------------------
[********] [********] [********] [********]
- -----------------------------------------------------------------------------
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
27
<PAGE>
ATTACHMENT D
TERAYON TRAINING PROGRAM
1. TERACOMM SYSTEM OVERVIEW
. Current System Release Supported Feature Sets
. Provisioning Server - Overview & Demo
2. TERACOMM SYSTEM TRAINING
3. PRE-INSTALLATION CRITERIA
. Network/Plant Characterization & Readiness
. LAN / WAN Network Preparation
. In Home Installation
. Billing & Provisioning Preparation
. Headend Combining & Splitting
4. TERACOMM SYSTEM INSTALL & ACTIVATION
. INITIAL System Turn up and Configuration
. CU Installation
. RU Installation
. RU to CU Connectivity
. Router Connection / ACIP
. Subscriber Activation & Disconnect
5. TERACOMM SYSTEM MANAGEMENT & TROUBLESHOOTING
. Diagnostics & Trouble Shooting
. System Faults & Alarms
. SNMPc / MIBs
Terayon Training Schedule to be updated as required.
28
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
ATTACHMENT E
[***********************************]
<TABLE>
<CAPTION>
===================================================================================================
[*************] [*****] [**********]
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
[*******] [***************************************** [********]
**********************************************
************]
- ---------------------------------------------------------------------------------------------------
[*******] [***************************************** [*******]
********************************************
***************************]
- ---------------------------------------------------------------------------------------------------
[********** [***************************************** [*******]
********] ********************************************
***************************]
- ---------------------------------------------------------------------------------------------------
TER - 002.2P 4. Apparatus and method for establishing Frame 7/19/96
(CIP #2) Synchronization in Distributed Digital Data
Communications Systems
- ---------------------------------------------------------------------------------------------------
[*******] [************************************** [*******]
***********************************************
*************]
- ---------------------------------------------------------------------------------------------------
TER - 004 6. Apparatus and method for Digital Data 3/14/96
Transmission over CATV system using
ATM Transport protocol
- ---------------------------------------------------------------------------------------------------
[**********] [***************************************** [*******]
***************************************
*******************]
- ---------------------------------------------------------------------------------------------------
[********** [***************************************** [*******]
*****] ************]
- ---------------------------------------------------------------------------------------------------
[********** [****************************************] [*******]
*****]
===================================================================================================
</TABLE>
[*] - Indicates confidential information that has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
Exhibit 10.9
RESALE AND LICENSE AGREEMENT
BY AND BETWEEN
DIGITAL EQUIPMENT CORPORATION
AND
TERAYON CORPORATION
Date: December 9, 1996
Rev: Version 4
<PAGE>
Confidential Draft
This Resale & License Agreement ("Agreement") is made as of December 9, 1996, by
and between Digital Equipment Corporation, with offices at 40 Old Bolton Road,
Stow, Massachusetts 01775, (hereinafter referred to as "DIGITAL"), and Terayon
Corporation, with its principal offices at 2952 Bunker Hill Lane, Santa Clara,
CA. 95054, (hereinafter referred to as "TERAYON"), (mutually hereinafter
referred to as the "Parties").
The following terms and conditions govern DIGITAL's purchase of TERAYON's
TeraLink 1000 Master Controller and TeraPro(TM) Client Cable Modemproducts as
identified in Exhibit A, (the "PRODUCTS"), for resale and license to DIGITAL's
customers. TERAYON reserves the right to incorporate additional products in
Exhibit A upon execution of a mutually negotiated amendment, which shall include
all relevant pricing and discount terms and conditions.
SECTION 1.0 APPOINTMENT
1. TERAYON appoints DIGITAL as a non-exclusive reseller and sub-licenser of
the PRODUCTS. This appointment shall not preclude DIGITAL from entering
into similar arrangements with other parties, including competitors of
TERAYON, without liability to DIGITAL. DIGITAL agrees to limit the resale
and sub-license of the PRODUCTS to its customers.
2. The Parties agree that their relationship is strictly limited to that of
buyer/reseller and seller/integrator, subject to the limitations of
DIGITAL's authority as contained in this Agreement. They further
acknowledge that DIGITAL is granted no right, title, interest in,
copyright, trademark or other proprietary rights relating to the PRODUCTS.
DIGITAL agrees not to grant licenses, or other rights in the PRODUCTS,
except for resale to its customers in its ordinary course of business and,
as applicable, under the specific terms and conditions of the TERAYON's
Software License Agreement, attached hereto as Exhibit B, and this
Agreement.
3. Neither party may assign nor otherwise transfer or sell any of its rights
under this Agreement without the prior written consent of the other party,
which shall not be unreasonably withheld.
SECTION 2.0 DEFINITIONS
1. The term "customer" as used in this Agreement shall generally refer to end
user customers which purchase PRODUCTS directly from DIGITAL as well as
those which purchase PRODUCTS from cable operators along with pre-packaged
and/or customized Digital services.
2. The term "days" as used in this Agreement shall refer to business days
unless otherwise stated.
3. The term "Documentation" as used in this Agreement is defined as the
functional description of the PRODUCTS, direction for installation and
use, and other explanatory material necessary for an customer to perform
all of the functions of the PRODUCTS.
<PAGE>
4. The term "Revision" as used in this Agreement is defined as any
correction, modification, maintenance release, update, enhancement, and/or
any new version of the PRODUCT.
SECTION 3.0 THE RELATIONSHIP
3.1 TERAYON'S GENERAL RESPONSIBILITIES:
1. TERAYON will provide tertiary technical assistance relating to the
PRODUCTS to the best of its abilities and to the extent practicable in its
judgment in the form of application assistance, hardware support and
technical sales support.
2. TERAYON agrees to provide initial PRODUCTS training, at its cost, at
TERAYON's Santa Clara facility for a mutually agreed upon number of
DIGITAL employees. DIGITAL shall be required to pay for the travel and
lodging expenses for its employees participating in the initial training.
Any additional training shall be provided by TERAYON based on TERAYON's
standard pricing and delivery terms. TERAYON's PRODUCTS' training shall be
sufficient to enable DIGITAL to sell, license and install the PRODUCTS,
and to perform post-sales support including first and second level
PRODUCT support.
3. TERAYON will supply reasonable quantities of demonstration PRODUCTS at
cost, and PRODUCT catalogs, marketing materials and other sales aids at no
charge, for distribution by DIGITAL in the course of its sales activities.
TERAYON will further work with DIGITAL to determine a mutually agreed upon
format for ongoing exchange of such information, which the Parties agree
will be based on DIGITAL's forecasted volume of PRODUCT sales.
4. Exclusive of territories and customers defined in Exhibit D. TERAYON
grants DIGITAL, for the term of this Agreement, a worldwide, non-exclusive
license to market and distribute the PRODUCTS (accompanied by the
Documentation, Software License Agreement and applicable PRODUCT warranty)
to DIGITAL's customers.
5. TERAYON will provide to DIGITAL and/or DIGITAL's customers, at DIGITAL's
request, Revisions to the PRODUCTS at the time TERAYON makes such
Revisions available to TERAYON's general customer base. Such Revisions
shall be provided at no charge during the applicable PRODUCTS' warranty
period and on a quote basis after expiration of the warranty period,
unless otherwise defined in a services agreement. Revisions will either be
downloaded or provided in the form of packaged media.
6. TERAYON agrees to provide pre-sales technical support to DIGITAL to assist
in the development of and response to customer opportunities.
7. TERAYON agrees to pay DIGITAL a commission equal to eight percent (8%) of
the PRODUCT list price for TERAYON's sale of TeraPro(TM) Client PRODUCTS
which has resulted from DIGITAL's lead and engagement of the respective
customer(s) for integration service purposes.
8. TERAYON agrees to provide post-sales support per the terms and conditions
contained in Exhibit C, PRODUCTS Support, attached hereto and incorporated
herein.
2.
<PAGE>
9. TERAYON shall provide written notice to DIGITAL to keep DIGITAL informed
concerning the prices at which the PRODUCTS will be offered for sale to
DIGITAL and of changes in the PRODUCTS' pricing, specifications, and
manufacturing lead-times and delivery.
10. TERAYON reserves the right to withdraw any of the PRODUCT(S) from its
pricelist provided TERAYON provides sixty (60) calendar days advance
written notice to DIGITAL and makes a comparable replacement product
available to DIGITAL. TERAYON agrees to honor all Purchase Orders placed
prior to and during the notification period, and further agrees to honor,
for a period of sixty (60) days from the date of notification, all
bids/proposals which are outstanding on or prior to the notification date.
11. TERAYON agrees to defend, indemnify and hold DIGITAL harmless from any and
all claims made against DIGITAL by reason of negligence, willful
misconduct, or other act or omission of TERAYON, its employees, agents or
servants.
12. TERAYON is an independent contractor, and shall not act as a legal
representative, legal partner, franchisee or agent of DIGITAL and has no
authority to act for, bind or make commitments on behalf of TERAYON.
13. TERAYON agrees to work with DIGITAL to develop and deliver sales and
marketing programs, including but not limited to, PRODUCT seminars, pre-
sales training sessions, leads programs and marketing promotions.
14. TERAYON agrees to meet with DIGITAL, on a quarterly or semi-annually
basis, to discuss performance of the Parties' obligations under the
Agreement.
3.2 DIGITAL'S GENERAL RESPONSIBILITIES
Digital agrees to the following
1. To serve the interests of TERAYON by not disclosing to nor permitting any
unauthorized person to have access to any TERAYON price lists, discount
schedules, quotation forms or other proprietary data regarding the
PRODUCTS.
2. To be responsible for and pay for all of DIGITAL's expenses of any nature
incidental to the sale and license of the PRODUCTS, including without
limitation, advertising, rental of space, traveling expenses, and all
other expenses other than expenses as may be specifically authorized in
writing by TERAYON.
3. To acknowledge and agree that all software PRODUCTS shall be subject to
the terms and conditions of TERAYON's Software License Agreement, attached
hereto as Exhibit B. DIGITAL agrees to notify TERAYON immediately upon the
occurrence of any infringement or misuse of the PRODUCTS which DIGITAL has
knowledge of.
4. Not to decompile or disassemble the PRODUCTS, nor analyze or otherwise
examine the PRODUCTS for the purpose of reverse engineering, nor permit
others to do so.
3.
<PAGE>
5. To provide sales and integration support for the PRODUCTS to the best of
its abilities, and to be responsible for primary and secondary support for
those PRODUCTS sold and installed by DIGITAL, as set forth in Exhibit C.
6. To meet a minimum purchase quantity of one (1) TeraLink 1000 Master
Controller per headend system per quarter in calendar '97 and five (5)
TeraLink I000 Master Controllers per headend system per quarter in
calendar '98.
7. To make, as necessary, reasonable efforts to provide dedicated technical
resources to perform presales support for the PRODUCTS, and to assist in
the development of and response to customer opportunities.
8. To make best efforts to provide, on a quarterly basis and in a mutually
agreed upon format, a report detailing DIGITAL's marketing activities for
the preceding quarterly period.
9. To defend, indemnify and hold TERAYON harmless from any and all claims
made against TERAYON for: (i) failure to pay taxes; (ii) failure to comply
with export control regulations and the Foreign Corrupt Practices Act;
(iii) warranties made to customers by DIGITAL; and (iv) liability claims
resulting from injury to persons or property attributed to negligence,
recklessness or willful misconduct of DIGITAL, its agents or employees.
10. To represent itself as an independent contractor, and to refrain from
acting as a legal representative, legal partner, franchisee or agent of
TERAYON and to acknowledge that DIGITAL has no authority to act for, bind
or make commitments on behalf of TERAYON.
11. To work with DIGITAL to develop and deliver sales and marketing programs,
including but not limited to, PRODUCT seminars, pre-sales training
sessions, leads programs and marketing promotions.
12. To make best efforts to provide, on a quarterly basis, a rolling non-
binding forecast of projected Teralink 1000 Master Controller PRODUCT
sales and TeraPro(TM) PRODUCT sales referrals, and to meet with TERAYON on
a quarterly or semi-annually basis to assess performance of the Parties in
meeting their obligations under the Agreement.
SECTION 4.0 TERMS AND CONDITIONS OF PURCHASE
4.1 PURCHASE ORDERS
1. Provided purchase orders ("Purchase Orders/PO's") are placed within the
scope of and in conformance with this Agreement, TERAYON will acknowledge
acceptance of the PO's within five (5) days of the initial order
placement. In the event TERAYON fails to provide the required
acknowledgment, the respective PO's shall be automatically accepted.
4.
<PAGE>
2. All orders accepted for delivery are subject to the terms and conditions
of this Agreement. Unless agreed to in writing, no additional or
conflicting terms which may appear on the face or reverse side of any
order by DIGITAL shall apply.
3. DIGITAL may submit Purchase Orders via: (1) hard copy; (2) facsimile; (3)
telephone; or (4) any other generally accepted electronic means. Execution
of this Agreement by DIGITAL provides authorization for TERAYON to accept
orders via facsimile, phone or any other generally acceptable means of
electronic transfer. If orders are submitted by telephone, DIGITAL will
provide TERAYON with a facsimile or hard copy follow-up within five (5)
business days.
4.2 RESCHEDULING RIGHTS
1. Unless authorized by TERAYON in writing, DIGITAL may not reschedule,
without limitation, any Purchase Order(s), or any part of any Purchase
Order(s) within thirty (30) days prior to the scheduled delivery date.
4.3 CANCELLATION RIGHTS
1. DIGITAL reserves the right to cancel any Purchase Order(s), or any part of
any Purchase Order(s) up to thirty (30) days prior to the scheduled
delivery date without penalty. Cancellations made inside of thirty (30)
days may be subject to a one hundred percent (100%) restocking fee.
4.4 DELIVERY
1. TERAYON commits to a manufacturing lead-time of twelve (12) weeks from the
date of the acknowledged PO. TERAYON further commits to prepare PRODUCTS
for shipment to DIGITAL, upon request, inside its standard four (4) week
manufacturing lead-time to meet specific customer requirements. All
deliveries shall be FOB TERAYON's Santa Clara, California offices, with
DIGITAL assuming responsibility for all delivery costs and risk of loss
during transit. Upon pickup by the carrier at TERAYON's facilities, title
shall pass to DIGITAL. TIME IS OF THE ESSENCE RESPECTING DELIVERY.
4.5 INSPECTION AND ACCEPTANCE OF PRODUCTS
1. Receipt of PRODUCTS at DIGITAL's or DIG1TAL's customer's facility(s) shall
be not considered acceptance until such time as the inspection of the
PRODUCTS has been completed. In the event DIGITAL determines during the
inspection period, which shall not exceed ten (10) days, that a PRODUCT(S)
is/are not in conformity (either physically or functionally) to TERAYON's
published specifications, DIGITAL shall notify TERAYON of its intent to
return the defective PRODUCT(s), debit the invoice price for the
PRODUCT(S), and request immediate delivery of a replacement PRODUCT(S),
freight prepaid by TERAYON. TERAYON shall, thereafter, issue a new invoice
for the replacement PRODUCT(S), and DIGITAL shall, within ten (10) days,
return the defective PRODUCT(S) to TERAYON, freight collect.
5.
<PAGE>
2. Acceptance shall automatically occur on the eleventh (11th) day following
initial receipt of the PRODUCTS if DIGITAL fails to provide TERAYON notice of
non-conformity. Non-conforming PRODUCTS identified for return after the initial
inspection period shall be treated in accordance with TERAYON's product warranty
policy as identified in this Agreement.
SECTION 5.0 EXPORT OF PRODUCTS
1. PRODUCTS obtained under this Agreement may be subject to U.S. and other
government export control regulations. DIGITAL shall be solely responsible
for acquiring all necessary export licenses and/or registrations prior to
exporting controlled PRODUCTS or technical data obtained from TERAYON or
any product produced directly from controlled technical data. TERAYON
shall provide all necessary supporting documentation (e.g. commercial
invoices) and/or assistance to DIGITAL to facilitate the export of
PRODUCTS hereunder.
SECTION 6.0 PRICES FOR PRODUCTS AND SERVICES
1. Prices for PRODUCTS and Services purchased under this Agreement have been
identified in the attached Exhibit A.
2. DIGITAL and TERAYON are free to establish their own prices and terms.
3. Excepting its obligations under Section 3.1.8 herein, TERAYON reserves the
right to change prices, upon its provision of sixty (60) days advance
written notification to DIGITAL.
4. In the event of a price increase, DIGITAL may cancel, without penalty, any
unshipped orders by providing written notice within ten (10) days of the
effective date of the price increase.
5. In the event of a price decrease, DIGITAL will be invoiced at the lower
price for all PRODUCTS that TERAYON ships on or after the effective date
of the price reduction.
6. Prices are exclusive of all sales, use and transfer taxes. DIGITAL shall
be responsible for payment of all taxes associated with the resale and sub-
licensing of PRODUCTS purchased under this Agreement with the exception of
taxes based on TERAYON's income. DIGITAL agrees to provide TERAYON with
valid tax exemption certificates for those states where deliveries are to
be made. If such certificates are not provided prior to shipment, DIGITAL
will be charged for all applicable state and local taxes.
SECTION 7.0 PAYMENT
1. Payment for PRODUCTS purchases shall be due net thirty (n/30) days from the
receipt of PRODUCTS provided DIGITAL has received a correct invoice from
TERAYON.
6.
<PAGE>
2. Payment by TERAYON of commissions resulting from DIGITAL's referral of
TeraProTM Client sales shall become due within thirty (30) days following
the close of the shipping quarter.
3. All payments shall be made in U.S. dollars at each party's principal places
of business.
4. Payment for any applicable technical post-sales support and/or Maintenance
and Support Agreements shall be due net thirty days (net/30) after from
the date of invoice.
5. If DIGITAL becomes delinquent in any form of payment, and such delinquency
is not cured within ten (10) days from the initial payment due date,
TERAYON shall provide DIGITAL with written notice and request immediate
cure of the past due payment. In the event DIGITAL fails to cure or
provide TERAYON with adequate assurances that the problem will be remedied
within a commercially reasonable period of time, TERAYON shall have the
following rights in addition to any other rights and remedies contained in
this Agreement, in any Security Agreements executed by the Parties, or by
applicable law:
(a) TERAYON may refuse to accept any new orders, may cancel or delay
shipment on existing orders and may stop any orders in transit.
(b) If DIGITAL purchases on open account, TERAYON may refuse the
extension of credit and require that all sales be made on a cash in
advance basis.
SECTION 8.0 LICENSE TERMS & TITLE AND RIGHTS TO THE SOFTWARE PRODUCTS
In accordance with the terms and conditions of this Agreement, TERAYON grants
DIGITAL and DIGITAL so accepts, a worldwide, non-exclusive license to promote,
market and distribute the PRODUCTS as set forth herein. The following terms and
conditions govern the license granted by TERAYON, and TERAYON's obligations in
consideration of such license.
1. DIGITAL shall incorporate TERAYON's Software License Agreement with all
PRODUCTS sold/licensed to customer customers.
2. DIGITAL is granted rights to make copies of the software PRODUCTS for the
limited purpose of providing warranty and post-warranty service and
support to its customer customers.
3. The software PRODUCTS and Revisions to the software PRODUCTS are
proprietary to TERAYON, and TERAYON shall retain all rights, title and
interest in and to the software PRODUCTS including all rights under
applicable patents, copyrights, trademarks, and trade secrets.
4. Unless otherwise provided for herein, DIGITAL is prohibited from making
any modifications, adaptations, enhancements, changes or derivative works
of the software PRODUCTS unless authorized in writing by TERAYON.
7.
<PAGE>
5. TERAYON represents and warrants that any and all corrections,
modifications, upgrades and enhancements to the software PRODUCTS shall at
all times be compatible and interoperable with the two (2) most recently
shipped versions of the software PRODUCTS.
6. To the extent necessary to give effect to this Agreement, the licenses
granted to DIGITAL shall include rights under any applicable patents,
copyrights, trademarks and trade secrets issued or pending and belonging
to TERAYON or which TERAYON has acquired or may acquire.
7. TERAYON represents that it is the sole owner and copyright holder of the
software PRODUCTS; that it has at the time of execution of the Agreement,
and will continue to maintain during the term of the Agreement, the full
right and authority to grant licenses to the software PRODUCTS, and that
neither this license nor performance under this Agreement do or shall
conflict with any other agreement or obligation to which DIGITAL is a
party or by which it is bound.
SECTION 9.0 DOCUMENTATION
1. TERAYON grants DIGITAL, during the term of the Agreement, rights to copy
the Documentation to distribute internally to its sales and engineering
organization, and externally to customer customers either in promotion of
the PRODUCTS or in conjunction with the delivery of the PRODUCTS, if so
required.
SECTION 10.0 WARRANTY TERMS AND CONDITIONS
1. Pursuant to its resale of the PRODUCTS under the terms and conditions of
this Agreement, DIGITAL shall represent itself as the warranty service
provider for customer warranty claims. The warranty terms and conditions
which follow herein this section are made in consideration of TERAYON's
status as a reseller of the PRODUCTS.
2. In addition to warranting that it has the right to grant the license
contained in this Agreement, TERAYON warrants for ninety (90) days from
the later of receipt by DIGITAL or receipt by DIGITAL's customer that the
PRODUCTS (hardware and software) shall be free from defects in design and
workmanship under normal usage. TERAYON further warrants that the PRODUCTS
will perform substantially in conformance with the currently published
Documentation.
3. TERAYON represents and warrants that it has the right to convey the
PRODUCTS to DIGITAL, that it has the necessary rights, titles, and
licenses to allow DIGITAL to perform all rights contemplated by this
Agreement including, without limitation, the right to license, resell and
distribute the PRODUCTS, and that the PRODUCTS are free from all liens or
encumbrances and do not infringe on the intellectual property interest of
any party.
4. TERAYON represents and warrants that its license rights are passed through
to DIGITAL's customer. Further, TERAYON's warranty to DIGITAL's customer
shall
8.
<PAGE>
extend to any Documentation, warranty statements, or literature provided
with the PRODUCTS or as described in information provided by TERAYON.
5. TERAYON warrants that no security measures have been incorporated in any
PRODUCT which would impair its use and operation except such measures as
are disclosed to DIGITAL in writing and approved by DIGITAL in writing.
6. TERAYON has no control over the conditions under which DIGITAL and its
customer customers use the PRODUCTS, and does not/cannot warrant the
results obtained by unauthorized use or use of the PRODUCTS for purposes
which they have not been intended.
7. TERAYON does not warrant that the functions contained in the PRODUCTS will
meet the requirements of DIGITAL or DIGITAL's customers, or that the
operation of the PRODUCTS will be uninterrupted or error-free. The
warranty shall not cover PRODUCTS which have been altered or changed in
any way by DIGITAL or DIGITAL's customers. TERAYON further shall not be
responsible for problems caused by changes in or modifications to the
operating characteristics of any computer hardware or operating system for
which the PRODUCTS were intended to be used, nor will TERAYON be
responsible for problems which occur as a result of the use of the
PRODUCTS in conjunction with hardware which is incompatible with the
hardware or operating system with which the PRODUCTS were designed for
and/or intended to be used.
8. The above representations and warranties shall survive any termination of
this Agreement, and shall run to DIGITAL, its customers, successors, and
assigns. DIGITAL shall have the right to enforce these warranties on
behalf of any of its customers.
9. TERAYON shall process all warranty claims, and shall repair or replace all
defective hardware PRODUCTS and/or software media within ten (10) days of
receipt of such defective PRODUCTS. TERAYON shall bear all warranty costs
such as labor, materials, inspection and shipment of materials to and from
DIGITAL's facilities.
10. EXCEPT AS PROVIDED FOR IN THIS AGREEMENT OR THE WARRANTY ACCOMPANYING EACH
PRODUCT, NO OTHER WARRANTY, EXPRESS OR IMPLIED, SHALL APPLY TERAYON
SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, AND DISCLAIMS WARRANTY OF TITLE AND NON-
INFRINGEMENT. NO REPRESENTATION OR WARRANTY, INCLUDING BUT NOT LIMITED TO:
STATEMENTS OF CAPACITY, SUITABILITY FOR USE OR PERFORMANCE, WHETHER MADE
BY TERAYON EMPLOYEES OR TERAYON PERSONNEL SHALL BE CONSIDERED TO BE A
WARRANTY BY TERAYON, FOR ANY PURPOSE, OR GIVE RISE TO ANY LIABILITY OF
TERAYON WHATSOEVER.
SECTION 11.0 PROPRIETARY RIGHTS PROTECTION
1. DIGITAL agrees not to remove any of TERAYON's proprietary and/or
restricted rights notices from any marketing documentation, literature
and/or promotional materials
9.
<PAGE>
developed directly by TERAYON or by DIGITAL on behalf of TERAYON during
the term of this Agreement.
SECTION 12.0 PATENTS AND COPYRIGHTS
1. TERAYON shall defend, indemnify and hold harmless, at its expense, any
claim or action made against DIGITAL alleging that the PRODUCTS, or any
part thereof, infringes any patent, copyright, trademark, trade secret,
mask work, or other intellectual property rights of a third party, and
shall pay costs and damages awarded if: (a) TERAYON is notified promptly
in writing by DIGITAL of any such claim; (b) is permitted by DIGITAL to
defend or settle such claim or action; and, (c) DIGITAL provides
reasonable assistance to TERAYON in defending or settling the claim or
action. TERAYON reserves the right to participate in the defense of any
claim or action through counsel selected by DIGITAL.
2. If an injunction against DIGITAL's use, sale, lease, license, or other
distribution of any PRODUCT, or any part thereof, as allowed by any term
or condition of this Agreement, results from such a claim or action,
TERAYON shall, at its expense, in addition to TERAYON's additional
obligations hereunder, and as DIGITAL requests: (i) obtain for DIGITAL the
right to continue using, selling, leasing, licensing, or otherwise
distributing the PRODUCT; or (ii) replace or modify the PRODUCT so it
becomes non-infringing but functionally equivalent. The provisions of this
section shall apply to any claim for infringement resulting solely from
DIGITAL's compliance with TERAYON's design specifications and/or data
sheets. Any claim for infringement which results from alteration or
modification of the PRODUCTS after delivery by TERAYON shall be excluded,
except to the extent such alterations or modifications have been
authorized by TERAYON.
SECTION 13.0 NO IMPLIED LICENSE
1. Both Parties understand that DIGITAL owns various patents, copyrights,
trademarks, trade secrets, and other proprietary rights which may cover,
be contained in, or otherwise relate to a portion or all of the various
PRODUCTS which DIGITAL may resell or sub-license pursuant to this
Agreement.
2. Unless otherwise identified herein, the Parties understand and agree that
neither the terms and conditions of this Agreement nor the performance or
acts of either party arising out of this Agreement or related to DIGITAL's
request for or use of the PRODUCTS may be considered in any way as a grant
of any license whatsoever under any of TERAYON's present or future
patents, copyrights, trademarks, trade secrets or other proprietary
rights; nor is any such license granted by implication, estoppel or
otherwise. It is mutually agreed and understood that the rights granted by
TERAYON to DIGITAL under this Agreement shall be sufficient to enable
DIGITAL to carry out its obligations under this Agreement. Any additional
rights which DIGITAL identifies as reasonably necessary must be authorized
in writing by TERAYON. TERAYON will not unreasonably withhold any such
authorization.
10.
<PAGE>
3. The Parties agree that DIGITAL reserves all rights to bring suit for
infringement of its respective patents, copyrights, trademarks, trade
secrets, and other proprietary rights against all manufacturers, sellers
and-users, which infringe their respective proprietary rights, and that
DIGITAL intends to enforce those rights.
4. To the extent that any fiduciary or other similar duties are established
by this Agreement, it is understood and agreed that such duties are not
inconsistent with and will not prevent DIGITAL from bringing said suits
for infringement of its respective patents, copyrights, trademarks, trade
secrets, and other proprietary rights.
SECTION 14.0 TRADEMARKS
1. Except as identified herein, neither party will use the other's corporate
names and trademarks, including logos, in their respective promotional,
advertising and marketing literature, without prior written approval. Such
approval by either Party will not be unreasonably withheld.
2. In the event usage of corporate names and/or trademarks is granted by
either party, the granting party shall provide the grantee with the format
by which such party's corporate name(s) or trademarks shall be utilized
("Usage Guidelines") at the time such usage is contemplated or required.
The Usage Guidelines will thereafter be incorporated into this Agreement
by a mutually agreed upon written amendment, signed by authorized
representatives of the Parties.
3. TERAYON shall be fully responsible for the registration and enforcement of
any TERAYON proprietary marks which are incorporated on or with the
PRODUCTS. DIGITAL agrees to provide reasonable assistance to TERAYON, upon
request and at TERAYON's expense, to assist TERAYON in acquiring
registration and/or approvals of proprietary marks in countries where
TERAYON's proprietary marks are either unregistered or unenforceable.
SECTION 15.0 TERM, TERMINATION FOR CAUSE & CONVENIENCE, AND
RIGHTS/OBLIGATIONS OF PARTIES AFTER TERMINATION
1. Term. This Agreement shall become effective on the date duly authorized
-----
representatives of the Parties execute the Agreement, and unless
terminated as provided for herein, shall continue in full force and
effect.
2. The initial term of this Agreement shall be for a two (2) year period from
the date of execution, and shall be automatically extended for additional
one (i) year terms unless terminated by either party upon its delivery of
notice to the other party at least sixty (60) calendar days prior to the
end of the then current term.
3. DIGITAL for Cause. DIGITAL may, by written notice to TERAYON, cancel or
------------------
terminate this Agreement and/or any Purchase Order issued hereunder if
TERAYON:
(a) fails to replace or correct defective PRODUCTS in accordance with the
provisions of the warranty, repair and support clauses made a part of
this
11.
<PAGE>
Agreement; or materially fails to perform any other provision of
this Agreement where such failure remains uncured for a period of
thirty (30) calendar days after receipt by TERAYON of written notice
from DIGITAL; or
(b) materially fails to deliver the PRODUCTS to DIGITAL on the required due
date(s), and such failure remains uncured for a period of thirty (30)
calendar days, thereafter; or
(c) becomes insolvent or makes an assignment for the benefit of
creditors, or a receiver or similar officer is appointed to take
charge of all or part of TERAYON's assets or shall cease to carry on
business; or
4. TERAYON for Cause. TERAYON may, by written notice to DIGITAL, terminate
-----------------
this Agreement or any Purchase Orders hereunder if DIGITAL:
(a) materially fails to perform any provision of this Agreement,
including failure to make payment for PRODUCT(S) delivered and
accepted by DIGITAL in accordance with Section 7 of this Agreement,
where such failure remains uncured for a period of thirty (30)
calendar days after receipt by DIGITAL of written notice from
TERAYON; or
(b) fails to make payment for any other service specified in this
Agreement where such failure remains uncured for a period of thirty
(30) calendar days after receipt of written notice from TERAYON; or
(c) becomes insolvent or makes an assignment for the benefit of
creditors, or a receiver or similar officer is appointed to take
charge of all or part of DIGITAL's assets or shall cease to carry on
business;
5. Termination for Convenience. After one hundred and eighty (180) days,
---------------------------
either party reserves the right to terminate this Agreement for
convenience at any time upon providing ninety (90) calendar days advance
written notice to the other party.
6. Obligations of DIGITAL upon expiration or termination. Upon expiration or
-----------------------------------------------------
termination, DIGITAL agrees to the following:
(a) pay for any PRODUCTS for which DIGITAL has not paid; and
(b) allow TERAYON, at TERAYON's discretion, to repurchase any PRODUCTS in
DIGITAL's possession or control at the price DIGITAL originally paid
TERAYON, less any credits issued to TERAYON. PRODUCTS to be returned
must be unused, in new condition, and in DIGITAL's inventory (or in
transit from TERAYON) on the day this Agreement ends. DIGITAL agrees
to pay all shipping charges; and
(c) immediately pay TERAYON any other amounts due.
12.
<PAGE>
7. Obligations of TERAYON upon expiration or termination. In the event TERAYON
-----------------------------------------------------
has delivered PRODUCTS to DIGITAL and received payment for such PRODUCTS
prior to the expiration or termination date of the Agreement, and the
PRODUCTS have not been received into DIGITAL's inventory due to non-
conformance of TERAYON's PRODUCT specifications or data sheets, TERAYON
agrees to provide one of the following remedies per DIGITAL' s request:
(a) refund the monies paid and pay for the return of the non-conforming
PRODUCTS; or negotiate a price reduction of the PRODUCTS to reflect the
non-conforming value; or
(b) if either of the initial remedies are not viable solutions, provide
DIGITAL with payment within thirty (30) calendar days of receipt of
DIGITAL's invoice for the full cost of similar replacement products
purchased from another manufacturer or supplier.
8. Shipments After Expiration or Termination. Deliveries and shipments
-----------------------------------------
effected after the date of expiration or termination of this Agreement as
a result of orders accepted on or prior to such date shall not be deemed
to revive this Agreement.
9. Return of Materials. DIGITAL shall upon expiration or termination or
-------------------
cancellation, within twenty (20) days of any such notice, return to
TERAYON, at DIGITAL's expense, any property owned by TERAYON including,
but not limited to, media, demonstration equipment, sales, training
materials, and Documentation.
10. Ongoing Rights. After the termination, neither party shall have any
--------------
further rights or obligations with respect to the other in connection with
the Agreement except as set forth in Section 18 of this Agreement.
SECTION 16.0 FORCE MAJEURE
Neither party shall be liable for failure to perform any of its obligations
under this Agreement during any period in which such party cannot perform due to
fire, flood, or other natural disaster, war, embargo, riot, or the intervention
of any government authority, provided that the party so delayed immediately
notifies the other party of such delay. If either party's performance is delayed
for these reasons for a cumulative period of sixty (60) calendar days or more,
the respective party may terminate this Agreement and/or any Purchase Order
hereunder by giving the other party written notice, and such termination shall
become effective per the terms and conditions of Section 17, hereunder. If
DIGITAL terminates, its liability under this Agreement or any Purchase Orders
issued hereunder will be to pay any balance due for conforming PRODUCTS: (1)
delivered by TERAYON before receipt of TERAYON's termination notice; and (2)
ordered by DIGITAL for delivery and actually delivered within fifteen (15) days
after receipt of TERAYON's termination notice.
13.
<PAGE>
SECTION 17.0 NON-DISCLOSURE/PROPRIETARY INFORMATION
1. All proprietary information disclosed by either party during the term of
this Agreement shall be treated pursuant to the terms and conditions of
the Mutual Non-Disclosure Agreement, executed on December 9, 1996, and
attached hereto as Addendum A.
2. Neither party may disclose or advertise the existence or any terms and
conditions of this Agreement without prior written authorization from the
non-disclosing party. This provision shall apply to any third parties who
have requested from DIGITAL the disclosure of TERAYON's Proprietary
Information.
3. Any breach of confidentiality by either party shall be cause for the non-
breaching party's immediate termination of this Agreement.
SECTION 18.0 SURVIVAL
1. The following sections of the Agreement shall survive the termination or
expiration of the Agreement; Section 7, Payment; Section 10, Warranty
Terms and Conditions; Section 12, Patent and Copyright; Section 15, Term,
Termination for Cause, and Rights and Obligations of the Parties After
Termination; Section 17, Nondisclosure/Proprietary Information, Section
19, Term of Availability and Section 20, General.
2. The terms of this Agreement shall remain in effect until fulfilled, and
shall apply to respective successors and assignees.
