<PAGE>
As filed with the Securities and Exchange Commission on September 8, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under The Securities Act of 1933
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COBALT NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
--------------
<TABLE>
<S> <C> <C>
California 3670 77-0440751
(before reincorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
Delaware 555 Ellis Street
(after reincorporation) Mountain View, CA 94043
(State or other jurisdiction of (650) 623-2500
incorporation or organization)
</TABLE>
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
Kenton D. Chow
Chief Financial Officer
555 Ellis Street
Mountain View, CA 94043
(650) 623-2500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Please send copies of all communications to:
<TABLE>
<S> <C>
Robert P. Latta, Esq. Kevin P. Kennedy, Esq.
Wilson Sonsini Goodrich & Rosati Shearman & Sterling
Professional Corporation 1550 El Camino Real
650 Page Mill Road Menlo Park, CA 94025
Palo Alto, CA 94304 (650) 330-2200
(650) 493-9300
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
--------------
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration 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
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price(1) Registration Fee
- --------------------------------------------------------------------------------
<S> <C> <C>
Common stock, $0.001 par value............. $86,250,000 $23,978
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) 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 which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated September 8, 1999.
Shares
[COBALT LOGO APPEARS HERE]
Common Stock
----------
This is an initial public offering of shares of common stock of Cobalt
Networks, Inc. All of the shares of our common stock are being sold by Cobalt.
Prior to this offering, there has been no public market for our common stock.
We anticipate that the initial public offering price will be between $ and
$ per share. We have applied for quotation of our common stock on the Nasdaq
National Market under the symbol "COBT".
See "Risk Factors" beginning on page 7 to read about certain factors you
should consider before buying shares of the common stock.
----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to Cobalt............................ $ $
</TABLE>
To the extent that the underwriters sell more than shares of common stock,
the underwriters have the option to purchase up to an additional shares from
Cobalt at the initial public offering price less the underwriting discount.
----------
The underwriters expect to deliver the shares on , 1999.
Goldman, Sachs & Co.
Merrill Lynch & Co.
BancBoston Robertson Stephens
----------
Prospectus dated , 1999.
<PAGE>
[Description for EDGAR: Three pictures of Cobalt products showing in
descending order, (1) a Cobalt Qube sitting on a Cobalt RaQ, (2) a stack of
Cobalt RaQs and (3) a Cobalt Qube sitting on a desktop. Above the pictures is
the name "Cobalt Networks". To the left of the pictures is the phrase "we take
the power of networking and make it affordable, accessible and simple" and the
Cobalt logo.]
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and our financial statements and notes to
those statements appearing elsewhere in this prospectus.
Cobalt Networks, Inc.
We are a leading provider of server appliances. Server appliances are a new
category of network infrastructure devices that are specifically designed and
optimized to deliver one or a few network-based applications well. Server
appliances differ from general purpose servers, which are designed to support a
broad range of applications and are not optimized for any particular function.
Our server appliances enable organizations that could not previously establish
an online presence to do so easily, cost-effectively and reliably. As the
number of Internet users and businesses online increases, we believe the demand
for server appliances will continue to grow.
Our principal product lines, the Cobalt Qube and Cobalt RaQ, enable our
customers to perform critical Internet-related applications including file
serving, web hosting and providing software applications over the Internet such
as electronic mail and electronic commerce. Our products tightly integrate the
open source Linux operating system with software applications embedded in
dedicated hardware designs. This software includes a rich set of core
applications developed by us and by the open source software developer
community, as well as proprietary third-party applications. Our use of the
Linux operating system enables us to leverage the rapid application development
cycles of the open source software community to reduce the time to market for
our new and innovative products.
As of July 2, 1999, we had sold over 11,000 appliances to more than 1,000 end
user customers in more than 60 countries. We market and sell our products
globally through our direct sales force and our channel partners. Our target
customers are small- to medium-sized organizations, including businesses,
educational and government entities and branch offices of large organizations.
We also target web hosting and application service providers that offer
outsourced Internet services to these end users.
Our Market Opportunity
Traditionally, creating an online presence has required complex network
technologies and the deployment of costly general purpose servers, which
require a technically skilled staff to maintain. However, these limitations
often prevent their adoption by small- to medium-sized organizations seeking to
deploy their own infrastructure, due to limited budgets and technology skills.
The high cost and complexity of general purpose servers also create challenges
for web hosting and application service providers that seek to profitably
differentiate themselves in an intensely competitive and price sensitive market
by offering high value added services.
Server appliances have been developed to address the challenges faced by
small- to medium-sized organizations and web hosting and application service
providers in deploying their Internet infrastructures. Because server
appliances are explicitly designed and optimized to provide one or a few
dedicated applications, they can be easy to use, administer and integrate with
other infrastructure components, while providing a low cost, reliable solution.
3
<PAGE>
Dataquest, an industry research firm, expects the server appliance market to
grow from $2.2 billion in 1999 to approximately $15.8 billion in 2003,
representing a 64% compound annual growth rate. Dataquest expects the Linux-
based server appliance market to grow at approximately 69% a year between 1999
and 2003 and represent approximately 24% of the total server appliance market,
or $3.8 billion, in 2003.
Our Strategy
Our objective is to become the leading global provider in the emerging market
for flexible, low cost server appliances. To accomplish our objective we intend
to:
. Increase market acceptance of server appliances. We intend to increase
market acceptance of server appliances by continuing to offer products
that are simple to manage at a low cost of total ownership.
. Attract and support application developers. We intend to continue to
promote third-party development of software applications for our products
through partnership programs with independent, open source software
developers.
. Develop and leverage partnerships to enhance our market reach. We
actively seek to encourage channel partners, original equipment
manufacturers and web hosting and application service providers to add
value to our products by modifying our solutions for specific customer
needs.
. Establish a strong brand identity. We intend to continue to create brand
awareness with innovative, award winning products, progressive product
styling and creative marketing.
. Provide focused server appliances for specific needs. We intend to
continue to develop and release products that meet specific customer
needs while retaining their relatively low prices and optimized
functionality.
Other Information
Unless otherwise noted, this prospectus assumes:
. our reincorporation in Delaware to be completed prior to this offering;
. the automatic conversion of our outstanding mandatorily redeemable
convertible preferred stock into common stock upon the closing of this
offering;
. the filing of our amended and restated certificate of incorporation
authorizing a class of 10,000,000 shares of undesignated preferred stock
upon the closing of the offering; and
. no exercise by the underwriters of their option to purchase additional
shares of our common stock in the offering.
Our net revenues were $3.5 million for 1998 and $7.7 million for the six
months ended July 2, 1999. Our net losses were $10.5 million and $8.2 million
for the same periods. Our total accumulated deficit was $13.2 million as of
December 31, 1998 and was $22.6 million as of July 2, 1999.
We filed our articles of incorporation in California in October 1996 under
the name Viavision Systems, Inc. We changed our name to Cobalt Microserver,
Inc. in March 1997 and to Cobalt Networks, Inc. in June 1998. We intend to
reincorporate in Delaware prior to the completion of this offering. Our
principal executive offices are located at 555 Ellis Street, Mountain View,
California 94043. Our telephone number is (650) 623-2500.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Shares offered by Cobalt................ shares
Shares to be outstanding after the
offering............................... shares
Use of proceeds......................... For general corporate purposes, including
working capital, funding our operating losses,
capital expenditures and potential acquisitions
of complementary businesses, products and
technologies.
Proposed Nasdaq National Market symbol.. "COBT"
</TABLE>
The above information is based on 22,010,103 shares outstanding as of July 2,
1999 and excludes:
. 2,144,943 shares issuable upon exercise of options outstanding at a
weighted average exercise price of $0.69 per share as of July 2, 1999;
. 525,665 shares issuable upon exercise of warrants outstanding at a
weighted average exercise price of $2.74 per share as of July 2, 1999;
and
. a total of 6,407,870 shares available for future issuance under our
various stock plans excluding the annual increases in the number of
shares authorized under each of our plans beginning January 1, 2001. See
"Management--Incentive Plans" for a description of how these annual
increases are determined.
5
<PAGE>
Summary Consolidated Financial Information
(in thousands, except per share data)
The following table sets forth a summary of our consolidated statement of
operations data for the periods presented. The pro forma net loss per share for
the year ended December 31, 1998 and the six months ended July 2, 1999 reflects
the conversion of our mandatorily redeemable convertible preferred stock and
the elimination of dividends and related charges.
<TABLE>
<CAPTION>
Year Ended
Period from December 31, Six Months Ended
Oct. 18, 1996 ----------------- -----------------
(inception) to June 30, July 2,
Dec. 31, 1996 1997 1998 1998 1999
-------------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues............. $ -- $ -- $ 3,537 $ 449 $ 7,663
Gross profit (loss)...... -- -- 414 (133) 2,507
Loss from operations..... (82) (1,757) (10,545) (3,749) (8,244)
Net loss................. (82) (1,769) (10,478) (3,752) (8,244)
Accretion of mandatorily
redeemable
convertible preferred
stock................... -- -- (828) -- (1,191)
Net loss attributable to
holders of common
stock................... (82) (1,769) (11,306) (3,752) (9,435)
Basic and diluted net
loss per share
attributable to holders
of common stock......... $ (4.10) $ (5.47) $ (2.09) $ (2.83)
Pro forma basic and
diluted net loss per
share .................. $ (1.43) $ (0.60)
Basic and diluted
weighted average shares
outstanding............. 432 2,065 1,792 3,338
Pro forma basic and
diluted weighted average
shares outstanding...... 7,330 13,808
</TABLE>
The following table sets forth a summary of our consolidated balance sheet
data as of July 2, 1999:
. on an actual basis;
. on a pro forma basis to give effect to the automatic conversion of all
of the outstanding shares of our mandatorily redeemable convertible
preferred stock into shares of common stock upon the closing of this
offering; and
. on a pro forma as adjusted basis to reflect the automatic conversion of
the mandatorily redeemable convertible preferred stock and our receipt
of the estimated net proceeds from the sale of shares of
common stock in this offering at an assumed initial public offering
price of $ per share.
<TABLE>
<CAPTION>
July 2, 1999
-------------------------------
Pro forma
Actual Pro forma as adjusted
-------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 27,426 $ 27,426 $
Working capital............................... 24,539 24,539
Total assets.................................. 34,902 34,902
Notes payable, less current portion........... 64 64
Mandatorily redeemable convertible preferred
stock........................................ 45,646 --
Total stockholders' equity (deficit).......... (19,850) 25,796
</TABLE>
6
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You should
consider the risks described below carefully and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. If any of the following risks actually occur, our business, financial
condition and results of operations would suffer. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment in our common stock.
Risks Related to Our Financial Results
We only began selling our products in March 1998 and, as a result, you may have
difficulty evaluating our business and operating results.
Our company was founded in October 1996, and we did not begin selling our
products until March 1998. An investor in our common stock must consider the
risks and difficulties we may encounter as an early stage company in the new
and rapidly evolving server appliance market. These risks and difficulties
include:
. an evolving and unpredictable business model;
. the uncertain demand for our products;
. the need to expand our sales and support organizations;
. the need to obtain sufficient manufacturing capacity from third parties;
. the rate of growth in usage and acceptance of the Internet; and
. the competition we face from general purpose server manufacturers.
We cannot be certain that our business strategy will be successful or that we
will successfully manage these risks. If we fail to address any of these risks
or difficulties adequately, our business would likely suffer.
We have a history of losses and may experience losses in the future.
Since our inception, we have incurred significant net losses, including net
losses of $10.5 million in 1998 and $8.2 million in the six months ended July
2, 1999. In addition, we had an accumulated deficit of $22.6 million as of July
2, 1999. We expect to continue to incur significant product development, sales
and marketing and administrative expenses. As a result, we will need to
generate significant revenues to achieve profitability. We cannot be certain
that we will achieve profitability in the future or, if we achieve
profitability, to sustain it.
We anticipate that our expenses will increase substantially in the
foreseeable future as we:
. increase our direct sales and marketing activities, particularly by
expanding our direct sales forces;
. develop our technology, expand our existing product lines and create and
market additional server appliance products;
. make additional investments to develop our brand;
. expand our distribution and reseller channels;
7
<PAGE>
. pursue original equipment manufacturing relationships; and
. implement additional internal systems, develop additional infrastructure
and hire additional management to keep pace with our growth.
Any failure to significantly increase our revenues as we implement our
product and distribution strategies would also harm our business.
We may not be able to sustain our current revenue growth rates, which could
cause our stock price to decline.
Although our revenues grew rapidly in 1998 and have grown rapidly in 1999 to
date, we do not believe that we will maintain this rate of revenue growth
because we started from a small base of revenue, and it is difficult to
maintain high percentage increases over a larger revenue base. In addition,
growing competition, the incremental manner in which customers implement server
appliances and our inexperience in selling our products to small- to medium-
sized organizations could also affect our revenue growth. Any significant
decrease in our rate of revenue growth after this offering would likely result
in a decrease in our stock price.
Because our ability to accurately forecast our quarterly sales is limited, our
costs are relatively fixed in the short term and we expect our business to be
affected by seasonality, our quarterly operating results and our stock price
may fluctuate.
Because of our limited operating history and the new and rapidly evolving
market for our server appliances, our ability to accurately forecast our
quarterly sales is limited, which makes it difficult to predict the quarterly
revenues that we will recognize. In addition, we cannot forecast operating
expenses based on historical results, and most of our costs are for personnel
and facilities, which are relatively fixed in the short term. If we have a
shortfall in revenues in relation to our expenses, we may be unable to reduce
our expenses quickly enough to avoid lower quarterly operating results. We do
not know whether our business will grow rapidly enough to absorb the costs of
these employees and facilities. As a result, our quarterly operating results
could fluctuate, and such fluctuation could adversely affect the market price
of our common stock.
In addition, we expect to experience seasonality in the sales of our
products. For example, we expect that sales may decline during summer months,
particularly in Asian and European markets. We also anticipate that sales may
be lower in our first fiscal quarter due to patterns in the capital budgeting
and purchasing cycles of our current and prospective customers. These
seasonable variations in our sales may lead to fluctuations in our quarterly
operating results. It is difficult for us to evaluate the degree to which this
seasonality may affect our business, because our growth may have largely
overshadowed this seasonality in recent periods. In addition, concerns
regarding year 2000 compliance issues may adversely affect the demand for
products like ours if our customers divert resources to address year 2000
issues.
We have relied and expect to continue to rely on sales of our Cobalt Qube and
Cobalt RaQ products for our revenues, and a decline in sales of these products
could cause our revenues to fall.
Historically, we have derived substantially all of our revenues from sales of
our Cobalt Qube and Cobalt RaQ products. During 1998 and the six months ended
July 2, 1999, sales of Cobalt Qube and Cobalt RaQ products accounted for
approximately 83% and 84% of our total revenues. We expect
8
<PAGE>
that these products will continue to account for a large portion of our total
revenues for the foreseeable future. Any factors adversely affecting the
pricing of or demand for our Cobalt Qube and Cobalt RaQ products, including
competition or technological change, could cause our revenues to decline and
our business to suffer. Factors that may affect the market acceptance of our
products, some of which are beyond our control, include the following:
. the growth and changing requirements of the server appliance market;
. the performance, quality, price and total cost of ownership of our
products;
. the availability, price, quality and performance of competing products
and technologies; and
. the successful development of our relationships with original equipment
manufacturer customers and existing and potential channel partners.
We may not succeed in developing and marketing new server appliance products,
and our operating results may decline as a result.
We are developing additional server appliance products that use the Linux
operating system, particularly for use by web hosting and application service
providers. Developing new products that meet the needs of web hosting and
application service providers requires significant additional expenses and
development resources. If we fail to successfully develop and market new
products, our operating results will decline.
We introduced our caching products in July 1998 and network attached storage
products in May 1999. To date, these products have accounted for only a limited
portion of our revenues. However, our future growth and profitability could be
affected by our ability to increase sales of our caching and network attached
storage products.
If we experience any increase in the length of our sales cycle, our quarterly
operating results could become more unpredictable and our stock price may
decline as a result.
We experience different sales cycles for our various products depending on
the nature of the product, the identity of the end user and whether the sale is
direct or indirect. If we experience any increase in the length of our sales
cycle, our quarterly operating results could become more unpredictable and our
stock price could decline as a result. Sales of our Cobalt Qube products are
generally limited to one unit per end user and do not involve a lengthy
evaluation cycle, if any. We rely heavily for sales of this product on indirect
selling, where our product is recommended by a reseller or distributor. If the
sales cycle for our Cobalt Qube products becomes longer, our revenues could
become less predictable. Our Cobalt RaQ and Cobalt Cache products are generally
sold to customers who evaluate the products before committing to purchase them.
In addition, for these products, a typical customer may purchase a small number
of units and then incrementally increase the size of the installation over
time. If customers were to implement enterprise-wide evaluation programs or
purchase products for the entire organization at once, our sales cycle could
lengthen and our revenues could be erratic from quarter to quarter. We do not
have enough historical experience selling our Cobalt NAS products to determine
how the sales cycle for these products will affect our revenues.
If we cannot increase our sales volumes, reduce our costs or introduce higher
margin products to offset anticipated reductions in the average unit price of
our products, our operating results may suffer.
We have not experienced an overall decrease in the average selling prices of
our products. However, we anticipate that as products in the server appliance
market become more commoditized, the average unit price of our products may
decrease in the future. The average unit price of our
9
<PAGE>
products may also decrease in response to changes in product mix, competitive
pricing pressures, new product introductions by us or our competitors or other
factors. If we are unable to offset the anticipated decrease in our average
selling prices by increasing our sales volumes, our revenues will decline.
Changes in the mix of our sales, including the mix between higher margin Cobalt
RaQ products and somewhat lower margin Cobalt Qube products, could adversely
affect our operating results for future quarters. In addition, our margins
could be affected if we invest additional resources in our lower margin Cobalt
NAS products. To maintain our gross margins, we also must continue to reduce
the manufacturing cost of our products. Further, as average unit prices of our
current products decline, we must develop and introduce new products and
product enhancements that sell at higher margins.
Risks Related to Growth of Our Market and Acceptance of Linux
Our business is dependent on the adoption of server appliances to perform
discrete tasks for corporate and Internet-based computer networks and a
decrease in their rates of adoption could cause our revenues to decline.
For the foreseeable future, we expect that substantially all of our revenues
will continue to come from sales of our server appliance products. As a result,
we depend on the growing use of server appliances to perform discrete tasks for
corporate and Internet-based networks. If the role of server appliances does
not increase as we anticipate, or if it in any way decreases, our revenues
would decline. We believe that our expectations for the growth of the server
appliance market may not be fulfilled if customers continue to use general
purpose servers. The role of our server appliances could, for example, be
limited if general purpose servers become better at performing the functions
currently being performed by our server appliances or are offered at a lower
cost. This could force us to lower the prices of our products or result in
fewer sales of our products. In addition, if corporate information technology
organizations do not accept Linux-based operating systems, or if there is a
wide acceptance of alternative operating systems that provide enhanced
capabilities, our business would likely suffer.
The server appliance market for web hosting and application service providers
in which we compete is new and unpredictable, and if this market does not
develop and expand as we anticipate, our business will suffer. In addition,
consolidation in this market could result in our clients being absorbed into
larger organizations which might not be as receptive to our products.
The market for server appliance products, particularly those for use
primarily by web hosting and application service providers--companies that
provide Internet, intranet, extranet and application hosting services to
others--has only recently begun to develop and is evolving rapidly. Because
this market is new, we cannot predict its potential size or future growth rate.
Our Cobalt RaQ products are used primarily by web hosting and application
service providers. Recently, consolidation has begun to occur in the web
hosting and application service provider market, and many large web hosting and
application service providers are acquiring the smaller and the regional
companies. Large web hosting and application service providers that provide
hosting services may not be as receptive to our products, because their buying
programs are more likely to be based on established, proprietary operating
systems and general purpose servers. In addition, we expect that Internet
service providers that specialize in providing Internet access and non-hosting
services to consumers will not be substantial purchasers of our products.
Small- to medium-sized organizations may not accept server appliances because
they are less likely to be early adopters of new technologies due to their need
for minimal service disruptions. As a result, we believe the rates of adoption
of server appliances for small- to medium-sized organizations
10
<PAGE>
are unpredictable. Our success in generating net revenues in this emerging
market will depend on, among other things, our ability to:
. educate potential end users, original equipment manufacturers and
channel partners about the benefits of server appliances;
. establish and maintain relationships with leading original equipment
manufacturers and maintain and enhance our relationships with our other
channel partners; and
. predict and base our products on technology that ultimately becomes
industry standard.
Because our products use Linux as their operating system, the failure of Linux
developers to enhance and develop the Linux kernel could impair our ability to
release major product upgrades and maintain market share.
We may not be able to release major upgrades of our Cobalt Qube, Cobalt RaQ,
Cobalt Cache and Cobalt NAS products on a timely basis because our products use
Linux as their operating system. The heart of Linux, the Linux kernel, is
maintained by third parties. Linus Torvalds, the original developer of the
Linux kernel, and a small group of independent engineers are primarily
responsible for the development and evolution of the Linux kernel. If this
group of developers fails to further develop the Linux kernel or if Mr.
Torvalds or other prominent Linux developers were to no longer work on the
Linux kernel, we would have to either rely on another party to further develop
the kernel or develop it ourselves. To date we have optimized our Linux-based
operating system based on a version of Red Hat Linux, which we have licensed
for a nominal price. If we were unable to access Red Hat Linux, or Red Hat
Linux were to become substantially more expensive to obtain, we would be
required to spend additional time to obtain a tested, recognized version of the
Linux kernel from another source or develop our own operating system
internally. We cannot predict whether enhancements to the kernel would be
available from reliable alternative sources. We could be forced to rely to a
greater extent on our own development efforts, which would increase our
development expenses and might delay our product release and upgrade schedules.
In addition, any failure on the part of the kernel developers to further
develop and enhance the kernel could stifle the development of additional
Linux-based applications for use with our products.
We may not succeed if Linux fragments, and application developers do not
develop software for our products.
Our products utilize a version of the Red Hat Linux operating system that we
have optimized for our server appliances. If Linux becomes a proprietary
operating system model, like UNIX or Windows NT, and our products do not use
the predominant Linux operating system, we may not be able to encourage third
party developers to write software applications for use with our products. If
this were to occur, our sales might be limited and our revenues could suffer.
Risks Related to Our Product Manufacturing
We will be unable to manufacture or sell our products if our contract
manufacturers are unable to meet our manufacturing needs.
We rely on contract manufacturers to produce our products. In the future, we
may need to find a new contract manufacturer that can manufacture our products
in higher volume and at lower costs. We may not find a contract manufacturer
that meets our needs. Additionally, qualifying a new contract manufacturer and
commencing volume production is expensive and time consuming. If we are
required or choose to change contract manufacturers, we may lose sales and our
customer relationships may suffer.
11
<PAGE>
We recently switched our outside product manufacturer and may experience
transitional problems, including delays and quality control issues. In
addition, we cannot be certain that our relationship with our second
manufacturing source will continue in light of this change.
We recently switched our contract manufacturer and we do not have enough
experience with our new manufacturer to adequately judge the quality of its
products or its capability to deliver these products on time. Prior to August
1999, almost all of our products were manufactured for us by a single
manufacturer that also provided supply chain management for our products'
components. In the quarter ending July 2, 1999, we experienced problems getting
our products manufactured by this contractor in a timely fashion due in part to
the increase in our volume requirements. In response to these problems, we
switched the majority of our manufacturing to SMTC Manufacturing Corp., in
August 1999. Although we believe that this will largely resolve the problems we
faced during the quarter ending July 2, 1999, we cannot be certain that we will
not face similar problems in the future. Moreover, because our relationship
with SMTC Manufacturing is new, we could face transitional problems with either
the quality of the products or the coordination of the relationship. If SMTC
Manufacturing does not meet our volume and quality requirements, our business
could be adversely affected.
SMTC Manufacturing is only obligated to supply products to us until August
2000 and only up to certain quantities based on our forecasts. If SMTC
Manufacturing experiences delays, disruptions, capacity constraints or quality
control problems in its manufacturing operations, then product shipments to our
customers could be delayed, which would negatively impact our net revenues,
competitive position and reputation.
We have also qualified an additional manufacturing source, Flash Electronics,
Inc. Although Flash has built limited quantities of our products in the past,
we cannot be certain that we will be able to access sufficient production
capacity at Flash upon demand or that Flash will agree to continue as a
secondary manufacturer for us in light of our decision to use SMTC
Manufacturing as our primary manufacturing contractor.
We may experience production delays or disruptions if we relocate our
manufacturing to offshore facilities, which could result in lost revenues.
We anticipate that we may relocate our manufacturing operations for sales
outside North America to one of SMTC Manufacturing's offshore manufacturing
facilities during 2000. We could experience difficulties and disruptions in the
manufacture of our products while we transition to a new facility.
Manufacturing disruption could prevent us from achieving timely delivery of
products and could result in lost revenues.
Because we depend on sole source and limited source suppliers for key
components, we are susceptible to supply shortages that could adversely affect
our operating results.
We depend upon single source suppliers for our industry standard processors
and power supplies and our custom printed circuit boards, chassis and sheet
metal parts. We also depend on limited sources to supply several other industry
standard components. We have in the past experienced and may in the future
experience shortages of, or difficulties in acquiring, these components. If we
are unable to buy these components, we will not be able to manufacture our
products on a timely basis.
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Because we order components and materials based on rolling forecasts, we may
overestimate or underestimate our component and material requirements, which
could increase our costs or prevent us from meeting customer demand.
We use rolling forecasts based on anticipated product orders to determine our
component requirements. Lead times for materials and components that we order
vary significantly and depend on factors including specific supplier
requirements, contract terms and current market demand for those components. As
a result, our component requirement forecasts may not be accurate. If we
overestimate our component requirements, we may have excess inventory, which
would increase our costs. If we underestimate our component requirements, we
may have inadequate inventory, which could interrupt our manufacturing and
delay delivery of our products to our customers. Any of these occurrences would
negatively impact our business and operating results.
Risks Related to Our Marketing and Sales Efforts
Because we rely on channel partners to sell a majority of our products, our
revenues could decline substantially if our existing channel partners do not
continue to purchase products from us.
We rely on our channel partners who are distributors, such as Ingram Micro,
Merisel and Tech Data, resellers and system integrators to sell a majority of
our products in the United States. A substantial majority of our sales outside
of the United States are through other channel partners, and we rely on Nissho
Electronics to sell a majority of our products in Japan. Sales to distributors
accounted for 54% of our net revenues in 1998 and 86% of our net revenues in
the six months ended July 2, 1999. If we fail to sell our products through our
existing channel partners, we would experience a material decline in revenues.
Even if we are successful in selling our products through new channel partners,
the rate of growth of our net revenues could be materially and adversely
affected if our existing channel partners do not continue to sell a substantial
number of our products. We cannot be certain that we will be able to attract
channel partners that market our products effectively or provide timely and
cost-effective customer support and service. None of our current channel
partners are obligated to continue selling our products. We cannot be certain
that any channel partner will continue to represent our products or that our
channel partners will devote a sufficient amount of effort and resources to
selling our products in their territories.
We face risks associated with the development of our brand, and we may incur
significant costs to promote our brand and compete effectively.
We believe that we need a strong brand to compete successfully. In order to
promote and maintain our brand identity and to attract and retain customers, we
plan to increase our spending on advertising and promotions and to implement
new marketing campaigns. We cannot be certain that these strategies will be
successful. If we are unable to design and implement effective marketing
campaigns or otherwise fail to promote and maintain our brand, our sales could
decline. Our business may also suffer if we incur excessive expenses in an
attempt to promote and maintain our brand without a corresponding increase in
revenues.
We need to expand our direct and indirect sales channels, and if we fail to do
so, our growth could be limited.
In order to increase market awareness and sales of our products, we will need
to substantially expand our direct and indirect sales operations, both
domestically and internationally. If we fail in this endeavor, our growth will
be limited. To date, we have relied primarily on our direct sales force to
generate demand for our products by regional and national web hosting and
application service providers. Our products require a sophisticated sales
effort targeted at our prospective customers' information technology
departments. We have recently expanded our direct sales force and plan to hire
additional sales personnel. Competition for qualified sales people is intense,
and we might not be able to hire the quality and number of sales people we
require.
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Our expansion to international markets will result in higher personnel costs
and could reduce our operating margins due to the higher costs of international
sales.
We must expand the number of channel partners who sell our products or our
direct international sales presence to significantly increase our international
sales. We may incur higher personnel costs by hiring direct sales staff that
may not result in an increase in our revenues. We may not realize corresponding
increases in operating margins from increases in international sales, due to
the higher costs of these sales. Our sales outside of the United States
represented 44% of our total revenues in 1998 and 56% of our total revenues in
the six months ended July 2, 1999. To date, we have relied primarily on
international channel partners and have only recently begun to employ direct
sales staff outside of the United States. Even if we are able to successfully
expand our direct and indirect international selling efforts, we cannot be
certain that we will be able to create or increase international market demand
for our products.
If we are unable to expand our customer service and support organization, we
may not be able to retain our existing customers and attract new customers.
We currently have a small customer service and support organization and will
need to increase our staff to support new customers and the expanding needs of
our existing customers. If we are unable to expand our customer service and
support organization, we may not be able to retain our existing customers and
attract new customers. Hiring customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of the Linux operating
environment.
We do not have a consulting staff, and our revenues may suffer if customers
demand extensive consulting or other support services.
Our products are designed to require little or no support from us and to be
deployed quickly and easily by our customers. Many of our competitors offer
extensive consulting services in addition to server appliance products. If we
introduced a product that required extensive consulting services for
installation and use or if our customers wanted to purchase from a single
vendor a menu of items that included extensive consulting services, we would be
required to change our business model. We would be required to hire and train
consultants, outsource the consulting services or enter into a joint venture
with another company that could provide those services. If these events were to
occur, our future profits would likely suffer because customers would choose
another vendor or we would incur the added expense of hiring and retaining
consulting personnel.
Risks Related to Competition Within Our Industry
We may not be able to effectively compete against providers of general and/or
limited purpose servers.
In the market for server appliances, we face significant competition from
larger companies who market general and/or limited purpose servers and have
greater financial resources and name recognition than we do. We believe that
Compaq, Dell, Gateway, Hewlett-Packard, IBM, Sun Microsystems or other server
manufacturers, each of which is also currently competing with us by
manufacturing and selling general and/or limited purpose servers, could also
introduce server products that include the functionality that we currently
provide in our products at lower prices. If these vendors provide lower cost
server appliances with the functionality of our products coupled with the
functionality of their existing product lines, our products could become
obsolete. Even if the functionality of the standard features of these products
is equivalent to ours, we face a substantial risk that a significant number of
customers would elect to pay a premium for similar functionality rather than
purchase products from a less well-known vendor.
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<PAGE>
We may face competition in the future from established companies that have
only recently entered the server appliance market, such as Intel, Novell or
Oracle or from emerging software companies. Barriers to entry in the server
appliance market are relatively low. Increased competition may negatively
affect our business and future operating results by leading to price
reductions, higher selling expenses or a reduction in our market share.
If we fail to compete successfully in the market for server appliances
products, our revenues will decline.
We face competition from different sources, and we must compete effectively
against other current and future competitors to retain and expand our customer
base. If we fail to retain and expand our customer base, our revenues could
decline substantially.
We believe the principal factors that will draw end users to a server
appliance product include:
. depth of product functionality for the specific purpose of the device;
. ease of use;
. brand name;
. distribution and customer support; and
. total cost of ownership.
To be competitive, we must respond promptly and effectively to the challenges
of technological change, evolving standards and our competitors' innovations by
continuing to enhance our products and sales channels. Any pricing pressures or
loss of market share resulting from our failure to compete effectively could
reduce our revenues.
Our revenues could be reduced if general purpose server manufacturers make
acquisitions in order to join their extensive distribution capabilities with
our smaller competitors' products.
Compaq, Dell, Gateway, Hewlett-Packard, IBM, Sun Microsystems and other
server manufacturers may not only develop their own server appliance solutions,
but they may also acquire or establish cooperative relationships with our other
current competitors, including smaller private companies. Because general
purpose server manufacturers have significant financial and organizational
resources available, they may be able to quickly penetrate the server appliance
market by leveraging the technology and expertise of smaller companies and
utilizing their own extensive distribution channels. We expect that the server
appliance industry will continue to consolidate. For example, Whistle
Communications, a server appliance company, was recently acquired by IBM. It is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
Our products may become less attractive to customers if other vendors' products
are no longer compatible with ours or other vendors bundle their products with
those of our competitors.
Our ability to sell our products depends in part on the compatibility of our
products with other vendors' software and hardware products. Developers of
these products may change their products so that they will no longer be
compatible with our products. These other vendors may also decide to bundle
their products with other server appliances for promotional purposes. If that
were to happen, our business and future operating results could suffer if we
were no longer able to offer commercially viable products.
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<PAGE>
Server appliance products are subject to rapid technological change due to
changing operating system software and network hardware and software
configurations, and our products could be rendered obsolete by new
technologies.
The server appliance market is characterized by rapid technological change,
frequent new product introductions and enhancements, uncertain product life
cycles, changes in customer demands and evolving industry standards. Our
products could be rendered obsolete if products based on new technologies are
introduced or new industry standards emerge. For example, sales of our products
may be limited if customers widely adopt Windows 2000-based server appliances,
and our products, which do not currently operate on the Windows 2000 platform,
fail to provide comparable functionality.
Client/server computing environments are inherently complex. As a result, we
cannot accurately estimate the life cycles of our server appliance products.
New products and product enhancements can require long development and testing
periods, which requires us to hire and retain increasingly scarce, technically
competent personnel. Significant delays in new product releases or significant
problems in installing or implementing new products could seriously damage our
business. We have, on occasion, experienced delays in the scheduled
introduction of new and enhanced products and cannot be certain that we will
avoid similar delays in the future.
Our future success depends upon our ability to enhance existing products,
develop and introduce new products, satisfy customer requirements and achieve
market acceptance. We cannot be certain that we will successfully identify new
product opportunities and develop and bring new products to market in a timely
and cost-effective manner.
Risks Related to Our Products' Dependence on Intellectual Property and Our Use
of Our Brand
Our server appliance products rely on our intellectual property, and any
failure by us to protect our intellectual property could enable our competitors
to market products with similar features that may reduce demand for our
products.
Our success and ability to compete are substantially dependent upon our
internally developed technology that is incorporated into our products. We
protect our intellectual property through a combination of copyright, trade
secret and trademark laws. We have only recently commenced a patent program and
to date have not filed any patent applications. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to our intellectual property
and the distribution of our server appliances, integrated software,
documentation and other proprietary information. We believe that such measures
afford only limited protection. Others may develop technologies that are
similar or superior to our technology or design around the copyrights and trade
secrets we own. We license our proprietary software products primarily under
shrink wrap licenses, which are licenses included as part of the product
packaging or system initiation menus. Shrink wrap licenses are not negotiated
with or signed by individual customers and purport to take effect upon the
opening of the product package or commencing use of the product. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Policing
unauthorized use of our products is difficult, and we cannot be certain that
the steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our
proprietary rights as fully as those in the United States. Our means of
protecting our proprietary rights may be inadequate.
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<PAGE>
Our products and the brand names we use to market them may infringe upon the
intellectual property rights of others, and any resulting claims against us
could be costly to defend or subject us to significant damages.
Substantial litigation regarding intellectual property rights exists in the
computer equipment and network infrastructure industries. We expect that server
appliance products may be increasingly subject to third-party infringement
claims as the number of competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. We are not
aware that our products employ technology that infringes any proprietary rights
of third parties. However, third parties may claim that we infringe their
intellectual property rights. Any claims, with or without merit, could:
. be time consuming to defend;
. result in costly litigation;
. divert our management's attention and resources;
. cause product shipment delays; or
. require us to enter into royalty or licensing agreements.
These royalty or licensing agreements may not be available on terms
acceptable to us, if at all. A successful claim of product infringement against
us or our failure or inability to license the infringed or similar technology
could adversely affect our business because we would not be able to sell the
impacted product without redeveloping it or incurring significant additional
expenses.
For example, in December 1998, CUBE Computer Corporation sued us for
trademark infringement, alleging that our use of the term "Qube" in connection
with our products infringes CUBE Computer Corporation's trademark. Although we
believe this claim is without merit, in the event we were to lose this
litigation with CUBE Computer Corporation, we could be forced to pay CUBE a
royalty for continuing use of our Cobalt Qube trademark or be barred from using
the name altogether. This could result in us losing the brand equity which we
have established for our Cobalt Qube products.
Other Risks Related to Our Business
We have experienced significant growth and change in our business and our
failure to manage this growth and any future growth could harm our business.
We continue to increase the scope of our operations and have grown our
headcount substantially. As of December 31, 1998, we had a total of 68
employees, and as of July 2, 1999 we had a total of 101 employees. Our
productivity and the quality of our products may be adversely affected if we do
not integrate and train our new employees quickly and effectively. We also
cannot be sure that our revenues will continue to grow at a sufficient rate to
absorb the costs associated with a larger overall headcount, as well as
recruiting-related expenses.
Because our strategy to expand our international operations is subject to
uncertainties, we may not be able to enter new international markets or
generate significant revenues from those markets outside of the United States
in which we currently operate.
Customers outside of the United States accounted for 44% of our net revenues
in 1998 and 56% of our net revenues in the six months ended July 2, 1999. We
plan to increase our international sales activities, but we have limited
experience in developing foreign language translations of our products and
little direct experience marketing and distributing our products
internationally.
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<PAGE>
We conduct direct sales activities in Japan, the United Kingdom, Germany and
the Netherlands and indirect sales activities in Asia, elsewhere in Europe and
Mexico. Our international operations are subject to other inherent risks,
including:
. the impact of recessions in economies outside the United States;
. greater difficulty in accounts receivable collection and longer
collection periods;
. unexpected changes in regulatory requirements;
. difficulties and costs of staffing and managing foreign operations;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences; and
. political and economic instability.
Any acquisitions that we undertake could be difficult to integrate, disrupt our
business, dilute stockholder value or harm our operating results.
We may make investments in complementary companies, products or technologies.
If we buy a company, we could have difficulty in assimilating that company's
personnel and operations. In addition, the key personnel of the acquired
company may decide not to work for us. If we make other types of acquisitions,
we could have difficulty in assimilating the acquired technology or products
into our operations. These difficulties could disrupt our ongoing business,
distract our management and employees and increase our expenses. We also expect
that we would incur substantial expenses if we acquired other businesses or
technologies. Any acquisition could result in us incurring additional debt,
contingent liabilities or amortization expenses related to goodwill and other
intangible assets, any of which could harm our profits. If we issue additional
equity securities, our stockholders could experience dilution. As of the date
of this prospectus, we have no agreements or understandings regarding any
future acquisitions.
We are in the final stages of assessing our Year 2000 readiness and any Year
2000 problems with our products or our internal systems could result in third-
party claims.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
determine whether "00" means 1900 or 2000. This may result in software failures
or the creation of erroneous results.
We are in the final stages of assessing our Year 2000 readiness. We have
concluded a preliminary investigation and performed limited testing to
determine whether each component of our products and our products in
development are Year 2000 compliant. Our server appliance products operate in
complex system environments and directly and indirectly interact with a number
of other hardware and software systems. Despite the investigation and testing
by us and our partners, our server appliance products and the underlying
systems and protocols running our products may contain errors or defects
associated with Year 2000 date functions. We are unable to predict to what
extent our business may be affected if our software or the systems that operate
in conjunction with our software experience a material Year 2000 failure. Known
or unknown errors or defects that affect the operation of our server appliances
could result in:
. delay or loss of revenues;
. cancellation of customer contracts;
. diversion of development resources;
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<PAGE>
. damage to our reputation;
. increased maintenance and warranty costs; or
. litigation costs;
any of which could adversely affect our business, financial condition and
results of operations.
Despite investigation and testing by us, our internal systems may contain
errors or defects associated with Year 2000 date functions. We are unable to
predict to what extent our core business functions may be affected if our
internal systems or software experience a material Year 2000 failure. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Year 2000 Readiness" for a description of our Year 2000 readiness
efforts.
We must continue to hire and retain research and development and sales and
marketing staff to sustain our revenue growth.
We intend to hire a significant number of additional research and
development, sales, support, marketing and other personnel in 1999 and 2000.
Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain highly qualified personnel. Our future success
and ability to sustain our revenue growth also depend upon the continued
service of our executive officers and other key sales, marketing and support
personnel, particularly since we have experienced disruption from the turnover
of senior management in the past. Competition for qualified personnel in our
industry and in the San Francisco Bay Area, as well as the other geographic
markets in which we recruit, is extremely intense and characterized by rapidly
increasing salaries, which may increase our operating expenses or hinder our
ability to recruit qualified candidates.
To achieve our business objectives, we may recruit and employ skilled
technical professionals from other countries to work in the United States.
Limitations imposed by federal immigration laws and the availability of visas
could harm our ability to attract necessary qualified personnel. This may have
a negative effect on our business and future operating results.
We rely on the services of our founders and other key personnel, and those
persons' knowledge of our business and technical expertise would be difficult
to replace.
Our products and technologies are complex and we are substantially dependent
upon the continued service of our existing engineering personnel, and
especially Stephen DeWitt, our President and Chief Executive Officer, and Vivek
Mehra, our Vice President of Products and one of our founders. The loss of any
of our key employees could adversely affect our business and slow our product
development processes. Although we maintain key person life insurance policies
on our key employees, the amount of this insurance may be inadequate to
compensate us for their loss.
Errors in our products or the failure of our products to conform to
specifications could result in our customers demanding refunds from us or
asserting claims for damages against us.
Because our server appliance products are complex, they could contain errors
or bugs that can be detected at any point in a product's life cycle. In the
past we have discovered errors in some of our products and have experienced
delays in the shipment of our products during the period required to correct
these errors. These delays have principally related to new product releases. To
date none of these delays has materially affected our business. While we
continually test our products for errors and work with customers through our
customer support services to identify and correct bugs in our software and
other product problems, errors in our products may be found in the future.
Although many of these errors may prove to be immaterial, any of these errors
could be significant. Detection of any significant errors may result in:
. the loss of or delay in market acceptance and sales of our products;
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. diversion of development resources;
. injury to our reputation; or
. increased maintenance and warranty costs.
These problems could harm our business and future operating results. Product
errors or delays could be material, including any product errors or delays
associated with the introduction of new products or the versions of our
products that support operating systems other than Linux. Occasionally, we have
warranted that our products will operate in accordance with specified customer
requirements. If our products fail to conform to these specifications,
customers could demand a refund for the purchase price or assert claims for
damages.
Moreover, because our products are used in connection with critical
distributed computing systems services, we may receive significant liability
claims if our products do not work properly. Our agreements with customers
typically contain provisions intended to limit our exposure to liability
claims. However, these limitations may not preclude all potential claims.
Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Any such claims, whether or not
successful, could seriously damage our reputation and our business.
Risks Related to this Offering
Our stock will likely be subject to substantial price and volume fluctuations
due to a number of factors, many of which will be beyond our control, that may
prevent our stockholders from reselling our common stock at a profit.
The securities markets have experienced significant price and volume
fluctuations in the past and the market prices of the securities of technology
companies have been especially volatile. This market volatility, as well as
general economic, market or political conditions, could reduce the market price
of our common stock in spite of our operating performance. In addition, our
operating results could be below the expectations of public market analysts and
investors, and in response the market price of our common stock could decrease
significantly. Investors may be unable to resell their shares of our common
stock at or above the offering price. In the past, companies that have
experienced volatility in the market price of their stock have been the object
of securities class action litigation. If we were the object of securities
class action litigation, it could result in substantial costs and a diversion
of management's attention and resources.
We have broad discretion in how we use the proceeds of this offering, and we
may not use these proceeds effectively.
Our management could spend most of the proceeds from this offering in ways
with which our stockholders may not agree or that do not yield a favorable
return. Our primary purpose in conducting this offering is to create a public
market for our common stock. As of the date of this prospectus, we plan to use
the proceeds from this offering for working capital and general corporate
purposes. We may also use the proceeds in future strategic acquisitions but do
not have any acquisitions planned. Until we need to use the proceeds of this
offering, we plan to invest the net proceeds in investment grade, interest-
bearing securities.
Our officers and persons affiliated with our directors hold a substantial
portion of our stock and could reject mergers or other business combinations
that a stockholder may believe are desirable.
We anticipate that our directors, officers and individuals or entities
affiliated with our directors will beneficially own approximately % of our
outstanding common stock as a group after this offering closes. Acting
together, these stockholders would be able to significantly influence all
matters that
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our stockholders vote upon, including the election of directors or the
rejection of a merger or other business combination that other stockholders may
believe is desirable.
The provisions of our charter documents may inhibit potential acquisition bids
that a stockholder may believe are desirable, and the market price of our
common stock may be lower as a result.
Upon completion of this offering, our board of directors will have the
authority to issue up to 10,000,000 shares of preferred stock. The board of
directors can fix the price, rights, preferences, privileges and restrictions
of the preferred stock without any further vote or action by our stockholders.
The issuance of shares of preferred stock may delay or prevent a change in
control transaction. As a result, the market price of our common stock and the
voting and other rights of our stockholders may be adversely affected. The
issuance of preferred stock may result in the loss of voting control to other
stockholders. We have no current plans to issue any shares of preferred stock.
Our charter documents contain anti-takeover devices including:
. only one of the three classes of directors is elected each year;
. the ability of our stockholders to remove directors without cause is
limited;
. the right of stockholders to act by written consent has been eliminated;
. the right of stockholders to call a special meeting of stockholders has
been eliminated; and
. a requirement of advance notice to nominate directors or submit
proposals for consideration at stockholder meetings.
These provisions could discourage potential acquisition proposals and could
delay or prevent a change in control transaction. They could also have the
effect of discouraging others from making tender offers for our common stock.
As a result, these provisions may prevent the market price of our common stock
from increasing substantially in response to actual or rumored takeover
attempts. These provisions may also prevent changes in our management.
Delaware law may inhibit potential acquisition bids; this may adversely affect
the market price of our common stock, discourage merger offers and prevent
changes in our management.
Section 203 of the Delaware General Corporation Law may inhibit potential
acquisition bids for our company. Upon completion of this offering, we will be
subject to the antitakeover provisions of the Delaware General Corporation Law,
which regulate corporate acquisitions. Delaware law will prevent us from
engaging, under certain circumstances, in a "business combination" with any
"interested stockholder" for three years following the date that the interested
stockholder became an interested stockholder unless our board of directors or a
supermajority of our uninterested stockholders agree. For purposes of Delaware
law, a "business combination" includes a merger or consolidation involving us
and the interested stockholder and the sale of more than 10% of our assets. In
general, Delaware law defines an "interested stockholder" as any holder
beneficially owning 15% or more of the outstanding voting stock of a
corporation and any entity or person affiliated with or controlling or
controlled by the holder. Under Delaware law, a corporation may opt out of the
foregoing antitakeover provisions. We do not intend to opt out of the
antitakeover provisions of Delaware Law.
A total of 22,010,103, or %, of our total outstanding shares after the
offering are restricted from immediate resale, but may be sold into the market
in the near future. This could cause the market price of our common stock to
drop significantly, even if our business is doing well.
Our current stockholders hold a substantial number of shares, which they will
be able to sell in the public market in the near future. Sales of a substantial
number of shares of our common stock
21
<PAGE>
could cause our stock price to fall. In addition, the sale of these shares
could impair our ability to raise capital through the sale of additional stock.
After this offering, we will have outstanding shares of common
stock. This includes shares that we are selling in the offering,
which may be resold immediately in the public market. The remaining 22,010,103
shares will become eligible for resale in the public market as shown in the
table below.
<TABLE>
<CAPTION>
Number of shares/% of total
outstanding after the offering Date of availability for resale into public market
------------------------------ --------------------------------------------------
<S> <C>
100,000/ % 30 days after the date of the final prospectus due to an agreement
the family of a deceased co-founder has with Cobalt and the
underwriters. However, the underwriters can waive this restriction
and allow these stockholders to sell their shares at any time.
21,910,103/ % 180 days after the date of the final prospectus due to agreements
these stockholders have with Cobalt and the underwriters.
However, the underwriters can waive this restriction and allow
these stockholders to sell their shares at any time. 14,975,753 of
these shares will be subject to sales volume limitations under the
federal securities laws.
</TABLE>
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary", "Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business", contains forward-looking statements.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may", "will",
"should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors". These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform our prior
statements to actual results.
22
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of common stock
that we are selling in this offering will be approximately $ , or $ if
the underwriters exercise their over-allotment option in full, based on an
assumed public offering price of $ per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by us.
The principal purposes of this offering are to fund our operating losses,
increase our working capital, fund our capital expenditures and create a public
market for our common stock. The amounts that we actually expend for working
capital purposes will vary significantly depending on a number of factors,
including future revenue growth, if any, and the amount of cash we generate
from operations. As a result, we will retain broad discretion in the allocation
of the net proceeds of this offering. In addition, we may use a portion of the
net proceeds for further development of our product lines through acquisitions
of products, technologies and businesses. However, we currently have no present
commitments or agreements with respect to any acquisitions. Pending these uses,
we intend to invest the net proceeds in interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain any future earnings for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
23
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of July 2, 1999. Our
capitalization is presented:
. on an actual basis;
. on a pro forma basis to give effect to the automatic conversion of all
outstanding shares of our mandatorily redeemable convertible preferred
stock into shares of common stock upon the closing of this offering; and
. on a pro forma as adjusted basis to reflect the automatic conversion of
our mandatorily redeemable convertible preferred stock and our receipt
of the estimated net proceeds from the sale of shares of common
stock in this offering at an assumed initial public offering price of
$ per share.
<TABLE>
<CAPTION>
As of July 2, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Notes payable, less current portion............ $ 64 $ 64 $ 64
-------- -------- --------
Mandatorily redeemable convertible preferred
stock, $.001 par value, 17,609,875 shares
authorized, 17,084,818 shares issued and
outstanding, actual and pro forma; no shares
authorized, issued or outstanding, pro forma
as adjusted................................... 45,646 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $.001 par value, no shares
authorized, issued or outstanding, actual
and pro forma; 10,000,000 shares authorized,
no shares issued or outstanding, pro forma
as adjusted.................................. -- -- --
Common stock, $.001 par value, 26,000,000
shares authorized, actual and pro forma,
4,925,285 shares issued and outstanding,
actual; 22,010,103 shares issued and
outstanding, pro forma; 120,000,000 shares
authorized, shares issued and
outstanding, pro forma as adjusted........... 5 22
Additional paid-in capital.................... 3,921 49,550
Unearned stock compensation................... (1,134) (1,134) (1,134)
Note receivable from stockholder.............. (50) (50) (50)
Accumulated deficit........................... (22,592) (22,592) (22,592)
-------- -------- --------
Total stockholders' equity (deficit)........ (19,850) 25,796
-------- -------- --------
Total capitalization...................... $ 25,860 $ 25,860 $
======== ======== ========
</TABLE>
In addition to the shares of common stock to be outstanding after the
offering, we may issue additional shares of common stock under the following
plans and arrangements:
. 2,144,943 shares issuable upon exercise of options outstanding at a
weighted average exercise price of $0.69 per share as of July 2, 1999;
. 525,665 shares issuable upon exercise of warrants outstanding at a
weighted average exercise price of $2.74 per share as of July 2, 1999;
and
. a total of 6,407,870 shares available for future issuance under our
various stock plans excluding the annual increases in the number of
shares authorized under each of our plans beginning January 1, 2001. See
"Management--Incentive Plans" for a description of how these annual
increases are determined.
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the financial statements and related notes beginning on page F-1.
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of July 2, 1999 was $25.8 million,
or $1.17 per share. Pro forma net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our total
liabilities and divided by the total number of shares of common stock
outstanding after giving effect to the automatic conversion of our mandatorily
redeemable convertible preferred stock. Dilution in pro forma net tangible book
value per share represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the pro forma net
tangible book value per share of common stock immediately after the completion
of this offering. After giving effect to the sale of the shares of common stock
offered by us at an assumed initial public offering price of $ per share,
and after deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our pro forma net tangible book
value as of July 2, 1999 would have been approximately $ million or $ per
share of common stock. This represents an immediate increase in pro forma net
tangible book value of $ per share to existing stockholders and an immediate
dilution of $ per share to new investors of common stock. The following
table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $
Pro forma net tangible book value per share as of July 2, 1999...... $1.17
Increase per share attributable to new investors....................
-----
Pro forma net tangible book value per share after this offering.......
---
Dilution per share to new investors................................... $
===
</TABLE>
The following table summarizes on a pro forma basis after giving effect to
the offering, based on an assumed initial public offering price of $ per
share, as of July 2, 1999, the differences between the existing stockholders
and new investors with respect to the number of shares of common stock
purchased from us, the total consideration paid to us and the average price
per share paid:
<TABLE>
<CAPTION>
Total Average
Shares Purchased Consideration Price
------------------ -------------- Per
Number Percent Amount Percent Share
---------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 22,010,103 % % $
New investors.........................
---------- --- ---- ---
Total............................... % %
========== === ==== ===
</TABLE>
The foregoing discussion and tables are based upon the number of shares
actually issued and outstanding on July 2, 1999 and assume no exercise of
options or warrants outstanding as of July 2, 1999. As of that date, there
were:
. 2,144,943 shares issuable upon exercise of options outstanding at a
weighted average exercise price of $0.69 per share; and
. 525,665 shares issuable upon exercise of warrants outstanding at a
weighted average exercise price of $2.74 per share.
To the extent these options and warrants are exercised, there will be further
dilution to new investors.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and notes thereto. The
selected consolidated statement of operations data for the period from October
18, 1996 (inception) to December 31, 1996 and for the years ended December 31,
1997 and 1998, and the selected consolidated balance sheet data as of December
31, 1997 and 1998, are derived from, and are qualified by reference to, the
audited consolidated financial statements included elsewhere in this
prospectus. The selected consolidated balance sheet data as of December 31,
1996 is derived from our audited consolidated financial statements that are not
included in this prospectus. The selected consolidated statement of operations
data for the six month periods ended June 30, 1998 and July 2, 1999, and the
selected consolidated balance sheet data as of July 2, 1999, are derived from
unaudited consolidated financial statements included elsewhere in this
prospectus. We prepared the unaudited consolidated financial statements on
substantially the same basis as the audited consolidated financial statements
and, in our opinion, they include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for these periods. The historical results presented below are not
necessarily indicative of future results.
Our mandatorily redeemable convertible preferred stock had a feature which
required us to repurchase the preferred stock from its holders at their
election. Accretion of mandatorily redeemable convertible preferred stock
represents the charge to retained earnings we took in 1998 and the six months
ended July 2, 1999 to reflect this potential liability. As of April 26, 1999,
the accretion was no longer required due to a change in the terms of the
preferred stock. The outstanding shares of mandatorily redeemable convertible
preferred stock will convert into shares of our common stock on a one for one
basis in connection with the closing of this offering and no dividends will be
paid or converted into common stock. The pro forma net loss per share for the
year ended December 31, 1998 and the six months ended July 2, 1999 reflect the
elimination of the accretion and the conversion of our preferred stock.
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended
Period from December 31, Six Months Ended
Oct. 18, 1996 ----------------- -----------------
(Inception) June 30, July 2,
to Dec. 31, 1996 1997 1998 1998 1999
---------------- ------- -------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $ -- $ -- $ 3,537 $ 449 $ 7,663
Cost of revenues........ -- -- 3,123 582 5,156
----- ------- -------- ------- -------
Gross profit (loss).... -- -- 414 (133) 2,507
----- ------- -------- ------- -------
Operating expenses:
Research and
development........... 22 1,067 3,483 1,204 2,771
Sales and marketing.... -- 245 5,581 1,801 6,273
General and
administrative........ 60 445 1,895 611 1,454
Amortization of stock
compensation.......... -- -- -- -- 253
----- ------- -------- ------- -------
Total operating
expenses............ 82 1,757 10,959 3,616 10,751
----- ------- -------- ------- -------
Loss from operations.... (82) (1,757) (10,545) (3,749) (8,244)
Interest income
(expense), net......... -- (12) 67 (3) --
----- ------- -------- ------- -------
Net loss................ (82) (1,769) (10,478) (3,752) (8,244)
Accretion of mandatorily
redeemable convertible
preferred stock........ -- -- (828) -- (1,191)
----- ------- -------- ------- -------
Net loss attributable to
holders of common
stock.................. $ (82) $(1,769) $(11,306) $(3,752) $(9,435)
===== ======= ======== ======= =======
Basic and diluted net
loss per share
attributable to holders
of common stock........ $ (4.10) $ (5.47) $ (2.09) $ (2.83)
======= ======== ======= =======
Basic and diluted
weighted average shares
outstanding............ 432 2,065 1,792 3,338
======= ======== ======= =======
Pro forma basic and
diluted net loss per
share.................. $ (1.43) $ (0.60)
======== =======
Pro forma basic and
diluted weighted
average shares
outstanding............ 7,330 13,808
======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------ July 2,
1996 1997 1998 1999
----- ------- -------- --------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................. $ 15 $ 1,738 $ 2,090 $ 27,426
Working capital (deficit)................. (105) 1,542 (1,912) 24,539
Total assets.............................. 42 1,998 6,145 34,902
Notes payable, less current portion....... 70 -- 84 64
Mandatorily redeemable convertible
preferred stock.......................... -- 3,551 12,339 45,646
Total stockholders' deficit............... (82) (1,847) (13,073) (19,850)
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our financial statements and related notes included
elsewhere in this prospectus. In addition to historical information, the
discussion in this prospectus contains certain forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those anticipated by these forward-looking statements due to factors
including, but not limited to, those factors set forth under "Risk Factors" and
elsewhere in this prospectus.
Overview
We are a leading provider of server appliances. Server appliances are a new
category of network infrastructure devices that are specifically designed and
optimized to deliver one or a few network-based applications well. Our products
deliver network-based applications in a flexible and reliable manner that is
simpler and more cost-effective than current solutions. From our inception in
October 1996 to March 1998, our operations consisted primarily of start-up and
initial product development activities, recruiting personnel and raising
capital. In March 1998, we shipped our first server appliance product, the
Cobalt Qube. Since that time, we have expanded our product family into several
new markets with our Cobalt RaQ, Cobalt Cache and Cobalt NAS product lines.
Since our inception in 1996, we have incurred substantial costs to develop
our technology and products, to recruit and train personnel for our
engineering, sales and marketing and technical support departments, and to
establish an administrative organization. As a result, we had an accumulated
deficit of $22.6 million as of July 2, 1999. We anticipate that our operating
expenses will increase substantially in the future as we increase our sales and
marketing operations, develop new channels, fund greater levels of research and
development, broaden our technical support and improve our operational and
financial systems. Accordingly, we will need to generate significant revenues
to achieve profitability. In addition, our limited operating history makes it
difficult for us to predict future operating results and, accordingly, there
can be no assurance that we will sustain revenue growth or achieve
profitability in future quarters.
We currently derive substantially all of our net revenues from sales of a
limited number of products. During 1998 and the six months ended July 2, 1999,
respectively, 83% and 84% of our net revenues were derived from sales of our
Cobalt Qube and Cobalt RaQ products. Although we began selling our Cobalt Cache
products in 1998 and Cobalt NAS products during the six months ended July 2,
1999, we expect that a substantial majority of our net revenues in 1999 will
continue to be generated from sales of our Cobalt Qube and Cobalt RaQ products.
We sell our products directly through our sales force and indirectly through
channel partners that include distributors, resellers and system integrators.
Indirect sales are a majority of our total sales and account for substantially
all of our sales outside of the United States. In 1998 and the six months ended
July 2, 1999, respectively, 46% and 14% of our net revenues were from direct
sales.
Indirect sales were 54% of our net revenues in 1998 and 86% of our net
revenues in the six months ended July 2, 1999. In 1998, approximately 12% of
our net revenues came from sales to one of our distributors, Nissho
Electronics. For the six months ended July 2, 1999, sales to two of our
distributors, Tech Data and Nissho Electronics, accounted for 18% and 13% of
our net revenues, respectively. While we are seeking to diversify our customer
base and expand the portion of our net revenues which is derived from sales
through various channels, we anticipate that our operating results will
continue to depend on volume sales to a relatively small number of channel
partners.
28
<PAGE>
For direct sales and sales to resellers and system integrators, we record
revenues upon shipment. For sales to distributors, we recognize revenues upon
estimated sell through to the end users as our contracts generally provide the
distributor with limited rights of return. As a result, we defer recognition of
gross profit, captioned on our balance sheet as deferred margin, on inventory
held by distributors until we record the revenues and cost of revenues on a
sell through basis. Revenues from service obligations are deferred and
recognized on a straight line basis over the contractual period.
We provide allowances for estimated sales returns and warranty costs at the
time of revenue recognition based on our historical results. To date, our
actual sales returns and warranty expenditures have each been less than 5% of
net revenues in any quarter. However, our past product return and warranty
experience may not be indicative of future product return rates and warranty
costs.