SECTION 19.0 TERM OF AVAILABILITY
Upon removal or PRODUCTS from TERAYON's pricelist without replacement pursuant
to Section 3.1.9 hereinabove, TERAYON agrees to provide technical post-sales
support and make spare parts and repair services available to DIGITAL for a
period of three (3) years thereafter.
SECTION 20.0 GENERAL PROVISIONS
1. Non-Waiver. The failure of either party to enforce at any time, or for any
-----------
period of time, the provisions of this Agreement, shall not be construed
as a waiver of such provisions or of the right of such party thereafter to
enforce each and every such provision.
2. Governing Law. This Agreement shall be governed in accordance with the laws
--------------
of The Commonwealth of Massachusetts.
3. Conflicts. In the event of any conflicts between this Agreement and the
---------
Exhibits, or referenced documents, the provisions of this Agreement shall
prevail.
4. Section Headings. The section and subsection headings contained herein are
----------------
for reference purposes only and shall not in any way affect the meaning and
interpretation of this Agreement.
14.
<PAGE>
5. Compliance with Laws. In the performance of the Agreement, the Parties
---------------------
shall comply with all applicable local, state and federal laws and
regulations including compliance with export laws and regulations relating
to the export of the PRODUCTS and technical data which originates in the
United States. Such compliance includes restrictions concerning the
provision of technical data to foreign nationals within the United States.
6. Severability. In the event of invalidity or unenforceability of any
-------------
provision of this Agreement, the remaining provisions shall continue in
full force and effect unless such invalid or unforceable provision: (i)
materially affects the essence of this Agreement; and (ii) the party
benefiting from said invalid or unforceable provision refuses to waive its
right to benefit from such provision and the parties cannot agree on a
substitute provision.
7. Exhibits. Attached hereto and made a part hereof are the following
---------
documents:
o Exhibit A - The PRODUCTS Pricelist & Discount Schedule
o Exhibit B - TERAYON's Software License Agreement
o Exhibit C - PRODUCT Support
o Exhibit D - TERRITORIES AND CUSTOMERS
o Addendum A - Mutual Non-Disclosure Agreement
8. Limitation of Liability. Either party's liability for any cause whatsoever
-----------------------
shall be limited to the lesser of one million dollars ($1,000,000.00) or
the actual damages incurred. This limitation will apply regardless of any
form of action, whether contract or tort, including without limitation
negligence. The foregoing limitation shall not apply to death or personal
injury, nor for claims or actions which brought under Section 12 of this
Agreement.
9. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY DAMAGES
RESULTING FROM LOSS OF DATA OR USE, LOST PROFITS OR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES. ANY CLAIM OR ACTION RESULTING FROM EITHER PARTY'S
LIABILITY MUST BE BROUGHT WITHIN EIGHTEEN (18) MONTHS AFTER THE CLAIM OR
CAUSE OF ACTION ARISES.
10. Entire Agreement. This Agreement, including Exhibits attached hereto,
----------------
constitutes the entire agreement between the Parties, and supersedes all
prior oral and written agreements between the parties relating to the
subject matter hereof. There are no terms, obligations, covenants,
representations, statements, or conditions other than those contained
herein. No variation or modification of this Agreement shall be deemed
valid unless in writing signed by duly authorized representatives of the
Parties. In the event of conflict, the terms and conditions of this
Agreement shall take precedence over any Purchase Order or statement of
work created hereunder.
11. Notice. Any notice or other communication hereunder shall be in writing
--------
and shall be delivered in person, by tested telex or facsimile
transmission or shall be sent by postage prepaid certified mail, return
receipt requested, and addressed to the parties at the address
15.
<PAGE>
of each party set forth herein. Either party may change its address by
written notice to the other given in the manner herein provided. Such
notice if mailed shall be deemed to have been given when the same is
deposited postage prepaid in the mails at a Territory Post Office or mail
box services by said office.
If to DIGITAL: If to TERAYON:
Digital Equipment Corporation Terayon Corporation
165 Dascomb Road 2952 Bunker Hill Lane
Andover, MA 01810 Santa Clara, CA. 95054
Attn:Russ Schott, Attn: Jacob Tanz,
Contracts Specialist Vice President of Marketing
with copies to: with copies to:
Lois Levick
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate as
of the date specified in paragraph one (1) of the Agreement
DIGITIAL EQUIPMENT CORPORATION TERAYON CORPORATION
By: By:
----------------------------- ---------------------------
Name: Name: Jacob Tanz
---------------------------
Title: Title: Vice President, Marketing
--------------------------
16.
<PAGE>
Confidential Draft
EXHIBIT A
THE PRODUCTS PRICELIST & DISCOUNT SCHEDULE
PRICELIST:
- ---------
PART NUMBER DESCRIPTION QUANTITY LIST PRICE
Teralink 1000 Master Controller (headend) 1 $24,000.00
RESALE DISCOUNT SCHEDULE:
- ------------------------
NO. PER QUARTER DISCOUNT FROM LIST
1-10 25%
11-49 28%
50+ 30%
INTERNAL USE (LAB/DEMO) DISCOUNT SCHEDULE:
- -----------------------------------------
NO. PER QUARTER DISCOUNT FROM LIST
demo 1/territory 40%
lab no minimum 40%
<PAGE>
Confidential Draft
EXHIBIT B
TERAYON'S SOFTWARE LICENSE AGREEMENT
(TO BE INCORPORATED BY TERAYON)
<PAGE>
Confidential Draft
EXHIBIT C
PRODUCT SUPPORT
1. First and Second Level Support. DIGITAL will provide First Level call
-------------------------------
screening to isolate an end user customer's problem, and Second Level
diagnostics and support to resolve end user customer problems throughout
the term of the Agreement. In the event DIGITAL is unable to directly
resolve the problem through diagnostics, DIGITAL may escalate the problem
to TERAYON for backup technical & engineering support and problem
resolution. DIGITAL will continue to maintain contact with the end user
customer and, unless otherwise agreed to by TERAYON, will be responsible
for problem closure. TERAYON will make backup engineering & technical
services available during its normal working hours as defined below.
2. Escalation Guidelines. DIGITAL will escalate problems to TERAYON based on
---------------------
the following classifications:
(a) Critical - error prevents all useful work;
(b) Severe Impact - errors which disable all functions; and
(c) Minimal Impact - all other errors.
3. TERAYON will respond to calls based upon the severity and priority of the
call as determined by the end user customer. Responsiveness shall be
provided as follows:
(a) Within two (2) hours of receipt
(b) Within eight (8) hours of receipt
(c) Within twenty-four (24) hours of receipt
4. TERAYON Support Requirements. TERAYON will provide, at no additional charge
-----------------------------
to DIGITAL, qualified, technical telephone support personnel to handle
escalated calls from FRONTIER during its normal business hours of eight
am, to five pm, Pacific Standard Time (8am - 5pm, EST), excluding the
nationally recognized holidays. After hours, weekends and holiday coverage
will be provided via a pager service. Excluding Level 1 calls, problem
calls received outside of TERAYON's normal business hours will be
responded to the following business day.
5. Critical On-Site Support. In the event critical on-site support is
-------------------------
required, TERAYON will make such services available to DIGITAL at its
standard time and materials rates.
6. Repair & Maintenance Charges (single repair): TBD
---------------------------------------------
7. Maintenance Agreement Charges (h/w & s/w): TBD
------------------------------------------
<PAGE>
8. Non-Warranty Repair Services. TERAYON will repair or replace all defective,
-----------------------------
out of warranty PRODUCTS within ten (10) days of receipt of the PRODUCTS
at TERAYON's Santa Clara facility. All returned units must be accompanied
by a Return Authorization (RA) number and defective tag which identifies
the alleged failure with the unit. RA numbers shall be provided by TERAYON
at the time DIGITAL calls to identify the defective unit(s).
9. Warranty Repair or Replacement. TERAYON will repair or replace all
-------------------------------
defective warranted PRODUCTS within five (5) days of receipt of the
PRODUCTS at TERAYON's Santa Clara facility. All returned units must be
accompanied by a Return Authorization (RA) number and defective tag which
identifies the alleged failure with the unit. RA numbers shall be provided
by TERAYON at the time DIGITAL calls to identify the defective unit(s).
10. Advanced Replacement. To the extent such service is required by DIGITAL to
---------------------
minimize inventory investments in meeting same day support agreements with
end user customers, TERAYON agrees to provide, at a mutually determined
price, advanced replacement services upon request by DIGITAL. Advanced
replacement services are defined as the shipment of a new PRODUCT in
advance of TERAYON's receipt of the end user customer's defective unit,
which shall be provided by DIGITAL within ten (10) days of receipt of the
replacement PRODUCT.
11. Priority Shipments. Provided PRODUCTS are in TERAYON's inventory, TERAYON
-------------------
will ship PRODUCTS within twenty-four (24) hours of order receipt to
assist DIGITAL in its delivery of critical service and support to end user
customers. In the event PRODUCTS are not in TERAYON's inventory, TERAYON
will make best efforts to ship as expeditiously as possible.
2.
<PAGE>
Confidential Draft
EXHIBIT D
TERRITORIES AND CUSTOMERS
1. Digital will be excluded from representing and reselling Terayon's products
in the following territories
A. All accounts in Japan
B. In North America territory the following customers will be excluded:
Cox Communications
Jones Intercable
Adelphia Communications
Continental Cablevision
Charter Communication
<PAGE>
Confidential Draft
ADDENDUM A
MUTUAL NONDISCLOSURE AGREEMENT (page 2.)
B. GENERAL
1. Either party may terminate this MNDA without cause upon five (5) days
written notice given to the other, provided that confidentiality obligations
under Section A of this Attachment A shall survive termination hereof.
2. No rights or obligations other than expressly recited herein are to be
implied here from. Nothing except that expressly stated herein shall
affect either party's present or prospective rights under any country's
patent laws, or be construed as granting any license under any present or
future patent or application therefor, or preclude marketing any product
unless such marketing constitutes unauthorized disclosure of INFORMATION.
3. This MNDA shall be construed, interpreted and applied in accordance with the
laws of the Commonwealth of Massachusetts.
4. Consistent with other provisions herein, each party assures that it will
not knowingly, without obtaining prior authorization from the U.S. Dept.
of Commerce Office of Export Administration, transmit directly or
indirectly the technical data received pursuant hereto or the immediate
product (including processes and services) produced directly by use of
such technical data to Afghanistan, People's Republic of China, or any
other Country Group Q, S, W, T, or Z country specified in Supplement No. I
to Part 370 of U.S. Dept. of Commerce Export Administration Regulations.
5. This document and appendices contain the entire agreement between the
Parties and supersede any previous oral or written understandings,
commitments or agreements pertaining to the subject matter hereof. This
MNDA shall not be modified or changed in any manner except in a writing
signed by both parties. If a court of competent jurisdiction finds any of
the provisions hereto so over-broad as to be unenforceable, such
provisions may be reduced in scope by the court to the extent it deems
necessary to render the provision reasonable and enforceable.
IN WITNESS WHEREOF, the Parties have caused this MDNA to be executed as of this
9th day of December __, 1996.
DIGITAL EQUIPMENT CORPORATION TERAYON Corporation
- ----------------------------- -----------------------------
Signed Signed
- ----------------------------- Jacob Tanz
Typed Name Typed Name
- ----------------------------- Vice President, Marketing
Title Title
<PAGE>
Exhibit 10.10
BLDG: GAP #B
OWNER: 500
PROP: 385
UNIT: 1
TENANT: 38501
LEASE AGREEMENT
THIS LEASE, made this 23rd day of January, 1996 between JOHN ARRILLAGA,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (ARRILLAGA FAMILY TRUST) as
amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated
7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter
called Landlord, and TERAYON CORPORATION, a California corporation, hereinafter
called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes form
Landlord those premises (the "Premises") outlined in red on Exhibit "A",
-----------
attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
A portion of that certain 37,145+ square foot, two-story building located
-
at 2952 Bunker Hill Lane, Suite 101, Santa Clara, California 95054. Said
Premises is more particularly shown within the area outlined in Red on
Exhibit A. The entire parcel, of which the Premises is a part, is shown
---------
within the area outlined in green on Exhibit A attached hereto. The
---------
interior of the building leased hereunder shall be improved by Landlord and
leased by Tenant in the configuration as shown in Red and Blue on Exhibit B
---------
to be attached hereto. At the commencement of this Lease, Tenant's
Premises shall contain 29,313+ square feet on the first and second floors
-
as shown in Red on Exhibit B to be attached hereto. Commencing July 1,
---------
1998, subject to Paragraph 48 of this Lease, Tenant's Premises shall be
increased to 37,145+ square feet (100% of the building), with the
-
additional 7,832+ square feet located on the first floor of the building
-
and shown in Blue on Exhibit B to be attached hereto. The Premises is
---------
leased on an "as-is" basis in the improved configuration as shown in Red
and Blue on Exhibit B to be attached hereto.
---------
As used herein the Complex shall mean and include all of the land outline
in Green and described in Exhibit A, attached hereto, and all of the buildings,
improvements, fixtures and equipment now or hereafter situated on said land.
Said letting and hiring is upon and subject to the terms, covenants and
conditions, hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE. Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purposes of general
office, light manufacturing, research and development, and storage and other
uses necessary for Tenant to conduct Tenant's business, provided that such uses
shall be in accordance with all applicable governmental laws and ordinances, and
for no other purpose. Tenant shall not do or permit to be done in or about the
Premises or the Complex nor bring or keep or permit to be brought or kept in or
about the Premises or the Complex anything which is prohibited by or will in any
way increase the existing rate of (or otherwise affect) fire or any insurance
covering the Complex or any part thereof, or any of its contents, or will cause
a cancellation of any insurance covering the Complex or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in, on or
1.
<PAGE>
about the Premises or the Complex which will in any way obstruct or interfere
with the rights of other tenants or occupants of the Complex or injure or annoy
them, or use or allow the Premises to be used for any improper, immoral,
unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit
any nuisance in, on or about the Premises or the Complex. No sale by auction
shall be permitted on the Premises. Tenant shall not place any loads upon the
floors, wall, or ceiling, which endanger the structure, or place any harmful
fluids or other materials in the drainage system of the building, or overload
existing electrical or other mechanical systems. No waste materials or refuse
shall be dumped upon or permitted to remain upon any part of the Premises or
outside of the building in which the Premises are a party, except in trash
containers placed inside exterior enclosures designated by Landlord for that
purpose or inside of the building proper where designated by Landlord . 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
outside the Premises or any portion of common area of the Complex. No
loudspeaker or other device, system or apparatus which can be heard outside the
Premises shall be used in or at the Premises without the prior written consent
off Landlord . Tenant shall not commit or suffer to be committed any waste in
or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless
against any loss, expense, damage, attorneys' fees, or liability arising out of
failure of Tenant to comply with any applicable law. Tenant shall comply with
any covenant, condition, or restriction ("CC&R's") affecting the Premises. The
provisions of this paragraph are for the benefit of Landlord only and shall not
be construed to be for the benefit of any tenant or occupant of the Complex.
2. TERM./1/
A. The term of this Lease shall be for a period of six (6) years (unless
sooner terminated as hereinafter provided) and, subject to Paragraphs 2(B) and
3, shall commence on the 1st day of April, 1996 and end on the 31st day of
March, 2002.
B. Possession of the Premises shall be deemed tendered and the term of this
Lease shall commence when the first of the following occurs:
(a) One day after a Certificate of Occupancy is granted by the proper
governmental agency, or, if the governmental agency having jurisdiction over
the area in which the Premises are situated does not issue certificates of
occupancy, then the same number of days after certification by Landlord 's
architect or contractor that Landlord 's construction work has been completed;
or
(b) Upon the occupancy of the Premises by any of Tenant's operating
personnel; or
(c) When the Tenant Improvements have been substantially completed
for Tenant's use and occupancy, in accordance and compliance with Exhibit B of
this Lease Agreement; or
- -----------------------------
/1/ It is agreed in the event said Lease commences on a date other than the
first day of the month the term of the Lease will be extended to account for
the number of days in the partial month. The Basic Rent during the resulting
partial month will be pro-rated (for the number of days in the partial month)
at the Basic Rent scheduled for the projected commencement date as shown in
Paragraph 43.
2.
<PAGE>
(d) As otherwise agreed in writing.
3. POSSESSION. If Landlord , for any reason whatsoever, cannot deliver
possession of said premises to Tenant at the commencement of the said term, as
hereinbefore specified, this Lease shall not be void or voidable; no obligation
of Tenant shall be effected thereby, nor shall Landlord or Landlord 's agent be
liable to Tenant for any loss or damage resulting therefrom; but in that event
the commencement and termination dates of the Lease, and all other dates
affected thereby shall be _______________ the date of Landlord 's delivery of
possession, as specified in Paragraph 2(b) above. The above is, however,
subject to the provision that the period of delay, of delivery of the premises
shall not exceed 60 days from the commencement date herein (except those delays
caused by Acts of God, strikes, war, utilities, governmental bodies, weather,
unavailable materials, and delays beyond Landlord 's control shall be excluded
in calculating such period) in which instance Tenant, at its option, may, by
written notice to Landlord, terminate this lease.
4. RENT.
A. Basic Rent. Subject to Paragraph 48, Tenant agrees to pay to Landlord
at such place as Landlord may designate without deduction, offset, prior
notice or demand, and Landlord agrees to accept as Basic Rent for the leased
Premises the total sum of THREE MILLION FIVE HUNDRED SEVENTY SIX THOUSAND
EIGHT HUNDRED THIRTY EIGHT AND 50/100 ($3,576,838.50) Dollars in lawful money
of the United States of America, payable as follows:
See Paragraph 43 for Basic Rent Schedule.
B. Time for Payment. In the event that the term of this Lease commences
on a date other than the first day of a calendar month, on the date of
commencement of the term hereof Tenant shall pay to Landlord as rent for the
period from such date of commencement to the first day of the next succeeding
calendar month that proportion of the monthly rent hereunder which the number
of days between such date of commencement and the first day of the next
succeeding calendar month bears to thirty (30). In the event that the term of
this Lease for any reason ends on a date other than the last day of a calendar
month, on the first day of the last calendar month of the term hereof Tenant
shall pay to Landlord as rent for the period from said first day of said last
calendar month to and including the last day of the term hereof that
proportion of the monthly rent hereunder which the number of days between said
first day of said last calendar month and the last day of the term hereof
bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if
Tenant is in default in the payment of rental as set forth in this Paragraph 4
when due, or any part thereof, Tenant agrees to pay Landlord, in addition to
the delinquent rental due, a late charge for each rental payment in default
ten (10) days. Said late charge shall equal ten (10%) percent of each rental
payment so in default.
D. Additional Rent. Beginning with the commencement date of the term of
this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as
Additional Rent the following:
(a) Tenant's proportionate share of all Taxes relating to the Complex
as set forth in Paragraph 12, and
3.
<PAGE>
(b) Tenant's proportionate share of all insurance premiums relating
to the Complex, as set forth in Paragraph 15,
(c) Tenant's proportionate share of expenses for the operation,
management, maintenance and repair of the Building (including common areas of
the Building) and Common Areas of the Complex in which the Premises are
located as set forth in Paragraph 7, and
(d) All charges, costs and expenses, which Tenant is required to pay
hereunder, together with all interest and penalties, costs and expenses
including attorney's fees and legal expenses, that may accrue thereto in the
event of Tenant's failure to pay such amounts, and all damages, reasonable
costs and expenses which Landlord may incur by reason of default of Tenant or
failure on Tenant's part to comply with the terms of this Lease. In the event
of nonpayment by Tenant of Additional Rent, Landlord shall have all the rights
and remedies with respect thereto as Landlord has for nonpayment of rent.
The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent
(i) within five days for taxes and insurance and within thirty (30) days for all
other Additional Rent items after presentation of invoice from Landlord or
Landlord's agent setting forth such Additional Rent and/or (ii) at the option of
Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's pro rata
share of any amount estimated by Landlord to be Landlord's approximate average
monthly expenditure for such Additional Rent items, which estimated amount shall
be reconciled within 120 days of the end of each calendar year or more
frequently if Landlord so elects to do so at Landlord's sole and absolute
discretion, as compared to Landlord's actual expenditure for said Additional
Rent items, with Tenant paying to Landlord, upon demand, any amount of actual
expenses expended by Landlord in excess of said estimated amount ,or Landlord
refunding to Tenant (providing Tenant is not in default in the performance of
any of the terms, covenants and conditions of this Lease) any amount of
estimated payments made by Tenant in excess of Landlord's actual expenditures
for said Additional Rent items.
The respective obligations of Landlord and Tenant under this paragraph
shall survive the expiration or other termination of the term of this Lease, and
if the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365.
E. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder
and all payments hereunder for Additional Rent shall be paid to Landlord at
the office of Landlord at Peery/Arrillaga, File 1504, Box 60000, San
Francisco, CA 94160 or to such other person or to such other place as Landlord
may from time to time designate in writing.
F. Security Deposit./2/ Concurrently with Tenant's execution of this
Lease, Tenant shall deposit with Landlord the sum of ONE HUNDRED EIGHTEEN
THOUSAND EIGHT
- ---------------------
/2/ $59,432.00 due upon Lease execution.
$59,432.00 Promissory Note due April 1, 1997.
4.
<PAGE>
HUNDRED SIXTY FOUR AND NO/100 ($118,864.00) Dollars. Said sum shall be held by
Landlord as a Security Deposit for the faithful performance by Tenant of all of
the terms, covenants, and conditions of this Lease to be kept and performed by
Tenant during the term hereof. If Tenant defaults with respect to any provision
of this Lease, including, but not limited to, the provisions relating to the
payment of rent and any of the monetary sums due herewith, Landlord may (but
shall not be required to) use, apply or retain all or any part of this Security
Deposit for the payment of any other amount which Landlord may spend by reason
of Tenant's default or to compensate Landlord for any other loss or damage which
Landlord may suffer by reason of Tenant's default. If any portion of said
Deposit is so used or applied, Tenant shall, within ten (10) days after written
demand therefor, deposit cash with Landlord in the amount sufficient to restore
the Security Deposit to its original amount. Tenant's failure to do so shall be
a material breach of this Lease. Landlord shall not be required to keep this
Security Deposit separate from its general funds, and Tenant shall not be
entitled to interest on such Deposit. If Tenant fully and faithfully performs
every provision of this Lease to be performed by it, the Security Deposit or any
balance thereof shall be returned to t (or at Landlord's option, to the last
assignee of Tenant's interest hereunder) at the expiration of the Lease term and
after Tenant has vacated the Premises. In the event of termination of Landlord's
interest in this Lease, Landlord shall transfer said Deposit to Landlord's
successor in interest whereupon Tenant agrees to release Landlord from liability
of the return of such Deposit or the accounting therefore.
5. RULES AND REGULATIONS AND COMMON AREA. 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 and customers shall, in
common with other occupants of the Complex in which the Premises are located,
and their respective employees, invitees and customers, and other entitled to
the use thereof, have the non-exclusive 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 Complex in which the Premises are
located, which areas and facilities are referred to herein as "Common Area".
This right shall terminate upon the termination of this Lease. Landlord reserves
the right from time to time to make change sin the shape, size, location, amount
and extent of Common Area. Landlord further reserves the right to promulgate
such reasonable rules and regulations relating to the use of the Common Area,
and any part of parts thereof, as Landlord may deem appropriate for the best
interests of the occupants of the Complex. 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 form time to time, with or without advance notice, and
all amendments shall be effective upon delivery of a copy to Tenant. Landlord
shall not be responsible to Tenant for the non-performance by any other tenant
or occupant of the Complex of any of said Rules and Regulations.
Landlord shall operate, manage and maintain the Common Area. The manner in
which the Common Areas shall be maintained and the expenditures for such
maintenance shall be at the discretion of Landlord.
6. PARKING. See Paragraph 49.
7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF
THE COMPLEX AND BUILDING IN WHICH THE PREMISES ARE
5.
<PAGE>
LOCATED. As Additional Rent and in accordance with Paragraph 4D of this Lease,
Tenant shall pay to Landlord Tenant's proportionate share (calculated on a
square footage or other equitable basis as calculated by Landlord) of all
expenses of operation, management, maintenance and repair of the Common Areas
of the Complex including, but not limited to, license, permit, and inspection
fees; security; utility charges associated with exterior landscaping and
lighting (including water and sewer charges); all charges incurred in the
maintenance of landscaped areas, lakes, parking lots, sidewalks, driveways;
maintenance, repair and replacement of all fixtures and electrical,
mechanical, and plumbing systems; structural elements and exterior surfaces of
the buildings; salaries and employee benefits of personnel and payroll taxes
applicable thereto; supplies, materials, equipment and tools; the cost of
capital expenditures which have the effect of reducing operating expenses,
provided, however, that in the event Landlord makes such capital improvements,
- -----------------
Landlord may amortize its investment in said improvements (together with
interest at the rate of fifteen (15%) percent per annum on the unamortized
balance) as an operating expense in accordance with standard accounting
practices, provided that such amortization is not at a rate greater than the
anticipated saving sin the operating expenses.
"Additional Rent" as used herein shall not include Landlord's debt
repayments; interest on charges; expenses directly or indirectly incurred by
Landlord for the benefit of any other tenant; cost for the installation of
partitioning or any other tenant improvements; cost of attracting tenants;
depreciation; interest, or executive salaries.
As Additional Rent and in accordance with Paragraph 4D of this Lease,
Tenant shall pay its proportionate share (calculated on a square footage or
other equitable basis as calculated by Landlord) of the cost of operation
(including common utilities), management, maintenance, and repair of the
building (including common areas such as lobbies, restrooms, janitor's closets,
hallways, elevators, mechanical and telephone rooms, stairwells, entrances,
spaces above the ceilings and janitorization of said common areas) in which the
Premises are located. The maintenance items herein referred to include, but are
not limited to, all windows, window frames, plate glass, glazing, truck doors,
main plumbing systems of the building (such as water and drain lines, sinks,
toilets, faucets, drains, showers and water fountains), main electrical systems
(such as panels and conduits), heating and air conditioning systems (such as
compressors, fans, air handlers, ducts, boilers, heaters), store fronts, roofs,
downspouts, building common area interiors (such as wall coverings, window
coverings, floor coverings and partitioning), ceilings, building exterior doors,
skylights (if any), automatic fire extinguishing systems, and elevators;
license, permit and inspection fees; security; salaries and employee benefits of
personnel and payroll taxes applicable thereto; supplies, materials, equipment
and tools; the cost of capital expenditures which have the effect of reducing
operating expenses, provided however, that in the event Landlord makes such
capital improvements, Landlord may amortize its investment in said improvements
(together with interest at the rate of fifteen (15%) percent per annum on the
unamortized balance) as an operating expense in accordance with standard
accounting practices, provided that such amortization is not at a rate greater
than the anticipated savings in the operating expenses. Tenant hereby waives
all rights under, and benefits of, subsection 1 of Section 1932 and Sections
1941 and 1942 of the California Civil Code and under any similar law, statute or
ordinance now or hereafter in effect.
8. ACCEPTANCE AND SURRENDER OF PREMISES. By entry hereunder, Tenant accepts
the Premises as being in good and sanitary order, condition and repair and
accepts the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the condition
of such building or as to the use or occupancy which may be made thereof. Any
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner
termination of this Lease, to surrender the Premises promptly and peaceably to
Landlord in good condition and repair (damage by Acts of God, fire, normal wear
and tear excepted), with all interior walls painted, or cleansed so that they
appear freshly painted, and repaired and replaced, if damaged; all floors
cleaned and waxed; all carpets cleaned
6.
<PAGE>
and shampooed; the air conditioning and heating equipment serviced by a
reputable and licensed service firm and in good operating condition (provided
the maintenance of such equipment has been Tenant's responsibility during the
term of this Lease) together with all alternations, additions, and
improvements which may have been made in, to, or on the Premises (except
movable trade fixtures installed at the expense of Tenant) except that t shall
ascertain from Landlord within thirty (30) days before the end of the term of
this Lease whether Landlord desires to have the Premises or any part of parts
thereof restored to their condition and configuration as when the Premises
were delivered to Tenant and if Landlord shall so desire, then Tenant shall
restore said Premises or such part of parts thereof before the end of this
Lease at Tenant's sole cost and expense. Tenant, on or before the end of the
term or sooner termination of this Lease, shall remove all of Tenant's
personal property and trade fixtures from the Premises, and all property not
so removed on or before the end of the term or sooner termination of this
Lease shall be deemed abandoned by Tenant and title to same shall thereupon
pass to Landlord without compensation to Tenant. Landlord may, upon
termination of this Lease, remove all moveable furniture and equipment so
abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by
such removal at Tenant's sole cost. If the Premises be not surrendered at the
end of the term or sooner termination of this Lease, Tenant shall indemnify
Landlord against loss or liability resulting from the delay by Tenant in so
surrendering the Premises including, without limitation, any claims made by
any succeeding tenant founded on such delay. Nothing contained herein shall be
construed as an extension of the term hereof or as a consent of Landlord to
any holding over by Tenant. The voluntary or other surrender of this Lease or
the Premises by Tenant or a mutual cancellation of this Lease shall not work
as a merger and, at the option of Landlord, shall either terminate all or any
existing subleases or subtenancies or operate as an assignment to Landlord of
all or any such subleases or subtenancies.
9. ALTERATIONS AND ADDITIONS. Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord first had and obtained by Tenant, but at the cost of Tenant,
and any addition to, or alteration of, the Premises, except moveable furniture
and trade fixtures, shall at once become a part of the Premises and belong to
Landlord. Landlord reserves the right to approve all contractors and mechanics
proposed by Tenant to make such alterations and additions. Tenant shall retain
title to all moveable furniture and trade fixtures placed in the Premises. All
heating, lighting, electrical, air conditioning, floor to ceiling partitioning,
drapery, carpeting, and floor installations made by Tenant, together with all
property that has become an integral part of the Premises, shall not be deemed
trade fixtures. Tenant agrees that it will not proceed to make such alteration
or additions, without having obtained consent from Landlord to do so, and until
five (5) days from the receipt of such consent, in order that Landlord may post
appropriate notices to avoid any liability to contractors or material suppliers
for payment for Tenant's improvements. Tenant will at all times permit such
notices to be posted and to remain posted until the completion of work. Tenant
shall, if required by Landlord, secure at Tenant's own cost and expense, a
completion and lien indemnity bond, satisfactory to Landlord, for such work.
Tenant further covenants and agrees that any mechanic's lien filed against the
Premises or against the Complex for work claimed to have been done for, or
materials claimed to have been furnished to Tenant, will be discharged by
Tenant, by bond or otherwise, within ten (10) days after the filing thereof at
the cost and expense of Tenant. Any exceptions to the foregoing must be made in
writing and executed by both Landlord and Tenant.
10. TENANT MAINTENANCE. Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, and in good and sanitary condition.
Tenant's maintenance and repair responsibilities herein referred to include, but
are not limited to, janitorization, plumbing systems within the non-common areas
of the Premises (such as water and drain lines, sinks), electrical systems
within the non-common areas of the Premises (such as outlets, lighting fixtures,
lamps, bulbs, tubes, ballasts), heating and air conditioning controls within the
non-common areas of the Premises (such as mixing boxes, thermostats, time
clocks, supply and return grills), all interior improvements within the premises
including but not limited to: wall
7.
<PAGE>
coverings, window coverings, acoustical ceilings, vinyl tile, carpeting,
partitioning, doors (both interior and exterior, including closing mechanisms,
latches, locks), and all other interior improvements of any nature whatsoever.
Tenant agrees to provide carpet shields under all rolling chairs or to
otherwise be responsible for wear and tear of the carpet caused by such
rolling chairs if such wear and tear exceeds that caused by normal foot
traffic in surrounding areas. Areas of excessive wear shall be replaced at
Tenant's sole expense upon Lease termination.
11. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED. As Additional
Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay its
proportionate share (calculated on a square footage or other equitable basis as
calculated by Landlord of the cost of all utility charges such as water, gas,
electricity, telephone, telex and other electronic communications service, sewer
service, waste pick-up and any other utilities, materials or services furnished
directly to the building in which the Premises are located, including, without
limitation, any temporary or permanent utility surcharge or other exactions
whether or not hereinafter imposed.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason or any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
Provided that Tenant is not in default in the performance or observance of
any of the terms, covenants or conditions of this Lease to be performed or
observed by it, Landlord shall furnish to the Premises between the hours of 8:00
AM and 6:00 PM, Mondays through Fridays (holidays excepted) and subject to the
rules and regulations of the Complex hereinbefore referred to, reasonable
quantities of water, gas and electricity suitable for the intended use of the
Premises and heat and air conditioning required in Landlord's judgment for the
comfortable use and occupation of the Premises for such purposes. Tenant may,
from time to time, have its staff and equipment operate on a twenty-four (24)
hour-a-day, seven (7) day-a-week schedule, and Tenant shall pay for any extra
utilities used by Tenant. Tenant agrees that at all times it will cooperate
fully with Landlord and abide by all regulations and requirements that Landlord
may prescribe for the proper functioning and protection of the building heating,
ventilating and air conditioning systems. Whenever heat generating machines,
equipment, or any other devices (including exhaust fans) are used in the
Premises by Tenant which affect the temperature or otherwise maintained by the
air conditioning system. Landlord shall have the right to install supplementary
air conditioning units in the Premises and the cost thereof, including the cost
of installation and the cost of operation and maintenance thereof, shall be paid
by Tenant to Landlord upon demand by Landlord. Tenant will not, without the
written consent of Landlord, use any apparatus or device in the Premises
(including, without limitation), electronic data processing machines or machines
using current in excess of 110 Volts which will in any way increase the amount
of electricity, gas, water or air conditioning usually furnished or supplied to
premises being used as general office space or connect with electric current
(except through existing electrical outlets in the Premises), or with gas or
water pipes any apparatus or device for the purposes of using electric current,
gas, or water. If Tenant shall require water, gas, or electric current in
excess of that usually furnished or supplied to premises being used as general
office space. Tenant shall first obtain the written consent of Landlord, which
consent shall not be unreasonably withheld and Landlord may cause an electric
current, gas or water meter to be installed in the Premises in order to measure
the amount of electric current, gas or water consumed for any such excess use.
The cost of any such meter and of the installation, maintenance and repair
thereof, all charges for such excess water, gas and electric current consumed
(as shown by such meters and at the rates then charged by the furnishing public
utility); and any additional expense incurred by Landlord in keeping account of
electric current, gas, or water so consumed shall be paid by Tenant, and Tenant
agrees to pay Landlord therefor promptly upon demand by Landlord.
8.