Although we enter into general sales contracts with our channel partners,
none of our channel partners is obligated to purchase any amount of our
products pursuant to these contracts. We rely on our channel partners to submit
purchase orders for specific quantities of our products.
Our gross profit is affected by:
. fluctuations in demand for our products;
. the mix of products sold;
. the mix of sales channels through which our products are sold;
. the mix of sales within and outside North America;
. the timing and size of customer orders;
. new product introductions by us and our competitors;
. changes in our pricing policies;
. changes in component costs; and
. the volume manufacturing prices we are able to obtain from our contract
manufacturers.
During the six months ended July 2, 1999 and during the period from July 3,
1999 to August 31, 1999, respectively, we recorded unearned stock compensation
on our balance sheet of $1.4 million and $7.4 million in connection with
certain stock option grants. We will amortize this stock compensation over the
vesting period of the related award. During the six months ended July 2, 1999,
we amortized $253,000 of stock compensation. During the remainder of 1999 and
in 2000, we expect to amortize stock compensation of:
<TABLE>
<CAPTION>
Fiscal Quarter Expected Amortization of
Ending Stock Compensation
-------------- ------------------------
(in thousands)
<S> <C>
October 1, 1999....................................... $ 893
December 31, 1999..................................... 1,235
March 31, 2000........................................ 1,221
June 30, 2000......................................... 1,198
September 29, 2000.................................... 847
December 29, 2000..................................... 615
</TABLE>
We then expect aggregate per quarter stock compensation amortization of
between $522,000 and $309,000 during 2001, between $254,000 and $115,000 during
2002 and between $77,000 and $10,000 during 2003. The amount of stock
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.
29
<PAGE>
As of December 31, 1998, we had approximately $11 million of federal and
state net operating loss carryforwards for tax reporting purposes available to
offset future taxable income. These net operating loss carryforwards expire
beginning in 2011 and 2004, respectively. We have not recognized any benefit
from the future use of loss carryforwards for these periods or for any other
period since inception because of uncertainty surrounding their realization.
The amount of net operating losses that we can utilize may be limited under tax
regulations in circumstances including a cumulative stock ownership change of
more than 50% over a three year period. It is possible that such a change may
have already occurred or could occur as a result of this offering.
Our net loss attributable to holders of common stock includes accretion
charges to increase over time the carrying amount of our mandatorily redeemable
convertible preferred stock to the amount we would be required to pay if
redeemed. As of April 26, 1999, we stopped recording these charges because we
changed the terms of the preferred stock to limit the redemption amount to its
original issue price plus accrued dividends.
We had 101 employees as of July 2, 1999, a substantial increase from 68 as of
December 31, 1998 and 14 as of December 31, 1997. This rapid growth has placed
significant demands on our management and operational resources. In order to
manage our growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. If our total revenues do
not increase relative to our operating expenses, our management systems do not
expand to meet increasing demands, we fail to attract, assimilate and retain
qualified personnel or our management otherwise fails to manage our expansion
effectively, we could experience a decline in our revenues and operating
results.
Until January 1, 1999, we operated on calendar fiscal quarters and a fiscal
year ending December 31. Beginning in 1999, we operate on thirteen week fiscal
quarters ending on a Friday. Therefore, in 1999 our fiscal quarters end on
April 2, July 2, October 1 and December 31. Fiscal 2000 will end on December
29, 2000.
Results of Operations
Six Months ended June 30, 1998 and July 2, 1999
Net Revenues
We began volume shipments of our Cobalt Qube product line in March 1998. Net
revenues increased from $449,000 for the six months ended June 30, 1998 to $7.7
million in the six months ended July 2, 1999. Net revenues increased primarily
as a result of increased sales to new and existing customers of our Cobalt Qube
product line and the September 1998 introduction of the Cobalt RaQ . To a
lesser extent, our net revenues increased due to the introduction of our Cobalt
Cache product line and Cobalt NAS product line in July 1998 and April 1999,
respectively, and an expansion of our sales through our channel partners.
Net revenues from sales outside the United States increased from $143,000 in
the six months ended June 30, 1998 to $4.3 million in the six months ended July
2, 1999. The increase in absolute dollars reflected expansion of our operations
in Japan, Europe and other countries. One factor relating to the increase in
net revenues in the Japanese market was our introduction of a Japanese language
user interface in May 1998. Our net revenues from sales outside the United
States were primarily denominated in U.S. dollars. The effect of foreign
exchange fluctuations did not have a significant impact on our results.
Cost of Revenues and Gross Profit
Cost of revenues includes technology license fees, manufacturing costs,
manufacturing personnel expenses, packaging and shipping costs and warranty
expenses. We have outsourced our manufacturing and repair operations.
Accordingly, a significant portion of our cost of revenues consists of payments
to our contract manufacturers. Cost of revenues increased from $582,000 in
30
<PAGE>
the six months ended June 30, 1998 to $5.2 million in the six months ended July
2, 1999. The increase in cost of revenues was primarily due to increased sales
volume and the introduction of new products. We believe that our cost of
revenues will increase in absolute dollars in future periods but will continue
to fluctuate as a percentage of net revenues.
Gross profit increased from a gross loss of $133,000 in the six months ended
June 30, 1998 to a gross profit $2.5 million in the six months ended July 2,
1999. Gross profit (loss) as a percentage of net revenues increased from (30)%
in the six months ended June 30, 1998 to 33% in the six months ended July 2,
1999. The increase in gross profit was primarily due to increased sales volume
and the introduction of new products. We believe that the rate of growth of the
increase in gross profit will not be sustainable in future quarters.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related
expenses for personnel engaged in research and development, fees paid to
consultants and outside service providers, material costs for prototype and
test units and other expenses related to the design, development, testing and
enhancements of our products. We expense all of our research and development
costs as they are incurred. Research and development expenses increased from
$1.2 million in the six months ended June 30, 1998 to $2.8 million in the six
months ended July 2, 1999. This increase was primarily due to the hiring of
additional research and development personnel. As net revenues have increased,
research and development expenses have declined as a percentage of net revenues
from 268% in the six months ended June 30, 1998 to 36% in the six months ended
July 2, 1999. We believe that a significant level of investment in product
research and development is required to remain competitive. Accordingly, we
expect to continue to devote substantial resources to product research and
development such that research and development expenses will increase in
absolute dollars but will continue to fluctuate as a percentage of net
revenues.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer support
functions, as well as costs associated with trade shows, promotional
activities, advertising and public relations. Sales and marketing expenses
increased from $1.8 million in the six months ended June 30, 1998 to
$6.3 million in the six months ended July 2, 1999. The increase in absolute
dollars was primarily due to the hiring of additional sales and marketing
personnel and the expansion of our global sales and marketing efforts,
particularly with respect to our branding campaign. As net revenues have
increased, these expenses have declined as a percentage of net revenues from
401% in the six months ended June 30, 1998 to 82% in the six months ended July
2, 1999. We intend to expand our sales and marketing operations and efforts
substantially, both domestically and internationally, in order to increase
market awareness and to generate sales of our products. Accordingly, we expect
our sales and marketing expenses to increase in absolute dollars but continue
to fluctuate as a percentage of net revenues.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related
expenses for executive, finance, accounting, information technology, facilities
and human resources personnel, recruiting expenses, professional fees and costs
associated with expanding our information systems. General and administrative
expenses increased from $611,000 in the six months ended June 30, 1998 to $1.5
million in the six months ended July 2, 1999. The increase in absolute dollars
was primarily due to the hiring of additional administrative personnel and
associated expenses necessary
31
<PAGE>
to manage and support our increased scale of operations. As net revenues have
increased, these expenses have declined as a percentage of net revenues from
136% in the six months ended June 30, 1998 to 19% in the six months ended July
2, 1999. We expect these expenses to increase in absolute dollars but continue
to fluctuate as a percentage of net revenues as we add personnel and incur
additional costs related to the growth of our business, expansion of our
information infrastructure and our operation as a public company.
Amortization of Stock Compensation
In connection with the grant of stock options to employees during the six
months ended July 2, 1999, we recorded unearned stock compensation within
stockholders' equity of approximately $1.4 million, representing the difference
between the estimated fair value of the common stock for accounting purposes
and the option exercise price of these options at the date of grant. We
recorded no stock compensation amortization in the six months ended June 30,
1998. We recorded amortization of stock compensation of $253,000 during the six
months ended July 2, 1999. The amount of stock compensation expense to be
recorded in future periods could decrease if options for which accrued but
unvested compensation has been recorded are forfeited.
Interest Income (Expense), Net
Interest income (expense), net includes income from our cash investments net
of expenses related to our debt and lease financing obligations. We had net
interest expense of $3,000 in the six months ended June 30, 1998 and no
interest income (expense), net in the six months ended July 2, 1999. The change
from the six months ended June 30, 1998 was primarily due to an increase in
interest income earned on proceeds from issuances of our preferred stock and
was partially offset by increased interest charges on debt and capital lease
obligations.
October 18, 1996 to December 31, 1996 and Years Ended December 31, 1997 and
1998
Net Revenues
We had net revenues of $3.5 million in 1998, principally related to sales of
the Cobalt Qube and Cobalt RaQ. We had no net revenues in either 1996 or 1997.
Net revenues from sales outside of the United States were approximately 44% of
net revenues in 1998, primarily in Japan and Europe, which accounted for 21%
and 15% of our net revenues in 1998, respectively.
Cost of Revenues
Cost of revenues was $3.2 million in 1998. There was no cost of revenues in
1996 or 1997.
Research and Development
Research and development expenses increased from $22,000 in 1996 to $1.1
million in 1997 and to $3.5 million in 1998. The increase in research and
development expenses was due primarily to expanded technology development
efforts related to our new products, user interfaces, Linux operating system
optimization and application software.
Sales and Marketing
We had no sales and marketing expenses in 1996. Sales and marketing expenses
increased from $245,000 in 1997 to $5.6 million in 1998. The increase in sales
and marketing expenses during 1998 was due primarily to the addition of new
sales, marketing and customer support personnel,
32
<PAGE>
product launches, sales channel growth and our expansion of our global selling
efforts, which emphasizes the support of sales and service through distributors
and resellers.
General and Administrative
General and administrative expenses increased from $60,000 in 1996 to
$445,000 in 1997 and to $1.9 million in 1998. The increase in general and
administrative expenses in each period was due primarily to the hiring of
additional personnel and expansion of our facilities to support the growth of
our business.
Interest Income (Expense), Net
We had no interest income (expense), net in 1996. We had net interest expense
of $12,000 in 1997 and net interest income of $67,000 in 1998. The net change
from 1997 to 1998 was due to interest income on the increased average cash and
cash equivalents balances as a result of our issuances of capital stock.
33
<PAGE>
Quarterly Results of Operations
The following table presents our consolidated operating results for each of
the six quarters in the period from January 1, 1998 through July 2, 1999. The
information for each of these quarters is unaudited and has been prepared on
the same basis as our audited consolidated financial statements appearing
elsewhere in this prospectus. In the opinion of management, all necessary
adjustments, consisting only of normal recurring adjustments, have been
included to present fairly the unaudited quarterly results when read in
conjunction with our audited consolidated financial statements and related
notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Apr. 2, July 2,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues............ $ 70 $ 379 $ 1,064 $ 2,024 $ 2,634 $ 5,029
Cost of revenues........ 155 427 808 1,733 2,002 3,154
-------- -------- -------- -------- -------- -------
Gross profit (loss).. (85) (48) 256 291 632 1,875
-------- -------- -------- -------- -------- -------
Operating expenses:
Research and
development........... 528 855 990 1,110 1,397 1,374
Sales and marketing.... 590 1,050 1,709 2,232 2,753 3,520
General and
administrative........ 242 351 487 815 621 833
Amortization of stock
compensation.......... -- -- -- -- 140 113
-------- -------- -------- -------- -------- -------
Total operating
expenses............ 1,360 2,256 3,186 4,157 4,911 5,840
-------- -------- -------- -------- -------- -------
Loss from operations.... (1,445) (2,304) (2,930) (3,866) (4,279) (3,965)
Interest income
(expense), net......... 7 (10) 48 22 (128) 128
-------- -------- -------- -------- -------- -------
Net loss................ $ (1,438) $ (2,314) $ (2,882) $ (3,844) $ (4,407) $(3,837)
======== ======== ======== ======== ======== =======
As a Percentage of Net
Revenues:
Net revenues............ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues........ 221.4 112.7 75.9 85.6 76.0 62.7
-------- -------- -------- -------- -------- -------
Gross profit (loss).. (121.4) (12.7) 24.1 14.4 24.0 37.3
-------- -------- -------- -------- -------- -------
Operating expenses:
Research and
development........... 754.3 225.6 93.0 54.8 53.0 27.3
Sales and marketing.... 842.9 277.1 160.6 110.3 104.5 70.0
General and
administrative........ 345.7 92.6 45.8 40.3 23.6 16.6
Amortization of stock
compensation.......... -- -- -- -- 5.3 2.2
-------- -------- -------- -------- -------- -------
Total operating
expenses............ 1,942.9 595.2 299.4 205.4 186.4 116.1
-------- -------- -------- -------- -------- -------
Loss from operations.... (2,064.3) (607.9) (275.3) (191.0) (162.4) (78.8)
Interest income
(expense), net......... 10.0 (2.6) 4.5 1.1 (4.9) 2.5
-------- -------- -------- -------- -------- -------
Net loss................ (2,054.3)% (610.5)% (270.8)% (189.9)% (167.3)% (76.3)%
======== ======== ======== ======== ======== =======
</TABLE>
Net revenues increased in each of the six quarters from January 1, 1998
through July 2, 1999. These quarterly increases were primarily due to the
introduction of our Cobalt RaQ and to a lesser extent, our Cobalt Cache and
Cobalt NAS products, increased sales of our Cobalt Qube products, and the
addition of new channel partners and web hosting and application service
provider customers.
Cost of revenues increased in each of the six quarters from January 1, 1998
through July 2, 1999 as a result of increased unit sales. Gross profit
generally increased in each of the six quarters from January 1, 1998 through
July 2, 1999 due to increases in the volume of sales and the realization of
associated economies of scale as well as the introduction of the higher margin
Cobalt RaQ products.
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Research and development expenses increased in each of the six quarters from
January 1, 1998 to March 31, 1999, primarily due to the addition of personnel
and costs incurred for the development of new products. For the quarter ended
July 2, 1999, research and development expenses decreased relative to the prior
quarter as a result of relatively high contract research and development
expenses in the prior quarter.
Sales and marketing expenses increased in each of the six quarters from
January 1, 1998 to July 2, 1999 due to the hiring of additional sales
personnel, higher commission expense resulting from increased unit sales,
marketing programs, tradeshows and customer support.
General and administrative expenses generally increased for each of the six
quarters from January 1, 1998 through July 2, 1999. We incurred moving costs
during the quarter ended December 31, 1998 in connection with our move to a new
corporate headquarters facility in Mountain View, California.
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Accordingly, we base our expenses in part
on future revenue projections. Most of our expenses are fixed in nature, and we
may not be able to quickly reduce spending if revenues are lower than we have
projected. Our ability to forecast our quarterly sales accurately is limited,
which makes it difficult to predict the quarterly revenues that we will
recognize. We expect that our business, operating results and financial
condition would be harmed if revenues did not meet projections.
We expect that our revenues and operating results may vary significantly from
quarter to quarter, and we anticipate that our expenses will increase
substantially in the foreseeable future as we:
. increase our sales and marketing activities, including expanding our
North American and international direct sales forces;
. expand our indirect channels;
. develop our technology, expand our product lines and create and market
new products; and
. pursue strategic relationships and acquisitions.
Accordingly, we believe that quarter to quarter comparisons of our operating
results are not necessarily meaningful. Investors should not rely on the
results of one quarter as an indication of future performance.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of mandatorily redeemable convertible preferred stock, the issuance of
convertible notes, equipment financings and net revenues generated from product
sales. As of July 2, 1999, we had cash and cash equivalents of $27.4 million,
an accumulated deficit of $22.6 million and working capital of $24.5 million.
Our operating activities used cash of $1.6 million in 1997, $7.5 million in
1998, and $7.5 million during the six months ended July 2, 1999. Cash used in
operating activities for 1997 and 1998 was primarily attributable to net losses
of $1.8 million and $10.5 million, respectively. In 1998, cash used in
operating activities was also attributable to increases in accounts receivable
and inventories of $2.0 million and $500,000, respectively, offset in part by
increases in accounts payable of $4.0 million and accrued expenses of $1.1
million. Cash used in operating activities during the six months ended July 2,
1999 was attributable to a net loss of $8.2 million and increases in accounts
receivable of $2.8 million and inventory of $505,000 but was offset in part by
increases in accounts payable of
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$1.3 million, accrued expenses of $1.6 million and deferred margin of $423,000,
as well as depreciation, amortization of stock compensation and other non-cash
expenses.
Our investing activities used cash of $157,000 in 1997, $1.4 million in 1998
and $428,000 in the six months ended July 2, 1999. Our investing activities
primarily reflect purchases of computer equipment and other fixed assets.
Our financing activities provided cash of $3.5 million in 1997, $9.3 million
in 1998 and $33.2 million in the six months ended July 2, 1999. The increases
in each period resulted primarily from the net proceeds from the issuances of
mandatorily redeemable convertible preferred stock and convertible promissory
notes, borrowings under bank lines of credit and advances from a related party.
From inception, we have made capital expenditures of $2.0 million to support
our research and development, sales and marketing and administrative
activities. We expect to have capital expenditures of approximately $2.0
million for the remainder of 1999 and 2000. We also anticipate that our capital
expenditures will increase over the next several years as we expand our
facilities and acquire equipment to support expansion of our sales and
marketing and research and development activities.
In September 1998, we entered into an equipment lease financing agreement
with a leasing corporation. This agreement provides for borrowings of up to
$1.0 million at an interest rate of 10.95% per annum, and those advances are
secured by our equipment, machinery and fixtures. We are required to repay
advances under the line in 34 equal installments. As of December 31, 1998 and
July 2, 1999, respectively, we had outstanding borrowings of $123,000 and
$105,000 under this lease line.
We intend to continue to invest heavily in the development of new products
and enhancements to our existing products. Our future liquidity and capital
requirements will depend upon numerous factors, including the costs and timing
of expansion of product development efforts and the success of these
development efforts, the costs and timing of expansion of sales and marketing
activities, the extent to which our existing and new products gain market
acceptance, market developments, the costs involved in maintaining and
enforcing intellectual property rights, the level and timing of license
revenues, available borrowings under line of credit arrangements and other
factors. We believe that the proceeds from this offering, together with our
current cash and investment balances and any cash generated from operations and
from current or future debt financing, will be sufficient to meet our operating
and capital requirements for at least the next 12 months. However, it is
possible that we may require additional financing within this period. We have
no current plans, and we are not currently negotiating, to obtain additional
financing following the completion of this offering. The factors described in
this paragraph will affect our future capital requirements and the adequacy of
our available funds. We may be required to raise additional funds through
public or private financings, strategic relationships or other arrangements. We
cannot assure you that such funding, if needed, will be available on terms
attractive to us, or at all. Furthermore, any additional equity financing may
be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. If we fail to raise capital when needed, our failure
could have a negative impact on our operating results and financial condition.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. We will be subject
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to SFAS No. 133 commencing in 2001. We have not yet determined what the impact
of SFAS No. 133 will be on our financial position or results of operations.
Year 2000 Readiness
The Year 2000 Issue
The year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations which are triggered by
advancement of date records past the year 1999. For example, if software that
uses the calendar year in computations is not ready for the millennial calendar
change, it may interpret a 21st century date as a 20th century date (for
example, mistaking 2001 for 1901).
Readiness of Our Products
We have designed our products to be ready for the year 2000 calendar change.
We represent to our customers that each software and hardware product supplied
by us will accurately process date data from, into and between the 20th and
21st centuries and the years 1999 and 2000, including leap year calculations,
when used in accordance with the product documentation provided by us. We also
represent to our customers that upon notification of any year 2000 problems
with our products, we will remedy it by product repair or replacement.
We do not represent to our customers that the networks to which our products
are connected will not have problems with year 2000 issues, since these
networks incorporate hardware and software products supplied by other
companies. We cannot evaluate the readiness of our products for year 2000 with
the innumerable combinations possible with other companies' products. We may,
therefore, face claims or complaints based on year 2000 problems related to our
customers' networks, even when we are not the source of their problem. We are
not aware of any such claims or complaints about us, but we may incur the cost
of legal or other defense and explanation of our product regardless of the
merits of such claims.
Readiness of Our Systems and Facilities
Our business may be affected by year 2000 issues. We have completed our
systems updates, upgrades and replacements of non-ready systems. Systems
include internal hardware and software as well as external services provided by
other companies, including contract manufacturing, product development,
information processing and facility services. We are not currently aware of any
unresolved year 2000 problems relating to any of our internal systems. We do
not believe that we have any significant systems that are not year 2000
compliant. The majority of our software, hardware and operating systems have
been acquired as new product in the last two years. Most of it is shrink
wrapped product and is still maintained by existing vendors. We do not believe
that we have any significant systems that contain embedded chips that are not
year 2000 compliant. Most of our hardware is made of branded components and has
been acquired in the last two years from manufacturers which are still in
business. We are not using legacy hardware or software that would be more
likely to have calendar issues because of its age.
Cost of Product and Internal Systems Preparation
Based on our assessment to date, we do not expect the total cost of year 2000
preparation and remediation to be material to our business. To date, our
preparation and remediation costs have not been material.
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<PAGE>
Year 2000 Risk
An internal or external business disruption caused by the year 2000 issue
could interrupt our operations and damage our relationships with our customers.
An internal disruption unique to us could give a comparative advantage to our
competitors. Failure of our internal systems and critical external services to
be ready for the year 2000 could delay order processing, issuing invoices or
development and shipment of products. The cost of recovery from failures could
be significant.
Our customers' purchasing plans could be affected by year 2000 issues if they
need to expend significant resources to fix their existing systems. This
situation could divert funds and resources otherwise available for new product
purchase. In addition, some customers may wait to purchase our products until
after the year 2000, which may reduce our revenues in the near future.
We are unable to determine at this time whether these or other year 2000
failures will occur and will have a material impact on our business, results of
operations, or financial condition. This inability is particularly due to the
potential scope of the year 2000 problem on and the inability to assure the
readiness of external service providers, including utilities, government
entities and other vendors. We have not developed, and we have no current plans
to develop in the near future, a contingency plan to deal with the effects of
this worst case scenario.
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BUSINESS
Overview
We are a leading provider of server appliances. Server appliances are a new
category of network infrastructure devices that are specifically designed and
optimized to deliver one or a few network-based applications well. Server
appliances differ from general purpose servers, which are designed to support a
broad range of applications and are not optimized for any particular function.
Our server appliances enable organizations that could not previously establish
an online presence to do so easily, cost-effectively and reliably. As the
number of Internet users and businesses online increases, we believe the demand
for server appliances will continue to grow.
Our principal product lines, the Cobalt Qube and Cobalt RaQ, enable our
customers to perform critical Internet-related applications including file
serving, web hosting and providing software applications over the Internet,
such as electronic mail and electronic commerce. We also offer network-attached
storage products, which provide overflow file storage for network users, and
network caching products, which enable more efficient bandwidth usage and
improve speed of Internet content delivery. Our products tightly integrate the
open source Linux operating system software with applications embedded in
dedicated hardware designs. This software includes a rich set of core
applications developed by us and by the open source software developer
community, as well as proprietary third party applications. Our use of the
Linux operating system enables us to leverage the rapid application development
cycles of the open source software community to reduce the time to market for
our new and innovative products.
As of July 2, 1999, we had sold over 11,000 appliances to more than 1,000 end
user customers in more than 60 countries. We market and sell our products
globally through our direct sales force and our channel partners. Our target
customers are small- to medium-sized organizations, including businesses,
educational and government entities and branch offices of large organizations.
We also target web hosting and application service providers that offer
outsourced Internet services to these end users.
Our objective is to become the leading global provider in the emerging market
for server appliances. We intend to increase market acceptance of server
appliances through a focus on providing solutions with a compelling value
proposition to targeted market segments. We intend to continue to encourage
open source and third party software application developers to create and
market software applications for our products through a comprehensive
partnership program. We expect to continue to base our products on industry
standard hardware components and the Linux open source operating system, so
that we can encourage our distributors, original equipment manufacturers and
web hosting and application service providers to sell our products by enabling
them to add value through modification of our solutions for specific customer
needs. We intend to establish Cobalt as the premier server appliance brand for
our target customers and third party application developers.
Industry Background
The emergence of the Internet as the backbone of electronic commerce and
content delivery has created the opportunity for small- to medium-sized
organizations to significantly expand their market reach. The Internet allows
these organizations to benefit from powerful information technology previously
beyond their economic and technical resources. In order to create an online
presence, these organizations can purchase and deploy their own infrastructure
or rely upon outsourced infrastructure deployed by web hosting and application
service providers that offer services such as electronic mail and electronic
commerce.
Traditionally, creating an online presence required the deployment of general
purpose servers and complex network technologies. General purpose servers are
designed to perform a large variety
39
<PAGE>
of functions including providing database, electronic mail, network management,
file management and application services. However, the high cost of ownership
and the complexity of general purpose servers often prevent their adoption by
small- and medium-sized organizations seeking to deploy their own
infrastructure, due to limited budgets and scarce and costly technology skills.
The high cost and complexity also create challenges for web hosting and
application service providers that seek to profitably differentiate themselves
in an intensely competitive and price sensitive market by offering high value
added services to small- to medium-sized organizations.
Server appliances have been developed to address the challenges faced by
small- to medium-sized organizations and web hosting and application service
providers in deploying their Internet infrastructures. Because server
appliances are explicitly designed and optimized to provide one or a few
dedicated applications, they can:
. be easy to install, use and administer;
. be easy to integrate with other infrastructure components;
. have a low acquisition price and low total cost of ownership; and
. deliver robust and scalable performance on an ongoing basis.
These benefits enable small- to medium-sized organizations to rapidly and
cost-effectively establish an online presence through the use of server
appliances. These benefits also enable larger organizations to easily
complement their existing general purpose servers by deploying application
specific server appliances and thereby reduce conflicting capacity demands on
their general purpose servers. In addition, these benefits allow web hosting
and application service providers to increase profitability by offering value
added services. In situations that may require the dedication of a single
server to a single customer to provide customized services, server appliances
enable these providers to avoid the high cost and complexity of a general
purpose server infrastructure.
Server appliances can be developed either with proprietary or open source
operating systems, such as Linux. Open source software uses publicly available
source code that can be copied, modified and distributed by any software
developer with very few restrictions. Unlike proprietary, or closed, software
products whose development is typically controlled by a single company, open
source software is developed by a community of independent developers who
permit others to access their improvements and modifications freely. Open
source software, such as Apache web server, Perl and Sendmail, is gaining
increasing acceptance, particularly among web hosting and application service
providers. Open source software may provide the following benefits to server
appliances:
. Better application integration: because the source code is open, server
appliance vendors may have a better understanding of the interaction of
all system components, which allows them to more tightly integrate their
applications with the operating system and improve system stability.
. Lower cost base: open source operating systems and software are
available at no cost and therefore can be incorporated in a system
without the need for royalty payments or significant internal research
and development costs.
. Shorter development cycles: the collaborative nature of the worldwide
developer base for open source software enables server appliance vendors
to improve their products more quickly than they can improve products
based on proprietary operating systems.
Dataquest, an industry research firm, expects the server appliance market to
grow from $2.2 billion in 1999 to approximately $15.8 billion in 2003,
representing a 64% compound annual growth rate. Dataquest believes that server
appliances based on open source operating systems, including
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<PAGE>
Linux, will be a significant market segment. Dataquest expects the Linux-based
server appliance market to grow at approximately 69% a year between 1999 and
2003 and represent approximately 24% of the total server appliance market, or
$3.8 billion, in 2003. The web hosting and application service provider market
represents an important part of the overall server appliance market
opportunity. Forrester Research estimates that Internet hosting revenues will
increase from approximately $2.0 billion in 1999 to approximately $14.6 billion
by 2003.
In response to the growth and opportunities in the server appliance market,
several server appliance vendors have emerged. However, many of the server
appliances available today do not deliver fully on the promise of the benefits
of server appliances. Some of these server appliances use closed, proprietary
architectures that restrict users' abilities to integrate them with other
applications and services. In order to achieve ease of use and low cost, others
offer systems that are not easily scalable or offer insufficient power to
adequately perform the functions for which they were designed. In addition,
server appliances offered by more established server vendors are typically
scaled down versions of their general purpose servers that fail to achieve an
optimal mix of low cost, ease of use, scalability, openness and performance.
Finally, some general purpose server vendors have long-standing relationships
with third party operating system and application vendors that may limit their
ability to aggressively pursue the opportunity for open source based server
appliances.
The Cobalt Solution
We are a leading provider of a new category of network infrastructure devices
known as server appliances. Our products deliver network-based applications in
a flexible and reliable manner that is simpler and more cost-effective than
other current solutions. Our server appliances tightly integrate a version of
the Red Hat Linux operating system that we have optimized for our products, a
rich set of core applications which have been developed by us and the open
source software developer community, and industry-standard hardware components.
We believe that we are well positioned to become the leading provider of server
appliance solutions for small- to medium-sized organizations and web hosting
and application service providers by offering the following advantages:
Complete, integrated solutions
Our products provide our customers with complete solutions that do not
require additional hardware or software to cost-effectively deliver the
specific applications for which the product is designed. Our use of open source
software and industry standard hardware enables us to fully understand the
interaction of all components of the system and design a more tightly
integrated solution. In addition, our products provide significant advantages
over other servers based on open source operating systems that are not designed
to fully integrate the applications and operating system to perform a specific
function. The tight integration of our software applications, operating system
and hardware results in a more reliable and stable product that is less likely
to cause disruptions in network services. This integration also enhances the
security of our solutions and enables us to optimize the hardware design in a
cost-effective manner.
Ease of installation and use
Our products are pre-configured and include a simple set up procedure
designed to require less than 15 minutes for deployment by a non-technical
person. In addition, our products are easy to use, can be administered from any
Internet-accessible location and require minimal space and power. Our web-based
user interface shields the user from technical complexities and minimizes the
need for trained information technology staff.
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<PAGE>
Low cost of ownership
We design our server appliances to deliver robust performance at a
significantly lower installed cost than general purpose servers. We can sell
our products at lower prices because our operating systems are based on
royalty-free open source software, and we avoid the use of unnecessary hardware
components by optimizing our products to perform a specific function. Our
products require limited skills and time to deploy and do not require a network
shut-down to install or add additional appliances. In addition, the software
tools included in our products minimize ongoing system management and support
efforts that would otherwise be provided by trained information technology
staff, thus greatly reducing the appliances' lifetime cost of ownership.
Building blocks for future growth
As the amount of data traffic handled by a Cobalt server appliance increases,
additional units can be added to increase capacity at little incremental
expense beyond the cost of the units themselves. The ability to easily add
additional server appliances provides an evolution path that allows customers
to develop their network infrastructure according to their needs without a high
upfront investment. Our low cost server appliances are designed to be building
blocks for scalable solutions. We are developing a software tool to enable our
Cobalt RaQ products to interoperate in a fully scalable fashion. We expect this
software tool to be released in early 2000.
Stable, open source development environment
Our products use a version of the Red Hat Linux operating system, an open
source operating system that undergoes a continuous cycle of enhancement by a
global community of open source developers. We optimize Red Hat Linux for our
server appliances by eliminating large portions of general purpose source code
that is unnecessary for a dedicated server appliance and tailoring the
remaining source code to work effectively with our dedicated hardware. Our open
source operating system is tightly integrated with our hardware components to
provide a reliable and stable environment upon which we and third party
developers can develop applications with a rapid time to market. In addition,
because our source code is royalty free and open, we believe our products will
attract a large community of third party application developers. We enjoy the
benefits of our optimizations exclusively for a short period of time, then
publish them for further enhancement by the open source development community.
Cross platform compatibility
Our products employ an Internet standards-based architecture that enables
them to function with other network devices that operate on a variety of
operating systems, including Windows NT and UNIX. By being cross platform
compatible, our products enable our customers to realize the benefits of our
products as part of their existing network infrastructure.
The Cobalt Strategy
Our objective is to become the leading global provider in the emerging market
for flexible, low cost server appliance products. To accomplish our objective,
the key elements of our strategy include:
Increase Market Acceptance of Server Appliances
We intend to increase market acceptance of server appliances through a focus
on providing solutions with a compelling value proposition to targeted markets.
We intend to continue to offer products that complement general purpose servers
by removing one or more specific, resource
42
<PAGE>
intensive functions from a network's general purpose server to improve network
performance and stability. Our approach to increase market acceptance of server
appliances is to:
. Add new applications. We intend to continue to deliver high value
results with application specific products. Our current proprietary
applications include solutions for web hosting, electronic mail, web
publishing, electronic commerce, file management and network services.
We intend to leverage this experience to expand the scope of our
software applications to address other specific needs of our target
customers. In addition we will continue to integrate third-party
applications into our products.
. Simplify management. We intend to further enhance the ease of use and
reliability of our products. For example, we are working to develop a
management tool that enables outsourced hosting and application service
providers to manage, troubleshoot and monitor a number of server
appliances from a single console.
. Add new hardware designs. We intend to continue to develop hardware
designs that address our customers' specific needs. We expect to
continue to rapidly introduce innovative, new products with enhanced
functionality that incorporates customer feedback and demands.
. Continue to offer low prices. We expect to continue to offer our server
applications at low cost by using readily available standard hardware
components and leveraging a royalty-free Linux-based operating system.
. Enable partners to add value. We intend to continue to design our
products with our open source operating system and application
interfaces to allow channel partners to add value through software
applications that they sell with our products. This design strategy will
also enable web hosting and application service providers to provide
value added services.
Attract and support application developers
Ensuring the existence of a rich set of software applications is a vital
requirement for offering complete, tightly integrated solutions and driving the
success of our server appliances. We intend to actively promote third-party
development of software applications for our products through a comprehensive
partnership program with independent, open source software developers. We
believe that our use of the Linux operating system is a fundamental element of
this program, since an open source operating system better enables developers
to create optimized and reliable high value added applications. We believe
there are currently over 40 applications developed by third parties for our
product platform. We intend to leverage our position in the Linux community in
order to expand upon the base of third party developers for our products
significantly by providing a high volume channel for their Internet and
electronic commerce applications. In order to encourage the continued growth of
the Linux community, we will continue to give back to the community those
elements of source code that we write that are relevant to the Linux kernel,
while still developing a proprietary base of intellectual property.
Develop and leverage partnerships to enhance our market reach
We base our products on industry standard hardware components and our open
source operating system to encourage channel partners, original equipment
manufacturers and web hosting and application service providers to add value by
modifying our solutions to address specific needs of our customers. Our
leveraged distribution strategy includes:
. Multi-tier sales channel. We believe that a highly leveraged sales
channel is critical for effectively penetrating our target markets. We
make it attractive for our distribution, reseller and system integrator
partners to resell our solutions by maximizing the opportunity for them
to add value to our products. In order to effectively reach small- to
medium-sized
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businesses, we intend to continue to enter into agreements with many of
the world's leading distributors, resellers and system integrators. We
also intend to continue to expand our sales channel globally, while
strengthening our direct sales efforts in key geographies where use of
the Internet is growing most rapidly.
. Web hosting and application service providers. We intend to promote the
sale of our products by leveraging our relationships with outsourced,
dedicated web hosting and application service providers. We believe our
highly-focused approach to serving this market provides us with an
advantage over competitors. Through our direct sales model we have
developed relationships with many of the prominent web hosting and
application service providers that are competing effectively by offering
higher revenue, value added application and hosting services. We expect
to leverage our leadership in this market by assisting our customers to
market to their customers.
. Original equipment manufacturer partnerships. We also intend to enter
into original equipment manufacturer partnerships. Our growing presence
in the server appliance market makes us an appealing partner for general
purpose server vendors. We intend to form strategic partnerships with
original equipment manufacturers for our products in order to rapidly
expand our market reach and become the technology provider of choice for
server appliances.
Establish a strong brand identity
We intend to establish Cobalt as the premier server appliance brand for our
target customers and third party application developers. We intend to continue
to create brand awareness with innovative, award winning products, progressive
product styling and creative marketing. We believe that this distinctive brand
identity is an important component of our efforts to increase market
acceptance of server appliances, expand participation in our software
development program and develop our reputation within a broad community of
potential partners and customers. We intend to actively seek new opportunities
to refine and extend our brand recognition.
Provide focused server appliances for specific needs
We intend to continue to develop and release products that meet specific
customer needs while retaining their relatively low prices and optimized
functionality in comparison to both general purpose servers and other server
appliances. For example, our Cobalt Qube and Cobalt RaQ products are available
with a user interface in the Japanese language, and we are developing several
other language specific user interfaces. Our Cobalt RaQ products are designed
specifically to minimize space usage, because more effective use of rack space
in a service provider's facility can increase the number of customers that the
service provider can host from a single facility. Our target customers are
small- to medium-sized organizations, including small- to medium-sized
businesses, educational and governmental entities and branch offices of large
organizations. We also target the web hosting and application service
providers that offer outsourced Internet services to these end users.
Products
All of our products are built on a common core software and hardware
architecture that enables us to develop and market new products rapidly. We
have introduced 16 products based on our four principal product lines in the
last 18 months. Our products are based on the Linux operating system, an
operating system known for its high reliability, performance, scalability,
customizability and low memory requirements. We have optimized the Red Hat
Linux operating system to improve the functionality and reliability of our
products. We have invested in the development of proprietary technology for
our products that includes core applications, software toolkits, management
tools, system maintenance daemons and clustering technologies.
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We also have an application developer program through which we encourage
third-party software developers to create additional software applications for
our products. Examples of those applications are electronic commerce engines, a
medical imaging file server program and a cellular telephone voicemail server
program. We believe that end users will benefit from our open source model by
having many additional applications available to them. We provide the relevant
portions of our source code to third party software developers to assist them
in creating applications that are closely integrated with our products'
operating systems, applications and hardware. We provide other assistance to
application developers including telephone support, electronic mail bulletin
boards and a web site. We believe that there are currently more than 40
applications that have been developed by third parties for our products. We
believe that other third party applications for our products are currently in
development.
The following table reflects our product lines:
<TABLE>
<CAPTION>
Date of First Starting
Product Line Commercial Sale List Price Function
------------ --------------- ---------- --------
<C> <C> <C> <S>
Cobalt Qube March 1998 $ 999 Small- to medium-sized organizations
(1st generation) can use these products for
dedicated functions such as
January 1999 electronic mail, file servers and
(2nd generation) print servers or to provide
Internet access and web serving. We
introduced a Japanese language user
interface for the Cobalt Qube in
May 1998.
Cobalt RaQ September 1998 $1,299 Web hosting and application service
(1st generation) providers can use our Cobalt RaQ
products for dedicated hosting
March 1999 services. The compact design of the
(2nd generation) product is intended to facilitate
its use in standard size networking
facility racks. We introduced a
Japanese language user interface
for this product in December 1998.
Cobalt Cache July 1998 $1,899 Customers can use our Cobalt
(1st generation) CacheQube and CacheRaQ products to
provide faster web response time
April 1999 and eliminate redundant traffic
(2nd generation) travelling over wide area network
links. These products are targeted
at markets where bandwidth is at a
premium and public communications
networks are less developed.
Cobalt NAS April 1999 $1,799 Customers can use the Cobalt NASRaQ
to add storage to an existing
network. For users of the network,
the Cobalt NASRaQ appears to be
another hard drive.
</TABLE>
Industry Recognition of Our Products
Our Cobalt Qube products have received recognition for their innovation and
quality, including the following industry awards:
. ""Best of Show", Showcase, January 1999
. ""Innovation of the Year", PC Computing, November 1998
. ""Most Valuable Product Award--Small Business Server Category", PC
Computing, November 1998
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. ""Editor's Choice", PC Magazine, July 1998
. ""Best New System Hardware", VARVision industry show, Spring 1998
. ""Best of Show", VARVision industry show, Spring 1998
. ""Best New Hardware Product", Reseller XChange, March 1998
. ""Best of Show", Reseller XChange, March 1998
In addition, our other products have received industry awards including the
following:
. The Cobalt RaQ for "Best Security", Internet World industry show, July
1999
. The Cobalt CacheRaQ for "Editor's Choice", Network Computing, May 1999
. The Cobalt CacheQube for "Best of Show for Infrastructure Hardware",
Internet World industry show, July 1998
Technology
We have invested in developing proprietary technology for our products that
includes our core operating system, core applications, software toolkits,
management tools, system maintenance daemons and clustering technologies.
Core Operating System
Our products are based on the Linux operating system, an operating system
known for its high reliability, performance, scalability, customizability and
low memory requirements. We recognize the many benefits that an open source
operating system, such as Linux, provides for the development of server
appliances. Linux is open source software that is constantly being improved by
a broad base of developers without requirements for royalty obligations to the
developers. We can customize existing Linux operating system applications or
adopt different versions of Linux without lengthy product transitions. We have
free access to the entire Linux source code and have modified Red Hat's version
of the Linux operating system to optimize it for use in our products.
Core Applications
Our server appliances offer a rich set of core applications such as web
serving, domain name serving, file transfer protocol, electronic mail,
discussion groups and web authoring. We provide integrated and optimized
royalty-free industry standard software such as Apache, a web serving software,
BIND, a file serving application, Perl, a scripting language for web site
development, and Sendmail, an electronic mail program. We also provide our
internally developed software for discussion groups and web page authoring as
integrated features of our Cobalt Qube and Cobalt RaQ products. We are
investing significant resources in deploying, testing and tightly integrating
these diverse applications with consistent, user friendly interfaces.
Software Toolkit
We have developed and are continuing to enhance a proprietary software
toolkit that provides a consistent interface between the applications and the
operating system. Our software toolkit enables us to provide uniform browser-
based user interfaces across all server functions and applications. Our custom
software toolkit overcomes the complexity generally associated with setting up,
managing, monitoring and using various complex network daemons and
applications. We intend to continue to develop and improve interfaces to our
software to assist third parties such as web hosting and application service
providers and value added resellers to add software applications to our
platform.
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<PAGE>
System Maintenance Daemons
To improve reliability and reduce cost of ownership of our server appliances,
we have developed a set of software daemons, which are software programs that
continuously monitor the state of the various software and hardware functions
on the server to permit troubleshooting. Our system maintenance daemons
automatically inform the user of excessive server resource utilization and
recommend corrective action. Our system maintenance daemons also attempt to fix
any problems automatically that the software detects and proactively inform the
user if an attempted solution was unsuccessful. The proactive problem
resolution enhances the overall reliability of the appliance while reducing
management overhead. Our products also support industry standards including
Simple Network Management Protocol.
Clustering Technologies
Our products incorporate our proprietary clustering technologies that
distribute network usage across a number of server appliances for improved
network performance. These technologies allow our server appliances to be
clustered without using expensive load balancing equipment. For example, these
technologies enable a user to deploy additional Cobalt CacheRaQ units as needed
to support increased network usage.
Management Tools
We have several management tools, such as our maintenance and restore
toolkit, that assist the user to perform maintenance and administrative tasks
on our server appliances. In addition, we are developing a web-based remote
management tool for monitoring the status and configurations of a large number
of our server appliances on a single network. In addition, this management
software will allow systems administrators to provide software upgrades to
multiple server appliances and configure multiple machines from a single
management console in an easy to use and cost effective manner.
Embedded Processor Hardware Platform
We enable our products to deliver high performance cost effectively through
our proprietary hardware and motherboards that leverage standard components
including hard disk drives, memory and processors. We have eliminated
unnecessary components, thus reducing cost and power consumption and increasing
reliability. With the compact size of our Cobalt RaQ products, our service
provider customers are able to achieve three to four times the server density
of general purpose servers, a key advantage in the web hosting and application
service provider market where rack space is at a premium.
Customers
As of July 2, 1999, we had sold more than 11,000 of our server appliance
products to more than 1,000 end user customers in over 60 countries. Our direct
customers include regional and national web hosting and application service
providers in the United States, in addition to our channel partners. Our
indirect customers are primarily composed of small- to medium-sized
organizations and web hosting and application service providers. With respect
to both our direct and indirect sales, customers often buy for a single
location, department or division, and then, based upon the initial success of
the products, later expand their use of our products into other parts of the
organization. In 1998 and the six months ended July 2, 1999, no single end user
customer accounted for more than 10% of our revenues.
Sales and Marketing
We sell our products through our direct sales force and channel partners
including distributors, resellers and system integrators. Historically our
direct sales efforts have focused on regional and
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national web hosting and application service providers in the United States. We
intend to continue and expand our sales efforts to web hosting and application
service providers. We also intend to pursue sales to the growing number of web
hosting and application service providers outside of the United States. We have
relied on original equipment manufacturers for only a limited number of sales,
but we intend to explore opportunities to work with additional original
equipment manufacturers in the future.
Direct Sales
The primary function of our direct sales force is to generate demand for our
products that is fulfilled either directly or through channel partners. As of
July 2, 1999, we had a direct sales organization of 13 persons. We encourage
our direct sales staff to work with potential web hosting and application
service provider customers regardless of whether the customer ultimately
purchases our product from us or one of our channel partners. We believe this
model enables us to encourage proliferation of our products in this key
customer group. Our direct sales force uses a team approach, which we believe
allows us to achieve better control of the sales process and respond more
rapidly to customer needs. Our direct sales force for North America is
distributed throughout the United States. In 1998 and the six months ended July
2, 1999, respectively, 46% and 14% of our net revenues were from direct sales,
substantially all of which was from the United States.
We opened sales offices in Japan, the United Kingdom and Germany in 1998.
During the six months ended July 2, 1999, we established direct sales
activities in the Netherlands. Although 44% and 56% of our net revenues were
from outside the United States in 1998 and the six months ended July 2, 1999,
respectively, almost all of our direct revenues were from the United States.
Channel Partners
As the server appliance market has matured, we have developed a multi-tier
sales channel that is comprised of distributors, resellers and system
integrators. Our channel consisted of over 250 partners in 30 countries as of
July 2, 1999. We believe that as the market for server appliances matures,
sales through channel partners will represent an increasing percentage of our
sales.
Sales to our channel partners represented 86% of our net revenues in the six
months ended July 2, 1999. Channel partner sales in the United States and
outside the United States were approximately 45% and 41% of net revenues,
respectively, in the six months ended July 2, 1999. Our top five channel
partners based on net revenues in the six months ended July 2, 1999 were:
<TABLE>
<S> <C>
Ingram Micro Nissho Electronics (Japan)
Merisel Tech Data
Mitsui (Japan)
</TABLE>
In addition to delivering our server appliances to small web hosting and
application service providers and small- to medium-sized organizations,
distributors enable us to more effectively pursue a number of vertical markets.
Vertical markets and applications such as branch offices of large
organizations, government, education and web-based direct resellers are targets
of our channel partners.
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<PAGE>
Original Equipment Manufacturers
We recently began utilizing original equipment manufacturers in our selling
efforts. We have initiated several original equipment manufacturer
relationships for our Cobalt Qube products. We plan to expand our selling
efforts through original equipment manufacturers and are currently evaluating
opportunities, particularly with respect to sales of our Cobalt Qube products.
Marketing Programs
To support our growing sales organization and channel, we have devoted
significant resources in the past year to building and launching a series of
marketing campaigns. Our marketing efforts have included a number of programs,
such as seminars, industry trade shows, mailings to resellers, analyst and
press tours, print and online advertising and public relations. We believe
these marketing programs have resulted in better awareness of our Cobalt brand.
In March 1999, we announced the launch of a two-tier distribution marketing
program. Our True Blue Partner and True Blue Sapphire Partner programs are for
web hosting and application service providers that resell a specified number of
Cobalt products. These web hosting and application service providers resell our
products for dedicated web hosting with our marketing support. We have similar
True Blue and True Blue Sapphire programs for value added resellers. In
addition to partner development activities, we also actively work on end user
education.
Customer Advocacy and Support
We believe that high quality customer service and support is critical to the
successful marketing and sale of our products. We are developing a
comprehensive service and support organization to manage customer accounts and
expect to provide an increasing level of support as our products are deployed
across a range of customers. We provide support for our products and services
primarily from our Mountain View, California location. We plan to establish
additional service and support sites internationally commensurate with customer
needs.
Our products are designed to be deployed quickly and effectively by our
customers and to require minimal support from us. We offer various levels of
service and support programs to meet pre- and post-sale technical requirements.
Our CobaltCare program offers extended warranties, advanced product
replacement, telephone and electronic mail trouble shooting assistance and
other support and services. We price our CobaltCare variably depending on the
level of support selected by the customer. We also offer a variety of services
specifically tailored for web hosting and application service providers and
resellers that provide immediate access to the latest support information,
white papers and answers to frequently asked questions.
Manufacturing
We use contract vendors to manufacture our products, and they perform tasks
that include material procurement, assembly, test, packaging, warehousing and
shipment. Utilizing a contract manufacturer enables us to reduce investment in
manufacturing capital and inventory warehousing costs. Our internal
manufacturing expertise is primarily focused on product testability,
manufacturability and the transfer of products from development to
manufacturing. However, we also manage the evaluation and selection of certain
key components.
In August 1999, we changed our contract manufacturer to SMTC Manufacturing.
We also use Flash Electronics to a lesser extent. Our agreement with SMTC
Manufacturing requires us to submit three months of rolling purchase orders and
rolling forecasts for the three months immediately following the purchase order
period. In any given month we have the ability to double
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<PAGE>
our forecast and require them to fill those orders. However, if we inaccurately
forecast demand for our products, SMTC Manufacturing may be unable to provide
us with adequate manufacturing capacity. Purchase prices will fluctuate based
on changes in component prices throughout the one year contract period.
However, SMTC Manufacturing is obligated to reduce certain component costs by a
fixed percentage in each quarter. We may be liable for materials that SMTC
Manufacturing purchases on our behalf that we cannot use, cannot be cancelled
before receipt or are unique parts otherwise unusable by SMTC Manufacturing.
The agreement restricts our ability to reschedule orders and allows us to
cancel existing orders subject to penalties of up to the total purchase price.
SMTC Manufacturing provides warranties on workmanship and pass-through
warranties on component parts.
SMTC Manufacturing purchases most of the key components used to manufacture
our products. We obtain some of these key components, such as our custom
printed circuit boards, sheet metal parts and chassis, directly from sole
sources and other industry standard components, such as our processors and
power supplies, from sole or limited sources. SMTC Manufacturing may not be
able to obtain adequate supplies of components to meet our customers' delivery
requirements. Alternatively, excess inventories may be accumulated by SMTC
Manufacturing for our account.
In order to reduce the costs of sales, we anticipate that we may relocate a
portion of our manufacturing operations from SMTC Manufacturing's manufacturing
facility in Milpitas, California to one of its offshore manufacturing
facilities during 2000. Additionally, we may consider moving the outsourced
manufacturing to other new locations or to a new contract manufacturer. These
relocations could be time consuming and expensive and there can be no assurance
that such moves would not disrupt the manufacturing of our products. Such
disruptions could cause us to lose net revenues and damage our customer
relationships.
Prior to August 1999, our primary contract manufacturer was an electronics
component supply chain company that procured materials and subcontracted the
assembly, test, packaging and shipment of our products to a subcontract
manufacturer. This contract manufacturer experienced difficulty in obtaining
selected components and coordinating with the subcontract manufacturer for the
manufacture of our products in the quarter ending July 2, 1999. We resolved
this difficulty in the quarter ended July 2, 1999 by internally managing
procurement of specified components and qualifying and commencing production of
our products with a second contract manufacturing partner, Flash Electronics,
in May 1999. We subsequently switched to SMTC Manufacturing as our primary
contract manufacturer in August 1999.
As our needs and the needs of our customers continue to evolve, we plan to
reassess our manufacturing requirements on a periodic basis and address changes
as we consider necessary.
Research and Development
Our research and development expenses were $1.1 million in 1997, $3.5 million
in 1998 and $2.8 million in the six months ended July 2, 1999. We believe that
our research and development efforts are essential to our ability to deliver
innovative products that address the needs of the market and help evolve the
capabilities of server appliances. As of July 2, 1999, our staff included
personnel with expertise in several key areas, including 22 people engaged in
software-related activities, 9 people engaged in hardware-related activities
and 3 people involved in other research and development activities.
We recognize the need to integrate new and enhanced technologies into our
products and to continue to extend the open architecture of our products' Linux
operating system. In addition to the
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development of proprietary core technologies, we plan to continue partnerships
with other leading providers of Linux technologies, products and services to
jointly develop architectures and industry standards.
Competition
We compete in markets that are new, intensely competitive, highly fragmented
and rapidly changing. We face competition primarily from server vendors that
provide solutions for distributed computing systems.
Companies offering competitive products vary in scope and breadth of products
and services offered and include:
. general purpose server manufacturers such as Compaq Computer,
Dell Computer, Hewlett-Packard Company, IBM, Sun Microsystems and VA
Linux, some of which, including Compaq, IBM and Sun Microsystems, have
recently begun manufacturing dedicated versions of their general purpose
server products for sale as server appliances;
. server appliance vendors such as Encanto Networks, Freegate, Intel and
Whistle Communications (recently acquired by IBM);
. network caching companies such as CacheFlow and Novell; and
. network attached storage vendors such as Meridian (recently acquired by
Quantum) and Network Appliance.
We believe we compete favorably on the principal factors that will draw end
users to a server appliance product, which include:
. depth of product functionality;
. ability to work with network components utilizing other operating
systems such as Windows NT;
. scalability;
. product quality and performance;
. open systems architecture;
. strength of channel;
. brand name recognition;
. competitive pricing; and
. customer support.
We expect competition in the server appliance market to increase
significantly as new companies enter the market and current competitors expand
their product lines and services. Many of these potential competitors are
likely to enjoy substantial competitive advantages including:
. greater resources that can be devoted to the development, promotion and
sale of their products;
. more established sales channels;
. greater software development experience; and
. greater name recognition.
Intellectual Property
We have invested significantly in the development of proprietary technology
for our products. Key areas of intellectual property development relate to the
tight integration of embedded software with industry standard platforms and
components, intuitive user interfaces that provide easy to use
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appliance functionality and clustering technology. Our success depends
significantly upon our proprietary technology. Additionally, we have integrated
third party intellectual property into our products. We may occasionally reach
agreements with third parties to provide additional functionality for our
products and may offer third parties our technology for integration into
products on an original equipment manufacturer or other basis. We have also
trademarked the Cobalt name as well as our individual product names in the
United States and are evaluating trademark registration in certain
international markets.
We currently rely on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. We protect our software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. We do not hold any patents and currently have no patent
applications pending. We cannot be certain that any patents we seek will be
issued or that, if issued, those patents will not be challenged. We have
registered and applied for registration of some of the service marks and
trademarks we use with the appropriate state agencies and the United States
Patent and Trademark Office. We will continue to analyze whether we should
register additional service marks and trademarks.
We generally enter into confidentiality agreements with our employees,
consultants, business partners and major customers. Despite our efforts to
protect our proprietary rights and other intellectual property, unauthorized
parties may attempt to copy aspects of our products, obtain and use information
that we regard as proprietary or misappropriate our copyrights, trademarks,
trade dress and similar proprietary rights. In addition, the laws of some
foreign countries do not protect proprietary rights to as great an extent as do
the laws of the United States. Our means of protecting our proprietary rights
may not be adequate. In addition, our competitors might independently develop
similar technology or duplicate our products or circumvent any patents or our
other intellectual property rights.
Cobalt, Cobalt Networks, the Cobalt logo, Cobalt Qube, Cobalt RaQ, Cobalt
NASRaQ, Cobalt CacheRaQ and RaQ are trademarks of our company. This prospectus
also contains brand names, trademarks or service marks of companies other than
Cobalt, and these brand names, trademarks and service marks are the property of
their respective holders.
Employees
As of July 2, 1999, we had 101 full time employees, of whom 34 were engaged
in research and development, 44 in sales and marketing and 23 in finance,
administration and operations. None of our employees is represented by a labor
union. We have not experienced any work stoppages and consider our relations
with our employees to be good.
Facilities
Our principal offices are located in a 28,000 square foot facility in
Mountain View, California. Our lease on the Mountain View facility expires in
December 2003. We expect that we will need additional space in the next twelve
months and have obtained an option to lease a 30,000 square foot facility
contiguous to our current facility to expand our Mountain View operations. We
also have sales and marketing offices in Germany, Japan, the Netherlands and
the United Kingdom. None of the leases for those offices is for a period of a
year or longer.
Legal Proceedings
In December 1998, CUBE Computer Corporation sued us in the United States
District Court for the Southern District of New York for trademark
infringement. CUBE, an original equipment manufacturer of personal computers,
argues that this alleged infringement resulted from our use of "Qube" in
connection with our products. We intend to defend this matter vigorously. We
believe, based on currently available information, the resolution of this
matter will not adversely affect us.
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MANAGEMENT
Executive Officers and Directors
Cobalt's officers and directors and their ages as of July 2, 1999 are as
follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Gordon A. Campbell......... 55 Chairman of the Board
Chief Executive Officer, President and
Stephen W. DeWitt.......... 33 Director
Chief Technology Officer and Vice President,
Vivek Mehra................ 35 Products
Gary A. Martell............ 36 Chief Operating Officer
Vice President, Finance, Chief Financial
Kenton D. Chow............. 34 Officer and Secretary
Vice President, Sales, Americas and Asia
Patrick J. Conte........... 40 Pacific
Mark H. Orr................ 49 Vice President, Business Development
George M. Korchinsky....... 58 Vice President, International Sales
Kelly M. Herrell........... 33 Vice President, Marketing
Jordan A. Levy............. 43 Director
</TABLE>
Gordon A. Campbell, one of our co-founders, has served as our Chairman and a
director since October 1996. Mr. Campbell has been a managing member of
TechFund Capital, a venture capital fund, since August 1997. In 1993, Mr.
Campbell created Techfarm Management, Inc., an incubation company for new
technology companies including Cobalt Networks. Mr. Campbell has founded and
been involved in the start-up of numerous Silicon Valley companies, including
3Dfx Interactive, a semiconductor graphics company, and CHIPS and Technologies,
Inc., a semiconductor and related device company. In addition to his role at
Cobalt Networks, Mr. Campbell serves as chairman of the board of 3Dfx
Interactive and is a member of the boards of directors of 3Com Corporation, a
network infrastructure company, and Bell Microproducts, a computer components
company.
Stephen W. DeWitt has served as our President and Chief Executive Officer
since February 1998. Prior to joining Cobalt, Mr. DeWitt was Vice President and
General Manager of the Enterprise Network Management Business Unit at Cisco
Systems, a network infrastructure company, from January 1997 to February 1998.
Mr. DeWitt also served as Vice President of Enterprise Marketing for Cisco from
January 1996 to February 1997. From September 1994 to January 1996, he was Vice
President of Marketing for Symantec Corporation, a system utilities,
development tools, and contact management software company. From June 1992 to
September 1994, Mr. DeWitt served as General Manager of Symantec's Canadian
subsidiary. Mr. DeWitt holds a Bachelor of Science in Finance and Economics
from Babson College in Wellesley, Massachusetts.
Vivek Mehra, one of our co-founders, has served as our Chief Technology
Officer since September 1999 and as our Vice President of Products since
November 1996. Mr. Mehra leads our engineering and product management teams.
Mr. Mehra also served as one of our directors from October 1996 to August 1999.
From January 1992 to November 1996, Mr. Mehra was a senior architect and
systems engineering manager at Apple Computer, a computer design and
manufacturing company. From March 1991 to January 1992, Mr. Mehra was a
developer at Silicon Graphics, a high performance workstation company. From
July 1988 to March 1991 Mr. Mehra served as a principal engineer for ASIC and
Board Design at Digital Equipment Corporation, a computer maker that is now a
division of Compaq Computer. Mr. Mehra holds a Bachelor of Science in
Electronics and Electrical Communications from Punjab University, India and a
Master of Science in Computer Engineering from Iowa State University.
Gary A. Martell has served as our Chief Operating Officer since July 1999.
From February 1988 to July 1999, Mr. Martell served as Chief Financial Officer
and Senior Vice President of Operations at Wyse Technology, a computer hardware
company. Mr. Martell holds a Bachelor of Science in Finance and Computer
Science from the University of Massachusetts at Amherst.
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Mark H. Orr, a co-founder of our company, has served as our Vice President of
Business Development since October 1998. Mr. Orr served as our Vice President
of Marketing and Business Development from March 1997 to September 1998. From
August 1994 to February 1997, Mr. Orr served in various capacities at Apple
Computer, including most recently as a business development manager. Mr. Orr
holds a Bachelor of Science in Mathematics from the University of Washington
and a Masters of Business Administration from the Stanford University Graduate
School of Business.
Kenton D. Chow has served as our Vice President of Finance and Chief
Financial Officer since April 1998 and as our Secretary since September 1999.