<PAGE>
12. TAXES.
A. As Additional rent and in accordance with Paragraph 4D of this Lease,
Tenant shall pay to Landlord Tenant's proportionate share of all Real Property
Taxes, which pro rata share shall be allocated to the leased Premises by
square footage or other equitable basis, as calculated by Landlord. The term
"Real Property Taxes" as used herein, shall mean (i) all taxes, assessments,
levies and other charges of any kind or nature whatsoever, general and
special, foreseen and unforeseen (including all installments of principal and
interest required to pay any general or special assessments for public
improvements and any increases resulting from reassessments caused by any
change in ownership of the Complex) now or hereafter imposed by any
governmental or quasi-governmental authority or special district having the
direct or indirect power to tax or levy assessments, which are levied or
assessed against, or with respect to the value, occupancy or use of, all or
any portion of the Complex (as now constructed or as may at any time hereafter
be constructed, altered, or otherwise changed) or Landlord's interest therein:
any improvements located within the Complex (regardless of ownership); the
fixtures, equipment and other property of Landlord, real or personal, that are
an integral part of and located in the Complex; or parking areas, public
utilities, or energy within the Complex; (ii) all charges, levies or fees
imposed by reason of environmental regulation or other governmental control of
the Complex; and (iii) all costs and fees (including attorneys' fees) incurred
by Landlord in contesting any Real Property Tax and in negotiating with public
authorities as to any Real Property Tax. If at any time during the term of
this Lease the taxation or assessment of the Complex prevailing as of the
commencement date of this Lease shall be altered so that in lieu of or in
addition to any Real Property Tax described above there shall be levied,
assessed or imposed (whether by reason of a change in the method of taxation
or assessment, creation of a new tax or charge, or any other cause) an
alternate or additional tax or charge (i) on the value, use or occupancy of
the Complex or Landlord's interest therein or (ii) on or measured by the gross
receipts, income or rentals from the Complex on Landlord's business of leasing
the Complex, or computed in any manner with respect to the operation of the
Complex, then any such tax or charge, however designated, shall be included
within the meaning of the term "Real Property Taxes" for purposes of this
Lease. If any Real Property Tax is based upon property or rents unrelated to
the Complex, then only that part of such real Property Tax that is fairly
allocable to the Complex shall be included within the meaning of the term
"real Property Taxes." Notwithstanding the foregoing, the term "Real Property
Taxes" shall not include estate, inheritance, gift or franchise taxes of
Landlord or the federal or state net income tax imposed on Landlord's income
from all sources.
B. Taxes On Tenant's Property
(a) Tenant shall be liable for and shall pay ten days before
delinquency, taxes levied against any personal property or trade fixtures
placed by Tenant in or about the Premises. If any such taxes on Tenant's
personal property or trade fixtures are levied against Landlord or Landlord's
property or if the assessed value of the Premises is increased by the
inclusion therein therein of a value placed upon such personal property or
trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays
the taxes based on such increased assessment, which Landlord shall have the
right to do regardless of the validity thereof, but only under proper protest
if requested by Tenant. Tenant shall upon demand, as the case may be, repay to
Landlord the taxes so levied against Landlord, or the proportion of such taxes
resulting from such increase in the assessment; provided that in any such
event Tenant shall have the right, in the name of Landlord and with Landlord's
full cooperation, to bring suit in any court of competent jurisdiction to
recover the amount of any such taxes so paid under protest, and any amount so
recovered shall belong to Tenant.
(b) if the Tenant improvements in the Premises, whether installed,
and/or paid for by Landlord or tenant and whether or not affixed to the real
property so as to become a part thereof, are assessed for real property tax
purposes at a valuation higher than the valuation at which standard office
9.
<PAGE>
improvements in other space in the Complex are assessed, then the real
property of Tenant and shall be governed by the provisions of 12Ba, above. If
the record of the County Assessor are available and sufficiently detailed to
serve as a basis for determining whether said Tenant improvements are assessed
at a higher valuation than standard than standard office improvements in other
space in the Complex, such records shall be binding on both the Landlord and
the tenant. If the records of the County Assessor are not available or
sufficiently detailed to serve as a basis for making said determination, the
actual cost of construction shall be used.
13. LIABILITY INSURANCE. Tenant at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of commercial general insurance with
combined single limit coverage of not less than Two Million Dollars ($2,000,000)
for injuries to or death of persons occurring in, on or about the Premises or
the Complex, and property damage. The policy or policies affecting such
insurance, certificates of insurance of which shall be furnished to Landlord,
shall name Landlord as additional insureds, and shall insure any liability of
Landlord, contingent or otherwise, as respects acts or omissions of tenant, its
agents, employees or invitees or otherwise by any conduct or transactions of any
of said persons in or about or concerning the Premises, including any failure of
Tenant, its agents, employees or invitees or otherwise by any conduct or issued
by an insurance company admitted to transact business in the State of
California; and shall provide that the insurance effected thereby shall not be
cancelled, except upon thirty (30) days' prior written notice to Landlord. If,
during the term of this Lease, in the considered opinion of Landlord's Lender,
insurance advisor, or counsel, the amount of insurance described in this
Paragraph 13 is not adequate. Tenant agrees to increase said coverage to such
reasonable amount as Landlord's Lender, insurance advisor, or counsel shall deem
adequate.
14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE.
Tenant shall maintain a policy or policies of fire and property damage insurance
in "all risk" form with a sprinkler leakage endorsement insuring the personal
property, inventory, trade fixtures, and leasehold improvements within the
leased Premises for the full replacement value thereof. The proceeds from any
such policies shall be used for the repair or replacement of such items so
insured. Tenant shall also maintain a policy or policies of workman's
compensation insurance any other employee benefit insurance sufficient to comply
with all laws.
15. PROPERTY INSURANCE. Landlord shall purchase and keep in force and as
Additional Rent and in accordance with Paragraph 4D of this Lease. Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (calculated on a square footage or other equitable basis as
calculated on a square footage or other equitable basis as calculated by
Landlord) of the deductibles on insurance claims and the cost of policy or
policies of insurance covering loss or damage to the Premises and Complex in the
amount of the full replacement value thereof, providing protection against those
perils included within the classification of "all risks" insurance and flood
and/or earthquake insurance, if available, plus a policy of rental income
insurance in the amount of one hundred percent (100%) of twelve (12) months
Basic Rent, plus sums paid as Additional Rent. If such insurance cost is
increased due to Tenant's use of the Premises or the Complex. Tenant agrees to
pay to Landlord the full cost of such increase. Tenant shall have no interest
in nor any right to the proceeds of any insurance procured by Landlord for the
Complex. Landlord and tenant do each hereby respectively release the other, to
the extent of insurance coverage of the releasing party, from any liability for
loss or damage caused by fire or any of the extended coverage casualties
included in the releasing party's insurance policies, irrespective of the cause
of such fire or casualty; provided, however, that if the insurance policy of
-----------------
either releasing party prohibits such waiver, then this waiver shall not take
effect until consent to such waiver is obtained. If such waiver is so
prohibited, the insured party affected shall promptly notify the other party
thereof.
10.
<PAGE>
16. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises or the Complex by
or from any cause whatsoever, including, without limitation, gas, fire, oil,
electricity or leakage of any character from the roof, walls, basement or the
portion of the Premises or the Complex but excluding, however, the willful
misconduct or negligence of Landlord, its agents, servants, employees, invitees,
or contractors of which negligence Landlord has knowledge and reasonable time to
correct. Except as to injury to persons or damage to property to the extent
arising from the willful misconduct or the negligence of Landlord, its agents,
servants, employees, invitees, or contractors. Tenant shall hold Landlord
harmless from and defend Landlord against any and all expenses, including
reasonable attorneys' fees, in connection therewith, arising out of any injury
to or death of any person or damage to or destruction of property occurring in,
on or about the Premises, or any part thereof, from any cause whatsoever.
17. COMPLIANCE. Tenant, at its sole cost and expense, shall promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of the
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction or
the admission of tenant in any action against Tenant, whether Landlord be a
party thereto or not, that Tenant has violated any such law, statute, ordinance
or governmental rule, regulation, requirement, direction or provision, shall be
conclusive of the fact as between Landlord and Tenant. This paragraph shall not
be interpreted as required tenant to make structural changes or improvements,
except to the extent such change or improvements are required as a result of
tenant's use of the Premises. Tenant shall, at is sole cost and expense, comply
with any and all requirements pertaining to said Premises, of any insurance
organization or company, necessary for the maintenance of reasonable fire and
public liability insurance covering the Premises.
18. LIENS. Tenant shall keep the Premises and the Complex free from any liens
arising out of any work performed, materials furnished or obligation incurred by
Tenant. In the event that Tenant shall not, within ten (10) days following the
imposition of such lien, cause the same to be released of record. Landlord
shall have, in addition to all other remedies provided herein and by law, the
right, but no obligation, to cause the same to be released by such means as it
shall deem proper, including payment of the claim giving rise to such lien. All
sums paid to landlord for such purpose, and all expenses incurred by it in
connection therewith, shall be payable to Landlord by Tenant on demand with
interest at the prime rate of interest as quoted by the Bank of America.
19. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, transfer, or
hypothecate the leasehold estate under this Lease, or any interest therein, and
shall not sublet the Premises, or any part thereof, or any right or privilege
appurtenant thereto, or suffer any other person or entity to occupy or use the
Premises, or any portion thereof, without, in each case, the prior written
consent of Landlord which consent will not be unreasonable withheld. As a
condition for granting this consent to any assignment, transfer, or subletting,
Landlord may require that Tenant agrees to pay to Landlord, as additional rent,
all rents or additional consideration received by tenant from its assignees,
transferees, or subtenants in excess of the rent payable by Tenant to Landlord
hereunder. Tenant shall, by thirty (30) days written notice, advise Landlord of
its intent to assign or transfer Tenant's interest in the Lease or sublet the
Premises or any portion thereof for any part of the term hereof. Within thirty
(30) days after receipt of said written notice, Landlord may, in its sole
discretion, elect to terminate this Lease as to the portion of the Premises
described in Tenant's notice on the date specified in Tenant's notice by giving
written notice of such election to terminate. If no such notice to terminate is
given to Tenant within said thirty (30) day period. Tenant may proceed to
locate an acceptable sublessee, assignee, or other transferee for presentment to
11.
<PAGE>
Landlord for Landlord's approval, all in accordance with the terms, covenants,
and conditions of this Paragraph 19. If Tenant intends to sublet the entire
Premises and Landlord elects to terminate this Lease, this Lease shall be
terminated on the date specified in Tenant's notice. If, however, this Lease
shall terminate pursuant to the foregoing with respect to less than all the
Premises, the rent, as defined and reserved hereinabove shall be adjusted on a
pro rata basis to the number of square feet retained by Tenant, and this Lease
as so amended shall continue in full force and effect. In the event Tenant is
allowed to assign, transfer or sublet the whole or any part of the premises,
with the prior written consent of Landlord, no assignee, transferee or subtenant
shall assign or transfer this Lease, either in whole or in part, or sublet the
whole or any part of the Premises, without also having obtained the prior
written consent of Landlord, which consent shall not be unreasonably withheld.
A consent of Landlord to one assignment, transfer, hypothecation, subletting,
occupation or use without such consent shall be void and shall constitute a
breach of this Lease by Tenant and shall, at the option of Landlord exercised by
written notice to Tenant, terminate this Lease. The leasehold estate under this
Lease shall not, nor shall any interest there, be assignable for any purpose by
operation of law without the written consent of Landlord, which consent shall
not be unreasonably withheld. As a condition to its consent, Landlord may
require Tenant to pay all expenses in connection with the assignment, and
Landlord may require Tenant's assignee or transferee (or other assignees or
transferees) to assume in writing all of the obligations under this Lease and
for Tenant to remain liable to Landlord under the Lease.
20. SUBORDINATION AND MORTGAGES. In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord.
Tenant shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of tenant under this
Lease. Notwithstanding any such subordination, tenant's possession under this
Lease shall not be disturbed if Tenant is not in default and so long as Tenant
shall pay all rent and observe and perform all of the provisions set forth in
this Lease.
21. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable times,
after at least 24 hours notice (except in emergencies) have, the right to enter
the Premises to inspect them to perform any services to be provided by Landlord
hereunder, to submit the Premises to prospective purchasers, mortgagers or
tenants, to post notices of nonresponsibility, and to alter, improve or repair
the Premises and any portion of the Complex, all without abatement of rent, and
may erect scaffolding and other necessary structures in or through the Premises
where reasonably required by the character of the work to be performed;
provided, however that the business of Tenant shall be interfered with to the
- -----------------
least extent that is reasonably practical. For each of the foregoing purposes.
Any entry to the Premises obtained by Landlord by any of said means, or
otherwise, shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into or a detainer of the Premises or an eviction,
actual or constructive, of Tenant from the Premises or any portion thereof.
Landlord shall also have the right at any time to change the arrangement or
location of entrances or passageways, doors and doorways, and corridors,
elevators, stairs, toilets, or other public parts of the Complex and to change
the name, number or designation by which the Complex is commonly known, and none
of the foregoing shall be deemed an actual or constructive eviction of Tenant,
or shall entitle Tenant to any reduction of rent hereunder.
22. BANKRUPTCY AND DEFAULT. The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired
12.
<PAGE>
Lease, the trustee or receiver shall notify Landlord in writing of its
election within thirty (30) days after an order for relief in a liquidation
action or within thirty (30) days after the commencement of any action.
Within thirty (30) days after court approval of the assumption of this
Lease, the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure) any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under said Lease to the reasonable satisfaction of Landlord.
Adequate assurance of future performance as used herein, includes, but shall not
be limited to: (i) assurance of source and payment of rent, and other
consideration due under this Lease; (ii) assurance that the assumption or
assignment of this Lease will not breach substantially any provision, such as a
radius, location, use, or exclusivity provision, in any agreement relating to
the above-described Premises.
Nothing contained in this section shall affect the existing right of
Landlord to refuse to accept an assignment upon commencement of or in
connection with a bankruptcy, liquidation, reorganization, or insolvency action
or an assignment of Tenant for the benefit of creditors or other similar act.
Nothing contained in this Lease shall be construed as giving or granting or
creating an equity in the demised Premises to Tenant. In no event shall the
leasehold estate under this Lease, or any interest therein be assigned by
voluntary or involuntary bankruptcy proceeding without the prior written consent
of Landlord. In no event shall this Lease or any rights or privileges hereunder
be an asset of Tenant under any bankruptcy, insolvency or reorganization
proceedings.
The failure to perform or honor any covenant, condition or representation
made under this Lease shall constitute a default hereunder by Tenant upon
expiration of the appropriate grace period hereinafter provided. Tenant shall
have a period of five (5) days from the date of written notice from Landlord
within which to cure any default in the payment of rental or adjustment thereto.
Tenant shall have a period of thirty (30) days from the date of written notice
from Landlord within which to cure any other default under this Lease; provided,
--------
however, that if the nature of tenant's failure is such that more than thirty
- -------
(30) days is reasonably required to cure the same, Tenant shall not be in
default so long as Tenant commences performance within such thirty (30) day
period and thereafter prosecutes the same to completion. Upon an uncured
default of this Lease by Tenant, Landlord shall have the following rights and
remedies in addition to any other rights or remedies available to Landlord at
law or in equity.
(a) The rights and remedies provided for by California Civil Code
Section 1951.2, including but not limited to, recovery of the worth at the
time of award of the amount by which the unpaid rent for the balance of the
term after the time of award exceeds the amount of rental loss for the same
period that tenant proves could be reasonably avoided, as computed pursuant to
subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs
(2) and (3) of Section 1951.2 of the California Civil Code of the amount of
rental loss that could be reasonably avoided shall be made in the following
manner. Landlord and tenant shall each select a licensed real estate broker in
the business of renting property of the same type and use as the Premises and
in the same geographic vicinity. Such two real estate brokers shall select a
third licensed real estate broker, and the three licensed real estate brokers
so selected shall determine the amount of the renal loss that could be
reasonably avoided from the balance of the term of this Lease after the time
of award. The decision of the majority of said licensed real estate brokers
shall be final and binding upon the parties hereto.
(b) The rights and remedies provided by California Civil Code
Section which allows Landlord to continue the Lease in effect and to enforce
all of its rights and remedies under this Lease, including the right to
recover rent as it becomes due, for so long as Landlord does not terminate
Tenant's right to possession; acts of maintenance or preservation, efforts to
relet the Premises, or the appointment
13.
<PAGE>
of a receiver upon Landlord's initiative to protect its interest under this
Lease shall not constitute a termination of Tenant's right to possession.
(c) The right to terminate this Lease by giving notice to Tenant in
accordance with applicable law.
(d) The right and power to enter the Premises and remove therefrom
all persons and property, to store such property in a public warehouse or
elsewhere at the cost of and for the account of Tenant, and to sell such
property and apply such proceeds therefrom pursuant to applicable California
law. Landlord may from time to time sublet the Premises or any part thereof
for such term or terms (which may extend beyond the term of this Lease) and at
such rent and such other terms as Landlord in its sole discretion may deem
advisable, with the right to make alterations and repairs to the Premises.
Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord,
in addition to indebtedness other than rent due hereunder, the cost of such
subletting, including, but not limited to, reasonable attorneys' fees, and any
real estate commissions actually paid, and the cost of such alterations and
repairs incurred by Landlord and the amount, if any, by which the rent
hereunder for the period of such subletting (to the extent such period does
not exceed the term hereof) exceeds the amount to be paid as rent for the
Premises for such period or (ii) at the option of Landlord, rents received
from such subletting shall be applied first to payment of indebtedness other
than rent due hereunder from Tenant to Landlord; second, to the payment of any
costs of such subletting and of such alterations and repairs; third to payment
of rent due and unpaid hereunder, and the residue, if any, shall be held by
Landlord and applied in payment of future rent as the same becomes due
hereunder. If Tenant has been credited with any rent to be received by such
subletting under option (i) and such rent shall not be promptly paid to
Landlord by the subtenant(s), or if such rentals received from such subletting
under option (ii) during any month be less than that to be paid during that
month by Tenant hereunder. Tenant shall pay any such deficiency to Landlord.
Such deficiency shall be calculated and paid monthly. For all purposes set
forth in this subparagraph D. No taking possession of the Premises by Landlord
shall be construed as an election on its part to terminate this Lease unless a
written notice of such intention be given to Tenant. Notwithstanding any such
subletting without termination, Landlord may at any time hereafter elect to
terminate this Lease for such previous breach.
(e) The right to have a receiver appointed for Tenant upon
application by Landlord, to take possession of the Premises and to apply any
rental collected from the Premises and to exercise all other rights and
remedies granted to Landlord pursuant to subparagraph D above.
23. ABANDONMENT. Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease (except that Tenant may vacate so long as it pays
rent, provides an on-site security guard during normal business hours from
Monday through Friday, and otherwise performs its obligations hereunder) and if
Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by
the process of law, or otherwise, any personal property belonging to Tenant and
left on the Premises shall be deemed to be abandoned, at the option of Landlord,
except such property as may be mortgaged to Landlord.
24. DESTRUCTION. In the event the Premises are destroyed in whole or in part
from any cause, except for routine maintenance and repairs and incidental damage
and destruction caused from vandalism and accidents for which Tenant is
responsible for under Paragraph 10. Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to the
damage or destruction, or
(b) Terminate this Lease. (providing that the Premises is damaged to the
extent of 33 1/3% of the replacement cost)
14.
<PAGE>
If Landlord does not give Tenant notice in writing within thirty (30) days
from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense, promptly to rebuild or restore the Premises to their condition prior to
the damage or destruction. Tenant shall be entitled to a reduction in rent
while such repair is being made in the proportion that the area of the Premises
rendered untenantable by such damage bears to the total area of the Premises.
If Landlord initially estimates that the rebuilding or restoration will exceed
180 days or if Landlord does not complete the rebuilding or restoration within
one hundred eighty (180) days following the date of destruction (such period of
time to be extended for delays caused by the fault or neglect of Tenant or
because of Acts of God, acts of public agencies, labor disputes, strikes, fires,
freight embargoes, rainy or stormy weather, inability to obtain materials,
supplies or fuels, acts of contractors or subcontractors, or delay of the
contractors or subcontractors due to such causes or other contingencies beyond
the control of Landlord), then Tenant shall have the right to terminate this
Lease by giving fifteen (15) days prior written notice to landlord.
Notwithstanding anything herein to the contrary, Landlord's obligation to
rebuild or restore shall be limited to the building and interior improvements
constructed by Landlord as they existed as of the commencement date of the lease
and shall not include restoration of Tenant's trade fixtures, equipment,
merchandise, or any improvements, alterations or additions made by Tenant to the
Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole
cost and expense provided this Lease is not cancelled according to the
provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives the
provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the
California Civil Code.
In the event that the building in which the Premises are situated is damage
or destroyed to the extent of not less than 33-1/3% of the replacement cost
thereof, Landlord may elect to terminate this Lease whether the Premises be
injured or not.
25. EMINENT DOMAIN. If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or conveyance
in lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title vests in the condemnor, and Landlord
shall be entitled to any and all payment, income, rent, award, or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance, and Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this Lease. Notwithstanding the foregoing
paragraph, any compensation specifically awarded Tenant for loss of business.
Tenant's personal property, moving cost or loss of goodwill, shall be and remain
the property of Tenant.
If (i) any action or proceeding is commenced for such taking of the
Premises or any part thereof, or if Landlord is advised in writing by any entity
or body having the right or power of condemnation of its intention to condemn
the premises or any portion thereof, or (ii) any of the foregoing events occur
with respect to the taking of any space in the Complex not leased hereby, or if
any such spaces so taken or conveyed in lieu of such taking and Landlord shall
decide to discontinue the use and operation of the Complex, or decide to
demolish, alter or rebuild the Complex, then, in any of such events Landlord
shall have the right to terminate this Lease by giving Tenant written notice
thereof within sixty (60) days of the date of receipt of said written advice, or
commencement of said action or proceeding, or taking conveyance, which
termination shall take place as of the first to occur of the last day of the
calendar month next following the month in which such notice is given or the
date on which title to the Premises shall vest in the condemnor.
15.
<PAGE>
In the event of such a partial taking or conveyance of the Premises, if the
portion of the Premises taken or conveyed is so substantial that the Tenant can
no longer reasonably conduct its business. Tenant shall have the privilege of
terminating this Lease within sixty (60) days from the date of such taking or
conveyance, upon written notice to Landlord of its intention so to do, and upon
giving of such notice this Lease shall terminate on the last day of the calendar
month next following the month in which such notice is given, upon payment by
Tenant of the rent from the date of such taking or conveyance to the date of
termination.
If a portion of the Premises be taken by condemnation or conveyance in lieu
thereof and neither Landlord nor Tenant shall terminate this Lease as provided
herein, this Lease shall continue in full force and effect as to the part of the
Premises not so taken or conveyed, and the rent herein shall be apportioned as
of the date of such taking or conveyance so that thereafter the rent to be paid
by Tenant shall be in the ratio that the area of the portion of the Premises not
so taken or conveyed bears to the total area of the Premises prior to such
taking.
26. SALE OR CONVEYANCE BY LANDLORD. In the event of a sale or conveyance of
the Complex or any interest therein, by any owner of the reversion then
constituting Landlord, the transferor shall thereby be released from any further
liability upon any of the terms, covenants or conditions (express or implied)
herein contained in favor of Tenant, and in such event, insofar as such transfer
is concerned. Tenant agrees to look solely to the responsibility of the
successor-in-interest of such transferor in and to the Complex and this Lease.
This Lease shall not be affected by any such sale or conveyance, and Tenant
agrees to attorn to the successor-in-interest of such transferor.
27. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of Landlord
in the land and buildings in which the leased Premises are located (whether such
interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale. Tenant hereby agrees to attorn to the
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this Lease. In the event the lien of the deed of trust securing
the loan from a Lender to Landlord is prior and paramount to the Lease, this
Lease shall nonetheless continue in full force and effect for the remainder of
the unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
28. HOLDING OVER. Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly provided
in this Lease. Any holding over after the expiration or other termination of
the term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent
required during the last month of the Lease term.
29. CERTIFICATE OF ESTOPPEL. Tenant shall at any time upon not less than ten
(10) days' prior written notice to Landlord execute, acknowledge and deliver to
Landlord a statement in writing (i) certifying that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any, are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that this Lease is in full force and effect, without modification
except as may be
16.
<PAGE>
represented by Landlord; that there are no uncured defaults in Landlord's
performance, and that not more than one month's rent has been paid in advance.
30. CONSTRUCTION CHANGES. It is understood that the description of the
Premises and the location of ductwork, plumbing and other facilities therein are
subject to such minor changes as Landlord or Landlord's architect determines to
be desirable in the course of construction of the Premises, and no such changes,
or any changes in plans for any other portions of the Complex shall affect this
Lease or entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant. Landlord does not guarantee the accuracy of
any drawings supplied to Tenant and verification of the accuracy of such
drawings rests with Tenant.
31. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and conditions of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid by
it hereunder or shall fail to perform any other term or covenant hereunder on
its part to be performed, and such failure shall continue for five (5) days
after written notice thereof by Landlord. Landlord, without waiving or
releasing Tenant from any obligation of Tenant hereunder, may, but shall not be
obligated to, make any such payment or perform any such other term or covenant
on Tenant's part to be performed. All sums so paid by Landlord and all
necessary costs of such performance by Landlord together with interest thereon
at the rate of the prime rate of interest per annum as quoted by the Bank of
America from the date of such payment or performance by Landlord, shall be paid
(and Tenant covenants to make such payment) to Landlord on demand by Landlord,
and Landlord shall have (in addition to any other right or remedy of Landlord)
the same rights and remedies in the event of nonpayment by Tenant as in the case
of failure by Tenant in the payment of rent hereunder.
32. ATTORNEYS' FEES.
A. In the event that either Landlord or Tenant should bring suit for the
possession of the Premises, for the recovery of any sum due under this Lease, or
because of the breach of any provision of this Lease, or for any other relief
against the other party hereunder, then all costs and expenses, including
reasonable attorneys' fees incurred by the prevailing party therein shall be
paid by the other party, which obligation on the part of the other party shall
be deemed to have accrued on the date of the commencement of such action and
shall be enforceable whether or not the action is prosecuted to judgment.
B. Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder.
Tenant shall pay to Landlord its costs and expenses incurred in such suit,
including a reasonable attorney's fee.
33. WAIVER. The waiver by either party of the other party's failure to perform
or observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any way
affect the right of either party to insist upon performance and observance by
the other party in strict accordance with the terms hereof.
34. NOTICES. All notices, demands, requests, advices or designations which may
be or are required to be given by either party to the other hereunder shall be
in writing. All notices, demands, requests, advices or designations by Landlord
to Tenant shall be sufficiently given, made or delivered if personally served on
Tenant by leaving the same at the Premises or if sent by United States certified
or registered mail, postage prepaid, addressed to Tenant at the Premises. All
notices, demands, requests, advices or designations by Tenant to Landlord shall
be sent by United States certified or registered
17.
<PAGE>
mail, postage prepaid, addressed to Landlord at its offices at
Peery/Arrillaga, 2560 Mission College Blvd., Suite 101, Santa Clara, CA 95054.
Each notice, request, demand, advice or designation referred to in this
paragraph shall be deemed received on the date of the personal service or
mailing thereof in the manner herein provided, as the case may be.
35. EXAMINATION OF LEASE. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
36. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord
fails to perform obligations required of Landlord within a reasonable time, but
in no event earlier than thirty (30) days after written notice by Tenant to
Landlord and to the holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have heretofore been furnished to Tenant
in writing, specifying wherein Landlord has failed to perform such obligations;
provided, however, that if the nature of Landlord's obligations is such that
- -----------------
more than thirty (30) days are required for performance, then Landlord shall not
be in default if Landlord commences performance within such thirty (30) day
period and thereafter diligently prosecutes the same to completion.
37. CORPORATE AUTHORITY. If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the by-
laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or partnership)
in accordance with its terms. If Tenant is a corporation, Tenant shall, within
thirty (30) days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease.
38. Intentionally left blank.
39. LIMITATION OF LIABILTY. In consideration of the benefits accruing
hereunder, Tenant and all successors and assigns covenant and agree that, in the
event of any actual or alleged failure, breach or default hereunder by Landlord:
(i) the sole and exclusive remedy shall be against Landlord and
Landlord's assets;
(ii) no partner of Landlord shall be sued or named as a party in nay
suit or action (except as may be necessary to secure jurisdiction of the
partnership);
(iii) no service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the
partnership);
(iv) no partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(v) no judgment will be taken against any partner of Landlord;
(vi) any judgment taken against any partner of Landlord may be vacated
and set aside at any time without hearing;
18.
<PAGE>
(vii) no writ of execution will ever be levied against the assets of any
partner of Landlord; and
(viii) these covenants and agreements are enforceable both by Landlord
and also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this Lease
or imposed by statute or at common law.
40. MISCELLANEOUS AND GENERAL PROVISIONS.
(a) Tenant shall not, without the written consent of Landlord, use the
name of the building or any purpose other than as the address of the business
conducted by Tenant in the Premises.
(b) This Lease shall in all respects be governed by and construed in
accordance with the laws of the State of California. If any provision of this
Lease shall be invalid, unenforceable or ineffective for any reason
whatsoever, all other provisions hereof shall be and remain in full force and
effect.
(c) The term "Premises" includes the space leased hereby and any
improvements now or hereafter installed therein or attached thereto. The term
"Landlord" or any pronoun used in place thereof includes the plural as well as
the singular and the successors and assigns of Landlord. The term "Tenant" or
any pronoun used in place thereof includes the plural as well as the singular
and individuals, firms, associations, partnerships and corporations, and their
and each of their respective heirs, executors, administrators, successors and
permitted assigns, according to the context hereof, and the provisions of this
Lease shall inure to the benefit of and bind such heirs, executors,
administrators, successors and permitted assigns.
The term "person" includes the plural as well as the singular and
individuals, firms, associations, partnerships and corporations. Words used in
any gender include other genders. If there be more than one Tenant the
obligations of Tenant hereunder are joint and several. The paragraph headings
of this Lease are for convenience of reference only and shall have no effect
upon the construction or interpretation of any provision hereof.
(d) Time is of the essence of this Lease and of each and all of its
provisions.
(e) At the expiration or earlier termination of this Lease, Tenant shall
execute, acknowledge and deliver to Landlord, within ten (10) days after
written demand from Landlord to Tenant, any quitclaim deed or other document
required by any reputable title company, licensed to operate in the State of
California, to remove the cloud or encumbrance created by this Lease from the
real property of which Tenant's Premises are a part.
(f) This instrument along with any exhibits and attachments hereto
constitutes the entire agreement between Landlord and Tenant relative to the
Premises and this agreement and the exhibits and attachments may be altered,
amended or revoked only by an instrument in writing signed by both Landlord
and Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous
oral agreements between and among themselves and their agents or
representatives relative to the leasing of the Premises are merged in or
revoked by this agreement.
(g) Neither Landlord nor Tenant shall record this Lease or a short form
memorandum hereof without the consent of the other.
19.
<PAGE>
(h) Tenant further agrees to execute any amendments required by a lender
to enable Landlord to obtain financing, so long as Tenant's rights hereunder
are not substantially affected.
(i) Paragraphs 43 through 50 are added hereto and are included as a part
of this lease.
(j) Clauses, plats and riders, if any, signed by Landlord and Tenant and
endorsed on or affixed to this Lease are a part hereof.
(k) Tenant covenants and agrees that no diminution or shutting off of
light, air or view by any structure which may be hereafter erected (whether or
not by Landlord) shall in any way affect his Lease, entitle Tenant to any
reduction of rent hereunder or result in any liability of Landlord to Tenant.
41. BROKERS. Tenant warrants that it had dealings with only the following
real estate brokers or agents in connection with the negotiation of this Lease:
None; and that it knows of no other real estate broker or agent who is entitled
to a commission in connection with this Lease.
42. SIGNS. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice without notice to
and at the expense of Tenant. If Tenant is allowed to print or affix or in any
way place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease. Tenant at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on outside doors shall be printed, affixed
or inscribed at the expense of Tenant by a person approved of by Landlord.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door partition or wall which may appear unsightly from
outside the Premises.
20.
<PAGE>
BLDG: GAP #B
OWNER: 500
PROP: 385
UNIT: 1
TENANT: 38501
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year last written below.
LANDLORD: TENANT:
ARRILLAGA FAMILY TRUST TERAYON CORPORATION, a California
corporation
By: By:
-------------------------- ----------------------------------
Dated: Title:
----------------------- -------------------------------
RICHARD T. PEERY SEPARATE
PROPERTY TRUST Type or Print Name:
------------------
By: Dated:
-------------------------- -------------------------------
Dated:
-----------------------
21.
<PAGE>
Paragraphs 43 through 50 to Lease Agreement Dated January 23, 1996, By and
Between the Arrillaga Family Trust and the Richard T. Peery Separate Property
Trust, as Landlord, and Terayon Corporation, a California corporation, as
Tenant for 37,145+ Square Feet of Space Located at 2952 Bunker Hill Lane,
Suite 101, Santa Clara, California.
43. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum
----------
of THREE MILLION FIVE HUNDRED SEVENTY SIX THOUSAND EIGHT HUNDRED THIRTY EIGHT
AND 50/100 DOLLARS ($3,576,838.50), shall be payable as follows:
On April 1, 1996, the sum of TWENTY SEVEN THOUSAND AND NO/100 DOLLARS
($27,000.00) shall be due, and a like sum due on the first day of each month
thereafter, through and including September 1, 1996.
On October 1, 1996, the sum of THIRTY NINE THOUSAND FIVE HUNDRED SEVENTY
TWO AND 55/100 DOLLARS ($39,572.55) shall be due, and a like sum due on the
first day of each month thereafter, through and including March l, 1997.
On April 1, 1997, the sum of FORTY ONE THOUSAND THIRTY EIGHT AND 20/100
DOLLARS ($41,038.20) shall be due, and a like sum due on the first day of each
month thereafter, through and including March 1, 1998.
On April 1, 1998, the sum of FORTY TWO THOUSAND FIVE HUNDRED THREE AND
85/100 DOLLARS ($42,503.85) shall be due, and a like sum due on the first day of
each month thereafter, through and including June l, 1998.
On July 1, 1998, the sum of FIFTY THREE THOUSAND EIGHT HUNDRED SIXTY AND
25/100 DOLLARS ($53,860.25) shall be due, and a like sum due on the first day of
each month thereafter, through and including March 1, 1999.
On April 1, 1999, the sum of FIFTY FIVE THOUSAND SEVEN HUNDRED SEVENTEEN
AND 50/100 DOLLARS ($55,717.50) shall be due, and a like sum due on the first
day of each month thereafter, through and including March l, 2000.
On April 1, 2000, the sum of FIFTY SEVEN THOUSAND FIVE HUNDRED SEVENTY FOUR
AND 75/100 DOLLARS ($57,574.75) shall be due, and a like sum due on the first
day of each month thereafter, through and including March 1, 2001.
On April 1, 2001, the sum of FIFTY NINE THOUSAND FOUR HUNDRED THIRTY TWO
AND NO/100 DOLLARS ($59,432.00) shall be due, and a like sum due on the first
day of each month thereafter, through and including March l, 2002; or until the
entire aggregate sum of THREE MILLION FIVE HUNDRED SEVENTY SIX THOUSAND EIGHT
HUNDRED THIRTY EIGHT AND 50/100 DOLLARS ($3,576,838.50) has been paid.
44. EARLY ENTRY: Tenant and its agents and contractors shall be permitted to
-----------
enter the Premises prior to the Commencement Date for the purpose of installing
at Tenant's sole cost and expense, Tenant's trade fixtures and equipment,
telephone equipment, security systems and cabling for computers. Such entry
shall be subject to all of the terms and conditions of this Lease, except that
Tenant shall not be required to pay any Rent on account thereof. Any entry or
installation work by Tenant and its agents in the Premises pursuant to this
Paragraph 44 shall (i) be undertaken at Tenant's sole risk, (ii) not interfere
---------
with or delay Landlord's work in the Premises (if any), and (iii) not be deemed
occupancy or possession of the Premises for purposes of the Lease. Tenant shall
indemnify, defend, and hold Landlord harmless from any and all loss, damage,
liability, expense (including reasonable attorney's fees), claim or demand of
whatsoever character, direct or consequential, including, but without limitation
thereby the generality of the foregoing, injury to or death of
22.
<PAGE>
persons and damage to or loss of property arising out of the exercise by
Tenant of any early entry right granted hereunder. In the event Tenant's work
in said Premises delays the completion of the interior improvements to be
provided by Landlord, if any, or in the event Tenant has not completed
construction of it's interior improvements by the scheduled Commencement Date,
it is agreed between the parties that this Lease will commence on the
scheduled Commencement Date of April 1, 1996 regardless of the construction
status of said interior improvements completed or to be completed by Tenant or
Landlord. It is the intent of the parties hereto that the commencement of
Tenant's obligation to pay Rent under the Lease not be delayed by any of such
causes or by any other act of Tenant (except as expressly provided herein)
and, in the event it is so delayed, Tenant's obligation to pay Rent under the
Lease shall commence as of the date it would otherwise have commenced absent
delay caused by Tenant.
45. "AS-IS" BASIS: Subject only to Landlord making the improvements shown on
-------------
Exhibit B to be attached hereto, it is hereby agreed that the Premises leased
- ---------
hereunder is leased strictly on an "as-is" basis and in its present condition,
and in the configuration as shown in Red and Blue on Exhibit B to bc attached
---------
hereto, and by reference made a part hereof. It is specifically agreed between
the parties that after Landlord makes the interior improvements as shown in Red
on Exhibit B, Landlord shall not be required to make, nor be responsible for any
---------
cost, in connection with any repair, restoration, and/or improvement to the
Premises in order for this Lease to commence, or thereafter, throughout the Term
of this Lease. Landlord makes no warranty or representation of any kind or
nature whatsoever as to the condition or repair of the Premises, nor as to the
use or occupancy which may be made thereof.
46. CONSENT: Whenever the consent of one party to the other is required
-------
hereunder, such consent shall not be unreasonably withheld.
47. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
-------------------
the existence or use of "Hazardous Materials" (as defined herein) on, in, under
or about the Premises and real property located beneath said Premises
(hereinafter collectively referred to as the "Property") and the Complex:
As used herein, the term "Hazardous Materials" shall mean any hazardous or
toxic substance, material or waste which is or becomes subject to or regulated
by any local governmental authority, the State of California, or the United
States Government. The term "Hazardous Materials" includes, without limitation
any material or hazardous substance which is (i) listed under Article 9 or
defined as "hazardous" or "extremely hazardous" pursuant to Article 11 of Title
22 of the California Administrative Code, Division 4, Chapter 30, (ii) listed or
defined as a "hazardous waste" pursuant to the Federal Resource Conservation and
Recovery Act, Section 42 U.S.C. Section 6901 et. seq., (iii) listed or defined
-------
as a "hazardous substance" pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., (42 U.S.C.
Section 9601), (iv) petroleum or any derivative of petroleum, or (v) asbestos.
Subject to the terms of this Paragraph 47, Tenant shall have no obligation
to "clean up", reimburse, release, indemnify, or defend Landlord with respect to
any Hazardous Materials or wastes which Tenant (prior to and during the term of
the Lease) or other parties on the Property or Complex, as described below,
(during the term of this Lease) did not store, dispose, or transport in, use, or
cause to be on the Property or which Tenant, its agents, employees, contractors,
vendors, invitees, visitors or its future subtenants and/or assignees (if any)
(during the Term of this Lease), did not store, dispose, or transport in, use or
cause to be on the Complex in violation of applicable law.
Tenant shall be 100 percent liable and responsible for: (i) any and all
"investigation and cleanup" of said Hazardous Materials contamination which
Tenant, its agents, employees, contractors, vendors, invitees, visitors or its
future subtenants and/or assignees (if any), or other parties on the Property,
does store, dispose, or transport in, use or cause to be on the Property, and
which Tenant, its agents, employees, contractors, vendors, invitees, visitors or
its future subtenants and/or assignees (if any) does store, dispose, or
transport in, use or cause to be on the Complex and (ii) any claims, including
third party claims, resulting from such Hazardous Materials contamination.
Tenant shall indemnify Landlord and hold Landlord harmless from any
23.
<PAGE>
liabilities, demands, costs, expenses and damages, including, without
limitation, attorney fees incurred as a result of any claims resulting from
such Hazardous Materials contamination.
Tenant also agrees not to use or dispose of any Hazardous Materials on the
Property or the Complex without first obtaining Landlord's written consent.
Tenant agrees to complete compliance with governmental regulations regarding the
use or removal or remediation of Hazardous Materials used, stored, disposed of,
transported or caused to be on the Property or the Complex as stated above, and
prior to the termination of said Lease Tenant agrees to follow the proper
closure procedures and will obtain a clearance from the local fire department
the appropriate governing agency. If Tenant uses Hazardous Materials, Tenant
agrees to ) install, at Tenant s expense, such Hazardous Materials monitoring
devices as Landlord deems reasonably necessary. It is agreed that the Tenants
responsibilities related to Hazardous Materials will survive the termination
date of the Lease and that Landlord may obtain specific performance of Tenant's
responsibilities under this Paragraph 47.
48. INCREASE IN SQUARE FOOTAGE CONTINGENT UPON THIRD PARTY TENANT VACATING THE
--------------------------------------------------------------------------
PREMISES: It is agreed that at the commencement of this Lease, Tenant shall
- --------
occupy 29,313+ square feet of the entire 37,145+ square feet of the Leased
Premises. On July 1, 1998, the number of square feet Tenant occupies shall be
increased by 7,832+ square feet, or from 29,313+ square feet to 37,145+ square
feet of space. The additional 7,832+ square feet (the "Additional Space") is
more particularly shown in Blue on Exhibit B to be attached hereto. The
---------
Additional Space is, as of the date of this Lease, vacant; however, Landlord is
negotiating a third party lease agreement with ZeitNet, Inc. for said Additional
Space. The increase in square footage as related to the Additional Space is
subject to and conditional upon said third party tenant, ZeitNet, Inc.,
("ZeitNet") vacating said Additional Space by June 30, 1998, In the event
ZeitNet fails to timely vacate the Additional Space and surrender same to
Landlord free and clear of its occupancy on or before June 30, 1998, Tenant's
requirement to occupy said Additional Space shall not be void or voidable, but
in such an event, the date scheduled for said occupancy of the Additional Space
shall be modified and the Lease shall be amended to reflect the date Landlord so
received possession of the Additional Space and delivers same to Tenant;
provided, however, that said period of delay shall not exceed sixty (60) days
from the scheduled delivery date of July 1, 1998. In the vent the Additional
Space is not delivered to Tenant by August 30, 1998, Tenant may rescind its
agreement to lease the Additional Space provided Tenant notifies Landlord in
writing of Tenant's election to rescind said agreement no later than September
9, 1998. In the event said agreement regarding the Additional Space is rescinded
as stated herein, this Paragraph 48 shall be null and void and of no further
force or effect and this Lease shall be amended to amend the Basic Rent Schedule
and the Aggregate Rent accordingly
49. PARKING: At the commencement of this Lease, Tenant shall have the
-------
nonexclusive use of one hundred six (106) parking spaces within the area
outlined in Orange on Exhibit A. Upon the commencement of this Lease as related
---------
to the Additional Space as described in Paragraph 48 above, Tenant shall have
the fight to use one hundred percent (100%) of the parking spaces as outlined in
Orange on Exhibit A. Tenant agrees that Tenant, Tenant's employees, agents,
---------
representatives, and/or invitees shall not use any other or additional parking
spaces except for those parking spaces allocated to Tenant hereunder. Landlord
shall have the fight, at Landlord's sole discretion, to redesignate the location
of Tenant's parking spaces within the Complex. Said parking spaces may be
relocated by Landlord at any time, and from time to time. Landlord reserves the
right, at Landlord's sole discretion, to rescind any specific designation of
parking spaces, thereby returning Tenant's parking spaces to a common parking
area. Landlord shall give Tenant written notice of any change in Tenant's
parking spaces. Tenant shall not, at any time, park, or permit to be parked, any
trucks or vehicles adjacent to the loading area so 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's trucks and other vehicles or the trucks and vehicles of
Tenant's suppliers or others, in any portion of the common areas not designated
by Landlord for such use by Tenant. Tenant shall not park nor permit to be
parked, any inoperative vehicles or equipment on any portion of the common
parking area or other common areas of the Complex. Tenant agrees to assume
responsibility for compliance by its employees with the parking provision
contained herein. If Tenant or its employees park in other than designated
parking areas, then Landlord may charge Tenant, as an additional
24.
<PAGE>
charge, and Tenant agrees to pay Ten Dollars ($10.00) per day for each day or
partial day each such vehicle is parking in any area other than that
designated. Tenant hereby authorizes Landlord, at Tenant's sole expense, to
tow away from the Complex any vehicle belonging to Tenant or Tenant's
employees parked in violation of these provisions, or to attach violation
stickers or notices to such vehicles. Tenant shall use the parking area for
vehicle parking only and shall not use the parking areas for storage.
50. ASSESSMENT CREDITS: The demised property herein may be subject to a special
------------------
assessment levied by the City of Santa Clara as part of an Improvement District.
As a part of said special assessment proceedings (if any), additional bonds were
or may be sold and assessments were or may be levied to provide for construction
contingencies and reserve funds. Interest shall be earned on such funds created
for contingencies and on reserve funds, such surpluses shall be credited for the
benefit of said assessment district. To the extent surpluses may be created in
said district through unused contingency funds, interest earnings or reserve
funds, such surpluses shall be deemed the property of Landlord. Notwithstanding
that such surpluses may be credited on assessments otherwise due against tile
Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the
time of any such credit of surpluses, an amount equal to all such surpluses so
credited.
25.
<PAGE>
March 28, 1996
MR. JAMES H. SUSSBAUER
TERAYON CORPORATION
404 Saratoga Avenue
Santa Clara, CA 95054
RE: COMMENCEMENT OF LEASE
Gentlemen:
This letter will confirm our agreement relative to the Commencement Date of the
Lease Agreement dated January 23, 1996 by and between the Arrillaga Family Trust
and the Richard T. Peery Separate Property Trusts, as landlord, and Terayon
Corporation, a California corporation, as Tenant, for approximately 29,313+/-
square feet of space located at 2952 Bunker Hill Lane, Suite 101, Santa Clara,
California.
Notwithstanding anything to the contrary contained in said Lease Agreement, it
is agreed that said Lease shall commence effective April 1, 1996 and terminate
six (6) years later on March 31, 2002. It is also agreed that the Basic Rent
Schedule as provided for in Paragraph 43 of the Lease Agreement shall remain
unchanged.
Please execute this letter in the space provided below, indicating your
agreement with the foregoing, and return all copies to us for our execution,
together with your check in the amount of $27,000.00 representing the Basic
Rental for the period of April 1, 1996 through April 30, 1996. We will return a
fully executed original for your records.
Respectfully Yours,
PEERY/ARRILLAGA
By
---------------------
John Arrillaga
AGREEMENT:
TERAYON CORPORATION
A California Corporation
- -------------------------------------
Type or Print Name/Title
26.
<PAGE>
Exhibit 10.11
TERAYON CORPORATION
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into by and between TERAYON CORPORATION, a
California corporation (the "Company"), and ZAKI RAKIB ("Employee"), as of this
__ day of February, 1993 at San Jose, California.
In consideration of the mutual promises contained below, the parties agree
as follows:
1. EMPLOYMENT.
(a) ACCEPTANCE. By this Agreement, the Company employs Employee and Employee
accepts employment with the Company. Employee represents to the Company that he
is free to enter into and fully perform the duties described under this
Agreement.
(b) DUTIES. Employee will serve the Company in the capacity of Chief
Executive Officer and Chief Financial Officer, performing such duties as the
Board of Directors will determine from time to time in its discretion. Employee
will perform and discharge all of his duties to the best of his ability on a
part-time basis.
2. DURATION. This Agreement and Employee's employment with the Company is not
for a specified term, is at will and may be terminated by either party with or
without cause at any time upon written notice. This Agreement will terminate
upon the death of the Employee.
3. SALARY AND BENEFITS.
(a) SALARY. For the performance of all of Employee's obligations under this
Agreement, the Company will pay Employee a salary as the Board of Directors will
determine, payable as earned in accordance with the payroll policies of the
Company as constituted from time to time.
(b) STOCK PURCHASE. The Company's Board of Directors (the "Board") will
grant the Employee an opportunity to purchase 100 shares (the "Shares") of the
Company's Common Stock subject to the terms and conditions of a Founder's
Restricted Stock Purchase Agreement (the "Stock Purchase Agreement").
(c) RESTRICTIONS ON SHARES. The Purchase Agreement shall provide that as a
condition to purchasing the Shares Employee will deliver to the Company an
Irrevocable Proxy (the "Proxy") appointing Selim Rakib (the "Proxy Holder") as
Employee's attorney and proxy to attend meetings, vote, give consents and in all
other ways to act in his place with respect to the Shares for a period of ten
years from the effective date of the Purchase Agreement or until such time as
the Proxy Holder's right to hold the Proxy is terminated according to the terms
that certain Employment Agreement dated February __, 1993 between the Company
and the Proxy Holder. In addition, the Purchase Agreement will provide that the
Shares will be subject to certain rights of first refusal as set forth in the
Company's Bylaws.
1.
<PAGE>
(d) EXPENSES. The Company will reimburse Employee for all reasonable and
necessary travel and other expenses incurred by Employee in connection with
his duties hereunder in accordance with the Company's normal timetable of
expense reimbursements in effect from time to time.
(e) OTHER BENEFITS. During the term of employment under this Agreement the
Employee will be entitled to receive other benefits of employment generally
available to the Company's other similarly situated employees as he becomes
eligible for them.
(f) WITHHOLDING. All sums payable to Employee under this Agreement will be
reduced by all federal, state, local and other withholding and similar
taxes and payments required by applicable law.
4. ADDITIONAL TERMS.
(a) ASSIGNMENT. This Agreement is not assignable by Employee except with the
written consent of the Company. This Agreement will be binding upon Employee's
heirs, executors, administrators, other legal representatives and assigns and is
for the benefit of the Company, its successors, assigns and affiliates.
(b) GOVERNING LAW. This Agreement will be construed in accordance with and
governed by the laws of the State of California.
(c) ENTIRE AGREEMENT. This Agreement expresses the entire understanding of
the parties with respect to the subject matter hereof and supersedes and
terminates any prior oral or written agreement with respect to such subject
matter.
(d) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of which together
will constitute one and the same document.
(e) NOTICES. All notices hereunder will be in writing and will be deemed to
have been given when delivered personally or mailed by certified mail, return
receipt requested, to the other party at the address set forth below such
party's signature hereto, or at such other address as may be hereafter requested
for such purpose by notice duly given hereunder.
2.
<PAGE>
The parties to this Agreement hereby accept and agree to the above terms
and acknowledge receipt of a copy of this Agreement.
TERAYON CORPORATION ___________________________________
Employee's Signature
By: Zaki Rakib
_________________________________ ___________________________________
(Employee's Name)
Title: ______________________________
Address: ____________________________ Address: 1408 Miller Avenue
_________________________
San Jose, CA 95129
_____________________________________ ___________________________________
3.
<PAGE>
Exhibit 10.12
TERAYON CORPORATION
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into by and between TERAYON CORPORATION, a
California corporation (the "Company"), and SELIM RAKIB ("Employee"), as of this
___ day of February, 1993 at San Jose, California.
In consideration of the mutual promises contained below, the parties agree
as follows:
1. EMPLOYMENT.
(a) ACCEPTANCE. By this Agreement, the Company employs Employee and Employee
accepts employment with the Company. Employee represents to the Company that he
is free to enter into and fully perform the duties described under this
Agreement.
(b) DUTIES. Employee will serve the Company in the capacity of Chairman of
the Board and President, performing such duties as the Board of Directors will
determine from time to time in its discretion. Employee will perform and
discharge all of his duties to the best of his ability on a part-time basis.
2. DURATION. This Agreement and Employee's period of employment with the
Company will be for a specified term of seven (7) years; provided however that
such employment is at will and may be terminated by either party with or without
cause at any time upon written notice.
3. SALARY AND BENEFITS.
(a) SALARY. For the performance of all of Employee's obligations under this
Agreement, the Company will pay Employee a salary as the Board of Directors will
determine, payable as earned in accordance with the payroll policies of the
Company as constituted from time to time.
(b) STOCK OPTION. The Company's Board of Directors (the "Board") have
granted the Employee an option to acquire 400 shares (the "Shares") of the
Company's Common Stock subject to the terms and conditions of a Stock Option
Grant and Stock Option Exercise Agreement (the "Option Agreements") in exchange
for the assignment by the Employee to the Company of technology valued at
$50,000. The Shares will be subject to certain rights of first refusal as set
forth in the Company's Bylaws.
(c) IRREVOCABLE PROXY. In consideration for Employee entering into this
Agreement with the Company and purchasing and holding the option, Employee
will receive an Irrevocable Proxy with respect to any shares of the
Company's stock outstanding as of the date hereof. Such Proxy will appoint
Employee as attorney and proxy to attend meetings, vote, give consents and
in all other represent such shares until both this Agreement and the Option
Agreements are terminated or expire in accordance with the respective
provisions of both this Agreement and the Option Agreements.
1.
<PAGE>
(d) EXPENSES. The Company will reimburse Employee for all reasonable and
necessary travel and other expenses incurred by Employee in connection with
his duties hereunder in accordance with the Company's normal timetable of
expense reimbursements in effect from time to time.
(e) OTHER BENEFITS. During the term of employment under this Agreement, the
Employee will be entitled to receive other benefits of employment generally
available to the Company's other similarly situated employees as he becomes
eligible for them.
(f) WITHHOLDING. All sums payable to Employee under this Agreement will be
reduced by all federal, state, local and other withholding and similar
taxes and payments required by applicable law.
4. ADDITIONAL TERMS.
(a) ASSIGNMENT. This Agreement is not assignable by Employee except with the
written consent of the Company. This Agreement will be binding upon Employee's
heirs, executors, administrators, other legal representatives and assigns and is
for the benefit of the Company, its successors, assigns and affiliates.
(b) SEVERABILITY. If any provision of this Agreement may be unenforceable
for any reason, it will be interpreted, to the extent possible, to enhance its
enforceability in order to achieve the intent of the parties to this Agreement.
Nonetheless, the invalidity of any provision of this Agreement as applied to
certain circumstances will not affect the validity or enforceability of such
provision as applied to other circumstances or any other provision of this
Agreement.
(c) GOVERNING LAW. This Agreement will be construed in accordance with and
governed by the laws of the State of California.
(d) ENTIRE AGREEMENT. This Agreement expresses the entire understanding of
the parties with respect to the subject matter hereof and supersedes and
terminates any prior oral or written agreement with respect to such subject
matter.
(e) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of which together
will constitute one and the same document.
(f) NOTICES. All notices hereunder will be in writing and will be deemed to
have been given when delivered personally or mailed by certified mail,
return receipt requested, to the other party at the address set forth below
such party's signature hereto, or at such other address as may be hereafter
requested for such purpose by notice duly given hereunder.
(G) AMENDMENT, WAIVER. Any term of this Agreement may be amended and
observance of any term of this Agreement may be waived only with the
written consent of the parties hereto. Waiver of any term or condition of
this Agreement by any party will not be construed as a waiver of any
subsequent breach or failure of the same term or condition or a waiver of
any other term or condition of this Agreement. The failure of any party at
any time to require
2.
<PAGE>
performance by any other party of any provision of this Agreement will not
affect the right of any such party to require future performance of such
provision or any other provision of this Agreement.
The parties to this Agreement hereby accept and agree to the above terms
and acknowledge receipt of a copy of this Agreement.
TERAYON CORPORATION ___________________________________
Employee's Signature
By: Selim Rakib
_________________________________ ___________________________________
(Employee's Name)
Title: ______________________________
Address: ____________________________ Address: 1408 Miller Avenue
_________________________
San Jose, CA 95129
_____________________________________ ___________________________________
3.
<PAGE>
IMPERIAL BANK EXHIBIT 10.13
Member FDIC April 24, 1997
226 Airport Parkway
San Jose, California
Subject: Credit Terms and Borrower: Terayon Corporation
Conditions ("Agreement")
Gentlemen:
To induce you to make loans to the undersigned (herein called "Borrower"), and
in consideration of any loan or loans you, in your sole discretion, may make to
Borrower, Borrower warrants and agrees as follows:
A. Borrower represents and warrants that:
1. EXISTENCE AND RIGHTS.
Company is a corporation
Borrower is duly organized and existing and in good standing under the laws of
the State of California and is authorized and in good standing to do business in
the State of California. Borrower has powers and adequate authority, rights and
franchises to own its property and to carry on its business as now conducted,
and is duly qualified and in good standing in each State in which the character
of the properties owned by it therein or the conduct of its business makes such
qualification necessary, and Borrower has the power and adequate authority to
make and carry out this Agreement. Borrower has no investment in any other
business entity, except as previously disclosed to Bank.
2. AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, or Articles of Association, as the case may
be, and this Agreement is the valid, binding and legally enforceable obligation
of Borrower in accordance with its terms.
3. NO CONFLICT. The execution, delivery and performance of this Agreement
are not in contravention of or in conflict with any agreement, indenture or
undertaking to which Borrower is a party or by which it or any of its property
may be bound or affected, and do not cause any lien, charge or other encumbrance
to be created or imposed upon any such property by reason thereof.
4. LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in default with
respect to any order, writ, injunction, decree or demand of any court or other
governmental or regulatory authority.
5. FINANCIAL CONDITION. The balance sheet of Borrower as of 2/28/97, and
the related profit and loss statement for the 2 months ended on that date, a
copy of which has heretofore been delivered to you by Borrower, and all other
statements and data submitted in writing by Borrower to you in connection with
this request for credit are true and correct and said balance sheet and profit
and loss statement truly present the financial condition of Borrower as of the
date thereof and the results of the operation of Borrower for the period covered
thereby, and have been prepared in accordance with generally accepted accounting
principles on a basis consistently maintained. Since such date there have been
no materially adverse changes in the financial condition or business of
Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise,
as such date not reflected in said balance sheet, and Borrower has not entered
into any special commitments or substantial contracts which are not reflected in
said balance sheet, other than in the ordinary and normal course of its
business, which may have a materially adverse effect upon its financial
condition, operations or business as now conducted.
6. TITLE TO ASSETS. Borrower has good title to its assets, and the same are
not subject to any liens or encumbrances other than those permitted by Section
C.3 hereof.
7. TAX STATUS. Borrower has no liability for any delinquent state, local or
federal taxes, and if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
8. TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
9. REGULATION U. The proceeds of this loan shall not be used to purchase or
carry margin stock (as defined with Regulation U of the Board of Governors of
the Federal Reserve system).
B. Borrower agrees that so long as it is indebted to you, it will, unless you
shall otherwise consent in writing:
1. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and
other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair, conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
2. INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses.
3. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
(a) the same are being contested in good faith and by appropriate
proceedings in such manners as not to cause any materially adverse effect upon
its financial condition or the loss of any right of redemption from any sale
thereunder, and
(b) it shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed by it adequate
with respect thereto.
4. RECORDS AND REPORTS. Maintain a standard and modern system of accounting
in accordance with generally accepted accounting principles on a basis
consistently maintained; permit your representatives to have access to, and to
examine its properties, books and records at all reasonable times; and furnish
you:
(a) As soon as available, and in any event within 25 days after the
close of each month of each fiscal year of Borrower, commencing with the month
next ending, a balance sheet, profit and loss statement and reconciliation of
Borrower's capital accounts as of the close of such period and covering
operations for the portion of Borrower's fiscal year ending on the last day of
such period, all in reasonable detail and stating in comparative form the
figures for the corresponding date and period in the previous fiscal year,
prepared in accordance with generally accepted accounting principles on a basis
consistently maintained by Borrower and certified by an appropriate officer of
Borrower, subject, however, to year-end audit adjustments;
(b) As soon as available, and in any event within 90 days after the
close of each fiscal year of Borrower, a report of audit of Company as of the
close of and for such fiscal year, all in reasonable detail and stating in
comparative form the figures as of the close of and for the previous fiscal
year, with the unqualified opinion of accountants satisfactory to you.
(c) Within 24 days after the close of each month of each fiscal year of
Borrower, a certificate by chief financial officer or partner of Borrower
stating that Borrower has performed and observed each and every covenant
contained in this Letter of Inducement to be performed by it and that no event
has occurred and no condition then exists which constitutes an event of default
hereunder or would constitute such an event of default upon the
<PAGE>
lapse of time or upon the giving of notice and the lapse of time specified
herein, or, if any such event has occurred or any such condition exists,
specifying the nature thereof.
(d) Promptly after the receipt thereof by Borrower, copies of any
detailed audit reports submitted to Borrower by independent accountants in
connection with each annual or interim audit of the accounts of Borrower made by
such accountants;
(e) Promptly after the same are available, copies of all such proxy
statements, financial statements and reports as Borrower shall send to its
stockholders, if any, and copies of all reports which Borrower may file with the
Securities and Exchange Commission or any governmental authority at any time
substituted therefor; and
(f) Such other information relating to the affairs of Borrower as you
reasonably may request from time to time.
(g) Notice of Default. Promptly notify the Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice and
lapse of time would be an event of default.
C. Borrower agrees that so long as it is indebted to you, it will not, without
your written consent:
1. TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the
character of its business; or make any change in its executive management.
2. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from you except obligations
now existing as shown in financial statement dated 2/28/97, excluding those
being refinanced by your bank; or sell or transfer, either with or without
recourse, any accounts or notes receivable or any moneys due to become due.
3. LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other title retention
agreement) upon any asset now owned or hereafter acquired by it, other than
liens for taxes not delinquent and liens in your favor.
4. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to
any person or other entity other than in the ordinary and normal course of its
business as now conducted or make any investment in the securities of any person
or other entity other than the United States Government; or guarantee or
otherwise become liable upon the obligation of any person or other entity,
except by endorsement of negotiable instruments for deposit or collection in the
ordinary and normal course of its business.
5. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings therefor;
or sell any assets except in the ordinary and normal course of its business as
now conducted; or sell, lease, assign, or transfer any substantial part of its
business or fixed assets, or any property or other assets necessary for the
continuance of its business as now conducted including without limitation the
selling of any property or other asset accompanied by the leasing back of the
same.
6. DIVIDENDS, STOCK PAYMENTS. If a corporation, declare or pay any dividend
(other than dividends payable in common stock of Borrower) or make any other
distribution on any of its capital stock now outstanding or hereafter issued or
purchase, redeem or retire any of such stock.
D. The occurrence of any one of the following events of default shall, at your
option terminate your commitment to lend and make all sums of principal and
interest then remaining unpaid on all Borrower's indebtedness to you immediately
due and payable, all without demand, presentment or notice, all of which are
hereby expressly waived.
1. FAILURE TO PAY NOTE. Failure to pay any installment of principal or of
interest on any indebtedness of Borrower to you.
2. BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Agreement binding upon Borrower.
3. BREACH OF WARRANTY. Any of Borrower's representations or warranties made
herein or any statement or certificate at any time given in writing pursuant
hereto or in connection herewith shall be false or misleading in any material
respect.
4. INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent or
admit its inability to pay its debts as they mature, or make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
5. JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of
attachment, or similar process shall be entered or filed against Borrower or any
of its assets and shall remain unvacated, unbonded or unstayed for a period of
10 days or in any event later than five days to the date of any proposed sale
thereunder.
BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.
E. MISCELLANEOUS PROCEDURE
1. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
your Bank or any holder of Notes issued hereunder, in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this agreement or any note issued in
connection with a loan that your Bank may make hereunder, are cumulative to, and
not exclusive of, any rights or remedies otherwise available.
See Addendum dated April 24, 1997 attached hereto and incorporated herein by
this reference for additional terms. In the event of a conflict between this
Agreement and the Addendum, the terms in the Addendum prevail.
TERAYON CORPORATION
By:
---------------------------------
(Authorized Signature and Title)
2.
<PAGE>
TERAYON CORPORATION
ADDENDUM TO CREDIT TERMS & CONDITIONS
DATED APRIL 24, 1997
A. CREDIT FACILITY
1. A $10,000 Revolving Line of Credit ("Line") for working capital with a
$500,000 sublimit for the issuance of trade-related commercial and
standby letters of credit.
2. A $1,000,000 Term Loan ("Term Loan") for the purchase of capital
equipment and software. (As of the date hereof, Term Loan has an
outstanding balance of $833,333.32. The outstanding balance is being
paid down with monthly principal repayments of $27,777.78 plus
interest. As of the date hereof, 30 monthly principal repayments
remain).
3. A $750,000 Term Loan ("Term Loan2") for the purchase of new equipment
and software and to refinance previously purchased equipment and
software. (As of the date hereof, Term Loan2 has an outstanding
balance of $222,271.10. The outstanding balance is being paid down
with monthly principal repayments of $17,097.77 plus interest. As of
the date hereof, 13 monthly principal repayments remain).
4. A $1,000,000 Term Loan ("Term Loan3") for the purchase of new
equipment and software. (Term Loan3 is split into two loan
amortization schedules hereinafter referred to as "Schedule 1" and
"Schedule 2". As of the date hereof, Schedule 1 has an outstanding
balance of $749,752.49. The outstanding balance is being paid down
with monthly principal repayments of $23,429.77 plus interest. As of
the date hereof, 32 monthly principal repayments remain on Schedule 1.
As of the date hereof, Schedule 2 has an outstanding balance of
$154,456.00. Payments of interest are due monthly through May 27,
1997. Thereafter, the $154,456.00 outstanding on Schedule 2 shall be
repaid with 30 monthly principal repayments of $5,148.53 plus interest
beginning June 27, 1997).
5. A $1,500,000 Term Loan ("Term Loan4") for the purchase of new
equipment and software.
B. MATURITY
1. Line: 364 days from the date hereof.
2. Term Loan: October 5, 1999
3. Term Loan2: May 5, 1998
4. Term Loan3: November 27, 1999
5. Term Loan4: November 6, 2000
C. TERMS
1. Line: Interest payable monthly, principal at maturity.
2. Term Loan: Equal monthly payment of principal in amount of
$27,777.78 per month plus interest, with 30 monthly
principal repayments remaining as of the date
hereof. The remaining balance, if any, shall be due
and payable at maturity.
3. Term Loan2: Equal monthly payments of principal in the amount
of $17,097.77 per month plus interest, with 13
monthly principal repayments remaining as of the
date hereof. The remaining balance, if any, shall
be due and payable at maturity.
<PAGE>
4. Term Loan3: Schedule 1: Equal monthly payments of principal in
the amount of $23,429.77 per month plus interest,
with 32 monthly principal repayments remaining as
of the date hereof. The remaining balance, if any,
shall be due and payable at maturity.
Schedule 2: Monthly payments of interest through
May 27, 1997. Equal monthly payments of principal
beginning June 27, 1997 in an amount of $5,148.53
plus interest, with 30 monthly principal repayments
required as of the date hereof. The remaining
balance, if any, shall be due and payable at
maturity.
5. Term Loan4: Available for draws with interest only payable
monthly through November 5, 1997, followed by 36
equal monthly payments of principal plus interest
beginning December 5, 1997. The remaining balance,
if any, shall be due and payable at maturity.
D. COLLATERAL
An existing blanket first priority security interest perfected by a UCC
filing on all assets of Borrower including all present and future
inventory, chattel paper, accounts, contract rights, unencumbered
equipment, general intangibles, and fixtures and the product thereof.
E. BORROWING FORMULA
1. Line: Advances shall be limited to the lesser of
(i) 80% of Eligible Accounts (as hereinafter
defined); or (ii) $10,000,000. As used herein,
"Eligible Accounts" will include those accounts
receivable of Borrower which are outstanding less
than 90 days from invoice date subject to certain
exclusions for contra, foreign*, US government,
inter-company accounts, and accounts with over 25%
of the balance aged more than 90 days past invoice
date. Any account which alone exceeds 25% of total
accounts will have the amount in excess of 25%
excluded unless approved in writing by Bank.
*Foreign accounts approved in writing by Bank shall be eligible for
inclusion in the Borrowing Formula.
2. Term Loan: 85% against invoice price of equipment purchases
(excluding furniture, fixtures, and phone systems)
and software purchases less tax and freight.
Advances against software purchases shall not
exceed $750,000.
3. Term Loan2: 100% against license price of software less sales
tax and freight, up to a maximum of $500,000. 80%
against original equipment invoices (excluding
furniture, fixtures, and phone systems) less sales
tax and freight, up to a maximum of $250,000.
4. Term Loan3: 85% against invoice price of equipment purchases
(excluding fixtures, and phone systems) and
software purchases less tax and freight. Advances
against software purchases shall not exceed
$400,000.
5. Term Loan4: 85% against invoice price of equipment purchases
(excluding fixtures, and phone systems) and
software purchases less tax and freight. Advances
against software purchases shall not exceed
$500,000.
F. PRICING
1. INTEREST RATE:
2.
<PAGE>
(a) Line: Bank's Prime Rate + 0.5% per annum.
(b) Term Loan: Bank's Prime Rate + 1.5% per annum.
(c) Term Loan2: Bank's Prime Rate + 1.5% per annum.
(d) Term Loan3: Bank's Prime Rate + 1.5% per annum.
(e) Term Loan4: Bank's Prime Rate + 1.5% per annum.
2. FACILITY FEE:
(a) Line: $5,000 due and payable concurrently with
execution hereof by Borrower.
(b) Term Loan: $5,000, already paid by Borrower to Bank.
(c) Term Loan2: $5,000, already paid by Borrower to Bank.
(d) Term Loan3: $5,000, already paid by Borrower to Bank.
(e) Term Loan4: $5,000, due and payable concurrently with
execution hereof by Borrower.
G. COVENANTS
1. Borrower to maintain on a monthly basis unless stated otherwise:
(a) Minimum Quick Ratio/1/ of 1.00 to 1.00.
(b) Minimum Tangible Net Worth/2/ of $6,000,000.
(c) Maximum Total Liabilities/3/ to Tangible Net Worth/2/ of 1.60
to 1.00.
(d) Minimum Liquid Asset Coverage/4/ of $5,000,000.
(e) Losses not to exceed $5,000,000 in the quarter ending
3/31/97, $4,800,000 in the quarter ending 6/30/97, and
$4,400,000 in the quarter ending 9/30/97. After tax
profitability on a fiscal quarterly basis beginning with the
quarter ending 12/31/97.
(f) Borrower to provide to Bank with evidence satisfactory to
Bank that Borrower has received a minimum of $9,000,000 in
new equity by 6/30/97.
Definitions:
/1/Quick Ratio is cash plus accounts receivable divided by current
liabilities.
/2/Tangible Net Worth is the financial statement net worth of the Borrower
prepared according to generally accepted accounting principles less
intangible assets, plus indebtedness fully subordinated to the debt due to
the Bank.
/3/Total Liabilities are all the Borrower's liabilities except for
indebtedness fully subordinated to the debt due tot he Bank and deferred
revenues.
/4/Minimum Liquid Asset Coverage defined as unrestricted cash and cash
equivalents plus 60% of eligible accounts receivable minus any outstanding
balance on the line of credit and/or any outstanding standby or commercial
letters of credit under the line of credit.
2. Borrower to provide to Bank:
3.
<PAGE>
(a) Unqualified audited financial statements within 90 days after
each fiscal year end.
(b) Company prepared monthly financial statements and Compliance
Certificate within 25 days after the end of each month.
(c) Monthly agings of accounts receivable and accounts payable
with Borrowing Base Certificate within 10 days after the end
of each month.
(d) Budgets, sales projections, operating plan, or other
financial exhibits which Bank may reasonably request.