From October 1996 to January 1998, Mr. Chow served as the Director of Finance
at OpenTV, Inc., an interactive software developer for digital television. From
January 1995 to October 1996, Mr. Chow served as Controller, Worldwide Sales of
Symantec Corporation. Mr. Chow served as Senior Manager, Financial Reporting at
Bay Networks, Inc., a networking company, now part of Nortel Networks, from
November 1991 to January 1995. Prior to that time, Mr. Chow was a Senior
Associate at PricewaterhouseCoopers LLP. Mr. Chow is a certified public
accountant. He holds both a Bachelor of Science in Finance and a Masters of
Business Administration from Santa Clara University.
Patrick J. Conte has served as our Vice President of Sales Americas and Asia
Pacific since July 1999. From October 1998 to June 1999, Mr. Conte served as
our Vice President of Sales and Marketing. Mr. Conte served as Vice President
of Sales and Channel Marketing for Dynamic Pictures, a graphics company, from
January 1997 to September 1998. From April 1995 to December 1996, Mr. Conte
served as Vice President of Sales, Americas for Wyse Technology. Prior to that
time, Mr. Conte was Director, OEM Sales with Wyse Technology from October 1994
to March 1995. Mr. Conte holds a Bachelor of Science in Political Science and
History from James Madison University and a Masters of Arts in Political
Science from Northern Illinois University.
George M. Korchinsky has served as our Vice President of International Sales
since July 1998 and is based in offices in the Netherlands. Mr. Korchinsky
served as a vice president of sales for Europe, the Middle East and Africa at
Aurora Electronics, from October 1996 to May 1998. From May 1991 to October
1996, Mr. Korchinsky served as a vice president of sales for Europe, the Middle
East and Africa at Symantec. Prior to that time, Mr. Korchinsky served in
various capacities at Cognos Limited, Paradyne Corporation and IBM. Mr.
Korchinsky is currently a member of the board of DataCore Ltd., a United
Kingdom software company. Mr. Korchinsky holds a Bachelor of Science in
Mechanical Engineering from University of Alberta.
Kelly M. Herrell has served as our Vice President of Marketing since July
1999. Prior to joining our company, Mr. Herrell served as Vice President of
Marketing at CacheFlow, Inc., a caching products company, from September 1997
to May 1999. Mr. Herrell served as a Senior Director of Marketing at Oracle
Corporation from September 1996 to September 1997. Prior to that time, Mr.
Herrell acted as Director of Strategy for NCR Corporation from January 1995 to
September 1996. Mr. Herrell was also a Senior Marketing Manager at AT&T Global
Information Systems from January 1993 to January 1995. Mr. Herrell holds a
Bachelor of Arts from Washington State University and a Masters of Business
Administration from Cornell University.
Jordan A. Levy has served as one of our directors since July 1998. Mr. Levy
was a co-founder, and from July 1990 to October 1998, the President and Co-
Chief Executive Officer of Softbank Services Group, previously Upgrade
Corporation of America, an outsourcing services company specializing in
providing call center services for technology companies. From September 1988 to
February 1990, Mr. Levy served as an Executive Vice President and Chief
Operating Officer of Software Etc. Inc. Mr. Levy is a co-founder of Ingram
Software, now known as Ingram Micro, and served as an Executive Vice President
from February 1982 to August 1988. Mr. Levy also sits on the boards of the
Rights Exchange, Inc., a producer of software applications for the metering,
sale and distribution of digital products, GT Interactive Software, a publisher
of entertainment software, and
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Client Logic Corp., where he also serves as Vice Chairman of the board of
directors. Mr. Levy holds a Bachelor of Arts in Political Science from the
State University of New York at Buffalo.
Our board of directors currently consists of three members. Prior to the
closing of this offering, our board of directors will be divided into three
classes, with each director serving a three-year term and one class being
elected at each year's annual meeting of stockholders. Mr. DeWitt will be in
the class of directors whose initial term expires at the 2000 annual meeting of
stockholders. Mr. Campbell will be in the class of directors whose initial term
expires at the 2001 annual meeting of the stockholders. Mr. Levy will be in the
class of directors whose initial term expires at the 2002 annual meeting of
stockholders. Following completion of this offering, the board of directors
intends to appoint at least two additional directors who will not be officers
or employees of Cobalt.
Executive officers are elected by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified. There
are no family relationships among any of our directors, officers or key
employees.
Board Committees
We have established an audit committee and a compensation committee. Messrs.
Campbell and Levy are members of both the audit and compensation committees.
The audit committee reviews our internal accounting procedures and consults
with and reviews the services provided by our independent accountants. The
compensation committee reviews and recommends to the board of directors the
compensation and benefits of all of our officers and establishes and reviews
general policies relating to compensation and benefits of our other employees.
Compensation Committee Interlocks and Insider Participation
Our board of directors established its compensation committee in March 1998.
Prior to establishing the compensation committee, our board of directors as a
whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between any member of our compensation
committee and any member of any other company's board of directors or
compensation committee.
Director Compensation
Directors do not currently receive any cash compensation from our company for
their service as members of our board of directors, except for reimbursement
for reasonable travel expenses in connection with attendance at board and
committee meetings. Under our 1997 stock option plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board of
directors, and, after this offering is completed, all nonemployee directors
will receive stock options pursuant to the automatic option grant program in
effect under the 1999 director option plan. See "--Incentive Stock Plans" for
more about the automatic grant program.
55
<PAGE>
Executive Compensation
Summary Compensation Information
The following table sets forth the compensation earned for services rendered
to us in all capacities by our Chief Executive Officer and our four most highly
compensated executive officers whose total cash compensation exceeded
$100,000--collectively, the "Named Executive Officers"--for the year ended
December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
---------------- ------------
Securities
Underlying All Other
Name and Principal Position Salary Bonus Options (#) Compensation
--------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Stephen W. DeWitt.................. $156,771 $53,594 400,000 $ 9,136
President and Chief Executive
Officer
Vivek Mehra........................ 143,959 -- -- 3,288
Chief Technology Officer and Vice
President, Products
Robin Porter....................... 127,917 -- -- 10,375
Vice President, Manufacturing
Mark Orr........................... 125,000 -- -- 11,721
Vice President, Business
Development
Kenton D. Chow..................... 100,000 25,550 140,000 8,517
Vice President, Finance and Chief
Financial Officer
</TABLE>
Ms. Porter resigned as our Vice President of Manufacturing in July 1999.
The amounts in the column titled "All Other Compensation" represent premiums
for health, dental and life insurance paid by Cobalt for Messrs. DeWitt, Mehra,
Orr and Chow and Ms. Porter.
Option Grants
The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during the year ended
December 31, 1998. For grants in 1999 to the Named Executive Officers, see
"Related Party Transactions--Option Grants to Directors and Executive
Officers." All of the options were granted under our 1997 stock option plan.
Options under the stock option plan generally vest over four years with 25% of
the shares subject to the option vesting on the first anniversary of the grant
date, and the remaining option shares vesting ratably monthly thereafter.
Option Grants in 1998
<TABLE>
<CAPTION>
Percent
of Total Potential Realizable
Options Value at Assumed
Number of Granted Annual Rates of Stock
Securities to Appreciation for
Underlying Employees Exercise Option Term
Options During Price per Expiration -----------------------
Name Granted (#) Period Share Date 5% 10%
---- ----------- --------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stephen W. DeWitt....... 400,000 26.9% $0.10 03/18/08
Vivek Mehra............. -- -- -- -- -- --
Robin Porter............ -- -- -- -- -- --
Mark Orr................ -- -- -- -- -- --
Kenton D. Chow.......... 90,000 6.0 0.10 04/15/08
50,000 3.4 0.50 12/15/08
</TABLE>
56
<PAGE>
The exercise price per share of each option was equal to the fair market
value of the common stock as determined by the board of directors on the date
of grant. The potential realizable values assume that the initial public
offering price of $ per share was the fair market value of the common
stock on the date of grant and that the price of the applicable stock increases
from the date of grant until the end of the ten-year option term of the annual
rates specified. There is no assurance provided to any holder of our securities
that the actual stock price appreciation over the ten-year option term will be
at the assumed 5% and 10% levels or at any other defined level.
The percentages above are based on an aggregate of 1,488,550 shares subject
to options we granted to employees and consultants in the year ended December
31, 1998.
Option Exercises
The following table sets forth information with respect to the Named
Executive Officers concerning option exercises for the year ended December 31,
1998 and exercisable and unexercisable options held as of December 31, 1998.
Aggregate Option Exercises in 1998 and Values at December 31, 1998
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares December 31, 1998 (#) December 31, 1998
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen W. DeWitt....... -- -- -- 400,000 $ -- $160,000
Vivek Mehra............. -- -- -- -- -- --
Robin Porter............ -- -- 24,375 65,625 9,750 26,250
Mark Orr................ -- -- -- -- -- --
Kenton D. Chow.......... -- -- -- 140,000 -- 36,000
</TABLE>
The value of in-the-money options represents the positive spread between the
exercise price of the stock options and the deemed fair market value of the
common stock as of December 31, 1998, which our board of directors determined
was $0.50 per share.
Incentive Plans
1997 Stock Option Plan
Our 1997 stock option plan was adopted by our board of directors in April
1997 and approved by our stockholders in May 1997. The stock option plan was
amended in September 1999. A total of 3,000,000 shares of common stock have
been reserved for issuance under our stock option plan, together with an annual
increase in the number of shares reserved thereunder beginning on the first day
of our fiscal year, commencing January 1, 2001, in an amount equal to the
lesser of:
. 2,500,000 shares;
. five percent of our outstanding shares of common stock on the last day
of the prior fiscal year; or
. an amount determined by our board of directors.
As a result of these annual increases, a maximum of 17,500,000 additional
shares could be issued over the remaining seven year life of the 1997 stock
option plan.
The 1997 stock option plan provides for grants of incentive stock options to
our employees including officers and employee directors and nonstatutory stock
options to our consultants including nonemployee directors. The purposes of our
stock option plan are to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to our
57
<PAGE>
employees and consultants and to promote the success of our business. At the
request of the board of directors, the compensation committee administers our
stock option plan and determines the optionees and the terms of options
granted, including the exercise price, number of shares subject to the option
and the exercisability thereof.
The term of options granted under the 1997 stock option plan is stated in the
option agreement. However, the term of an incentive stock option may not exceed
ten years and, in the case of an option granted to an optionee who owns more
than 10 percent of our outstanding stock at the time of grant, the term of an
option may not exceed five years. Options granted under the 1997 stock option
plan vest and become exercisable as set forth in each option agreement.
With respect to any optionee who owns more than 10 percent of our outstanding
stock, the exercise price of any stock option granted must be at least 110% of
the fair market value on the grant date.
No incentive stock options may be granted to an optionee, which, when
combined with all other incentive stock options becoming exercisable in any
calendar year that are held by that person, would have an aggregate fair market
value in excess of $100,000. In any fiscal year, we may not grant any employee
options to purchase more than 500,000 shares or 1,000,000 shares in the case of
an employee's initial employment.
The 1997 stock option plan will terminate in April 2007, unless our board of
directors terminates it sooner.
As of July 2, 1999, we had issued 197,521 shares of common stock upon the
exercise of options granted under our stock option plan, we had outstanding
options to purchase 2,144,943 shares of common stock at a weighted average
exercise price of $0.69 per share and shares remain available for future option
grants under our stock option plan.
1999 Employee Stock Purchase Plan
Our 1999 employee stock purchase plan was adopted by our board of directors
in August 1999 and will become effective upon the closing of this offering. We
have reserved a total of 2,250,000 shares of common stock for issuance under
the 1999 employee stock purchase plan, together with an annual increase in the
number of shares reserved thereunder beginning on the first day of our fiscal
year commencing January 1, 2001 in an amount equal to the lesser of:
. 1,500,000 shares;
. three percent of our outstanding common stock on the last day of the
prior fiscal year; or
. an amount determined by our board of directors.
As a result of these annual increases, a maximum of 13,500,000 additional
shares could be sold over the remaining nine year life of the employee stock
purchase plan.
Our employee stock purchase plan is administered by the board of directors
and is intended to qualify under Section 423 of the Internal Revenue Code. Our
employees, including our officers and employee directors but excluding our
five percent or greater stockholders, are eligible to participate if they are
customarily employed for at least 20 hours per week and for more than five
months in any calendar year. Our employee stock purchase plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed the lesser of 15% of an employee's compensation, where compensation is
defined on Form W-2, or $25,000.
Our employee stock purchase plan will be implemented in a series of
overlapping 24 month offering periods, and each offering period consists of
four six month purchase periods. The initial offering period under our employee
stock purchase plan will begin on the effective date of this offering, and the
subsequent offering periods will begin on the first trading day on or after May
1 and
58
<PAGE>
November 1 of each year. Each participant will be granted an option on the
first day of the offering period and the option will be automatically exercised
on the date six months later, the end of a purchase period, throughout the
offering period. If the fair market value of our common stock on any purchase
date is lower than such fair market value on the start date of that offering
period, then all participants in that offering period will be automatically
withdrawn from such offering period and re-enrolled in the immediately
following offering period. The purchase price of our common stock under our
employee stock purchase plan will be 85 percent of the lesser of the fair
market value per share on the start date of the offering period or at the end
of the purchase period. Employees may end their participation in an offering
period at any time, and their participation ends automatically on termination
of employment with our company.
Our employee stock purchase plan will terminate in August 2009, unless our
board of directors terminates it sooner.
1999 Director Option Plan
Our 1999 director option plan will become effective upon the closing of this
offering. We have reserved a total of 400,000 shares of common stock for
issuance under the 1999 director option plan, together with an annual increase
in the number of shares reserved thereunder beginning on the first day of our
fiscal year commencing January 1, 2001 equal to the lesser of:
. 100,000 shares;
. one quarter of one percent of the outstanding shares of our common stock
on the last day of the prior fiscal year; or
. an amount determined by the board of directors.
As a result of these annual increases, a maximum of 900,000 additional shares
could be issued over the remaining nine year life of the 1999 director option
plan.
The option grants under the 1999 director option plan are automatic and non-
discretionary, and the exercise price of the options is 100% of the fair market
value of our common stock on the grant date.
The 1999 director option plan provides for an initial grant to a nonemployee
director of an option to purchase 50,000 shares, other than the chairman whose
initial grant will be 55,000 shares, on the date on which he or she becomes a
member of the board of directors. Each nonemployee director will thereafter
automatically be granted an additional option to purchase 10,000 shares of
common stock at the next meeting of the board of directors following the annual
meeting of stockholders, if on the date of the annual meeting the director has
served on the board of directors for at least six months. At the time a
nonemployee director joins a committee of our board of directors, the
nonemployee director will also receive a one-time 5,000 share option for each
committee upon which the director serves.
The term of the options granted under the 1999 director plan is ten years,
but the options expire three months following the termination of the optionee's
status as a director or twelve months if the termination is due to death or
disability. The initial 50,000 share grants, or 55,000 share grant with respect
to the chairman, will become exercisable at a rate of one-fourth of the shares
on the first anniversary of the grant date and at a rate of 1/48th of the
shares per month thereafter. The subsequent 10,000 share grants and the
committee grants will become exercisable at the rate of one-fourth of the
shares on the first anniversary of the grant date and at a rate of 1/48th of
the shares per month thereafter.
401(k) Plan
In January 1998, we adopted a Retirement Savings and Investment Plan, the
401(k) Plan, covering our full-time employees located in the United States. The
401(k) Plan is intended to qualify
59
<PAGE>
under Section 401(k) of the Internal Revenue Code, so that contributions to the
401(k) Plan by employees or by us and the investment earnings thereon are not
taxable to the employees until withdrawn. If our 401(k) Plan qualifies under
Section 401(k) of the Internal Revenue Code, our contributions will be
deductible by us when made. Our employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit of $10,000 in
1999 and to have those funds contributed to the 401(k) Plan. The 401(k) Plan
permits us, but does not require us, to make additional matching contributions
on behalf of all participants. To date, we have not made any contributions to
the 401(k) Plan.
Employment Agreements and Change in Control Arrangements
We have entered into the following employment, noncompete and change in
control arrangements and agreements with our current officers. For a
description of arrangements with our former officers, directors and substantial
stockholders, see "Related Party Transactions" on page 62.
Each of our executive officers listed in "Management--Executive Officers and
Management" other than Mr. Korchinsky and Mr. Martell entered into an
employment agreement with us in September 1999. These agreements provide that
if the officer is terminated without cause or constructively terminated he will
receive:
. one year accelerated vesting of any of his stock options;
. one year accelerated vesting of common stock purchased by him pursuant
to restricted stock purchase agreements; and
. one year of salary and target bonus.
If the officer voluntarily resigns, is terminated for cause or is terminated
for any other reason, he is not entitled to these benefits.
In June 1998, we entered into a letter agreement with George Korchinsky, our
Vice President of International Sales. Pursuant to the agreement, Mr.
Korchinsky receives an annual salary of $150,000 and is eligible for an
incentive-based sales bonus. In addition, Mr. Korchinsky received options to
purchase 120,000 shares of our common stock pursuant to our employee stock
plan, 25% of which vest after one year and 1/48 of which vest every month
thereafter; provided, however, that 50% of the option shares will vest if we
experience a change in control. Pursuant to the terms of the option grant, a
change in control is defined as:
. any person becoming the beneficial owner of 50% or more of the total
voting power of our then outstanding voting securities; or
. a merger or consolidation with any other corporation, other than a
merger or consolidation which would result in our voting securities
outstanding immediately prior thereto continuing to represent at least
50% of the total voting power of the surviving entity outstanding
immediately after such merger or consolidation, or our stockholders
approve a plan of complete liquidation or an agreement for the sale or
disposition of all or substantially all of our assets.
In the event of a change of control of our company, Mr. Korchinsky has 90
days following the completion of such a transaction to decide whether it
constitutes a constructive termination of his employment in which case all of
his options will vest up to the date of constructive termination regardless of
the one year initial anniversary vesting, plus an additional six months of
options will be deemed vested. If he terminated without cause, Mr. Korchinsky
is entitled to receive twelve (12) months of his annual base salary and
benefits in exchange for a general release.
In July 1999, we entered into a letter agreement with Gary Martell, our Chief
Operating Officer. Pursuant to the agreement, Mr. Martell:
60
<PAGE>
. receives an annual base salary of $200,000;
. was granted options to purchase 400,000 shares of common stock; and
. is eligible for an annual bonus of up to $50,000.
Mr. Martell is entitled to accelerated vesting of 50% of his outstanding
options in the event of a greater than 50% change in ownership of our shares.
If Mr. Martell is terminated without cause, his salary and benefits will
continue for six months after termination.
Limitations on Directors' Liability and Indemnification
Our certificate of incorporation limits the liability of our directors and
executive officers to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
. any breach of their duty of loyalty to our company or our stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
The limits on a director or officer's liability in our certificate of
incorporation do not apply to liabilities arising under the federal securities
laws and do not affect the availability of equitable remedies such as
injunctive relief or rescission.
Our certificate of incorporation together with our bylaws provide that we
must indemnify our directors and executive officers and may indemnify our other
officers and employees and other agents to the fullest extent permitted by law.
We believe that indemnification under our bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in that capacity,
regardless of whether our bylaws would otherwise permit indemnification. We
believe that the indemnification provisions of our amended and restated
certificate of incorporation and bylaws are necessary to attract and retain
qualified persons as directors and officers. We also maintain directors' and
officers' liability insurance.
Prior to the effective time of this offering, we expect to enter into
agreements to indemnify our directors and executive officers. These agreements
provide for indemnification of our directors and executive officers for certain
expenses including attorneys' fees, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding. We expect the actions
and right of our company, arising out of such person's services as a director
or executive officer of our company, one of our subsidiaries or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as our directors and executive officers.
At present we are not aware of any pending litigation or proceeding involving
any director, officer, employee or agent of our company where indemnification
will be required or permitted. Nor are we aware of any threatened litigation or
proceeding that might result in a claim for indemnification.
61
<PAGE>
RELATED PARTY TRANSACTIONS
All future transactions, other than compensation, stock options pursuant to
the plans and other benefits available to employees generally, including any
loans from us to our officers, directors, principal stockholders or affiliates,
will be approved by a majority of our board of directors, including a majority
of our independent and disinterested members of our board of directors. If
required by law, the future transactions will be approved by a majority of the
disinterested stockholders. These future transactions will be on terms no less
favorable to us than we could obtain from unaffiliated third parties.
Stock Issuances to our Directors, Officers and Principal Stockholders
In May and June of 1997, we issued 4,181,426 shares of common stock at $0.001
per share to 4 individuals for aggregate proceeds of $4,181. In August 1997, we
issued 471,338 shares of common stock at $0.001 per share for aggregate
proceeds of $471. Of such shares, we issued 111,338 shares to Vivek Mehra. In
March 1998, we issued 800,000 shares of common stock at $0.10 per share to
Stephen DeWitt for aggregate proceeds of $80,000. In February 1999, we issued
100,000 shares of common stock at $0.50 per share to Vivek Mehra for aggregate
proceeds of $50,000.
We repurchased 570,000 shares of common stock in September 1997 from the
estate of Mark Wu. Mark Wu was one of our founders. The company repurchased
570,000 shares of his common stock at the original purchase price on September
29, 1997. The balance of his shares were transferred to his heirs.
Between October 1996 and June 1997, we issued warrants to purchase 162,500
shares of Series A preferred stock at a per share exercise price of $1.00 per
share to 13 persons as consideration for bridge loans that were converted to
Series A preferred stock. Between August and November 1997, we sold 3,572,401
shares of Series A preferred stock at a per share price of $1.00 for aggregate
proceeds of $3.6 million.
Between April and June 1998, we issued warrants to purchase 41,612 shares of
Series B preferred stock at a per share exercise price of $2.16 to three
stockholders as consideration for bridge loans that were converted to Series B
preferred stock. In July 1998, we issued 3,698,910 shares of Series B preferred
stock at a per share price of $2.16 for aggregate proceeds of $8.0 million.
In February and March 1999, we issued warrants to purchase an aggregate of
79,045 shares of Series C preferred stock with a per share exercise price of
$3.70 to 12 investors as consideration for bridge loans that were converted to
Series C preferred stock. In May 1999, we issued 9,813,507 shares of Series C
preferred stock at a per share price of $3.70 for aggregate proceeds of $36.3
million. In connection with our Series C preferred stock financing, we issued a
warrant to BT Alex. Brown to purchase 242,508 shares of common stock with a per
share exercise price of $3.70 that expires in May 2002 as consideration for BT
Alex. Brown's services as placement agent in the Series C preferred stock
financing.
62
<PAGE>
Upon closing of this offering, all shares of outstanding preferred stock will
be automatically converted into shares of common stock. Listed below are those
persons who participated in the financings described above who are our
executive officers, directors or stockholders who beneficially own five percent
or more of our securities.
<TABLE>
<CAPTION>
Series A Series B Series C
Common Preferred Series A Preferred Series B Preferred Series C Aggregate
Stockholder Stock Stock Warrants Stock Warrants Stock Warrants Consideration
----------- --------- --------- -------- --------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
August Capital
entities............... -- -- -- -- -- 2,702,701 -- $10,004,992
Chase Venture Capital
Assoc. L.P............. -- 517,500 -- 1,387,091 -- 531,081 13,039 5,530,744
Kenton D. Chow.......... -- -- -- 2,312 -- 2,433 121 14,450
Crystal Internet
Ventures Fund, L.P..... -- -- -- 924,728 -- 445,946 13,512 3,699,996
Stephen W. DeWitt....... 800,000 -- -- 115,591 18,494 27,027 1,351 390,799
George M. Korchinsky.... -- -- -- -- -- 27,027 2,702 109,997
Vivek Mehra............. 946,382 5,000 -- -- -- -- -- 5,946
Mark H. Orr............. 946,382 -- -- -- -- -- -- 946
SPLZ One Partners, LLC
(Jordan A. Levy)....... -- -- -- -- -- 135,135 20,720 500,000
Techfarm/TechFund
Capital entities....... 1,200,000 982,500 32,500 213,214 11,559 56,757 2,836 1,654,243
Vanguard V, L.P......... -- 1,202,465 -- 462,364 11,559 135,135 6,756 2,752,462
Mark Wu................. 1,200,000 -- -- -- -- -- -- 1,200
</TABLE>
The entities listed above as Techfarm/TechFund Capital entities include
TechFund Capital, LP and its general partner, TechFund Capital Management, LLC;
TechFund Capital II, LP and its general partner, TechFund Capital Management
II, LLC; and Techfarm Management, Inc. Mr. Campbell, our Chairman, is a
managing member of TechFund Capital Management, LLC and TechFund Capital
Management II, LLC and the President and a shareholder of Techfarm Management,
Inc. Mr. Campbell disclaims beneficial ownership of the shares held by each
entity, except to the extent of his pecuniary interest therein.
Jordan A. Levy, one of our directors, is a managing member of SPLZ One
Partners, LLC. Mr. Levy disclaims beneficial ownership of the shares held by
each entity, except to the extent of his pecuniary interest therein.
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<PAGE>
Option Grants to our Directors and Executive Officers
Stock option grants to directors and executive officers of our company are
described under the captions "Management--Board Compensation" and "--Executive
Compensation". Since our inception, we have granted options to our directors
and current and former executive officers, including the Named Executive
Officers as follows:
<TABLE>
<CAPTION>
Number
of Exercise
Name Shares Grant Date Price
---- ------- ---------- --------
<S> <C> <C> <C>
Kenton D. Chow.............................. 90,000 April 15, 1998 $0.10
50,000 December 15, 1998 0.50
60,000 July 27, 1999 2.50
Patrick J. Conte............................ 100,000 September 23, 1998 0.50
40,000 February 16, 1999 0.80
40,000 July 27, 1999 2.50
Stephen W. DeWitt........................... 400,000 March 18, 1998 0.10
100,000 May 18, 1999 1.85
250,000 July 27, 1999 2.50
Kelly M. Herrell............................ 250,000 July 27, 1999 2.50
George M. Korchinsky........................ 120,000 July 15, 1998 0.50
60,000 July 27, 1999 2.50
Jordan A. Levy.............................. 30,000 July 15, 1998 0.50
Gary A. Martell............................. 400,000 July 27, 1999 2.50
Vivek Mehra................................. 100,000 July 27, 1999 2.50
Mark H. Orr................................. 30,000 July 27, 1999 2.50
Robin Porter................................ 90,000 November 25, 1997 0.10
</TABLE>
In connection with a separation agreement dated July 28, 1999, we accelerated
the vesting of options to purchase 37,500 shares of our common stock held by
Ms. Porter. Pursuant to the separation agreement, Ms. Porter will receive her
regular salary and benefits other than accrued vacation pay until October 31,
1999. Ms. Porter released any and all claims against us that arose prior to the
date of the agreement, whether known or unknown, arising out of any agreement,
act or omission, including matters arising from her employment relationship
with us.
Other Relationships
Our company has a management consulting agreement with Techfarm Management,
Inc. pursuant to which it provides management consulting services to our
company for a fee of $5,000 per month. These services and our payment of the
related fees will cease upon the closing of this offering. Gordon Campbell is
the President of Techfarm Management, Inc. and serves as the Chairman of our
board of directors. In addition, Mr. Campbell is also a managing member of
TechFund Capital Management, LLC, the general partner of TechFund Capital, L.P.
On August 20, 1999, we made an interest free loan of $500,000 to Stephen W.
Dewitt, our President and Chief Executive Officer. The loan is secured by
50,000 shares of our Series B preferred stock held by Mr. DeWitt and is full
recourse. The loan is payable on August 20, 2003. In the event Mr. DeWitt
leaves our employment, the note will be due and payable in full 60 days after
his last day of employment with us.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of July 2, 1999, and as adjusted to
reflect the sale of common stock offered hereby by:
. each stockholder known by us to own beneficially more than five percent
of our common stock;
. each of the Named Executive Officers;
. each director of our company; and
. all directors and executive officers as a group.
<TABLE>
<CAPTION>
Percent Beneficially Owned
Total Number ------------------------------
Name and Address of Shares Before Offering After Offering
---------------- ------------ --------------- --------------
<S> <C> <C> <C>
August Capital entities........... 2,702,701 12.3%
2480 Sand Hill Road, Suite 101
Menlo Park, California 94025
Chase Venture Capital Assoc. L.P.
................................. 2,448,711 11.1
380 Madison Avenue, 12th Floor
New York, New York 10017
Techfarm/TechFund Capital
entities......................... 2,446,866 11.1
111 West Evelyn Avenue Suite 101
Sunnyvale, California 94086
Vanguard V, L.P................... 1,818,279 8.2
525 University Avenue Suite 600
Palo Alto, California 94301
Crystal Internet Venture Fund,
L.P.............................. 1,384,186 6.3
1120 Chester Avenue, Suite 310
Cleveland, Ohio 44114
Gordon A. Campbell................ 2,446,866 11.1
Stephen W. DeWitt................. 1,112,463 5.0
Vivek Mehra....................... 951,382 4.3
Mark H. Orr....................... 946,382 4.3
Robin Porter...................... 35,625 *
Kenton D. Chow.................... 34,866 *
Jordan A. Levy.................... 171,655 *
All executive officers and
directors as a group
(11 persons)..................... 5,884,176 26.5
</TABLE>
- --------
* Less than 1% of the outstanding shares of common stock.
Except as otherwise noted above, the address of each person listed on the
table is 555 Ellis Street, Mountain View, California 94043.
As of July 2, 1999, 22,010,103 shares of our common stock were outstanding,
assuming that each share of preferred stock was converted on a one for one
basis to common stock. The columns regarding beneficial ownership before and
after the offering assume that the underwriters' over-allotment option is not
exercised. If the over-allotment option is exercised in full, we will sell an
aggregate of shares of new common stock.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person, we
have included the shares of common stock subject to options or warrants held by
that person that are currently exercisable or will become exercisable within 60
days after July 2, 1999, but we have not included those shares for purposes of
computing
65
<PAGE>
percentage ownership of any other person. We have assumed unless otherwise
indicated below that the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
The beneficial ownership reported for August Capital entities includes
2,583,782 shares held by August Capital II, LP and 118,919 shares held by
August Capital Strategic Partners II, LP. The general partner of each of these
entities is August Capital Management II, LLC. The managing members of August
Capital Management II, LLC are David F. Marquardt, John R. Johnston, Andrew L.
Anker and Andrew S. Rappaport.
The general partner of Chase Venture Capital Associates, L.P. is Chase
Capital Partners. The general partners of Chase Capital Partners are Jeffrey
Walker, Mitchel Blutt, M.D., Arnold Chavkin, Steven Murray, Michael Hannon,
Shahan Soghikian, Brian Richmand, Donald Hofmann, Chris Behrens, John M.B.
O'Connor, John Baron, Damion Wicker, M.D., Susan Segal, Lindsay Stuart and
Chase Capital Corporation. Jeffrey Walter is the President of Chase Capital
Corporation, which is a wholly-owned subsidiary of Chase Manhattan Corporation.
The beneficial ownership reported for the Techfarm/TechFund Capital entities
and Gordon A. Campbell includes:
. 1,147,500 shares held by Techfarm II, LP;
. 1,015,590 shares held by TechFund Capital, LP;
. 96,321 shares held by TechFund Capital Management, LLC;
. 83,803 shares held by Gordon A. Campbell;
. 47,297 shares held by TechFund Capital II, LP;
. 9,460 shares held by TechFund Capital II, LP; and
. 46,895 shares subject to warrants held by Mr. Campbell.
Mr. Campbell disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest.
The general partners of Vanguard V, L.P. are Robert Ulrich, Clifford
Higgerson, Jack Gill and Curtis Kipling Myers.
The general partner of Crystal Internet Venture Fund, L.P. is Crystal
Venture, Ltd. Joseph Tzeng is the President and Dan Kellog is the Vice
President of Crystal Venture Ltd.
The beneficial ownership of Jordan Levy as reported above includes 135,135
shares of Series C preferred stock and warrants to purchase 20,720 shares of
Series C preferred stock held by SPLZ One Partners, LLC. Mr. Levy is a managing
member of SPLZ One Partners, LLC. However, Mr. Levy disclaims beneficial
ownership of the shares and warrants held by SPLZ One Partners except to the
extent of his pecuniary interest therein.
The beneficial ownership of the persons set forth in the table above includes
the following options or warrants to purchase our common stock that may be
exercised by such person within 60 days of July 2, 1999:
66
<PAGE>
Securities Exercisable Within 60 Days of July 2, 1999
<TABLE>
<CAPTION>
Options Warrants
------- --------
<S> <C> <C>
Techfarm/TechFund entities..................................... -- 46,895
Chase Venture Capital Assoc. L.P. ............................. -- 13,039
Crystal Internet Venture Fund, L.P............................. -- 13,512
Vanguard V, L.P................................................ -- 18,315
Gordon A. Campbell............................................. -- 46,895
Stephen W. DeWitt.............................................. 150,000 19,845
Kenton D. Chow................................................. 1,875 121
Robin Porter................................................... 35,625 --
Jordan Levy.................................................... 16,250 --
All directors and officers..................................... 236,250 86,995
</TABLE>
67
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, we will be authorized to issue 120,000,000
shares of common stock, $0.001 par value, and 10,000,000 shares of undesignated
preferred stock, $0.001 par value.
Common Stock
As of July 2, 1999, we had 22,010,103 shares of common stock outstanding held
by approximately 105 stockholders.
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends that may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to be issued upon
the closing of this offering will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, our board of directors will have the
authority, without action by our stockholders, to designate and issue preferred
stock in one or more series. The board of directors may also designate the
rights, preferences and privileges of each series of preferred stock; any or
all of which may be superior to the rights of the common stock. It is not
possible to state the actual effect of the issuance of any shares of preferred
stock upon the rights of holders of the common stock until the board of
directors determines the specific rights of the holders of the preferred stock.
However, these effects might include:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; and
. delaying or preventing a change in control of our company without
further action by the stockholders.
We have no present plans to issue any shares of preferred stock.
Warrants
As of July 2, 1999, we had outstanding warrants to purchase:
. 242,508 shares of common stock issued to BT Alex. Brown at an exercise
price of $3.70 per share that will expire in May 2002;
. 162,500 shares of Series A preferred stock issued to 13 stockholders at
an exercise price of $1.00 per share that will expire at various times
from October 2001 to June 2002;
. 41,612 shares of Series B preferred stock issued to three stockholders
at an exercise price of $2.16 per share that will expire at various
times from April 2000 to June 2000; and
. 79,045 shares of Series C preferred stock issued to 12 stockholders at
an exercise price of $3.70 per share that will expire at various times
from February 2002, to March 2002.
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<PAGE>
Our outstanding warrants to purchase preferred stock will convert to warrants
to purchase common stock upon the closing of this offering.
Holders of Registration Rights Can Require Us to Register Shares of Our Stock
for Resale
The holders of 17,084,818 shares of common stock and 283,157 shares of common
stock issuable upon the exercise of warrants or their permitted transferees are
entitled to certain rights with respect to registration of such shares under
the Securities Act of 1933, as amended. These rights are provided under the
terms of our agreement with the holders of registrable securities. Under these
registration rights, holders of at least a majority of the then outstanding
registrable securities may require on two occasions that we register their
shares for public resale. We are obligated to register these shares if the
holders of a majority of the eligible shares request registration and only if
the shares to be registered have an anticipated public offering price of at
least $10,000,000. In addition, holders of registrable securities may require
on two separate occasions that we register their shares for public resale on
Form S-3 or similar short-form registration, if we are eligible to use Form S-3
or similar short-form registration, and the value of the securities to be
registered is at least $10,000,000. If we elect to register any of our shares
of common stock for any public offering, the holders of registrable securities
are entitled to include shares of common stock in the registration. However we
may reduce the number of shares proposed to be registered in view of market
conditions. We will pay all expenses in connection with any registration, other
than underwriting discounts and commissions.
Anti-Takeover Effects of Some Provisions of Delaware Law and Our Charter
Documents
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the acquisition of our company through a tender offer, a
proxy contest or other means more difficult and could make the removal of
incumbent officers and directors more difficult. We expect these provisions to
discourage certain types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of our company to
first negotiate with our board of directors. We believe that the benefits
provided by our ability to negotiate with the proponent of an unfriendly or
unsolicited proposal outweigh the disadvantages of discouraging such proposals.
We believe the negotiation of an unfriendly or unsolicited proposal could
result in an improvement of its terms.
Delaware Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested stockholder, unless:
. prior to the date of the transaction, the board of directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
. the stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding (a) shares
owned by persons who are directors and also officers, and (b) shares
owned by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
. on or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an annual or
special meeting of stockholders, and not by written
69
<PAGE>
consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder.
Generally, a "business combination" includes a merger, asset or stock sale,
or other transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own 15% or more of a
corporation's outstanding voting securities. We expect the existence of this
provision to have an anti-takeover effect with respect to transactions our
board of directors does not approve in advance. We also anticipate that
Section 203 may also discourage attempts that might result in a premium over
the market price for the shares of common stock held by stockholders.
Charter Documents
Upon completion of this offering, our certificate of incorporation provides
for our board of directors to be divided into three classes serving staggered
terms. Approximately one-third of the board of directors will be elected each
year. The provision for a classified board could prevent a party who acquires
control of a majority of the outstanding voting stock from obtaining control
of the board of directors until the second annual stockholders meeting
following the date the acquirer obtains the controlling stock interest. The
classified board provision could discourage a potential acquirer from making a
tender offer or otherwise attempting to obtain control of our company and
could increase the likelihood that incumbent directors will retain their
positions. Our certificate of incorporation provides that directors may be
removed:
. with cause by the affirmative vote of the holders of at least a majority
of the outstanding shares of voting stock; or
. without cause by the affirmative vote of the holders of at least 66 2/3%
of the then-outstanding shares of the voting stock.
Our bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the board of directors. At an annual
meeting, stockholders may only consider proposals or nominations specified in
the notice of meeting or brought before the meeting by or at the direction of
the board of directors. Stockholders may also consider a proposal or
nomination by a person who was a stockholder of record on the record date for
the meeting, who is entitled to vote at the meeting and who has given to our
Secretary timely written notice, in proper form, of his or her intention to
bring that business before the meeting. The bylaws do not give the board of
directors the power to approve or disapprove stockholder nominations of
candidates or proposals regarding other business to be conducted at a special
or annual meeting of the stockholders. However, our bylaws may have the effect
of precluding the conduct of certain business at a meeting if the proper
procedures are not followed. These provisions may also discourage or deter a
potential acquirer from conducting a solicitation of proxies to elect the
acquirer's own slate of directors or otherwise attempting to obtain control of
our company.
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. Our bylaws authorize a majority of
our board of directors, the chairman of the board or the chief executive
officer to call a special meeting of stockholders. Because our stockholders do
not have the right to call a special meeting, a stockholder could not force
stockholder consideration of a proposal over the opposition of the board of
directors by calling a special meeting of stockholders prior to such time as a
majority of the board of directors believed or the chief executive officer
believed the matter should be considered or until the next annual meeting
provided that the requestor met the notice
70
<PAGE>
requirements. The restriction on the ability of stockholders to call a special
meeting means that a proposal to replace the board also could be delayed until
the next annual meeting.
Although Delaware law provides that stockholders may execute an action by
written consent in lieu of a stockholder meeting, it also allows us to
eliminate stockholder actions by written consent. Elimination of written
consents of stockholders may lengthen the amount of time required to take
stockholder actions since actions by written consent are not subject to the
minimum notice requirement of a stockholder's meeting. However, we believe that
the elimination of stockholders' written consents may deter hostile takeover
attempts. Without the availability of stockholder's actions by written consent,
a holder controlling a majority of our capital stock would not be able to amend
our bylaws or remove directors without holding a stockholders meeting. The
holder would have to obtain the consent of a majority of the board of
directors, the chairman of the board or the chief executive officer to call a
stockholders' meeting and satisfy the notice periods determined by the board of
directors. Our certificate of incorporation provides for the elimination of
actions by written consent of stockholders upon the closing of this offering.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is BankBoston, N.A.
BankBoston is located at 150 Royall Street, Canton, Massachusetts, 02021 and
its telephone number is (508) 575-3120.
Nasdaq Stock Market Listing
We have applied to have our common stock listed on the Nasdaq National Market
for quotation under the symbol "COBT".
71
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock. Future
sales of substantial amounts of our common stock in the public market following
this offering or the possibility of such sales occurring could adversely affect
prevailing market prices for our common stock or could impair our ability to
raise capital through an offering of equity securities.
After this offering, we will have outstanding shares of common stock,
based upon shares outstanding as of July 2, 1999, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants after July 2, 1999. All of the shares sold in this offering will be
freely tradeable without restriction under the Securities Act except for any
shares purchased by our "affiliates" as that term is defined in Rule 144 under
the Securities Act. The remaining 22,010,103 shares of common stock held by
existing stockholders are "restricted" shares as that term is defined in Rule
144 under the Securities Act. We issued and sold the restricted shares in
private transactions in reliance upon exemptions from registration under the
Securities Act. Restricted shares may be sold in the public market only if they
are registered under the Securities Act or if they qualify for an exemption
from registration, such as Rule 144 or 701 under the Securities Act, which are
summarized below.
Our officers, directors, employees, and other stockholders, who collectively
hold an aggregate of 22,010,103 restricted shares, and the underwriters entered
into lock-up agreements in connection with this offering. These lock-up
agreements provide that, with certain limited exceptions, our officers,
directors, employees and stockholders have agreed not to offer, sell, contract
to sell, grant any option to purchase or otherwise dispose of any of our shares
for a period of 180 days after the effective date of this offering. Goldman,
Sachs & Co. may, in its sole discretion and at any time without prior notice,
release all or any portion of the shares subject to these lock-up agreements.
We have also entered into an agreement with Goldman, Sachs & Co. that we will
not offer, sell or otherwise dispose of our common stock until 180 days after
the effective date of this offering.
Taking into account the lock-up agreements, the number of shares that will be
available for sale in the public market under the provisions of Rules 144,
144(k) and 701 will be as follows:
<TABLE>
<CAPTION>
Number of
Date of Availability for Sale Shares
----------------------------- ----------
<S> <C>
At various times between July 2, 1999 and the date 30 days
after the effective date of this offering......................... --
At various times between the date 30 days and the date
180 days after the effective date of this offering................ 100,000
At various times thereafter upon the expiration of applicable
holding periods................................................... 21,910,103
</TABLE>
Following the expiration of the lock-up period, shares issued upon exercise
of options granted by us prior to the completion of this offering will also be
available for sale in the public market pursuant to Rule 701 under the
Securities Act unless those shares are held by one of our affiliates, directors
or officers.
In general, under Rule 144 as currently in effect, 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:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately shares immediately after the
offering; or
. 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.
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<PAGE>
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 us. Under Rule 144(k), a person who is not deemed to have been an
affiliate of our 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 an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares under a written compensatory plan or
contract to resell these shares in reliance upon Rule 144 but without
compliance with specific restrictions. Rule 701 provides that affiliates may
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirement and that non-affiliates may sell these shares in reliance on
Rule 144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144.
We intend to file, shortly after the effectiveness of this offering, a
registration statement on Form S-8 under the Securities Act covering all shares
of common stock reserved for issuance under the stock plans and subject to
outstanding options under our 1997 stock option plan. See "Management--Stock
Plans". Shares of common stock issued upon exercise of options under the Form
S-8 will be available for sale in the public market, subject to Rule 144 volume
limitations applicable to affiliates and subject to the contractual
restrictions described above. As of July 2, 1999, options to purchase 2,144,943
shares of common stock were outstanding of which approximately 382,486 options
were then vested and exercisable. Beginning 180 days after the effective date
of this offering, approximately 728,687 shares issuable upon the exercise of
vested stock options will become eligible for sale in the public market, if
such options are exercised.
Following this offering, the holders of an aggregate of 17,084,818 shares of
outstanding common stock and 283,157 shares of common stock issuable upon the
exercise of warrants have the right to require us to register their shares for
sale upon meeting certain requirements. See "Description of Capital Stock--
Holders of Registration Rights Can Require Us to Register Shares of Our Stock
for Resale" for additional information regarding registration rights.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters specified by the underwriters in connection with this
offering will be passed upon for the underwriters by Shearman & Sterling, Menlo
Park, California.
EXPERTS
The financial statements as of December 31, 1997 and 1998 and for the period
from inception (October 18, 1996) to December 31, 1996 and for each of the two
years in the period ended December 31, 1998 included in this Prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
73
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission 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 our company and our
common stock, reference is made to the registration statement and to the
exhibits and schedules filed therewith. A copy of the registration statement
may be inspected by anyone without charge at the Public Reference Section of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of all or any portion 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 prescribed
fees. The public may obtain information on the operations of the public
reference facilities in Washington, D.C. by calling the Commission at 1-800-
SEC-0330. The Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
74
<PAGE>
COBALT NETWORKS , INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statement of Operations....................................... F-4
Consolidated Statement of Stockholders' Deficit............................ F-5
Consolidated Statement of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cobalt Networks, Inc.
The reincorporation described in Note 1 to the consolidated financial
statements has not been consummated as of September 8, 1999. When it has been
consummated, we will be in a position to issue the following report:
"In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Cobalt Networks, Inc. and its subsidiaries at
December 31, 1997 and 1998, and the results of their operations and their
cash flows for the period from October 18, 1996 (inception) through
December 31, 1996 and the years ended December 31, 1997 and 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above."
PricewaterhouseCoopers LLP
San Jose, California
January 18, 1999, except as to
Note 11, which is as of September 1, 1999.
F-2
<PAGE>
COBALT NETWORKS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma
December 31, Stockholders'
---------------- July 2, Equity as of
1997 1998 1999 July 2, 1999
------ -------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents......... $1,738 $ 2,090 $27,426
Accounts receivable, net of
allowance for doubtful accounts
of $--, $335 and $485............ -- 2,040 4,829
Inventories....................... 20 514 1,019
Other current assets.............. 78 239 307
------ -------- -------
Total current assets............ 1,836 4,883 33,581
Property and equipment, net........ 162 1,262 1,321
------ -------- -------
$1,998 $ 6,145 $34,902
====== ======== =======
Liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' equity (deficit)
Current liabilities:
Notes payable, current............ $ -- $ 39 $ 41
Borrowings under line of credit... -- 600 --
Advance from related party........ -- 500 --
Accounts payable.................. 209 4,179 5,503
Accrued liabilities............... 85 1,183 2,781
Deferred margin on distributor
inventory........................ -- 294 717
------ -------- -------
Total current liabilities....... 294 6,795 9,042
Notes payable...................... -- 84 64
------ -------- -------
294 6,879 9,106
------ -------- -------
Mandatorily Redeemable Convertible
Preferred Stock (Note 4).......... 3,551 12,339 45,646 $ --
------ -------- ------- -------
Commitments and contingencies
(Notes 9 and 10)
Stockholders' equity (deficit)
Preferred Stock: $0.001 par
value; 10,000,000 shares
authorized, none issued and
outstanding pro forma............ -- -- -- --
Common Stock: $0.001 par value;
120,000,000 shares authorized;
4,193,000, 4,750,000 and
4,925,000 (unaudited) shares
issued and outstanding at
December 31, 1997, 1998 and July
2, 1999; 22,010,103 (unaudited)
shares issued and outstanding
pro forma........................ 4 5 5 22
Additional paid-in capital........ -- 79 3,921 49,550
Unearned stock compensation....... -- -- (1,134) (1,134)
Note receivable from
stockholder...................... -- -- (50) (50)
Accumulated deficit............... (1,851) (13,157) (22,592) (22,592)
------ -------- ------- -------
Total stockholders' equity
(deficit)...................... (1,847) (13,073) (19,850) $25,796
------ -------- ------- =======
$1,998 $ 6,145 $34,902
====== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
COBALT NETWORKS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Period From
October 18,
1996 Year Ended
(inception) to December 31, Six Months Ended
December 31, ---------------------- --------------------------
1996 1997 1998 June 30, 1998 July 2, 1999
-------------- ---------- ---------- ------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues............ $ -- $ -- $ 3,537 $ 449 $ 7,663
Cost of revenues........ -- -- 3,123 582 5,156
---------- ---------- ---------- ---------- ----------
Gross profit (loss)..... -- -- 414 (133) 2,507
---------- ---------- ---------- ---------- ----------
Operating expenses:
Research and
development........... 22 1,067 3,483 1,204 2,771
Sales and marketing.... -- 245 5,581 1,801 6,273
General and
administrative........ 60 445 1,895 611 1,454
Amortization of stock
compensation.......... -- -- -- -- 253
---------- ---------- ---------- ---------- ----------
Total operating
expenses............ 82 1,757 10,959 3,616 10,751
---------- ---------- ---------- ---------- ----------
Loss from operations.... (82) (1,757) (10,545) (3,749) (8,244)
Interest income......... -- 17 82 9 217
Interest expense........ -- (29) (15) (12) (217)
---------- ---------- ---------- ---------- ----------
Net loss................ (82) (1,769) (10,478) (3,752) (8,244)
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock........ -- -- (828) -- (1,191)
---------- ---------- ---------- ---------- ----------
Net loss attributable to
holders of Common
Stock.................. $ (82) $ (1,769) $ (11,306) $ (3,752) $ (9,435)
========== ========== ========== ========== ==========
Basic and diluted net
loss per share
attributable to holders
of Common Stock........ $ (4.10) $ (5.47) $ (2.09) $ (2.83)
========== ========== ========== ==========
Basic and diluted
weighted average shares
outstanding............ 432,000 2,065,000 1,792,000 3,338,000
========== ========== ========== ==========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (1.43) $ (0.60)
========== ==========
Pro forma basic and
diluted weighted
average shares
outstanding
(unaudited)............ 7,330,000 13,808,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
COBALT NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Unearned Note Receivable
---------------------- Paid-in Stock from Accumulated
Shares Amount Capital Compensation Stockholder Deficit Total
--------- ----------- ----------- ------------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss................ -- $ -- $ -- $ -- $ -- $ (82) $ (82)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31,
1996................... -- -- -- -- -- (82) (82)
Issuance of Common
Stock.................. 4,763,000 5 -- -- -- -- 5
Repurchase of Common
Stock.................. (570,000) (1) -- -- -- -- (1)
Net loss................ -- -- -- -- -- (1,769) (1,769)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31,
1997................... 4,193,000 4 -- -- -- (1,851) (1,847)
Issuance of Common
Stock.................. 812,000 1 79 -- -- -- 80
Repurchase of Common
Stock.................. (255,000) -- -- -- -- -- --
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock........ -- -- -- -- -- (828) (828)
Net loss................ -- -- (10,478) (10,478)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31,
1998................... 4,750,000 5 79 -- -- (13,157) (13,073)
Issuance of Common Stock
(unaudited)............ 175,000 -- 58 -- (50) -- 8
Issuance of warrants
(unaudited)............ -- -- 532 -- -- -- 532
Unearned stock
compensation
(unaudited) (Note 11).. -- -- 1,387 (1,387) -- -- --
Amortization of stock
compensation
(unaudited)............ -- -- -- 253 -- -- 253
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock
(unaudited)............ -- -- -- -- -- (1,191) (1,191)
Adjustments to
redemption value of
Mandatorily Redeemable
Preferred Stock
(unaudited)............ -- -- 1,865 -- -- -- 1,865
Net loss (unaudited).... -- -- -- -- -- (8,244) (8,244)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at July 2, 1999
(unaudited)............ 4,925,000 $ 5 $ 3,921 $ (1,134) $ (50) $ (22,592) $ (19,850)
========= =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
COBALT NETWORKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended
Period From December 31, Six Months Ended
October 18, 1996 -------------------- -------------------
(inception) to June 30, July 2,
December 31, 1996 1997 1998 1998 1999
----------------- --------- --------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $ (82) $ (1,769) $ (10,478) $ (3,752) $ (8,244)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation......... -- 18 323 82 369
Amortization of
stock
compensation........ -- -- -- -- 253
Non-cash interest
expense............. -- 20 2 -- 130
Changes in assets
and liabilities:
Accounts
receivable......... -- -- (2,040) (331) (2,789)
Inventories......... -- (20) (494) 19 (505)
Other current
assets............. (4) (74) (161) (25) (68)
Accounts payable.... 45 164 3,970 955 1,324
Accrued
liabilities........ 9 76 1,096 130 1,648
Deferred margin on
distributor
inventory.......... -- -- 294 -- 423
--------- --------- --------- --------- --------
Net cash used in
operating
activities........ (32) (1,585) (7,488) (2,922) (7,459)
--------- --------- --------- --------- --------
Cash flows used in
investing activities
for acquisition of
property and
equipment: (23) (157) (1,423) (407) (428)
--------- --------- --------- --------- --------
Cash flows from
financing activities:
Proceeds from
issuance of
Mandatorily
Redeemable
Convertible
Preferred Stock,
net.................. -- 2,992 7,210 597 29,583
Proceeds from
issuance of Common
Stock................ -- 4 80 80 8
Proceeds from advance
from related party... -- -- 500 300 --
Proceeds from
borrowings under
line of credit....... -- -- 600 300 --
Principal payments on
line of credit....... -- -- -- -- (600)
Proceeds from
borrowings under
notes payable........ 70 -- 431 -- --
Principal payments on
notes payable........ -- (130) (308) -- (18)
Proceeds from
borrowings under
convertible
promissory notes..... -- 599 750 750 4,250
--------- --------- --------- --------- --------
Net cash provided by
investing
activities......... 70 3,465 9,263 2,027 33,223
--------- --------- --------- --------- --------
Net increase (decrease)
in cash and cash
equivalents........... 15 1,723 352 (1,302) 25,336
Cash and cash
equivalents at
beginning of period... -- 15 1,738 1,738 2,090
--------- --------- --------- --------- --------
Cash and cash
equivalents at end of
period................ $ 15 $ 1,738 $ 2,090 $ 436 $ 27,426
========= ========= ========= ========= ========
Supplemental disclosure
of cash flow
information:
Cash paid for
interest............. $ -- $ 9 $ 13 $ -- $ 88
========= ========= ========= ========= ========
Conversion of notes
payable and accrued
interest into
Mandatorily
Redeemable
Convertible
Preferred Stock...... $ -- $ 559 $ 750 $ -- $ 4,800
========= ========= ========= ========= ========
Issuance of
warrants............. $ -- $ -- $ -- $ -- $ 402
========= ========= ========= ========= ========
Issuance of Common
Stock for promissory
note................. $ -- $ -- $ -- $ -- $ 50
========= ========= ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Cobalt Networks, Inc., (formerly ViavisionSystems Inc. and Cobalt
Microserver, Inc.) (the "Company"), was incorporated in California in October
1996. The Company is a leading provider of server appliances. Server appliances
are a new category of network infrastructure devices that are optimized to
deliver one or a few network-based applications well. The Company markets and
sells its products globally through its direct sales force and its channel
partners. The Company operates in one business segment.
Reincorporation
On September 1, 1999, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. As a result of the
reincorporation, the Company is authorized to issue 120,000,000 shares of
$0.001 par value Common Stock and 10,000,000 shares of $0.001 par value
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof. The par value and shares of
Common Stock and Preferred Stock authorized, issued and outstanding at each
balance sheet date presented, and for each period presented in the consolidated
statement of stockholders' deficit have been retroactively adjusted to reflect
the reincorporation.
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Through December 31, 1998 the Company operated on a calendar quarter-end and
year-end basis. Beginning in 1999 the Company changed its accounting periods to
thirteen-week fiscal quarters ending on the Friday closest to the end of the
month.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
Revenue from product sales to other than distributors is generally recognized
at the time the product is shipped. Provisions for estimated future product
returns and exchanges are recognized upon product shipment.
The Company grants distributors limited rights of return on unsold inventory
held by such distributors. The Company has limited control over the extent to
which products sold to distributors are sold through to end users. Accordingly,
the Company recognizes revenues on sales to distributors based on estimates of
products sold through to end users.
Upon shipment, the Company also provides for the estimated cost that may be
incurred for product warranties.
F-7
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The majority of the
Company's cash equivalents consist of money market funds.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using standard cost which approximates the first-in, first-out method.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets, generally eighteen months to five years, or the lease term of the
respective assets.
Research and development
Research and development costs are charged to operations as incurred.
Software development costs are included in research and development and are
expensed as incurred. After technological feasibility is established, material
software development costs are capitalized. The capitalized cost is then
amortized on a straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenues, whichever is
greater. To date, the period between achieving technological feasibility, which
the Company has defined as the establishment of a working model which typically
occurs when the beta testing commences, and the general availability of such
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
Income taxes
Income taxes are computed using the asset and liability method. Deferred
income tax assets or liabilities are established for the expected future
consequences resulting from the temporary differences between the financial
reporting and income tax bases of assets and liabilities and from net operating
loss and tax credit carryforwards. The Company records a valuation allowance
against deferred tax assets when it is more likely than not that such assets
will not be realized.
Fair value of financial instruments
The Company's financial instruments, including cash, cash equivalents,
accounts receivable, accounts payable, notes payable and capital lease
obligations are carried at cost, which approximates their fair value because of
the short-term maturity of these instruments.
Concentration of credit risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash equivalents and
accounts receivable. The Company places its cash and cash equivalents primarily
in market rate accounts with high credit financial institutions. The Company's
accounts receivable are derived from revenue earned from customers located in
the
F-8
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
United States, Europe and Asia. Sales to foreign customers in 1998, which are
denominated in U.S. dollars, accounted for 44% of total revenue. Sales in the
United States, Japan, Europe and other foreign countries were 56%, 21%, 15% and
8%, respectively, of total revenues in 1998. The Company performs ongoing
credit evaluations of its customers' financial condition and generally requires
no collateral from its customers. The Company maintains an allowance for
doubtful accounts receivable based upon the expected collectibility of accounts
receivable.
During the year ended December 31, 1998, one customer accounted for
approximately 12% of net revenues. As of December 31, 1998, this customer
accounted for 15% of total accounts receivable. During the period ended July 2,
1999 two customers accounted for approximately 18% and 13% (unaudited),
respectively, of net revenues. As of July 2, 1999, one of these customers
accounted for 23% (unaudited) of total accounts receivable.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123 "Accounting for Stock-Based Compensation."
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
Foreign currency translation
The Company uses the U.S. dollar as its functional currency for all of its
worldwide operations. All sales worldwide are billed in U.S. dollars. Foreign
currency assets and liabilities are remeasured into U.S. dollars at the end-of-
period exchange rates. Expenses are translated at average exchange rates in
effect during each period, except for those expenses related to balance sheet
amounts which are translated at historical exchange rates. Gains or losses from
foreign currency remeasurements and transactions are included in net loss and
were not material for all periods presented.
Comprehensive income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from nonowner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income (loss) as
compared to its reported net loss.
Net loss per share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed
by dividing the net loss available to holders of Common Stock for the period by
the weighted average number of shares of Common Stock outstanding during the
period. Weighted average shares exclude shares of Common Stock subject to
repurchase ("restricted shares"). Diluted net loss per share is computed by
dividing the net loss
F-9
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
available to holders of Common Stock for the period by the weighted average
number of shares of Common Stock and potential Common Stock outstanding during
the period, if dilutive. Potential Common Stock includes unvested restricted
shares of Common Stock and incremental shares of Common Stock issuable upon the
exercise of stock options and warrants and upon conversion of Series A, B, and
C Mandatorily Redeemable Convertible Preferred Stock.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except share and per share
data):
<TABLE>
<CAPTION>
Period From Six Months Ended
October 18, 1996 Year Ended December 31, --------------------
(inception) to ------------------------ June 30,July 2,
December 31, 1996 1997 1998 1998 1999
----------------- ----------- ----------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss attributable
to holders of Common
Stock................ $ (82) $ (1,769) $ (11,306) $ (3,752) $ (9,435)
========== =========== =========== ========= =========
Denominator:
Weighted average
shares outstanding... -- 2,519,000 4,700,000 4,626,000 4,834,000
Weighted average
shares of Common
Stock subject to
repurchase........... -- 2,087,000 2,635,000 2,834,000 1,496,000
---------- ----------- ----------- --------- ---------
Denominator for basic
and diluted
calculation.......... -- 432,000 2,065,000 1,792,000 3,338,000
========== =========== =========== ========= =========
Basic and diluted net
loss per share
attributable to holders
of Common Stock........ $ -- $ (4.10) $ (5.47) $ (2.09) $ (2.83)
========== =========== =========== ========= =========
</TABLE>
The effects of options to purchase 238,000, 1,622,000 and 2,145,000
(unaudited) shares of Common Stock at an average exercise price of $0.03, $0.26
and $0.69 (unaudited) per share; warrants to purchase 164,000, 204,000 and
283,000 (unaudited) shares of Preferred Stock at an average exercise price of
$1.00, $1.24 and $1.93 (unaudited) per share; and 3,572,000, 7,271,000 and
17,085,000 (unaudited) shares of Mandatorily Redeemable Convertible Preferred
Stock for the years ended December 31, 1997 and 1998 and the six months ended
July 2, 1999, respectively, and warrants to purchase 243,000 (unaudited) shares
of Common Stock at $3.70 (unaudited) per share at July 2, 1999, have not been
included in the computation of diluted net loss per share as their effect would
have been anti-dilutive.
Pro forma net loss per share (unaudited)
Pro forma net loss per share for the year ended December 31, 1998 and the six
months ended July 2, 1999 is computed using the weighted average number of
shares of Common Stock
F-10
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
outstanding, including the pro forma effects of the automatic conversion of the
Company's Series A, B, and C Mandatorily Redeemable Convertible Preferred Stock
into shares of the Company's Common Stock effective upon the closing of the
Company's initial public offering as if such conversion occurred on January 1,
1998 or at the date of original issuance, if later. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
basic net loss per share of 5,265,000 for the year ended December 31, 1998 and
10,470,000 for the six months ended July 2, 1999.
Segment information
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. During each period presented, the Company operated in a
single business segment, primarily in the United States, Japan and Europe.
New accounting pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company has not
yet determined what the effect of SFAS No. 133 will be on the operations and
financial position of the Company. The Company will be required to implement
SFAS No. 133 beginning in 2001.
Unaudited interim results
The accompanying consolidated balance sheet as of July 2, 1999, the
consolidated statements of operations and cash flows for the six months ended
July 2, 1999 and June 30, 1998 and the consolidated statement of stockholders'
deficit for the six months ended July 2, 1999 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position and its results of operations and cash flows for the interim
periods. The data included in notes to the financial statements for these
periods is unaudited.
F-11
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--BALANCE SHEET COMPONENTS (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------- July 2,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Inventories:
Finished goods............................... $ -- $ 498 $ 813
Raw materials................................ 20 16 206
------- ------- -------
Total...................................... $ 20 $ 514 $ 1,019
======= ======= =======
Property and equipment:
Computer equipment........................... $ 100 $ 456 $ 737
Office equipment and fixtures................ 4 280 416
Production equipment and tooling............. 76 417 417
Leasehold improvements....................... -- 450 461
------- ------- -------
180 1,603 2,031
Less: Accumulated depreciation............... (18) (341) (710)
------- ------- -------
$ 162 $ 1,262 $ 1,321
======= ======= =======
Accrued liabilities:
Employee benefits............................ $ 55 $ 543 $ 1,042
Reserve for sales returns.................... -- 386 979
Warranty..................................... -- 181 494
Other........................................ 30 73 266
------- ------- -------
$ 85 $ 1,183 $ 2,781
======= ======= =======
</TABLE>
NOTE 3--DEBT:
Line of credit
At December 31, 1998, the Company had $600,000 outstanding under a line of
credit agreement with a bank. The line of credit provides for borrowings of up
to $800,000 which are secured by the assets of the Company. The line of credit
expired in May 1999 and bears interest at prime plus 0.75% per annum (8.75% at
December 31, 1998).
Notes payable
In September 1998, the Company entered into an equipment lease financing
agreement with a leasing company. The agreement provides for borrowings of up
to $1.0 million which are secured by the Company's equipment, machinery and
fixtures. As of December 31, 1998 and July 2, 1999, the Company had outstanding
borrowings under this agreement of $123,000 and $105,000 (unaudited),
respectively. The note balance is payable in 34 equal monthly installments and
bears interest at 10.95% per annum. Future principal payments under this note
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999............................................................... $ 39
2000............................................................... 44
2001............................................................... 40
----
$123
====
</TABLE>
F-12
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In November 1996 and December 1996, the Company borrowed a total of $70,000
from a stockholder which bore interest at 10% per annum. In connection with
this loan, the Company issued warrants to purchase 17,500 shares of Series A
Mandatorily Redeemable Convertible Preferred Stock at $1.00 per share. The
estimated fair value of the warrants at the grant date was not material to the
financial statements.
In January 1997 and March 1997, the Company borrowed an additional $60,000
from the same stockholder which bore interest at 10% per annum. In connection
with this loan, the Company issued warrants to purchase 15,000 shares of Series
A Mandatorily Redeemable Convertible Preferred Stock at $1.00 per share. The
estimated fair value of the warrants at the grant date was not material to the
financial statements.
In September 1997, the Company repaid the above loans.
In June 1998, the Company borrowed $300,000 from a stockholder which bore
interest at 5.5% per annum. In connection with the loan, the Company issued
warrants to purchase 7,000 shares of Series B Mandatorily Redeemable
Convertible Preferred Stock at $2.163 per share. The estimated fair value of
the warrants at the grant date was not material to the financial statements. In
July 1998, the Company repaid the loan in full.
Convertible promissory notes payable
During the year ended December 31, 1997, the Company borrowed $539,000 from
various individuals under convertible promissory notes bearing interest at 10%
per annum. In connection with these notes, the Company issued warrants to
purchase 131,000 shares of Series A Mandatorily Redeemable Convertible
Preferred Stock at $1.00 per share. The estimated fair value of these warrants
at the grant date was not material to the financial statements. These notes,
including $20,000 of accrued interest, were converted into Series A Mandatorily
Redeemable Convertible Preferred Stock at $1.00 per share in September 1997.
In April 1998, the Company borrowed $750,000 from various individuals under
convertible promissory notes bearing interest at 5.5% per annum. In connection
with these borrowings, the Company issued warrants to purchase 35,000 shares of
Series B Mandatorily Redeemable Convertible Preferred Stock at $2.163 per
share. The estimated fair value of the warrants at the grant date was not
material to the financial statements. These notes were converted into Series B
Mandatorily Redeemable Convertible Preferred Stock at $2.163 per share in July
1998.
In December 1998, the Company borrowed $500,000 from an affiliate of a member
of its Board of Directors and $50,000 from an individual investor under
convertible promissory notes bearing interest at 6% per annum. These notes were
converted to Series C Mandatorily Redeemable Preferred Stock in May 1999 (See
Note 11).
F-13
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Mandatorily Redeemable Convertible Preferred Stock ("Preferred Stock") at
December 31, 1998 and July 2, 1999 (unaudited) consists of the following (in
thousands, except share data):
<TABLE>
<CAPTION>
Shares
---------------------- Liquidation Redemption
Authorized Outstanding Amount Amounts
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Series A........................ 3,735,000 3,572,000 $ 3,572 $ 3,572
Series B........................ 3,741,000 3,699,000 8,000 8,000
---------- ---------- -------
Balance at December 31, 1998.... 7,476,000 7,271,000 11,572
Series C (unaudited)............ 10,134,000 9,814,000 36,310 34,074
---------- ---------- ------- -------
Balance at July 2, 1999
(unaudited).................... 17,610,000 17,085,000 $47,882 $45,646
========== ========== ======= =======
</TABLE>
During 1997, the Company issued 3,571,000 shares of Series A Preferred Stock
at $1.00 per share for net proceeds of approximately $3.0 million and the
conversion of $559,000 of notes payable described in Note 3. In July 1998, the
Company issued 1,000 shares of Series A Preferred Stock at $1.00 per share for
net proceeds of $1,000 upon the exercise of a warrant.
In July 1998, the Company issued 3,699,000 shares of Series B Preferred
Stock at $2.163 per share for net proceeds of approximately $7.2 million and
the conversion of $750,000 of notes payable described in Note 3.
The holders of Preferred Stock have various rights and preferences as
follows:
Voting
Each share of Preferred Stock has voting rights equal to an equivalent number
of shares of Common Stock into which it is convertible and votes together as
one class with the Common Stock.
As long as at least 750,000 shares of Preferred Stock are outstanding, the
Company must obtain approval from two-thirds of the then outstanding shares of
Preferred Stock in order to alter the articles of incorporation as related to
Preferred Stock, authorize or issue any other equity security senior to or on a
parity with Preferred Stock, redeem or purchase any shares of Preferred Stock
other than by redemption in accordance with the certificate of incorporation,
increase or decrease the number of authorized shares of Preferred Stock,
authorize a dividend for any class or series other than Preferred Stock,
increase the size of the Board of Directors, or acquire any other company or
business.
Conversion
Each share of Preferred Stock outstanding is convertible into one share of
Common Stock, subject to adjustment for dilution, and will be converted into
Common Stock in the event of the closing of a public offering of at least
$20,000,000 at a minimum price of $7.50 per share. As of December 31, 1998, the
Company had reserved 7,271,000 shares of its Common Stock for issuance upon
conversion of the outstanding Preferred Stock.
F-14
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividends
Holders of Series A and B are entitled to receive cumulative dividends at the
per annum rate of $0.10 and $0.2163 per share, respectively, when and if
declared by the Board of Directors, prior to payment of dividends on Common
Stock. No dividends have been declared.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, holders of the Series B are entitled to
receive $2.163 per share, plus any declared but unpaid dividends, prior to any
distribution to the holders of Series A and Common Stock. Holders of Series A
are entitled to receive $1.00 per share, plus any declared but unpaid
dividends, prior to distribution to the holders of Common Stock. Any assets
remaining after distribution of the preference amounts on the Series A and
Common Stock will be distributed on a pro rata basis, assuming conversion of
the Preferred Stock.
Redemption
The holders of Preferred Stock may cause the Company to redeem their shares
after the fifth and before the seventh anniversary of the Series B issue date.
Redemption will be at the greater of fair market value or the original purchase
price plus accrued but unpaid dividends. During 1998, the Company recorded a
charge to its accumulated deficit of approximately $828,000 related to the
accretion to the Preferred Stock redemption value. As described in Note 11, in
connection with the issuance of Series C Preferred Stock in April 1999, the
redemption amount was modified to equal the original purchase price plus
accrued but unpaid dividends.
NOTE 5--COMMON STOCK:
Certain shares of Common Stock outstanding were sold under Restricted Stock
Purchase Agreements (the "Agreements"). According to the terms of the
Agreements, in the event that the purchaser ceases their relationship with the
Company, the Company has the right to repurchase shares issued at the original
purchase price ("purchase option"), subject to a declining percentage over
time. During 1998 and 1997, the Company exercised its purchase option for
255,000 shares and 570,000 shares, respectively, of Common Stock at $0.001 per
share. As of December 31, 1998 and July 2, 1999, a total of 2,232,000 and
1,287,000 (unaudited) shares, respectively, were subject to repurchase by the
Company. Additionally, in the event that the purchase option has lapsed and the
purchaser decides to sell their shares, the Company has the first right of
refusal with respect to such shares.
NOTE 6--STOCK OPTIONS PLAN:
In April 1997, the Company adopted the Employee Stock Option Plan ( the
"Plan"). The Plan provides for the granting of stock options and Common Stock
to employees and consultants of the Company. Options granted under the Plan may
be either incentive stock options or nonqualified stock options. Incentive
stock options ("ISO") may be granted only to Company employees (including
officers and directors who are also employees). Nonqualified stock options
("NSO") may be granted to Company employees and consultants. At December 31,
1998 and July 2, 1999, the Company has reserved 2,550,000 and 3,100,000
(unaudited) shares, respectively, of Common Stock for issuance under the Plan.
F-15
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options are generally exercisable immediately, subject to
repurchase options held by the Company. The repurchase options lapse over a
maximum period of five years at such times and under such conditions as
determined by the Board of Directors. Options vest over 4 years, 25% after the
first year and ratably each month over the remaining 36 months.
During 1998, the Company issued NSOs to an outside consultant to purchase
25,000 shares of Common Stock at $0.50 per share, the estimated grant date fair
market value. The estimated fair value of the options was not material to the
financial statements.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise
Available Options Price
for Grant Outstanding Per Share
---------- ----------- ----------
<S> <C> <C> <C>
Balance at December 31, 1996............... -- -- $ --
Authorized............................... 1,145,000 -- --
Granted.................................. (826,000) 826,000 0.008
Exercised................................ -- (110,000) 0.001
Canceled................................. 478,000 (478,000) 0.001
---------- ----------
Balance at December 31, 1997............... 797,000 238,000
Authorized............................... 1,405,000 -- --
Granted.................................. (1,437,000) 1,437,000 0.500
Exercised................................ -- (12,000) 0.001
Canceled................................. 41,000 (41,000) 0.190
---------- ----------
Balance at December 31, 1998............... 806,000 1,622,000
Authorized (unaudited)................... 550,000 -- --
Granted (unaudited)...................... (742,000) 742,000 1.53
Exercised (unaudited).................... -- (75,000) 0.17
Canceled (unaudited)..................... 144,000 (144,000) 0.38
---------- ----------
Balance at July 2, 1999 (unaudited)........ 758,000 2,145,000
========== ==========
</TABLE>
F-16
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
and exercisable as of December 31, 1998.
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable at
at December 31, 1998 December 31, 1998
----------------------------------- ------------------
Weighted Weighted
Weighted Average Average Average
Range of Exercise Number of Remaining Exercise Number of Exercise
Prices Shares Contractual Life Price Shares Price
------------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.001............. 32,000 8.38 years $ 0.001 12,000 $ 0.001
0.100............. 928,000 9.17 years 0.100 48,000 0.100
0.500............. 662,000 9.65 years 0.500 -- --
--------- ------
1,622,000 60,000
========= ======
</TABLE>
Fair value disclosures
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss for the years ended
December 31, 1996, 1997 and 1998 would have been increased to the pro forma
amounts indicated in the following table (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Net loss attributable to holders of Common
Stock:
As reported............................... $ (82) $ (1,769) $ (11,306)
======== ======== =========
Pro forma................................. $ (82) $ (1,774) $ (11,412)
======== ======== =========
Basic and diluted net loss per share
attributable to holders of Common Stock:
As reported............................... $ (4.10) $ (5.47)
======== =========
Pro forma................................. $ (4.11) $ (5.53)
======== =========
</TABLE>
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes pricing model with the following
assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Expected life (years)........................................ 5 5
Risk free interest rate...................................... 6.03% 6.66%
Expected volatility.......................................... -- --
Dividend yield............................................... -- --
</TABLE>
The estimated weighted average fair value of options granted to purchase
shares of common stock under the Plan in 1997 and 1998 was $0.01 and $0.07,
respectively.
F-17
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan (the "Plan") covering
all eligible employees. Contributions made by the Company are determined
annually by the Board of Directors. No contributions have been made to the Plan
by the Company.
NOTE 8--INCOME TAXES:
No provision or benefit for income taxes has been recognized for any of the
periods presented as the Company has incurred net operating losses since
inception.
At December 31, 1998, the Company has approximately $11 million of net
operating loss carryforwards available to offset future taxable income for
Federal and California purposes which expire beginning in 2011 and 2004,
respectively. Under the Tax Reform Act of 1986, the amount of net operating
losses that can be utilized may be limited in certain circumstances including,
but not limited to, a cumulative stock ownership change of more than 50% over a
three-year period.
Deferred tax assets of approximately $4.4 million and $400,000 at December
31, 1998 and 1997, respectively, consist primarily of federal and California
net operating loss carryforwards. Based on a number of factors, including the
lack of a history of profits and the fact that the Company competes in a
developing market that is characterized by rapidly changing technology,
management believes there is sufficient uncertainty regarding the realization
of deferred tax assets such that a full valuation allowance has been provided.
NOTE 9--COMMITMENTS:
The Company leases office space under a noncancelable operating lease which
expires on December 31, 2003. Rent expense for the year ended December 31, 1998
and 1997 was $316,000 and $73,000, respectively. Rent expense for the period
ended July 2, 1999 was $392,000 (unaudited).
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1999............................................................. $ 726
2000............................................................. 743
2001............................................................. 794
2002............................................................. 827
2003............................................................. 844
------
$3,934
======
</TABLE>
NOTE 10--CONTINGENCIES:
Pursuant to the Company's turnkey service and purchase agreement with its
subcontract manufacturer, in the event that the agreement is terminated, the
Company would be required to purchase remaining surplus or obsolete inventory
which is specific to the Company's products.
On December 4, 1998, Cube Computer Corporation filed suit against the Company
claiming the use of the trademark Qube for its server products constitutes a
trademark infringement of Cube Computer Corporation's registered Cube trademark
for computer hardware products. The Company
F-18
<PAGE>
COBALT NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
intends to defend this matter vigorously but is unable to provide an evaluation
of the probability of a favorable or unfavorable outcome. Management believes,
based on currently available information, the resolution of this matter will
not have a material adverse effect on its financial position or cash flows.
NOTE 11--SUBSEQUENT EVENTS
Financings
In February and March 1999, the Company borrowed $4.25 million from various
investors under convertible promissory notes bearing interest at 6.0% per
annum. These notes were converted into Series C Mandatorily Redeemable
Preferred Stock in May 1999. In connection with the notes, the Company issued
warrants to purchase 79,045 shares of Series C Mandatorily Redeemable
Convertible Preferred Stock at $3.70 per share. The estimated fair value of the
warrants at the grant date was $130,000 and was recorded as interest expense.
In April 1999, the Company amended its articles of incorporation to increase
its authorized shares to 26,000,000 shares of Common Stock and 17,610,000
shares of Preferred Stock, of which 10,134,452 shares were designated as Series
C Mandatorily Redeemable Convertible Preferred Stock. The Company also revised
the redemption provisions of its Preferred Stock such that the redemption
amount is the original issue price plus accrued dividends.
In May 1999, the Company issued 9,814,000 shares of Series C Mandatorily
Redeemable Preferred Stock at $3.70 per share for net proceeds of approximately
$29.6 million and the conversion of $4.80 million of notes payable described in
Note 3 and above. In connection with the transaction, the Company issued a
warrant to purchase 243,000 shares of Common Stock at $3.70 per share. The
estimated fair value of the warrants at the date of grant was $402,000, which
was recorded as additional paid in capital. The rights of Series C are similar
to Series B except, among other differences, the holders of Series C are
entitled to noncumulative dividends of $0.37 per share and the liquidation
preference is $3.70 per share.
Unearned stock compensation
In connection with certain stock option grants during the six months ended
July 2, 1999, the Company recorded unearned stock compensation cost totaling
$1.4 million which is being recognized over the vesting period of the related
options of four years. Amortization expense associated with unearned stock
compensation totaled $253,000 for the six months ended July 2, 1999.
During the period from July 3, 1999 through September 3, 1999, the Company
granted options to purchase an aggregate of 1,355,000 shares of Common Stock at
exercise prices ranging from $2.50 to $10.00 per share. The Company expects to
record additional unearned stock compensation with respect to these options
totaling $7.4 million. The Company will record amortization expense associated
with unearned stock compensation of $893,000 and $1.2 million in the third and
fourth quarters of fiscal 1999 and $1.2 million, $1.2 million, $847,000 and
$615,000 in the first, second, third and fourth quarters of fiscal 2000,
respectively.
Note Receivable from Stockholder
In August 1999, the Company advanced $500,000 to its Chief Executive Officer.
In September 1999, the advance was converted into a full recourse non-interest
bearing promissory note payable in four years and is secured by 50,000 shares
of Series B Preferred Stock.
F-19
<PAGE>
UNDERWRITING
Cobalt and the underwriters for the offering named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and BancBoston Robertson
Stephens Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
BancBoston Robertson Stephens Inc. .........................
---------
Total.....................................................
=========
</TABLE>
---------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Cobalt to cover such sales. They may exercise that option for 30
days. If any shares are purchased under this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by Cobalt. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Cobalt
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............................................. $ $
Total................................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any of
these securities dealers may resell any shares purchased from the underwriters
to other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and
the other selling terms.
Cobalt and its directors, officers, employees and substantially all holders
of shares of Cobalt's common stock have agreed with the underwriters not to
dispose of or hedge any of their common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman, Sachs & Co. This
restriction does not apply to any issuances under Cobalt's existing employee
benefit plans. The underwriters have agreed that the holders of up to 100,000
shares may sell those shares beginning 30 days after the date this offering is
declared effective provided that the shares are sold through Goldman, Sachs &
Co. and at a time agreeable to both Goldman, Sachs & Co. and Cobalt. See
"Shares Eligible for Future Sale" for a discussion of transfer restrictions.
U-1
<PAGE>
Prior to this offering, there has been no public market for the common stock.
The initial public offering price for the common stock will be negotiated among
Cobalt and the representatives of the underwriters. Among the factors to be
considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions, are Cobalt's historical performance,
estimates of Cobalt's business potential and earnings prospects, an assessment
of Cobalt's management and the consideration of the above factors in relation
to market valuation of companies in related businesses.
Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "COBT".
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters may also impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of this underwriter in stabilizing or short-sale covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
At Cobalt's request, the underwriters have reserved up to shares of
the common stock offered hereby for sale, at the initial public offering price,
to customers and other friends of Cobalt through a directed share program. The
number of shares available for sale to the general public will be reduced to
the extent these persons purchase the reserved shares. There can be no
assurance that any of the reserved shares will be so purchased. Any reserved
shares not so purchased will be offered by the underwriters to the general
public on the same basis as other shares offered hereby.
Cobalt estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1,050,000.
Cobalt has agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act of 1933.
U-2
<PAGE>
[Description for EDGAR: Picture of a woman holding 4 Cobalt RaQ server
appliances with stacks of Cobalt RaQ server appliances in the background.
Underneath the picture is the caption "The Cobalt RaQ" and beneath that is the
following text: "Simple. Affordable. The dedicated hosting solution that is
less than two inches tall." Beneath this text is the Cobalt logo and the words
"Cobalt Networks".]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 22
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 25
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 28
Business................................................................. 39
Management............................................................... 53
Related Party Transactions............................................... 62
Principal Stockholders................................................... 65
Description of Capital Stock ............................................ 68
Shares Eligible for Future Sale.......................................... 72
Legal Matters............................................................ 73
Experts.................................................................. 73
Where You Can Find Additional Information................................ 74
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
--------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when
acting as underwriter and with respect to an unsold allotment or subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
Cobalt Networks, Inc.
Common Stock
--------------
[COBALT LOGO APPEARS HERE]
--------------
Goldman, Sachs & Co.
Merrill Lynch & Co.
BancBoston Robertson Stephens
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discounts, payable by the Registrant in connection with the sale
of the securities being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 23,978
NASD Filing Fee.................................................. 9,125
Nasdaq National Market Listing Fee............................... 95,000
Printing Costs................................................... 275,000
Legal Fees and Expenses.......................................... 350,000
Accounting Fees and Expenses..................................... 250,000
Blue Sky Fees and Expenses....................................... 5,000
Transfer Agent and Registrar Fees................................ 10,000
Miscellaneous.................................................... 31,897
----------
Total...................................................... $1,050,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
As permitted by Section 204(a) of the California General Corporation Law, the
Registrant's Amended and Restated Articles of Incorporation eliminate a
director's personal liability for monetary damages to the Registrant and its
shareholders arising from a breach or alleged breach of the director's
fiduciary duty, except for liability arising under Sections 310 and 316 of the
California General Corporation Law or liability for (i) acts or omissions that
involve intentional misconduct or knowing and culpable violation of law, (ii)
acts or omissions that a director believes to be contrary to the best interests
of the Registrant or its shareholders or that involve the absence of good faith
on the part of the director, (iii) any transaction from which a director
derived an improper personal benefit, (iv) acts or omissions that show a
reckless disregard for the director's duty to the Registrant or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the Registrant or its shareholders, (v) acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Registrant or its shareholders, (vi)
interested transactions between the corporation and a director in which a
director has a material financial interest, and (vii) liability for improper
distributions, loans or guarantees. This provision does not eliminate the
directors' duty of care, and in appropriate circumstances equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available under California law.
Sections 204(a) and 317 of the California General Corporation Law authorize a
corporation to indemnify its directors, officers, employees and other agents in
terms sufficiently broad to permit indemnification (including reimbursement for
expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Amended and Restated Articles of Incorporation and Bylaws contain provisions
covering indemnification to the maximum extent permitted by the California
General Corporation Law of corporate directors, officers and other agents
against certain liabilities and expenses incurred as a result of proceedings
involving such persons in their capacities as directors, officers employees or
agents, including proceedings under the Securities Act or the Securities
Exchange Act of 1934, as amended. Prior to the effective date of this Offering,
the Registrant will enter into indemnification agreements with its directors
and executive officers.
In connection with its reincorporation in Delaware, the Registrant will be
subject to Section 145 of the Delaware General Corporation Law ("Section 145").
Section 145 permits indemnification of
II-1
<PAGE>
officers and directors of the Company under certain conditions and subject to
certain limitations. Section 145 also provides that a corporation has the power
to maintain insurance on behalf of its officers and directors against any
liability asserted against such person and incurred by him or her in such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her against such liability
under the provisions of Section 145. Upon shareholder approval of such
reincorporation, Article VI, Section 6.1, of the Registrant's Bylaws will
provide for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
not prohibited by the Delaware General Corporation Law. The rights to indemnity
thereunder continue as to a person who has ceased to be a director, officer,
employee or agent and inure to the benefit of the heirs, executors and
administrators of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact that he or she
is or was a director or officer of the Registrant (or was serving at the
Registrant's request as a director or officer of another corporation) shall be
paid by the Registrant in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such director
or officer to repay such amount if it shall ultimately be determined that he or
she is not entitled to be indemnified by the Registrant as authorized by the
relevant section of the Delaware General Corporation Law.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
the Registrant's Certificate of Incorporation provides that, pursuant to
Delaware law, its directors shall not be personally liable for monetary damages
for breach of the directors' fiduciary duty as directors to the Registrant and
its stockholders. This provision in the Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Registrant for acts or omission not in good faith or involving
international misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of Stock repurchases or redemptions that are unlawful under Section
174 of the Delaware General Corporation Law. The provision also does not affect
a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into indemnification agreements with each of its directors and
executive officers. Generally, the indemnification agreements attempt to
provide the maximum protection permitted by Delaware law as it may be amended
from time to time. Moreover, the indemnification agreements provide for certain
additional indemnification. Under such additional indemnification provisions,
however, an individual will not receive indemnification for judgments,
settlements or expenses if he or she is found liable to the Registrant (except
to the extent the court determines he or she is fairly and reasonably entitled
to indemnity for expenses), for settlements not approved by the Registrant or
for settlements and expenses if the settlement is not approved by the court.
The indemnification agreements provide for the Registrant to advance to the
individual any and all reasonable expenses (including legal fees and expenses)
incurred in investigating or defending any such action, suit or proceeding. In
order to receive an advance of expenses, the individual must submit to the
Registrant copies of invoices presented to him or her for such expenses. Also,
the individual must repay such advances upon a final judicial decision that he
or she is not entitled to indemnification.
The Registrant intends to enter into additional indemnification agreements
with each of its directors and executive officers to effectuate these indemnity
provisions and to purchase directors' and officers' liability insurance.
In addition to the foregoing, the Underwriting Agreement contains certain
provisions by which the Underwriters have agreed to indemnify the Registrant,
each person, if any, who controls the
II-2
<PAGE>
Registrant within the meaning of Section 15 of the Securities Act, each
director of the Registrant, each officer of the Registrant who signs the
Registration Statement, with respect to information furnished in writing by or
on behalf of the Underwriters for use in the Registration Statement.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
Item 15. Recent Sales of Unregistered Securities.
Since our incorporation in October 1996, we have sold and issued the
following securities:
(1) In May and June 1997 the Registrant issued and sold 4,181,426 shares
of Common Stock to employees for $4,181 pursuant to Section 4(2) of the
Securities Act.
(2) In August 1997, the Registrant issued and sold 471,338 shares of
Common Stock to three employees for $471 pursuant to Section 4(2) of the
Securities Act.
(3) From August to November 1997, the Registrant issued and sold
3,572,401 shares of Series A Preferred Stock to 13 investors for $3.6
million pursuant to Section 4(2) of the Securities Act.
(4) In March and April 1998, the Registrant issued and sold 800,000
shares of Common Stock to one employee for $80,000 pursuant to Section 4(2)
of the Securities Act.
(5) In July 1998, the Registrant issued and sold 3,698,910 shares of
Series B Preferred Stock to 21 investors for $8.0 million pursuant to
Section 4(2) of the Securities Act.
(6) In February 1999, the Registrant issued and sold 100,000 shares of
Common Stock to one employee for $50,000 pursuant to Section 4(2) of the
Securities Act.
(7) In May 1999, the Registrant issued and sold 9,813,507 shares of
Series C Preferred Stock to 60 investors for $36.3 million pursuant to
Section 4(2) of the Securities Act.
(8) Pursuant to Rule 701 promulgated under the Securities Act, from
October 18, 1996 to July 2, 1999, the Registrant issued and sold 197,521
shares of Common Stock to employees and consultants for aggregate
consideration of $13,260 upon the exercise of stock options pursuant to the
Registrant's Employee Stock Plan.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Form of Merger Agreement between Cobalt Networks, Inc., a California
corporation, and Cobalt Networks, Inc., a Delaware corporation
3.1 Certificate of Incorporation of the Registrant, as currently in
effect
3.1.1 Form of Certificate of Incorporation of the Registrant to be filed
after the closing of the offering made under this Registration
Statement
3.2 Bylaws of the Registrant
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.3 California Restated Articles of Incorporation
3.4 California Bylaws
4.1* Specimen Common Stock Certificate
4.2 Second Amended and Restated Investors' Rights Agreement, dated April
30, 1999, by and among the Registrant and certain stockholders of
the Registrant
5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2 Amended and Restated 1997 Employee Stock Plan
10.2.1 Form of Option Agreement under the Employee Stock Plan
10.3 1999 Employee Stock Purchase Plan
10.3.1 Form of Subscription Agreement under the 1999 Employee Stock
Purchase Plan
10.4 1999 Director Option Plan
10.4.1 Form of Option Agreement under 1999 Director Plan
10.5 Form of Executive Officer Employment Agreement
10.6 Consulting Agreement dated August 30, 1996 by and between the
Registrant and Techfarm Management, Inc.
10.7 Lease Agreement dated August 5, 1998 between Registrant and Renault
& Handley Solar Ellis Joint Venture for 555 Ellis Street, Mountain
View, California office
10.7.1 Assignment of lease dated September 2, 1998 between Registrant and
Netscape Communications, Inc.
10.7.2 Sublease dated October 28, 1996 between Netscape Communications,
Inc. and Banta Corporation
10.7.3 Addendum One to sublease dated November 6, 1996 among Netscape
Communications, Inc., Banta Corporation and Renault & Handley Solar
Ellis Joint Venture
10.7.4 Lease dated August 10, 1993 ("Master Lease") between Banta Digital
Services, Inc. and Renault & Handley Solar Ellis Joint Venture
10.8 Employee Option Agreement dated July 15, 1998 between the Registrant
and George M. Korchinsky
10.9 Employment Offer Letter dated July 20, 1999 from the Registrant to
Gary Martell
10.10 Separation Agreement dated July 28, 1999 by and between the
Registrant and Robin Porter
10.11+ Turnkey Service and Purchase Agreement dated August 31, 1999 by and
among the Registrant and SMTC Manufacturing Corporation
10.12 Promissory Note and Security Agreement dated August 20, 1999 between
the Registrant and Stephen W. DeWitt
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.2 Form of Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see Page II-6)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
+ Confidential treatment requested
II-4
<PAGE>
(b) Financial Statement Schedules.
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements 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 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Mountain View, State of
California on September 8, 1999.
/s/ Stephen W. DeWitt
By: _________________________________
Stephen W. DeWitt
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Stephen W. DeWitt
and Kenton D. Chow, and each of them, as his attorney-in-fact, with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this registration statement (including post-effective
amendments), and any and all registration statements filed pursuant to Rule 462
under the Securities Act of 1933, as amended, in connection with or related to
the offering contemplated by this registration statement and its amendments, if
any, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said registration statement.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen W. DeWitt President, Chief Executive September 8, 1999
______________________________________ Officer and Director
Stephen W. DeWitt (Principal Executive
Officer)
/s/ Kenton D. Chow Vice President Finance and September 8, 1999
______________________________________ Chief Financial Officer
Kenton D. Chow (Principal Financial and
Accounting Officer)
/s/ Gordon A. Campbell Chairman of the Board of September 8, 1999
______________________________________ Directors
Gordon A. Campbell
/s/ Jordan A. Levy Director September 8, 1999
______________________________________
Jordan A. Levy
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
2.1 Form of Merger Agreement between Cobalt Networks, Inc., a California
corporation, and Cobalt Networks, Inc., a Delaware corporation
3.1 Certificate of Incorporation of the Registrant, as currently in
effect
3.1.1 Form of Certificate of Incorporation of the Registrant to be filed
after the closing of the offering made under this Registration
Statement
3.2 Bylaws of the Registrant
3.3 California Restated Articles of Incorporation
3.4 California Bylaws
4.1* Specimen Common Stock Certificate
4.2 Second Amended and Restated Investors' Rights Agreement, dated April
30, 1999, by and among the Registrant and certain stockholders of
the Registrant
5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2 Amended and Restated 1997 Employee Stock Plan
10.2.1 Form of Option Agreement under the Employee Stock Plan
10.3 1999 Employee Stock Purchase Plan
10.3.1 Form of Subscription Agreement under the 1999 Employee Stock
Purchase Plan
10.4 1999 Director Option Plan
10.4.1 Form of Option Agreement under 1999 Director Plan
10.5 Form of Executive Officer Employment Agreement
10.6 Consulting Agreement dated September 30, 1996 by and between the
Registrant and Techfarm Management, Inc.
10.7 Lease Agreement dated August 5, 1998 between Registrant and Renault
& Handley Solar Ellis Joint Venture for 555 Ellis Street, Mountain
View, California office
10.7.1 Assignment of lease dated September 2, 1998 between Registrant and
Netscape Communications, Inc.
10.7.2 Sublease dated October 28, 1996 between Netscape Communications,
Inc. and Banta Corporation
10.7.3 Addendum One to sublease dated November 6, 1996 among Netscape
Communications, Inc., Banta Corporation and Renault & Handley Solar
Ellis Joint Venture
10.7.4 Lease dated August 10, 1993 ("Master Lease") between Banta Digital
Services, Inc. and Renault & Handley Solar Ellis Joint Venture
10.8 Employee Option Agreement dated July 15, 1998 between the Registrant
and George Korchinsky
10.9 Employment Offer Letter dated July 20, 1999 from the Registrant to
Gary Martell
10.10 Separation Agreement dated July 28, 1999 by and between the
Registrant and Robin Porter
10.11+ Turnkey Service and Purchase Agreement dated August 31, 1999 by and
among the Registrant and SMTC Manufacturing Corporation
10.12 Promissory Note and Security Agreement dated August 20, 1999 between
the Registrant and Stephen W. DeWitt
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
23.2 Form of Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see Page II-6)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
+ Confidential treatment requested
<PAGE>
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
OF COBALT NETWORKS, INC.
A DELAWARE CORPORATION
AND
A CALIFORNIA CORPORATION
THIS AGREEMENT AND PLAN OF MERGER dated as of September __, 1999, (the
"Agreement") is between Cobalt Networks, Inc., a Delaware corporation ("Cobalt-
Delaware") and Cobalt Networks, Inc., a California corporation ("Cobalt-
California"). Cobalt-Delaware and Cobalt-California are sometimes referred to
herein as the "Constituent Corporations."
R E C I T A L S
----------------
A. Cobalt-Delaware is a corporation duly organized and existing under the
laws of the State of Delaware and has an authorized capital of 137,609,875
shares, 120,000,000 of which are designated "Common Stock", $0.001 par value,
and 17,609,875 of which are designated "Preferred Stock", $0.001 par value. Of
such authorized shares of Preferred Stock, 3,734,901 shares are designated
"Series A Preferred Stock," 3,740,522 shares are designated "Series B Preferred
Stock" and 10,134,452 shares are designated "Series C Preferred Stock." As of
the date of this Agreement of Merger, 1,000 shares of Common Stock are issued
and outstanding, all of which were held by Cobalt-California. No shares of
Preferred Stock are outstanding.
B. Cobalt-California is a corporation duly organized and existing under
the laws of the State of California and has an authorized capital of 43,609,875
shares, 26,000,000 of which are designated "Common Stock", no par value and
17,609,875 of which are designated "Preferred Stock", no par value. Of such
authorized shares of Preferred Stock, 3,734,901 shares are designated "Series A
Preferred Stock," and 3,740,522 shares are designated "Series B Preferred Stock"
and 10,134,452 shares are designated "Series C Preferred Stock." As of the
record date of the meeting of shareholders at which this Agreement of Merger was
approved, 5,262,410 shares of Common Stock, 3,572,401 shares of Series A
Preferred Stock, 3,698,910 shares of Series B Preferred Stock and 9,813,507
shares of Series C Preferred Stock were issued and outstanding.
C. The Board of Directors of Cobalt-California has determined that, for
the purpose of effecting the reincorporation of Cobalt-California in the State
of Delaware, it is advisable and in the best interests of Cobalt-California that
Cobalt-California merge with and into Cobalt-Delaware upon the terms and
conditions herein provided.
D. The respective Boards of Directors of Cobalt-Delaware and Cobalt-
California have approved this Agreement and have directed that this Agreement be
submitted to a vote of their respective stockholders and executed by the
undersigned officers.
<PAGE>
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, Cobalt-Delaware and Cobalt-California hereby agree, subject to the
terms and conditions hereinafter set forth, as follows:
I. MERGER
1.1 Merger. In accordance with the provisions of this Agreement, the
------
Delaware General Corporation Law and the California General Corporation Law,
Cobalt-California shall be merged with and into Cobalt-Delaware (the "Merger"),
the separate existence of Cobalt-California shall cease and Cobalt-Delaware
shall be, and is herein sometimes referred as, the "Surviving Corporation", and
the name of the Surviving Corporation shall be Cobalt Networks, Inc.
1.2 Filing and Effectiveness. The Merger shall be completed when the
------------------------
following actions shall have been completed:
(a) This Agreement and Merger was adopted and approved by the
stockholders of each Constituent Corporation in accordance with the requirements
of the Delaware General Corporation Law and the California General Corporation
Law on September __, 1999 and September __, 1999, respectively;
(b) All of the conditions precedent to the consummation of the Merger
specified in this Agreement shall have been satisfied or duly waived by the
party entitled to satisfaction thereof;
(c) An executed Agreement and Plan of Merger meeting the requirements
of the Delaware General Corporation Law shall have been filed with the Secretary
of State of the State of Delaware; and
(d) An executed Certificate of Merger or an executed, acknowledged
and certified counterpart of this Agreement meeting the requirements of the
California Corporations Code shall have been filed with the Secretary of State
of the State of California.
Pursuant to Section 251 of the Delaware General Corporation Law and
Section 1168 of the California Corporations Code, the date and time when the
Merger shall become effective, shall be the date upon which subsections (a), (b)
and (c) of this Section 1.2 are satisfied and as to Cobalt-California on the day
subsection (d) is satisfied, is herein called the "Effective Date of the
Merger."
1.3 Effect of the Merger. Upon the Effective Date of the Merger, the
--------------------
separate existence of Cobalt-California shall cease and Cobalt-Delaware, as the
Surviving Corporation, (i) shall continue to possess all of its assets, rights,
powers and property as constituted immediately prior to the Effective Date of
the Merger, (ii) shall be subject to all actions previously taken by its and
Cobalt-California's Board of Directors, (iii) shall succeed, without other
transfer, to all of the assets, rights, powers and property of Cobalt-California
in the manner more fully set forth in Section 259 of the Delaware General
Corporation Law, (iv) shall continue to be subject to all of the debts,
liabilities and obligations of Cobalt-Delaware as constituted immediately prior
to the Effective Date of the Merger, and (v) shall succeed, without other
transfer, to all of the debts, liabilities and obligations of
-2-
<PAGE>
Cobalt-California in the same manner as if Cobalt-Delaware had itself incurred
them, all as more fully provided under the applicable provisions of the Delaware
General Corporation Law and the California Corporations Code.
II. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 Certificate of Incorporation. The Certificate of Incorporation of
----------------------------
Cobalt-Delaware as in effect immediately prior to the Effective Date of the
Merger shall continue in full force and effect as the Certificate of
Incorporation of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
2.2 Bylaws. The Bylaws of Cobalt-Delaware as in effect immediately prior
------
to the Effective Date of the Merger shall continue in full force and effect as
the Bylaws of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
2.3 Directors and Officers. The directors and officers of Cobalt-
----------------------
California immediately prior to the Effective Date of the Merger shall be the
directors and officers of the Surviving Corporation until their successors shall
have been duly elected and qualified or until as otherwise provided by law, the
Certificate of Incorporation of the Surviving Corporation or the Bylaws of the
Surviving Corporation.
III. MANNER OF CONVERSION OF STOCK
3.1 Cobalt-California Common Shares. Upon the Effective Date of the
-------------------------------
Merger, each share of Cobalt-California Common Stock, issued and outstanding
immediately prior thereto shall by virtue of the Merger and without any action
by the Constituent Corporations, the holder of such shares or any other person,
be converted into and exchanged for one fully paid and nonassessable share of
Common Stock, $.001 par value, of the Surviving Corporation. No fractional
share interests of Surviving Corporation Common Stock shall be issued. In lieu
thereof, any fractional share interests to which a holder would otherwise be
entitled shall be aggregated.
3.2 Cobalt-California Preferred Shares.
----------------------------------
(a) Upon the Effective Date of the Merger, each share of Series A
Preferred, Series B Preferred, and Series C Preferred Stock of Cobalt-
California, no par value, issued and outstanding immediately prior to the
Merger, which shares are convertible into such number of shares of Cobalt-
California Common Stock as set forth in the Cobalt-California Restated Articles
of Incorporation, as amended, shall by virtue of the Merger and without any
action by the Constituent Corporations, the holder of such shares or any other
person, be converted into or exchanged for one fully paid and nonassessable
share of Series A Preferred, Series B Preferred and Series C Preferred Stock of
the Surviving Corporation, $0.001 par value, respectively, having such rights,
preferences and privileges as set forth in the Certificate of Incorporation of
the Surviving Corporation, which share of Preferred Stock shall be convertible
into the same number of shares of the Surviving Corporation's Common Stock,
$0.001 par value, as such share of Cobalt-California Preferred Stock was so
convertible into immediately prior to the Effective Date of the Merger, subject
to adjustment pursuant to the terms of the Certificate of Incorporation of the
Surviving Corporation.
-3-
<PAGE>
3.3 Cobalt-California Options, Warrants, Stock Purchase Rights and
--------------------------------------------------------------
Convertible Securities.
----------------------
(a) Upon the Effective Date of the Merger, the Surviving Corporation
shall assume the obligations of Cobalt-California under, and continue, the
option plans (including without limitation the 1997 Employee Stock Plan ("Stock
Option Plan"), 1999 Employee Stock Purchase Plan and 1999 Director Option Plan)
and all other employee benefit plans of Cobalt-California. Each outstanding and
unexercised option, warrant, other right to purchase, or security convertible
into, Cobalt-California Common Stock or Cobalt-California Preferred Stock (a
"Right") shall become, subject to the provisions in paragraph (c) hereof, an
option, warrant, right to purchase or a security convertible into the Surviving
Corporation's Common Stock or Preferred Stock, respectively, on the basis of one
share of the Surviving Corporation's Common Stock or Preferred Stock, as the
case may be, for each one share of Cobalt-California Common Stock or Preferred
Stock, as the case may be, issuable pursuant to any such Right, on the same
terms and conditions and at an exercise price equal to the exercise price
applicable to any such Cobalt-California Right at the Effective Date of the
Merger. This paragraph 3.3(a) shall not apply to Cobalt-California Common Stock
or Preferred Stock. Such Common Stock and Preferred Stock are subject to
paragraph 3.1 and 3.2, respectively, hereof.
(b) A number of shares of the Surviving Corporation's Common Stock
and Preferred Stock shall be reserved for issuance upon the exercise of options,
warrants, stock purchase rights and convertible securities equal to the number
of shares of Cobalt-California Common Stock and Cobalt-California Preferred
Stock so reserved immediately prior to the Effective Date of the Merger.
(c) The assumed Rights shall not entitle any holder thereof to a
fractional share upon exercise or conversion (unless the holder was entitled to
a fractional interest immediately prior to the Merger). In lieu thereof, any
fractional share interests to which a holder of an assumed Right (other than an
option issued pursuant to Cobalt-Delaware's 1997 Stock Option Plan, 1999
Employee Stock Purchase Plan and 1999 Director Option Plan) would otherwise be
entitled upon exercise or conversion shall be aggregated (but only with other
similar Rights which have the same per share terms). To the extent that after
such aggregation, the holder would still be entitled to a fractional share with
respect thereto upon exercise or conversion, the holder shall be entitled upon
the exercise or conversion of all such assumed Rights pursuant to their terms
(as modified herein), to one full share of Common Stock or Preferred Stock in
lieu of such fractional share. With respect to each class of such similar
Rights, no holder will be entitled to more than one full share in lieu of a
fractional share upon exercise or conversion.
Notwithstanding the foregoing, with respect to options issued under
the Cobalt-California 1997 Stock Option Plan, 1999 Employee Stock Purchase Plan
and 1999 Director Option Plan that are assumed in the Merger, the number of
shares of Common Stock to which the holder would be otherwise entitled upon
exercise of each such assumed option following the Merger shall be rounded down
to the nearest whole number and the exercise price shall be rounded up to the
nearest whole cent. In addition, no "additional benefits" (within the meaning
of Section 424(a)(2) of the Internal Revenue Code of 1986, as amended) shall be
accorded to the optionees pursuant to the assumption of their options.
-4-
<PAGE>
3.4 Cobalt-Delaware Common Stock. Upon the Effective Date of the Merger,
----------------------------
each share of Common Stock, $.001 par value, of Cobalt-Delaware issued and
outstanding immediately prior thereto shall, by virtue of the Merger and without
any action by Cobalt-Delaware, the holder of such shares or any other person, be
canceled and returned to the status of authorized but unissued shares.
3.5 Exchange of Certificates. After the Effective Date of the Merger,
------------------------
each holder of an outstanding certificate representing shares of Cobalt-
California Common Stock or Preferred Stock may be asked to surrender the same
for cancellation to an exchange agent, whose name will be delivered to holders
prior to any requested exchange (the "Exchange Agent"), and each such holder
shall be entitled to receive in exchange therefor a certificate or certificates
representing the number of shares of the Surviving Corporation's Common Stock or
Preferred Stock, as the case may be, into which the surrendered shares were
converted as herein provided. Until so surrendered, each outstanding certificate
theretofore representing shares of Cobalt-California Common Stock or Preferred
Stock shall be deemed for all purposes to represent the number of shares of the
Surviving Corporation's Common Stock or Preferred Stock, respectively, into
which such shares of Cobalt-California Common Stock or Preferred Stock, as the
case may be, were converted in the Merger.
The registered owner on the books and records of the Surviving
Corporation or the Exchange Agent of any such outstanding certificate shall,
until such certificate shall have been surrendered for transfer or conversion or
otherwise accounted for to the Surviving Corporation or the Exchange Agent, have
and be entitled to exercise any voting and other rights with respect to and to
receive dividends and other distributions upon the shares of Common Stock or
Preferred Stock of the Surviving Corporation represented by such outstanding
certificate as provided above.
Each certificate representing Common Stock or Preferred Stock of the
Surviving Corporation so issued in the Merger shall bear the same legends, if
any, with respect to the restrictions on transferability as the certificates of
Cobalt-California so converted and given in exchange therefore, unless otherwise
determined by the Board of Directors of the Surviving Corporation in compliance
with applicable laws.
If any certificate for shares of the Surviving Corporation's stock is
to be issued in a name other than that in which the certificate surrendered in
exchange therefor is registered, it shall be a condition of issuance thereof
that the certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer, that such transfer otherwise be proper and comply with
applicable securities laws and that the person requesting such transfer pay to
the Exchange Agent any transfer or other taxes payable by reason of issuance of
such new certificate in a name other than that of the registered holder of the
certificate surrendered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not payable.
IV. GENERAL
4.1 Covenants of Cobalt-Delaware. Cobalt-Delaware covenants and agrees
----------------------------
that it will, on or before the Effective Date of the Merger:
-5-
<PAGE>
(a) Qualify to do business as a foreign corporation in the State of
California and in connection therewith irrevocably appoint an agent for service
of process as required under the provisions of Section 2105 of the California
General Corporation Law.
(b) File any and all documents with the California Franchise Tax
Board necessary for the assumption by Cobalt-Delaware of all of the franchise
tax liabilities of Cobalt-California.
(c) Take such other actions as may be required by the California
General Corporation Law.
4.2 Further Assurances. From time to time, as and when required by
------------------
Cobalt-Delaware or by its successors or assigns, there shall be executed and
delivered on behalf of Cobalt-California such deeds and other instruments, and
there shall be taken or caused to be taken by it such further and other actions
as shall be appropriate or necessary in order to vest or perfect in or conform
of record or otherwise by Cobalt-Delaware the title to and possession of all the
property, interests, assets, rights, privileges, immunities, powers, franchises
and authority of Cobalt-California and otherwise to carry out the purposes of
this Agreement, and the officers and directors of Cobalt-Delaware are fully
authorized in the name and on behalf of Cobalt-California or otherwise to take
any and all such action and to execute and deliver any and all such deeds and
other instruments.
4.3 Abandonment. At any time before the Effective Date of the Merger,
-----------
this Agreement may be terminated and the Merger may be abandoned for any reason
whatsoever by the Board of Directors of either Cobalt-California or of Cobalt-
Delaware, or of both, notwithstanding the approval of this Agreement by the
shareholders of Cobalt-California or by the sole stockholder of Cobalt-Delaware,
or by both.
4.4 Amendment. The Boards of Directors of the Constituent Corporations
---------
may amend this Agreement at any time prior to the filing of this Agreement (or
certificate in lieu thereof) with the Secretary of State of the State of
Delaware, provided that an amendment made subsequent to the adoption of this
Agreement by the stockholders of either Constituent Corporation shall not: (1)
alter or change the amount or kind of shares, securities, cash, property and/or
rights to be received in exchange for or on conversion of all or any of the
shares of any class or series thereof of such Constituent Corporation, (2) alter
or change any term of the Certificate of Incorporation of the Surviving
Corporation to be effected by the Merger, or (3) alter or change any of the
terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of any class or series of capital stock of any
Constituent Corporation.
4.5 Registered Office. The registered office of the Surviving Corporation
-----------------
in the State of Delaware is 1209 Orange Street, Wilmington, County of New
Castle, DE 19801 and The Corporation Trust Company is the registered agent of
the Surviving Corporation at such address.
4.6 Agreement. Executed copies of this Agreement will be on file at the
---------
principal place of business of the Surviving Corporation at 555 Ellis Street,
Mountain View, California 94043, and copies thereof will be furnished to any
stockholder of either Constituent Corporation, upon request and without cost.
-6-
<PAGE>
4.7 Governing Law. This Agreement shall in all respects be construed,
-------------
interpreted and enforced in accordance with and governed by the laws of the
State of Delaware and, so far as applicable, the merger provisions of the
California General Corporation Law.
4.8 FIRPTA Notification.
-------------------
(a) On the Effective Date of the Merger, Cobalt-California shall
deliver to Cobalt-Delaware, as agent for the shareholders of Cobalt-California,
a properly executed statement (the "Statement") substantially in the form
attached hereto as Exhibit A. Cobalt-Delaware shall retain the Statement for a
period of not less than seven years and shall, upon request, provide a copy
thereof to any person that was a shareholder of Cobalt-California immediately
prior to the Merger. In consequence of the approval of the Merger by the
shareholders of Cobalt-California, (i) such shareholders shall be considered to
have requested that the Statement be delivered to Cobalt-Delaware as their agent
and (ii) Cobalt-Delaware shall be considered to have received a copy of the
Statement at the request of the Cobalt-California shareholders for purposes of
satisfying Cobalt-Delaware's obligations under Treasury Regulation Section
1.1445-2(c)(3).
(b) Cobalt-California shall deliver to the Internal Revenue Service a
notice regarding the Statement in accordance with the requirements of Treasury
Regulation Section 1.897-2(h)(2).
-7-
<PAGE>
IN WITNESS WHEREOF, this Agreement having first been approved by the
resolutions of the Board of Directors of Cobalt-Delaware and Cobalt-California
is hereby executed on behalf of each of such two corporations and attested by
their respective officers thereunto duly authorized.
COBALT NETWORKS, INC.
a California corporation
By:__________________________________________
Stephen DeWitt, President
and Chief Executive Officer
ATTEST:
_____________________________
Kenton D. Chow
Secretary
COBALT NETWORKS, INC.
a Delaware corporation
By:__________________________________________
Stephen DeWitt, President
and Chief Executive Officer
ATTEST:
_____________________________
Kenton D. Chow
Secretary
-8-
<PAGE>
EXHIBIT A
---------
September __, 1999
TO THE SHAREHOLDERS OF COBALT NETWORKS, INC.:
In connection with the reincorporation (the "Reincorporation") in Delaware
of Cobalt Networks, Inc., a California corporation (the "Company"), pursuant to
the Agreement and Plan of Merger (the "Agreement") dated as of September __,
1999 between the Company and Cobalt Networks, Inc., a Delaware corporation and
wholly-owned subsidiary of the Company ("Cobalt-Delaware"), your shares of
Company stock will be replaced by shares of stock in Cobalt-Delaware.
In order to establish that (i) you will not be subject to tax under Section
897 of the Internal Revenue Code of 1986, as amended (the "Code"), in
consequence of the Reincorporation and (ii) Cobalt-Delaware will not be required
under Section 1445 of the Code to withhold taxes from the Cobalt-Delaware stock
that you will receive in connection therewith, the Company hereby represents to
you that, as of the date of this letter, shares of Company stock do not
constitute a "United States real property interest" within the meaning of
Section 897(c) of the Code and the regulations issued thereunder.
A copy of this letter will be delivered to Cobalt-Delaware pursuant to
Section 4.9 of the Agreement.
Under penalties of perjury, the undersigned officer of the Company hereby
declares that, to the best knowledge and belief of the undersigned, the facts
set forth herein are true and correct.
Sincerely,
___________________________________
Stephen DeWitt, President and
Chief Executive Officer
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
COBALT NETWORKS, INC.
ARTICLE I.
The name of this corporation is Cobalt Networks, Inc.
ARTICLE II.
The address of the corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of Newcastle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III.
The purpose of the corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV.
The total number of shares of all classes of stock which the
Corporation is authorized to issue is 137,609,875 shares, consisting of
120,000,000 shares of Common Stock, $0.001 par value, and 17,609,875 shares
of Preferred Stock, $0.001 par value. The Preferred Stock consists of three
series, of which 3,734,901 shares have been designated as Series A Preferred
Stock (the "Series A Preferred Stock"), of which 3,740,522 shares have been
designated as Series B Preferred Stock (the "Series B Preferred Stock") and of
which 10,134,452 shares have been designated as Series C Preferred Stock (the
"Series C Preferred Stock").
The relative rights, preferences, privileges and restrictions granted
to or imposed on the respective series or classes of capital stock or the
holders thereof are as follows:
Section 1. Dividends.
---------
1.1 Dividend Rights. The holders of the Series C Preferred Stock and
---------------
Series B Preferred Stock shall be entitled to receive dividends, prior to the
payment of any dividends on the Series A Preferred Stock and the Common Stock,
at the rate of $0.37 per annum per share of Series C Preferred Stock then held
by them (the "Series C Dividend Rate") and at the rate of
<PAGE>
$0.21628 per annum per share of Series B Preferred Stock then held by them (the
"Series B Dividend Rate") out of any funds legally available therefor when, if
and as declared by the Board of Directors. The holders of the Series A Preferred
Stock shall be entitled to receive dividends, prior to the payment of any
dividends on the Common Stock, at the rate of $0.10 per annum per share of
Series A Preferred Stock then held by them (the "Series A Dividend Rate") out of
any funds legally available therefor when, if and as declared by the Board of
Directors. Without limiting the foregoing, no distribution shall be made in
respect of the Common Stock unless the holders of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall receive a
proportionate share of any such distribution as though the holders of the Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock were
the holders of the number of shares of Common Stock of the Corporation into
which such shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock are then convertible.
1.2 Definition of Distribution. For purposes of this Section 1,
--------------------------
unless the context otherwise requires, a "distribution" shall mean the transfer
of cash or other property without consideration whether by way of dividend or
otherwise or the purchase or redemption of shares of the Corporation (other than
repurchases of Common Stock issued to or held by employees, officers, directors
or consultants of the Corporation or its subsidiaries upon termination of their
employment or services pursuant to agreements providing for the right of said
repurchase) for cash or property.
1.3 Certain Repurchases not Distributions. As authorized by Section
-------------------------------------
402.5(c) of the California Corporations Code, the provisions of Sections 502 and
503 of the California Corporations Code shall not apply with respect to
repurchases by the Corporation of shares of Common Stock issued to or held by
employees, officers, directors or consultants of the Corporation or its
subsidiaries upon termination of their employment or services pursuant to
agreements providing for the right of said repurchase.
Section 2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, distributions to the
stockholders of the Corporation shall be made in the following manner:
(i) The holders of Series C Preferred Stock and Series B
Preferred Stock shall be entitled to receive, prior and in preference to
any distribution of any of the assets of the Corporation to the holders of
the Series A Preferred Stock and the Common Stock by reason of their
ownership thereof, an amount equal to $3.70 for each outstanding share of
Series C Preferred Stock (the Series C Preferential Amount") and $2.1628
for each outstanding share of Series B Preferred Stock (the "Series B
Preferential Amount"), adjusted for any stock split, combination,
consolidation, or stock distributions or stock dividends with respect to
such shares, and, in addition, an amount equal to all declared but unpaid
dividends on the Series C Preferred Stock and Series B Preferred Stock. If
the assets and funds thus distributed among the holders of the Series C
Preferred Stock and
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<PAGE>
Series B Preferred Stock shall be insufficient to permit the payment to
such holders of the full Series C Preferential Amount and Series B
Preferential Amount, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed among the holders
of the Series C Preferred Stock and Series B Preferred Stock in proportion
to the respective Series C Preferential Amounts and Series B Preferential
Amounts which each such holder is entitled to receive pursuant to this
Section 2(a)(i).
(ii) After payment has been made to the holders of the Series C
Preferred Stock and the Series B Preferred Stock of the full amounts to
which they shall be entitled as set forth in Section 2(a)(i) above, the
Series A Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of the Corporation to
the holders of the Common Stock by reason of their ownership thereof, an
amount equal to $1.00 for each outstanding share of Series A Preferred
Stock (the "Series A Preferential Amount"), adjusted for any stock split,
combination, consolidation, or stock distributions or stock dividends with
respect to such shares, and, in addition, an amount equal to all declared
but unpaid dividends on the Series A Preferred Stock. If the assets and
funds thus distributed among the holders of the Series A Preferred Stock
shall be insufficient to permit the payment to such holders of the full
Series A Preferential Amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed among
the holders of the Series A Preferred Stock in proportion to the respective
Series A Preferential Amounts which each such holder is entitled to receive
pursuant to this Section 2(a)(ii).
(iii) After payment has been made to the holders of the Series A
Preferred Stock of the full amounts to which they shall be entitled as set
forth in Section 2(a)(ii) above, then the holders of the Common Stock shall
be entitled to receive an amount equal to $0.10 for each outstanding share
of Common Stock (the "Common Preferential Amount"), adjusted for any stock
split, combination, consolidation, or stock distributions or stock
dividends with respect to such shares, and, in addition, an amount equal to
all declared but unpaid dividends on the Common Stock. If the assets and
funds legally available for distribution among the holders of Common Stock
shall be insufficient to permit the payment to such holders of the full
Common Preferential Amount, then such assets and funds shall be distributed
ratably among the holders of Common Stock in proportion to the total Common
Preferential Amount which each such holder is entitled to receive pursuant
to this Section 2(a)(iii).
(viii) Any assets remaining after the distributions pursuant to
Sections 2(a)(i) through (iii) shall be distributed on a pro rata basis to
the holders of Common Stock and Preferred Stock based on the number of
shares (assuming conversion of each holder's shares of Preferred Stock into
the number of shares of Common Stock into which such holder's Preferred
Stock is then convertible, as adjusted from time to time pursuant to
Section 4 hereof) then held by each holder of Common Stock and Preferred
Stock.
-3-
<PAGE>
(b) (i) Any (x) consolidation or merger of the Corporation
with or into any other corporation or other entity or person, or any other
corporate reorganization, in which the stockholders of the Corporation
immediately prior to such consolidation, merger or reorganization, own less
than fifty percent (50%) of the Corporation's voting power immediately
after such consolidation, merger or reorganization, or any transaction or
series of related transactions in which in excess of fifty percent (50%) of
the Company's voting power is transferred or (y) a sale, lease or other
disposition of all or substantially all of the assets of the Corporation
shall be deemed to be a liquidation subject to this Section 2.