3. Other Covenants:
(a) Borrower's primary banking and investment accounts to be
maintained at Bank.
(b) Without Bank's prior approval, Borrower shall not:
(1) Enter into any mergers or acquisitions or major debt
agreements, except for equipment leases.
(2) Pay cash dividends or repurchase stock.
(3) Hypothecate existing assets.
(4) Loan money or guarantee loans of others.
(c) Borrower shall notify Bank in writing of any legal action
commenced against it which may result in damages over
$50,000. Borrower shall provide Bank with such notice
immediately upon Borrower's receipt of notice of such legal
action.
(d) Borrower shall provide Bank proof of insurance of all
tangible corporate assets and a Lender's Loss Payable Clause
with Bank as loss payee.
H. OTHER CONDITIONS
1. Borrower shall execute and deliver to Bank any and all documents
required by Bank.
2. Prior to Line disbursement, Bank shall conduct an initial collateral
audit by Bank's designated agent at Borrower's expense, with results
satisfactory to Bank. Thereafter, Bank shall conduct annual
collateral audits by Bank's designated agent at Borrower's expense,
with results satisfactory to Bank.
TERAYON CORPORATION
By:
------------------------
Title:
---------------------
Date:
----------------------
4.
<PAGE>
Imperial Bank
Member FDIC
NOTE
$1,500,000.00 San Jose, California April 24, 1997
On November 6, 2000, and as hereinafter provided for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its Santa Clara Valley Regional office, the principal
sum of $1,500,000.00, or such sums up to the maximum, if so stated, as the Bank
may now or hereafter advance to or for the benefit of the undersigned in
accordance with the terms hereof, together with interest from date of
disbursement or N/A , whichever is later, on the unpaid principal
----------------
balance [ ] at the rate of _____% per year [x] at the rate of 1.500% per year in
excess of the rate of interest which Bank has announced as its prime lending
rate (the "Prime Rate"), which shall vary concurrently with any change in such
Prime Rate, or $250.00, whichever is greater. Interest shall be computed at the
above rate on the basis of the actual number of days during which the principal
balance is outstanding, divided by 360, which shall for interest computation
purposes, be considered one year.
Interest shall be payable [x] monthly [ ] quarterly [ ] included with principal
[x] in addition to principal [ ] * beginning May 6, 1997, and if not so paid
shall become a part of the principal. All payments shall be applied first to
interest and the remainder, if any, on principal. [ ] (if checked), Principal
shall be payable in installments of $_____________, or more, each installment
on the _____ day of each _____________________, beginning
_________________________. Advances not to exceed any unpaid balance owing at
any one time equal to the maximum amount specified above, may be made at the
option of Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of principal
or interest when due, or in the performance or observance, when due, of any
item, covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to, the failure of the maker(s)
to pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor; or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, insecure.
[x] If any installment payment or principal balance payment due hereunder is
delinquent ten or more days, Obligor agrees to pay a late charge in the amount
of 5% of the payment so due and unpaid, in addition to the payment; but nothing
in this paragraph is to be construed as any obligation on the part of the holder
of this note to accept payment of any installment past due or less than the
total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all costs
and expenses of collection and reasonable attorney's fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and
extensions of time for payment hereof, before, at, or after maturity; consents
to the acceptance, release or substitution of security for this note, and waives
demand and protest and the right to assert any statute of limitations. Any
married person who signs this note agrees that recourse may be had
<PAGE>
against separate property for any obligations hereunder. The indebtedness
evidenced hereby shall be payable in lawful money of the United States. In any
action brought under or arising out of this note, each Obligor, including
successor(s) or assign(s) hereby consents to the application of California law,
to the jurisdiction of any competent court within the State of California, and
to service of process by any means authorized by California law.
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security. Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust, security agreement
or other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith.
* See Addendum attached.
_________________________ TERAYON CORPORATION
_________________________ ____________________________
_________________________ ____________________________
2.
<PAGE>
ADDENDUM TO NOTE
Advances under the Note shall be available through November 5, 1997
("Amortization Date"). Commencing on the sixth day of the calendar month
immediately following the initial disbursement of funds hereunder and on the
sixth day of each calendar month thereafter through and including the
Amortization Date, the undersigned shall make monthly payments equal to the
accrued interest hereunder. On the Amortization Date the outstanding balance of
disbursements made under the Note shall be converted to an amortizing loan
payable in 36 equal monthly principal payments, plus accrued interest, thereof,
with said monthly payments due and payable on the sixth day of each calendar
month commencing on the 6th day of December 1997.
All principal and accrued but unpaid interest shall in any event be due and
payable on November 6, 2000.
TERAYON CORPORATION
_______________________________
<PAGE>
IMPERIAL BANK
Member FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
Name(s): TERAYON CORPORATION Date: April 24, 1997
$ paid to you directly by Cashiers Check No.
$ 1,500,000.00 credited to deposit account No. 17-063-219
$ when advances are requested from undisbursed funds
paid to Loan(s) No.
$ amounts paid to Bank for:
Amounts paid to others on your behalf:
$ to Title Insurance Company
$ to Public Officials
$ to
$ to
$ to
$ to
$ 1,500,000.00 SUBTOTAL (NOTE AMOUNT)
LESS $ .00 Prepaid Finance Charge (Loan fee(s))
$ 1,500,000.00 TOTAL (AMOUNT FINANCED)
Upon consummation of this transaction, this document will also serves as the
authorization for Imperial Bank to disburse the loan proceeds as stated above.
TERAYON CORPORATION
- --------------------------------- --------------------------------
Signature Signature
- --------------------------------- --------------------------------
Signature Signature
<PAGE>
Imperial Bank
Member FDIC
AUTOMATIC DEBIT AUTHORIZATION
TO: Imperial Bank
RE: LOAN #_________________________
You are hereby authorized and instructed to charge account No. 17-063-219 in the
name of TERAYON CORPORATION for principal and interest payments due on above
referenced loan as set forth below and credit the loan referenced above.
[x] Debit each interest payment as it becomes due according to the terms of the
note and any renewals or amendments thereof.
[ ] Debit each principal payment as it becomes due according to the terms of
the note and any renewals or amendments thereof.
This Authorization is to remain in full force and effect until revoked in
writing.
Borrower Signature:
TERAYON CORPORATION
By: Date:
--------------------------- -----------------------------
<PAGE>
Imperial Bank
Member FDIC
CORPORATE RESOLUTION REGARDING CREDIT
OFFICE: Santa Clara Valley Regional ADDRESS: 226 Airport Parkway
San Jose, California 95110
RESOLVED, that TERAYON CORPORATION borrow from IMPERIAL BANK,
hereinafter referred to as "Bank," from time to time, such sums of money as, in
the judgment of the officer or officers hereinafter authorized, this corporation
may require, provided that the aggregate amount of such borrowing, pursuant to
this resolution, shall not at any one time exceed the principal sum of Thirteen
Million Six Hundred Thousand Four Hundred Seventy Nine and No/100 Dollars
($13,600,479.00), in addition to such amount as may be otherwise authorized;
RESOLVED FURTHER, that any 1 of the following named officers:
---
Zaki Rakib the CEO/Secretary
- ------------------------------------- --------------------------------
Shlomo Rakib the President
- ------------------------------------- --------------------------------
the
- ------------------------------------- --------------------------------
the
- ------------------------------------- --------------------------------
of this corporation (the officer or officers acting in combination, authorized
to act pursuant hereto being hereinafter designated as "authorized officers"),
be and they are hereby authorized, directed and empowered, for and on behalf and
in the name of this corporation (1) to execute and deliver to the Bank such
notes or other evidences or indebtedness of this corporation for the monies so
borrowed, with interest thereon, as the Bank may require, and to execute and
deliver, from time to time, renewals or extensions of such notes or other
evidences of indebtedness; (2) to grant a security interest in, transfer, or
otherwise hypothecate or deed in trust for Bank's benefit and deliver by such
instruments in writing or otherwise as may be demanded by the Bank, any of the
property of this corporation as may be required by the Bank to secure the
payment of any notes or other indebtedness of this corporation or third parties
to the Bank, whether arising pursuant to this resolution or otherwise; and (3)
to perform all acts and execute and deliver all instruments which the Bank may
deem necessary to carry out the purposes of this resolution.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized and empowered, and that any one of said authorized officers be and
he/she is hereby authorized and empowered (1) to discount with or sell to the
Bank conditional sales contracts, notes, acceptances, drafts, bailment
agreements, leases, receivables and evidences of indebtedness payable to this
corporation, upon such terms as may be agreed upon by them and the Bank, and to
endorse in the name of this corporation said notes, acceptances, drafts,
bailment agreements, leases, receivables and evidences of indebtedness so
discounted, and to guarantee the payment of the same to the Bank, and (2) to
apply for and obtain from the Bank letters of credit and in connection therewith
to execute such agreement, applications, guarantees, indemnities and other
financial undertakings as Bank may require;
RESOLVED FURTHER, that said authorized officers are also authorized to
direct the disposition of the proceeds of any such obligation, and to accept or
direct delivery from the Bank of any property of this corporation at any time
held by the Bank;
<PAGE>
RESOLVED FURTHER, that the authority given hereunder shall be deemed
retroactive and any and all acts authorized hereunder performed prior to the
passage of this resolution are hereby ratified and affirmed;
RESOLVED FURTHER, that this resolution will continue in full force and
effect until the Bank shall receive official notice in writing from this
corporation of the revocation thereof by a resolution duly adopted by the Board
of Directors of this corporation, and that the certification of the Secretary of
this corporation as to the signatures of the above named persons shall be
binding on this corporation.
I, ZAKI RAKIB, Secretary of the above named corporation, duly
organized and existing under the laws of the State of California, do hereby
certify that the foregoing is a full, true and correct copy of a resolution of
the Board of Directors of said corporation, duly and regularly passed and
adopted by the Board of Directors of said corporation.
I further certify that said resolution is still in full force and
effect and has not been amended or revoked, and that the specimen signatures
appearing below are the signatures of the officers authorized to sign for this
corporation by virtue of said resolution.
Executed on April 24, 1997.
Signature:
------------------------ --------------------------------
Zaki Rakib Zaki Rakib (Secretary)
Signature:
------------------------ --------------------------------
Shlomo Rakib
Signature:
------------------------ --------------------------------
Signature:
------------------------ --------------------------------
Signature:
------------------------ --------------------------------
<PAGE>
IMPERIAL BANK
Member FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
Name(s): TERAYON CORPORATION Date: April 24, 1997
$ paid to you directly by Cashiers Check No.
$ 10,000,000.00 credited to deposit account No. 17-063-219
$ when advances are requested from undisbursed funds paid
on Loan(s) No.
$ 500,000.00 amounts paid to Bank for: the issuance of trade-
related*
Amounts paid to others on your behalf:
$ to Title Insurance Company
$ to Public Officials
$ to *standby and commercial letters of credit
$ to ** within $10,000,000.00 maximum credit
$ to
$ to
$ 10,000,000.00 SUBTOTAL (NOTE AMOUNT)
LESS $ .00 Prepaid Finance Charge (Loan fee(s))
$ 10,000,000.00 TOTAL (AMOUNT FINANCED)
Upon consummation of this transaction, this document will also serves as the
authorization for Imperial Bank to disburse the loan proceeds as stated above.
TERAYON CORPORATION
- --------------------------------- -----------------------------------
Signature Signature
- --------------------------------- -----------------------------------
Signature Signature
<PAGE>
Imperial Bank
Member FDIC
AUTOMATIC DEBIT AUTHORIZATION
TO: Imperial Bank
RE: LOAN #_________________________
You are hereby authorized and instructed to charge account No. 17-063-219 in the
name of TERAYON CORPORATION for principal and interest payments due on above
referenced loan as set forth below and credit the loan referenced above.
[x] Debit each interest payment as it becomes due according to the terms of the
note and any renewals or amendments thereof.
[x] Debit each principal payment as it becomes due according to the terms of
the note and any renewals or amendments thereof.
This Authorization is to remain in full force and effect until revoked in
writing.
Borrower Signature:
TERAYON CORPORATION
By: Date:
------------------------------- ----------------------------
<PAGE>
IMPERIAL BANK
Member FDIC
AGREEMENT TO PROVIDE INSURANCE
(REAL OR PERSONAL PROPERTY)
TO: IMPERIAL BANK Date: April 24, 1997
226 Airport Parkway Borrower: TERAYON CORPORATION
San Jose, California 95110
In consideration of a loan in the amount of $13,600,479.00, secured by all
tangible personal property including inventory and equipment
I/We agree to obtain adequate insurance coverage to remain in force during the
term of the loan.
I/We also agree to advise the below named agent to add Imperial Bank as loss
payee on the new or existing insurance policy, and to furnish Bank at above
address with a copy of said policy/endorsements and any subsequent renewal
policies.
I/We understand that the policy must contain:
3. Fire and extended coverage in an amount sufficient to cover:
(a) The amount of the loan, OR
(b) All existing encumbrances, whichever is greater,
But not in excess of the replacement value of the improvements on the
real property.
1. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of Imperial
Bank, or any other form acceptable to Bank.
INSURANCE INFORMATION
Insurance Co./Agent: Telephone No.:
TERAYON CORPORATION
Signature of Obligor:
-----------------------
Signature of Obligor:
-----------------------
===============================================================================
- --------------------------------------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION: Date: _______________
Person Spoken to: _____________________________________________________
Policy Number: ________________________________________________________
Effective From: _______________________________________________________
Verified By: __________________________________________________________
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 10.14
PRODUCT DEVELOPMENT AGREEMENT
This Product Development Agreement ("Agreement") is made and entered into as of
July 22, 1996 ("Effective Date"), by and between Cisco Systems, Inc., a
California corporation, having principal offices at 170 West Tasman Drive, San
Jose, California 95134-1706 ("Cisco"), and Terayon Corporation, a California
corporation, having principal offices at 2952 Bunker Hill Lane, Santa Clara,
California 95054 ("Terayon").
Common objectives of the parties in entering into this Agreement include: (i)
to develop an end-to-end system providing Internet/WAN access through the Cable
System (as defined below) to the end user, and (ii) to develop efficient
interconnection protocols between Cisco products, including the Cisco 75xx
Router family and the Cisco Lightstream 1010 ATM Switch, and products that
Terayon will develop (as described below), which together will form the basis of
an end-to-end system for the Cable System market.
The parties hereby agree as follows:
Definitions. For purposes of this Agreement, the following terms shall
------------
have the following meanings:
1.1 "Teralink" shall mean a head-end cable modem concentrator
chassis or cable data modem terminal server ("CDMTS"), which includes the
channel controller unit(s) and other components based on Terayon technology.
Teralink as defined herein includes all versions developed by Terayon including
the Teralink 1000, Teralink 2000, and other Terayon designs, and includes all
components including but not limited to the RF circuitry and ASIC component,
which are resident on a VME Board; CPU, TDM interface, Utopia, SAR, and Ethernet
interface.
1.2 "Terapro" shall mean a subscriber-end remote unit and modem
device based on Terayon technology, which will provide data transmission from
the subscriber through the hybrid fiber coax ("HFC") system to the Teralink and
on to the cable head-end platform.
1.3 "sCDMA" shall mean Terayon's Synchronous Code Division
Multiple Access spread spectrum communication digital access scheme which
Terayon shall incorporate into Terayon's physical layer modules resident and
other components in the Terapro and Teralink.
1.4 "Terayon Technology" shall mean Terayon's Teralink, Terapro,
and sCDMA as defined in Sections 1.1 - 1.3 above, including, without limitation,
integrated circuits, design documentation, board schematics, source code,
designs, technology, ideas, know-how, processes, formulas, data, techniques,
improvements, modifications, inventions (whether patentable or not), works of
authorship, derivative works, circuits, mask works, layouts, algorithms, and
computer programs relating thereto, and all patents, patent rights, copyrights,
mask work rights, trade secret rights and other intellectual property and
proprietary rights therein anywhere in the world.
1.5 "IF Interfaces" shall mean collectively three separate
interfaces:
<PAGE>
(a) I/F4 Interface: The I/F4 interface is the interface
between the Teralink and the 75xx Router, which supports a standard ATM
interface compliant with ATM Forum UNI 3.1. At the physical layer, the I/F4
interface supports a SONET/SDH based interface. The I/F4 also supports a
management interface using a separate 10Base-T Ethernet interface for local
exchange of management information such as TeraPro modem configuration
information and RF channel up/down status information between the router and the
TeraLink system. Both the data interface and the local management interface
supported by I/F4 are jointly being developed by Terayon and Cisco.
(b) I/F6 Interface: The I/F6 is the IP interface between
the router located at the headend or remote distribution hub and the PC located
at the subscriber premise. Several of the functions supported by the I/F6
interface are unique to the CATV data network. For example, there is an intimate
relationship between the Logical IP Subnet (LIS) over CATV data network and the
CATV RF channel parameters. The I/F6 interface supports LIS configuration with
routers and directly connected PCs using RF channels in the CATV data network.
All ARP messages originated by the PCs in the router's IP subnetwork are passed
on to the router through the I/F6 interface. In addition, the router
participates via the I/F6 interface in the DHCP message exchange between the PC
and the DHCP server and uses the information to bind the PC MAC address, the PC
IP address, and the TeraPro modem identifier. Terayon and Cisco are jointly
specifying the I/F6 interface.
(c) I/F7 Interface: The I/F7 is the IP interface between
the DHCP server located at the headend or remote distribution hub and the PC
located at the subscriber premise. The I/F7 interface supports dynamic
assignment of IP addresses to the PC using DHCP on PC powerup. As mentioned
earlier, the router participates in the DHCP message exchange between the PC and
the DHCP server. As part of specifying the DHCP interface across I/F7, Terayon
and Cisco are also working together to resolve issues such as inclusion of the
TeraPro modem identifier in the DHCP messages across I/F5 interface and DHCP
affecting the I/F7 during TeraPro modem power loss.
1.6 "Cisco Technology" shall mean the IF Interfaces as defined
in paragraph 1.5 above.
1.7 "Cable System" shall mean an end-to-end system that provides
high-speed data communications, including Internet, digital video and other data
services, as well as WAN services over the cable HFC infrastructure.
1.8 "Lightstream 1010 ATM Switch" shall mean a Cisco device
--------------------
providing high speed LAN bridging.
1.9 "75xx Router" shall mean Cisco's OSI layer 3 device that
----
can decide which of several paths network traffic will follow and can forward
packets from one network to another.
1.10 "Cable Operators" shall mean cable television operators,
cable equipment integrators, as well as VARs, resellers and distributors who
sell cable equipment and/or services.
2.
<PAGE>
2. Development Activities.
-----------------------
2.1 The parties will jointly develop the IF Interfaces for a Cable
System incorporating Cisco Technology and Terayon Technology.
2.2 The parties intend to work together in the future to develop
additional products and future generations of systems as agreed to by the
parties in writing.
3. Development Obligations.
------------------------
3.1 Preparation of Statement of Work. The parties have jointly
---------------------------------
prepared a statement of work ("Statement of Work") set forth as Attachment A,
detailing the development activities and obligations of each party,
specifications for the interface for the Cable System, and a milestone schedule
for the completion of such activities and obligations. The parties understand
and agree that the Statement of Work may be modified, from time to time, but
only if such modification is agreed to by both parties.
3.2 Prototype. The parties shall use commercially reasonable
----------
efforts to undertake and complete development of a prototype model of the Cable
System.
3.3 Joint Development. As more specifically set forth in the
------------------
Statement of Work, Cisco and Terayon will use commercially diligent efforts to
develop the Interfaces.
3.4 Development Schedule and Specifications. The parties will use
----------------------------------------
commercially diligent efforts to prepare a Development Schedule and
Specifications for the prototype of the Cable System ("Phase I System") with
which the parties will agree to and comply. Each party represents that it is
capable of successfully completing its portion of the Phase I System and the
Phase I System may be available for field trials by Cable Operators no later
than October 1, 1996.
3.5 Delay. Should a developing party ("Developing Party") incur
------
delay in meeting the Development Schedule, that Developing Party shall promptly
notify the other party in writing of any delay in meeting the Development
Schedule hereunder. The parties agree to work together in good faith to develop
a mutually acceptable revised development schedule taking such delay into
account, and to meet the revised development schedule. However, should the
Developing Party fail to meet the revised development schedule, the other party
at its election shall be relieved of its obligations under Sections 4 and 6
below upon written notice to the Developing Party.
4. Field Trial Obligations
-----------------------
4.1 Upon satisfactory completion of the Phase I System, the parties
agree that they shall conduct at least two field trials of the Phase I System
(along with any modifications thereto) to be sponsored by one or more Cable
Operators. The selection of the field trials, the cost sharing, and the
implementation and support procedures shall be mutually agreed to by the
parties. All data, procedures and results of the field trials shall be shared by
the parties.
3.
<PAGE>
5. Ownership Of Interfaces; Licenses
---------------------------------
5.1 Ownership. For the convenience of the parties, the ownership
----------
of the jointly developed Interfaces shall be assigned to Cisco. Cisco shall use
commercially reasonable efforts, consistent with its general policies and
practices, to protect and enforce the important proprietary elements of such
technologies.
5.2 License. Cisco hereby grants to Terayon a perpetual (but with
--------
respect to copyrighted works, until the expiration of such copyright rights),
fully paid, irrevocable, royalty-free, non-exclusive worldwide right and license
to make, have made, modify, improve, make derivative works, use, sell, lease,
license and sublicense the Interfaces. For the purposes of Section 11, this
license shall be the equivalent of ownership and each party shall be free to
make its own business decisions regarding disclosures relating to the Interfaces
in the conduct of their respective businesses.
6. Phase II System. Cisco and Terayon will endeavor to develop a
---------------
Phase II Cable System, the goals of which include:
6.1 Cable System cost reduction.
6.2 Cable System simplification, integration and improvement.
This statement of intention shall not be binding on either party until a
definitive agreement concerning the Phase II System is entered into in writing
by each of the parties.
7. Marketing, Sales and OEM Relationship.
--------------------------------------
7.1 Coordinated Marketing and Sales. The parties intend to develop
--------------------------------
a coordinated marketing, sales and customer support program in connection with
the Cable System, including reference selling in targeted situations to Cable
Operators and exchanges of sales leads regarding Cable Operators.
7.2 CISCO-TERAYON OEM RELATIONSHIP.
(a) The parties intend to discuss and negotiate in good faith
terms and conditions under which Terayon will sell to Cisco for resale and
support Cable System Teralink and Terapro devices, components, and the complete
Cable System. This OEM arrangement shall encompass the Teralink, Terapro, system
level components, chipsets and ASICs. The parties intend to negotiate in good
faith financial terms and conditions including OEM pricing on each component
(including chipsets and ASICs), device and system.
(b) With respect to pricing of components and chipsets, the
parties understand that some of the components (particularly the RF circuitry
and ASIC components) may be high value added parts of the system and it is the
intention of the parties that the pricing should reflect the contribution of the
component or chipset to the margin which Terayon is deriving from the systems
product (such as the Teralink and the Terapro) in which the component is used.
In calculating the system margin, it is understood that the parties will
4.
<PAGE>
consider average margins actually received by Terayon, not selective high margin
transactions, in determining gross margin for components and chipsets sold by
Terayon to Cisco.
(c) If the parties decide to establish an OEM relationship with
respect to Terayon products, Cisco will discuss and negotiate in good faith
terms and conditions under which Cisco will sell to Terayon for resale routers
and switches.
The statements of intention in this Section 7.2 regarding OEM relationships
shall not be binding upon either party until a definitive OEM Agreement is
entered into in writing between the parties.
8. Ownership
---------
8.1 Ownership. As between the parties, each party retains all
----------
title to and, except as expressly and unambiguously licensed herein, all rights
and interest (including all proprietary and intellectual property rights
throughout the world) in and to its Technology, all copies, modifications and
derivative works thereof (by whomever produced) and all inventions
("Inventions") (whether patentable or not) relating to its Technology made,
conceived, or reduced to practice during the course of development under this
Agreement.
8.2 Assignment to Cisco. Terayon agrees to assign and does hereby
--------------------
assign to Cisco all rights, title and interest including, without limitation,
copyright rights, patent rights, trade secret rights, mask work rights and all
other intellectual property and proprietary rights that Terayon may have
throughout the world in and to any Inventions, modifications or derivative works
of the Cisco Technology or any portion thereof made, conceived or reduced to
practice by Terayon during the course of development under this Agreement. The
foregoing shall apply to all rights of every kind and character whatsoever
throughout the world, whether or not such rights are now existing or come into
existence hereafter, and whether or not such rights are now known, recognized or
contemplated. Terayon agrees to perform, during and after the term of this
Agreement, all acts deemed necessary or desirable by Cisco to permit and assist
it in evidencing and perfecting such assignment.
8.3 Assignment to Terayon. Cisco agrees to assign and does
----------------------
hereby assign to Terayon all rights, title and interest including, without
limitation, copyright rights, patent rights, trade secret rights, mask work
rights and all other intellectual property and proprietary rights that Cisco may
have throughout the world in and to any Inventions, modifications or derivative
works of the Terayon Technology and/or any portion thereof made, conceived or
reduced to practice by Cisco during the course of development under this
Agreement. The foregoing shall apply to all rights of every kind and character
whatsoever throughout the world, whether or not such rights are now existing or
come into existence hereafter, and whether or not such rights are now known,
recognized or contemplated. Cisco agrees to perform, during the term of this
Agreement, all acts deemed necessary or desirable by Terayon to permit and
assist it in evidencing and perfecting such assignment.
9. Documentation. Each party shall produce its own end-user
--------------
documentation and standards publications at its sole expense.
5.
<PAGE>
10. Representations, Warranties and Covenants.
------------------------------------------
10.1 By Terayon. Terayon represents, warrants and covenants:
-----------
(a) that manufacture, use, sale, offer for sale, import,
reproduction, modification or creation of derivative works of the Terayon
Technology does not and will not misappropriate, violate or infringe the
property rights of any third party in the Terayon Technology (including, without
limitation, trade secret rights, copyright rights, patent rights and mask work
rights);
(b) to comply with good business practices and all applicable
laws and regulations and to represent Cisco products and technology in a
professional manner in accordance with the highest standards in the computer
networking industry, including, without limitation, accurately representing the
features and functionality of Cisco products and technology in Terayon's
marketing, promotional, distribution and sales activities; and
(c) not to initiate any proceeding against Cisco based upon
an allegation that Cisco's exercise of its rights or license hereunder infringe
Terayon's intellectual property or proprietary rights in the Terayon Technology.
10.2 By Cisco. Cisco represents, warrants and covenants that:
---------
(a) manufacture, use, sale, offer for sale, import,
reproduction, modification or creation of derivative works of the Cisco
Technology does not and will not misappropriate, violate or infringe the
property rights of any third party in the Cisco Technology (including, without
limitation, trade secret rights, copyright rights, patent rights and mask work
rights);
(b) to comply with good business practices and all applicable
laws and regulations and to represent Terayon products and technology in a
professional manner in accordance with the highest standards in the computer
networking industry, including, without limitation, accurately representing the
features and functionality of Terayon products and technology in Cisco's
marketing, promotional, distribution and sales activities: and
(c) not to initiate any proceeding against Terayon based upon
an allegation that Terayon's exercise of its rights or license hereunder
infringe Cisco's intellectual property or proprietary rights in the Cisco
Technology.
11. Confidentiality.
----------------
Each party agrees that all information provided pursuant to this Agreement
including, without limitation, designs, layouts, mask works, design
documentation, code, schematics, 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 allowed herein, the receiving party will hold in
confidence and not use or disclose during the term of this Agreement and for
five (5) years thereafter any Proprietary Information of the disclosing party
and shall similarly bind its employees and subcontractors in such manner as it
employs with respect to its own confidential information. The parties further
6.
<PAGE>
agree that the terms of this Agreement are confidential and that neither party
may disclose the terms of this Agreement to any third party notwithstanding
disclosure obligations in connection with a merger, acquisition or sale of
assets. In the event of a merger discussion other than with Cisco competitors,
Terayon may disclose to the third party a summary of this agreement, excluding
any pricing matters and Statement of Work. The receiving party shall not be
obligated under this Section with respect to information the receiving party can
document:
(a) is or has become readily publicly available without
restriction through no fault of the receiving party or its employees or agents;
or
(b) is received without restriction from a third party
lawfully in possession of such information and lawfully empowered to disclose
such information; or
(c) was rightfully in the possession of the receiving party
without restriction prior to its disclosure by the other party; or
(d) was independently developed by employees or consultants
of the receiving party; or
If either party breaches any of its obligations with respect to
confidentiality, or if such a breach is likely to occur, the other party shall
be entitled to equitable relief, including specific performance or an
injunction, in addition to any other rights or remedies, including, without
limitation, money damages, provided by law.
12. Term and Termination
--------------------
12.1 Term. Unless terminated earlier as provided herein, this
-----
Agreement shall have a term of four (4) years commencing from the date executed,
unless terminated sooner by written notice given by a party pursuant to this
Section 12. This Agreement shall automatically renew for additional one (1) year
periods, unless a party provides written notice not later than thirty (30) days
prior to the end of the initial term or any renewal thereof of its intent not to
renew.
12.2 Termination. This Agreement may be terminated by a party
------------
for cause immediately by written notice upon the occurrence of any of the
following events:
(a) If the other ceases to do business, or otherwise
terminates its business operations; or
(b) If the other breaches any material provision of this
Agreement and fails to cure such breach within sixty (60) days (immediately in
the case of a material breach of Section 10) of written notice describing the
breach. Notwithstanding the foregoing, both parties recognize the inherent
difficulty of development, and both parties agree that prior to terminating the
Agreement for a development issue, both parties will discuss the issues and
timelines for resolution of the issues in good faith; or
(c) If the other becomes insolvent or seeks protection under
any bankruptcy, receivership, trust deed, creditors arrangement, composition or
comparable
7.
<PAGE>
proceeding, or if any such proceeding is instituted against the other
(and not dismissed within ninety (90) days).
12.3 Corporate Event. Within sixty (60) days of a material
----------------
change of control, merger or acquisition of Terayon (an "Acquisition"), Cisco in
its sole discretion may elect to terminate this Agreement.
12.3.1. In the event of termination, each party will return
or destroy the Proprietary Information of the other party.
13. Survival. Sections 1, 5, 8, and 10 will survive termination or
---------
expiration of this Agreement.
14. Regulatory Compliance. Each party will be responsible for
----------------------
obtaining, at its own expense, all necessary governmental approvals and
attaining network compliance for the Phase I System.
15. Export Controls. Each party agrees at its sole cost and expense to
----------------
comply with all applicable export control laws, and restrictions and
regulations, as they exist from time to time, including those of the United
States Department of Commerce, and not to export or reexport any material
provided to it under this Agreement, including the Phase I System and any
Proprietary Information of the other party, or any of the direct products of the
foregoing, in violation of any such laws or regulations, or to Afghanistan, the
People's Republic of China or any Group Q, S, w, Y or Z country (as specified in
Supplement No. 1 to Paragraph 770 of the U.S. Export Administration Regulations,
or any successor thereto) or otherwise except in compliance with and with all
licenses and approvals required under applicable export laws and regulations.
16. Assignment. A party may not assign or transfer this Agreement and
-----------
the rights and obligations hereunder without prior written consent of the other
party.
17. Relationship of the Parties; No Agency. Nothing contained herein
---------------------------------------
shall be construed as creating any agency, partnership, or other form of joint
enterprise between the parties. The parties' relationship will be that of
independent contractors. Neither party shall have any express or implied right
or authority to assume or create any obligations on behalf of or in the name of
the other party or to bind the other party to any other contract, agreement or
undertaking with any third party.
18. General.
--------
18.1 Governing Law. Any dispute in the meaning, effect or
--------------
validity of this Agreement will be resolved in accordance with the laws of the
State of California.
18.2 Attorneys' Fees. In any action or proceeding to enforce
----------------
rights under this Agreement, the prevailing party shall be entitled to recover
reasonable costs and attorneys' fees.
18.3 Severability. If any provision of this Agreement is held to
-------------
be illegal or unenforceable, that provision will be limited or eliminated to the
minimum extent necessary so that this Agreement will otherwise remain in full
force and effect and enforceable.
8.
<PAGE>
18.4 Entire Agreement. This Agreement contains the entire
-----------------
understanding of the parties with respect to the subject matter hereof and
supersedes all prior or contemporaneous communications, understandings and
agreements with respect to the subject matter hereof, whether oral or written,
and can only be modified or amended by a subsequent writing signed by both
parties.
18.5 Headings. All headings used in this Agreement are for
---------
convenience only and shall not be used in interpreting this Agreement.
18.6 Notices. All notices required under this Agreement shall be
--------
in writing and shall be deemed to be given when delivered by hand or dispatched
(with reasonable evidence of receipt) by telex, telegraph or other means of
electronic facsimile transmission, or twenty-four (24) hours after being
dispatched by an internationally recognized overnight courier service with
tracking capabilities or five (5) days after deposit in the U.S. mail if mailed
by certified or registered mail, postage pre-paid, return receipt requested,
addressed to the party to whom the notice is intended to be given at the address
specified in the opening paragraph or such other address as either party may
designate by like notice.
18.7 Force Majeure. Neither party shall be liable hereunder by
--------------
reason of any failure or delay in the performance of its obligations hereunder
on account of strikes, shortages, riots, insurrection, fires, flood, storm,
explosions, acts of God, war, governmental action, labor conditions, earthquakes
or any other cause which is beyond the reasonable control of such party.
18.8 Waiver. The failure of either party to require performance
-------
by the other party of any provision hereof shall not affect the full right to
require such performance at any time thereafter, nor shall the waiver by either
party of a breach of any provision hereof be taken or held to be a waiver of the
provision itself.
18.9 Counterparts. This Agreement may be executed in two or more
-------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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. TERAYON CORPORATION
BY: BY:
-------------------------------------- -----------------------------
NAME: JONATHAN SHANTZ NAME: ZAKI RAHIB
TITLE: VICE PRESIDENT AND GENERAL MANAGER TITLE: CHIEF EXECUTIVE OFFICER
SERVICE PROVIDER MARKET -----------------------
9.
<PAGE>
Cisco-Terayon Statement of Work
This Statement of Work is dated as of July 22, 1996 and has been prepared by
Cisco Systems, Inc. ("Cisco") and Terayon Corporation ("Terayon") pursuant to
Section 3.1 of the Product Development Agreement dated as of July 22, 1996 by
and between Cisco and Terayon.
1.0 OBJECTIVE
Phase 1 - To develop and validate feasibility of a first generation sCDMA cable
modem system that provides data transmission from the subscriber remote unit,
through the HFC infrastructure, to the Tera1000 cable modem chassis and on to
the cablerouter headend platform, C7513 chassis.
2.0 PRODUCT DEFINITION DELIVERABLES
2.1 System Functional Specification: Cisco-Terayon
2.1.1 This will be an I/F4, I/F6 and I/F7 specification defined by
Cisco and Terayon.
2.1.1.1 sub-documents that will be the basis for this document
a) Functional Spec
b) Fiji Spec
c) protocol stack definition
2.2 System Software Specification: Cisco
2.2.1 This includes:
a. IP spec for end-to-end packet transfer only
B. Driver spec
2.3 CDMTS System Software Specification: Terayon
2.3.1 This includes:
a. Tera1000 software spec
b. TeraPro software spec
c. I/F 1 spec
2.4 MIB Specification: Cisco-Terayon
2.5 Hardware: Terayon
10.
<PAGE>
2.5.1 This includes:
a. Hardware specification for the cpu, rf and digital
logic cards.
b. Interface specification for the ATM fiber and ethernet
ports.
3.0 TERAYON PRODUCT DELIVERABLES
3.1 Tera1000 cable modem chassis with 6 channels of 10Mbps upstream
and 6 channels of 10Mbps downstream data.
3.2 TeraPro remote unit capable of 10Mbps/10Mpps up/down stream
performance, respectively.
4.0 CISCO PRODUCT DELIVERABLES
4.1 C75xx with AIP and EIP, or equivalent equipment, populated to
accommodate the Tera1000 channel density.
Examples: phase 1 1 7507
2 AIP
1 Viper- 16E
1 LS [010
(Phase 2 future)
1 7507
2 Viper-2 ATM-WAN-PAs
1 Viper- 100BaseX
or
1 ELC 4xxx
x ATM-WAN-PAs
1 10 or 100BaseX PA
4.2 IOS software with data transport (I/F6) support through ATM-OC3
4.3 IOS software with Phase 1 SNMP (I/F4) support over Ethernet
11.
<PAGE>
5.0 METRICS FOR A SUCCESSFUL PHASE 1 DEMONSTRATION
5.1 Demonstrate the ability to transmit/receive command and packet data
from the Headend cablerouter, through the Tera1000, across the HFC network,
through the Terapro subscriber unit to the terminating PC.
5.2 Demonstrate the ability:
a. of 10Mbps sCDMA upstream data transmission
b. of 10Mbps sCDMA or 64QAM downstream data transmission
c. to achieve a BER of 10E-9 for sCDMA channels
5.3 Demonstrate basic network management functionality, a subset of SNMP.
6.0 MARKETING
6.1 Joint Cable Data Communications I/F4, I/F6 and I/7 market visibility &
plan.
6.2 Joint sCDMA visability & market plan.
7.0 RISKS AND DISCLAIMERS
8.0 SCHEDULE OF DELIVERABLES
12.
<PAGE>
Exhibit 10.15
PROMISSORY NOTE
$100,000.00 Santa Clara, California
March 6, 1996
FOR VALUE RECEIVED, the undersigned ("Obligor") hereby unconditionally
promises to pay to the order of TERAYON CORPORATION, a California corporation
(the "Company"), at its offices in Santa Clara, California, or at such other
place as the Company may designate in writing, in lawful money of the United
States of America and in immediately available funds, the principal sum of One
Hundred Thousand Dollars ($100,000.00) on the terms and conditions set forth
more fully herein.
1. PRINCIPAL REPAYMENT. The outstanding principal amount under this
Promissory Note (the "Note") shall be due and payable in full on the earliest
of: (i) March 6, 2001; (ii) the day on which Obligor ceases to serve as an
employee of the Company; (iii) the day on which the shareholders of the Company
sell substantially all of the Company's outstanding capital stock or the Company
sells substantially all of its assets; or (iv) the day on which the Company
effects an initial public offering of its securities. Such principal amount
shall be payable in cash or, at the option of the Obligor, in Common Stock of
the Company then held by the Obligor at the current fair market value of the
Common Stock of the Company as determined by the Board of Directors of the
Company.
2. INTEREST. No interest shall accrue on this Note.
3. PLEDGE. This Note shall be secured by the Twenty Thousand (20,000)
shares of Common Stock of the Company held by Obligor. If Obligor fails to pay
any of the principal when due, the Company, at its sole option, shall have the
right to make a claim against the Obligor pursuant to the Stock Pledge Agreement
attached as Exhibit A hereto.
4. PREPAYMENT. This Note may be prepaid at any time without penalty.
All money paid toward the satisfaction of this Note shall be applied to the
retirement of the principal.
5. EVENTS OF DEFAULT. The occurrence of any one or more of the following
shall constitute an event of default hereunder ("Event of Default"):
a. Obligor fails to pay any of the principal due under or on this
Note, and such failure shall not have been cured to the Company's satisfaction
within five (5) business days after the Company gives Obligor written notice of
such failure;
b. Obligor shall become insolvent; or admit in writing his inability
to pay his debts as they mature; or make an assignment for the benefit of
creditors; or apply for or consent to the appointment of a receiver, liquidator,
custodian or trustee for it or for a substantial part of his property or
business, or such a receiver, liquidator, custodian or trustee otherwise shall
1.
<PAGE>
be appointed and shall not be discharged within one hundred eighty (180) days
after such appointment; or
c. This Note shall, for any reason other than the indefeasible
payment in full of the obligations of Obligor hereunder, cease to be, or be
asserted by Obligor not to be, a legal, valid and binding obligation of Obligor,
enforceable in accordance with its terms.
6. WAIVER OF DEFAULT. Any Event of Default may be waived only with the
written consent of the Company. Any Event of Default so waived shall be deemed
to have been cured and not to be continuing; but no such waiver shall be deemed
a continuing waiver or shall extend to or affect any subsequent like default or
impair any rights arising therefrom.
7. REMEDIES. Upon the occurrence and continuance of any Event of
Default, the Company may, at its option, do any one or more of the following,
all of which are hereby authorized by Obligor:
a. Declare all or any of the obligations of Obligor under this Note
to be immediately due and payable, and upon such declaration such obligations so
declared due and payable shall immediately become due and payable; and
b. Exercise in addition to all other rights and remedies granted
hereunder, any and all rights and remedies granted under the Stock Pledge
Agreement or otherwise available at law or in equity.
8. RIGHTS AND REMEDIES CUMULATIVE. The Company's rights and remedies
under this Note shall be cumulative. No exercise by the Company of one right or
remedy shall be deemed an election and no delay by the Company shall constitute
a waiver, election or acquiescence by the Company.
9. RENEWAL. This Note may be renewed or extended at the option of the
Company.
10. NOTICES. Any notice required or permitted under this Note shall be
given in writing and shall be deemed effectively given (i) upon personal
delivery to the party to be notified or (ii) upon receipt if sent by commercial
overnight courier or by facsimile transmission (with confirmation of receipt) or
by certified or registered mail, return receipt requested. All notices shall be
sent to the address or facsimile number (as the case may be) indicated for such
party below, or at such other address as such party may designate by ten (10)
days advance written notice hereunder to the other parties:
2.
<PAGE>
IF TO OBLIGOR: SHLOMO RAKIB
____________________________________
____________________________________
IF TO THE COMPANY: TERAYON CORPORATION
404 Saratoga Avenue, Suite 201
Santa Clara, CA 95050
Attention: Chief Financial Officer
11. SEVERABILITY. Any provision in this Note that is held to be
inoperative, unenforceable or invalid in any jurisdiction shall, as to that
jurisdiction, be inoperative, unenforceable or invalid without affecting the
remaining provisions in that jurisdiction or the operation, enforceability or
validity of that provision in any other jurisdiction, and to this end the
provisions of this Note are declared to be severable.
12. SUCCESSORS AND ASSIGNS. This Note shall be binding upon Obligor and
upon the successors and assigns, heirs and legal representatives of Obligor and
shall inure to the benefit of the Company's successors and assigns; all
references herein to Obligor and to the Company shall be deemed to include their
successors and assigns, heirs and legal representatives, as applicable.
Obligor's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for Obligor. All references to the
singular shall be deemed to include the plural where the context so requires.
13. GOVERNING LAW. This Note shall be governed by, and construed,
enforced and interpreted in accordance with, the laws of the State of California
as applied to agreements among California residents entered into and to be
performed entirely within California.
OBLIGOR:
____________________________________
SHLOMO RAKIB
Exhibit A - Stock Pledge Agreement
3.
<PAGE>
EXHIBIT A
STOCK PLEDGE AGREEMENT
<PAGE>
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (the "Agreement") is entered into as of March
6, 1996, by and between SHLOMO RAKIB, an individual (the "Pledgor"), and TERAYON
CORPORATION, a California corporation (the "Company").
RECITALS
WHEREAS, Pledgor has issued a promissory note in the amount of One Hundred
Thousand Dollars ($100,000) in favor of the Company (the "Note"); and
WHEREAS, the Company is willing to accept the Note from Pledgor, but only
upon the condition, among others, that Pledgor shall have executed and delivered
to the Company this Pledge Agreement and the Pledged Shares (as defined below).
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants, conditions, representations and warranties contained herein, the
parties hereto do hereby agree as follows:
1. PLEDGE. Pledgor hereby pledges to the Company, and grants to the
Company a first priority security interest in, Twenty Thousand (20,000) shares
of Common Stock owned by Pledgor (the "Pledged Shares") and the certificates
representing such Pledged Shares.
2. SECURITY INTEREST. The foregoing pledge and security interest hereby
granted to the Company are given as security for the complete and faithful
performance, payment, observance and fulfillment of Pledgor's obligations under
the Note (all of which are hereinafter referred to collectively as the
"Liabilities"). The certificates representing the Pledged Shares shall be
delivered to Cooley Godward Castro Huddleson & Tatum as escrow agent (the
"Escrow Agent") to be held by it in escrow pursuant to the terms of the Escrow
Agreement of even date attached hereto as Exhibit A-1. The Pledged Shares shall
be accompanied by a stock assignment separate from certificate, attached hereto
as Exhibit A-2, endorsed in blank, and the books of the Company shall contain a
legend to reflect the pledge of, and the grant to the Company of a security
interest in, the Pledged Shares. From and after the occurrence of an Event of
Default (as defined below), the Company shall have the right, at any time in its
discretion and without notice to Pledgor, to request Escrow Agent to transfer to
or to register in the name of the Company or any of its nominees any or all of
the Pledged Shares.
3. DIVIDENDS AND DISTRIBUTIONS. To the extent Pledgor is entitled to
receive dividends or distributions as a shareholder of the Company, such amounts
shall be paid to Pledgor until such time, if any, as the Company has effectively
exercised its right to request transfer of the Pledged Shares pursuant to
Section 2 above.
1.
<PAGE>
4. EVENT OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default hereunder (any of such occurrences are herein
referred to as an "Event of Default"):
(a) Pledgor fails to pay any amount due the Company under the Note or
this Agreement or Pledgor fails to observe or perform any other of the
covenants, conditions and agreements contained therein or herein;
(b) Any representation or warranty made by Pledgor to the Company in
this Agreement proves untrue in any material respect or is breached; or
(c) Any Event of Default under, and as defined in the Note, shall
occur.
5. MAINTENANCE OF PRIORITY OF SECURITY INTEREST. Pledgor shall not, shall
not attempt to, and shall not permit a third party to assign, pledge,
mortgage, lease, hypothecate or otherwise encumber, sell or otherwise dispose
of the Pledged Shares or suffer or permit to be incurred any liens on or
security interest in such Pledged Shares. In addition, Pledgor agrees that
Pledgor shall defend the Pledged Shares held by Pledgor against the claims and
demands of all parties. Pledgor agrees, at Pledgor's sole cost and expense, to
secure, re-execute, deliver and re-deliver all documents reasonably requested
by the Company to enable the Company to perfect, preserve and protect its
security interest in and on the Pledged Shares, and does hereby authorize the
Company to file and record any such documents for such purposes. In the event
that the Company declares any share dividend, reclassification, readjustment
or makes any other change in its structure, all new, substituted or additional
shares or other securities issued to Pledgor by reason of such change shall be
subject to the security interest of the Company described herein. All
references to the "Pledged Shares" shall include such new, substituted or
additional shares or other securities and immediately upon the issuance of
such new, substituted or additional shares or other securities, Pledgor shall
deliver the certificates representing such shares or other securities to
Escrow Agent, accompanied by a stock power and assignment separate from
certificate (or other comparable assignment instrument in the case of the
issuance of securities other than stock) endorsed in blank.
6. RIGHT TO CONTEST LIEN. Pledgor shall, without demand, notify the
Company in writing within ten (10) days after Pledgor is notified of or
otherwise discovers that a lien, security interest, charge or other encumbrance
of any kind or nature whatsoever has attached to all or any part of the Pledged
Shares (collectively, a "Lien"). Pledgor shall have the right to contest in
good faith, with due diligence and by appropriate proceedings, without cost or
expense to the Company, the validity, applicability or amount of any such Lien;
provided, however, that Pledgor, prior to commencing such contest, shall have
furnished to the Company a bond, guarantee or security, satisfactory in form and
substance to the Company, to the extent that the contesting of such Lien does
not suspend the enforcement of the Lien.
7. TAXES. Pledgor shall pay promptly any and all taxes, assessments,
charges and liens against the Pledged Shares (including any and all interest,
penalties and related provisional fees in connection therewith) (collectively, a
"Tax Lien "); provided, however, that Pledgor shall
2.
<PAGE>
have the right to contest in good faith, with due diligence and by appropriate
proceedings, the validity, amount or imposition of any Tax Lien, if prior to
commencing such contest, Pledgor shall have delivered to the Company a bond,
guarantee or other security, satisfactory in form and substance to the Company.
8. PLEDGOR'S FAILURE TO PAY TAXES AND OTHER ITEMS. If Pledgor fails to
make any payment or do any act required of Pledgor hereunder, then the Company
shall have the right, but not the obligation, without notice to or demand upon
Pledgor, and without releasing Pledgor from any obligation under the Note or
this Agreement, to make or do the same, and to pay, purchase, contest or
compromise any Lien or Tax Lien which in the Company's judgment places its
security interest in the Pledged Shares or Pledgor's title to the Pledged Shares
in jeopardy, and in exercising any such rights, to expend whatever reasonable
amounts the Company in its sole discretion may deem necessary therefor,
including reasonable attorneys' fees and expenses. Any amounts expended by the
Company pursuant to this Section 8 shall be a demand obligation owing by Pledgor
from the date the Company expends such amount until repaid.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PLEDGOR. Pledgor hereby
represents, warrants and covenants to the Company:
(a) Pledgor has the authority to execute, deliver and perform the
covenants and obligations to be performed by Pledgor under this Agreement and to
grant and create in favor of the Company the security interest in the Pledged
Shares granted hereby;
(b) The execution, delivery and performance by Pledgor of this
Agreement and the creation of the security interest in the Pledged Shares does
not violate any provisions of law or violate any provisions of, or result in a
default or acceleration of any obligation under, any agreement or instrument of
any kind or any undertaking, order, decree or judgment to which Pledgor is a
party or by which Pledgor is bound;
(c) The execution, delivery and performance of this Agreement by
Pledgor and the creation of the security interest in the Pledged Shares does not
violate any provisions of, or result in a default or acceleration under, any
agreement or instrument of any kind or any order, decree or judgment to which
Pledgor is a party or by which Pledgor is bound;
(d) No consent, approval or authorization of, or registration or
filing with, any governmental body or authority, or any other person, firm or
entity not a party hereto, is or shall be required as a condition to the valid
execution, delivery, performance or enforceability of this Agreement or as a
condition to the validity of the Company's first and prior security interest in
the Pledged Shares;
(e) This Agreement is the valid obligation of Pledgor, binding and
enforceable against Pledgor in accordance with the terms hereof, and Pledgor is
fully familiar with all the covenants, terms and conditions hereof;
3.
<PAGE>
(f) On the date hereof and at all times hereafter, Pledgor shall
continue to own and hold good title to the Pledged Shares free and clear of all
claims, liens and encumbrances other than the security interest granted to the
Company herein, and Pledgor, at his sole expense, shall defend such title to the
Pledged Shares against the claims and demands of all parties;
(g) The security interest granted to the Company in the Pledged Shares
is and at all times hereafter shall be, a valid, first and prior security
interest, free and clear of all other liens, claims and encumbrances;
(h) There are no subscription warrants or other options exercisable
with respect to the Pledged Shares; and
(i) The Company's security interest in the Pledged Shares is granted
to the Company free and clear of any restrictive stock agreements, stock
redemption agreements, cross purchase agreements, buy-sell agreements or any
other similar agreement (including restrictive stock legends on the share
certificates) which have the effect of limiting or restricting a shareholder's
right or power to transfer or encumber the Pledged Shares.
10. RIGHTS AND REMEDIES UPON DEFAULT.
(a) No remedy herein or in any other documents executed in connection
herewith conferred on or reserved to the Company is intended to be exclusive of
any other remedy or remedies, but each and every such remedy shall be cumulative
and shall be in addition to every other remedy given hereunder, under any other
document now or hereafter existing at law or in equity. No delay or omission to
exercise any right or power shall be construed to be a waiver of any such
default or acquiescence therein, and every such right and power may be exercised
from time to time and as often as may be deemed expedient. No acceptance of any
payment of any kind or nature whatsoever during the continuance of an Event of
Default shall constitute a waiver of such Event of Default. No waiver of an
Event of Default hereunder shall affect or alter (i) this Agreement, and the
same shall continue in full force and effect, or (ii) the rights of the Company
with respect to any other then existing or subsequent Event of Default.
(b) The Company may recover from Pledgor all of its expenses
(including, without limitation, reasonable attorneys' fees and expert witness
fees) incurred in enforcing any of its rights under this Agreement.
11. IRREVOCABLE PROXY. Pledgor does hereby irrevocably constitute and
appoint the Company and the Company's successors and assigns as Pledgor's proxy
with respect to the Pledged Shares, with full power, in the same manner, to the
same extent, and with the same effect as if Pledgor were to do the same:
(a) To attend all meetings of shareholders of the Company held from
the date hereof, and to vote the Pledged Shares at any such meeting in such
manner as the Company shall, in its sole discretion, deem appropriate;
4.
<PAGE>
(b) To consent, in the sole discretion of the Company, to any and all
actions by or with respect to the Company for which the consent of the
shareholders of the Company is or may be necessary or appropriate; and
(c) Without limitation, to do all things which Pledgor can or could do
as a shareholder of the Company giving to the Company full power of
substitution and revocation;
provided, however, that this proxy shall not be exercisable by the Company, and
Pledgor alone shall have the foregoing powers, so long as there is no Event of
Default. This proxy shall terminate at such time as this Agreement is
terminated as provided in Section 17 below. Pledgor hereby revokes any proxy or
proxies heretofore given to any person or persons, and agrees not to give any
other proxy in derogation hereof until such time as this Agreement is terminated
as provided below. Pledgor and the Company hereby specifically agree that the
proxies granted hereunder are coupled with an interest and shall be and remain
irrevocable until this Agreement is terminated as provided below. In
furtherance of the agreements of Pledgor set forth in this Section 11, Pledgor
hereby agrees to deliver to the Company from time to time, Pledgor's proxy in
substitution of the proxy given hereunder.
12. ATTORNEY-IN-FACT. Pledgor hereby appoints the Company as Pledgor's
attorney-in-fact without imposing any obligations on the Company, for the
purpose of executing, delivering, recording or filing any instruments or
documents or performing any other acts that the Company deems appropriate to
perfect and continue the security interest granted hereunder. The power of
attorney granted herein is coupled with an interest and is irrevocable until
this Agreement is terminated as provided below.
13. MISCELLANEOUS.
(a) This Agreement, shall constitute the entire agreement between the
parties hereto with respect to the subject matter hereof and shall supersede all
other prior agreements, written or oral, with respect thereto.
(b) This Agreement shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns; provided, however,
that neither party may assign or transfer its respective rights or obligations
of the other party hereto without the prior written consent of the other party
hereto.
(c) This Agreement may be amended, modified, renewed or extended but
only by a written instrument, executed by both of the parties hereto in the
manner of the execution of this Agreement.
(d) This Agreement shall in all respects be governed by and construed
in accordance with the laws of the State of California as applied to contracts
entered into and to be performed entirely within the State of California.
5.
<PAGE>
(e) All parties hereto shall, from time to time, do and perform such
other and further acts and execute and deliver any and all such other and
further instruments as may be required or reasonably requested by any other
party to establish, maintain and protect the respective rights and remedies of
such other party and to carry out and effect the intents and purposes of this
Agreement.
(f) All documents, agreements, certificates and instruments herein
required shall be in form and substance satisfactory in all respects to the
Company in his sole discretion and shall be provided at the sole cost and
expense of Pledgor.
(g) The representations and warranties hereunder shall survive the
execution hereof and the Company may enforce such representations and warranties
at any time. Pledgor's covenants shall survive the execution hereof and shall
be performed fully and faithfully by Pledgor and at all times.
(h) If any term or provision of this Agreement, or the application
thereof to any circumstance, shall be invalid, illegal or unenforceable to any
extent, such term or provision shall not invalidate or render unenforceable any
other term or provision of this Agreement, or the application of such term or
provision to any other circumstance. To the extent permitted by law, the
parties hereto hereby waive any provision of law that renders any term or
provision hereof invalid or unenforceable in any respect.
(i) Time is of the essence in this Agreement.
(j) Any notice, demand or any other instruments authorized by this
Agreement to be served on or given to a party hereto shall be sufficiently
served or given for all purposes when served upon or given to such party in
accordance with the Note.
(k) Without limiting the generality of any other provision of this
Agreement, in the event litigation is commenced to enforce the terms and
provisions of this Agreement, the prevailing party shall be entitled to an award
for reasonable attorneys' fees and expert witness fees and other court costs
incurred, which award shall be determined by the court.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when so executed and delivered, shall be deemed to
be an original, but all such counterparts shall together constitute but one and
the same instrument.
15. HEADINGS. The headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and shall in no
way restrict or otherwise modify any of the terms or provisions hereof.
16. CONSTRUCTION. All references to the singular shall include the plural
and vice versa and all references to the masculine shall include the neuter or
feminine and vice versa. This Agreement has been reviewed and negotiated by
counsel for each party and no ambiguity
6.
<PAGE>
in this Agreement shall be construed against either party based upon its having
prepared the same.
17. TERMINATION. This Agreement shall terminate upon the payment and
satisfaction of all the Liabilities. Upon receipt of notice of such termination
from Pledgor and the Company, Escrow Agent shall return to Pledgor the
certificates representing the Pledged Shares.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
PLEDGOR:
------------------------------------------------
SHLOMO RAKIB
THE COMPANY:
TERAYON CORPORATION
By:
---------------------------------------------
Title:
------------------------------------------
EXHIBITS
Exhibit A-1 Escrow Agreement
Exhibit A-2 Stock Assignment Separate from Certificate
7.
<PAGE>
EXHIBIT A-1
ESCROW AGREEMENT
8.
<PAGE>
EXHIBIT A-2
STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE
9.
<PAGE>
Exhibit 10.16
STOCK REPURCHASE AGREEMENT
THIS STOCK REPURCHASE AGREEMENT (the "Agreement") is made as of the 16th
day of March, 1995, by and between TERAYON CORPORATION, a California corporation
(the "Corporation"), and ZAKI RAKIB ("Shareholder").
W I T N E S S E T H :
WHEREAS, in connection with the purchase by certain investors of shares of
the Corporation's Series A Preferred Stock, Shareholder desires to grant the
Corporation an option to repurchase certain shares of the Corporation's Common
Stock held by Shareholder.
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. (a) One Million Five Hundred Thousand (1,500,000) shares of the
Corporation's Common Stock held by Shareholder (hereinafter sometimes
collectively referred to as the "Shares") shall be subject to the option set
forth in this paragraph 1 (the "Purchase Option"). In the event Shareholder
shall cease to be employed by the Corporation (including a parent or subsidiary
of the Corporation) at any time prior to the fourth anniversary of the date of
this Agreement (the "Commencement Date") by voluntary resignation or termination
with or without cause, the Corporation shall have the right, at any time within
thirty (30) days after the date Shareholder ceases to be so employed (the
"Employment Termination Date"), to exercise the Purchase Option, which consists
of the right to purchase from the Shareholder or his personal representative, as
the case may be, at a purchase price of Ten Cents ($0.10) per share ("the Option
Price"), up to but not exceeding the number of Shares that have not vested under
the provisions of subparagraph 1(b) below, upon the terms hereinafter set forth.
(b) The Corporation may exercise the Purchase Option as to all or any
portion of the Shares less the number of shares equal to the product of 31,250
multiplied by the number of full months that occurs between the Commencement
Date and the Employment Termination Date.
(c) Nothing in this Agreement shall affect in any manner whatsoever the
right or power of the Corporation, or a parent or subsidiary of the Corporation,
to terminate Shareholder's employment, for any reason, with or without cause.
2. The Purchase Option shall be exercised by written notice signed by an
officer of the Corporation and delivered or mailed as provided in paragraph 14.
The Option Price shall be payable, at the option of the Corporation, in
cancellation of all or a portion of any outstanding indebtedness of Shareholder
to the Corporation or in cash (by check) or both.
3. The Corporation may assign its rights under paragraphs 1 and 2 hereof.
1.
<PAGE>
4. If, from time to time during the term of the Purchase Option:
(i) there is any stock dividend or liquidating dividend of cash and/or
property, stock split, or other change in the character or amount of any of
the outstanding securities of the Corporation; or
(ii) there is any consolidation, merger or sale of all, or
substantially all, of the assets of the Corporation;
then, in such event, any and all new, substituted or additional securities or
other property to which Shareholder is entitled by reason of his ownership of
the Shares shall be immediately subject to the Purchase Option and be included
in the word "Shares" for all purposes of the Purchase Option with the same force
and effect as the Shares subject to the Purchase Option under the terms of
paragraph 1. While the total Option Price shall remain the same after each such
event, the Option Price per Share upon exercise of the Purchase Option shall be
appropriately adjusted.
5. The Purchase Option shall terminate at the earlier of (a) March 15,
1999 or (b) if there is a Corporate Change, then as of the day immediately
preceding the date of such Corporate Change. For purposes of this paragraph 5,
"Corporate Change" shall mean an event in which (a) the Company shall not be the
surviving corporation in any merger or consolidation (or survives only as a
subsidiary of another entity), (b) the Company sells all or substantially all of
its assets, (c) any person or entity, including a "group" as determined in
accordance with Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (together with all persons or entities controlling, controlled by or
under common control with such person or entity), acquires or gains ownership or
control of (including, without limitation, power to vote) more than 50% of the
outstanding shares of voting capital stock of the Company, (other than shares
newly issued by the Company in a financing), (d) as a result of, or in
connection with any transaction, the persons who were directors of the Company
before such transaction shall cease to constitute a majority of the board of
directors of the Company or any successor to the Company or (e) the Company is
dissolved and liquidated.
6. All certificates representing any Shares subject to the provisions of
this Agreement shall have endorsed thereon the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
OPTION SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED
HOLDER, OR THE PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THIS CORPORATION. ANY TRANSFER OR ATTEMPTED TRANSFER OF ANY
SHARES SUBJECT TO SUCH OPTION IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT
OF THE ISSUER OF THESE SHARES."
(b) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). THEY
2.
<PAGE>
MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED UNLESS THE
SECURITIES ARE REGISTERED UNDER THE ACT OR AN EXEMPTION THEREFROM IS AVAILABLE."
(c) Any legend required to be placed thereon by the Corporation's
Bylaws.
(d) Any legend required to be placed thereon by appropriate Blue Sky
laws.
7. As security for his faithful performance of the terms of this Agreement
and to insure that the Shares will be available for delivery upon exercise of
the Purchase Option as herein provided, the Shareholder agrees to deliver to and
deposit with Cooley Godward Castro Huddleson & Tatum, counsel to the Corporation
("Escrow Agent"), as escrow agent in this transaction, two Stock Assignments
duly endorsed (with date and number of shares blank) substantially in the form
of Exhibit A attached hereto, together with the certificate or certificates
evidencing the Shares; said documents are to be held by the Escrow Agent and
delivered by the Escrow Agent pursuant to the Joint Escrow Instructions of the
Corporation and Shareholder substantially in the form of Exhibit B attached
hereto and incorporated by this reference, which instructions shall also be
delivered to the Escrow Agent at the closing hereunder.
8. Shareholder shall not sell or transfer any Shares then subject to the
Purchase Option. Without in any way limiting the foregoing, Shareholder further
agrees that he shall in no event make any disposition of all or any portion of
the Shares unless and until:
(i) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with said registration statement; or
(ii) (a) He shall have notified the Corporation of the proposed
disposition and shall have furnished the Corporation with a detailed statement
of the circumstances surrounding the proposed disposition, (b) he shall have
furnished the Corporation with an opinion of his own counsel to the effect that
such disposition will not require registration of such shares under the Act, and
(c) such opinion of his counsel shall have been concurred in by counsel for the
Corporation, such concurrence not to be unreasonably withheld, and the
Corporation shall have advised him of such concurrence.
9. The Corporation shall not be required (i) to transfer on its books any
Shares that shall have been sold or transferred in violation of any of the
provisions set forth in this Agreement or (ii) to treat as owner of such shares
or to accord the right to vote as such owner or to pay dividends to any
transferee to whom such shares shall have been so transferred.
10. Subject to the provisions of paragraph 7 above, Shareholder shall,
during the term of this Agreement, exercise all rights and privileges of a
shareholder of the Corporation with respect to the Shares deposited in said
escrow.
3.
<PAGE>
11. The Shareholder hereby agrees that, if so requested by the Corporation
and the underwriters, Shareholder shall not sell or otherwise transfer or
dispose of (other than to donees who agree to be similarly bound) any Common
Stock of the Corporation held by him at any time during the 180-day period
following the effective date of the first registration statement of the
Corporation covering Common Stock (or other securities) to be sold on its behalf
in an underwritten public offering, except Common Stock included in such
registration; provided, however, that all officers and directors of the
Corporation who hold securities of the Corporation or options to acquire
securities of the Corporation enter into similar agreements.
In order to enforce the foregoing covenant, the Corporation may impose
stop-transfer instructions with respect to the Common Stock held by the
Shareholder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
12. The parties agree to execute such further instruments and to take such
further action as may reasonably be necessary to carry out the intent of this
Agreement.
13. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or delivery by
express courier, or four days after deposit in the United States Post Office, by
registered or certified mail with postage and fees prepaid, addressed to the
other party hereto at its address hereinafter shown below its signature or at
such other address as such party may designate by ten days' advance written
notice to the other party hereto.
14. This Agreement shall be governed by the laws of the State of
California and interpreted and determined in accordance with the laws of the
State of California, as such laws are applied by California courts to contracts
made and to be performed entirely in California by residents of that state.
15. This Agreement shall inure to the benefit of the successors and
assigns of the Corporation and, subject to the restrictions on transfer herein
set forth, shall be binding upon the Shareholder, his heirs, executors,
administrators, successors and assigns.
16. This Agreement, together with the Exhibits hereto, constitutes the
entire, final and exclusive statement of the agreement of the parties with
respect to the subject matter hereof.
4.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SHAREHOLDER: TERAYON CORPORATION:
__________________________________ By: _________________________________
ZAKI RAKIB SHLOMO RAKIB, President
Address: _________________________ Address: 404 Saratoga Avenue,
__________________________________ Suite 201
__________________________________ Santa Clara, CA 95050
EXHIBIT A Assignment
EXHIBIT B Escrow Instructions
5.
<PAGE>
EXHIBIT A
STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, Zaki Rakib hereby sells, assigns and transfers unto
TERAYON CORPORATION, a California corporation (the "Company"), pursuant to the
Purchase Option under that certain Stock Repurchase Agreement, dated March 16,
1995, by and between the undersigned and the Company (the "Agreement"),
_______________ (________) shares of Common Stock of the Company standing in the
undersigned's name on the books of the Company represented by Certificate No(s).
_______ and does hereby irrevocably constitute and appoint the Company's
Secretary attorney to transfer said stock on the books of the Company with full
power of substitution in the premises. This Assignment may be used only in
accordance with and subject to the terms and conditions of the Agreement, in
connection with the repurchase of shares of Common Stock issued to the
undersigned pursuant to the Agreement, and only to the extent that such shares
remain subject to the Company's Purchase Option under the Agreement.
Dated: __________________________
__________________________________
ZAKI RAKIB
<PAGE>
EXHIBIT B
JOINT ESCROW INSTRUCTIONS
Cooley Godward Castro
Huddleson & Tatum
One Maritime Plaza, 20th Floor
San Francisco, CA 94111-3580
Dear Sir or Madam:
As Escrow Agent for both TERAYON CORPORATION, a California corporation
("Corporation"), and the undersigned holder of stock of the Corporation
("Shareholder"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Stock Repurchase
Agreement ("Agreement"), dated March 16, 1995, to which a copy of these Joint
Escrow Instructions is attached as Exhibit B, in accordance with the following
instructions:
1. In the event the Corporation or an assignee shall elect to exercise
the Purchase Option set forth in the Agreement, the Corporation or its assignee
will give to Shareholder and you a written notice specifying the number of
shares of stock to be purchased, the purchase price, and the time for a closing
hereunder at the principal office of the Corporation. Shareholder and the
Corporation hereby irrevocably authorize and direct you to close the transaction
contemplated by such notice in accordance with the terms of said notice.
2. At the closing you are directed (a) to date any stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Corporation against the
simultaneous delivery to you of evidence of payment to Shareholder of the
purchase price of the number of shares of stock being purchased pursuant to the
exercise of the Purchase Option.
3. Shareholder irrevocably authorizes the Corporation to deposit with you
any certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as specified in the Agreement.
Shareholder does hereby irrevocably constitute and appoint you as his attorney-
in-fact and agent for the term of this escrow to execute with respect to such
securities and other property all documents of assignment and/or transfer and
all stock certificates necessary or appropriate to make all securities
negotiable and complete any transaction herein contemplated.
4. This escrow shall terminate upon expiration or exercise in full of the
Purchase Option, whichever occurs first.
1.
<PAGE>
5. If at the time of termination of this escrow you should have in your
possession any documents, securities or other property belonging to Shareholder,
you shall deliver all of same to any pledgee entitled thereto or, if none, to
Shareholder and shall be discharged of all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties or
their assignees. You shall not be personally liable for any act you may do or
omit to do hereunder as Escrow Agent or as attorney-in-fact for Shareholder
while acting in good faith and any act done or omitted by you pursuant to the
advice of your own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree of any court,
you shall not be liable to any of the parties hereto or to any other person,
firm or corporation by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under any
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall resign by written notice to each party. In the event of any such
termination, the Corporation may appoint any officer, assistant officer or other
representative of the Corporation as successor Escrow Agent and Shareholder
hereby confirms the appointment of such successor or successors as his attorney-
in-fact and agent to the full extent of your appointment.
12. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
13. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities, you
may (but are not obligated to) retain in your possession without liability to
anyone all or any part of said securities until
2.
<PAGE>
such dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
14. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
any United States Post Box, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties hereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days' written notice to each of the other parties hereto:
CORPORATION: TERAYON CORPORATION
404 Saratoga Avenue, Suite 201
Santa Clara, CA 95050
SHAREHOLDER: ZAKI RAKIB
________________________________
________________________________
ESCROW AGENT: Cooley Godward Castro
Huddleson & Tatum
One Maritime Plaza, 20th Floor
San Francisco, CA 94111-3580
Attn: Karyn R. Smith
15. By signing these Joint Escrow Instructions you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
16. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns. It is
understood and agreed that references to "you" or "your" herein refer to the
original Escrow agent and to any and all successor Escrow Agents. It is
understood and agreed that the Corporation may at any time or
3.
<PAGE>
from time to time assign its rights under the Agreement and these Joint Escrow
Instructions in whole or in part.
Very truly yours,
TERAYON CORPORATION
By: ___________________________________
Title: ________________________________
SHAREHOLDER:
_______________________________________
ZAKI RAKIB
ESCROW AGENT:
COOLEY GODWARD CASTRO
HUDDLESON & TATUM
By: _________________________________
Name: _______________________________
Title: ______________________________
4.
<PAGE>
Exhibit 10.17
STOCK REPURCHASE AGREEMENT
THIS STOCK REPURCHASE AGREEMENT (the "Agreement") is made as of the 16th
day of March, 1995, by and between TERAYON CORPORATION, a California corporation
(the "Corporation"), and SHLOMO RAKIB ("Shareholder").