(i) In any of such events, if the consideration received by
the Corporation is other than cash or indebtedness, its value will be
deemed to be its fair market value. In the case of securities, fair market
value shall be determined as follows:
(A) Securities not subject to investment letter or other
similar restrictions on free marketability:
(I) If traded on a securities exchange, or over-the
-counter as a NASDAQ National Market System security, the value
shall be deemed to be the average of the closing prices of the
securities on such exchange or NASDAQ National Market System over
the 30-day period ending three (3) days prior to the closing;
(II) If actively traded over-the-counter (but not on
the National Market System), the value shall be deemed to be the
average of the closing bid prices over the 30-day period ending
three (3) days prior to the closing; and
(III) If there is no active public market, the value
shall be the fair market value thereof, as determined by the
unanimous consent or vote of the Board of Directors and the
approval of holders of at least 66 2/3% of the Series A Preferred
Stock, of at least 66 2/3% of the Series B Preferred Stock and of
at least 66 2/3% of the Series C Preferred Stock and such
determination shall be binding upon the holders of the Preferred
Stock; and
(IV) The method of valuation of securities subject
to investment letter or other restrictions on free marketability
shall be to make an appropriate discount from the market value
determined as above in subparagraphs (A) (I), (II) or (III) to
reflect the approximate fair market value thereof, as determined
by the unanimous consent or vote of the Board of Directors and
the approval of holders of at least 66 2/3% of the Series A
Preferred Stock, of at least 66 2/3% of the Series B Preferred
-4-
<PAGE>
Stock and of at least 66 2/3% of the Series C Preferred Stock,
and such determination shall be binding upon the stockholders.
(c) The liquidation preference of holders of Preferred Stock
provided herein shall not be deemed to be impaired by distributions made by the
Corporation in connection with the repurchase of shares of Common Stock,
including the Reserved Shares, as hereinafter defined, at the lower of fair
market value or the original issue price from former employees or consultants
upon termination of their employment or services pursuant to stock restriction
agreements between the Corporation and such persons approved by the
Corporation's Board of Directors, and such holders shall be deemed to have
consented to such repurchases.
Section 3. Voting Rights.
-------------
(a) General. Except with respect to the election of directors
-------
of the Corporation as set forth below, the holder of each share of Common Stock
issued and outstanding shall have one vote and each holder of Preferred Stock
issued and outstanding shall have the number of votes equal to the number of
shares of Common Stock into which such holder's shares of Preferred Stock are
then convertible, as adjusted from time to time pursuant to Section 4 hereof, at
the record date for determination of the stockholders entitled to vote on such
matters or, if no record date is established, at the date such vote is taken or
any written consent of stockholders is first solicited. The holders of Preferred
Stock shall be entitled to receive notice, together with the holders of Common
Stock, of all stockholder meetings even if only the holders of Common Stock are
entitled to vote on the issues addressed at such meeting.
(b) Board of Directors. Subject to Section 3(c) below, the
------------------
authorized number of directors comprising the Company's Board of Directors shall
be seven (7). As long as there are at least 2,000,000 shares of Preferred Stock
issued and outstanding, of the authorized number of members of the Corporation's
Board of Directors:
(i) the holders of Series A Preferred Stock voting separately
as a class shall be entitled to elect one (1) director (and to fill any
vacancies with respect thereto), with each holder of Series A Preferred
Stock entitled to the number of votes determined as provided in Section
3(a) above;
(ii) the holders of Series B Preferred Stock voting separately
as a class shall be entitled to elect one (1) director (and to fill any
vacancies with respect thereto), with each holder of Series B Preferred
Stock entitled to the number of votes determined as provided in Section
3(a) above;
(iii) the holders of Series C Preferred Stock voting separately
as a class shall be entitled to elect one (1) director (and to fill any
vacancies with respect thereto), with each holder of Series C Preferred
Stock entitled to the number of votes determined as provided in Section
3(a) above; and
-5-
<PAGE>
(iv) the holders of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Common Stock, voting together
as a single class, shall be entitled to elect four (4) directors (and to
fill any vacancies with respect thereto).
Subject to Section 302 and Section 303 of the California Corporations Code, any
director who shall have been elected by a specified group of stockholders may be
removed during the aforesaid term of office, either for or without cause, by and
only by, the affirmative vote of the holders of a majority of the shares of such
specified group, given at a special meeting of such stockholders duly called or
by an action by written consent for that purpose.
(c) Designated Default. If the holders of 66 2/3% of the Preferred
------------------
Stock elect to declare a Designated Default in accordance with the Second
Amended and Restated Investors' Rights Agreement, dated as of the Series C
Original Issue Date, among the Corporation and certain stockholders of the
Corporation (the "Investors' Rights Agreement"), the authorized number of
directors comprising the Corporation's Board of Directors shall be increased by
four (4) directors to eleven (11) directors. One of such additional directors
shall be elected by the holders of Series A Preferred Stock voting separately as
a class, with each holder of Series A Preferred Stock entitled to the number of
votes determined as provided in Section 3(a) above, one of such additional
directors shall be elected by the holders of Series B Preferred Stock voting
separately as a class, with each holder of Series B Preferred Stock entitled to
the number of votes determined as provided in Section 3(a) above, one of such
additional directors shall be elected by the holders of Series C Preferred Stock
voting separately as a class, with each holder of Series C Preferred Stock
entitled to the number of votes determined as provided in Section 3(a) above and
one of such additional directors shall be elected by the holders of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock voting
together as a single class, with each holder of Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock entitled to the number of votes
determined as provided in Section 3(a) above.
(d) Audit Committee. The Corporation's Board of Directors shall
---------------
establish an Audit Committee consisting of three (3) directors, which shall
include the directors elected in accordance with Section 3(b)(i), (ii) and (iii)
above.
(e) Compensation Committee. The Corporation's Board of Directors
----------------------
shall establish an Compensation Committee consisting of three (3) directors,
which shall include the directors elected in accordance with Section
3(b)(i),(ii) and (iii) above.
Section 4. Conversion. The holders of Preferred Stock shall have
----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert.
----------------
(i) Optional Conversion. Each share of Preferred Stock shall
-------------------
be convertible at the option of the holder thereof at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for Preferred Stock, into such number of
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<PAGE>
fully paid and nonassessable shares of Common Stock as is determined in the case
of the Series A Preferred Stock, by dividing $1.00 by the Series A Conversion
Price at the time in effect, as is determined in the case of the Series B
Preferred Stock, by dividing $2.1628 by the Series B Conversion Price at the
time in effect and as is determined in the case of the Series C Preferred Stock,
by dividing $3.70 by the Series C Conversion Price at the time in effect. As of
the effective date of this Certificate of Incorporation, the Series A Conversion
Price shall be $1.00, the Series B Conversion Price shall be $2.1628 and the
Series C Conversion Price shall be $3.70 Such initial Series A Conversion Price,
Series B Conversion Price and Series C Conversion Price shall be subject to
adjustment as set forth below.
(ii) Series A Preferred Stock. Each share of Series A Preferred
------------------------
Stock shall automatically be converted into shares of Common Stock at the
Series A Conversion Price then in effect upon the earlier of (1) the
affirmative vote of holders of 66 2/3% of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, voting together as a
single class, to convert all shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock into shares of Common Stock,
(2) the date on which fewer than 50,000 shares of Series A Preferred Stock
(appropriately adjusted for any stock splits, combinations, consolidations,
or stock distributions or dividends with respect to such shares) remain
outstanding or (3) the closing of an underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
Corporation to the public at a price per share (before deduction of
underwriter discounts and commissions and offering expenses) of not less
than $7.50 per share (as adjusted for any stock splits, combinations,
consolidations, or stock distributions or dividends with respect to such
shares) and an aggregate offering price to the public of not less than
$20,000,000.
(iii) Series B Preferred Stock. Each share of Series B Preferred
------------------------
Stock shall automatically be converted into shares of Common Stock at the
Series B Conversion Price then in effect upon the earlier of (1) the
affirmative vote of holders of 66 2/3% of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, voting together as a
single class, to convert all shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock into shares of Common Stock,
(2) the date on which fewer than 50,000 shares of Series B Preferred Stock
(appropriately adjusted for any stock splits, combinations, consolidations,
or stock distributions or dividends with respect to such shares) remain
outstanding or (3) the closing of an underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
Corporation to the public at a price per share (before deduction of
underwriter discounts and commissions and offering expenses) of not less
than $7.50 per share (appropriately adjusted for any stock splits,
combinations, consolidations, or stock distributions or dividends with
respect to such shares) and an aggregate offering price to the public of
not less than $20,000,000.
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<PAGE>
(iv) Series C Preferred Stock. Each share of Series C Preferred
------------------------
Stock shall automatically be converted into shares of Common Stock at the
Series C Conversion Price then in effect upon the earlier of (1) the
affirmative vote of holders of 66 2/3 % of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, voting together as a
single class, to convert all shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock into shares of Common Stock,
(2) the date on which fewer than 50,000 shares of Series C Preferred Stock
(appropriately adjusted for any stock splits, combinations, consolidations,
or stock distributions or dividends with respect to such shares) remain
outstanding or (3) the closing of an underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
Corporation to the public at a price per share (before deduction of
underwriter discounts and commissions and offering expenses) of not less
than $7.50 per share (appropriately adjusted for any stock splits,
combinations, consolidations, or stock distributions or dividends with
respect to such shares) and an aggregate offering price to the public of
not less than $20,000,000.
(v) In the event of the automatic conversion of the Series A,
Series B or Series C Preferred Stock as set forth in Sections 4 (a)(ii)(3),
4(a)(iii)(3) and 4(a)(iv)(3) above, the person(s) entitled to receive the
Common Stock issuable upon such conversion shall not be deemed to have
converted such shares until immediately prior to the closing of such sale
of securities causing the conversion, at which time the Preferred Stock
shall be converted automatically without any further action by the holders
of such shares and whether or not the certificates representing such shares
are surrendered to the Corporation or its transfer agent; provided,
however, that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion unless
certificates evidencing such shares of the Preferred Stock being converted
are either delivered to the Corporation or its transfer agent, as
hereinafter provided, or the holder notifies the Corporation or its
transfer agent, as hereinafter provided, that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by it in
connection therewith. Upon the automatic conversion of the Preferred Stock,
the holders of the Preferred Stock shall surrender the certificates
representing such shares at the office of the Corporation or of any
transfer agent for the Preferred Stock. Thereupon, there shall be issued
and delivered to such holder, promptly at such office and in his name as
shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the shares
of the Preferred Stock surrendered were convertible on the date on which
such automatic conversion occurred.
(vi) Upon conversion of the Preferred Stock, the Common Stock
so issued shall be duly and validly issued, fully paid and nonassessable
shares of the Corporation.
-8-
<PAGE>
(b) Mechanics of Conversion. No fractional shares of Common
-----------------------
Stock shall be issued upon conversion of Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then-
effective conversion price for a particular series of Preferred Stock (a
"Conversion Price"). Except as provided in Section 4(a)(ii), before any holder
of Preferred Stock shall be entitled to convert the same into full shares of
Common Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for the
Preferred Stock, and shall give written notice by mail, postage prepaid, to the
Corporation at its principal corporate office, of the election to convert the
same. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid and a check payable to the holder in the amount of any
cash payable in lieu of fractional shares of Common Stock (after aggregating all
shares of Common Stock issuable to such holder of Preferred Stock upon
conversion of the number of shares of Preferred Stock at the time being
converted). In addition, if less than all of the shares represented by such
certificates are surrendered for conversion pursuant to Section 4(a)(i), the
Corporation shall issue and deliver to such holder a new certificate for the
balance of the shares of Preferred Stock not so converted. Except as provided in
Section 4(a)(ii), such conversion shall be deemed to have been made immediately
prior to the close of business on the date of the surrender of the shares of
such 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 as of such date. If the conversion is in connection with an
underwritten offer of securities registered pursuant to the Securities Act of
1933, the conversion may, at the option of any holder tendering such Preferred
Stock for conversion, be conditioned upon the closing with the underwriter of
the sale of securities pursuant to such offering, in which event the person(s)
entitled to receive Common Stock issuable upon such conversion of such Preferred
Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the closing of such sale of securities. In addition, any
conversion may be conditional upon the happening of a specific event, in which
event the person(s) entitled to receive Common Stock issuable upon such
conversion of such Preferred Stock shall not be deemed to have converted such
Preferred Stock until immediately prior to the happening of such event.
(c) Adjustment to Conversion Price for Diluting Issues.
--------------------------------------------------
(i) Special Definitions. For purposes of this Section 4(c),
-------------------
the following definitions shall apply:
(1) "Convertible Securities" shall mean any evidences
----------------------
of indebtedness, shares (other than Common Stock, Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
-9-
<PAGE>
(2) "Options" shall mean rights, options or warrants to
-------
subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities, except for those issued to officers or
employees of, or consultants to, the Corporation as provided in
Section 4(c)(i)(6)(B).
(3) "Series C Original Issue Date" shall mean the date on
----------------------------
which the first share of Series C Preferred Stock is issued.
(4) "Dilutive Financing" means any issuance or deemed
------------------
issuance of Additional Shares of Common Stock after the Series C
Original Issue Date for a consideration per share less than the
applicable Series A, Series B or Series C Conversion Price in effect
on the date of and immediately prior to such sale.
(5) "New Securities" means shares of Common Stock,
--------------
Preferred Stock or any other class of capital stock of the Company,
whether or not now authorized, securities of any type that are
convertible into shares of such capital stock, and options, warrants
or rights to acquire shares of such capital stock. Notwithstanding
the foregoing, the term "New Securities" will not include: (A)
securities issued in connection with bona fide equipment lease or
working capital debt financings with lending institutions that have
been approved by the Corporation's Board of Directors; (B) securities
offered to the public pursuant to a registration statement filed under
the Securities Act; (C) securities issued to the sellers of a
corporation pursuant to the acquisition of such corporation by the
Company by merger, purchase of substantially all of the assets, or
other reorganization whereby the Company owns not less than 51% of the
voting power of such corporation; (D) securities issued upon exercise
or conversion of options, warrants and other convertible securities
outstanding on the date of filing of this Certificate of
Incorporation; (E) shares of Common Stock or Preferred Stock issued in
connection with any stock split, stock dividend or recapitalization by
the Company in which all classes and series of capital stock are
adjusted equally; and (F) securities issued to the Corporation's
placement agent in connection with the sale and issuance of the
Corporation's Series C Preferred Stock.
(6) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock issued (or, pursuant to Section 4(c)(iii),
deemed to be issued) by the Corporation after the Series C Original
Issue Date, including New Securities, other than shares of Common
Stock issued or issuable:
(A) upon conversion of shares of Preferred Stock;
(B) to officers or employees of, or consultants to,
the Corporation pursuant to a stock grant, stock option plan,
stock purchase plan or other stock incentive agreement
(collectively, the "Plans"),
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<PAGE>
(collectively, the "Reserved Shares") up to an aggregate of
805,812 shares;
(C) as a dividend or distribution on Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock;
(D) as securities excluded from the definition of
New Securities in Section 4(c)(i)(5);
(E) following a vote of the holders of 66 2/3% of
the Preferred Stock voting on the basis of the number of shares
of Common Stock into which each holder's shares of Preferred
Stock are then convertible, as adjusted from time to time
pursuant to Section 4 hereof, that designated shares of Common
Stock issued or deemed to be issued shall not constitute
Additional Shares of Common Stock;
(F) in connection with any transaction for which
adjustment is made pursuant to Section 4(d) hereof; and
(G) by way of dividend or distribution on shares of
Common Stock excluded from the definition of Additional Shares of
Common Stock by the foregoing clauses (A), (B), (C), (D), (E),
(F) or this clause (G).
(ii) No Adjustment of Conversion Price. No adjustment in
---------------------------------
the Conversion Price of a share of Preferred Stock shall be made in respect
of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or
deemed to be issued by the Corporation is less than the Conversion Price in
effect on the date of, and immediately prior to, such issuance, for such
share of Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common Stock.
-------------------------------------------------
(1) Options and Convertible Securities. In the event
----------------------------------
the Corporation at any time or from time to time after the Series C
Original Issue Date shall issue any Options or Convertible Securities
or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such
number) of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed
to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the
close of business on such record date; provided, however, that
Additional Shares of
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<PAGE>
Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Section 4(c)(v)
hereof) of such Additional Shares of Common Stock would be less than
the Conversion Price in effect on the date of and immediately prior to
such issue, or such record date, as the case may be; and, provided,
further, that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(A) no further adjustment in the Conversion Price
shall be made upon the subsequent issue of Convertible Securities
or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any
increase or decrease in the consideration payable to the
Corporation, or increase or decrease in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall,
upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease, insofar as it
affects such Conversion Price, but no further change in the
Conversion Price shall be made upon the exercise, conversion or
exchange of such Options or Convertible Securities, and no such
adjustment of the Conversion Price shall affect Common Stock
previously issued upon conversion of the Preferred Stock;
(C) if any such Options or Convertible Securities
shall expire or be canceled without having been exercised or
converted, the Conversion Price as adjusted upon the original
issuance thereof (or upon the occurrence of a record date with
respect thereto) shall be readjusted as if
(I) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of
Common Stock so issued were shares of Common Stock, if any,
actually issued or sold on the exercise of such Options or
the conversion or exchange 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, plus the consideration,
if any, actually received by the Corporation for the
granting of all such Options, whether or not exercised, plus
the consideration received for issuing or selling the
Convertible Securities actually converted plus the
consideration, if any, actually received by the Corporation
(other than by cancellation of
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<PAGE>
liabilities or obligations evidenced by such Convertible
Securities) on the conversion or exchange of such
Convertible Securities; and
(II) in the case of Options for Convertible
Securities, only the Convertible Securities, if any,
actually issued upon the exercise thereof were issued at the
time of issue of such Options, and the consideration
received by the Corporation for the Additional Shares of
Common Stock deemed to have been then issued was the
consideration actually received by the Corporation for the
issue of all such Options, whether or not exercised, plus
the consideration deemed to have been received by the
Corporation upon the issue of the Convertible Securities
with respect to which such Options were actually exercised;
(D) no readjustment pursuant to clauses (B) or (C)
above shall have the effect of increasing the Conversion Price to
an amount which exceeds the lower of (i) the Conversion Price on
the original adjustment date (immediately prior to the
adjustment), or (ii) the Conversion Price that would have
resulted from any actual issuance of Additional Shares of Common
Stock between the original adjustment date and such readjustment
date.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common Stock. Subject to Section 4(c)(ii), the Conversion Price
----------------------
of the Preferred Stock shall be subject to adjustment under this Section
4(c)(iv) as follows:
(1) In the event the Corporation shall at any time after
the Series C Original Issue Date issue Additional Shares of Common
Stock (including Additional Shares of Common Stock deemed to be issued
pursuant Section 4(c)(iii)), without consideration or for a
consideration per share less than the Conversion Price in effect on
the date of and immediately prior to such issue, then and in such
event, such Conversion Price shall be reduced, concurrently with such
issue, to the price (calculated to the nearest cent) determined by
multiplying such Conversion Price by a fraction (x) the numerator of
which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common
Stock which the aggregate consideration received by the Corporation
for the total number of Additional Shares of Common Stock so issued
would purchase at such Conversion Price, and (y) the denominator of
which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of such Additional
Shares of Common Stock so issued; provided, however, that, for the
purposes of this Section 4(c)(iv), all shares of Common Stock issuable
upon conversion of outstanding shares of Preferred Stock shall be
deemed to be outstanding; and, further provided, that any
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<PAGE>
Additional Shares of Common Stock deemed issued pursuant to Section
4(c)(iii) shall be deemed to be outstanding.
(v) Determination of Consideration. For purposes of this
------------------------------
Section 4(c), the consideration received by the Corporation for the
issuance of any Additional Shares of Common Stock shall be computed, after
deducting all commissions, expenses and fees, as follows:
(1) Cash and Property. Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or
accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board of
Directors; and
(C) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other
assets of the Corporation for consideration which covers
both, by the proportion of such consideration so received,
computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration
----------------------------------
per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section
4(c)(iii)(1), relating to Options and Convertible Securities,
shall be determined by dividing:
(A) the total amount, if any, received or receivable
by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth
in the instruments relating thereto, without regard to any
provisions contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the
exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of
such Convertible Securities, by
(B) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without
regard to any
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<PAGE>
provisions contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or
the conversion or exchange of such Convertible Securities.
(d) Adjustments for Stock Dividends, Distributions, Subdivisions,
-------------------------------------------------------------
Combinations or Consolidations of Common Stock.
- ----------------------------------------------
(i) Stock Dividends, Distributions or Subdivisions. In the
----------------------------------------------
event the Corporation shall issue Additional Shares of Common Stock
pursuant to a stock dividend, stock distribution or subdivision, the
Conversion Price in effect immediately prior to such stock dividend, stock
distribution or subdivision shall concurrently with such stock dividend,
stock distribution or subdivision, be proportionately decreased.
(ii) Combinations or Consolidations. 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, the Conversion Price in effect immediately prior to such combination
or consolidation shall, concurrently with the effectiveness of such
combination or consolidation, be proportionately increased.
(iii) Adjustments for Other Distributions. In the event the
-----------------------------------
Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 4(c) or
(d) or as otherwise provided in Section 1, then, and in each such event,
provision shall be made so that the holders of Preferred Stock shall
receive upon conversion thereof, in addition to the number of shares of
Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Preferred Stock been
converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including
the date of conversion, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for
during such period under this Section 4(c) or (d) with respect to the
rights of the holders of the Preferred Stock.
(iv) Adjustments for Reclassification, Exchange, and
-----------------------------------------------
Substitution. If the Common Stock issuable upon conversion of the
------------
Preferred Stock shall be changed into the same or a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), the applicable Conversion Price
then in effect shall, concurrently with the effectiveness of such
reorganization or reclassification, be proportionately adjusted such that
the 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 or 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 their Preferred Stock
immediately before that change.
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<PAGE>
(e) 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
other 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 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Preferred Stock against impairment.
(f) 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
Preferred Stock, such number of shares of its Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of
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 Preferred Stock, in addition to such other remedies as
shall be available to the holders of Preferred Stock, the Corporation will take
such corporate actions 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 purposes.
(g) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Preferred Stock a certificate 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
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) all such adjustments and readjustments, (ii) the
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 such Preferred Stock.
(h) Notices of Record Date. In the event that the Corporation shall
----------------------
propose at any time:
(i) to declare any dividend or distribution upon the 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, other than distributions to stockholders in connection with the
repurchase of shares of Common Stock, including the Reserved Shares, of
former employees or consultants, to which the holders of Preferred Stock
have consented in Section 2(c) hereof; or
(ii) to offer for subscription to the holders of any class
or series of its capital stock any additional shares of stock of any class
or series or any other rights; or
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<PAGE>
(iii) to effect any reclassification or recapitalization; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property
or business, or to liquidate, dissolve or wind up, or to effect any other
transaction subject to the provisions of Section 2 of this Certificate of
Incorporation;
then, in connection with each such event, the Corporation shall send to the
holders of the Preferred Stock:
(1) at least 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 the rights
to vote 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 20 days' prior written notice of the date of a
stockholders meeting at which a vote on such matters shall take place
or the effective date of any written consent (and specifying the
material terms and conditions of the proposed transaction or event and
the date on which the holders of Preferred Stock and Common Stock
shall be entitled to exchange their Preferred Stock and Common Stock
for securities or other property deliverable upon the occurrence of
such event and the amount of securities or other property deliverable
upon such event).
Each such written notice shall be given personally or by
first class mail, postage prepaid, addressed to the holders of Preferred Stock
at the address for each such holder as shown on the books of the Corporation.
Section 5. No Reissuance of Preferred Stock. No share or shares of
--------------------------------
Preferred Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Corporation shall be
authorized to issue.
Section 6. Protective Provisions.
---------------------
(a) Preferred Stock. In addition to any other rights provided by
---------------
law and without limiting the last paragraph of this Section 6(a), so long
as at least 750,000 shares of Preferred Stock (as such number may be
adjusted for stock splits, combinations and the like) shall be outstanding,
the Corporation shall not, without first obtaining the affirmative vote or
written consent of the holders of 66 2/3% of the outstanding shares of
Preferred Stock voting as a single class (in each case based on the number
of shares of Common Stock into which each holder's Preferred Stock is then
convertible, as adjusted from time to time pursuant to Section 4 hereof):
-17-
<PAGE>
(i) amend or repeal any provision of, or add any provision
to, this Corporation's Certificate of Incorporation or bylaws if such
action would alter or change the preferences, rights, privileges or powers
of, or the restrictions provided for the benefit of, any series of
Preferred Stock or the Preferred Stock in an adverse manner;
(ii) increase the authorized number of shares of any series of
Preferred Stock;
(iii) authorize or issue any new shares or reclassify any
Common Stock or other shares into shares of any class or series of stock
senior to or on parity with any series of Preferred Stock as to dividends,
redemption rights, liquidation preferences, conversion rights, voting
rights or otherwise;
(iv) sell, license or otherwise dispose of all or
substantially all of the assets or business of the Corporation or authorize
any liquidation or winding up of the Corporation;
(v) effect a consolidation, reorganization or merger of the
Corporation with or into any other corporation, or any other transaction in
which ownership of a majority of the Corporation's capital stock is
transferred;
(vi) redeem any shares of the Corporation's capital stock,
other than redemptions of Preferred Stock required under the Investors'
Rights Agreement; or
(vii) increase the authorized number of directors of this
Corporation to more than seven (7), other than any increase required under
the Investors' Rights Agreement.
In addition to any other rights provided by law and without limiting
the foregoing, so long as any shares of Preferred Stock shall be outstanding,
the Corporation shall not, without first obtaining the affirmative vote or
written consent of the holders of a majority of the outstanding shares of
Preferred Stock voting as a single class (based on the number of shares of
Common Stock into which each holder's Preferred Stock is then convertible, as
adjusted from time to time pursuant to Section 4 hereof), take any action to
amend the Certificate of Incorporation in which the dividend, liquidation
preference, conversion, voting, redemption or other rights of the Preferred
Stock will be adversely affected.
Section 7. Redemption. The shares of Preferred Stock shall be redeemed as
----------
follows:
(a) Mandatory Redemption. The holders of 66 2/3 % of the
--------------------
shares of Preferred Stock (the "Electing Holders") may elect, at any time
from time to time following July 2, 2003 but prior to July 2, 2005, by
written notice (the "Redemption Notice") to the Corporation and all other
holders of Preferred Stock, to require that the Corporation redeem all (but
not less than all) shares of Preferred Stock owned by the Electing Holders
(and/or any permitted assignee of such Electing Holders) (the "Redemption
Shares") in accordance with
-18-
<PAGE>
this Section 7 (a "Mandatory Redemption"). Holders of Preferred Stock
receiving such Redemption Notice may elect by written notice to the
Corporation and the Electing Holders within ten (10) days following
delivery of the Redemption Notice to participate in the Mandatory
Redemption and become an Electing Holder for purposes of this Section 7.
(b) Redemption Price and Payment. The aggregate purchase
----------------------------
price (the "Redemption Price") for the Redemption Shares shall be the
aggregate purchase price paid to the Corporation by the Electing Holders
for such Redemption Shares, plus all accrued but unpaid dividends with
respect to such Redemption Shares. The shares of Preferred Stock to be
redeemed following delivery of the Redemption Notice shall be redeemed by
paying for each share in cash an amount (such amount being referred to as
the "Redemption Price") equal to $1.00 per share of Series A Preferred
Stock, $2.1628 per share of Series B Preferred Stock and $3.70 per share of
Series C Preferred Stock plus, in the case of each share, an amount equal
to all dividends declared but unpaid thereon, computed to the date of such
Redemption Notice. The Company shall redeem the Redemption Shares no later
than ninety (90) days following delivery of the Redemption Notice, by
paying the Redemption Price to such Electing Holders in immediately
available funds (the "Redemption Date").
(c) Redemption Mechanics. The Redemption Notice shall be
--------------------
given by delivery in person, certified or registered mail, return receipt
requested, telecopier or telex, to each holder of record (at the close of
business on the business day next preceding the day on which the Redemption
Notice is given) of shares of Preferred Stock. The Redemption Notice shall
set forth the aggregate purchase price paid to the Corporation by the
Electing Holders for such Redemption Shares, plus all accrued but unpaid
dividends with respect to such Redemption Shares. The Redemption Notice
shall be addressed to each holder of Preferred Stock at his address as
shown by the records of the Corporation. From and after the close of
business on a Redemption Date, unless there shall have been a default in
the payment of the Redemption Price, all rights of holders of shares of
Preferred Stock (except the right to receive the Redemption Price) shall
cease with respect to the shares to be redeemed on such Redemption Date,
and such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever. If
the funds of the Corporation legally available for redemption of shares of
Preferred Stock on a Redemption Date are insufficient to redeem the total
number of shares of Preferred Stock to be redeemed on such Redemption Date,
the holders of such shares shall share ratably in any funds legally
available for redemption of such shares according to the respective amounts
which would be payable to them if the full number of shares to be redeemed
on such Redemption Date were actually redeemed. The shares of Preferred
Stock required to be redeemed but not so redeemed shall remain outstanding
and entitled to all rights and preferences provided herein. At any time
thereafter when additional funds of the Corporation are legally available
for the redemption of such shares of Preferred Stock, such funds will be
used, at the end of the next succeeding fiscal quarter, to redeem the
balance of such shares, or such portion thereof for which funds are then
legally available, on the basis set forth above.
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<PAGE>
(d) Redeemed or Otherwise Acquired Shares to be Retired. Any
---------------------------------------------------
shares of Preferred Stock redeemed pursuant to this Section 7 or otherwise
acquired by the Corporation in any manner whatsoever shall be cancelled and
shall not under any circumstances be reissued; and the Corporation may from time
to time take such appropriate corporate action as may be necessary to reduce
accordingly the number of authorized shares of Preferred Stock.
ARTICLE V.
The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
ARTICLE VI.
The Corporation is to have perpetual existence.
ARTICLE VII.
1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the Corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
2. Indemnification. The corporation may indemnify to the fullest extent
---------------
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the corporation, or any predecessor of
the corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the corporation or any predecessor to the
corporation.
3. Amendments. Neither any amendment nor repeal of this Article VII,
----------
nor the adoption of any provision of the corporation's Certificate of
Incorporation inconsistent with this Article VII, shall eliminate or reduce the
effect of this Article VII, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article VII, would accrue
or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
ARTICLE VIII.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the corporation.
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<PAGE>
ARTICLE IX.
Following the closing of a public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
any of the corporation's securities (as that term is defined under the
Securities Act of 1933, as then in effect), no action shall be taken by the
stockholders of the corporation except at an annual or special meeting of the
stockholders called in accordance with the Bylaws of the corporation and no
action shall be taken by the stockholders by written consent.
ARTICLE X.
Meetings of stockholders may be held within or without the State of
Delaware, as the By-laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XI.
The name and mailing address of the incorporator are:
Donna Moser
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
* * *
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<PAGE>
The undersigned incorporator hereby acknowledges that the above Certificate
of Incorporation of Cobalt Networks, Inc. is her act and deed and that the facts
stated therein are true.
/s/ Donna Moser
-------------------------------
Donna Moser
Dated: September 2, 1999
<PAGE>
EXHIBIT 3.1.1
RESTATED CERTIFICATE OF INCORPORATION
OF
COBALT NETWORKS, INC.
Cobalt Networks, Inc., a corporation organized and existing under laws of
the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is Cobalt Networks, Inc. The original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of the state of Delaware on September 2, 1999.
2. Pursuant to Sections 228, 242 and 245 of the General Corporation Laws
of the State of Delaware, this Restated Certificate of Incorporation restates
and integrates and further amends the provisions of the Certificate of
Incorporation of this corporation.
3. The text of the Certificate of Incorporation as heretofore amended or
supplemented is hereby amended and restated to read in its entirety as follows:
FIRST: The name of this corporation is Cobalt Networks, Inc.
SECOND: The address of the corporation's registered office in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, State
of Delaware. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of this corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: 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 130,000,000
shares. 120,000,000 shares shall be Common Stock, par value $.001 per share,
and 10,000,000 shares shall be Preferred Stock, par value $.001 per share.
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is authorized to fix the number of shares of any series
of Preferred Stock and to determine the designation of any such series. The
Board of Directors is also authorized to determine and alter the powers, rights,
preferences and privileges and the qualifications, limitations and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock and
within the limitations or restrictions stated in any resolution or resolutions
of the Board of Directors originally fixing the number of shares constituting
any series, to increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares of any series subsequent to the
issue of shares of that series, to determine the designation of any series, and
to fix the number of shares of any series. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
<PAGE>
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
FIFTH: "Qualified Public Offering" as used in this Certificate of
Incorporation shall mean the corporation's initial firm commitment underwritten
public offering pursuant to an effective registration under the Securities Act
of 1933, as amended, covering the offer and sale of Common Stock for the account
of the Corporation to the public. 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, effective upon the closing of a Qualified Public Offering:
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 from time to time by the Board of
Directors.
The Board of 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 date
hereof, 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 date hereof, 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 date hereof, 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 or her successor is duly elected and qualified or until
his or her death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal, or other causes shall be filled by either (i) the
affirmative vote of the holders of a majority of the voting power of the then-
outstanding shares of voting stock of the corporation entitled to vote generally
in the election of directors (the "Voting Stock") voting together as a single
class; or (ii) by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board of Directors. Newly
created directorships resulting from any increase in the number of directors
shall, unless the Board of Directors determines by resolution that any such
newly created directorship shall be filled by the stockholders, be filled only
by the affirmative vote 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
class of directors
<PAGE>
in which the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified.
2. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend,
or repeal the Bylaws of the corporation.
3. The directors of the corporation need not be elected by written ballot
unless a stockholder demands election by written ballot at the meeting and
before voting begins, or unless the Bylaws so provide.
4. The affirmative vote of sixty-six and two-thirds percent (66-2/3%) of
the voting power of the then outstanding shares of Voting Stock, voting together
as a single class, shall be required for the adoption, amendment or repeal of
the following sections of the corporation's Bylaws by the stockholders of this
corporation: 2.3 (Annual Meeting) and 2.4 (Special Meeting).
5. No action shall be taken by the stockholders of the corporation except
at an annual or special meeting of the stockholders called in accordance with
the Bylaws.
6. Advance notice of stockholder nomination 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.
7. Any director, or the entire Board of Directors, may be removed from
office at any time (i) with cause by the affirmative vote of the holders of at
least a majority of the voting power of all of the then-outstanding shares of
the Voting Stock, voting together as a single class; 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 of the then-outstanding shares of the
Voting Stock.
SIXTH: Notwithstanding any other provision in this Certificate of
Incorporation or in 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 Article FIFTH or
this Article SIXTH.
SEVENTH: 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 Article
SIXTH of this Certificate, and all rights conferred upon the stockholders herein
are granted subject to this right.
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<PAGE>
EIGHTH:
1. To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director of
the corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach fiduciary duty as a director.
2. The corporation may indemnify to the fullest extent permitted by
law any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he or she, his or her testator or intestate is or was a director, officer
or employee of the corporation or any predecessor of the corporation or serves
or served at any other enterprise as a director, officer or employee at the
request of the corporation or any predecessor to the corporation.
3. Neither an amendment nor repeal of this Article I, nor the
adoption of any provision of the corporation's Certificate of Incorporation
inconsistent with this Article EIGHTH, shall eliminate or reduce the effect of
this Article EIGHTH, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article EIGHTH, would
accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
NINTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
The foregoing Restated Certificate of Incorporation has been duly approved
by the Board of Directors.
The foregoing Restated Certificate of Incorporation has been duly approved
by the required vote of stockholders in accordance with Section 228 of the
Delaware General Corporation Law. The total number of outstanding shares of the
Corporation is ______________ shares of Common Stock. The number of shares
voting in favor of the amendment equaled or exceeded the vote required. The
percentage vote required was more than 50% of the Common Stock.
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<PAGE>
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed
this ____ day of November, 1999.
Cobalt Networks, Inc.
By: ______________________________________
Stephen DeWitt
President and Chief Executive Officer
ATTEST:
___________________________
Kenton D. Chow, Secretary
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<PAGE>
EXHIBIT 3.2
BYLAWS
OF
COBALT NETWORKS, INC.
Article 1
Offices
-------
Section 1.1. Registered Office. The registered office of the Corporation
-----------------
which is required by the state of Delaware to be maintained in the state of
Delaware shall be the registered office named in the charter documents of the
Corporation, or such other office as may be designated from time to time by the
Board of Directors in the manner provided by law.
Section 1.2. Other Offices. The Corporation 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 2
Stockholders
------------
Section 2.1. Place of Meetings. All meetings of the stockholders shall be
-----------------
held at the principal office of the Corporation, or at such other place within
or without the state of Delaware as shall be specified or fixed in the notices
or waivers of notice thereof.
Section 2.2. Quorum; Adjournment of Meetings. Unless otherwise required
-------------------------------
by law or provided in the charter documents of the Corporation or these Bylaws,
(i) the holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at any meeting of stockholders for the transaction of business, (ii) in
all matters other than election of directors, the affirmative vote of the
holders of a majority of such stock so present or represented at any meeting of
stockholders at which a quorum is present shall constitute the act of the
stockholders, and (iii) where a separate vote by a class or classes is required,
a majority of the outstanding shares of such class or classes, present in person
or represented by proxy shall constitute a quorum entitled to take action with
respect to that vote on that matter and the affirmative vote of the majority of
the shares of such class or classes present in person or represented by proxy at
the meeting shall be the act of such class. The stockholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum, subject to the provisions of clauses (ii) and (iii) above.
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.
<PAGE>
Notwithstanding the other provisions of the charter documents of the
Corporation or these Bylaws, the chairman of the meeting or the holders of a
majority of the issued and outstanding stock, present in person or represented
by proxy and entitled to vote thereat, at any meeting of stockholders, whether
or not a quorum is present, shall have the power to adjourn such meeting from
time to time, without any notice other than announcement at the meeting of the
time and place of the holding of the adjourned 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 such meeting. At such
adjourned meeting at which a quorum shall be present or represented any business
may be transacted which might have been transacted at the meeting as originally
called.
Section 2.3. Annual Meeting.
--------------
(a) An annual meeting of the stockholders, for the election of
directors to succeed those whose terms expire and for the transaction of such
other business as may properly come before the meeting, shall be held at such
place (within or without the state of Delaware), on such date, and at such time
as the Board of Directors shall fix and set forth in the notice of the meeting,
which date shall be within thirteen (13) months subsequent to the last annual
meeting of stockholders.
(b) At an annual meeting of 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 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 less than one hundred twenty
(120) calendar days in advance of the date specified in the corporation's proxy
statement released to stockholders in connection with the previous year's annual
meeting of stockholders; 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 a reasonable time before the solicitation is made. 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
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<PAGE>
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 2.2. 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 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 elections 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 2.2. 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 warrants, 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.
Section 2.4. Special Meetings. Special meetings of stockholders may be
----------------
called at any time by a majority of the the Board of Directors, or by the
chairman of the board, but such special meetings may not be called by any other
person or persons.
Section 2.5. Record Date. For the purpose of determining stockholders
-----------
entitled to notice of or to vote at any meeting of stockholders, or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other
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<PAGE>
lawful action, the Board of Directors of the Corporation may fix a date as
the record date for any such of stockholders, which record date shall not
precede the date on which the resolutions fixing the record date are adopted and
which record date shall not be more than sixty (60) days nor less than ten (10)
days before the date of such meeting of stockholders, nor more than sixty (60)
days prior to any other action to which such record date relates.
If the Board of Directors does not fix a record date for any meeting of the
stockholders, the record date for determining stockholders entitled to notice of
or to vote at such meeting shall be at the close of business on the day next
preceding the day on which notice is given, or, in accordance with Article 7,
Section 7.3 of these Bylaws notice is waived, at the close of business on the
day next preceding the day on which the meeting is held. The record date for
determining stockholders for any other purpose (other than the consenting 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 relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
For the purpose of determining 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. If the
Board of Directors does not fix the record date, 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 necessary, 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 at its registered office
in the state of incorporation of the Corporation or at its principal place of
business. If the Board of Directors does not fix the record date, and prior
action by the Board of Directors is necessary, 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.
Section 2.6. Notice of Meetings. Written notice of the place, date and
------------------
hour of all meetings, and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be given by or at the direction of the
President, the Secretary or the other person(s) calling the meeting to each
stockholder entitled to vote thereat not less than ten (10) nor more than sixty
(60) days before the date of the meeting. Such notice may be delivered either
personally or by mail. If mailed, notice is given when deposited in the United
States mail, postage prepaid, directed to the stockholder at such stockholder's
address as it appears on the records of the Corporation.
Section 2.7. Stockholder List. A complete list of stockholders entitled
----------------
to vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in the name of such stockholder, 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
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<PAGE>
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The stockholder list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and may be inspected by
any stockholder who is present.
Section 2.8. Proxies. Each stockholder entitled to vote at a meeting of
-------
stockholders or to express consent or dissent to a corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy. Proxies for use at any meeting of stockholders shall be filed with the
Secretary, or such other officer as the Board of Directors may from time to time
determine by resolution, before or at the time of the meeting. All proxies
shall be received and taken charge of and all ballots shall be received and
canvassed by the secretary of the meeting, who shall decide all questions
touching upon the qualification of voters, the validity of the proxies, and the
acceptance or rejection of votes, unless an inspector or inspectors shall have
been appointed by the chairman of the meeting, in which event such inspector or
inspectors shall decide all such questions.
No proxy shall be valid after three (3) years from its date, unless the
proxy provides for a longer period. Each proxy shall be revocable unless
expressly provided therein to be irrevocable and coupled with an interest
sufficient in law to support an irrevocable power.
Should a proxy designate two or more persons to act as proxies, unless such
instrument shall provide the contrary, a majority of such persons present at any
meeting at which their powers thereunder are to be exercised shall have and may
exercise all the powers of voting or giving consents thereby conferred, or if
only one be present, then such powers may be exercised by that one; or, if an
even number attend and a majority do not agree on any particular issue, each
proxy so attending shall be entitled to exercise such powers in respect of such
portion of the shares as is equal to the reciprocal of the fraction equal to the
number of proxies representing such shares divided by the total number of shares
represented by such proxies.
Section 2.9. Voting; Election; Inspectors. Unless otherwise required by
----------------------------
law or provided for in the charter documents of the Corporation, each
stockholder shall on each matter submitted to a vote at a meeting of
stockholders have one vote for each share of the stock entitled to vote which is
registered in his name on the record date for the meeting. For the purposes
hereof, each election to fill a directorship shall constitute a separate matter.
Shares registered in the name of another corporation, domestic or foreign, may
be voted by such officer, agent or proxy as the bylaws (or comparable body) of
such corporation may determine. Shares registered in the name of a deceased
person may be voted by the executor or administrator of such person's estate,
either in person or by proxy.
All voting, except as required by the charter documents of the Corporation
or where otherwise required by law, may be by a voice vote; provided, however,
upon request of the chairman of the meeting or upon demand therefor by
stockholders holding a majority of the issued and outstanding stock present in
person or by proxy at any meeting a stock vote shall be taken. Every stock vote
shall be taken by written ballots, each of which shall state the name of the
stockholder or proxy voting and such other information as may be required under
the procedure established for the meeting. All elections of directors shall be
by written ballots, unless otherwise provided in the charter documents of the
Corporation.
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<PAGE>
At any meeting at which a vote is taken by written ballots, the chairman of
the meeting may appoint one or more inspectors; each of whom shall subscribe an
oath or affirmation to execute faithfully the duties of inspector at such
meeting with strict impartiality and according to the best of such inspector's
ability. Such inspector shall receive the written ballots, count the votes, and
make and sign a certificate of the result thereof. The chairman of the meeting
may appoint any person to serve as inspector, except no candidate for the office
of director shall be appointed as an inspector.
Unless otherwise provided in the charter documents of the Corporation,
cumulative voting for the election of directors shall be prohibited.
Section 2.10. Conduct of Meetings. The meetings of the stockholders shall
-------------------
be presided over by the President, or, if the President is not present, by a
chairman elected at the meeting. The Secretary of the Corporation, if present,
shall act as secretary of such meetings, or, if the Secretary is not present, an
Assistant Secretary shall so act; if neither the Secretary of or Assistant
Secretary is present, then a secretary shall be appointed by the chairman of the
meeting.
The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to the chairman in order.
Section 2.11. Treasury Stock. The Corporation shall not vote, directly or
--------------
indirectly, shares of its own stock owned by it and such shares shall not be
counted for quorum purposes. Nothing in this Section 2.11 shall be construed as
limiting the right of the Corporation to vote stock, including but not limited
to its own stock, held by it in a fiduciary capacity.
Section 2.12. Action Without Meeting. Unless otherwise provided in the
----------------------
Certificate of Incorporation, any action which may be taken at any annual or
special meeting of stockholders may be taken without a meeting and without prior
notice, if a consent in writing, setting forth the action so taken, is signed by
the holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take that action at a meeting at
which all shares entitled to vote on that action were present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
Following the closing date of the Corporation's initial public offering of
shares of its Common Stock pursuant to an effective registration statement filed
with the Securities and Exchange Commission (the "IPO"), no action of
stockholders shall be taken by the stockholders except at an annual or special
meeting of stockholders called in accordance with the notice requirements of
Section 2.6 above and no action of the stockholders shall be taken by written
consent.
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<PAGE>
Article 3
Board of Directors
------------------
Section 3.1. Power; Number; Term of Office. The business and affairs of
-----------------------------
the Corporation shall be managed by or under the direction of the Board of
Directors, and, subject to the restrictions imposed by law or the charter
documents of the Corporation, the Board of Directors may exercise all the powers
of the Corporation.
Notwithstanding anything contained in these Bylaws to the contrary, at any
time that a valid agreement among the stockholders is in force with respect to
the nomination, election and removal of directors or similar matters, such
agreement is hereby recognized and directors shall be nominated, elected and
removed in accordance therewith.
The number of directors which shall constitute the whole Board of Directors
shall be determined from time to time by the Board of Directors (provided that
no decrease in the number of directors which would have the effect of shortening
the term of an incumbent director may be made by the Board of Directors). Each
director shall hold office for the term for which such director is elected, and
until such director's successor shall have been elected and qualified or until
such director's earlier death, resignation or removal.
Unless otherwise provided in the charter documents of the Corporation,
directors need not be stockholders nor resident of the state of Delaware.
Section 3.2. Classes of Directors. Effective upon the closing of the
--------------------
Corporation's IPO, 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 IPO, 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 IPO, 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
earlier 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 3.3. Quorum; Voting. Unless otherwise provided in the charter
--------------
documents of the Corporation, a majority of the number of directors then in
office shall constitute a quorum for the transaction of business of the Board of
Directors and the vote of a majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
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<PAGE>
Section 3.4. Place of Meetings; Order of Business. The directors may hold
------------------------------------
their meetings and may have an office and keep the books of the Corporation,
except as otherwise provided by law, in such place or places, within or without
the state of incorporation of the Corporation, as the Board of Directors may
from time to time determine. At all meetings of the Board of Directors business
shall be transacted in such order as shall from time to time be determined by
the President or by the Board of Directors.
Section 3.5. First Meeting. Each newly elected Board of Directors may
-------------
hold its first meeting for the purpose of organization and the transaction of
business, if a quorum is present, immediately after and at the same place as the
annual meeting of the stockholders. Notice of such meeting shall not be
required. At the first meeting of the Board of Directors in each year at which a
quorum shall be present, held after the annual meeting of stockholders, the
Board of Directors shall elect the officers of the Corporation.
Section 3.6. Regular Meetings. Regular meetings of the Board of Directors
----------------
shall be held at such times and places as shall be designated from time to time
by the President, or in the President's absence, by another officer of the
Corporation. Notice of such regular meetings shall not be required.
Section 3.7. Special Meetings. Special meetings of the Board of Directors
----------------
may be called by the President, or on the written request of any director, by
the Secretary, in each case on at least twenty-four (24) hours' personal,
written, telegraphic, cable or wireless notice to each director. Such notice, or
any waiver thereof pursuant to Article 7, Section 7.3 hereof, need not state the
purpose or purposes of such meeting, except as may otherwise be required by law
or provided for in the charter documents of the Corporation or these Bylaws.
Meetings may be held at any time without notice if all the directors are present
or if those not present waive notice of the meeting in writing.
Section 3.8. Removal. Any director or the entire Board of Directors may be
-------
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
Section 3.9. Vacancies; Increases in the Number of Directors. Any director
-----------------------------------------------
may resign effective on giving written notice to the chairman of the board, the
president, the secretary or the board of directors, unless the notice specifies
a later time for that resignation to become effective. If the resignation of a
director is effective at a future time, the board of directors may elect a
successor to take office when the resignation becomes effective.
Unless otherwise provided in the Certificate of Incorporation or these
bylaws, vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the stockholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute a majority of the required quorum), or by the unanimous written
consent of all shares entitled to vote thereon. Each director so elected shall
hold office until the next annual meeting of the stockholders and until a
successor has been elected and qualified.
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<PAGE>
Unless otherwise provided in the Certificate of Incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
Section 3.10. Compensation. Directors and members of standing committees
------------
may receive such compensation as the Board of Directors from time to time shall
determine to be appropriate, and shall be reimbursed for all reasonable expenses
incurred in attending and returning from meetings of the board of Directors.
Section 3.11. Action Without a Meeting: Telephone Conference Meeting.
------------------------------------------------------
Unless otherwise restricted by the charter documents of the Corporation, any
action required or permitted to be taken at any of the Board of Directors or any
committee designated by the Board of Directors 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 the writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee. Such consent shall have the
same force and effect as a unanimous vote at a meeting, and may be stated as
such in any document or instrument filed with the Secretary of State of the
state of incorporation of the Corporation.
Unless otherwise restricted by the charter documents of the Corporation,
subject to the requirement for notice of meetings, members of the Board of
Directors, or members of any
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<PAGE>
committee designated by the Board of Directors, may participate in a meeting of
such Board of Directors or committee, as the case may be, by means of a
conference telephone connection or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation in such a meeting shall constitute presence in person at such
meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.
Section 3.12. Approval or Ratification of Acts or Contracts by
------------------------------------------------
Stockholders. The Board of Directors in its discretion may submit any act or
- ------------
contract for approval or ratification at any annual meeting of the stockholders,
or at any special meeting of the stockholders called for the purpose of
considering any such act or contract, and any act or contract that shall be
approved or be ratified by the vote of the stockholders holding a majority of
the issued and outstanding shares of stock of the Corporation entitled to vote
and present in person or by proxy at such meeting (provided that a quorum is
present) shall be as valid and as binding upon the Corporation and upon all the
stockholders as if it has been approved or ratified by every stockholder of the
Corporation. In addition, any such act or contract may be approved or ratified
by the written consent of stockholders holding a majority of the issued and
outstanding shares of capital stock of the Corporation entitled to vote, and
such consent shall be as valid and binding upon the Corporation and upon all the
stockholders as if it had been approved or ratified by every stockholder of the
Corporation.
Article 4
Committees
----------
Section 4.1. Designation; Powers. The Board of Directors may, by
-------------------
resolution passed by a majority of the board, designate one or more committees,
including, if they shall so determine, an executive committee and a compensation
committee, with each such committee to consist of one or more of the directors
of the Corporation. Any such designated committee shall have and may exercise
such of the powers and authority of the Board of Directors in the management of
the business and affairs of the Corporation as may be provided in such
resolution, except that no such committee shall have the power or authority of
the Board of Directors in reference of amending the charter documents of the
Corporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution of the
Corporation, or amending, altering or repealing these Bylaws or adopting new
bylaws for the Corporation. Any such designated committee may authorize the seal
of the Corporation to be affixed to all papers which may require it. In addition
to the above, such committee or committees shall have such other powers and
limitations of authority as may be determined from time to time by the Board of
Directors.
Section 4.2. Procedure; Meetings; Quorum. Any committee designated
---------------------------
pursuant to this Article 4 shall keep regular minutes of its actions and
proceedings in a book provided for that purpose and report the same to the Board
of Directors at its meeting next succeeding such action, shall fix its own rules
or procedures, and shall meet at such times and at such place or places as may
be provided by such rules, or by such committee or the board of Directors.
Should a committee fail to fix its own rules, the provisions of these Bylaws,
pertaining to the calling of meetings and conduct of business by the Board of
Directors, shall apply as nearly as may be possible. At every meeting of
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<PAGE>
any such committee, the presence of a majority of all the members thereof shall
constitute a quorum, except as provided in Section 4.3 of this Article 4 and the
affirmative vote of a majority of the members present shall be necessary for the
adoption by it of any resolution.
Section 4.3. Substitution and Removal of Members: Vacancies. 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
such committee. In the absence or disqualification of a member of a committee,
the member or members present at any meeting and not disqualified from voting,
whether or not constituting a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of the absent or
disqualified member. The Board of Directors shall have the power at any time to
remove any member(s) of a committee and to appoint other directors in lieu of
the person(s) so removed and shall also have the power to fill vacancies in a
committee.
Article 5
Officers
--------
Section 5.1. Number, Titles, and Term of Office. The officers of the
----------------------------------
Corporation shall be a President, Treasurer, a Secretary, and such other
officers as the Board of Directors may from time to time elect or appoint
(including, but not limited to, a Chairman of the Board, and or more Vice
Presidents, (anyone or more of whom may be designated Executive Vice President
or Senior Vice President) Vice Chairman of the Board, one or more Assistant
Secretaries and one or more Assistant Treasurers). Each officer shall hold
office until such officer's successor shall be duly elected and shall qualify or
until such officer's death or until such officer shall resign or shall have been
removed. Any number of offices may be held by the same person, unless the
Articles of Incorporation of the Corporation provide otherwise. Except for the
Chairman of the Board and the Vice Chairman of the Board, no officer need be a
director.
Section 5.2. Powers and Duties of the President. The President shall be
----------------------------------
the chief executive officer of the Corporation. Subject to the control of the
Board of Directors and the Executive Committee (if any), the President shall
have general executive charge, management and control of the properties,
business and operations of the Corporation with all such powers as may be
reasonably incident to such responsibilities; may agree upon and execute all
leases, contracts, evidences of indebtedness and other obligations in the name
of the Corporation and may sign all certificates for shares of capital stock of
the Corporation; and shall have such other powers and duties as designated in
accordance with these Bylaws and as from time to time may be assigned to the
President by the Board of Directors. The President shall preside at all meetings
of the stockholders and of the Board of Directors.
Section 5.3. Vice Presidents. Each Vice President shall at all times
---------------
possess power to sign all certificates, contracts and other instruments of the
Corporation, except as otherwise limited in writing by the Chairman of the
Board, the President or the Vice Chairman of the Board of the Corporation. Each
Vice President shall have such other powers and duties as from time to time may
be assigned to such Vice President by the Board of Directors, the Chairman of
the Board, the President or the Vice Chairman of the Board.
-11-
<PAGE>
Section 5.4. Secretary. The Secretary shall keep the minutes of all
---------
meetings of the Board of Directors, committees of the Board of Directors and the
stockholders, in books provided for that purpose; shall attend to the giving and
serving of all notices; may in the name of the Corporation affix the seal of the
Corporation to all contracts and attest the affixation of the seal of the
Corporation thereto; may sign with the other appointed officers all certificates
for shares of capital stock of the Corporation; shall have charge of the
certificate books, transfer books and stock ledgers, and such other books and
papers as the Board of Directors may direct, all of which shall at all
reasonable times be open to inspection of any director upon application at the
office of the Corporation during business hours; shall have such other powers
and duties as designated in these Bylaws and as from time to time may be
assigned to the Secretary by the Board of Directors, the Chairman of the Board,
the President or the Vice Chairman of the Board; and shall in general perform
all acts incident of the office of Secretary, subject to the control of the
Board of Directors, the Chairman of the Board, the President or the Vice
Chairman of the Board.
Section 5.5. Assistant Secretaries. Each Assistant Secretary shall have
---------------------
the usual powers and duties pertaining to such offices, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to an Assistant Secretary by the board of directors, the President, or
the Secretary. The Assistant Secretaries shall exercise the powers of the
Secretary during that officer's absence or inability or refusal to act.
Section 5.6. Treasurer. The Treasurer shall have responsibility for the
---------
custody and control of all the funds and securities of the Corporation, and
shall have such other powers and duties as designated in these Bylaws and as
from time to time may be assigned to the Treasurer by the Board of Directors or
the President. The Treasurer shall perform all acts incident to the position of
Treasurer, subject to the control of the Board of Directors or the President;
and the Treasurer shall, if required by the Board of Directors, give such bond
for the faithful discharge of the Treasurer's duties in such form as the Board
of Directors may require.
Section 5.7. Assistant Treasurers. Each Assistant Treasurer shall have
--------------------
the usual powers and duties pertaining to such office, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to each Assistant Treasurer by the Board of Directors, the President,
or the Treasurer. The Assistant Treasurers shall exercise the powers of the
Treasurer during that officer's absence or inability or refusal to act.
Section 5.8. Action with Respect to Securities of Other Corporations.
-------------------------------------------------------
Unless otherwise directed by the Board of Directors, the President, together
with the Secretary or any Assistant Secretary shall have power to vote and
otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of security holders of or with respect to any action of security holders
of any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
Section 5.9. Delegation. For any reason that the Board of Directors may
----------
deem sufficient, the Board of Directors may, except where otherwise provided by
statute, delegate the powers or duties of any officer to any other person, and
may authorize any officer to delegate specified duties
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<PAGE>
of such office to any other person. Any such delegation or authorization by the
Board shall be effected from time to time by resolution of the Board of
Directors.
Article 6
Capital Stock
-------------
Section 6.1. Certificates of Stock. The certificates for shares of the
---------------------
capital stock of the Corporation shall be in such form, not inconsistent with
that required by law and the charter documents of the Corporation, as shall be
approved by the Board of Directors. Every holder of stock represented by
certificates shall be entitled to have a certificate signed by or in the name of
the Corporation by the President or a Vice President and the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation representing the number of shares (and, if the stock of the
Corporation shall be divided into classes or series, certifying the class and
series of such shares) owned by such stockholder which are registered in
certified form; provided, however, that any of or all the signatures on the
certificate may be facsimile. The stock record books and the blank stock
certificate books shall be kept by the Secretary or at the office of such
transfer agent or transfer agents as the Board of Directors may from time to
time determine. In case any officer, transfer agent or registrar who shall have
signed or whose facsimile signature or signatures shall have been placed upon
any such certificate or certificates shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued by the
Corporation, such certificate may nevertheless be issued by the Corporation with
the same effect as if such person were such officer, transfer agent or registrar
at the date of issue. The stock certificates shall be consecutively numbered and
shall be entered in the books of the Corporation as they are issued and shall
exhibit the holder's name and number of shares.
Section 6.2. Transfer of Shares. The shares of stock of the Corporation
------------------
shall be transferable only on the books of the Corporation by the holders
thereof in person or by their duly authorized attorneys or legal representatives
upon surrender and cancellation of certificates for a like number of shares.
Upon surrender to the Corporation or a transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
Section 6.3. Ownership of Shares. The Corporation shall be entitled to
-------------------
treat the holder of record of any share or shares of capital stock of the
Corporation as the holder in fact thereof and, accordingly, 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 the state of
Delaware.
Section 6.4. Regulations Regarding Certificates. The Board of Directors
----------------------------------
shall have the power and authority to make all such rules and regulations as
they may deem expedient concerning the issue, transfer and registration or the
replacement of certificates for shares of capital stock of the Corporation.
Section 6.5. Lost or Destroyed Certificates. The Board of Directors may
------------------------------
determine the conditions upon which the Corporation may issue a new certificate
of stock in place of a certificate
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<PAGE>
theretofore issued by it which is alleged to have been lost, stolen or destroyed
and may require the owner of such certificate or such owner's legal
representative to give bond, with surety sufficient to indemnify the Corporation
and each transfer agent and registrar against any and all losses or claims which
may arise by reason of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate in the place of the one so
lost, stolen destroyed.
Article 7
Miscellaneous Provisions
------------------------
Section 7.1. Fiscal Year. The fiscal year of the Corporation shall begin
-----------
on the first day of January of each year.
Section 7.2. Corporate Seal. The corporate seal shall be circular in form
--------------
and shall have inscribed thereon the name of the Corporation and the state of
its incorporation, which seal shall be in the charge of the Secretary and shall
be affixed to certificates of stock, debentures, bonds and other documents, in
accordance with the direction of the Board of Directors or a committee thereof,
and as may be required by law; however, the Secretary may, if the Secretary
deems it expedient, have a facsimile of the corporate seal inscribed on any such
certificates of stock, debentures, bonds, contract or other documents.
Duplicates of the seal may be kept for use by any Assistant Secretary.
Section 7.3. Notice and Waiver of Notice. Whenever any notice is required
---------------------------
to be given by law, the charter documents of the Corporation or under the
provisions of these Bylaws, said notice shall be deemed to be sufficient if
given (i) by telegraphic, cable or wireless transmission (including by telecopy
or facsimile transmission) or (ii) by deposit of the same in a post office box
or by delivery to an overnight courier service company in a sealed prepaid
wrapper addressed to the person entitled thereto at such person's post office
address, as it appears on the records of the Corporation, and such notice shall
be deemed to have been given on the day of such transmission or mailing or
delivery to courier, as the case may be.
Whenever notice is required to be given by law, the charter documents of
the Corporation or under any of the provisions of these Bylaws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person, including without limitation a director, at meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice unless
so required by the charter documents of the Corporation or these Bylaws.
Section 7.4. Facsimile Signature. In addition to the provisions for the
-------------------
use of facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors.
Section 7.5. Reliance upon Books, Reports and Records. A member of the
----------------------------------------
Board of Directors, or a member of any committee designated by the Board of
Directors, shall, in the
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<PAGE>
performance of such person's duties, be protected to the fullest extent
permitted by law in relying upon the records of the Corporation and upon
information, opinion, reports or statements presented to the Corporation.
Section 7.6. Application of Bylaws. In the event that any provisions of
---------------------
these Bylaws is or may be in conflict with any law of the United States, of the
state of Delaware, or of any other governmental body or power having
jurisdiction over this Corporation, or over the subject matter to which such
provision of these Bylaws applies, or may apply, such provision of these Bylaws
shall be inoperative to the extent only that the operation thereof unavoidably
conflicts with such law, and shall in all other respects be in full force and
effect.
Article 8
Indemnification of Officers and Directors
-----------------------------------------
Section 8.1. Indemnification. The corporation shall, to the maximum
---------------
extent and in the manner permitted by the General Corporation Law of Delaware,
indemnify each of its directors and officers against expenses (including
attorneys' fees), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was an agent of the corporation. For purposes of
this Section 6.1, a "director" or "officer" of the corporation includes any
person (i) who is or was a director or officer of the corporation, (ii) who is
or was serving at the request of the corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise, or
(iii) who was a director or officer of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation.
Section 8.2. Indemnification of Others. The corporation shall have the
--------------------------
power, to the maximum extent and in the manner permitted by the General
Corporation Law of Delaware, to indemnify each of its employees and agents
(other than directors and officers) against expenses (including attorneys'
fees), judgments, fines, settlements and other amounts actually and reasonably
incurred in connection with any proceeding, arising by reason of the fact that
such person is or was an agent of the corporation. For purposes of this Section
6.2, an "employee" or "agent" of the corporation (other than a director or
officer) includes any person (i) who is or was an employee or agent of the
corporation, (ii) who is or was serving at the request of the corporation as an
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, or (iii) who was an employee or agent of a corporation which
was a predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.
Section 8.3. Insurance. The corporation may purchase and maintain
---------
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him or her and incurred by him or her in any such capacity, or arising out of
his or her status as such, whether or not the corporation would have the power
to indemnify him or her against such liability under the provisions of the
General Corporation Law of Delaware.
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<PAGE>
Article 9
Amendments
----------
Section 9.1. Amendments. The Board of Directors shall have the power to
----------
adopt, amend and repeal from time to time Bylaws of the Corporation, subject to
the right of the stockholders entitled to vote with respect thereto to amend or
repeal such Bylaws as adopted or amended by the Board of Directors.
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<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
COBALT NETWORKS, INC.
---------------------
(Name of Corporation)
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of COBALT NETWORKS, INC. hereby adopts the foregoing bylaws,
comprising sixteen (16) pages as the Bylaws of the corporation.
Executed this 2nd day of September, 1999.
/s/ Donna Moser
_____________________________
Donna Moser,
Incorporator
Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------
The undersigned hereby certifies that he is the duly elected,
qualified and acting Secretary of COBALT NETWORKS, INC. and that the foregoing
Bylaws, comprising sixteen (16) pages, were adopted as the Bylaws of the
corporation on September 2, 1999, by the person appointed in the Certificate of
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 2nd day of September, 1999.
/s/ Kenton D. Chow
______________________________
Kenton D. Chow
Secretary
<PAGE>
EXHIBIT 3.3
RESTATED ARTICLES OF INCORPORATION
OF
COBALT NETWORKS, INC.
a California Corporation
The undersigned, Stephen DeWitt and John Montgomery, hereby certify that:
1. They are the duly elected and acting President and Assistant
Secretary, respectively, of Cobalt Networks, Inc., a California corporation (the
"Corporation").
2. The Articles of Incorporation of the Corporation are amended and
restated in their entirety as in Appendix I attached hereto.
3. The amendments and restatements herein set forth have been duly
approved by the Board of Directors of the Corporation.
4. The amendments herein set forth have been duly approved by the
required vote of the shareholders of the Corporation in accordance with Sections
902 and 903 of the California Corporations Code. The total number of shares of
Common Stock entitled to vote is 4,849,886, the total number of shares of Series
A Preferred Stock entitled to vote is 3,572,401 and the total number of shares
of Series B Preferred Stock entitled to vote is 3,698,910. The number of shares
voting in favor of the amendments equaled or exceeded the vote required. The
percentage vote required was more than 50% of the outstanding shares of Common
Stock, more than 66 2/3% of the outstanding shares of Series A Preferred Stock,
more than 80% of the outstanding shares of Series B Preferred Stock, more than
66 2/3% of the outstanding shares of Series A Preferred Stock and Series B
Preferred Stock voting together as one class and more than 50% of the
outstanding shares of Common Stock, Series A Preferred Stock and Series B
Preferred Stock voting together as one class.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Executed on April 29, 1999.
/s/ Stephen DeWitt
------------------------------------
Stephen DeWitt, President
/s/ John Montgomery
- ------------------------------------
John Montgomery, Assistant Secretary
<PAGE>
Appendix I
RESTATED ARTICLES OF INCORPORATION
OF
COBALT NETWORKS, INC.
a California Corporation
ARTICLE I
NAME
----
The name of this corporation is Cobalt Networks, Inc. (the
"Corporation").
ARTICLE II
PURPOSES
--------
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.
ARTICLE III
CAPITAL STOCK
-------------
The total number of shares of all classes of stock which the
Corporation is authorized to issue is 43,609,875, consisting of 26,000,000
shares of Common Stock, no par value, and 17,609,875 shares of Preferred Stock,
no par value. The Preferred Stock consists of three series, of which 3,734,901
shares have been designated as Series A Preferred Stock (the "Series A Preferred
Stock"), of which 3,740,522 shares have been designated as Series B Preferred
Stock (the "Series B Preferred Stock") and of which 10,134,452 shares have been
designated as Series C Preferred Stock (the "Series C Preferred Stock")
The relative rights, preferences, privileges and restrictions granted
to or imposed on the respective Series or classes of capital stock or the
holders thereof are as follows:
Section 1. Dividends.
---------
1.1 Dividend Rights. The holders of the Series C Preferred Stock and
---------------
Series B Preferred Stock shall be entitled to receive dividends, prior to the
payment of any dividends on the Series A Preferred Stock and the Common Stock,
at the rate of $0.37 per annum per share of Series C Preferred Stock then held
by them (the "Series C Dividend Rate") and at the rate of $0.21628 per annum per
share of Series B Preferred Stock then held by them (the "Series B Dividend
Rate") out of any funds legally available therefor when, if and as declared by
the Board of Directors. The holders of the Series A Preferred Stock shall be
entitled to receive dividends, prior to the payment of any dividends on the
Common Stock, at the rate of $0.10 per annum per share of Series A Preferred
Stock then held by them
<PAGE>
(the "Series A Dividend Rate") out of any funds legally available therefor when,
if and as declared by the Board of Directors. Without limiting the foregoing, no
distribution shall be made in respect of the Common Stock unless the holders of
the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock shall receive a proportionate share of any such distribution as though the
holders of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock were the holders of the number of shares of Common Stock of the
Corporation into which such shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock are then convertible.
1.2 Definition of Distribution. For purposes of this Section 1, unless
--------------------------
the context otherwise requires, a "distribution" shall mean the transfer of cash
or other property without consideration whether by way of dividend or otherwise
or the purchase or redemption of shares of the Corporation (other than
repurchases of Common Stock issued to or held by employees, officers, directors
or consultants of the Corporation or its subsidiaries upon termination of their
employment or services pursuant to agreements providing for the right of said
repurchase) for cash or property.
1.3 Certain Repurchases not Distributions. As authorized by Section
-------------------------------------
402.5(c) of the California Corporations Code, the provisions of Sections 502 and
503 of the California Corporations Code shall not apply with respect to
repurchases by the Corporation of shares of Common Stock issued to or held by
employees, officers, directors or consultants of the Corporation or its
subsidiaries upon termination of their employment or services pursuant to
agreements providing for the right of said repurchase.
Section 2. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding
up of the Corporation, either voluntary or involuntary, distributions to the
shareholders of the Corporation shall be made in the following manner:
(i) The holders of Series C Preferred Stock and Series B
Preferred Stock shall be entitled to receive, prior and in preference to
any distribution of any of the assets of the Corporation to the holders of
the Series A Preferred Stock and the Common Stock by reason of their
ownership thereof, an amount equal to $3.70 for each outstanding share of
Series C Preferred Stock (the Series C Preferential Amount") and $2.1628
for each outstanding share of Series B Preferred Stock (the "Series B
Preferential Amount"), adjusted for any stock split, combination,
consolidation, or stock distributions or stock dividends with respect to
such shares, and, in addition, an amount equal to all declared but unpaid
dividends on the Series C Preferred Stock and Series B Preferred Stock. If
the assets and funds thus distributed among the holders of the Series C
Preferred Stock and Series B Preferred Stock shall be insufficient to
permit the payment to such holders of the full Series C Preferential Amount
and Series B Preferential Amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed among
the holders of the Series C Preferred Stock and Series B Preferred Stock in
proportion to the respective Series C Preferential Amounts and Series B
Preferential Amounts which each such holder is entitled to receive pursuant
to this Section 2(a)(i).
(ii) After payment has been made to the holders of the Series
C Preferred Stock and the Series B Preferred Stock of the full amounts to
which they shall be entitled as set forth in Section 2(a)(i) above, the
Series A Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of the Corporation to
the holders of the Common Stock by reason of their ownership thereof, an
amount equal to $1.00 for each
-2-
<PAGE>
outstanding share of Series A Preferred Stock (the "Series A Preferential
Amount"), adjusted for any stock split, combination, consolidation, or
stock distributions or stock dividends with respect to such shares, and, in
addition, an amount equal to all declared but unpaid dividends on the
Series A Preferred Stock. If the assets and funds thus distributed among
the holders of the Series A Preferred Stock shall be insufficient to permit
the payment to such holders of the full Series A Preferential Amount, then
the entire assets and funds of the Corporation legally available for
distribution shall be distributed among the holders of the Series A
Preferred Stock in proportion to the respective Series A Preferential
Amounts which each such holder is entitled to receive pursuant to this
Section 2(a)(ii).
(iii) After payment has been made to the holders of the Series A
Preferred Stock of the full amounts to which they shall be entitled as set
forth in Section 2(a)(ii) above, then the holders of the Common Stock shall
be entitled to receive an amount equal to $0.10 for each outstanding share
of Common Stock (the "Common Preferential Amount"), adjusted for any stock
split, combination, consolidation, or stock distributions or stock
dividends with respect to such shares, and, in addition, an amount equal to
all declared but unpaid dividends on the Common Stock. If the assets and
funds legally available for distribution among the holders of Common Stock
shall be insufficient to permit the payment to such holders of the full
Common Preferential Amount, then such assets and funds shall be distributed
ratably among the holders of Common Stock in proportion to the total Common
Preferential Amount which each such holder is entitled to receive pursuant
to this Section 2(a)(iii).
(iv) Any assets remaining after the distributions pursuant to
Sections 2(a)(i) through (iii) shall be distributed on a pro rata basis to
the holders of Common Stock and Preferred Stock based on the number of
shares (assuming conversion of each holder's shares of Preferred Stock into
the number of shares of Common Stock into which such holder's Preferred
Stock is then convertible, as adjusted from time to time pursuant to
Section 4 hereof) then held by each holder of Common Stock and Preferred
Stock.
(b) (i)Any (x) consolidation or merger of the Corporation with
or into any other corporation or other entity or person, or any other
corporate reorganization, in which the shareholders of the Corporation
immediately prior to such consolidation, merger or reorganization, own less
than fifty percent (50%) of the Corporation's voting power immediately
after such consolidation, merger or reorganization, or any transaction or
Series of related transactions in which in excess of fifty percent (50%) of
the Company's voting power is transferred or (y) a sale, lease or other
disposition of all or substantially all of the assets of the Corporation
shall be deemed to be a liquidation subject to this Section 2.
(i) In any of such events, if the consideration received by the
Corporation is other than cash or indebtedness, its value will be deemed to be
its fair market value. In the case of securities, fair market value shall be
determined as follows:
(A) Securities not subject to investment letter or other
similar restrictions on free marketability:
(I) If traded on a securities exchange, or over-the-
counter as a NASDAQ National Market System security, the value
shall be deemed to be the average of the closing prices of the
securities on such exchange or NASDAQ
-3-
<PAGE>
National Market System over the 30-day period ending three (3)
days prior to the closing;
(II) If actively traded over-the-counter (but not
on the National Market System), the value shall be deemed to
be the average of the closing bid prices over the 30-day
period ending three (3) days prior to the closing; and
(III) If there is no active public market, the value
shall be the fair market value thereof, as determined by the
unanimous consent or vote of the Board of Directors and the
approval of holders of at least 66 2/3% of the Series A
Preferred Stock, of at least 66 2/3% of the Series B Preferred
Stock and of at least 66 2/3% of the Series C Preferred Stock
and such determination shall be binding upon the holders of
the Preferred Stock; and
(IV) The method of valuation of securities subject
to investment letter or other restrictions on free
marketability shall be to make an appropriate discount from
the market value determined as above in subparagraphs (A)(I),
(II) or (III) to reflect the approximate fair market value
thereof, as determined by the unanimous consent or vote of the
Board of Directors and the approval of holders of at least 66
2/3% of the Series A Preferred Stock, of at least 66 2/3% of
the Series B Preferred Stock and of at least 66 2/3% of the
Series C Preferred Stock, and such determination shall be
binding upon the shareholders.
(c) The liquidation preference of holders of Preferred Stock
provided herein shall not be deemed to be impaired by distributions made by the
Corporation in connection with the repurchase of shares of Common Stock,
including the Reserved Shares, as hereinafter defined, at the lower of fair
market value or the original issue price from former employees or consultants
upon termination of their employment or services pursuant to stock restriction
agreements between the Corporation and such persons approved by the
Corporation's Board of Directors, and such holders shall be deemed to have
consented to such repurchases.
Section 3. Voting Rights.
-------------
(a) General. Except with respect to the election of
-------
directors of the Corporation as set forth below, the holder of each share of
Common Stock issued and outstanding shall have one vote and each holder of
Preferred Stock issued and outstanding shall have the number of votes equal to
the number of shares of Common Stock into which such holder's shares of
Preferred Stock are then convertible, as adjusted from time to time pursuant to
Section 4 hereof, at the record date for determination of the shareholders
entitled to vote on such matters or, if no record date is established, at the
date such vote is taken or any written consent of shareholders is first
solicited. The holders of Preferred Stock shall be entitled to receive notice,
together with the holders of Common Stock, of all shareholder meetings even if
only the holders of Common Stock are entitled to vote on the issues addressed at
such meeting.
(b) Board of Directors. Subject to Section 3(c) below, the
------------------
authorized number of directors comprising the Company's Board of Directors shall
be seven (7). As long as there are at least 2,000,000 shares of Preferred Stock
issued and outstanding, of the authorized number of members of the Corporation's
Board of Directors:
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<PAGE>
(i) the holders of Series A Preferred Stock voting
separately as a class shall be entitled to elect one (1) director (and to
fill any vacancies with respect thereto), with each holder of Series A
Preferred Stock entitled to the number of votes determined as provided in
Section 3(a) above;
(ii) the holders of Series B Preferred Stock voting
separately as a class shall be entitled to elect one (1) director (and to
fill any vacancies with respect thereto), with each holder of Series B
Preferred Stock entitled to the number of votes determined as provided in
Section 3(a) above;
(iii) the holders of Series C Preferred Stock voting
separately as a class shall be entitled to elect one (1) director (and to
fill any vacancies with respect thereto), with each holder of Series C
Preferred Stock entitled to the number of votes determined as provided in
Section 3(a) above; and
(iv) the holders of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Common Stock, voting together
as a single class, shall be entitled to elect four (4) directors (and to
fill any vacancies with respect thereto).
Subject to Section 302 and Section 303 of the California Corporations Code, any
director who shall have been elected by a specified group of shareholders may be
removed during the aforesaid term of office, either for or without cause, by and
only by, the affirmative vote of the holders of a majority of the shares of such
specified group, given at a special meeting of such shareholders duly called or
by an action by written consent for that purpose.
(c) Designated Default. If the holders of 66 2/3 % of the Preferred
------------------
Stock elect to declare a Designated Default in accordance with the Second
Amended and Restated Investors' Rights Agreement, dated as of the Series C
Original Issue Date, among the Corporation and certain shareholders of the
Corporation (the "Investors' Rights Agreement"), the authorized number of
directors comprising the Corporation's Board of Directors shall be increased by
four (4) directors to eleven (11) directors. One of such additional directors
shall be elected by the holders of Series A Preferred Stock voting separately as
a class, with each holder of Series A Preferred Stock entitled to the number of
votes determined as provided in Section 3(a) above, one of such additional
directors shall be elected by the holders of Series B Preferred Stock voting
separately as a class, with each holder of Series B Preferred Stock entitled to
the number of votes determined as provided in Section 3(a) above, one of such
additional directors shall be elected by the holders of Series C Preferred Stock
voting separately as a class, with each holder of Series C Preferred Stock
entitled to the number of votes determined as provided in Section 3(a) above and
one of such additional directors shall be elected by the holders of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock voting
together as a single class, with each holder of Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock entitled to the number of votes
determined as provided in Section 3(a) above .
(d) Audit Committee. The Corporation's Board of Directors shall
---------------
establish an Audit Committee consisting of three (3) directors, which shall
include the directors elected in accordance with Section 3(b)(i), (ii) and (iii)
above.
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<PAGE>
(e) Compensation Committee. The Corporation's Board of Directors
----------------------
shall establish an Compensation Committee consisting of three (3) directors,
which shall include the directors elected in accordance with Section
3(b)(i),(ii) and (iii) above.
Section 4. Conversion. The holders of Preferred Stock shall have
----------
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert.
----------------
(i) Optional Conversion. Each share of Preferred Stock shall
-------------------
be convertible at the option of the holder thereof at any time after the
date of issuance of such share, at the office of the Corporation or any
transfer agent for Preferred Stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined in the case of the
Series A Preferred Stock, by dividing $1.00 by the Series A Conversion
Price at the time in effect, as is determined in the case of the Series B
Preferred Stock, by dividing $2.1628 by the Series B Conversion Price at
the time in effect and as is determined in the case of the Series C
Preferred Stock, by dividing $3.70 by the Series C Conversion Price at the
time in effect. As of the effective date of these Restated Articles of
Incorporation, the Series A Conversion Price shall be $1.00, the Series B
Conversion Price shall be $2.1628 and the Series C Conversion Price shall
be $3.70 Such initial Series A Conversion Price, Series B Conversion Price
and Series C Conversion Price shall be subject to adjustment as set forth
below.
(ii) Series A Preferred Stock. Each share of Series A
------------------------
Preferred Stock shall automatically be converted into shares of Common
Stock at the Series A Conversion Price then in effect upon the earlier of
(1) the affirmative vote of holders of 66 2/3 % of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock, voting
together as a single class, to convert all shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock into shares of
Common Stock, (2) the date on which fewer than 50,000 shares of Series A
Preferred Stock (appropriately adjusted for any stock splits, combinations,
consolidations, or stock distributions or dividends with respect to such
shares) remain outstanding or (3) the closing of an underwritten public
offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common
Stock for the account of the Corporation to the public at a price per share
(before deduction of underwriter discounts and commissions and offering
expenses) of not less than $7.50 per share (as adjusted for any stock
splits, combinations, consolidations, or stock distributions or dividends
with respect to such shares) and an aggregate offering price to the public
of not less than $20,000,000.
(iii) Series B Preferred Stock. Each share of Series B
------------------------
Preferred Stock shall automatically be converted into shares of Common
Stock at the Series B Conversion Price then in effect upon the earlier of
(1) the affirmative vote of holders of 66 2/3 % of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock, voting
together as a single class, to convert all shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock into shares of
Common Stock, (2) the date on which fewer than 50,000 shares of Series B
Preferred Stock (appropriately adjusted for any stock splits, combinations,
consolidations, or stock distributions or dividends with respect to such
shares) remain outstanding or (3) the closing of an underwritten public
offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common
Stock for the account of the Corporation to the public at a price per share
(before deduction of underwriter
-6-
<PAGE>
discounts and commissions and offering expenses) of not less than $7.50 per
share (appropriately adjusted for any stock splits, combinations,
consolidations, or stock distributions or dividends with respect to such
shares) and an aggregate offering price to the public of not less than
$20,000,000.
(iv) Series C Preferred Stock. Each share of Series C Preferred
------------------------
Stock shall automatically be converted into shares of Common Stock at the
Series C Conversion Price then in effect upon the earlier of (1) the
affirmative vote of holders of 66 2/3 % of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, voting together as a
single class, to convert all shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock into shares of Common Stock,
(2) the date on which fewer than 50,000 shares of Series C Preferred Stock
(appropriately adjusted for any stock splits, combinations, consolidations,
or stock distributions or dividends with respect to such shares) remain
outstanding or (3) the closing of an underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
Corporation to the public at a price per share (before deduction of
underwriter discounts and commissions and offering expenses) of not less
than $7.50 per share (appropriately adjusted for any stock splits,
combinations, consolidations, or stock distributions or dividends with
respect to such shares) and an aggregate offering price to the public of
not less than $20,000,000.
(v) In the event of the automatic conversion of the Series A,
Series B or Series C Preferred Stock as set forth in Sections 4 (a)(ii)(3),
4(a)(iii)(3) and 4(a)(iv)(3) above, the person(s) entitled to receive the
Common Stock issuable upon such conversion shall not be deemed to have
converted such shares until immediately prior to the closing of such sale
of securities causing the conversion, at which time the Preferred Stock
shall be converted automatically without any further action by the holders
of such shares and whether or not the certificates representing such shares
are surrendered to the Corporation or its transfer agent; provided,
however, that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion unless
certificates evidencing such shares of the Preferred Stock being converted
are either delivered to the Corporation or its transfer agent, as
hereinafter provided, or the holder notifies the Corporation or its
transfer agent, as hereinafter provided, that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by it in
connection therewith. Upon the automatic conversion of the Preferred Stock,
the holders of the Preferred Stock shall surrender the certificates
representing such shares at the office of the Corporation or of any
transfer agent for the Preferred Stock. Thereupon, there shall be issued
and delivered to such holder, promptly at such office and in his name as
shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the shares
of the Preferred Stock surrendered were convertible on the date on which
such automatic conversion occurred.
(vi) Upon conversion of the Preferred Stock, the Common Stock so
issued shall be duly and validly issued, fully paid and nonassessable
shares of the Corporation.
(b) Mechanics of Conversion. No fractional shares of Common
-----------------------
Stock shall be issued upon conversion of Preferred Stock. In lieu of any
fractional shares to which the holder would
-7-
<PAGE>
otherwise be entitled, the Corporation shall pay cash equal to such fraction
multiplied by the then-effective conversion price for a particular Series of
Preferred Stock (a "Conversion Price"). Except as provided in Section 4(a)(ii),
before any holder of Preferred Stock shall be entitled to convert the same into
full shares of Common Stock, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Preferred Stock, and shall give written notice by mail, postage
prepaid, to the Corporation at its principal corporate office, of the election
to convert the same. The Corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such holder of Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which he
shall be entitled as aforesaid and a check payable to the holder in the amount
of any cash payable in lieu of fractional shares of Common Stock (after
aggregating all shares of Common Stock issuable to such holder of Preferred
Stock upon conversion of the number of shares of Preferred Stock at the time
being converted). In addition, if less than all of the shares represented by
such certificates are surrendered for conversion pursuant to Section 4(a)(i),
the Corporation shall issue and deliver to such holder a new certificate for the
balance of the shares of Preferred Stock not so converted. Except as provided in
Section 4(a)(ii), such conversion shall be deemed to have been made immediately
prior to the close of business on the date of the surrender of the shares of
such 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 as of such date. If the conversion is in connection with an
underwritten offer of securities registered pursuant to the Securities Act of
1933, the conversion may, at the option of any holder tendering such Preferred
Stock for conversion, be conditioned upon the closing with the underwriter of
the sale of securities pursuant to such offering, in which event the person(s)
entitled to receive Common Stock issuable upon such conversion of such Preferred
Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the closing of such sale of securities. In addition, any
conversion may be conditional upon the happening of a specific event, in which
event the person(s) entitled to receive Common Stock issuable upon such
conversion of such Preferred Stock shall not be deemed to have converted such
Preferred Stock until immediately prior to the happening of such event.
(c) Adjustment to Conversion Price for Diluting Issues.
--------------------------------------------------
(i) Special Definitions. For purposes of this Section 4(c),
-------------------
the following definitions shall apply:
(1) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares (other than Common Stock, Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
(2) "Options" shall mean rights, options or warrants to
-------
subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities, except for those issued to officers or
employees of, or consultants to, the Corporation as provided in
Section 4(c)(i)(6)(B).
(3) "Series C Original Issue Date" shall mean the date
----------------------------
on which the first share of Series C Preferred Stock is issued.
-8-
<PAGE>
(4) "Dilutive Financing" means any issuance or deemed issuance of
------------------
Additional Shares of Common Stock after the Series C Original Issue Date for a
consideration per share less than the applicable Series A, Series B or Series C
Conversion Price in effect on the date of and immediately prior to such sale.
(5) "New Securities" means shares of Common Stock, Preferred Stock or
--------------
any other class of capital stock of the Company, whether or not now authorized,
securities of any type that are convertible into shares of such capital stock,
and options, warrants or rights to acquire shares of such capital stock.
Notwithstanding the foregoing, the term "New Securities" will not include: (A)
securities issued in connection with bona fide equipment lease or working
capital debt financings with lending institutions that have been approved by the
Corporation's Board of Directors; (B) securities offered to the public pursuant
to a registration statement filed under the Securities Act; (C) securities
issued to the sellers of a corporation pursuant to the acquisition of such
corporation by the Company by merger, purchase of substantially all of the
assets, or other reorganization whereby the Company owns not less than 51% of
the voting power of such corporation; (D) securities issued upon exercise or
conversion of options, warrants and other convertible securities outstanding on
the date of filing of these Amended and Restated Articles of Incorporation; (E)
shares of Common Stock or Preferred Stock issued in connection with any stock
split, stock dividend or recapitalization by the Company in which all classes
and Series of capital stock are adjusted equally; and (F) securities issued to
the Corporation's placement agent in connection with the sale and issuance of
the Corporation's Series C Preferred Stock.
(6) "Additional Shares of Common Stock" shall mean all shares of
---------------------------------
Common Stock issued (or, pursuant to Section 4(c)(iii), deemed to be issued) by
the Corporation after the Series C Original Issue Date, including New
Securities, other than shares of Common Stock issued or issuable:
(A) upon conversion of shares of Preferred Stock;
(B) to officers or employees of, or consultants to, the
Corporation pursuant to a stock grant, stock option plan, stock purchase
plan or other stock incentive agreement (collectively, the "Plans"),
(collectively, the "Reserved Shares") up to an aggregate of 805,812 shares;
(C) as a dividend or distribution on Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock;
(D) as securities excluded from the definition of New
Securities in Section 4(c)(i)(5);
(E) following a vote of the holders of 66 2/3% of the Preferred
Stock voting on the basis of the number of shares of Common Stock into
which each holder's shares of Preferred Stock are then convertible, as
adjusted from time to time pursuant to Section 4 hereof, that designated
shares of Common Stock issued or deemed to be issued shall not constitute
Additional Shares of Common Stock ;
-9-
<PAGE>
(F) in connection with any transaction for which adjustment
is made pursuant to Section 4(d) hereof; and
(G) by way of dividend or distribution on shares of Common
Stock excluded from the definition of Additional Shares of Common
Stock by the foregoing clauses (A), (B), (C), (D), (E), (F) or this
clause (G).
(ii) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
Conversion Price of a share of Preferred Stock shall be made in respect of the
issuance of Additional Shares of Common Stock unless the consideration per share
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Conversion Price in effect on the date of, and
immediately prior to, such issuance, for such share of Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common Stock.
-------------------------------------------------
(1) Options and Convertible Securities. In the event the
----------------------------------
Corporation at any time or from time to time after the Series C Original
Issue Date shall issue any Options or Convertible Securities or shall fix a
record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the
maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable upon the exercise of
such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall
be deemed to be Additional Shares of Common Stock issued as of the time of
such issue or, in case such a record date shall have been fixed, as of the
close of business on such record date; provided, however, that Additional
Shares of Common Stock shall not be deemed to have been issued unless the
consideration per share (determined pursuant to Section 4(c)(v) hereof) of
such Additional Shares of Common Stock would be less than the Conversion
Price in effect on the date of and immediately prior to such issue, or such
record date, as the case may be; and, provided, further, that in any such
case in which Additional Shares of Common Stock are deemed to be issued:
(A) no further adjustment in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or
exchange of such Convertible Securities;
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase
or decrease in the consideration payable to the Corporation, or
increase or decrease in the number of shares of Common Stock issuable,
upon the exercise, conversion or exchange thereof, the Conversion
Price computed upon the original issue thereof (or upon the occurrence
of a record date with respect thereto), and any subsequent adjustments
based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease, insofar
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<PAGE>
as it affects such Conversion Price, but no further change in the
Conversion Price shall be made upon the exercise, conversion or
exchange of such Options or Convertible Securities, and no such
adjustment of the Conversion Price shall affect Common Stock
previously issued upon conversion of the Preferred Stock;
(C) if any such Options or Convertible Securities shall
expire or be canceled without having been exercised or converted, the
Conversion Price as adjusted upon the original issuance thereof (or
upon the occurrence of a record date with respect thereto) shall be
readjusted as if
(I) in the case of Convertible Securities or Options
for Common Stock, the only Additional Shares of Common Stock so
issued were shares of Common Stock, if any, actually issued or
sold on the exercise of such Options or the conversion or
exchange 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, plus the consideration, if any, actually received by
the Corporation for the granting of all such Options, whether or
not exercised, plus the consideration received for issuing or
selling the Convertible Securities actually converted plus the
consideration, if any, actually received by the Corporation
(other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) on the conversion or
exchange of such Convertible Securities; and
(II) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such
Options, and the consideration received by the Corporation for
the Additional Shares of Common Stock deemed to have been then
issued was the consideration actually received by the Corporation
for the issue of all such Options, whether or not exercised, plus
the consideration deemed to have been received by the Corporation
upon the issue of the Convertible Securities with respect to
which such Options were actually exercised;
(D) no readjustment pursuant to clauses (B) or (C) above
shall have the effect of increasing the Conversion Price to an amount
which exceeds the lower of (i) the Conversion Price on the original
adjustment date (immediately prior to the adjustment), or (ii) the
Conversion Price that would have resulted from any actual issuance of
Additional Shares of Common Stock between the original adjustment date
and such readjustment date.
(iv) Adjustment of Conversion Price Upon Issuance of Additional Shares
-----------------------------------------------------------------
of Common Stock. Subject to Section 4(c)(ii), the Conversion Price of the
- ---------------
Preferred Stock shall be subject to adjustment under this Section 4(c)(iv) as
follows:
(1) In the event the Corporation shall at any time after the
Series C Original Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant
Section 4(c)( iii)), without
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<PAGE>
consideration or for a consideration per share less than the Conversion
Price in effect on the date of and immediately prior to such issue, then
and in such event, such Conversion Price shall be reduced, concurrently
with such issue, to the price (calculated to the nearest cent) determined
by multiplying such Conversion Price by a fraction (x) the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of shares of Common Stock which the
aggregate consideration received by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such
Conversion Price, and (y) the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued; provided,
however, that, for the purposes of this Section 4(c)(iv), all shares of
Common Stock issuable upon conversion of outstanding shares of Preferred
Stock shall be deemed to be outstanding; and, further provided, that any
Additional Shares of Common Stock deemed issued pursuant to Section
4(c)(iii) shall be deemed to be outstanding.
(v) Determination of Consideration. For purposes of this Section
------------------------------
4(c), the consideration received by the Corporation for the issuance of any
Additional Shares of Common Stock shall be computed, after deducting all
commissions, expenses and fees, as follows:
(1) Cash and Property. Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued
dividends;
(B) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets
of the Corporation for consideration which covers both, by the
proportion of such consideration so received, computed as
provided in clauses (A) and (B) above, as determined in good
faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration per
----------------------------------
share received by the Corporation for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 4(c)(iii)(1),
relating to Options and Convertible Securities, shall be determined by
dividing:
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments
relating thereto, without regard to any provisions contained
therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the
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<PAGE>
exercise of such Options or the conversion or exchange of such
Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible
Securities, by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any
provisions contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(d) Adjustments for Stock Dividends, Distributions, Subdivisions,
-------------------------------------------------------------
Combinations or Consolidations of Common Stock.
- ----------------------------------------------
(i) Stock Dividends, Distributions or Subdivisions. In the
----------------------------------------------
event the Corporation shall issue Additional Shares of Common Stock
pursuant to a stock dividend, stock distribution or subdivision, the
Conversion Price in effect immediately prior to such stock dividend, stock
distribution or subdivision shall concurrently with such stock dividend,
stock distribution or subdivision, be proportionately decreased.
(ii) Combinations or Consolidations. 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, the Conversion Price in effect immediately prior to such combination
or consolidation shall, concurrently with the effectiveness of such
combination or consolidation, be proportionately increased.
(iii) Adjustments for Other Distributions. In the event the
-----------------------------------
Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 4(c) or
(d) or as otherwise provided in Section 1, then, and in each such event,
provision shall be made so that the holders of Preferred Stock shall
receive upon conversion thereof, in addition to the number of shares of
Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Preferred Stock been
converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including
the date of conversion, retained such securities receivable by them as
aforesaid during such period, subject to all other adjustments called for
during such period under this Section 4(c) or (d) with respect to the
rights of the holders of the Preferred Stock.
(iv) Adjustments for Reclassification, Exchange, and
------------------------------------------------
Substitution. If the Common Stock issuable upon conversion of the Preferred
------------
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of
shares provided for above), the applicable Conversion Price then in effect
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the 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 or classes of stock equivalent to the number
of shares of Common Stock that would
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<PAGE>
have been subject to receipt by the holders upon conversion of their
Preferred Stock immediately before that change.
(e) 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
other 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 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Preferred Stock against impairment.
(f) 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
Preferred Stock, such number of shares of its Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of
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 Preferred Stock, in addition to such other remedies as
shall be available to the holders of Preferred Stock, the Corporation will take
such corporate actions 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 purposes.
(g) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the Conversion Price pursuant to this Section 4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Preferred Stock a certificate 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
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) all such adjustments and readjustments, (ii) the
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 such Preferred Stock.
(h) Notices of Record Date. In the event that the Corporation shall
----------------------
propose at any time:
(i) to declare any dividend or distribution upon the 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, other than distributions to shareholders in connection with the
repurchase of shares of Common Stock, including the Reserved Shares, of
former employees or consultants, to which the holders of Preferred Stock
have consented in Section 2(c) hereof; or
(ii) to offer for subscription to the holders of any class or
Series of its capital stock any additional shares of stock of any class or
Series or any other rights; or
(iii) to effect any reclassification or recapitalization; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property
or business, or to liquidate, dissolve or wind up, or to effect any other
transaction subject to the provisions of Section 2 of these Amended and
Restated Articles of Incorporation;
-14-
<PAGE>
then, in connection with each such event, the Corporation shall send to the
holders of the Preferred Stock:
(1) at least 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 the rights
to vote 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 20 days' prior written notice of the date of a
shareholders meeting at which a vote on such matters shall take place
or the effective date of any written consent (and specifying the
material terms and conditions of the proposed transaction or event and
the date on which the holders of Preferred Stock and Common Stock
shall be entitled to exchange their Preferred Stock and Common Stock
for securities or other property deliverable upon the occurrence of
such event and the amount of securities or other property deliverable
upon such event).
Each such written notice shall be given personally or by first
class mail, postage prepaid, addressed to the holders of Preferred Stock at the
address for each such holder as shown on the books of the Corporation.
Section 5. No Reissuance of Preferred Stock. No share or shares of
--------------------------------
Preferred Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Corporation shall be
authorized to issue.
Section 6. Protective Provisions.
---------------------
(a) Preferred Stock. In addition to any other rights provided by law
---------------
and without limiting the last paragraph of this Section 6(a), so long as at
least 750,000 shares of Preferred Stock (as such number may be adjusted for
stock splits, combinations and the like) shall be outstanding, the
Corporation shall not, without first obtaining the affirmative vote or
written consent of the holders of 66 2/3% of the outstanding shares of
Preferred Stock voting as a single class (in each case based on the number
of shares of Common Stock into which each holder's Preferred Stock is then
convertible, as adjusted from time to time pursuant to Section 4 hereof):
(i) amend or repeal any provision of, or add any provision to,
this Corporation's Articles of Incorporation or bylaws if such action would
alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, any Series of Preferred Stock or
the Preferred Stock in an adverse manner;
(ii) increase the authorized number of shares of any Series of
Preferred Stock;
(iii) authorize or issue any new shares or reclassify any Common
Stock or other shares into shares of any class or Series of stock senior to
or on parity with any series of
-15-
<PAGE>
Preferred Stock as to dividends, redemption rights, liquidation
preferences, conversion rights, voting rights or otherwise;
(iv) sell, license or otherwise dispose of all or substantially
all of the assets or business of the Corporation or authorize any
liquidation or winding up of the Corporation;
(v) effect a consolidation, reorganization or merger of the
Corporation with or into any other corporation, or any other transaction in
which ownership of a majority of the Corporation's capital stock is
transferred;
(vi) redeem any shares of the Corporation's capital stock, other
than redemptions of Preferred Stock required under the Investors' Rights
Agreement; or
(vii) increase the authorized number of directors of this
Corporation to more than seven (7) , other than any increase required under
the Investors' Rights Agreement.
In addition to any other rights provided by law and without
limiting the foregoing, so long as any shares of Preferred Stock shall be
outstanding, the Corporation shall not, without first obtaining the affirmative
vote or written consent of the holders of a majority of the outstanding shares
of Preferred Stock voting as a single class (based on the number of shares of
Common Stock into which each holder's Preferred Stock is then convertible, as
adjusted from time to time pursuant to Section 4 hereof), take any action to
amend the Articles of Incorporation in which the dividend, liquidation
preference, conversion, voting, redemption or other rights of the Preferred
Stock will be adversely affected.
Section 7. Redemption. The shares of Preferred Stock shall be redeemed
----------
as follows:
(a) Mandatory Redemption. The holders of 66 2/3 % of the shares
--------------------
of Preferred Stock (the "Electing Holders") may elect, at any time from
time to time following July 2, 2003 but prior to July 2, 2005, by written
notice (the "Redemption Notice") to the Corporation and all other holders
of Preferred Stock, to require that the Corporation redeem all (but not
less than all) shares of Preferred Stock owned by the Electing Holders
(and/or any permitted assignee of such Electing Holders) (the "Redemption
Shares") in accordance with this Section 7 (a "Mandatory Redemption").
Holders of Preferred Stock receiving such Redemption Notice may elect by
written notice to the Corporation and the Electing Holders within ten (10)
days following delivery of the Redemption Notice to participate in the
Mandatory Redemption and become an Electing Holder for purposes of this
Section 7.
(b) Redemption Price and Payment. The aggregate purchase price
----------------------------
(the "Redemption Price") for the Redemption Shares shall be the aggregate
purchase price paid to the Corporation by the Electing Holders for such
Redemption Shares, plus all accrued but unpaid dividends with respect to
such Redemption Shares. The shares of Preferred Stock to be redeemed
following delivery of the Redemption Notice shall be redeemed by paying for
each share in cash an amount (such amount being referred to as the
"Redemption Price") equal to $1.00 per share of Series A Preferred Stock,
$2.1628 per share of Series B Preferred Stock and $3.70 per share of Series
C Preferred Stock plus, in the case of each share, an amount equal to all
dividends declared but unpaid thereon, computed to the date of such
Redemption Notice. The Company shall redeem the Redemption Shares no later
than ninety (90) days following delivery
-16-
<PAGE>
of the Redemption Notice, by paying the Redemption Price to such Electing
Holders in immediately available funds (the "Redemption Date").
(c) Redemption Mechanics. The Redemption Notice shall be
--------------------
given by delivery in person, certified or registered mail, return receipt
requested, telecopier or telex, to each holder of record (at the close of
business on the business day next preceding the day on which the Redemption
Notice is given) of shares of Preferred Stock. The Redemption Notice shall
set forth the aggregate purchase price paid to the Corporation by the
Electing Holders for such Redemption Shares, plus all accrued but unpaid
dividends with respect to such Redemption Shares. The Redemption Notice
shall be addressed to each holder of Preferred Stock at his address as
shown by the records of the Corporation. From and after the close of
business on a Redemption Date, unless there shall have been a default in
the payment of the Redemption Price, all rights of holders of shares of
Preferred Stock (except the right to receive the Redemption Price) shall
cease with respect to the shares to be redeemed on such Redemption Date,
and such shares shall not thereafter be transferred on the books of the
Corporation or be deemed to be outstanding for any purpose whatsoever. If
the funds of the Corporation legally available for redemption of shares of
Preferred Stock on a Redemption Date are insufficient to redeem the total
number of shares of Preferred Stock to be redeemed on such Redemption Date,
the holders of such shares shall share ratably in any funds legally
available for redemption of such shares according to the respective amounts
which would be payable to them if the full number of shares to be redeemed
on such Redemption Date were actually redeemed. The shares of Preferred
Stock required to be redeemed but not so redeemed shall remain outstanding
and entitled to all rights and preferences provided herein. At any time
thereafter when additional funds of the Corporation are legally available
for the redemption of such shares of Preferred Stock, such funds will be
used, at the end of the next succeeding fiscal quarter, to redeem the
balance of such shares, or such portion thereof for which funds are then
legally available, on the basis set forth above.
(d) Redeemed or Otherwise Acquired Shares to be Retired. Any
---------------------------------------------------
shares of Preferred Stock redeemed pursuant to this Section 7 or otherwise
acquired by the Corporation in any manner whatsoever shall be cancelled and
shall not under any circumstances be reissued; and the Corporation may from
time to time take such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of Preferred Stock.
ARTICLE IV
LIMITATION OF LIABILITY
-----------------------
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law. Any
repeal or modification of this Article IV, or the adoption of any provision of
the Articles of Incorporation inconsistent with this Article IV, shall only be
prospective and shall not adversely affect the rights under this Article IV in
effect at the time of the alleged occurrence of any act or omission to act
giving rise to liability.
ARTICLE V
INDEMNIFICATION
---------------
-17-
<PAGE>
The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through By-law
provisions, agreements with agents, vote of shareholders or disinterested
directors, or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to the applicable
limits on indemnification set forth in Section 204 of the California
Corporations Code with respect to actions for breach of duty to the Corporation
or its shareholders. Any repeal or modification of this Article V, or the
adoption of any provision of the Articles of Incorporation inconsistent with
this Article V, shall only be prospective and shall not adversely affect the
rights under this Article V in effect at the time of the alleged occurrence of
any action or omission to act giving rise to indemnification.
-18-
<PAGE>
EXHIBIT 3.4
BYLAWS
------
OF
--
VIAVISION SYSTEMS, INC.
-----------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I Principal Office...................................... 1
Section 1. Location of Principal Office.................. 1
Section 2. Other Business Offices........................ 1
ARTICLE II Meetings of Shareholders............................. 1
Section 1. Location of Meetings.......................... 1
Section 2. Annual Meetings............................... 1
Section 3. Special Meetings.............................. 2
Section 4. Quorum........................................ 3
Section 5. Adjournment................................... 3
Section 6. Record Date; Cumulative Voting................ 3
Section 7. Waiver of Notice.............................. 4
Section 8. Action by Written Consent..................... 4
Section 9. Proxies....................................... 5
Section 10. Inspectors of Election........................ 6
ARTICLE III Board of Directors.................................. 7
Section 1. Powers of the Board........................... 7
Section 2. Number of Directors........................... 8
Section 3. Election of Directors......................... 8
Section 4. Vacancies; Resignation........................ 9
ARTICLE IV Meetings of Directors................................ 9
Section 1. Location of Meetings.......................... 9
Section 2. Regular Meetings.............................. 9
Section 3. Special Meetings; Notice...................... 10
Section 4. Quorum........................................ 10
Section 5. Waiver of Notice.............................. 11
Section 6. Action by Written Consent..................... 11
Section 7. Committees.................................... 11
Section 8. Compensation of Directors..................... 11
Section 9. Indemnification............................... 11
ARTICLE V Officers.............................................. 11
Section 1. Designation of Officers....................... 11
Section 2. Chairman of the Board......................... 12
Section 3. President..................................... 12
Section 4. Vice Presidents............................... 12
Section 5. Secretary..................................... 12
Section 6. Assistant Secretary........................... 13
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
Page
----
<S> <C>
Section 7. Treasurer..................................... 13
Section 8. Assistant Treasurer........................... 13
ARTICLE VI Miscellaneous........................................ 13
Section 1. Record Date................................... 13
Section 2. Inspection of Corporate Records............... 14
Section 3. Certificates for Shares....................... 14
Section 4. Representation of Shares of Other Corporations 14
Section 5. Inspection of Bylaws.......................... 14
Section 6. Construction and Definitions.................. 15
ARTICLE VII Amendments.......................................... 15
Section 1. Amendment by Shareholders..................... 15
Section 2. Amendment by Board of Directors............... 15
ARTICLE VIII Annual and Other Reports........................... 15
Section 1. Annual Report to Shareholders................. 15
Section 2. Request for Financial Statements.............. 16
</TABLE>
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<PAGE>
BYLAWS
------
OF
--
VIAVISION SYSTEMS, INC.
----------------------
ARTICLE I
Principal Office
----------------
Section 1. Location of Principal Office. The principal executive office
----------------------------
for the transaction of the business of the corporation shall be established and
maintained by the board of directors at any place within or without the State of
California. The board of directors may change said principal executive office
from one location to another.
Section 2. Other Business Offices. The board of directors may at any time
----------------------
establish other business offices within or without the State of California.
ARTICLE II
Meetings of Shareholders
------------------------
Section 1. Location of Meetings. All meetings of the shareholders shall
--------------------
be held at any place within or without the State of California which may be
designated either by the board of directors or by the written consent of all
shareholders entitled to vote thereat given either before or after the meeting
and filed with the secretary of the corporation. In the absence of any such
designation, shareholders' meetings shall be held at the principal executive
office of the corporation.
Section 2. Annual Meetings. The annual meeting of the shareholders of the
---------------
corporation shall be held on such date and at such time as shall be determined
by the board of directors, not more than fifteen (15) months after the date of
the preceding annual meeting or, in the case of the first annual meeting, not
more than fifteen (15) months after the organization of the corporation. At such
meeting, directors shall be elected and any other proper business may be
transacted which is within the powers of the shareholders. Written notice of
each annual meeting shall be given to each shareholder entitled to vote either
personally or by first-class mail or other means of written communications
(which includes, without limitation and wherever used in these bylaws,
telegraphic and facsimile communication), charges prepaid, addressed to each
shareholder at the address appearing on the books of the corporation, or given
by the shareholder to the corporation for the purpose of notice. If any notice
or report addressed to the shareholder at the address of such shareholder
appearing on the books of the corporation is returned to the corporation by the
United
<PAGE>
States Postal Service marked to indicate that the United States Postal Service
is unable to deliver the notice or report to the shareholder at such address,
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available for the shareholder upon written
demand of the shareholder at the principal executive office of the corporation
for a period of one year from the date of the giving of the notice or report to
all other shareholders. If no address of a shareholder appears on the books of
the corporation or is given by the shareholder to the corporation, notice is
duly given to him if sent by mail or other means of written communication
addressed to the place where the principal executive office of the corporation
is located or if published at least once in a newspaper of general circulation
in the county in which said principal executive office is located.
All such notices shall be given to each shareholder entitled thereto
not less than ten (10) days nor more than sixty (60) days before each annual
meeting. Any such notice shall be deemed to have been given at the time when
delivered personally or deposited in the United States mail or delivered to a
common carrier for transmission to the recipient or actually transmitted by the
person giving the notice by electronic means to the recipient or sent by other
means of written communication. An affidavit of mailing of any such notice in
accordance with the foregoing provisions, executed by the secretary, assistant
secretary or transfer agent of the corporation shall be prima facie evidence of
the giving of the notice.
Such notices shall state:
(a) The place, date and hour of the meeting;
(b) Those matters which the board, at the time of the mailing of the
notice, intends to present for action by the shareholders;
(c) If directors are to be elected, the names of nominees intended
at the time of the notice to be presented by management for election;
(d) The general nature of a proposal, if any, to take action with
respect to the approval of (i) a contract or other transaction with an
interested director, (ii) an amendment of the articles of incorporation,
(iii) a reorganization of the corporation as defined in section 181 of the
California General Corporation Law (the "General Corporation Law"), (iv) a
voluntary dissolution of the corporation, or (v) a distribution in
dissolution other than in accordance with the rights of outstanding
preferred shares, if any; and
(e) Such other matters, if any, as may properly come before the
meeting or may be expressly required by statute.
Section 3. Special Meetings. Special meetings of the shareholders for the
----------------
purpose of taking any action permitted to be taken by the shareholders under the
General Corporation Law and the articles of incorporation of this corporation,
may be called by the chairman of the board or the president, or by the board of
directors, or by the holders of shares entitled to cast not less than ten
percent (10%) of the votes at the meeting. Upon request in writing that a
special meeting of
-2-
<PAGE>
shareholders be called for any proper purpose, directed to the chairman of the
board, president, vice president or secretary by any person (other than the
board of directors) entitled to call a special meeting of shareholders, the
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, not less than thirty-five (35) nor more than sixty (60)
days after receipt of the request. Except in special cases where other express
provision is made by statute, notice of such special meetings shall be given in
the same manner and contain the same statements as required for annual meetings
of shareholders. Notice of any special meeting shall also specify the general
nature of the business to be transacted, and no other business may be transacted
at such meeting.
Section 4. Quorum. The presence in person or by proxy of the holders of a
------
majority of the shares entitled to vote at any meeting shall constitute a quorum
for the transaction of business. The shareholders present at a duly called or
held meeting at which a quorum is present may continue to transact business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
Section 5. Adjournment. Any shareholders' meeting, annual or special,
-----------
whether or not a quorum is present, may be adjourned from time to time by the
vote of a majority of the shares, the holders of which are either present in
person or represented by proxy thereat, but in the absence of a quorum no other
business may be transacted at such meeting, except as provided in Section 4
above.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken, except that notice of the adjourned meeting shall be given
to each shareholder of record entitled to vote at an adjourned meeting in
accordance with Section 2 of this Article II if a new record date for the
adjourned meeting is fixed by the board of directors, or if the adjournment is
for more than forty-five (45) days from the date set for the original meeting.
At any adjourned meeting the corporation may transact any business which might
have been transacted at the original meeting.
Section 6. Record Date; Cumulative Voting. Unless a record date for voting
------------------------------
purposes be fixed as provided in Section 1 of Article VI of these bylaws, then,
subject to the provisions of sections 702 to 704, inclusive, of the General
Corporation Law, only persons in whose names shares entitled to vote stand on
the stock records of the corporation at the close of business on the business
day next preceding the day on which notice of the meeting is given or if such
notice is waived, at the close of business on the business day next preceding
the day on which the meeting of shareholders is held (except that the record
date for shareholders entitled to give consent to corporate action without a
meeting shall be determined in accordance with Section 8 of this Article II)
shall be entitled to receive notice of and to vote at such meeting, and such day
shall be the record date for such meeting. Any shareholder entitled to vote on
any matter may vote part of the shares in favor of the proposal and refrain from
voting the remaining shares or vote them against the proposal (other than
elections of directors), 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
-3-
<PAGE>
to all shares such shareholder is entitled to vote. Such vote may be viva vote
or by ballot; provided, however, that all elections for directors must be by
ballot upon demand made by a shareholder at any election and before the voting
begins. 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 shall constitute at least a majority of the required quorum) shall
be the act of the shareholders except as may otherwise be provided by (i)
Section 4 of this Article II, (ii) the cumulative voting provisions for the
election of directors as stated in this section below, and (iii) the General
Corporation Law or the articles of incorporation of this corporation (including
without limitation the provision that, upon the vote of the holder or holders of
shares representing fifty percent or more of the voting power of this
corporation, this corporation may elect voluntarily to wind up and dissolve).
Subject to the requirements of the next sentence, every shareholder entitled to
vote at any election for directors may cumulate his 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 his shares are normally entitled, or distribute his
votes on the same principle among as many candidates as he shall think fit. No
shareholder shall be entitled to cumulate votes unless such candidate or
candidates' names have been placed in nomination prior to the voting and the
shareholder has given notice at the meeting prior to the voting of the
shareholder's intention to cumulate his votes. If any one shareholder has given
such notice, all shareholders may cumulate their votes for candidates in
nomination. The candidates receiving the highest number of votes of shares
entitled to be voted for them, up to the number of directors to be elected,
shall be elected.
Section 7. Waiver of Notice. The transactions of any meeting of
----------------
shareholders, either annual or special, however called and noticed, and wherever
held, shall be as valid as though they had been determined at a meeting duly
held after regular call and notice, if a quorum be present either in person or
by proxy, and if, either before or after the meeting, each person entitled to
vote, not present in person or by proxy, signs a written waiver of notice or a
consent to a holding of the meeting, or an approval of the minutes thereof. The
waiver of notice, consent or approval need not specify either the business to be
transacted or the purpose of any regular or special meeting of shareholders,
except that if action is taken or proposed to be taken for approval of any of
those matters specified in subparagraph (d) of the third paragraph of Section 2
of this Article II, the waiver of notice, consent or approval shall state the
general nature of such proposal. All such waivers, consents or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
Attendance of a person at a meeting shall also constitute a waiver of
notice of such meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters required to be included in
the notice but not so included if such objection is expressly made at the
meeting.
Section 8. Action by Written Consent. Directors may be elected without a
-------------------------
meeting by a consent in writing, setting forth the action so taken, signed by
all of the persons who would be entitled to vote for the election of directors;
in addition a director may be elected at any time to fill a vacancy (other than
a vacancy created by removal) not filled by the directors by the written consent
-4-
<PAGE>
of persons holding a majority of the outstanding shares entitled to vote for the
election of directors. Notice of such election shall be given to non-consenting
shareholders if required by this Section 8.
Any other action which, under any provision of the General Corporation
Law, may be taken at a meeting of the shareholders, may be taken without a
meeting, and without notice except as hereinafter set forth, if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. All such consents shall be
filed with the secretary of the corporation and shall be maintained in the
corporate records.
Unless the consents of all shareholders entitled to vote have been
solicited in writing:
(a) Notice of any proposed shareholder approval of (i) a contract or
other transaction with an interested director; (ii) indemnification of an
agent of the corporation as authorized by Section 9 of Article IV of these
bylaws; (iii) a reorganization of the corporation as defined in section 181
of the General Corporation Law; or (iv) a distribution in dissolution other
than in accordance with the rights of outstanding preferred shares, if any,
without a meeting by less than unanimous written consent, shall be given at
least ten (10) days before the consummation of the action authorized by
such approval; and
(b) Prompt notice shall be given of the taking of any other corporate
action approved by shareholders without a meeting by less than unanimous
written consent, to those shareholders entitled to vote who have not
consented in writing. Such notices shall be given in the manner provided
in Section 2 of Article II of these bylaws.
Unless, as provided in Section 1 of Article VI of these bylaws, the
board of directors has fixed a record date for the determination of shareholders
entitled to notice of and to give such written consent, the record date for such
determination shall be (a) the day on which the first written consent is given,
when no prior action by the board of directors has been taken, or (b) the close
of business on the day the board of directors adopts the resolution relating to
such action.
Any shareholder giving a written consent, or the shareholder's
proxyholders, or a transferee of the shares or a personal representative of the
shareholder or their respective proxyholders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the secretary of the corporation.
Section 9. Proxies. Every person entitled to vote shares or execute
--------
consents shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such person or his duly authorized
agent and delivered to the secretary of the corporation. A proxy shall be deemed
executed if the shareholder's name is placed on the proxy (whether by manual
signature, typewriting, telegraphic transmission or otherwise) by the
shareholder or the shareholder's attorney in fact. Any proxy duly executed which
does not state that it is irrevocable
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shall continue in full force and effect until (i) a writing stating that the
proxy is revoked is delivered to the secretary of the corporation, (ii) a proxy
bearing a later date is executed by the person who executed the prior proxy and
is presented to the meeting, (iii) as to any meeting, by attendance at such
meeting and voting in person by the person executing the proxy or (iv) written
notice of the death or incapacity of the maker of such proxy is received by the
corporation before the vote pursuant thereto is counted; 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 revocability of a
proxy which states on its face that it is irrevocable shall be governed by the
provisions of sections 705(e) and (f) of the General Corporation Law.
Section 10. Inspectors of Election. In advance of any meeting of
----------------------
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting and any adjournment
thereof. If inspectors of election be not so appointed, the chairman of any such
meeting may, and on the request of any shareholder or his proxy shall, make such
appointment at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more shareholders or
proxies, the majority of shares represented in person or by proxy shall
determine whether one or three inspectors are to be appointed. In case any
person appointed as inspector fails to appear or fails or refuses to act, the
vacancy may and on the request of any shareholder or a shareholder's proxy
shall, be filled by appointment by the board of directors in advance of the
meeting, or at the meeting by the chairman of the meeting.
The duties of such inspectors shall be as prescribed by section 707 of
the General Corporation Law and shall include: determining the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining when the polls shall close;
determining the result; and such acts as may be proper to conduct the election
or vote with fairness to all shareholders. In the determination of the validity
and effect of proxies the dates contained on the forms of proxy shall
presumptively determine the order of execution of the proxies, regardless of the
postmark dates on the envelopes in which they are mailed.
The inspectors of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all. Any report or certificate made by the inspectors of election is prima
facie evidence of the facts stated therein.
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ARTICLE III
Board of Directors
------------------
Section 1. Powers of the Board. Subject to the provisions of the General
-------------------
Corporation Law and any limitations in the articles of incorporation and these
bylaws as to action to be authorized or approved by the shareholders, 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.
Without prejudice to such general powers, but subject to the same limitations,
it is hereby expressly declared that the board of directors shall have the
following powers:
First: To conduct, manage and control the affairs and business of the
-----
corporation and to make such rules and regulations therefor, not
inconsistent with law or with the articles of incorporation or with these
bylaws, as they may deem best;
Second: To elect and remove at pleasure the officers, agents and
------
employees of the corporation, prescribe their duties and fix their
compensation;
Third: To authorize the issue of shares of stock of the corporation
-----
from time to time upon such terms as may be lawful, in consideration of
money paid, labor done, services actually rendered to the corporation or
for its benefit or in its formation or reorganization, debts or securities
canceled, and tangible or intangible property actually received, but
neither promissory notes of the purchaser (unless adequately secured by
collateral other than the shares acquired or unless permitted by section
408 of the General Corporation Law) nor future services shall constitute
payment or part payment for the shares of the corporation;
Fourth: To borrow money and incur indebtedness for the purposes of
------
the corporation and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and
securities therefor;
Fifth: To alter, repeal or amend, from time to time, and at any time,
-----
these bylaws and any and all amendments of the same, and from time to time,
and at any time, to make and adopt such new and additional bylaws as may be
necessary and proper, subject to the power of the shareholders to adopt,
amend or repeal such bylaws, or to revoke the delegation of authority of
the directors, as provided by law or by Article VIII of these bylaws; and
Sixth: By resolution adopted by a majority of the authorized number
-----
of directors, to designate an executive and/or other committees, each
consisting of two or more directors, to serve at the pleasure of the board,
and to prescribe the manner in which proceedings of such committee shall be
conducted. The appointment of members or alternate members (who may
replace any absent member at any meeting of the committee) of a committee
requires the vote of a majority of the authorized number of directors. Any
such committee, to the extent
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provided in a resolution of the board, shall have all of the authority of
the board, except with respect to:
(i) The approval of any action for which the General
Corporation Law or the articles of incorporation also require
shareholder approval;
(ii) The filling of vacancies on the board or in any
committee;
(iii) The fixing of compensation of the directors for serving
on the board or on any committee;
(iv) The adoption, amendment or repeal of bylaws;
(v) The amendment or repeal of any resolution of the board
which by its express terms is not so amendable or repealable;
(vi) Any distribution to the shareholders, except at a rate or
in a periodic amount or within a price range determined by the board;
and
(vii) The appointment of other committees of the board or the
members thereof.
Section 2. Number of Directors. The number of directors of the corporation
-------------------
shall be not less than three (3) nor more than five (5). The exact number of
directors shall be three (3) until changed, within the limits specified above,
by a bylaw amending this Section 3.2, duly adopted by the board of directors or
by the shareholders. The indefinite number of directors may be changed, or a
definite number may be fixed without provision for an indefinite number, by a
duly adopted amendment to the articles of incorporation or by an amendment to
this bylaw duly adopted by the vote or written consent of holders of a majority
of the outstanding shares entitled to vote; provided, however, that an amendment
reducing the fixed number or the minimum number of directors to a number less
than five (5) cannot be adopted if the votes cast against its adoption at a
meeting, or the shares not consenting in the case of an action by written
consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the
outstanding shares entitled to vote thereon. No amendment may change the stated
maximum number of authorized directors to a number greater than two (2) times
the stated minimum number of directors minus one (1).