W I T N E S S E T H :
WHEREAS, in connection with the purchase by certain investors of shares of
the Corporation's Series A Preferred Stock, Shareholder desires to grant the
Corporation an option to repurchase certain shares of the Corporation's Common
Stock held by Shareholder.
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. (a) One Million Five Hundred Thousand (1,500,000) shares of the
Corporation's Common Stock held by Shareholder (hereinafter sometimes
collectively referred to as the "Shares") shall be subject to the option set
forth in this paragraph 1 (the "Purchase Option"). In the event Shareholder
shall cease to be employed by the Corporation (including a parent or subsidiary
of the Corporation) at any time prior to the fourth anniversary of the date of
this Agreement (the "Commencement Date") by voluntary resignation or involuntary
termination with or without cause, the Corporation shall have the right, at any
time within thirty (30) days after the date Shareholder ceases to be so employed
(the "Employment Termination Date"), to exercise the Purchase Option, which
consists of the right to purchase from the Shareholder or his personal
representative, as the case may be, at a purchase price of Ten Cents ($0.10) per
share ("the Option Price"), up to but not exceeding the number of Shares that
have not vested under the provisions of subparagraph 1(b) below, upon the terms
hereinafter set forth.
(b) The Corporation may exercise the Purchase Option as to all or any
portion of the Shares less the number of shares equal to the product of 31,250
multiplied by the number of full months that occurs between the Commencement
Date and the Employment Termination Date.
(c) Nothing in this Agreement shall affect in any manner whatsoever the
right or power of the Corporation, or a parent or subsidiary of the Corporation,
to terminate Shareholder's employment, for any reason, with or without cause.
2. The Purchase Option shall be exercised by written notice signed by an
officer of the Corporation and delivered or mailed as provided in paragraph 14.
The Option Price shall be payable, at the option of the Corporation, in
cancellation of all or a portion of any outstanding indebtedness of Shareholder
to the Corporation or in cash (by check) or both.
3. The Corporation may assign its rights under paragraphs 1 and 2 hereof.
1.
<PAGE>
4. If, from time to time during the term of the Purchase Option:
(i) there is any stock dividend or liquidating dividend of cash and/or
property, stock split, or other change in the character or amount of any of
the outstanding securities of the Corporation; or
(ii) there is any consolidation, merger or sale of all, or
substantially all, of the assets of the Corporation;
then, in such event, any and all new, substituted or additional securities or
other property to which Shareholder is entitled by reason of his ownership of
the Shares shall be immediately subject to the Purchase Option and be included
in the word "Shares" for all purposes of the Purchase Option with the same force
and effect as the Shares subject to the Purchase Option under the terms of
paragraph 1. While the total Option Price shall remain the same after each such
event, the Option Price per Share upon exercise of the Purchase Option shall be
appropriately adjusted.
5. The Purchase Option shall terminate at the earlier of (a) March 15,
1999 or (b) if there is a Corporate Change, then as of the day immediately
preceding the date of such Corporate Change. For purposes of this paragraph 6,
"Corporate Change" shall mean an event in which (a) the Company shall not be the
surviving corporation in any merger or consolidation (or survives only as a
subsidiary of another entity), (b) the Company sells all or substantially all of
its assets, (c) any person or entity, including a "group" as determined in
accordance with Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (together with all persons or entities controlling, controlled by or
under common control with such person or entity), acquires or gains ownership or
control of (including, without limitation, power to vote) more than 50% of the
outstanding shares of voting capital stock of the Company (other than shares
newly issued by the Company in a financing), (d) as a result of, or in
connection with any transaction, the persons who were directors of the Company
before such transaction shall cease to constitute a majority of the board of
directors of the Company or any successor to the Company or (e) the Company is
dissolved and liquidated.
6. All certificates representing any Shares subject to the provisions of
this Agreement shall have endorsed thereon the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
OPTION SET FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED
HOLDER, OR THE PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THIS CORPORATION. ANY TRANSFER OR ATTEMPTED TRANSFER OF ANY
SHARES SUBJECT TO SUCH OPTION IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT
OF THE ISSUER OF THESE SHARES."
(b) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). THEY
2.
<PAGE>
MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED UNLESS THE
SECURITIES ARE REGISTERED UNDER THE ACT OR AN EXEMPTION THEREFROM IS AVAILABLE."
(c) Any legend required to be placed thereon by the Corporation's
Bylaws.
(d) Any legend required to be placed thereon by appropriate Blue Sky
laws.
7. As security for his faithful performance of the terms of this Agreement
and to insure that the Shares will be available for delivery upon exercise of
the Purchase Option as herein provided, the Shareholder agrees to deliver to and
deposit with Cooley Godward Castro Huddleson & Tatum, counsel to the Corporation
("Escrow Agent"), as escrow agent in this transaction, two Stock Assignments
duly endorsed (with date and number of shares blank) substantially in the form
of Exhibit A attached hereto, together with the certificate or certificates
evidencing the Shares; said documents are to be held by the Escrow Agent and
delivered by the Escrow Agent pursuant to the Joint Escrow Instructions of the
Corporation and Shareholder substantially in the form of Exhibit B attached
hereto and incorporated by this reference, which instructions shall also be
delivered to the Escrow Agent at the closing hereunder.
8. Shareholder shall not sell or transfer any Shares then subject to the
Purchase Option. Without in any way limiting the foregoing, Shareholder further
agrees that he shall in no event make any disposition of all or any portion of
the Shares unless and until:
(i) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with said registration statement; or
(ii) (a) He shall have notified the Corporation of the proposed
disposition and shall have furnished the Corporation with a detailed statement
of the circumstances surrounding the proposed disposition, (b) he shall have
furnished the Corporation with an opinion of his own counsel to the effect that
such disposition will not require registration of such shares under the Act, and
(c) such opinion of his counsel shall have been concurred in by counsel for the
Corporation, such concurrence not to be unreasonably withheld, and the
Corporation shall have advised him of such concurrence.
9. The Corporation shall not be required (i) to transfer on its books any
Shares that shall have been sold or transferred in violation of any of the
provisions set forth in this Agreement or (ii) to treat as owner of such shares
or to accord the right to vote as such owner or to pay dividends to any
transferee to whom such shares shall have been so transferred.
10. Subject to the provisions of paragraph 7 above, Shareholder shall,
during the term of this Agreement, exercise all rights and privileges of a
shareholder of the Corporation with respect to the Shares deposited in said
escrow.
3.
<PAGE>
11. The Shareholder hereby agrees that, if so requested by the Corporation
and the underwriters, Shareholder shall not sell or otherwise transfer or
dispose of (other than to donees who agree to be similarly bound) any Common
Stock of the Corporation held by him at any time during the 180-day period
following the effective date of the first registration statement of the
Corporation covering Common Stock (or other securities) to be sold on its behalf
in an underwritten public offering, except Common Stock included in such
registration; provided, however, that all officers and directors of the
Corporation who hold securities of the Corporation or options to acquire
securities of the Corporation enter into similar agreements.
In order to enforce the foregoing covenant, the Corporation may impose
stop-transfer instructions with respect to the Common Stock held by the
Shareholder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
12. The parties agree to execute such further instruments and to take such
further action as may reasonably be necessary to carry out the intent of this
Agreement.
13. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or delivery by
express courier, or four days after deposit in the United States Post Office, by
registered or certified mail with postage and fees prepaid, addressed to the
other party hereto at its address hereinafter shown below its signature or at
such other address as such party may designate by ten days' advance written
notice to the other party hereto.
14. This Agreement shall be governed by the laws of the State of
California and interpreted and determined in accordance with the laws of the
State of California, as such laws are applied by California courts to contracts
made and to be performed entirely in California by residents of that state.
15. This Agreement shall inure to the benefit of the successors and
assigns of the Corporation and, subject to the restrictions on transfer herein
set forth, shall be binding upon the Shareholder, his heirs, executors,
administrators, successors and assigns.
16. This Agreement, together with the Exhibits hereto, constitutes the
entire, final and exclusive statement of the agreement of the parties with
respect to the subject matter hereof.
4.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SHAREHOLDER: TERAYON CORPORATION:
__________________________________ By: _________________________________
SHLOMO RAKIB ZAKI RAKIB, Chief Executive Officer
Address: _________________________ Address: 404 Saratoga Avenue,
__________________________________ Suite 201
__________________________________ Santa Clara, CA 95050
EXHIBIT A Assignment
EXHIBIT B Escrow Instructions
5.
<PAGE>
EXHIBIT A
STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, Shlomo Rakib hereby sells, assigns and transfers unto
TERAYON CORPORATION, a California corporation (the "Company"), pursuant to the
Purchase Option under that certain Stock Repurchase Agreement, dated March 16,
1995, by and between the undersigned and the Company (the "Agreement"),
_______________ (________) shares of Common Stock of the Company standing in the
undersigned's name on the books of the Company represented by Certificate No(s).
_______ and does hereby irrevocably constitute and appoint the Company's
Secretary to transfer said stock on the books of the Company with full power of
substitution in the premises. This Assignment may be used only in accordance
with and subject to the terms and conditions of the Agreement, in connection
with the repurchase of shares of Common Stock issued to the undersigned pursuant
to the Agreement, and only to the extent that such shares remain subject to the
Company's Purchase Option under the Agreement.
Dated: ____________________
____________________________________________
SHLOMO RAKIB
<PAGE>
EXHIBIT B
JOINT ESCROW INSTRUCTIONS
Cooley Godward Castro
Huddleson & Tatum
One Maritime Plaza, 20th Floor
San Francisco, CA 94111-3580
Dear Sir or Madam:
As Escrow Agent for both TERAYON CORPORATION, a California corporation
("Corporation"), and the undersigned holder of stock of the Corporation
("Shareholder"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Stock Repurchase
Agreement ("Agreement"), dated March 16, 1995, to which a copy of these Joint
Escrow Instructions is attached as Exhibit B, in accordance with the following
instructions:
1. In the event the Corporation or an assignee shall elect to exercise
the Purchase Option set forth in the Agreement, the Corporation or its assignee
will give to Shareholder and you a written notice specifying the number of
shares of stock to be purchased, the purchase price, and the time for a closing
hereunder at the principal office of the Corporation. Shareholder and the
Corporation hereby irrevocably authorize and direct you to close the transaction
contemplated by such notice in accordance with the terms of said notice.
2. At the closing you are directed (a) to date any stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Corporation against the
simultaneous delivery to you of evidence of payment to Shareholder of the
purchase price of the number of shares of stock being purchased pursuant to the
exercise of the Purchase Option.
3. Shareholder irrevocably authorizes the Corporation to deposit with you
any certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as specified in the Agreement.
Shareholder does hereby irrevocably constitute and appoint you as his attorney-
in-fact and agent for the term of this escrow to execute with respect to such
securities and other property all documents of assignment and/or transfer and
all stock certificates necessary or appropriate to make all securities
negotiable and complete any transaction herein contemplated.
4. This escrow shall terminate upon expiration or exercise in full of the
Purchase Option, whichever occurs first.
1.
<PAGE>
5. If at the time of termination of this escrow you should have in your
possession any documents, securities or other property belonging to Shareholder,
you shall deliver all of same to any pledgee entitled thereto or, if none, to
Shareholder and shall be discharged of all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties or
their assignees. You shall not be personally liable for any act you may do or
omit to do hereunder as Escrow Agent or as attorney-in-fact for Shareholder
while acting in good faith and any act done or omitted by you pursuant to the
advice of your own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree of any court,
you shall not be liable to any of the parties hereto or to any other person,
firm or corporation by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under any
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall resign by written notice to each party. In the event of any such
termination, the Corporation may appoint any officer, assistant officer or other
representative of the Corporation as successor Escrow Agent and Shareholder
hereby confirms the appointment of such successor or successors as his attorney-
in-fact and agent to the full extent of your appointment.
12. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
13. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities, you
may (but are not obligated to) retain in your possession without liability to
anyone all or any part of said securities until
2.
<PAGE>
such dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
14. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
any United States Post Box, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties hereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days' written notice to each of the other parties hereto:
CORPORATION: TERAYON CORPORATION
404 Saratoga Avenue, Suite 201
Santa Clara, CA 95050
SHAREHOLDER: SHLOMO RAKIB
_________________________________
_________________________________
_________________________________
ESCROW AGENT: Cooley Godward Castro
Huddleson & Tatum
One Maritime Plaza, 20th Floor
San Francisco, CA 94111-3580
Attn: Karyn R. Smith
15. By signing these Joint Escrow Instructions you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
16. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns. It is
understood and agreed that references to "you" or "your" herein refer to the
original Escrow agent and to any and all successor Escrow Agents. It is
understood and agreed that the Corporation may at any time or
3.
<PAGE>
from time to time assign its rights under the Agreement and these Joint Escrow
Instructions in whole or in part.
Very truly yours,
TERAYON CORPORATION
By: ___________________________________
Title: ________________________________
SHAREHOLDER:
_______________________________________
SHLOMO RAKIB
ESCROW AGENT:
COOLEY GODWARD CASTRO
HUDDLESON & TATUM
By: _________________________________
Name: _______________________________
Title: ______________________________
4.
<PAGE>
Exhibit 10.18
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT (THE "AGREEMENT") is made
as of the 16 day of June, 1995, by and between TERAYON CORPORATION, a
California corporation (the "Corporation"), and LEWIS SOLOMON, an individual
("Purchaser").
WITNESSETH:
WHEREAS, the Corporation desires to issue and sell, and the Purchaser
desires to purchase, Series A Preferred Stock of the Corporation as herein
described, on the terms and conditions hereinafter set forth.
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. Purchaser hereby agrees to purchase from the Corporation and the
Corporation agrees to sell to the Purchaser Fifty Thousand (50,000) shares of
the Corporation's Series A Preferred Stock (the "Stock") at $0.9545 per share
for an aggregate purchase price of Forty-Seven Thousand Seven Hundred and
Twenty-Five Dollars ($47,725.00) (the "Purchase Price"). Payment of the
Purchase Price shall be made by delivery to the Company of a Promissory Note
(the "Promissory Note"), substantially in the form of Exhibit A attached hereto,
secured by a Pledge Agreement (the "Pledge Agreement") substantially in the form
of Exhibit B attached hereto.
2. Purchaser acknowledges that he is aware that the Stock to be issued to
him by the Corporation pursuant to this Agreement has not been registered under
the Securities Act of 1933, as amended (the "Act"), and that the Stock is deemed
to constitute "restricted securities" under Rule 144 promulgated under the Act.
In this connection, Purchaser warrants and represents to the Corporation that
Purchaser is purchasing the Stock for Purchaser's own account and Purchaser has
no present intention of distributing or selling said stock except as permitted
under the Act and applicable state blue sky laws. Purchaser further warrants
and represents that Purchaser has either (i) preexisting personal or business
relationships with the Corporation or any of its officers, directors or
controlling persons, or (ii) the capacity to protect his own interests in
connection with the purchase of the Stock by virtue of the business or financial
expertise of any professional advisors to the Purchaser who are unaffiliated
with and who are not compensated by the Corporation or any of its affiliates,
directly or indirectly. Purchaser further acknowledges that the exemption from
registration under Rule 144 will not be available for at least three years from
the date of sale of the Stock unless after at least two years from the date of
sale (i) a public trading market then exists for the Series A Preferred Stock
(or the Common Stock into which the Series A Preferred Stock is convertible) of
the Corporation, (ii) adequate information concerning the Corporation is then
available to the public, and (iii) other terms and conditions of Rule 144 are
complied with; and that any sale of the Stock may be made only in limited
amounts in accordance with such terms and conditions.
1.
<PAGE>
3. All certificates representing any shares of Stock subject to the
provisions of this Agreement shall have endorsed thereon the following legends:
(a) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY
MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED UNLESS THE
SECURITIES ARE REGISTERED UNDER THE ACT OR AN EXEMPTION THEREFROM IS
AVAILABLE.
(b) Any legend required to be placed thereon by the Corporation's
Bylaws.
(c) Any legend required to be placed thereon by appropriate Blue Sky
officials.
4. Subject to the provisions of the Promissory Note and the Pledge
Agreement, Purchaser shall, during the term of this Agreement, exercise all
rights and privileges of a shareholder of the Corporation with respect to the
Stock deposited in said escrow.
5. Purchaser hereby agrees that, if so requested by the Corporation,
Purchaser shall not sell or otherwise transfer (other than to donees who agree
to be similarly bound) any of the Stock or other securities of the Corporation
during the one hundred eighty (180) day period following the effective date of a
registration statement of the Corporation filed under the Act; provided that
such restriction shall only apply to the first two registration statements of
the Corporation to become effective which include securities to be sold on
behalf of the Corporation to the public in an underwritten offering; and
provided, further, that all officers and directors of the Corporation enter into
similar agreements.
In order to enforce the foregoing covenant, the Corporation may impose
stop-transfer instructions with respect to the Stock (or Common Stock issued
upon conversion of the Stock) held by Purchaser until the end of such period.
6. The parties agree to execute such further instruments and to take such
further action as may reasonably be necessary to carry out the intent of this
Agreement.
7. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or delivery by
express courier, or four days after deposit in the United States Post Office, by
registered or certified mail with postage and fees prepaid, addressed to the
other party hereto at its address hereinafter shown below its signature or at
such other address as such party may designate by ten days' advance written
notice to the other party hereto.
8. This Agreement shall be governed by the laws of the State of
California and interpreted and determined in accordance with the laws of the
State of California, as such laws are applied by California courts to contracts
made and to be performed entirely in California by residents of that state.
2.
<PAGE>
9. This Agreement shall inure to the benefit of the successors and assigns
of the Corporation and, subject to the restrictions on transfer herein set
forth, shall be binding upon the Purchaser, his heirs, executors,
administrators, successors and assigns.
10. This Agreement, together with the Exhibits hereto, constitutes the
entire, final and exclusive statement of the agreement of the parties with
respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PURCHASER: TERAYON CORPORATION:
________________________________ By __________________________________
LEWIS SOLOMON Zaki Rakib
Chief Executive Officer
Address: Address:
G&L Investments 404 Saratoga Avenue
144 Nassau Boulevard Suite 201
West Hampstead, NY 11552 Santa Clara, CA 95050
Exhibit A Promissory Note
Exhibit B Stock Pledge Agreement
Exhibit B-1 Escrow Agreement
Exhibit B-2 Assignment Separate From Certificate
3.
<PAGE>
Exhibit 10.19
EXHIBIT A
THIS PROMISSORY NOTE IS SUBJECT TO THE TERMS AND CONDITIONS OF THAT CERTAIN
SERIES A PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF JUNE 16, 1995
BETWEEN OBLIGOR AND THE COMPANY.
PROMISSORY NOTE
$47,725.00 Santa Clara, California
June 16, 1995
FOR VALUE RECEIVED pursuant to that certain Series A Preferred Stock
Purchase Agreement dated June 16, 1995 (the "Agreement"), by and among LEWIS
SOLOMON, an individual (the "Obligor") and TERAYON CORPORATION, a California
corporation (the "Company"), Obligor hereby unconditionally promises to pay to
the order of the Company, at its offices in Santa Clara, California, or at such
other place as the Company may designate in writing, in lawful money of the
United States of America and in immediately available funds, the principal sum
of Forty-Seven Thousand Seven Hundred Twenty-Five Dollars ($47,725.00) together
with interest accrued from the date hereof on the unpaid principal at the rate
of 10.00% per annum (the "Rate"), on the terms and conditions set forth more
fully herein.
This promissory note (the "Note") is the Promissory Note referred to in and
executed and delivered pursuant to Paragraph 1 of the Agreement. Capitalized
words and terms used but not defined herein shall have their respective meanings
as set forth in the Agreement.
1. PRINCIPAL REPAYMENT. The outstanding principal amount hereunder shall
be due and payable in full on the earlier of: (i) June 16, 2000; or (ii) the
thirtieth (30th) day following the day on which Obligor ceases to serve as a
member of the Company's Board of Directors.
2. INTEREST. Interest shall be payable annually in arrears and shall be
calculated on the basis of a three hundred sixty-five (365) day year for the
actual number of days elapsed. In the event that Obligor should fail to pay any
interest due under or on this Note of such amount, in addition to such other
rights the Company may have, such amount due shall accrue additional interest at
the "prime rate" of interest announced from time to time by Bank of America NT &
SA (or its successor), plus four percent (4%), per annum until such amount has
been paid in full.
3. PLEDGE. This Note shall be secured by the Fifty Thousand (50,000)
shares of Series A Preferred Stock of the Company to be purchased by Obligor
pursuant to the Agreement. If Obligor fails to pay any of the principal and
accrued interest when due, the
1.
<PAGE>
Company, at its sole option, shall have the right to make a claim against the
Obligor pursuant to the Stock Pledge Agreement attached as Exhibit B to the
Agreement.
4. PREPAYMENT. This Note may be prepaid at any time without penalty.
All money paid toward the satisfaction of this Note shall be applied first to
the payment of interest as required hereunder and then to the retirement of the
principal.
5. EVENTS OF DEFAULT. The occurrence of any one or more of the following
shall constitute an event of default hereunder ("Event of Default"):
a. Obligor fails to pay any installment of principal or interest due
under or on this Note on the Payment Date of such amount whether at stated
maturity, acceleration or otherwise, and such failure shall not have been cured
the Company's satisfaction within five (5) business days after the Company gives
Obligor written notice of such failure; or
b. Obligor shall become insolvent; or admit in writing his inability
to pay his debts as they mature; or make an assignment for the benefit of
creditors; or apply for or consent to the appointment of a receiver, liquidator,
custodian or trustee for it or for a substantial part of his property or
business, or such a receiver, liquidator, custodian or trustee otherwise shall
be appointed and shall not be discharged within one hundred eighty (180) days
after such appointment.
c. This Note shall, for any reason other than the indefeasible
payment in full of the obligations of Obligor hereunder, cease to be, or be
asserted by Obligor not to be, a legal, valid and binding obligation of Obligor,
enforceable in accordance with its terms.
6. WAIVER OF DEFAULT. Any Event of Default may be waived only with the
written consent of the Company. Any Event of Default so waived shall be deemed
to have been cured and not to be continuing; but no such waiver shall be deemed
a continuing waiver or shall extend to or affect any subsequent like default or
impair any rights arising therefrom.
7. REMEDIES. Upon the occurrence and continuance of any Event of
Default, the Company may, at its option, do any one or more of the following,
all of which are hereby authorized by Obligor:
a. Declare all or any of the obligations of Obligor under this Note
to be immediately due and payable, and upon such declaration such obligations so
declared due and payable shall immediately become due and payable; and
b. Exercise in addition to all other rights and remedies granted
hereunder, any and all rights and remedies granted under the Stock Pledge
Agreement or otherwise available at law or in equity.
8. RIGHTS AND REMEDIES CUMULATIVE. The Company's rights and remedies
under this Note shall be cumulative. No exercise by the Company of one right or
remedy shall be
2.
<PAGE>
deemed an election and no delay by the Company shall constitute a waiver,
election or acquiescence by the Company.
9. NOTICES. Any notice required or permitted under this Note shall be
given in writing and shall be deemed effectively given (i) upon personal
delivery to the party to be notified or (ii) upon receipt if sent by commercial
overnight courier or by facsimile transmission (with confirmation of receipt) or
by certified or registered mail, return receipt requested. All notices shall be
sent to the address or facsimile number (as the case may be) indicated for such
party below, or at such other address as such party may designate by ten (10)
days advance written notice hereunder to the other parties:
IF TO OBLIGOR: LEWIS SOLOMON
G&L Investments
144 Nassau Boulevard
West Hampstead, NY 11552
IF TO THE COMPANY: TERAYON CORPORATION
404 Saratoga Avenue
Suite 201
Santa Clara, CA 95050
Attention: Chief Financial Officer
10. SEVERABILITY. Any provision in this Note that is held to be
inoperative, unenforceable or invalid in any jurisdiction shall, as to that
jurisdiction, be inoperative, unenforceable or invalid without affecting the
remaining provisions in that jurisdiction or the operation, enforceability or
validity of that provision in any other jurisdiction, and to this end the
provisions of this Note are declared to be severable.
11. SUCCESSORS AND ASSIGNS. This Note shall be binding upon Obligor and
upon the successors and assigns, heirs and legal representatives of Obligor and
shall inure to the benefit of the Company's successors and assigns; all
references herein to Obligor and to the Company shall be deemed to include their
successors and assigns, heirs and legal representatives, as applicable.
Obligor's successors and assigns shall include, without limitation, a receiver,
trustee or debtor in possession of or for Obligor. All references to the
singular shall be deemed to include the plural where the context so requires.
12. GOVERNING LAW. This Note shall be governed by, and construed,
enforced and interpreted in accordance with, the laws of the State of California
as applied to agreements among California residents entered into and to be
performed entirely within California.
OBLIGOR:
____________________________________
LEWIS SOLOMON
3.
<PAGE>
Exhibit 10.20
EXHIBIT B
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (the "Agreement") is entered into as of June
16, 1995, by and between LEWIS SOLOMON, an individual (the "Pledgor"), and
TERAYON CORPORATION, a California corporation (the "Company").
RECITALS
WHEREAS, pursuant to that certain Series A Preferred Stock Purchase
Agreement dated as of the date hereof, to which the Company and Pledgor are
parties (the "Agreement"), Pledgor has issued a promissory note in favor of the
Company (the "Note") in connection with the purchase by Pledgor of certain
shares of Series A Preferred Stock of the Company. All capitalized terms used
but not defined herein shall have the meaning ascribed to them in the Agreement;
and
WHEREAS, the Company is willing to accept the Note from Pledgor, but only
upon the condition, among others, that Pledgor shall have executed and delivered
to the Company this Pledge Agreement and the Pledged Shares (as defined below).
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants, conditions, representations and warranties contained herein, the
parties hereto do hereby agree as follows:
1. PLEDGE. Pledgor hereby pledges to the Company, and grants to the
Company a first priority security interest in, Fifty Thousand (50,000) shares of
Series A Preferred Stock owned by Pledgor (the "Pledged Shares") and the
certificates representing such Pledged Shares.
2. SECURITY INTEREST. The foregoing pledge and security interest hereby
granted to the Company are given as security for the complete and faithful
performance, payment, observance and fulfillment of Pledgor's obligations under
the Note (all of which are hereinafter referred to collectively as the
"Liabilities"). The certificates representing the Pledged Shares shall be
delivered to Cooley Godward Castro Huddleson & Tatum as escrow agent (the
"Escrow Agent") to be held by it in escrow pursuant to the terms of the Escrow
Agreement of even date attached hereto as Exhibit B-1. The Pledged Shares shall
be accompanied by a stock assignment separate from certificate, attached hereto
as Exhibit B-2, endorsed in blank, and the books of the Company shall contain a
legend to reflect the pledge of, and the grant to the Company of a security
interest in, the Pledged Shares. From and after the occurrence of an Event of
Default (as defined below), the Company shall have the right, at any time in its
discretion and without
1.
<PAGE>
notice to Pledgor, to request Escrow Agent to transfer to or to register in the
name of the Company or any of its nominees any or all of the Pledged Shares.
3. DIVIDENDS AND DISTRIBUTIONS. To the extent Pledgor is entitled to
receive dividends or distributions as a shareholder of the Company, such amounts
shall be paid to Pledgor until such time, if any, as the Company has effectively
exercised its right to request transfer of the Pledged Shares pursuant to
Section 2 above.
4. EVENT OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default hereunder (any of such occurrences are herein
referred to as an "Event of Default"):
(a) Pledgor fails to pay any amount due the Company under the Note or
this Agreement or Pledgor fails to observe or perform any other of the
covenants, conditions and agreements contained therein or herein;
(b) Any representation or warranty made by Pledgor to the Company in
this Agreement proves untrue in any material respect or is breached; or
(c) Any Event of Default under, and as defined in the Note, shall
occur.
5. MAINTENANCE OF PRIORITY OF SECURITY INTEREST. Pledgor shall not, shall
not attempt to, and shall not permit a third party to assign, pledge, mortgage,
lease, hypothecate or otherwise encumber, sell or otherwise dispose of the
Pledged Shares or suffer or permit to be incurred any liens on or security
interest in such Pledged Shares. In addition, Pledgor agrees that Pledgor shall
defend the Pledged Shares held by Pledgor against the claims and demands of all
parties. Pledgor agrees, at Pledgor's sole cost and expense, to secure, re-
execute, deliver and re-deliver all documents reasonably requested by the
Company to enable the Company to perfect, preserve and protect its security
interest in and on the Pledged Shares, and does hereby authorize the Company to
file and record any such documents for such purposes. In the event that the
Company declares any share dividend, reclassification, readjustment or makes any
other change in its structure, all new, substituted or additional shares or
other securities issued to Pledgor by reason of such change shall be subject to
the security interest of the Company described herein. All references to the
"Pledged Shares" shall include such new, substituted or additional shares or
other securities and immediately upon the issuance of such new, substituted or
additional shares or other securities, Pledgor shall deliver the certificates
representing such shares or other securities to Escrow Agent, accompanied by a
stock power and assignment separate from certificate (or other comparable
assignment instrument in the case of the issuance of securities other than
stock) endorsed in blank.
6. RIGHT TO CONTEST LIEN. Pledgor shall, without demand, notify the
Company in writing within ten (10) days after Pledgor is notified of or
otherwise discovers that a lien, security interest, charge or other encumbrance
of any kind or nature whatsoever has attached to all or any part of the Pledged
Shares (collectively, a "Lien"). Pledgor shall have the right to contest in
good faith, with due diligence and by appropriate proceedings, without cost or
2.
<PAGE>
expense to the Company, the validity, applicability or amount of any such Lien;
provided, however, that Pledgor, prior to commencing such contest, shall have
furnished to the Company a bond, guarantee or security, satisfactory in form and
substance to the Company, to the extent that the contesting of such Lien does
not suspend the enforcement of the Lien.
7. TAXES. Pledgor shall pay promptly any and all taxes, assessments,
charges and liens against the Pledged Shares (including any and all interest,
penalties and related provisional fees in connection therewith) (collectively, a
"Tax Lien "); provided, however, that Pledgor shall have the right to contest in
good faith, with due diligence and by appropriate proceedings, the validity,
amount or imposition of any Tax Lien, if prior to commencing such contest,
Pledgor shall have delivered to the Company a bond, guarantee or other security,
satisfactory in form and substance to the Company.
8. PLEDGOR'S FAILURE TO PAY TAXES AND OTHER ITEMS. If Pledgor fails to
make any payment or do any act required of Pledgor hereunder, then the Company
shall have the right, but not the obligation, without notice to or demand upon
Pledgor, and without releasing Pledgor from any obligation under the Note or
this Agreement, to make or do the same, and to pay, purchase, contest or
compromise any Lien or Tax Lien which in the Company's judgment places its
security interest in the Pledged Shares or Pledgor's title to the Pledged Shares
in jeopardy, and in exercising any such rights, to expend whatever reasonable
amounts the Company in its sole discretion may deem necessary therefor,
including reasonable attorneys' fees and expenses. Any amounts expended by the
Company pursuant to this Section 8 shall be a demand obligation owing by Pledgor
from the date the Company expends such amount until repaid.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PLEDGOR. Pledgor hereby
represents, warrants and covenants to the Company:
(a) Pledgor has the authority to execute, deliver and perform the
covenants and obligations to be performed by Pledgor under this Agreement and to
grant and create in favor of the Company the security interest in the Pledged
Shares granted hereby;
(b) The execution, delivery and performance by Pledgor of this
Agreement and the creation of the security interest in the Pledged Shares does
not violate any provisions of law or violate any provisions of, or result in a
default or acceleration of any obligation under, any agreement or instrument of
any kind or any undertaking, order, decree or judgment to which Pledgor is a
party or by which Pledgor is bound;
(c) The execution, delivery and performance of this Agreement by
Pledgor and the creation of the security interest in the Pledged Shares does not
violate any provisions of, or result in a default or acceleration under, any
agreement or instrument of any kind or any order, decree or judgment to which
Pledgor is a party or by which Pledgor is bound;
(d) No consent, approval or authorization of, or registration or filing
with, any governmental body or authority, or any other person, firm or entity
not a party hereto, is or shall be required as a condition to the valid
execution, delivery, performance or enforceability
3.
<PAGE>
of this Agreement or as a condition to the validity of the Company's first and
prior security interest in the Pledged Shares;
(e) This Agreement is the valid obligation of Pledgor, binding and
enforceable against Pledgor in accordance with the terms hereof, and Pledgor is
fully familiar with all the covenants, terms and conditions hereof;
(f) On the date hereof and at all times hereafter, Pledgor shall
continue to own and hold good title to the Pledged Shares free and clear of all
claims, liens and encumbrances other than the security interest granted to the
Company herein, and Pledgor, at his sole expense, shall defend such title to the
Pledged Shares against the claims and demands of all parties;
(g) The security interest granted to the Company in the Pledged Shares
is and at all times hereafter shall be, a valid, first and prior security
interest, free and clear of all other liens, claims and encumbrances;
(h) There are no subscription warrants or other options exercisable
with respect to the Pledged Shares; and
(i) The Company's security interest in the Pledged Shares is granted to
the Company free and clear of any restrictive stock agreements, stock redemption
agreements, cross purchase agreements, buy-sell agreements or any other similar
agreement (including restrictive stock legends on the share certificates) which
have the effect of limiting or restricting a shareholder's right or power to
transfer or encumber the Pledged Shares.
10. RIGHTS AND REMEDIES UPON DEFAULT.
(a) No remedy herein or in any other documents executed in connection
herewith conferred on or reserved to the Company is intended to be exclusive of
any other remedy or remedies, but each and every such remedy shall be cumulative
and shall be in addition to every other remedy given hereunder, under any other
document now or hereafter existing at law or in equity. No delay or omission to
exercise any right or power shall be construed to be a waiver of any such
default or acquiescence therein, and every such right and power may be exercised
from time to time and as often as may be deemed expedient. No acceptance of any
payment of any kind or nature whatsoever during the continuance of an Event of
Default shall constitute a waiver of such Event of Default. No waiver of an
Event of Default hereunder shall affect or alter (i) this Agreement, and the
same shall continue in full force and effect, or (ii) the rights of the Company
with respect to any other then existing or subsequent Event of Default.
(b) The Company may recover from Pledgor all of its expenses
(including, without limitation, reasonable attorneys' fees and expert witness
fees) incurred in enforcing any of its rights under this Agreement.
4.
<PAGE>
11. IRREVOCABLE PROXY. Pledgor does hereby irrevocably constitute and
appoint the Company and the Company's successors and assigns as Pledgor's proxy
with respect to the Pledged Shares, with full power, in the same manner, to the
same extent, and with the same effect as if Pledgor were to do the same:
(a) To attend all meetings of shareholders of the Company held from
the date hereof, and to vote the Pledged Shares at any such meeting in such
manner as the Company shall, in its sole discretion, deem appropriate;
(b) To consent, in the sole discretion of the Company, to any and all
actions by or with respect to the Company for which the consent of the
shareholders of the Company is or may be necessary or appropriate; and
(c) Without limitation, to do all things which Pledgor can or could do
as a shareholder of the Company giving to the Company full power of
substitution and revocation;
provided, however, that this proxy shall not be exercisable by the Company, and
Pledgor alone shall have the foregoing powers, so long as there is no Event of
Default. This proxy shall terminate at such time as this Agreement is
terminated as provided in Section 17 below. Pledgor hereby revokes any proxy or
proxies heretofore given to any person or persons, and agrees not to give any
other proxy in derogation hereof until such time as this Agreement is terminated
as provided below. Pledgor and the Company hereby specifically agree that the
proxies granted hereunder are coupled with an interest and shall be and remain
irrevocable until this Agreement is terminated as provided below. In
furtherance of the agreements of Pledgor set forth in this Section 11, Pledgor
hereby agrees to deliver to the Company from time to time, Pledgor's proxy in
substitution of the proxy given hereunder.