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
Section 3. Election of Directors. The directors shall be elected at each
---------------------
annual meeting of shareholders, but if any such annual meeting is not held or
the directors are not elected thereat, the directors may be elected at any
special meeting of shareholders held for that purpose. Each director, including
a director elected to fill a vacancy, shall hold office until his successor is
elected, except as otherwise provided by statute.
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Section 4. Vacancies; Resignation. A vacancy in the board of directors
----------------------
shall be deemed to exist in case of the death, resignation or removal of any
director, if the authorized number of directors be increased, or if the
shareholders fail, at any annual or special meeting of shareholders at which any
director or directors are elected, to elect the full authorized number of
directors to be voted for at that meeting. 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 has been convicted of a felony.
Vacancies in the board of directors, except for a vacancy created by
the removal of a director, may be filled by a majority of the directors then in
office, whether or not less than a quorum, or by a sole remaining director, and
each director so elected shall hold office until his successor is elected at an
annual or a special meeting of the shareholders. A vacancy in the board of
directors created by the removal of a director may only be filled by the 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 the holders of
all of the outstanding shares.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors. Any such election by
written consent other than to fill a vacancy created by removal shall require
the consent of holders of a majority of the outstanding shares entitled to vote.
Any director 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 board of directors accepts the resignation of a
director tendered to take effect at a future time, the board or the shareholders
shall have power to elect a successor to take office when the resignation is to
become effective.
No reduction of the authorized number of the directors shall have the
effect of removing any director prior to the expiration of his term of office.
ARTICLE IV
Meetings of Directors
---------------------
Section 1. Location of Meetings. Regular meetings of the board of
--------------------
directors shall be held at any place within or without the State of California
that has been designated from time to time by the board of directors. In the
absence of such designation, regular meetings shall be held at the principal
executive office of the corporation, except as provided in Section 2. Special
meetings of the board of directors may be held at any place within or without
the State of California which has been designated in the notice of the meeting,
or, if not designated in the notice or if there is no notice, at the principal
executive office of the corporation.
Section 2. Regular Meetings. Immediately following each annual meeting of
----------------
the shareholders there shall be a regular meeting of the board of directors of
the corporation at the place
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of said annual meeting or at such other place as shall have been designated by
the board of directors for the purpose of organization, election of officers and
the transaction of other business. Other regular meetings of the board of
directors shall be held without call on such date and time as may be fixed by
the board of directors; provided, however, that should any such day fall on a
legal holiday, then said meeting shall be held at the same time on the next
business day thereafter ensuing which is not a legal holiday. Notice of regular
meetings of the directors is hereby dispensed with and no notice whatever of any
such meeting need be given, provided that notice of any change in the time or
place of regular meetings shall be given to all of the directors in the same
manner as notice for special meetings of the board of directors.
Section 3. Special Meetings; Notice. Special meetings of the board of
------------------------
directors for any purpose or purposes may be called at any time by the chairman
of the board or president or, if both the chairman of the board and the
president are absent or are unable or refuse to act, by any vice president or by
any two directors. Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director, or sent by first-class
mail or telegram or facsimile transmission, charges prepaid, addressed to him at
his address as it appears upon the records of the corporation or, if it is not
so shown on the records and is not readily ascertainable, at the place at which
the meetings of the directors are regularly held. In case such notice is mailed,
it shall be deposited in the United States mail at least four (4) days prior to
the time of the holding of the meeting. In case such notice is delivered
personally, telephoned, telegraphed or sent by facsimile transmission, it shall
be delivered to the director or transmitted to the director at least forty-eight
(48) hours prior to the time of the holding of the meeting. Any notice given
personally or by telephone, telegraph or facsimile may be communicated to either
the director or to a person at the office of the director whom the person giving
the notice has reason to believe will promptly communicate it to the director.
Such deposit in the mail, delivery to a common carrier, transmission by
electronic means or delivery, personally or by telephone, as above provided,
shall be due, legal and personal notice to such directors. The notice need not
specify the place of the meeting if the meeting is to be held at the principal
executive office of the corporation, and need not specify the purpose of the
meeting.
Section 4. Quorum. Presence of a majority of the authorized number of
------
directors at a meeting of the board of directors constitutes a quorum for the
transaction of business, except as hereinafter provided. Members of the board
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. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
sections 310, 311 and 317 of the General Corporation Law. A meeting at which a
quorum is initially present may continue to transact business notwithstanding
the withdrawal of directors, provided that any action taken is approved by at
least a majority of the required quorum for such meeting. A majority of the
directors present, whether or not a quorum is present, may adjourn any meeting
to another time and place. If the meeting is adjourned for more than twenty-four
(24) hours, notice of any adjournment to another time or place (other than
adjournments until the time fixed for the next regular meeting of the board of
directors, as to which no notice is required) shall be given prior to the time
of the adjourned meeting to the directors who were not present at the time of
the adjournment.
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Section 5. Waiver of Notice. Notice of a meeting need not be given to any
----------------
director who signs a waiver of notice or a consent to holding the meeting or an
approval of the minutes thereof, whether before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to such director. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
Section 6. Action by Written Consent. 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 shall 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. Such action by written consent shall have the same
force and effect as a unanimous vote of such directors.
Section 7. Committees. The provisions of this Article IV shall also apply,
----------
with necessary changes in points of detail, to committees of the board of
directors, if any, and to actions by such committees (except for the first
sentence of Section 2 of Article IV, which shall not apply, and except that
special meetings of a committee may also be called at any time by any two
members of the committee), unless otherwise provided by these bylaws or by the
resolution of the board of directors designating such committees. For such
purpose, references to "the board" or "the board of directors" shall be deemed
to refer to each such committee and references to "directors" and "members of
the board" shall be deemed to refer to members of the committee.
Section 8. Compensation of Directors. 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 resolution of the
board.
Section 9. Indemnification. The corporation shall, to the maximum extent
---------------
permitted by the General Corporation Law, indemnify each of its agents against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was an agent of the corporation. For purposes of
this Section, an "agent" of the corporation includes any person who is or was a
director, officer, employee or other agent of the corporation, or who is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or who was a director, officer, employee or agent of a corporation
which was a predecessor of the corporation or of another enterprise at the
request of such predecessor corporation.
ARTICLE V
Officers
--------
Section 1. Designation of Officers. The officers of the corporation shall
-----------------------
be a chairman of the board or a president, or both, a secretary, and a
treasurer, who shall also be the chief financial officer of the corporation. The
corporation may also have, at the discretion of the board of directors, one or
more vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and
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such other officers as may be designated from time to time by the board of
directors. Any number of offices may be held by the same person. The officers
shall be elected by the board of directors and shall hold office at the pleasure
of such board.
Section 2. Chairman of the Board. The chairman of the board, if there be
---------------------
such officer, shall, if present, preside at all meetings of the board of
directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the board of directors or prescribed by the
bylaws. If there is not a president, the chairman of the board shall, in
addition, be the general manager and chief executive officer of the corporation
and shall have the powers and duties prescribed in Section 3 of Article V of
these bylaws.
Section 3. President. Subject to such powers and duties, if any, as may be
---------
prescribed by these bylaws or the board of directors for the chairman of the
board, if there be such officer, the president shall be the general manager and
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. He shall preside at all meetings of
the shareholders and, in the absence of the chairman of the board, or if there
be none, at all meetings of the board of directors. He shall have all of the
powers and shall perform all of the duties which are ordinarily inherent in the
office of the president, and he shall have such further powers and shall perform
such further duties as may be prescribed for him by the board of directors.
Section 4. Vice Presidents. In the absence or disability or refusal to act
---------------
of the president, the vice presidents in order of their rank as fixed by the
board of directors, or, if not ranked, the vice president designated by the
president or the board of directors, shall perform all of the duties of the
president and when so acting shall have all the powers of and be subject to all
the restrictions upon the president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them, respectively, by the board of directors or the bylaws.
Section 5. Secretary. The secretary shall keep or cause to be kept at the
---------
principal executive office of the corporation or such other place as the board
of directors may order, a book of minutes of all proceedings of the
shareholders, the board of directors and committees of the board, with the time
and place of holding, whether regular or special, and if special how authorized,
the notice thereof given, the names of those present at directors' and committee
meetings, and the number of shares present or represented at shareholders'
meetings. The secretary shall keep or cause to be kept at the principal
executive office or at the office of the corporation's transfer agent a record
of shareholders or a duplicate record of shareholders showing the names of the
shareholders and their addresses, the number of shares and classes of shares
held by each, the number and date of certificates issued for the same and the
number and date of cancellation of every certificate surrendered for
cancellation. The secretary or an assistant secretary, or, if they are absent or
unable or refuse to act, any other officer of the corporation, shall give or
cause to be given notice of all the meetings of the shareholders, the board of
directors and committees of the board required by the bylaws or by law to be
given, and he shall keep the seal of the corporation, if any, in safe custody
and shall have such other powers and perform such other duties as may be
prescribed by the board of directors or by the bylaws.
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Section 6. Assistant Secretary. It shall be the duty of the assistant
-------------------
secretaries to assist the secretary in the performance of his duties and
generally to perform such other duties as may be delegated to them by the board
of directors.
Section 7. Treasurer. The treasurer shall be the chief financial officer
---------
of the corporation and shall keep and maintain, or cause to be kept and
maintained, adequate and correct books and records of account of the
corporation. He shall receive and deposit all moneys and other valuables
belonging to the corporation in the name and to the credit of the corporation
and shall disburse the same only in such manner as the board of directors or the
appropriate officers of the corporation may from time to time determine, shall
render to the president and the board of directors, whenever they request it, an
account of all his transactions as treasurer and of the financial condition of
the corporation, and shall perform such further duties as the board of directors
may require.
Section 8. Assistant Treasurer. It shall be the duty of the assistant
-------------------
treasurers to assist the treasurer in the performance of his duties and
generally to perform such other duties as may be delegated to them by the board
of directors.
ARTICLE VI
Miscellaneous
-------------
Section 1. 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 and to vote at any meeting of shareholders or entitled to give consent
to corporate action in writing without a meeting, to receive any report, to
receive any dividend or distribution, or any allotment of rights, or to exercise
rights in respect to any change, conversion, or exchange of shares. The record
date so fixed shall be not more than sixty (60) days nor less than ten (10) days
prior to the date of any meeting, nor more than sixty (60) days prior to any
other event for the purposes of which it is fixed. When a record date is so
fixed, only shareholders of record at the close of business on that date are
entitled to notice of and to vote at any such meeting, to give consent without a
meeting, to receive any report, to receive a 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 by statute or in the articles of
incorporation or bylaws.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice
of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the business day
next preceding the day on which the meeting is held.
(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 has been taken, shall be the day on which the first
written consent is given.
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(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
adopts the resolution relating thereto, or the sixtieth (60th) day prior to
the date of such other action, whichever is later.
Section 2. Inspection of Corporate Records. The accounting books and
-------------------------------
records, the record of shareholders, and minutes of proceedings of the
shareholders and the board and committees of the board of this corporation and
any subsidiary of this corporation shall be open to inspection upon the 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 the holder
of such voting trust certificate. Such inspection by a shareholder or holder of
a voting trust certificate may be made in person or by agent or attorney, and
the right of inspection includes the right to copy and make extracts.
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the corporation and its subsidiary corporations.
Such inspection by a director may be made in person or by agent or attorney and
the right of inspection includes the right to copy and make extracts.
Section 3. Certificates 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 treasurer or an assistant treasurer or the secretary
or any 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.
Any such certificate shall contain such legend or other statement as
may be required by the California Corporate Securities Law of 1968, the Federal
securities laws, and any agreement between the corporation and the issuee
thereof.
Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the board of directors or the bylaws may
provide; provided, however, that any such certificate so issued prior to full
payment shall state on the face thereof the amount remaining unpaid and the
terms of payment thereof.
Section 4. Representation of Shares of Other Corporations. The president
----------------------------------------------
or any vice president or the secretary or any assistant secretary of this
corporation is authorized to vote, represent and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted to said officers to vote or represent on behalf of this corporation any
and all shares held by this corporation in any other corporation or corporations
may be exercised either by such officers in person or by any other person
authorized so to do by proxy or power of attorney duly executed by said
officers.
Section 5. Inspection of Bylaws. The corporation shall keep in its
--------------------
principal executive office in California, or if its principal executive office
is not in California, then at its principal business office in California (or
otherwise provide upon written request of any shareholder), the
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original or a copy of the bylaws as amended to date, certified by the secretary,
which shall be open to inspection by the shareholders at all reasonable times
during office hours.
Section 6. Construction and Definitions. Unless the context otherwise
----------------------------
requires, the general provisions, rules of construction and definitions
contained in the General Corporation Law shall govern the construction of these
bylaws. Without limiting the generality of the foregoing, the masculine gender
includes the feminine and neuter, the singular number includes the plural and
the plural number includes the singular, and the term "person" includes a
corporation as well as a natural person.
ARTICLE VII
Amendments
----------
Section 1. Amendment by Shareholders. New bylaws may be adopted or these
-------------------------
bylaws may be amended or repealed by the affirmative vote or written consent of
a majority of the outstanding shares entitled to vote, except as otherwise
provided by law or by the articles of incorporation or these bylaws.
Section 2. Amendment by Board of Directors. Subject to the right of
-------------------------------
shareholders as provided in Section 1 of this Article to adopt, amend or repeal
bylaws, and except as otherwise provided by law or by the articles of
incorporation, bylaws (other than a bylaw or amendment thereof changing the
authorized maximum or minimum number of directors) may be adopted, amended or
repealed by the board of directors.
ARTICLE VIII
Annual and Other Reports
------------------------
Section 1. Annual Report to Shareholders.
-----------------------------
(a) So long as the corporation shall have fewer than one hundred
shareholders of record (determined as provided in section 605 of the
General Corporation Law), the requirement of section 1501(a) of said law
that an annual report be sent to the shareholders is expressly waived.
(b) Notwithstanding subdivision (a) of this Section, the corporation
shall, upon the written request of any shareholder made more than one
hundred twenty (120) days after the close of a fiscal year, deliver or mail
to the person making the request, within thirty (30) days thereafter, the
financial statements required by section 1501(a) of the General Corporation
Law.
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Section 2. Request for Financial Statements. A shareholder or shareholders
--------------------------------
holding at least five percent (5%) of the outstanding shares of any class of the
corporation may make a written request to the corporation for an income
statement of the corporation for the three-month, six-month or nine-month period
of the current fiscal year ended more than thirty (30) days prior to the date of
the request and a balance sheet of the corporation as of the end of such period
and, in addition, if no annual report for the last fiscal year has been sent to
shareholders, the statements referred to in section 1501(a) of the General
Corporation Law for the last fiscal year. The corporation shall deliver or mail
the statements to the person making the request within thirty (30) days
thereafter. A copy of any such statements shall be kept on file in the principal
executive office of the corporation for twelve (12) months and they shall be
exhibited at all reasonable times to any shareholder demanding an examination of
them or a copy shall be mailed to such shareholder. The quarterly income
statements and balance sheets referred to in this Section shall be accompanied
by the report thereon, if any, of any independent accountants engaged by the
corporation or the certificate of an authorized officer of the corporation that
such financial statements were prepared without audit from the books and records
of the corporation.
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CERTIFICATE OF SECRETARY
------------------------
I, the undersigned, hereby certify:
1. That I am the duly elected, acting and qualified Secretary of
Viavision Systems, Inc., a California corporation; and
2. That the foregoing Bylaws constitute the Bylaws of such corporation as
duly adopted by action of the sole incorporator of the corporation duly taken on
October 31, 1996 approved by action of the board of directors of the corporation
duly taken on November 9, 1996.
Dated: November 9, 1996
/s/ Gordon Campbell
___________________________________
Gordon Campbell
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<PAGE>
Exhibit 4.2
SECOND AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
-------------------------------------------------------
This Second Amended and Restated Investors' Rights Agreement (this
"Agreement") is made and entered into as of April 30, 1999 by and among Cobalt
Networks, Inc. (the "Company"), the undersigned holders of capital stock or
warrants to purchase capital stock of the Company (the "Investors"), and the
undersigned purchasers of Series C Preferred Stock of the Company (the
"Purchasers"). The Investors, other holders of registration and other rights
under the Prior Agreement (as defined below), and the Purchasers are sometimes
collectively referred to as the "Shareholders". The names of the Investors and
the Purchasers are set forth on the Schedule of Investors and Purchasers
attached hereto as Schedule A.
RECITALS:
--------
A. The Company will issue to the Purchasers an aggregate of up to
9,813,507 shares of Series C Preferred Stock pursuant to a Series C Preferred
Stock Purchase Agreement dated as of April 30, 1999 (the "Series C Agreement").
B. The Purchasers have required that certain registration and other
rights be granted to them with respect to the securities of the Company to be
acquired.
C. The Investors hold a majority of the shares of Series A Preferred
Stock of the Company, or warrants to purchase shares of Series A Preferred Stock
and Series B Preferred Stock of the Company, enjoying certain registration
rights and rights regarding receipt of information pursuant to an Amended and
Restated Investors' Rights Agreement dated as of July 2, 1998 (the "Prior
Agreement"). The Investors wish to terminate all rights under the Prior
Agreement and have such rights superseded in their entirety by the rights
provided under this Agreement and wish to have this Agreement supersede and
replace the Prior Agreement in its entirety.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, the parties agree as follows:
1. Restrictions on Transfer; Registration Rights.
---------------------------------------------
1.1 Definitions. As used herein:
-----------
(a) The terms "register", "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended (the "Securities Act"),
and the declaration or ordering of the effectiveness of such registration
statement.
(b) For the purposes hereof, the term "Registrable Securities"
means shares of (i) any and all Common Stock of the Company issued or issuable
upon conversion of shares of the Series A Preferred Stock of the Company issued
pursuant to the Series A Preferred Stock Purchase
<PAGE>
Agreement dated as of August 29, 1997 between the Company and the parties
thereto, which have not been previously resold to the public in a registered
public offering, (ii) any and all Common Stock of the Company issued or issuable
upon conversion of up to 163,500 shares of the Series A Preferred Stock of the
Company issued or issuable upon exercise of the warrants to purchase shares of
Series A Preferred Stock listed on Exhibit A, which have not been previously
resold to the public in a registered public offering, (iii) any and all Common
Stock of the Company issued or issuable upon conversion of shares of the Series
B Preferred Stock of the Company issued pursuant to the Series B Preferred Stock
Purchase Agreement dated July 2, 1998, which have not been previously resold to
the public in a registered public offering, (iv) any and all Common Stock of the
Company issued or issuable upon conversion of up to 41,612 shares of the Series
B Preferred Stock of the Company issued or issuable upon exercise of certain
warrants issued in connection with the sale of the Series B Preferred Stock (the
"Bridge Financing Warrants"), which have not been previously resold to the
public in a registered public offering, (v) any and all Common Stock of the
Company issued or issuable upon conversion of up to 320,945 shares of the Series
C Preferred Stock of the Company issued or issuable upon exercise of certain
warrants issued in connection with the sale of the Series C Preferred Stock (the
"C Bridge Financing Warrants"), which have not been previously resold to the
public in a registered public offering, (vi) any and all Common Stock of the
Company issued or issable upon exercise of certain warrants issued to the
placement agent of the Company in connection with the sale of the Series C
Preferred Stock (the "Placement Agent's Warrants"), (vii) any and all Common
Stock of the Company issued or issuable upon conversion of shares of the Series
C Preferred Stock of the Company issued pursuant to the Series C Agreement,
which have not been previously resold to the public in a registered public
offering, (viii) stock issued with respect to or in any exchange for or in
replacement of stock included in subparagraphs (i), (ii), (iii), (iv), (v),
(vi), (vii) and (viii) above which have not been previously resold to the public
in a registered public offering, and (ix) stock issued in respect of the stock
referred to in (i), (ii), (iii), (iv), (v), (vi), (vii) and (viii) above as a
result of a stock split, stock dividend or the like, which have not been
previously resold to the public in a registered public offering.
(c) The terms "Holder" or "Holders" mean any person or persons to
whom Registrable Securities were originally issued and who execute this
Agreement or qualifying transferees under Section 3 hereof who hold Registrable
Securities.
(d) The term "Initiating Holders" means any Holder or Holders of in
the aggregate at least 40% of the Registrable Securities which have not been
previously resold to the public in a registered public offering.
(e) The term "Majority Participating Holders" means Holders of a
majority of Registrable Securities proposed to be included in any particular
registration.
1.2 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
the Initiating Holders a written request that the Company effect any
registration with respect to all or a part of the Registrable Securities, the
Company will:
(i) within ten (10) days after its receipt thereof give written
notice of the proposed registration to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect such
registration (including, without limitation, preparation of a registration
statement and prospectus complying
-2-
<PAGE>
as to form with the requirements of the Securities Act, the execution of an
undertaking to file post-effective amendments, appropriate qualifications
under the applicable blue sky or other state securities laws and
appropriate compliance with exemptive regulations issued under the
Securities Act and any other governmental requirements or regulations) as
may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Holder's or Holders'
Registrable Securities as is specified in such request, together with all
or such portion of the Registrable Securities of any Holder or Holders
joining in such request as are specified in a written request given within
twenty (20) days after receipt of such written notice from the Company;
provided, that the Company shall not be obligated to take any action to
effect such registration pursuant to this Section 1.2:
(A) Prior to the earlier of (1) June 30, 2001 or (2) six
months following the effective date of the Company's first registered
offering to the general public of its securities for its own account;
or
(B) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process
in effecting such registration; or
(C) After the Company has effected two such registrations
pursuant to this subsection 1.2(a) and such registration has been
declared or ordered effective for the period set forth in Section
1.6(a); or
(D) If the Registrable Securities to be registered have an
anticipated offering price to the public of less than $10,000,000.
Subject to the foregoing clauses (A) through (D), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practical, but in any event within ninety (90) days after
receipt of the request or requests of the Initiating Holders; provided, however,
that if the Company shall furnish to such Holders a certificate signed by the
President or Chief Executive Officer of the Company stating that in the good
faith judgment of the Board of Directors it would materially interfere with the
Company and its business for such registration statement to be filed at the date
filing would be required and it is therefore essential to defer the filing of
such registration statement, the Company shall be entitled to delay the filing
of such registration statement not more than once for an additional period of up
to one hundred twenty (120) days.
(b) Underwriting. If the Majority Participating 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 Section 1.2 and the Company shall include such information in the
written notice referred to in subsection 1.2(a)(i). The right of any Holder to
registration pursuant to Section 1.2 shall be conditioned upon such Holder's
participation 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) to the extent
provided herein. The Company shall (together with all Holders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the Holders
participating in such registration, provided, however, that the managing
underwriter shall be approved by
-3-
<PAGE>
the Company, which approval shall not be unreasonably withheld. Notwithstanding
any other provision of this Section 1.2, if the underwriter advises the Majority
Participating Holders in writing that marketing factors require a limitation of
the number of shares to be underwritten, the Majority Participating Holders
shall so advise all Holders of Registrable Securities who have elected to
participate in such offering, and the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated
among all such Holders thereof in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by such Holders. If any Holder
of Registrable Securities disapproves of the terms of the underwriting, he may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the Majority Participating Holders. Any Registrable Securities which are
excluded from the underwriting by reason of the underwriter's marketing
limitation or withdrawn from such underwriting shall be withdrawn from such
registration. If the underwriter has not limited the number of Registrable
Securities to be underwritten, the Company may include securities for its own
account (or for the account of employees and other holders, at the Company's
sole discretion) in such registration if the underwriter so agrees and if the
number of Registrable Securities which would otherwise have been included in
such registration and underwriting will not thereby be limited by the
underwriter.
1.3 Company Registration.
--------------------
(a) Right to Include. If at any time or from time to time the
----------------
Company proposes to register any of its securities for its own account or the
account of any of its shareholders other than the Holders (other than a
registration relating solely to employee stock option or purchase plans, or a
registration relating solely to an SEC Rule 145 transaction, or a registration
on any other form, (other than Form S-1, S-2, S-3, SB-2 or any successor to such
form) which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of
Registrable Securities), the Company will:
(i) promptly give to each Holder written notice thereof;
and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance with applicable
laws), and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests made within twenty
(20) days after receipt of such written notice from the Company by any
Holder or Holders to be included in any such registration, except as set
forth in subsection 1.3(b) below.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to subsection 1.3(a)(i). In such event the right of any Holder to
registration pursuant to Section 1.3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. 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 in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 1.3, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the underwriter may limit the number of
Registrable Securities to be included in the registration and underwriting (i)
completely, in the case of the Company's initial public offering, or (ii) to not
less than 20% of the shares to be included in any other registration that is
solely for the account of the Company; provided, that in each case, the
registration does not include shares of any other selling
-4-
<PAGE>
shareholder In the event of a cutback by the underwriters of the number of
Registrable Securities to be included in the registration and underwriting, the
Company shall advise all Holders of Registrable Securities which would otherwise
be registered and underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all of such Holders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders. If any Holder disapproves of the terms of any such underwriting, he may
elect to withdraw therefrom by written notice to the Company and the
underwriter. Any Registrable Securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
1.4 Form S-3. After its initial public offering, the Company shall
--------
use its best efforts to qualify for registration on Form S-3 or any comparable
or successor form. After the Company has qualified for the use of Form S-3,
Holders of the outstanding Registrable Securities shall have the right to
request unlimited registrations on Form S-3 (such requests shall be in writing
and shall state the number of shares of Registrable Securities to be disposed of
and the intended method of disposition of Shares by such Holders), subject only
to the following:
(a) The Company shall not be required to effect a registration
pursuant to this Section 1.4 within one hundred twenty (120) days of the
effective date of any registration referred to in Sections 1.2 or 1.3 above.
(b) The Company shall not be required to effect a registration
pursuant to this Section 1.4 unless the Holder or Holders requesting
registration propose to dispose of shares of Registrable Securities having an
aggregate disposition price (before deduction of underwriting discounts and
expenses of sale) of at least $1,500,000.
(c) The Company shall not be required to effect more than two
(2) registrations pursuant to this Section 1.4 in any consecutive twelve (12)
month period.
The Company shall promptly give written notice to all Holders of
Registrable Securities of the receipt of a request for registration pursuant to
this Section 1.4 and shall provide a reasonable opportunity for other Holders to
participate in the registration, provided that if the registration is for an
underwritten offering, the terms of subsection 1.2(b) shall apply to all
participants in such offering. Subject to the foregoing, the Company will use
its best efforts to effect as promptly as practicable the registration of all
shares of Registrable Securities on Form S-3 to the extent requested by the
Holder or Holders thereof for purposes of disposition; provided, however, that
if the Company shall furnish to such Holders a certificate signed by the
President or Chief Executive Officer of the Company stating that in the good
faith judgement of the Board of Directors it would materially interfere with the
Company and its business for such registration statement to be filed at the date
filing would be required and it is therefore essential to defer the filing of
such registration statement, the Company shall be entitled to delay the filing
of such registration statement for such a period that the Board determines in
good faith to be necessary, which in no event shall exceed, one hundred twenty
(120) days. Any registration pursuant to this Section 1.4 shall not be counted
as a registration pursuant to Section 1.2.
1.5 Expenses of Registration. All expenses incurred in connection
------------------------
with any registration, qualification or compliance pursuant to this Section 1,
including without limitation, all registration, filing and qualification fees,
printing expenses, exchange or NASDAQ listing fees, fees and disbursements of
counsel for the Company and fees and expenses of any special audits incidental
to or required by such registration, shall be borne by the Company except as
follows:
-5-
<PAGE>
(a) The Company shall not be required to pay for expenses of any
registration proceeding begun pursuant to Section 1.2 or 1.4, the request for
which has been subsequently withdrawn by the Majority Participating Holders
(other than as a result of the Company's deferral, in which such case, such
expenses shall be borne by the Holders requesting such withdrawal); provided,
however, that in lieu of paying such expenses the Majority Participating Holders
may elect to forfeit their right to request one registration pursuant to Section
1.2; provided further, however, that if at the time of such withdrawal the
Holders have learned of a material adverse change in the business, condition or
prospects of the Company from that known to the Holders at the time of their
request and have withdrawn the request with reasonable promptness following
disclosure by the Company of such change, then the Holders shall not be required
to pay any such expenses and shall retain their rights to such registration
pursuant to Section 1.2.
(b) The Company shall not be required to pay fees of legal counsel of
a Holder except for a single counsel acting on behalf of all selling Holders
(which counsel shall also be counsel to the Company unless counsel to the
Company has a conflict of interest with respect to the representation of any
selling Holder or the underwriters object to the selling Holders' representation
by Company counsel).
(c) The Company shall not be required to pay underwriters' fees,
discounts or commissions relating to the Registrable Securities.
1.6 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder participating therein advised in writing as to
the initiation of each registration, qualification and compliance and as to the
completion thereof. At its expense the Company will:
(a) Keep such registration, qualification or compliance pursuant to
Sections 1.2, 1.3 or 1.4 effective for a period of one hundred eighty (180) days
or until the Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs;
(b) 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;
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of the Registrable Securities owned by them;
(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 or 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;
-6-
<PAGE>
(e) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such United States jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(f) Cause all such Registrable Securities registered under this
Section 1 to be listed on each securities exchange or reporting system on which
similar securities issued by the Company are then listed; and
(g) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 1, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with such registration, if such securities are being sold through underwriters
or, if such securities are not being sold through underwriters, on the date that
the registration statement with respect to such securities becomes effective,
(i) an opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities,
and (ii) a letter dated such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities.
1.7 Indemnification.
---------------
(a) The Company will indemnify and hold harmless each Holder of
Registrable Securities, each of its officers, directors and partners, and each
person controlling such Holder, with respect to which such registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter of the
Registrable Securities held by or issuable to such Holder, against all claims,
losses, expenses, damages and liabilities (or actions in respect thereto)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any preliminary or final prospectus, offering
circular or other document (including any related registration statement,
notification or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation or alleged violation by the Company
relating to action or inaction required of the Company in connection with the
Securities Act, any rule or regulation promulgated under the Securities Act or
any state securities law applicable to the Company and will reimburse (on an as
incurred basis) each such Holder, each of its officers, directors and partners,
and each person controlling such Holder, each such underwriter and each person
who controls any such underwriter, for any reasonable legal and any other
expenses incurred in connection with investigating, defending or settling any
such claim, loss, damage, liability or action; provided, however, that the
Company will not be liable to a Holder to the extent that any such claim, loss,
damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company in an
instrument duly executed by such Holder specifically for use therein and will
not be liable to an underwriter to the extent that any such claim, loss, damage
or liability arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company in an instrument duly executed
by such underwriter specifically for use therein, and provided further that the
agreement of the Company to indemnify any
-7-
<PAGE>
underwriter and any person who controls such underwriter contained herein with
respect to any such preliminary prospectus shall not inure to the benefit of any
underwriter, from whom the person asserting any such claim, loss, damage,
liability or action purchased the stock which is the subject thereof, if at or
prior to the written confirmation of the sale of such stock, a copy of the
prospectus (or the prospectus as amended or supplemented) was not sent or
delivered to such person, excluding the documents incorporated therein by
reference, and the untrue statement or omission of a material fact contained in
such preliminary prospectus was corrected in the prospectus (or the prospectus
as amended or supplemented).
(b) Each Holder will, if Registrable Securities held by or issuable
to such Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify and hold harmless the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company within the meaning of the Securities Act, and each other
such Holder, each of its officers, directors and partners and each person
controlling such Holder, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) by such Holder of a material fact
contained in any preliminary or final prospectus, offering circular or other
document (including any related registration statement, notification or the
like) incident to any such registration, qualification or compliance or based on
any omission (or alleged omission) by such Holder to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse (on an as incurred basis) the Company, such
Holders, such directors, officers, partners, persons or underwriters for any
reasonable legal or any other expenses incurred in connection with
investigating, defending or settling 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) by such Holder or omission (or alleged
omission) by such Holder 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 in an instrument duly executed by
such Holder specifically for use therein, and provided further that the
agreement of such Holder to indemnify any underwriter and any person who
controls such underwriter contained herein with respect to any such preliminary
prospectus shall not inure to the benefit of any underwriter, from whom the
person asserting any such claim, loss, damage, liability or action purchased the
stock which is the subject thereof, if at or prior to the written confirmation
of the sale of such stock, a copy of the prospectus (or the prospectus as
amended or supplemented) was not sent or delivered to such person, excluding the
documents incorporated therein by reference, and the untrue statement or
omission of a material fact contained in such preliminary prospectus was
corrected in the prospectus (or the prospectus as amended or supplemented).
Notwithstanding the foregoing, in no event shall the indemnification provided by
any Holder hereunder exceed the gross proceeds received by such Holder for the
sale of such Holder's securities pursuant to such registration.
(c) Each party entitled to indemnification under this Section 1.7
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual know ledge of any claim as to which indemnity may be sought. The
Indemnified Party shall promptly permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom, provided that
counsel for the Indemnifying Party, who shall conduct the defense of such claim
or litigation, shall be approved by the Indemnified Party (whose approval shall
not be unreasonably be withheld). The Indemnified Party may participate in such
defense and hire counsel at such party's own expense (or at the Indemnifying
Party's expense, in the event that a conflict of interest exists between
Indemnifying Party's counsel and the Indemnified Party's counsel). The failure
of any Indemnified Party to give notice as provided herein
-8-
<PAGE>
shall not relieve the Indemnifying Party of its obligations hereunder, unless,
and only to the extent that, such failure is materially prejudicial to an
Indemnifying Party's ability to defend such action. No Indemnifying Party, in
the defense of any such claim or litigation, shall, except with the consent of
the Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation. Any Indemnified Party shall
reasonably cooperate with the Indemnifying Party in the defense of any claim or
litigation brought against such Indemnified Party.
If the indemnification provided for in this Section 1.7 is for any reason
not available to an Indemnified Party with respect to any loss, liability,
claim, damage, or expense referred to therein, then the Indemnifying Party, in
lieu of indemnifying such Indemnified Party hereunder, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such loss,
liability, claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and of the
Indemnified Party on the other in connection with the statements or omissions
that resulted in such loss, liability, claim, damage, or expense as will as any
other relevant equitable considerations. The relative fault of the Indemnifying
Party and of the Indemnified Party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
1.8 Lock-Up Provision. Upon receipt of a written request by the
-----------------
Company or by its underwriters, the Holders shall not sell, sell short, grant an
option to buy, or otherwise dispose of shares of the Company's Common Stock or
other securities convertible into or exchangable for the Company's Common Stock,
in each case where such securities have been acquired by the Holders prior to
the initial registration of the Company's Common Stock (except for any such
shares included in the registration) for a period of one hundred eighty (180)
days following the effective date of the initial registration of the Company's
securities (other than any transfer of shares as a bona fide gift or gifts, or
by will or intestacy or, if the Holder is a partnership or corporation, any
distribution by such partnership or corporation to its partners or
shareholders); provided, however, that such Holder shall have no obligation to
enter into the agreement described in this Section 1.8 unless all executive
officers and directors of the Company and all other Holders and holders of other
registration rights from the Company enter into similar agreements. The Company
may impose stop-transfer instructions with respect to the shares (or securities)
subject to the foregoing restriction until the end of said one hundred eighty
(180) day period.
1.9 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall promptly furnish to the Company
such information regarding such Holder or Holders and the distribution proposed
by such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to herein.
1.10 Rule 144 Reporting.
------------------
(a) With a view to making available to Holders of Registrable
Securities the benefits of certain rules and regulations of the Securities and
Exchange Commission (the "SEC") which may permit the sale of the Registrable
Securities to the public without registration, at all times after ninety (90)
days after the effective date of the first registration filed by the Company for
an offering of its securities to the general public the Company agrees to:
-9-
<PAGE>
(i) Make and keep public information available, as those terms
are understood and defined in SEC Rule 144 under the Securities Act;
(ii) File with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); and
(iii) So long as a Holder owns any Registrable Securities, to
furnish to such Holder forthwith upon such Holder's request a written
statement by the Company as to its compliance with the reporting
requirements of said Rule 144 (at any time after ninety (90) days after the
effective date of the first registration statement filed by the Company for
an offering of its securities to the public), and of the Securities Act and
the Exchange Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as
such Holder may reasonably request in availing itself of any rule or
regulation of the SEC allowing such Holder to sell any such securities
without registration.
1.11 Limitations on Subsequent Registration Rights. From and after
---------------------------------------------
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company which would allow such holder or prospective holder (a) to
include such securities in any registration filed under Section 1.2, 1.3 or 1.4
hereof, unless under the terms of such agreement, such holder or prospective
holder may include such securities in any such registration only to the extent
that the inclusion of its securities will not reduce the amount of the
Registrable Securities of the Holders which is included or (b) to make a demand
registration which (i) could result in such registration statement being
declared effective prior to the earlier of either of the dates set forth in
subsection 1.2(a)(ii)(A) or (ii) would result in the registration of such
parties' securities to the exclusion of any securities requested to be included
in such registration under Section 1.3 hereof.
1.12 Termination. The rights of a Holder under this Agreement shall
-----------
terminate on the earlier of the date on which a Holder can sell all of its
Registrable Securities without registration pursuant to Rule 144 within a three
(3) month period, unless at the time the Holder's Registrable Securities
represent more than 1% of the outstanding capital stock of the Company or five
years following the effective date of the Company's first registered offering to
the general public of its securities for its own account.
1.13 Cooperation of Other Purchasers. (a) Each Purchaser agrees to
-------------------------------
cooperate with the Company in all reasonable respects in complying with the
terms and provisions of the Sideletter between the Company and Chase Venture
Capital Associates, LP, ("Investor"), as amended by the Amendment thereto dated
as of the date hereof, a copy of which Sideletter Amendment is attached hereto
as Exhibit B, regarding small business matters, including without limitation,
---------
voting to approve amending the Company's Articles of Incorporation, the
Company's bylaws or this Agreement in a manner reasonably requested by Investor
or any Regulated Holder (as defined in the Sideletter) entitled to make such
request pursuant to the Sideletter. Anything contained in this Section 1.13 to
the contrary notwithstanding, no Purchaser shall be required under this Section
1.13 to take any action that would adversely affect in any material respect such
Purchaser's rights under this Agreement or as a shareholder of the Company.
-10-
<PAGE>
(b) Covenant Not to Amend. The Company and each Purchaser agree not
---------------------
to amend or waive the voting or other provisions of the Company's Articles of
Incorporation, the Company's bylaws or this Agreement if such amendment or
waiver would cause any Regulated Holder to have a Regulatory Problem (as defined
in the Sideletter), provided that any such Purchaser notifies the Company that
it would have a Regulatory Problem promptly after it has notice of such
amendment or waiver.
2. Covenants of the Company.
------------------------
2.1 Financial Information. So long as a Shareholder and its
---------------------
affiliates (as the term "affiliate" is defined under Regulation D of the
Securities Act) continue to hold at least 50,000 shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or shares of Common
Stock issued upon conversion of Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock (collectively, the "Securities"), the Company
will furnish the following information to the Shareholder:
(a) Annual Financials. As soon as practicable after the end of
-----------------
each fiscal year, and in any event within one hundred twenty (120) days
thereafter, the Company will provide the Shareholder with consolidated balance
sheets of the Company and its subsidiaries, if any, as at the end of such fiscal
year, and consolidated statements of operations and consolidated statements of
cash flows of the Company and its subsidiaries, if any, for such year, prepared
in accordance with generally accepted accounting principles, all in reasonable
detail, certified by independent public auditors of recognized national standing
selected by the Company, and accompanied by management's discussion and analysis
thereof.
(b) Quarterly Financials. As soon as practicable after the end
--------------------
of each fiscal quarter (except the fourth fiscal quarter), and in any event
within forty-five (45) days of each fiscal quarter, the Company will provide the
Shareholder with consolidated balance sheets of the Company and its
subsidiaries, if any, as at the end of such fiscal month or quarter, and
consolidated statements of operations and consolidated statements of cash flows
of the Company and its subsidiaries, if any, for such month or quarter, prepared
in accordance with generally accepted accounting principles (except for required
footnotes and for minor year-end adjustments), all in reasonable detail,
certified by the chief financial officer of the Company and accompanied by
management's discussion and analysis thereof.
2.2 Additional Information. So long as a Shareholder (together with
----------------------
permitted assigns and its affiliates (as the term "affiliate" is defined under
Regulation D of the Securities Act) continues to hold at least 2.5% of the
Company's outstanding capital stock, such Shareholder shall be entitled to visit
and inspect the Company's properties to examine its books of account and to
discuss its affairs with management personnel, all at such reasonable times
during normal business hours as may be requested by such Shareholder.
2.3 Observer Rights. As long as Chase Venture Capital Associates, LP
---------------
and its affiliates (as the term "affiliate" is defined in Regulation D of the
Securities Act) hold at least 250,000 shares of Preferred Stock, it shall have
the right to attend all meetings of the Board of Directors in a nonvoting
observer capacity, to receive notice of such meetings and to receive the
information provided by the Company to the Board of Directors.
2.4 Confidentiality of Information. All information obtained by a
------------------------------
Shareholder pursuant to Section 2.1, 2.2 and 2.3 shall be deemed proprietary and
confidential to the Company and will not be disclosed by a Shareholder to any
person or entity without the prior written consent of the
-11-
<PAGE>
Company. This restriction shall not apply to information which (a) is
previously, or becomes, known to the public, except by breach of this Agreement
by such Shareholder or other similar agreement by such Shareholder regarding
confidential information, (b) was in Shareholder's possession at the time of
disclosure without obligation of confidentiality, (c) was received by the
Shareholder from a third party without similar restrictions and, to the
knowledge of such Shareholder, without breach of any obligation of
confidentiality owed to the disclosing party, (d) was developed independently by
the Shareholder without reference to the Company's confidential information, or
(e) which is disclosed pursuant to a governmental regulation or order, provided
that prior to disclosure the disclosing party notifies the Company of such
proposed disclosure in order to permit the Company to seek confidential
treatment of such information.
2.5 Employee Stock Purchase and Option Agreements. The Company
---------------------------------------------
agrees that it will utilize, in connection with any stock purchase or stock
option agreements entered into with officers, directors, employees or
consultants pursuant to equity incentive plans adopted by the Board of Directors
of the Company, vesting provisions providing in substance that such stock or
options shall vest at the rate of 25% of such shares one year after the option
grant date (which will be no earlier than the date of hire or appointment) and
1/48th of the shares monthly thereafter; provided, however, such vesting rate
may be changed or accelerated if unanimously approved by the Company's Board of
Directors. In addition, each such stock purchase or stock option agreement
shall contain a "market stand-off" provision, pursuant to which the recipient of
stock pursuant to such agreement will agree, upon request, not to sell or
otherwise transfer any securities of the Company during a period of up to one
hundred eighty (180) days following the effective date of the initial
registration statement pursuant to which the Company registers shares of its
Common Stock for sale to the public and any other registration statement filed
within three (3) years of such initial statement.
2.6 Directors and Officers Liability Insurance. The Company shall
------------------------------------------
procure and maintain adequate directors and officers liability insurance, to the
extent available, for the protection of the Company's directors.
2.7 Net Worth. The Company will not suffer or permit Net Worth
---------
(defined below) at any time to be less than $1,000,000. "Net Worth" means the
excess (as determined in accordance with generally accepted accounting
principles) of the value of the assets of the Company (after deducting all
applicable valuation reserves) over the liabilities of the Company, all on a
consolidated basis as reflected on the books and records of the Company.
2.8 Special Board of Directors Approval for Joint Ventures. The
------------------------------------------------------
approval of two thirds of the members of the Company's Board of Directors shall
be required to enter into a joint venture with respect to the Company's business
operations.
2.9 Termination of Covenants. The Company's obligation to deliver
------------------------
the information required under subsections 2.1 (a) and (b) and under Section 2.2
and to provide the rights set forth in subsection 2.3 above shall terminate upon
the date on which the Company is required to file a report with the SEC pursuant
to Section 13(a) of the Exchange Act by reason of the Company having registered
any of its securities pursuant to Section 12(g) of the Exchange Act.
3. Right to Maintain.
-----------------
3.1 "New Securities". For purposes of this Section 3, the term "New
--------------
Securities" shall mean shares of Common Stock, Preferred Stock or any other
class of capital stock of the Company,
-12-
<PAGE>
whether or not now authorized, securities of any type that are convertible into
shares of such capital stock, and options, warrants or rights to acquire shares
of such capital stock. Notwithstanding the foregoing, the term "New Securities"
will not include (a) securities issuable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock; (b)
securities issued in connection with bona fide equipment lease or working
capital debt financings with lending institutions approved by the Company's
Board of Directors; (c) securities offered to the public pursuant to a
registration statement filed under the Securities Act; (d) securities issued to
the sellers of a corporation pursuant to the acquisition of such corporation by
the Company by merger, purchase of substantially all of the assets, or other
reorganization whereby the Company owns not less than 51% of the voting power of
such corporation; (e) up to an aggregate of 805,812 shares of Common Stock (or
related options or warrants) issued or issuable at any time to employees or
consultants of the Company for compensation purposes, pursuant to any stock
offering, plan or arrangement approved by the Board of Directors (which maximum
aggregate amount shall be deemed to be increased for purposes of this Section
3.1(e) if any additional issuances above such amount (x) are approved by the
Board of Directors with the approval of the directors elected in accordance with
Sections 3(b)(i) and (ii) of the Company's Amended and Restated Articles of
Incorporation in the first year following the date of this Agreement or (y) are
approved by the Board of Directors at any time following the first anniversary
of the date of this Agreement); (f) securities issued upon exercise or
conversion of options, warrants and other convertible securities outstanding on
the date hereof and described in the Series C Agreement or the Schedules
thereto; (g) shares of Common Stock or Preferred Stock issued in connection with
any stock split, stock dividend or recapitalization by the Company; and (h) any
security if holders of at least 66 2/3 % of the outstanding shares of Preferred
Stock consent in writing that the rights under this Section 3 shall not apply to
such securities.
3.2 Grant of Rights.
---------------
Subject to the terms specified in this Section 3, the Company hereby
grants to each Shareholder the right of first refusal to purchase a portion of
any issue of New Securities which the Company hereafter may from time to time
propose to issue and sell as shall maintain the Shareholder's pro rata
percentage ownership of the Company's capital stock. The "pro rata" percentage
ownership of a Shareholder is calculated by dividing (a) the number of shares of
Common Stock held by the Shareholder plus the total number of shares of Common
Stock issuable upon the conversion of all Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock then held by the Shareholder by (b)
the total number of shares of Common Stock then outstanding, including shares
issuable upon conversion of any Preferred Stock. For the purposes of the last
sentence of Section 3.3(a) below, "pro rata share" for a Shareholder electing to
purchase New Securities which are unsubscribed by the other Shareholders shall
be the percentage calculated by dividing (a) the number of shares of New
Securities subscribed for by such participating Shareholder by (b) the total
number of shares of New Securities subscribed for by all other participating
Shareholders.
3.3 Procedure.
---------
(a) In the event the Company proposes to undertake an issuance
of New Securities, it shall give the Shareholders written notice of its
intention, describing the type of New Securities, the proposed purchasers, the
price and all other material terms upon which the Company proposes to issue the
same. A Shareholder shall have thirty (30) days from the date of receipt of any
such notice to agree to purchase up to its pro rata share of such New Securities
for the price and upon the terms specified in the Company's notice by giving
written notice to the Company to such effect and stating therein the quantity of
New Securities to be purchased. In addition, a Shareholder may elect in
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<PAGE>
such thirty (30) day period to purchase its pro rata share (as determined in
Section 3.2) of any New Securities which are unsubscribed by the other
Shareholders, and this process shall be repeated until all New Securities are
subscribed for or no Shareholder wishes to purchase any additional New
Securities.
(b) In the event a Shareholder fails to exercise its right to
purchase its pro rata share of the New Securities within such thirty (30) day
period, the Company shall have ninety (90) days thereafter to sell or enter into
an agreement to sell any New Securities not purchased by Shareholders exercising
their rights at a price and upon terms no more favorable to the purchaser than
the terms specified in the Company's notice to the Shareholders, after which
ninety (90) day period the Company shall not thereafter sell such New Securities
without first offering a portion to the Shareholders in accordance with this
Section 3.
3.4 Expiration. The rights granted under this Section 3 shall expire
----------
as to all Shareholders, upon the closing of a public offering which, under the
terms of the Company's Articles of Incorporation as then in effect, shall cause
the automatic conversion of all shares of the Company's Preferred Stock into
Common Stock.
3.5 Consent. The Investors, who hold a majority of the outstanding
-------
shares of Series A Preferred Stock and Series B Preferred Stock, hereby consent
that the rights under Section 3 of the Prior Agreement shall not apply to ( i)
the issuance of shares of Series C Preferred Stock pursuant to the Series C
Agreement (ii) to the issuance of up to $5,000,000 principal amount of 6%
convertible promissory notes and the C Bridge Financing Warrants and (iii) the
Placement Agent's Warrants.
3.6 Termination of Prior Agreement. The Investors, who hold a
------------------------------
majority of the outstanding shares of Series A Preferred Stock and Series B
Preferred Stock, hereby agree that all rights under the Prior Agreement are
hereby terminated and superseded by the rights provided under this Agreement,
which Agreement supersedes and replaces the Prior Agreement in its entirety.
4. Assignment of Rights. The rights granted pursuant to this Agreement
--------------------
may be assigned by a Shareholder or its transferee upon sale or transfer (other
than a sale to the public) of at least 250,000 shares of Registrable Securities
(as adjusted for stock dividends, stock splits, recapitalizations and the like)
held by a Shareholder, or in connection with any transfer or assignment by a
Shareholder of any number of shares to (a) any partner, retired partner or
shareholder of such Shareholder or any transfer to spouses and ancestors, lineal
descendants and siblings of such partners or shareholders or spouses who acquire
Registrable Securities by gift, will, intestate succession or otherwise or (b)
to any affiliate of a Shareholder (as the term "affiliate" is defined under
Regulation D of the Securities Act), provided that such rights may not be
assigned to a transferee which the Company reasonably believes is a competitor
or intends to become a competitor of the Company and provided further that the
Company is given prompt notice of such transfer and any such transferee shall
agree to become subject to the obligations of the Shareholders under this
Agreement.
5. Designated Default. If the Company at any time or from time to time
------------------
(a) fails to satisfy the covenant set forth in Section 2.7 or (b) fails to
redeem all Redemption Shares (as defined in Article III, Section 7 of the
Company's Restated Articles of Incorporation as required under Article III,
Section 7 of the Company's Restated Articles of Incorporation, the Shareholders
holding 66 2/3% of the shares of Preferred Stock shall have a right to declare a
default by the Company (a "Designated Default") by delivery of written notice to
the Company. Upon the declaration of a Designated Default, the authorized
number of directors comprising the Company's Board of Directors shall be
increased and such additional
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<PAGE>
directors shall be elected in accordance with Section 3(c) of the Company's
Restated Articles of Incorporation.
6. Miscellaneous.
-------------
6.1 Amendment or Waiver. Any term of this Agreement may be amended
-------------------
and the observance of any such term may be waived (either generally or in a
particular instance and either retroactively or prospectively) with the written
consent of the Company and Holders holding at least a majority of the
outstanding Registrable Securities. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon the parties hereto and
their successors and assigns, provided that no amendment, waiver or modification
may discriminate against a Holder without such Holder's consent.
6.2 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
6.3 Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties with respect to the subject
hereof and it supersedes, merges, and renders void any and all prior
understandings and/or agreements, written or oral, with respect to such subject
matter.
6.4 Notices. All notices and other communications required or
-------
permitted hereunder shall be in writing and shall be personally delivered,
mailed by certified or registered mail, postage prepaid, or delivered by
overnight delivery or express courier, addressed to the Holders at their
addresses shown on the records of the Company or, to the Company, at its
principal executive office, or at such other address as the Company or any
Holder shall hereafter furnish in writing. All notices that are mailed shall be
deemed delivered five (5) days after deposit in the United States mail.
6.5 Severability. In case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
6.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same instrument.
6.7 Attorney's Fees. If any legal action is necessary to enforce or
---------------
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
COBALT NETWORKS, INC.
By:__________________________________________
Title:_______________________________________
PURCHASERS:
_____________________________________________
[print name of Purchaser]
By:__________________________________________
Title:_______________________________________
INVESTORS:
_____________________________________________
[print name of Investor]
By:__________________________________________
Title:_______________________________________
-16-
<PAGE>
Schedule A
----------
List of Shareholders
--------------------
Investors:
- ---------
Series A Preferred Stock:
- ------------------------
Chase Venture Capital Associates, L.P.
TechFund Capital, L.P.
TechFund Capital Management, LLC
Steve Stephansen
George W. & Nancy E. Jones Family Trust dtd 12/13/93
Mason S. Brutschy
Donald R. & Marguerite E. Shriner Trust dtd 4/28/95
George S. Taylor
Exis, Inc.
John B. Montgomery
Vanguard V, L.P.
GCA Investments 97
Aditya Guleri
Shailly Guleri
Brian J. & Susan K. Currie Family Trust
Mitsui Comtek Corp.
Mary T. Lee
Sobrato 1979 Revocable Trust
Casey Cho
Lawrence Clark
Vivek Mehra
Series A Preferred Stock Warrants:
- ---------------------------------
Brian J. & Susan K. Currie Family Trust
Steve Stephansen
George W. & Nancy E. Jones Family Trust dtd 12/13/93
Mason S. Brutschy
Donald R. & Marguerite E. Shriner Trust dtd 4/28/95
George S. Taylor
Exis, Inc.
Aditya Guleri
Shailly Guleri
John B. Montgomery
Gordon Campbell
Mary T. Lee
Sobrato 1979 Revocable Trust
Casey Cho
Lawrence Clark
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<PAGE>
Series B Preferred Stock:
- ------------------------
Chase Venture Capital Associates, L.P.
Crystal Internet Venture Fund, L.P.
TechFund Capital, L.P.
NTT Leasing (U.S.A.), Inc.
Innovacom
Vanguard V, L.P.
Stephen DeWitt
Dave Bellett
Don Bell
Rich Christopher
Kenton D. Chow
Steve Stephansen
George W. & Nancy E. Jones dtd 12/13/93
Mason S. Brutschy
Aditya Guleri
Shailly Guleri
Brian J. & Susan K. Currie Family Trust
Mary T. Lee
Sobrato 1979 Revocable Trust
Casey Cho
Series B Preferred Stock Warrants:
- ---------------------------------
Stephen DeWitt
Vanguard V, L.P.
Techfund Capital, L.P.
SCHEDULE OF PURCHASERS
- ----------------------
Chase Venture
Capital Associates, L.P.
380 Madison Avenue, 12th floor
New York, NY 10017
Crystal Internet Venture Fund, L.P.
1120 Chester Avenue, Suite 310
Cleveland, OH 44114
TechFund Capital, L.P.
111 West Evelyn Avenue, Suite 101
Sunnyvale, CA 94086
TechFund Capital Management, LLC
111 West Evelyn Avenue, Suite 101
Sunnyvale, CA 94086
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<PAGE>
NTT Leasing (U.S.A.), Inc.
C/oC/o The Prentice-Hall Corporation System, Inc.
1013 Center Road
Wilmington, Delaware 19805-1297
Nissho Electronics/Nissho Electronics Corporation
Attn: Hiroya Ishida
3-1Tsukiji 7, Chome
Chuo-ku, Tokyo 104
Japan
INNOVACOM
23 Rue Royale
75008 Paris
France
Vanguard V, L.P.
525 University Avenue, Suite 600
Palo Alto, CA 94301
Stephen W. DeWitt
Cobalt Networks, Inc.
440 Ellis St.
Mountain View, CA 94043
Kenton Chow
Cobalt Networks, Inc.
440 Ellis St.
Mountain View, CA 94043
George Korchinsky
Cobalt Networks, Inc.
555 Ellis St.
Mountain View, CA 94043
SPLZ One Partners, LLC
58 Hamlet
East Amherst, New York 14501
ABS Employees Venture Fund Limited Partnership
c/o Richard O'Connell
1 South Street
Baltimore, MD 21202 .
August Capital
c/o Dave Marquardt
2480 Sand Hill Road, Suite 101
Menlo Park, CA 94025-6940
-19-
<PAGE>
Balruddery Investments
c/o Robert Simpson
Grosvenor Gardens House
35/37 Grosvenor Gardens
London, SW1W OBS.
Crown Advisors LTD
c/o David Bellet
The Lincoln Building
60 East 42nd St., Suite 3405
New York, NY 10165.
Essex Private Placement Fund, L.P.
c/o Susan Stickells
125 High Street, 29th Floor
Boston, MA 02108
GE Investments
c/o Patrick J. McNeela
3003 Summer Street, 6th Floor
Stamford, CT 06907
GGEP Coinvestment Partners, LLC
c/o Stephen A. Gilbert (Gilbert Global)
785 Smith Ridge Road
New Canann, CT 06840
HLM/CB Fund LP
c/o Al Wiegman
222 Berkeley Street, 25th Floor
Boston, MA 02116
Seligman Communications and Information Fund, Inc.
c/o Kei Yamamoto
100 Park Avenue, 7th Floor
New York, NY 10017
Oppenheimer Enterprise Fund
c/o Jay Tracey
2 World Trade Center,34st Floor
New York, NY 10048-0081
Pequot Capital Management, Inc.
c/o Martin Hale
535 Madison Avenue, 25th floor
New York, NY 10022
Rana Investment Company
-20-
<PAGE>
c/o Najmul Hasnain
PO Box 60148
Riyadh, Saudia Arabia
Van Wagoner Capital
c/o Garrett R. Van Wagoner
345 California Street, Suite 2450
San Francisco, CA 94104
Wakefield Partners, L.P.
c/o Steven Ballentine
10 Avon Meadow Lane
Avon, CT 06001-3737
Williams, Jones & Associates
c/o William P. Jones
717 Fifth Avenue, Suite 2400
New York, NY 10022
HBA Partnership
c/o Herman Abbott
2 North Breaker Road, #S-42
Palm Beach, FL 33480
Cameron Baker
Russ Building
235 Montgomery Street, Suite 3000
San Francisco, CA 94104
Howard Balter
1024 Reads Lane
Far Rockaway, NY 11691
Richard Berkeley
110 Castlewood Road
Baltimore, MD 21210
Pictet & Cie
c/o M. Allemann
29 bd Georges - Favon
Geneva, 1204 Switzerland
Nicolas H. Felzen & Anthony S. Felzen JT
c/o Paul Felzen
545 Madison Ave., 4th Floor
New York, NY 10022
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<PAGE>
Anthony S. Felzen & Nicholas H. Felzen
c/o Paul Felzen
545 Madison Ave., 4th Floor
New York, NY 10022
Robert S. Coleman
One Maritime Plaza, Suite 2535
San Francisco, CA 94111
Vinod Gupta Revocable Trust
c/o Doug Person
5711 S. 86th Circle
Omaha, NE 68127
The Hobe Sound Company
c/o Robert Hemmes
11844 Old Dixie Hwy
Hobe Sound, FL 33455
David Mimran/SAF
c/o Sam Lahoud
16 Brookside Road
Maplewood, NJ 07040
Jean Claude Mimran
c/o Sam Lahoud
16 Brookside Road
Maplewood, NJ 07040
H. Mark Lunenburg
11 Whitehall Place
Farmington, CT 06032
Ruthy Parnes
882 E. 23rd Street
Brooklyn, NY 11210
Sherwood Manor Partners
c/o John C. Pohlhaus
16 Exuma Terrace
Key Largo, FL 33037
Philip Rueppel
3271 Jackson Street
San Francisco, CA 94118
-22-
<PAGE>
Stewart Sonnenfeldt
1448 Cortez Avenue
Burlingame, CA 94010
Pacific Asset Partners
c/o Robert Stafford
222 Kearny Street, Suite 204
San Francisco, CA 94108
Plough Penney Partners
c/o Judson Traphagen
270 Lafayette Street, Suite 1301
New York, NY 10012
George Underwood
3804 Maplewood
Dallas, TX 75205
Raymond Wooldridge
P.O. Box 467549
Atlanta, GA 31146
Tennyson Private Placement Opportunity Fund
c/o Walpert Smullian & Blumenthal
Attn: Fred Walpart
29 West Susquehanna Avenue, 4th Floor
Baltimore, MD 21204
Wolfson Entities
c/o Aaron Wolfson
One State Street Plaza, 29th floor
New York, NY 10004 .
Morris Wolfson
One State Street Plaza, 29th floor
New York. NY 10004
Lee Schweichler
Schweichler Associates, Inc.
200 Tamal Vista, Building 200, Suite 100
Corte Madera, CA 94925
Casey Cho
7654 79th Avenue, S.E.