12. ATTORNEY-IN-FACT. Pledgor hereby appoints the Company as Pledgor's
attorney-in-fact without imposing any obligations on the Company, for the
purpose of executing, delivering, recording or filing any instruments or
documents or performing any other acts that the Company deems appropriate to
perfect and continue the security interest granted hereunder. The power of
attorney granted herein is coupled with an interest and is irrevocable until
this Agreement is terminated as provided below.
13. MISCELLANEOUS.
(a) This Agreement, shall constitute the entire agreement between the
parties hereto with respect to the subject matter hereof and shall supersede all
other prior agreements, written or oral, with respect thereto.
(b) This Agreement shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns; provided, however,
that neither party may assign or transfer its respective rights or obligations
of the other party hereto without the prior written consent of the other party
hereto.
5.
<PAGE>
(c) This Agreement may be amended, modified, renewed or extended but
only by a written instrument, executed by both of the parties hereto in the
manner of the execution of this Agreement.
(d) This Agreement shall in all respects be governed by and construed
in accordance with the laws of the State of California as applied to contracts
entered into and to be performed entirely within the State of California.
(e) All parties hereto shall, from time to time, do and perform such
other and further acts and execute and deliver any and all such other and
further instruments as may be required or reasonably requested by any other
party to establish, maintain and protect the respective rights and remedies of
such other party and to carry out and effect the intents and purposes of this
Agreement.
(f) All documents, agreements, certificates and instruments herein
required shall be in form and substance satisfactory in all respects to the
Company in his sole discretion and shall be provided at the sole cost and
expense of Pledgor.
(g) The representations and warranties hereunder shall survive the
execution hereof and the Company may enforce such representations and warranties
at any time. Pledgor's covenants shall survive the execution hereof and shall
be performed fully and faithfully by Pledgor and at all times.
(h) If any term or provision of this Agreement, or the application
thereof to any circumstance, shall be invalid, illegal or unenforceable to any
extent, such term or provision shall not invalidate or render unenforceable any
other term or provision of this Agreement, or the application of such term or
provision to any other circumstance. To the extent permitted by law, the
parties hereto hereby waive any provision of law that renders any term or
provision hereof invalid or unenforceable in any respect.
(i) Time is of the essence in this Agreement.
(j) Any notice, demand or any other instruments authorized by this
Agreement to be served on or given to a party hereto shall be sufficiently
served or given for all purposes when served upon or given to such party in
accordance with the Note.
(k) Without limiting the generality of any other provision of this
Agreement, in the event litigation is commenced to enforce the terms and
provisions of this Agreement, the prevailing party shall be entitled to an award
for reasonable attorneys' fees and expert witness fees and other court costs
incurred, which award shall be determined by the court.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when so executed and delivered, shall be deemed to
be an original, but all such counterparts shall together constitute but one and
the same instrument.
6.
<PAGE>
15. HEADINGS. The headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and shall in no
way restrict or otherwise modify any of the terms or provisions hereof.
16. CONSTRUCTION. All references to the singular shall include the plural
and vice versa and all references to the masculine shall include the neuter or
feminine and vice versa. This Agreement has been reviewed and negotiated by
counsel for each party and no ambiguity in this Agreement shall be construed
against either party based upon its having prepared the same.
17. TERMINATION. This Agreement shall terminate upon the payment and
satisfaction of all the Liabilities. Upon receipt of notice of such termination
from Pledgor and the Company, Escrow Agent shall return to Pledgor the
certificates representing the Pledged Shares.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
PLEDGOR:
_____________________________________________
LEWIS SOLOMON
THE COMPANY:
TERAYON CORPORATION
By: __________________________________________
Title: _______________________________________
7.
<PAGE>
EXHIBIT B-1
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") is made and entered into as of June
16, 1995, by and among LEWIS SOLOMON, an individual ("Pledgor"), TERAYON
CORPORATION, a California corporation ("Pledgee"), and COOLEY GODWARD CASTRO
HUDDLESON & TATUM (the "Escrow Agent").
RECITALS
WHEREAS, pursuant to that certain Stock Pledge Agreement of even date
herewith to which Pledgor and Pledgee are parties (the "Pledge Agreement"),
Pledgor pledged and granted to Pledgee a security interest in the Pledged
Shares; and
WHEREAS, pursuant to paragraph 2 of the Pledge Agreement, the certificates
representing the Pledged Shares are to be held by the Escrow Agent pursuant to
the terms and conditions of this Agreement; and
WHEREAS, the parties hereto desire to effect the provisions of paragraph 2
of the Pledge Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in the Pledge Agreement and herein, the parties hereto, intending to
be legally bound, do hereby agree as follows:
1. DEFINITIONS. All terms not otherwise described herein shall have the
meanings ascribed to them in the Pledge Agreement.
2. ESCROW FUND. Pledgee hereby authorizes Pledgor to deposit with the
Escrow Agent any certificates evidencing the Pledged Shares. The Pledged Shares
deposited with the Escrow Agent, together with any other property similarly
deposited pursuant to the Pledge Agreement, shall constitute an escrow fund (the
"Escrow Fund").
3. ATTORNEY-IN-FACT. Pledgor does hereby irrevocably constitute and
appoint the Escrow Agent as its attorney-in-fact and agent for the Escrow Period
(as hereinafter defined) to execute with respect to the Pledged Shares all
documents necessary or appropriate to make such securities negotiable and
complete any transaction contemplated in this Agreement or in the Pledge
Agreement, including but not limited to, any appropriate filing with state or
government officials.
1.
<PAGE>
4. ESCROW PERIOD. The Escrow Fund shall remain in existence until the
Pledge Agreement is terminated in accordance with paragraph 17 thereof (the
"Escrow Period").
5. CLAIMS UPON ESCROW FUND. Upon the occurrence of an Event of Default,
Pledgee shall deliver to the Escrow Agent a certificate signed by Pledgee and
duly sworn before a notary public (a) stating that an Event of Default has
occurred and that Pledgee is, therefore, entitled to invoke its rights and
remedies arising under paragraph 10 of the Pledge Agreement, (b) describing the
specific Event of Default, and (c) stating the number of Pledged Shares which
Pledgee requests be transferred to, or registered in the name of, Pledgee or any
of its nominees, naming any such nominee(s). Upon receipt by the Escrow Agent
on or before the last day of the Escrow Period of such certificate, the Escrow
Agent shall (a) date the stock assignments necessary for the transfer in
question, (b) fill in the number of Pledged Shares that are being transferred,
and (c) deliver to, or register in the name of, Pledgee or any of its nominees,
as promptly as practicable, any or all of the Pledged Shares held in the Escrow
Fund.
6. ESCROW AGENT'S DUTIES.
(a) The Escrow Agent shall hold and safeguard the Escrow Fund during
the Escrow Period, shall treat such fund as a trust fund in accordance with the
terms of this Agreement and not as the property of Pledgor or Pledgee and shall
hold and dispose of the Escrow Fund only in accordance with the terms of this
Agreement and the Pledge Agreement.
(b) The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein and may rely and shall be
protected in relying or refraining from acting on any instrument reasonably
believed to be genuine and to have been signed or presented by the proper party
or parties. The Escrow Agent shall not be liable for any act done or omitted
hereunder as Escrow Agent while acting in good faith and in the exercise of
reasonable judgment.
(c) The Escrow Agent is hereby expressly authorized to disregard any
and all warnings given by any of the parties hereto or by any other person,
excepting only orders or process of courts of law, and the Escrow Agent is
hereby expressly authorized to comply with and obey orders, judgments or decrees
of any court. In the event the Escrow Agent obeys or complies with any such
order, judgment or decree of any court, the Escrow Agent shall not be liable to
any of the parties hereto or to any other person by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without
jurisdiction.
(d) In the absence of willful misconduct by the Escrow Agent, the
Escrow Agent shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver this Agreement or any documents or papers deposited or called
for hereunder.
2.
<PAGE>
(e) The Escrow Agent shall not be liable for the outlawing of any
rights under any statute of limitations with respect to this Agreement or any
documents or certificates deposited with the Escrow Agent.
(f) Promptly following the termination of the Escrow Period, the
Escrow Agent shall deliver to Pledgor all of the Pledged Shares in the Escrow
Fund.
7. EXPIRATION OF INDEMNITY. Pledgee may make no claim against the Escrow
Fund after the expiration of the Escrow Period. The expiration of the Escrow
Period shall not affect any rights of Pledgee with respect to claims made prior
to such expiration. Nothing herein shall prohibit Pledgee, after the Escrow
Period has expired, from proceeding directly against Pledgor for a claim for
damages.
8. MISCELLANEOUS.
(a) Any notice or other communication required or permitted to be
given to the parties hereto shall be in writing and shall be deemed effective
upon the earlier of personal delivery (including confirmed delivery by
facsimile), the first business day after delivery to Federal Express or similar
delivery service specifying next day delivery, or the third business day after
mailing by certified or registered mail, postage prepaid, as follows (or at such
other address as the addressed party may have substituted by notice pursuant to
this paragraph 8):
IF TO PLEDGOR TO: LEWIS SOLOMON
G&L Investments
144 Nassau Boulevard
West Hampstead, NY 11552
IF TO PLEDGEE TO: TERAYON CORPORATION
404 Saratoga Avenue
Suite 201
Santa Clara, CA 95050
IF TO THE ESCROW AGENT: COOLEY GODWARD CASTRO HUDDLESON & TATUM
One Maritime Plaza
20th Floor
San Francisco, CA 94111
Attn: Karyn R. Smith
(b) This Agreement, together with the Pledge Agreement, shall
constitute the entire agreement between the parties hereto with respect to the
subject matter hereof and shall supersede all other prior agreements, written or
oral, with respect thereto.
(c) This Agreement shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns; provided, however,
that the parties may not
3.
<PAGE>
assign or transfer their respective rights or obligations of the other parties
without the prior written consent of such other parties.
(d) This Agreement may be amended, modified, renewed or extended but
only by a written instrument, executed by the parties hereto in the manner of
the execution of this Agreement.
(e) This Agreement shall in all respects be governed by and construed
in accordance with the laws of the State of California as applied to contracts
entered into and to be performed entirely within the State of California.
(f) All parties hereto shall, from time to time, do and perform such
other and further acts and execute and deliver any and all such other and
further instruments as may be required or reasonably requested by any other
party to establish, maintain and protect the respective rights and remedies of
such other parties and to carry out and effect the intent and purpose of this
Agreement.
(g) All documents, agreements, certificates and instruments herein
required shall be in form and substance satisfactory in all respects to Pledgee
in his sole discretion and shall be provided at the sole cost and expense of
Pledgor.
(h) If any term or provision of this Agreement, or the application
thereof to any circumstance, shall be invalid, illegal or unenforceable to any
extent, such term or provision shall not invalidate or render unenforceable any
other term or provision of this Agreement, or the application of such term or
provision to any other circumstance. To the extent permitted by law, the
parties hereto hereby waive any provision of law that renders any term or
provision hereof invalid or unenforceable in any respect.
(i) Time is of the essence in this Agreement.
(j) Without limiting the generality of any other provision of this
Agreement, in the event litigation is commenced to enforce the terms and
provisions of this Agreement, the prevailing party or parties shall be entitled
to an award for reasonable attorneys' fees and expert witness fees and other
court costs incurred, which award shall be determined by the court.
9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when so executed and delivered, shall be deemed to
be an original, but all such counterparts shall together constitute but one and
the same instrument.
10. HEADINGS. The headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and shall in no
way restrict or otherwise modify any of the terms or provisions hereof.
4.
<PAGE>
11. CONSTRUCTION. All references to the singular shall include the plural
and vice versa and all references to the masculine shall include the neuter or
feminine and vice versa. This Agreement has been reviewed and negotiated by
counsel for each of the parties and no ambiguity in this Agreement shall be
construed against any of the parties based upon its having prepared the same.
12. ESCROW AGENT FEES. Any fees imposed by the Escrow Agent for its
service as such will be borne by Pledgor.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
PLEDGOR:
__________________________________________
LEWIS SOLOMON
PLEDGEE:
TERAYON CORPORATION
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
ESCROW AGENT:
COOLEY GODWARD CASTRO HUDDLESON & TATUM
By: ______________________________________
Name: ____________________________________
Title: ___________________________________
5.
<PAGE>
Exhibit 10.21
ANTI-DILUTION WARRANT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE (AND THE SECURITIES ISSUABLE
UPON EXERCISE HEREOF) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF,
AND THE WARRANTS MAY NOT BE EXERCISED ON BEHALF OF ANY U.S. PERSON, EXCEPT IN
COMPLIANCE WITH THE REQUIREMENTS OF, OR AN EXEMPTION UNDER, SUCH ACT.
WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF
TERAYON COMMUNICATION SYSTEMS
APRIL 6, 1998
This certifies that SHAW COMMUNICATIONS INC. (the "Holder"), for value
received, is entitled to purchase from TERAYON COMMUNICATION SYSTEMS, a
California corporation (the "Company"), a number of shares of the Company's
common stock, no par value (the "Common Stock"), equal to the number of Issuable
Shares (as defined in and determined by the formula set forth in Section 2
below) for cash at an aggregate price of One Dollar (the "Stock Purchase
Price"), subject to the provisions and upon the terms and conditions hereinafter
set forth.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; EXERCISE PERIOD; ISSUANCE OF CERTIFICATES. This Warrant is
exercisable at the option of the Holder at any time during the Exercise Period
(as defined herein) for all or any part of the shares of Common Stock (but not
for a fraction of a share) in the event (and in each instance) that the Company
issues New Equity Securities (as defined in Section 2(d) below). "Exercise
Period" shall mean the period commencing upon the date hereof and terminating on
the date the Holder no longer legally or beneficially owns any Eligible Shares.
"Eligible Shares" shall mean only (a) shares of Series F Preferred Stock issued
to Holder under the Series F Preferred Stock Purchase Agreement dated April 6,
1998 (the "Purchase Agreement"), or shares of Common Stock into which such
shares of Series F Preferred Stock have been converted, (b) 3,000,000 shares of
Common Stock exercisable under the Product Purchase Warrant issued to Holder by
the Company as of the date hereof (the "Product Purchase Warrant"); provided
that in the event that the final number of vested shares (under the Product
Purchase Warrant) is less than 3,000,000, the number of Eligible Shares and the
number of shares of Common Stock issuable or issued to Holder under this Warrant
shall be appropriately adjusted (including, if necessary the return of
securities by Holder to the Company), and (c) any shares of Common Stock issued
pursuant to this Warrant. Certificates for the shares of Common Stock so
purchased hereunder, together with any other securities to which the Holder is
entitled upon such exercise, shall be delivered to the Holder by the Company
within a reasonable time after the rights represented by this Warrant have been
so exercised.
2. PAYMENT FOR SHARES; CALCULATION OF ISSUABLE SHARES. The Company agrees
that the shares of Common Stock purchased under this Warrant during the Exercise
Period shall
1.
<PAGE>
be deemed to be issued to the Holder as the record owner of such shares as of
the close of business on the date on which a copy of this Warrant shall have
been surrendered, properly endorsed, along with a completed, executed
Subscription Form in the form attached hereto as Exhibit A and Investment
Representation Letter in the form attached hereto as Exhibit B, and payment by
cash or check of the Stock Purchase Price in exchange for the then-applicable
number of Issuable Shares (as defined in Section 2(a) below).
(a) "Issuable Shares" shall mean the number of shares equal to the
difference between (i) the product of (A) the number of Eligible Shares
legally or beneficially owned by Holder multiplied by (B) the fraction, the
numerator of which is equal to the Current Market Price (as defined in
Section 2(b) below) and the denominator of which is equal to the Adjusted
Price (as defined in Section 2(c) below), and (ii) the number of Eligible
Shares legally or beneficially owned by Holder. Notwithstanding anything
else in this Warrant, the Company shall not be obligated to deliver any
Issuable Shares if the consideration for (x) any Common Stock or preferred
stock sold prior to the Company's initial underwritten public offering of
securities (the "IPO") exceeds $39.00 per share of Common Stock or (y) any
Common Stock sold following the completion of the IPO exceeds $39.00 per
share, in each of (x) and (y) above, such per share price is as adjusted
for any stock dividends, combinations or splits with respect to such
shares. In no event shall the number of Issuable Shares be less than a
whole number, and any fractional Issuable Share shall be treated as
provided in Section 10 below.
(b) "Current Market Price" shall mean the price per share of Common
Stock or any other equity security of the Company (herein collectively
referred to as a "security") at the date herein specified as follows:
(i) prior to the Company's IPO or if the security is not
registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the value of the security shall be $13.00 per share (as
adjusted for any stock dividends, combinations or splits with respect to
such shares); provided, however, that in determining the value of the
Common Stock for purposes of Section 10, if the foregoing shall not be
applicable, the Current Market Price shall be determined in good faith by
the Company's Board of Directors, or
(ii) if the security is registered under the Exchange Act the
value of the security shall be deemed to be the greater of (1) $7.55 per
share (as adjusted for any stock dividends, combinations or splits with
respect to such shares) or (2) the average of the daily market prices per
share of the security for the 20 consecutive trading days immediately
preceding the date as of which Current Market Price is to be determined or,
if the security has been so listed for less than 20 consecutive trading
days before such date, then the average of the daily market prices for all
of the trading days before such date for which daily market prices are
available. The market price for each such trading day shall be: (A) in the
case of a security listed or admitted to trading on any national securities
exchange or The Nasdaq National Market, the closing price on such day, or
if no sale takes place on such day, the average of the closing bid and ask
prices on such day, (B) in the case of a security not then listed or
admitted to trading on any national securities exchange or The Nasdaq
National Market, the last reported sale
2.
<PAGE>
price on such day, or if no sale takes place on such day, the average of
the closing bid and ask prices on such day, as reported by a reputable
quotation source designated by the Company and acceptable to Holder, (C) in
the case of a security not then listed or admitted to trading on any
national securities exchange or the Nasdaq National Market and as to which
no such reported sale price or bid ask prices are available, the average of
the reported high bid and low ask prices on such day, as reported by a
reputable quotation service, or a newspaper of general circulation in the
Borough of Manhattan City and State of New York, customarily published on
each business day, designated by the Company and acceptable to Holder, or
if there shall be no bid and ask prices on such day, the average of the
high bid and low ask prices, as so reported, on the most recent day (not
more than ten days prior to the date in question) for which prices have
been so reported, and (D) if there are no bid and ask prices reported
during the ten days prior to the date in question, the Current Market Value
of the security shall be determined as if the security were not registered
under the Exchange Act.
(c) "Adjusted Price" shall mean the amount equal to the product of (i)
the Current Market Price multiplied by (ii) the fraction in which (A) the
numerator is the sum of (1) the number of shares of Common Stock and
securities convertible into shares of Common Stock outstanding before
issuance of the New Equity Securities plus (2) the number of shares that
would be issuable at the Current Market Price in exchange for the total
consideration (including consideration for the exercise of any option or
warrant) to be received for the New Equity Securities, and (B) the
denominator is the sum of (1) the number of shares of Common Stock and
securities convertible into shares of Common Stock outstanding before
issuance of the New Equity Securities plus (2) the number of shares of
Common Stock represented by the New Equity Securities. For purposes of
calculating the Adjusted Price, the number of shares of Common Stock and
securities convertible into shares of Common Stock outstanding before
issuance of the New Equity Securities shall be calculated on a fully
diluted basis, as if all outstanding options, warrants (excluding this
Warrant) or other rights for the purchase of shares of Common Stock or
convertible securities had been fully exercised or converted immediately
prior to such issuance.
(d) "New Equity Securities" shall mean: (i) any Common Stock or
preferred stock or other security of the Company that gives the holder a
right to purchase, whether directly or indirectly, an equity interest in
the Company; (ii) any security convertible, with or without consideration,
into any Common Stock, preferred stock or other security (including any
option to purchase such a convertible security); or (iii) any security
carrying any warrant or right to subscribe to or purchase any Common Stock,
preferred stock or other security during the Exercise Period at a purchase
price per share that is less than the Current Market Price, as
appropriately adjusted pursuant to Section 4 below;
(e) Notwithstanding Section 2(d) above, "New Equity Securities" shall
not mean: (i) shares of Common Stock issued upon the conversion of any
preferred stock or other convertible security; or (ii) shares of Common
Stock and/or options, warrants or other Common Stock purchase rights and
the Common Stock issued pursuant to such options, warrants or other rights
(collectively, "Option Shares") issued or to be issued to employees or
officers of the Company or its subsidiaries in connection with the
provision of the services to the same pursuant
3.
<PAGE>
to stock purchase or stock option plans or arrangements that are approved
by the Company's board of directors and that do not exceed the following
amounts: (x) prior to the Company's IPO, 400,000 Option Shares may be
granted or issued at an exercise price of not less than $6.50 per Option
Share, and an additional 400,000 Option Shares may be granted or issued at
an exercise price of not less than $7.55 per Option Share and (y)
subsequent to the Company's IPO, Option Shares may be granted or issued up
to an aggregate amount that is equal to ten percent (10%) of the issued and
outstanding share capital of the Company at the time of such grant or
issuance at a per share exercise price that is equal to the Current Market
Price of the Company's Common Stock, as defined in Section 2(b)(ii) above
(in the case of each per share price in this Section 2(e), as such price is
adjusted for any stock dividend, combination or stock split with respect to
such shares); or (iii) shares of Common Stock issued upon the exercise of
options outstanding as of the date hereof. Notwithstanding anything else in
this Warrant, the Company may offer an amount and combination of securities
(an "Investment") to a "strategic partner" of the Company (determined in
each instance by a majority vote of the Company's board of directors, which
majority must include Holder's nominee) on terms that are equal to or less
favorable than the terms provided to Holder under the Purchase Agreement,
the Product Purchase Warrant and this Warrant, and any exhibits or
schedules hereto or thereto (the "Shaw Transaction"); provided that if the
terms and conditions of such an Investment are more favorable to such
strategic partner than the terms and conditions of the Shaw Transaction
with respect to the price, number or acceleration of vesting of any
securities, the rights, preferences and privileges of any preferred stock,
the number and price of warrants issued, or the amount of product required
to be purchased from the Company that gives rise to any rights to acquire
securities of the Company, then, in such event (and in each such instance),
at the election of Holder the Shaw Transaction shall be deemed to have
occurred on the same terms as the Investment, and additional securities,
which shall be Issuable Shares under this Warrant, shall be issued by the
Company to Holder or rights granted to such strategic partner shall be
granted to Holder.
3. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants and
agrees that it shall use its best efforts to ensure that all shares of Common
Stock (or any other securities) that may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be duly authorized,
validly issued, fully paid and nonassessable and free and clear of all liens,
encumbrances, equities and claims. The Company further covenants and agrees to
use its best efforts to have authorized and reserved during the Exercise Period,
for the purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of authorized but
unissued Common Stock, or other securities, when and as required to provide for
the exercise of the rights represented by this Warrant.
4. ADJUSTMENT OF NUMBER OF SHARES. THE NUMBER OF SHARES OF COMMON STOCK
PURCHASABLE UPON THE EXERCISE OF THIS WARRANT SHALL BE SUBJECT TO ADJUSTMENT
FROM TIME TO TIME UPON THE OCCURRENCE OF CERTAIN EVENTS DESCRIBED IN THIS
SECTION 4.
4.1 DIVIDENDS AND COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. If during
the Exercise Period the Company shall make a stock dividend, subdivide or
combine its Common Stock, the number of shares of Common Stock (if any) that
have been calculated or are issuable upon exercises of this Warrant shall be
appropriately adjusted.
4.
<PAGE>
4.2 RECLASSIFICATION AND REORGANIZATION. In case of any reclassification or
change of outstanding securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
the Company shall execute a new Warrant, providing that Holder shall have the
right to exercise such new Warrant upon payment of the Stock Purchase Price and
procure upon such exercise in lieu of each share of Common Stock theretofore
issuable upon exercise of this Warrant the kind and amount of shares of stock,
other securities, cash and property receivable upon such reclassification or
change by a holder of one share of Common Stock. Such new Warrant shall provide
for adjustments that shall be as nearly equivalent as may be practicable to the
adjustments (including adjustments in the Current Market Price) provided for in
this Section 4. The provisions of this Section 4.2 shall similarly apply to
successive reclassifications or changes.
4.3 NOTICES OF CHANGE. Promptly upon any adjustment in the number or class
of shares subject to this Warrant, the Company shall give written notice thereof
to the Holder, setting forth in reasonable detail and certifying the calculation
of such adjustment.
4.4 DE MINIMIS ADJUSTMENTS. No adjustment in the number of shares of Common
Stock issuable hereunder shall be required unless such adjustment would require
an increase of at least one percent (1%) in the number of shares of Common Stock
then legally or beneficially owned by Holder, provided, however, that any
adjustments which by reason of this Section 4.4 are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest one-thousandth of a share.
5. NO VOTING OR DIVIDEND RIGHTS. Nothing contained in this Warrant shall be
construed as conferring upon the Holder the right to vote or to consent or to
receive notice as a shareholder of the Company or any other matters or any
rights whatsoever as a shareholder of the Company. No dividends or interest
shall be payable or accrued in respect of this Warrant or the interest
represented hereby or the shares purchasable hereunder until, and only to the
extent that, this Warrant shall have been exercised.
6. NOTICES OF RECORD DATE, ETC. IN THE EVENT OF:
(a) Any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right (other than the issuance
of the Issuable Shares on the exercise of this Warrant) (a "Distribution");
(b) Any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, or any transfer of all or
substantially all of the assets of the Company to or consolidation or merger of
the Company with or into any other person (a "Reorganization");
(c) Any voluntary or involuntary dissolution, liquidation, or winding up of
the Company (a "Dissolution");
(d) Any issuance of New Equity Securities; or
5.
<PAGE>
(e) Any Investment.
then and in each such event the Company will mail or cause to be mailed to
the Holder a notice specifying (i) the date of any such Distribution stating the
amount and character of such Distribution, (ii) the date on which any
Reorganization is to take place, and the time, if any is to be fixed, as of
which the holders of Common Stock shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
Reorganization, (iii) the date of any such Dissolution and the assets and other
property that will be distributed pursuant to such Dissolution, (iv) the date
and terms of any such issuance of New Equity Securities or warrants, or (v) the
terms of any Investment. Such notice shall be mailed at least ten (10) days
prior to the date therein specified.
7. NO IMPAIRMENT. The Company shall not, by amendment of its articles of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
willfully avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Company.
8. WARRANT NON-TRANSFERABLE. This Warrant shall not be transferable by Holder
without the prior written consent of the Company, which consent shall not be
unreasonably withheld. Notwithstanding the foregoing, Holder may transfer this
Warrant to a subsidiary, parent or affiliated company of Holder; provided that
Holder deliver written notice of such transfer within ten days.
9. LOST WARRANTS. Upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant and, in
the case of any such loss, theft or destruction, upon receipt of an indemnity
reasonably satisfactory to the Company, or in the case of any such mutilation
upon surrender and cancellation of such Warrant, the Company will make and
deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or
mutilated Warrant.
10. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise of
this Warrant. The Company shall, in lieu of issuing any fractional share, pay
the Holder a sum in cash equal to such fraction multiplied by the Stock Purchase
Price.
11. GOVERNING LAW. This Warrant shall be governed by and construed under the
laws of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California.
12. TITLES AND SUBTITLES. The titles and subtitles used in this Warrant are
used for convenience only and are not to be considered in construing or
interpreting this Warrant.
13. NOTICES. Unless otherwise provided, any notice required or permitted under
this Warrant shall be given in writing and shall be deemed effectively given
upon personal delivery to the party to be notified by hand or professional
courier service, by telecopy or by facsimile, or five days after deposit with
the postal service, by registered or certified mail, postage prepaid and
addressed to the party to be notified at the address indicated for such party on
the signature page to this Warrant, or at such other address as such party may
designate by ten (10) days advance written notice to the other parties.
6.
<PAGE>
14. AMENDMENTS AND WAIVERS. Any term of this Warrant may be amended and the
observance of any term of this Warrant may be waived (either generally or in a
particular instance, either retroactively or prospectively, and either for a
specified period of time or indefinitely), only with the written consent of the
Company and the Holder.
15. SEVERABILITY. If one or more provisions of this Warrant are held to be
unenforceable under applicable law, such provision shall be excluded from this
Warrant and the balance of the Warrant shall be interpreted as if such provision
were so excluded and shall be enforceable in accordance with its terms unless
the result would be manifestly unjust or would deprive either party of the
benefit of their bargain.
[THIS SPACE INTENTIONALLY LEFT BLANK]
7.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
by its officers, thereunto duly authorized this ____ day of April, 1998.
The Company:
TERAYON COMMUNICATION SYSTEMS
a California corporation
___________________________________________
Zaki Rakib
Chief Executive Officer
Address: 2952 Bunker Hill Lane
Santa Clara, CA 95054
Attention: Chief Executive Officer
Facsimile: (408) 727-6205
Holder:
SHAW COMMUNICATIONS INC.
an Alberta corporation
Address: Suite 900, 630 Avenue S.W.
Calgary, Alberta T2P 4L4
Attention: Margot M. Micallef,
Corporate Counsel
Facsimile: (403) 750-7466
8.
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
Date: ______________
Terayon Communication Systems
2952 Bunker Hill Lane
Santa Clara, California 95054
Attn: Chief Executive Officer
Ladies and Gentlemen:
The undersigned hereby elects to exercise the Anti-Dilution Warrant dated April
6, 1998 (the "Warrant") issued to it by Terayon Communication Systems, a
California corporation (the "Company") and to purchase thereunder
__________________________ shares of the Common Stock or other securities of the
Company (the "Shares") for an aggregate purchase price of One Dollar ($1.00)
(the "Purchase Price").
Pursuant to the terms of the Warrant the undersigned has delivered the Purchase
Price herewith in full in cash or by certified check or wire transfer. The
undersigned also makes the representations set forth on Exhibit B of the
Warrant.
Very truly yours,
SHAW COMMUNICATIONS INC.
By:____________________________________________
Name:__________________________________________
Title:_________________________________________
<PAGE>
EXHIBIT B
INVESTMENT REPRESENTATION
THIS AGREEMENT MUST BE COMPLETED, SIGNED AND RETURNED TO TERAYON COMMUNICATION
SYSTEMS ALONG WITH THE SUBSCRIPTION FORM BEFORE THE COMMON STOCK ISSUABLE UPON
EXERCISE OF THE ANTI-DILUTION WARRANT DATED APRIL 6, 1998, WILL BE ISSUED.
____________ (Date)
Terayon Communication Systems
2952 Bunker Hill Lane
Santa Clara, California 95054
Attn: Chief Executive Officer
Ladies and Gentlemen:
The undersigned, Shaw Communications Inc. ("Purchaser"), intends to acquire up
to _____________________________ (____________) shares of the Common Stock, no
par value or other securities (the "Stock"), of Terayon Communication Systems
(the "Company") from the Company pursuant to the exercise of that certain Anti-
Dilution Warrant dated April 6, 1998 held by Purchaser. The Stock will be
issued to Purchaser in a transaction not involving a public offering and
pursuant to an exemption from registration under the Securities Act of 1933, as
amended (the "1933 Act"), and applicable state securities laws. In connection
with such purchase and in order to comply with the exemptions from registration
relied upon by the Company, Purchaser represents, warrants and agrees as
follows:
Purchaser is acquiring the Stock for its own account, to hold for investment,
and Purchaser shall not make any sale, transfer or other disposition of the
Stock in violation of the 1933 Act or the General Rules and Regulations
promulgated thereunder by the Securities and Exchange Commission or in violation
of any applicable state securities law.
Purchaser has been advised that the Stock has not been registered under the 1933
Act or state securities laws on the ground that this transaction is exempt from
registration, and that reliance by the Company on such exemptions is predicated
in part on Purchaser's representations set forth in this letter.
Purchaser has been informed that under the 1933 Act, the Stock must be held
indefinitely unless it is subsequently registered under the 1933 Act or unless
an exemption from such registration is available with respect to any proposed
transfer or disposition by Purchaser of the Stock. Purchaser further agrees
that the Company may refuse to permit Purchaser to sell, transfer or dispose of
the Stock until (i) such Stock has been effectively registered under the 1933
Act and sold by Purchaser in accordance with such registration, (ii) in the
opinion of counsel for Purchaser of such Stock, such restrictions are no longer
required in order to ensure compliance with the 1933 Act, or (iii) with
1.
<PAGE>
respect to Stock sold pursuant to Regulation S under the 1933 Act, a period of
one (1) year has expired from the date of vesting of the Anti-Dilution Warrant
under which such Stock will be purchased.
Purchaser certifies to the Company that (A) it is not a "U.S. Person" within the
meaning of Regulation S under the 1933 Act and that the Anti-Dilution Warrant is
not being exercised on behalf of a U.S. Person and (B) the Anti-Dilution Warrant
has not been exercised in the United States and the Stock shall not be delivered
within the United States upon exercise, unless registered under the 1933 Act or
an exemption from such registration is available.
Purchaser also understands and agrees that there will be placed on the
certificate(s) for the Stock, or any substitutions therefor, a legend stating in
substance that:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR
OTHERWISE DISTRIBUTED UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT OR
AN EXEMPTION THEREFROM IS AVAILABLE."
Purchaser has carefully read this letter and has discussed its requirements and
other applicable limitations upon Purchaser's resale of the Stock with
Purchaser's counsel.
Very truly yours,
SHAW COMMUNICATIONS INC.
By:________________________________________
Name:______________________________________
Title:_____________________________________
2.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Terayon Communication Systems Europe, S.A.
(incorporated in Belgium)
Terayon do Brasil Ltda
(incorporated in Brazil)
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
February 6, 1998 (except Note 13, as to which the date is June 11, 1998) in the
Registration Statement (Form S-1) and related Prospectus of Terayon
Communication Systems dated June 15, 1998.
Our audits also included the financial statement schedule of Terayon
Communication Systems for each of the three years in the period ended December
31, 1997 listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsbility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
June 11, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 1,569 109
<SECURITIES> 418 0
<RECEIVABLES> 936 2,153
<ALLOWANCES> 20 70
<INVENTORY> 1,322 380
<CURRENT-ASSETS> 4,935 4,620
<PP&E> 6,205 6,465
<DEPRECIATION> (2,590) 3,092
<TOTAL-ASSETS> 8,778 8,389
<CURRENT-LIABILITIES> 9,782 13,389
<BONDS> 0 0
0 1,494
35,807 35,807
<COMMON> 471 661
<OTHER-SE> (37,452) (43,289)
<TOTAL-LIABILITY-AND-EQUITY> 8,778 8,226
<SALES> 2,118 2,444
<TOTAL-REVENUES> 2,118 2,444
<CGS> 6,462 4,134
<TOTAL-COSTS> 6,462 4,134
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 268 78
<INCOME-PRETAX> (22,549) (5,704)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (22,549) (5,704)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (22,549) (5,704)
<EPS-PRIMARY> (2.07) (0.48)
<EPS-DILUTED> (2.07) (0.48)
</TABLE>