Mercer Island, WA 98040
Shailly Guleri
1235 Marlborough Rd.
Hillsborough, CA 94010
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<PAGE>
Ronald M. Lott
C/o Jill Rubenstein
11342 Canyon View Circle
Cupertino, CA 95014
Sumy Augustein
666 Portofino Lane
Foster City, CA 94404
Holder of Warrants to Purchase Common Stock:
- --------------------------------------------
BT Alex.Brown Incorporated
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<PAGE>
EXHIBIT 5.1
Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE 650-493-9300 FACSIMILE 650-493-6811
WWW.WSGR.COM
September ____, 1999
Cobalt Networks, Inc.
555 Ellis Street
Mountain View, California 94043
Re: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No. 333_____)
to be filed by you with the Securities and Exchange Commission on September
____, 1999 (the "Registration Statement") in connection with the registration
under the Securities Act of 1933, as amended, of __________ shares (including
shares issuable upon exercise of the underwriters' over-allotment option) of
Common Stock of Cobalt Networks, Inc. (the "Shares"). As your counsel in
connection with this transaction, we have examined the proceedings proposed to
be taken in connection with said sale and issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
various states, where required, the Shares when issued and sold in the manner
referred to in the Registration Statement will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Sincerely,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 10.1
COBALT NETWORKS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of
___________, 1999 by and between Cobalt Networks, Inc., a Delaware corporation
(the "Company"), and ______________ ("Indemnitee").
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and
WHEREAS, in connection with the Company's reincorporation, the Company and
Indemnitee desire to continue to have in place the additional protection
provided by an indemnification agreement, with such changes as are required to
conform the existing agreement to Delaware law and to provide indemnification
and advancement of expenses to the Indemnitee to the maximum extent permitted by
Delaware law;
WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.
1. Certain Definitions.
-------------------
a. "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same proportions as their ownership of stock of the Company, becomes the
"beneficial owner" (as defined
<PAGE>
in Rule 13d-3 under said Act), directly or indirectly, of securities of the
Company representing more than 50% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, (iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation
other than a merger or consolidation which would result in the Voting Securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting Securities of
the surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
related transactions) all or substantially all of the Company's assets.
b. "Claim" shall mean with respect to a Covered Event: any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other.
c. References to the "Company" shall include, in addition to Cobalt
Networks, Inc., any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which Cobalt Networks,
Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, agents or fiduciaries, so that if Indemnitee is
or was a director, officer, employee, agent or fiduciary of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued. Company shall also include Cobalt Networks, Inc., a
California corporation, the predecessor of Cobalt Networks, Inc., a Delaware
corporation.
d. "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.
e. "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a
-2-
<PAGE>
witness in or participating in (including on appeal), or preparing to defend, to
be a witness in or to participate in, any action, suit, proceeding, alternative
dispute resolution mechanism, hearing, inquiry or investigation), judgments,
fines, penalties and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld) of
any Claim and any federal, state, local or foreign taxes imposed on the
Indemnitee as a result of the actual or deemed receipt of any payments under
this Agreement.
f. "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
g. "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other Indemnitees under similar
indemnity agreements).
h. References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
i. "Reviewing Party" shall mean, subject to the provisions of
Section 2(d), any person or body appointed by the Board of Directors in
accordance with applicable law to review the Company's obligations hereunder and
under applicable law, which may include a member or members of the Company's
Board of Directors, Independent Legal Counsel or any other person or body not a
party to the particular Claim for which Indemnitee is seeking indemnification.
j. "Section" refers to a section of this Agreement unless otherwise
indicated.
k. "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
2. Indemnification.
---------------
a. Indemnification of Expenses. Subject to the provisions of Section
---------------------------
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part
-3-
<PAGE>
out of a Covered Event), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses.
b. Review of Indemnification Obligations. Notwithstanding the
-------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made prior to such determination by such
Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all Expenses
theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder
under applicable law; provided, however, that if Indemnitee has commenced or
-------- -------
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee is entitled to be indemnified hereunder
under applicable law, any determination made by any Reviewing Party that
Indemnitee is not entitled to be indemnified hereunder under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expenses theretofore paid in indemnifying Indemnitee until a
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expenses shall be unsecured and no
interest shall be charged thereon.
c. Indemnitee Rights on Unfavorable Determination; Binding Effect.
--------------------------------------------------------------
If any Reviewing Party determines that Indemnitee substantively is not entitled
to be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
d. Selection of Reviewing Party; Change in Control. If there has not
-----------------------------------------------
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's Certificate of Incorporation or Bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto. Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
Counsel in connection with all matters concerning a single Indemnitee, and
-4-
<PAGE>
such Independent Legal Counsel shall be the Independent Legal Counsel for any or
all other Indemnitees unless (i) the employment of separate counsel by one or
more Indemnitees has been previously authorized by the Company in writing, or
(ii) an Indemnitee shall have provided to the Company a written statement that
such Indemnitee has reasonably concluded that there may be a conflict of
interest between such Indemnitee and the other Indemnitees with respect to the
matters arising under this Agreement.
e. Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim, Indemnitee shall be indemnified against all Expenses incurred by
Indemnitee in connection therewith.
3. Expense Advances.
----------------
a. Obligation to Make Expense Advances. Upon receipt of a written
-----------------------------------
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefore by the Company hereunder under applicable law, the Company shall make
Expense Advances to Indemnitee.
b. Form of Undertaking. Any obligation to repay any Expense Advances
-------------------
hereunder pursuant to a written undertaking by the Indemnitee shall be unsecured
and no interest shall be charged thereon.
c. Determination of Reasonable Expense Advances. The parties agree
--------------------------------------------
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.
4. Procedures for Indemnification and Expense Advances.
---------------------------------------------------
a. Timing of Payments. All payments of Expenses (including without
------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than thirty (30) business days after such written
demand by Indemnitee is presented to the Company, except in the case of Expense
Advances, which shall be made no later than ten (10) business days after such
written demand by Indemnitee is presented to the Company.
b. Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified or Indemnitee's
right to receive Expense Advances under this Agreement, give the Company notice
in writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in
-5-
<PAGE>
writing to Indemnitee). In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
c. No Presumptions; Burden of Proof. For purposes of this Agreement,
--------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
---------------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law. In addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement under applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by any Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder under applicable law, the burden of
proof shall be on the Company to establish that Indemnitee is not so entitled.
d. Notice to Insurers. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
e. Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to provide indemnification for or make any Expense Advances
with respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the delivery to
Indemnitee of written notice of the Company's election to do so. After delivery
of such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees or expenses of separate counsel subsequently retained by
or on behalf of Indemnitee with respect to the same Claim; provided that, (i)
Indemnitee shall have the right to employ Indemnitee's separate counsel in any
such Claim at Indemnitee's expense and (ii) if (A) the employment of separate
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not continue to retain such counsel to defend such
Claim, then the fees and expenses of Indemnitee's separate counsel shall be
Expenses for which Indemnitee may receive indemnification or Expense Advances
hereunder.
-6-
<PAGE>
5. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
a. Scope. The Company hereby agrees to indemnify the Indemnitee to
-----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.
b. Nonexclusivity. The indemnification and the payment of Expense
--------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.
6. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.
7. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
9. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided
-7-
<PAGE>
to the most favorably insured of the Company's directors, if Indemnitee is a
director; or of the Company's officers, if Indemnitee is not a director of the
Company but is an officer; or of the Company's key employees, agents or
fiduciaries, if Indemnitee is not an officer or director but is a key employee,
agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement,
----------
the Company shall not be obligated pursuant to the terms of this Agreement:
a. Excluded Action or Omissions. To indemnify or make Expense
----------------------------
Advances to Indemnitee with respect to Claims arising out of acts, omissions or
transactions for which Indemnitee is prohibited from receiving indemnification
under applicable law.
b. Claims Initiated by Indemnitee. To indemnify or make Expense
------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or cross-claim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's Certificate of Incorporation or Bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under Section 145 of the Delaware General
Corporation Law, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, Expense Advances, or insurance recovery, as
the case may be.
c. Lack of Good Faith. To indemnify Indemnitee for any Expenses
------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous.
d. Claims Under Section 16(b). To indemnify Indemnitee for Expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in
-8-
<PAGE>
the same manner and to the same extent that the Company would be required to
perform if no such succession had taken place. This Agreement shall continue in
effect regardless of whether Indemnitee continues to serve as a director,
officer, employee, agent or fiduciary (as applicable) of the Company or of any
other enterprise at the Company's request.
13. Expenses Incurred in Action Relating to Enforcement or Interpretation.
---------------------------------------------------------------------
In the event that any action is instituted by Indemnitee under this Agreement or
under any liability insurance policies maintained by the Company to enforce or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having jurisdiction over such action makes a final judicial determination (as to
which all rights of appeal therefrom have been exhausted or lapsed) that each of
the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action. In
the event of an action instituted by or in the name of the Company under this
Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee in
defense of such action (including without limitation costs and expenses incurred
with respect to Indemnitee's counterclaims and cross-claims made in such
action), unless as a part of such action a court having jurisdiction over such
action makes a final judicial determination (as to which all rights of appeal
therefrom have been exhausted or lapsed) that each of the material defenses
asserted by Indemnitee in such action was made in bad faith or was frivolous;
provided, however, that until such final judicial determination is made,
Indemnitee shall be entitled under Section 3 to receive payment of Expense
Advances hereunder with respect to such action.
14. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
-------- -------
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
15. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
16. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
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<PAGE>
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
17. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
18. Choice of Law. This Agreement, and all rights, remedies, liabilities,
-------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and to be performed entirely
in the State of Delaware without regard to principles of conflicts of laws.
19. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
20. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed to be or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver.
21. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
22. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
[Remainder of Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
COBALT NETWORKS, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
Address: 555 Ellis Street
Mountain View, CA 94043
AGREED TO AND ACCEPTED
INDEMNITEE:
______________________________________
(signature)
______________________________________
Name
______________________________________
Address
______________________________________
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<PAGE>
EXHIBIT 10.2
COBALT NETWORKS, INC.
AMENDED AND RESTATED 1997 EMPLOYEE STOCK PLAN
(With Amendments Through September 1, 1999)
1. Purposes of the Plan. The purposes of this Employee Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Cobalt Networks, Inc., a California corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
<PAGE>
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
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<PAGE>
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this Employee Stock Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b) " means Section 16(b) of the Exchange Act.
-------------
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
-3-
<PAGE>
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 6,100,334 Shares, plus an annual increase to be added on the
first day of the Company's fiscal year, beginning with January 1, 2001, equal to
the lesser of (i) 2,500,000 Shares, (ii) 5% of the outstanding shares on such
date or (iii) a lesser amount determined by the Board. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be
------------------------------
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the Administrator
-------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
----------
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
-4-
<PAGE>
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
-5-
<PAGE>
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 500,000
Shares, which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 13. (iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
------------
effective upon its adoption by the Board. It shall continue in effect for a
term of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock
-6-
<PAGE>
Option shall be five (5) years from the date of grant or such shorter term as
may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following :
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and
-7-
<PAGE>
(B) have a Fair Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Option shall be exercised;
(v) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment;
or
(viii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the
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<PAGE>
Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
-9-
<PAGE>
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
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<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
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<PAGE>
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-12-
<PAGE>
EXHIBIT 10.2.1
COBALT NETWORKS, INC.
EMPLOYEE STOCK PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
[Name] ISO - [ ]
- --------------------------
- --------------------------
You have been granted an option, consisting of the Stock Option Agreement
attached hereto as Exhibit A and this Notice of Stock Option Grant (together,
the "Option") to purchase Common Stock of COBALT NETWORKS, INC. (the "Company")
as follows:
Date of Grant
----------------------------
Vesting Date
----------------------------
Option Price Per Share $
----------------------------
Total Number of Shares Granted
----------------------------
Total Price of Shares Granted $
----------------------------
Type of Option Incentive Stock Option
---
Nonqualified Stock
--- Option
Term/Expiration Date 10 years/
-------------------
Exercise Schedule:
-----------------
This Option may be exercised, in whole or in part, in accordance with the
Vesting Schedule set out below;
Vesting Schedule:
----------------
Date of Vesting Number of Shares
--------------- ----------------
<PAGE>
Termination Period:
------------------
Option may be exercised for 90 days after termination of employment or
consulting relationship except as set out in Sections 7 and 8 of the Stock
Option Agreement (but in no event later than the Expiration Date).
Additional Forms of Consideration:
--------------------------------
In addition to the forms of consideration set out in Section 3 of the Stock
Option Agreement, this Option may be exercised using the following forms of
consideration:
_ No Additional Forms
_ Additional Forms as
noted: Promissory Note at
the discretion of the
Company.__________________
_________________________________________________________________________
_________________________________________________________________________
Exercise of this Option shall be on a form of Exercise Notice provided by the
Company.
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THIS OPTION IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION
OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S EMPLOYEE STOCK PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT T0 TERMINATE HIS
EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.
-2-
<PAGE>
Optionee acknowledges receipt of a copy of the Plan and certain information
related to it and represents that he or she is familiar with the terms and
provisions of the Plan and this Option. Optionee accepts this Option subject to
all such terms and provisions. Optionee has reviewed the Plan and this Option in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Employee Stock Plan and the [Incentive/Nonstatutory]
Stock Option Agreement, all of which are attached and made a part of this
document.
OPTIONEE: COBALT NETWORKS, INC., a
California company
By
- -------------------------- ---------------------------
Signature
Title
- -------------------------- ------------------------
Print Name
-3-
<PAGE>
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Stock Option. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Stock Option, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Stock Option
and further agrees that any community property interest shall be similarly
bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-
fact for the undersigned with respect to any amendment or exercise of rights
under the Plan or this Stock Option.
------------------------------------
Spouse of Purchaser
-4-
<PAGE>
EXHIBIT 10.3
COBALT NETWORKS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of Cobalt Networks, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company or any
-----
committee thereof designated by the Board of Directors of the Company in
accordance with Section 14 of the Plan.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the common stock of the Company.
------------
(d) "Company" shall mean Cobalt Networks, Inc. and any Designated
-------
Subsidiary of the Company.
(e) "Compensation" shall mean all compensation reportable on Form W-
------------
2, including without limitation base straight time gross earnings, sales
commissions, payments for overtime, shift premiums, incentive compensation,
incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
---------------
Offering Period.
(i) "Exercise Date" shall mean the last Trading Day of each Purchase
-------------
Period.
<PAGE>
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the date of determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock prior
to the date of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board; or
(iv) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately
----------------
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after May 1 and November
1 of each year and terminating on the last Trading Day in the periods ending
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before October 31,
2001. The duration and timing of Offering Periods may be changed pursuant to
Section 4 of this Plan.
(l) "Plan" shall mean this 1999 Employee Stock Purchase Plan.
----
(m) "Purchase Period" shall mean the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
(n) "Purchase Price" shall mean 85% of the Fair Market Value of a
--------------
share of Common Stock on the Enrollment Date or on the Exercise Date, whichever
is lower; provided however, that the Purchase Price may be adjusted by the Board
pursuant to Section 20.
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
-2-
<PAGE>
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee (as defined in Section 2(g)) who shall be employed
by the Company on a given Enrollment Date shall be eligible to participate in
the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1 and November 1 each year, or on such other date as
the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
October 31, 2001. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without shareholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
-3-
<PAGE>
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period, including allowing such
changes only at the beginning of each Purchase Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than a
number of shares determined by dividing $12,500 by the Fair Market Value of a
share of the Company's Common Stock (subject to any adjustment pursuant to
Section 19) on the Enrollment Date, and provided further that such purchase
shall be
-4-
<PAGE>
subject to the limitations set forth in Sections 3(b) and 12 hereof. The Board
may, for future Offering Periods, increase or decrease, in its absolute
discretion, the maximum number of shares of the Company's Common Stock an
Employee may purchase during each Purchase Period of such Offering Period.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall expire
on the last day of the Offering Period.
8. Exercise of Option.
------------------
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
(i) the number of shares of Common Stock that were available for sale under the
Plan on the Enrollment Date of the applicable Offering Period, or (ii) the
number of shares available for sale under the Plan on such Exercise Date, the
Board may in its sole discretion (x) provide that the Company shall make a pro
rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or Exercise Date, as applicable, in as uniform
a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and terminate any or all Offering Periods
then in effect pursuant to Section 20 hereof. The Company may make pro rata
allocation of the shares available on the Enrollment Date of any applicable
Offering Period pursuant to the preceding sentence, notwithstanding any
authorization of additional shares for issuance under the Plan by the Company's
shareholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any
-5-
<PAGE>
time by giving written notice to the Company in the form of Exhibit B to this
Plan. All of the participant's payroll deductions credited to his or her account
shall be paid to such participant promptly after receipt of notice of withdrawal
and such participant's option for the Offering Period shall be automatically
terminated, and no further payroll deductions for the purchase of shares shall
be made for such Offering Period. If a participant withdraws from an Offering
Period, payroll deductions shall not resume at the beginning of the succeeding
Offering Period unless the participant delivers to the Company a new
subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 2,250,000 shares together with an annual increase to the number of
shares reserved for issuance thereunder on the first day of the Company's fiscal
year beginning in January 1, 2001, equal to the lesser of (i) 1,500,000 shares,
(ii) 3% of the outstanding shares of the Company on the last day of the prior
fiscal year or (iii) such amount as determined by the Board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
-6-
<PAGE>
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
-7-
<PAGE>
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
- --------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board
-8-
<PAGE>
of Directors on any Exercise Date if the Board determines that the termination
of the Offering Period or the Plan is in the best interests of the Company and
its shareholders. Except as provided in Section 19 and this Section 20 hereof,
no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or any
other applicable law, regulation or stock exchange rule), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial accounting consequences, the Board
may, in its discretion and, to the extent necessary or desirable, modify or
amend the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(i) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(ii) shortening any Offering Period so that Offering Period ends
on a new Exercise Date, including an Offering Period underway at the time of the
Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
-9-
<PAGE>
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company; provided, however, the Plan shall not become
effective until the effective date of the Company's initial public offering
pursuant to a registration statement filed with the Securities and Exchange
Commission. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules, if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT 10.3.1
COBALT NETWORKS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ____________________ hereby elects to participate in the Cobalt Networks,
Inc. Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") and
subscribes to purchase shares of the Company's Common Stock in accordance
with this Subscription Agreement and the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday during the Offering Period in
accordance with the Employee Stock Purchase Plan. (Please note that the
percentage withholding must be between 1% and 15% and that no fractional
percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my ability
to exercise the option under this Subscription Agreement is subject to
shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):
_____________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price which I paid for the shares. I
-
hereby agree to notify the Company in writing within 30 days after the date
---------------------------------------------------------------------------
of any disposition of my shares and I will make adequate provision for
----------------------------------------------------------------------
Federal, state or other tax withholding obligations, if any, which arise
------------------------------------------------------------------------
upon the disposition of the Common Stock. The Company may, but will not be
----------------------------------------
obligated to, withhold from my compensation the amount necessary to meet
any applicable withholding obligation
<PAGE>
including any withholding necessary to make available to the Company any
tax deductions or benefits attributable to sale or early disposition of
Common Stock by me. If I dispose of such shares at any time after the
expiration of the 2-year and 1-year holding periods, I understand that I
will be treated for federal income tax purposes as having received income
only at the time of such disposition, and that such income will be taxed as
ordinary income only to the extent of an amount equal to the lesser of (1)
the excess of the fair market value of the shares at the time of such
disposition over the purchase price which I paid for the shares, or (2) 15%
of the fair market value of the shares on the first day of the Offering
Period. The remainder of the gain, if any, recognized on such disposition
will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)_____________________________________________________
(First) (Middle) (Last)
_________________________ _______________________________________
Relationship
_______________________________________
(Address)
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________ _______________________________________
Signature of Employee
_______________________________________
Spouse's Signature (If beneficiary
other than spouse)
-2-
<PAGE>
COBALT NETWORKS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Cobalt Networks,
Inc. Employee Stock Purchase Plan which began on ____________, ______ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:___________________________
<PAGE>
EXHIBIT 10.4
COBALT NETWORKS, INC.
1999 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1999 Director Option Plan
--------------------
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the common stock of the Company.
------------
(d) "Company" shall mean Cobalt Networks, Inc.
-------
(e) "Director" shall mean a member of the Board.
--------
(f) "Disability" shall mean total and permanent disability as defined
----------
in section 22(e)(3) of the Code.
(g) "Employee" shall mean any person, including officers and
--------
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(i) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock for the last market
<PAGE>
trading day prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(j) "Inside Director" shall mean a Director who is an Employee.
---------------
(k) "Option" shall mean a stock option granted pursuant to the Plan.
------
(l) "Optioned Stock" shall mean the Common Stock subject to an
--------------
Option.
(m) "Optionee" shall mean a Director who holds an Option.
--------
(n) "Outside Director" shall mean a Director who is not an Employee.
----------------
(o) "Parent" shall mean a "parent corporation," whether now or
------
hereafter existing, as defined in Section 424(e) of the Code.
(p) "Plan" shall mean this 1999 Director Option Plan.
----
(q) "Share" shall mean a share of the Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(r) "Subsidiary" shall mean a "subsidiary corporation," whether now
----------
or hereafter existing, as defined in Section 424(f) of the Internal Revenue Code
of 1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 400,000 Shares (the "Pool") (the Shares may be authorized, but
unissued, or reacquired Common Stock), together with an annual increase to the
number of Shares reserved thereunder on the first day of the Company's fiscal
year, beginning with January 1, 2001, equal to the lesser of (i) 100,000 Shares,
(ii) .25% of the outstanding Shares of Common Stock on the last day of each
prior fiscal year or (iii) such amount as determined by the Board.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
---------------------------------------------------
(a) Procedure for Grants. All grants of Options to Outside Directors
--------------------
under this Plan shall be automatic and nondiscretionary and shall be made
strictly in accordance with the following provisions:
-2-
<PAGE>
(i) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the number of Shares
to be covered by Options.
(ii) Each Outside Director shall be automatically granted an
Option to purchase Shares (the "First Option") on the date on which the later of
the following events occurs: (A) the effective date of this Plan, as determined
in accordance with Section 6 hereof; or (B) the date on which such person first
becomes an Outside Director, whether through election by the shareholders of the
Company or appointment by the Board to fill a vacancy; provided, however, that
an Inside Director who ceases to be an Inside Director but who remains a
Director shall not receive a First Option. The First Option shall be for 50,000
Shares; provided, however, it shall be increased by 5,000 Shares for service as
Chairman of the Board of Directors, 5,000 Shares for service on the Board's
Audit Committee and 5,000 Shares for service on the Board's Compensation
Committee.
(iii) Each Outside Director shall subsequently be automatically
granted an Option to purchase Shares (a "Subsequent Option") on the date of the
next meeting of the Board following the Annual Meeting of Shareholders in each
year commencing with the 2001 Annual Meeting of Shareholders provided he or she
is then an Outside Director and if as of such date, he or she shall have served
on the Board for at least the preceding six (6) months. The Subsequent Option
Shall be for 10,000 Shares; provided, however, it shall be increased by 2,500
Shares for service as Chairman of the Board of Directors, 2,500 Shares for
service on the Board's Audit Committee and 2,500 Shares for service on the
Board's Compensation Committee.
(iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any exercise of an Option granted before the Company has obtained
shareholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such shareholder approval of the Plan in accordance
with Section 16 hereof.
(v) The terms of a First Option granted hereunder shall be as
follows:
(A) the term of the First Option shall be ten (10) years.
(B) the First Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the First Option provided,
however, that in the case of a First Option granted on the effective date of the
Company's initial public offering pursuant to a registration statement filed
with the Securities and Exchange Commission, the exercise price per share shall
be the initial public offering price per share.
(D) subject to Section 10 hereof, the First Option shall
become exercisable as to 1/4 of the Shares subject to the First Option on the
anniversary of the date of grant, and as to 1/48 of the First Option at the end
of each month thereafter, so that the First Option shall be fully exercisable
four years after its date of grant, provided that the Optionee continues to
serve as a Director on such dates.
-3-
<PAGE>
(vi) The terms of a Subsequent Option granted hereunder shall
be as follows:
(A) the term of the Subsequent Option shall be ten (10)
years.
(B) the Subsequent Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Subsequent Option.
(D) subject to Section 10 hereof, the Subsequent Option
shall become exercisable cumulatively with respect to 1/48th of the Subsequent
Option at the end of each month after the date of grant, so that the Subsequent
Option shall be fully exercisable four years after its date of grant, provided
that the Optionee continues to serve as a Director on such dates.
(vii) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the remaining
Shares available for Option grant shall be granted under Options to the Outside
Directors on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the Board or the shareholders to increase the number of Shares which
may be issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the shareholders of the
Company as described in Section 16 of the Plan; provided, however, the Plan
shall not become effective until the effective date of the Company's initial
public offering pursuant to a registration statement filed with the Securities
and Exchange Commission. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to
---------------------
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) consideration received
by the Company under a cashless exercise
-4-
<PAGE>
program implemented by the Company in connection with the Plan, or (v) any
combination of the foregoing methods of payment.
8. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4 hereof; provided, however, that no Options shall be exercisable until
shareholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. Subject to
----------------------------------------------
Section 10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's death or Disability), the Optionee may exercise
his or her Option, but only within three (3) months following the date of such
termination, and only to the extent that the Optionee was entitled to exercise
it on the date of such termination (but in no event later than the expiration of
its ten (10) year term). To the extent that the Optionee was not entitled to
exercise an Option on the date of such termination, and to the extent that the
Optionee does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event Optionee's status as a
----------------------
Director terminates as a result of Disability, the Optionee may exercise his or
her Option, but only within twelve (12) months following the date of such
termination, and only to the extent that the Optionee was entitled to exercise
it on the date of such termination (but in no event later than the expiration of
its ten (10) year term). To the extent that the Optionee was not entitled to
exercise an Option on the date of termination, or if he or she does not exercise
such Option (to the extent otherwise so entitled) within the time specified
herein, the Option shall terminate.
-5-
<PAGE>
(d) Death of Optionee. In the event of an Optionee's death, the
-----------------
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or Subsidiary thereof (the
"Successor Corporation"). If an Option is assumed or substituted for, the Option
or equivalent option shall continue to be exercisable as provided in Section 4
hereof for so long as the Optionee serves as a Director or a director of the
Successor Corporation. Following such assumption or substitution, if the
Optionee's status as a Director or director of the Successor Corporation, as
applicable, is terminated other than upon a voluntary resignation by the
Optionee, the Option or option shall become fully exercisable, including as to
Shares for which it would not otherwise be exercisable. Thereafter, the Option
or option shall remain exercisable in accordance with Sections 8(b) through (d)
above.
-6-
<PAGE>
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are
-7-
<PAGE>
being purchased only for investment and without any present intention to sell or
distribute such Shares, if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of
law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan, will
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
16. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under applicable state and federal law and any stock exchange rules.
-8-
<PAGE>
EXHIBIT 10.4.1
COBALT NETWORKS, INC.
DIRECTOR OPTION AGREEMENT
Cobalt Networks, Inc., (the "Company"), has granted to ___________________
(the "Optionee"), an option to purchase a total of [__________ (____)] shares of
the Company's Common Stock (the "Optioned Stock"), at the price determined as
provided herein, and in all respects subject to the terms, definitions and
provisions of the Company's 1999 Director Option Plan (the "Plan") adopted by
the Company which is incorporated herein by reference. The terms defined in the
Plan shall have the same defined meanings herein.
1. Nature of the Option. This Option is a nonstatutory option and is not
--------------------
intended to qualify for any special tax benefits to the Optionee.
2. Exercise Price. The exercise price is $_______ for each share of
--------------
Common Stock.
3. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the provisions of Section 8 of the Plan as follows:
(i) Right to Exercise.
-----------------
(a) This Option shall become exercisable in installments
cumulatively with respect to __________ of the Optioned Stock
___________________ the date of grant, and as to an additional 1/48 of the
Optioned Stock each month thereafter, so that one hundred percent (100%) of the
Optioned Stock shall be exercisable four years after the date of grant;
provided, however, that in no event shall any Option be exercisable prior to the
date the stockholders of the Company approve the Plan.
(b) This Option may not be exercised for a fraction of a share.
(c) In the event of Optionee's death, disability or other
termination of service as a Director, the exercisability of the Option is
governed by Section 8 of the Plan.
(ii) Method of Exercise. This Option shall be exercisable by written
------------------
notice which shall state the election to exercise the Option and the number of
Shares in respect of which the Option is being exercised. Such written notice,
in the form attached hereto as Exhibit A, shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied by payment of the exercise
price.
4. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Optionee:
(i) cash;
(ii) check; or
<PAGE>
(iii) surrender of other shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (y) have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the Shares as
to which said Option shall be exercised; or
(iv) delivery of a properly executed exercise notice together with
such other documentation as the Company and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price.
5. Restrictions on Exercise. This Option may not be exercised if the
------------------------
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulations, or if such issuance
would not comply with the requirements of any stock exchange upon which the
Shares may then be listed. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
7. Term of Option. This Option may not be exercised more than ten (10)
--------------
years from the date of grant of this Option, and may be exercised during such
period only in accordance with the Plan and the terms of this Option.
8. Taxation Upon Exercise of Option. Optionee understands that, upon
--------------------------------
exercise of this Option, he or she will recognize income for tax purposes in an
amount equal to the excess of the then Fair Market Value of the Shares purchased
over the exercise price paid for such Shares. Since the Optionee is subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended, under certain
limited circumstances the measurement and timing of such income (and the
commencement of any capital gain holding period) may be deferred, and the
Optionee is advised to contact a tax advisor concerning the application of
Section 83 in general and the availability a Section 83(b) election in
particular in connection with the exercise of the Option. Upon a resale of such
Shares by the Optionee, any difference between the sale price and the Fair
Market Value of the Shares on the
-2-
<PAGE>
date of exercise of the Option, to the extent not included in income as
described above, will be treated as capital gain or loss.
DATE OF GRANT: ______________
Cobalt Networks, Inc.,
a Delaware corporation
By:________________________________
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
attached hereto, and represents that he or she is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the terms
and provisions thereof. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under the Plan.
Dated: _________________
______________________________
Optionee
-3-
<PAGE>
EXHIBIT A
DIRECTOR OPTION EXERCISE NOTICE
Cobalt Networks, Inc.
______________
______________
Attention: Corporate Secretary
1. Exercise of Option. The undersigned ("Optionee") hereby elects to
------------------
exercise Optionee's option to purchase ______ shares of the Common Stock (the
"Shares") of Cobalt Networks, Inc. (the "Company") under and pursuant to the
Company's 1999 Director Option Plan and the Director Option Agreement dated
_______________ (the "Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Agreement.
3. Federal Restrictions on Transfer. Optionee understands that the Shares
--------------------------------
must be held indefinitely unless they are registered under the Securities Act of
1933, as amended (the "1933 Act"), or unless an exemption from such registration
is available, and that the certificate(s) representing the Shares may bear a
legend to that effect. Optionee understands that the Company is under no
obligation to register the Shares and that an exemption may not be available or
may not permit Optionee to transfer Shares in the amounts or at the times
proposed by Optionee.
4. Tax Consequences. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultant(s) Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
5. Delivery of Payment. Optionee herewith delivers to the Company the
-------------------
aggregate purchase price for the Shares that Optionee has elected to purchase
and has made provision for the payment of any federal or state withholding taxes
required to be paid or withheld by the Company.
6. Entire Agreement. The Agreement is incorporated herein by reference.
----------------
This Exercise Notice and the Agreement constitute the entire agreement of the
parties and supersede in their entirety all prior undertakings and agreements of
the Company and Optionee with respect to the
<PAGE>
subject matter hereof. This Exercise Notice and the Agreement are governed by
California law except for that body of law pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: Cobalt Networks, Inc.
By:________________________ By:______________________________
Its:_____________________________
Address:
Dated:_____________________ Dated:___________________________
-2-
<PAGE>
EXHIBIT 10.5
COBALT NETWORKS, INC.
FORM OF EMPLOYMENT AGREEMENT
This Agreement (the "Agreement") is made as of August , 1999 by and
between Cobalt Networks, Inc., a California corporation (the "Company"), and
_______ (the "Executive").
1. Employment and Duties. Executive shall be employed as an Executive
----------------------
Vice President of the Company, reporting directly to the Chief Executive
Officer, President or Chief Operating Officer of the Company, as the Company
designates, and assuming and discharging such responsibilities as are
commensurate with such office and position. Executive shall comply with and be
bound by the Company's operating policies, procedures and practices as in effect
from time to time during the term of Executive's employment hereunder. During
the term of Executive's employment with the Company, Executive shall devote his
full business time, skill and attention to his duties and responsibilities, and
shall perform them faithfully, diligently and competently, and Executive shall
use his best efforts to further the business of the Company and its affiliated
entities.
2. At-Will Employment. The Company and Executive acknowledge that
------------------
Executive's employment hereunder is and shall continue to be at-will (as defined
under applicable law), and may be terminated at any time, with or without cause,
at the option of either party. If Executive's employment terminates for any
reason, Executive shall not be entitled to any payments, benefits, damages,
awards or compensation other than as specifically provided by this Agreement, or
as may otherwise be established pursuant to the then existing benefit plans or
policies of the Company in effect at the time of such termination. No provision
of this Agreement shall be construed as conferring upon Executive a right to
continue in his position or in any other position with the Company.
3. Salary. In consideration of Executive's services, Executive will be
------
paid a minimum base salary at the rate of $[ ] per year (the "Base
Salary") during the term of his employment, to be paid in installments in
accordance with the Company's standard payroll practices. Executive's Base
Salary shall be reevaluated by the Board of Directors of the Company (or persons
appointed by the Board of Directors), at the same frequency as the Company's
other executive officers.
4. Benefits; Expenses. Executive shall be permitted, to the extent
------------------
eligible, to participate in the employee benefit plans and programs maintained
by the Company and offered to employees of comparable position, including
without limitation retirement plans, savings and profit sharing plans, stock
option, incentive or other bonus plans, group medical, dental, life, disability
and other insurance plans and other similar benefit plans of the Company,
subject in each case to the generally applicable terms and conditions of the
applicable plan or program and to the determination of the Company or any
committee administering such plan or program.
The Company shall reimburse Executive for all reasonable business and
travel expenses actually incurred or paid by Executive in the performance of
Executive's services on behalf of the
<PAGE>
Company, in accordance with the Company's expense reimbursement policy as in
effect from time to time.
5. Vacation. Executive shall be entitled to paid Company holidays and
--------
vacation in accordance with the Company's policies in effect from time to time
for its executive officers.
6. Termination by Company.
----------------------
(a) The Company may terminate the Executive's employment in the event
Executive is unable, for a period of at least three consecutive months, due to
illness, accident or other physical or mental incapacity, to perform his duties
hereunder; provided, that in the event Executive shall become permanently
unable, due to illness, accident or other physical and mental incapacity, to
perform such duties, the Company may forthwith terminate his employment, prior
to the expiration of such three month period;
(b) The Company may terminate the Executive's employment for "Cause"
which is defined as any one or more of the following occurrences:
(i) Executive's conviction by, or entry of a plea of guilty or
nolo contendere in, a court of competent and final jurisdiction for any crime
which constitutes a felony in the jurisdiction involved;
(ii) Executive's commission of an act of fraud or
misappropriation of material property, whether prior to or subsequent to the
date hereof, upon the Company, or any of its respective affiliates;
(iii) A willful breach by Executive of a material provision of
this Agreement;
(iv) Failure of Executive to perform the lawful duties and
responsibilities assigned to him by the Company, as determined by the Company's
Board of Directors.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause without (i) reasonable notice to Executive setting forth
the reasons for Company's intention to terminate for Cause, and (ii) an
opportunity for Executive, together with his counsel, if any, to be heard.
(c) The Company may terminate Executive's employment for any other
reason upon not less than 30 days advance written notice to Executive.
7. Termination by Executive. Executive may terminate Executive's
------------------------
employment hereunder at any time upon 30 days advance written notice to Company.
8. Effect of Termination.
---------------------
-2-
<PAGE>
(a) Except as otherwise expressly set forth in this Section 8,
Executive's right to receive salary or any other payments not required by law
shall cease upon the effective date of any termination of Executive's employment
and the Company shall have no further liability or obligation to the Executive,
his executors, administrators or assigns hereunder except for unpaid salary and
benefits accrued to the date of termination.
(b) If executive is terminated without Cause or pursuant to a Constructive
Termination (as defined below), then Executive shall receive (i) one year
accelerated vesting of any Company stock options held by him and (ii) one year
of salary payable at the same rate and frequency as in effect at the time of
such termination. If Executive is terminated for Cause or terminates as a result
of a Voluntary Resignation (as defined below) or for any other reason, then
Executive shall not be entitled to any accelerated vesting with respect to the
options held by him referenced above. For purposes of this Agreement, (i) a
"Voluntary Resignation" means the Executive's voluntary resignation from
employment, excluding a voluntary resignation as a result of a Constructive
Termination and (ii) "Constructive Termination" means (A) a material reduction
-------------------------
in salary and benefits other than a reduction applied to all employees, (B) a
requirement to relocate without the Executive's consent beyond 50 miles from the
principal offices of the Company in Mountain View, California, (C) a material
reduction in responsibilities reasonably accorded or expected of an Executive
Vice President of the Company, (D) the Company materially breaches the terms of
this Agreement or any other agreement between the Executive and the Company with
respect to the payment or vesting of compensation or benefits or in any other
material respect and such breach is not cured within 30 days after the Company
receives written notice thereof, and (E) the Company requires the Executive, as
a condition to his continued employment with the Company, to perform felonious
or fraudulent acts or omissions; provided, however, that a Constructive
Termination shall not include any matters set forth in (A), (B) and (C) above
which are proposed by the Company and agreed to by Executive.
9. Confidential Information Agreement. The Company and Executive shall
----------------------------------
execute and deliver the Company's standard Confidential Information and
Invention Assignment Agreement.
10. Successors. The Company shall require any successor or assignee, in
----------
connection with any sale, transfer or other disposition of all or substantially
all of the Company's assets or business, whether by purchase, merger,
consolidation or otherwise, expressly to assume and agree to perform the
Company's obligations under this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession or
assignment had taken place. In such event, the term "Company," as used in this
Agreement, shall mean any successor or assignee to the business and assets which
by reason hereof becomes bound by the terms and provisions of this Agreement.
11. Arbitration.
-----------
(a) Any claim, dispute or controversy arising out of this Agreement,
the interpretation, validity or enforceability of this Agreement or the alleged
breach thereof shall be submitted by the parties to binding arbitration by the
American Arbitration Association in California;
-3-
<PAGE>
provided, however, that this arbitration provision shall not preclude the
Company from seeking injunctive relief from any court having jurisdiction with
respect to any disputes or claims relating to or arising out of the misuse or
misappropriation of the trade secrets or confidential and proprietary
information of the Company, or any of its respective affiliates. The losing
party to any such arbitration shall bear all costs of the arbitration, including
the reasonable fees and expenses of counsel and experts retained by both
parties. The fees and expenses of counsel and experts retained by each party
shall be paid by the party retaining such services. Judgment may be entered on
the award of the arbitrator in any court having jurisdiction.
(b) EXECUTIVE HAS READ AND UNDERSTANDS THIS SECTION, WHICH DISCUSSES
ARBITRATION. EXECUTIVE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, EXECUTIVE
AGREES TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO, OR IN CONNECTION
WITH HIS EMPLOYMENT OR TERMINATION THEREOF, OR THE INTERPRETATION, VALIDITY,
CONSTRUCTION, PERFORMANCE OR BREACH OF THIS AGREEMENT, TO BINDING ARBITRATION,
AND THAT THIS ARBITRATION SECTION CONSTITUTES A WAIVER OF EXECUTIVE'S RIGHT TO A
JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS
OF THE EXECUTIVE/COMPANY RELATIONSHIP, INCLUDING BUT NOT LIMITED TO,
DISCRIMINATION CLAIMS.
12. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California applicable to agreements
made and to be performed entirely within such state.
13. Integration. This Agreement and any written Company plans and written
-----------
agreements between the parties that are referenced herein represent the entire
agreement and understanding between the parties hereto as to the subject matter
hereof and supersede all prior or contemporaneous agreements, whether written or
oral. No waiver, alteration, or modification, if any, of the provisions of this
Agreement shall be binding unless in writing and signed by duly authorized
representatives of the parties hereto.
14. Assignment. This Agreement and all rights under this Agreement shall
----------
be binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective personal or legal representatives, executors,
administrators, heirs, distributees, devisees, legatees, successors and assigns.
The Executive shall not, without the written consent of the Company, assign or
transfer this Agreement or any right or obligation under this Agreement to any
other person or entity. If Executive should die while any amounts are still
payable to Executive hereunder, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee, or other designee or, if there be no such
designee, to the Executive's estate.
15. Counterparts. This Agreement may be executed in counterparts, which
------------
together will constitute one instrument.
-4-
<PAGE>
16. Surviving Provisions. Notwithstanding any other provision of this
--------------------
Agreement, the provisions of Sections 4 and 5, and 8 through 15 shall survive
the termination of this Agreement.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
set forth above.
COBALT NETWORKS, INC.
By:_______________________________
Title:____________________________
EXECUTIVE
__________________________________
Kenton Chow
-5-
<PAGE>
Exhibit 10.6
TECHFARM
August 30, 1996
Mr. Mark Wu
President
VIAVISION Systems, Inc.
Saratoga, California
Dear Mark,
This letter will summarize our proposal to you for an agreement between
VIAVISION Systems, Inc. (and its future corporate forms) and Techfarm
Management, Inc. Techfarm will act as consultants and advisors for VIAVISION and
help to obtain funding. This letter is intended to set forth the principal terms
of the agreement between the parties and to enable Techfarm and VIAVISION to
commence work on the projects while formal documents are being put in place.
We are uniquely qualified to work with you in forming and funding this new
venture. Techfarm has experience in most areas of business management & start-up
development, and we are looking forward to working together.
1. Techfarm will perform the following services:
a) Assist VIAVISION in the development of a structure and strategy in
order to obtain outside funding.
b) Assist VIAVISION in finalizing its business plan, including financials
and strategic issues related to the definition, development,
marketing, and distribution of VIAVISION's products;
c) Assist in implementation of the strategic plan, including bringing the
products to market and establishing strategic relationships;
d) Provide early stage management, as needed, to round out VIAVISION's
existing management expertise;
e) Make a representative of Techfarm available to serve on VIAVISION's
Board of Directors.
2. Techfarm will arrange an initial bridge loan of $250,000 at 10% annual
interest with 25% warrant coverage. The convertible note will entitle
Techfarm and others to purchase shares of the security sold in the
financing. This loan will be initiated with a deposit of $50,000 within 3
days of the signing of the note and balances being deposited as moneys are
needed.
3. Techfarm will receive a monthly management fee of $5,000, accruing but not
paid until after bridge financing is put in place and continuing until its
services are no longer required, as determined by VIAVISION's Board of
Directors;
<PAGE>
Letter of Intent
VIAVISION
4. The initial capitalization will be as follows:
a) 80% of VIAVlSION initial stock will be reserved for founders and
employees. It is expected that the founders will be issued founders'
shares of common stock which will vest over four years. An employee
stock option pool will be created in order to attract key employees.
Such employee options will be subject to a standard 4 year vesting
schedule with an initial nine month cliff vesting period.
b) 20% of VIAVISION initial stock in the form of common shams will be
issued to Techfarm LP II subject to a 4 year vesting based upon a
stock repurchase agreement. Shares vesting in the first year (25% of
the shares) will become fully vested at the time of first equity
financing with the remaining 75% vesting at the rate of 1/36 per
month from the first anniversary of this letter's date. Should an
IPO, acquisition or change of control event of VIAVISION be approved
by its Board of Directors, Techfarm's shares shall become immediately
vested.
5. This Agreement shall have a term of one year but may be terminated by
either party at any time.
We look forward to working with you on this exciting opportunity.
Please sign below and return by September 30/th/ to acknowledge your agreement
to this proposal.
Very Truly Yours, AGREED AND ACCEPTED:
Techfarm Management Inc. VIAVISION Systems, Inc.
/s/ Kurt Keilhacker /s/ Mark Wu
- ---------------------------------- ----------------------------
Kurt Keilhacker Date: 9/30/96
-----------------------
<PAGE>
EXHIBIT 10.7
Renault & Handley
INDUSTRIAL & COMMERCIAL REAL ESTATE
This LEASE, executed in duplicate at Palo Alto, California, this 5th
PARTIES day of August, 1998 by and between
Renault & Handley Solar Ellis Joint Venture
and
Cobalt Networks, Inc., a California corporation
hereinafter called respectively Lessor and Lessee, without regard to
number or gender.
PREMISES 1. Witnesseth: That Lessor hereby leases to Lessee, and Lessee hires
from Lessor, those certain premises, hereinafter in this lease
designated as "the Premises," with the appurtenances, situated in the
City of Mountain View, County of Santa Clara, State of California, and
more particularly described as follows, to-wit:
An approximate 28,137 sf industrial building commonly referred to as
555 Ellis Street.
USE 2. The Premises shall be used and occupied by Lessee for the purpose
of general office, sales, service, engineering, research &
development, manufacturing and any related lawful purpose in
conformity to municipal zoning requirements and any CC&R applicable to
the property. and for no other purpose without the prior written
consent of Lessor.
TERM 3. The term shall be for five (5) years, commencing on the 1/st/ day
of January, 1999 and terminating on the 31/st/ day of December 2003.
RENTAL 4. Rent shall be payable to the Lessor without deduction or offset
initially at 2500 E1 Camino Real, Palo Alto, CA 94306 or at such place
or places as may be designated from time to time by the Lessor as
follows:
Twenty Five Thousand and No/100ths Dollars ($25,000.00) upon execution
of the lease, representing partial rental due January 1, 1999. Thirty
Five Thousand Four Hundred Ninety Five and No/100ths Dollar
($35,495.00) shall be due on November 1, 1998, representing the
balance of the rental due on January 1, 1999. Sixty Thousand Four
Hundred Ninety Five and No/100ths ($60,495.00) shall be due on
February 1, 1999. and on the 1/st/ day of each and every month through
December 1, 1999. Sixty, One Thousand Nine Hundred One and No/100ths
Dollars ($61,901.00) shall be due on January 1, 2000 and on the 1/st/
day of each and every month through December 1, 2000. Sixty Six
Thousand One Hundred Twenty Two and No/100ths Dollars ($66, 122.00)
shall be due on January 1, 2001 and on the 1/st/ day of each and every
month through December 1,2001. Sixty Eight Thousand Nine Hundred
Thirty Five and No/100ths Dollars ($68,935.00) shall be due on January
1, 2002 and on the 1/st/ day of each and every month through December
1, 2002. Seventy Thousand Three Hundred Forty Three and No/100ths
Dollars $70,343.00 shall be due on January 1, 2003 and on the 1/st/
day of each and every month through December 1, 2003.
<PAGE>
SECURITY 5. On January 1, 1999, Lessee shall with Lessor Seventy Thousand
DEPOSIT Three Hundred Forty Three Dollars and No/l00ths ($70,343,00) as
security for the full and faithful performance of each and every
term, provision, covenant and condition of this Lease. In the event
Lessee defaults in respect of any of the terms, provisions,
covenants or conditions of this Lease, including, but not limited to
the payment of rent, Lessor may use, apply or retain the whole or
any part of such security for the payment of any rent in default or
for any other sum which. Lessor may spend or be required to spend by
reason of Lessee's default. Should Lessee faithfully and fully
comply with all of the terms, provisions, covenants and conditions
of this Lease, the security of any balance thereof shall be returned
to Lessee or, at the option of Lessor, to the last assignee of
Lessee's interest in this Lease at the expiration of the term
hereof. Lessee shall not be entitled to any interest on said
security deposit.
POSSESSION 6. If Lessor, for any reason whatsoever, cannot deliver possession
of the Premises to Lessee at the commencement of the said term, as
hereinbefore specified, this Lease shall not be void or voidable,
nor shall Lessor, or Lessor's agents, be liable to Lessee 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 revised to conform to the date of Lessor's
delivery of possession. The above is, however, subject to the
provision that the period of delay of delivery of the Premises shall
not exceed Thirty (30) days from the commencement date herein. If
the period of delay of delivery exceeds the foregoing, Lessee, at
his or it's option, may declare this Lease null and void.
ACCEPTANCE 7. By entry hereunder, the Lessee accepts the Premises as being in
OF good and satisfactory condition, unless within Sixty (60) days after
PREMISES such entry Lessee shall give Lessor written notice specifying in
AND reasonable detail the respects in which the Premises were not in
CONSENT TO satisfactory condition, and Lessor shall promptly repair such items.
SURRENDER The Lessee agrees on the last day of the term hereof, or on sooner
termination of this Lease, to surrender the Premises, together with
all alterations, additions, and improvements which have been made
in, to, or on the Premises by Lessor or Lessee, unto Lessor in the
same good condition as at Lessee's entry into the Premises excepting
for such wear and tear as would be normal for the period of the
Lessee's occupancy, Acts of God, casualty, Condemnation, hazardous
materials not stored, used or disposed of by Lessee and alterations
with respect to which Lessor has not required removal. The Lessee,
on or before the end of the term or sooner termination of this
Lease, shall remove all Lessee's personal property and trade
fixtures from the Premises and all property not removed shall be
deemed abandoned by the lessee. If the Premises be not surrendered
at the end of term or sooner termination of this Lease, the Lessee
shall indemnify the Lessor against loss or liability resulting from
delay by the Lessee in so surrendering the Premises including,
without limitation, any claims made by any succeeding tenant founded
on such delay.
USES 8. Lessee shad not commit, or permit to be committed, any waste
PROHIBITED upon the Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant in or around the
buildings in which the Premises may be located, or allow any sale by
auction upon the Premises, or allow the premises to be used for any
unlawful purpose, or place any loads upon the floor, wails, or roof
which endanger the structure, or place any harmful liquids in the
drainage system of the building. No waste materials or refuse shall
be dumped upon or permitted to remain upon any part of the Premises
outside of the building proper. No materials, supplies, equipment,
finished products or semi-finished products, raw materials or
articles of any nature shall be stored upon or permitted to remain
on any portion of the Premises outside of the buildings proper.
ALTERATIONS 9. Except for nonstructural alterations not exceeding Seventy Five
AND Hundred Dollars ($7500.00) per work of improvement, the Lessee shall
ADDTIONS make no alterations, additions, or improvements to the Premises or
any part thereof without first obtaining the prior written consent
of the Lessor, which shall not be unreasonably withheld or delayed.
The Lessor may impose as a condition to the aforesaid consent such
requirements as Lessor may reasonably deem necessary in Lessor's
discretion, including without limitation thereto the manner in which
the work is done, a right of approval of the contractor by whom the
work is to be performed which approval shall not be unreasonably
withheld or delayed, the times during which it is to be
accomplished, and the requirement that upon written request of
Lessor made at the time that Lessee requests consent to such, prior
to the expiration or earlier termination of the Lease, Lessee will
remove any or all improvements or additions to the Premises
installed at Lessee's expense. All such alterations, additions or
improvements not specified to be removed shall at the expiration or
<PAGE>
earlier termination of the lease become property of the Lessor and
remain upon and be surrendered with the Premises. All movable
furniture, business and trade fixtures, or machinery and equipment
shall remain in the property of the Lessee and may be removed by
the Lessee at any time during the Lease term when Lessee b not in
default beyond applicable cure period. Items which are not to be
deemed as movable furniture, business mud trade fixtures, or
machinery mud equipment shall include heating, lighting,
electrical systems, air conditioning, bard wail partitioning,
carpeting, or any other installation which has become an integral
part of the Premises. The Lessee will at all times permit notices
of non-responsibility to be posted and to remain posted until the
completion of alterations or additions which have been approved by
the Lessor.
MAINTENANCE 10. Subject to the Memorandum of Understanding, Lessee shall, at
OF Lessee's sole cost, keep and maintain the Premises and
PREMISES appurtenances and every part thereof, including but not limited
to, glazing, sidewalks, parking areas, plumbing, electrical
systems, heating and air conditioning installations, any store
front, roof covering unless it is not feasible to repair the
existing roof covering and a new roof is required, and the
interior of the Premises in good order, condition, and repair.
Lessor at the Lessor's sole cost and expense shall maintain the
exterior of the wails, and structural portions of the roof,
foundations, walls and floors except for any repairs caused by the
wrongful act of the Lessee and Lessee's agents. The Lessor will
replace the roof covering if repairs to said coveting are no
longer economically feasible in the judgement of roofing experts,
and provided said replacement is not made necessary by acts of the
Lessee and Lessee's agents. The Lessee shall water, maintain and
replace, when necessary, any shrubbery and landscaping provided by
the Lessor on the Premises. The Lessee expressly waives the
benefits of any statute now or hereafter in effect which would
otherwise afford the Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to
keep the Premises in good order, conditions or repair.
FIRE AND 11. See revised insurance clause attached.
EXTENDED
COVERAGE
INSURANCE
AND
SUBROGATION
ABANDONMENT 12. Lessee shall not vacate or abandon the Premises while in
default of it's obligation to pay rent; and if Lessee shall
abandon, vacate, or surrender the Premises while in default of
it's obligation to pay rent, or be dispossessed by process of law,
or otherwise, any personal property belonging to Lessee and left
on the Premises shall be deemed abandoned, at the option of the
Lessor, except such property as may be mortgaged to Lessor,
FREE FROM 13. Lessee shall keep the Premises and the property in which the
LIENS Premises are situated, free from any lien arising out of any work
performed, materials furnished, or obligations incurred by Lessee.
COMPLIANCE 14. As of commencement date, Premises is in compliance with
WITH applicable law. Lessee shall, at his sole cost and expenses,
GOVERNMENTAL comply will all the requirements of all Municipal, State, and
REGULATIONS Federal authorities, which may hereafter be in force, pertaining
to the Lessee's particular use of the Premises and shall
faithfully observe in the use of the Premises all Municipal
ordinances and State and Federal statutes now in force or which
may hereafter be in force. The judgement of any court of competent
jurisdiction, or the admission of Lessee in any action or
proceeding against Lessee, whether Lessor be a party thereto or
not, that Lessee has violated any such ordinance or statute in the
use of the Premises, shall be conclusive of the fact as between
Lessor and Lessee. With respect to cost incurred to comply with
laws of applicability to owners of commercial property in general,
Lessor shall pay such costs, amortized over the useful life of the
improvement and Lessee shall pay the Lessor tee amortized costs
falling due during the term as extended on a monthly basis.
INDEMNI- 15. The Lessee, as a material part of the consideration to be
FICATION of rendered to the Lessor, hereby waives all claims against the
LESSOR AND Lessor for damages to goods, wares, and merchandise, and all other
LESSEE'S personal property in, upon, or about the Premises and for injuries
to persons in or about the Premises, from any cause arising at any
time, excepting claims arising from the Lessor's negligence or
willful misconduct or that
<PAGE>
LIABILITY of it's agent, employees, or contractors, and the Lessee will hold
INSURANCE the Lessor exempt and harmless from any damage or from the use of
the Premises by the lessee, or from the failure of the Lessee to
keep the Premises in good condition and repair, ms herein
provided. See revised insurance clause attached.
ADVERTISE- 16. Lessee will not place or permit to be placed, in, upon or
MENTS AND about the Premises any unusual or extraordinary signs, or any
SIGNS signs not approved by the city or other governing authority. The
Lessee will not place, or permit to be placed, upon the Premises,
any sirens, advertisements, or notices without the written consent
of the Lessor first had and obtained, which shall not be
unreasonably withheld or delayed. Any sign so placed on the
Premises shall be so placed upon the understanding and agreement
that the Lessee will remove same at the termination of the tenancy
herein created and repair any damage or injury to the Premises
caused thereby, and if not so removed by Lessee then Lessor may
have same so removed at Lessee's expense.
UTILITIES 17. Lessee shall pay for all water, gas, heat, light, power,
telephone service and all other service supplied to the Premises.
If the premises are not served by a separate water meter, the
Lessee shall pay to the Lessor 100 percent of the water bill for
the Premises.
ATTORNEY'S 18. In case suit shall be brought for the possession of the
FEES Premises, for the recovery of any sum due hereunder, or because of
the breach of any other covenant herein, the losing party shall
pay to the prevailing party a reasonable attorney's fee, which
shall be deemed to have accrued on the commencement of such action
and shall be enforceable whether or not such action is prosecuted
to judgement.
DEFAULT 19. In the event of any failure by Lessee to pay rent within 5
days after receipt of notice from Lessor that such sum is due, or
any failure by Lessee to perform any other obligation on its part
to be performed within 15 days after receipt of written notice
form Lessor (or if the failure is not capable of cure within 15
days, Lessee shall not be in default hereunder if Lessee commences
the cure within the 15 day period and thereafter prosecutes the
cure to completion), or an abandonment of the property by Lessee
coupled with Lessee's failure to pay rent hereunder, the Lessor
has the option of 1) removing all persons and property from the
Premises and repossessing the Premises in which case any of the
Lessee's property which the Lessor removes from the Premises may
be stored in a public warehouse elsewhere at the cost of, and for
the account of the Lessee, or 2) allowing the Lessee to remain in
fur possession and control of the Premises. If the lessor chooses
to repossess the Premises, the lease will automatically terminate
in accordance with provisions of the California Civil Code,
Section 1951.2. In the event of such termination of the Lease, the
Lessor may recover from the Lessee: 1) the worth at the time of
award of the unpaid rent which had been earned at the time of
termination including interest at 7% per annum; 2) the worth at
the time of award of the amount by which the unpaid rent which
would have been earned after termination until the time of award
exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided including interest at 7% per
annum; 3) the worth at the time of such rental loss that the
Lessee proves could be reasonably avoided; and 4) any other mount
necessary to compensate the Lessor for all the detriment
proximately caused by the Lessee's failure to perform his
obligations under the Lease or which in the ordinary course of
things would be likely to result therefrom. If the Lessor chooses
not to repossess the Premises, but allows the Lessee to remain in
full possession and control of the Premises, then in accordance
with provisions of the California Civil Code, Section 1951.4, the
Lessor may treat the Lease as being in full force and effect,. and
may collect from the Lessee all rents as they become due through
the termination date of the lease as specified in the a) Acts of
maintenance or preservation or efforts to relet the property, b)
the appointment of a receiver on the initiative of the Lessor to
protect his interest under this Lease.
LATE CHARGES 20. Lessee hereby acknowledges that late payment by Lessee to
Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this lease, the exact amount of
which will be extremely difficult to impose the Lessor by the
terms of any mortgage or trust deed coveting the Premises.
Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within
five (5) clays after such amount shall be due, Lessee shall pay to
Lessor a late charge equal to ten percent (10%) of such overdue
amount. The parties hereby agree that such late charge represents
a fair and reasonable estimate of the cost Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge
by Lessor shall in no event constitute a waiver of
<PAGE>
Lessee's default with respect to such overdue amount, nor prevent
Lessor from exercising any of the other rights and remedies
granted hereunder:
SURRENDER OF 21. The voluntary or other surrender of this Lease by Lessee, or a
LEASE mutual cancellation thereof, shall not work a merger, and shall,
at the option of Lessor, terminate all of any existing subleases
or subtenancies, or may, at the opinion of Lessor, operate as an
assignment to him of any of all such subleases or subtenancies.
TAXES 22. The Lessee shall be liable for all taxes levied against
personal property and trade or business fixtures. The Lessee also
agrees to pay, as an additional rental, during the term of this
Lessee and any extension thereof, all real estate taxes plus the
yearly installments of any special assessments which are of record
or which may become of record during the term of this lease. If
said taxes and assessments are assessed against the entire
building and building site, and this Lease does not cover the
entire building or building site, the taxes and assessment
installments allocated to the Premises shall be pro-rated on a
square footage or other equitable basis. It is understood and
agreed that the Lessee's obligation under this paragraph will be
pro-rated to reflect the commencement and termination dates of
this Lease.
NOTICES 23. All notices to be given to Lessee may be given in writing
personally or by depositing the same in the United States mail,
postage prepaid, and address to Lessee at the said premises,
whether or not Lessee has departed from, abandoned or vacated the
Premises.
ENTRY BY 24. Lessee shall permit Lessor and his agents to enter into and
LESSOR upon the Premises at all reasonable times upon reasonable prior
notice for the purpose of inspecting the same or for the purpose
of maintaining the building in which the Premises are situated, or
for the purpose of making repairs, alterations or additions to any
other portion of said building, including the erection and
maintenance of such scaffolding, canopies, fences and props as may
be required without any rebate of rent and without any liability
to Lessee for any loss of occupation or quiet enjoyment of the
Premises thereby occasioned; and shall permit Lessor and his
agents, at any time within ninety days prior the expiration of
this Lease, to place upon the Premises any usual or ordinary "For
Sale" or "To Lease" sign and exhibit the Premises to prospective
tenants at reasonable hours. Lessor's exercised of the forgoing
rights shall not materialy increase Lessee's obligations or
diminish Lessee's rights under this lease.
DESTRUCTION 25. In the event of a partial destruction of the Prorated during
OF PREMISES the said term from any cause, except earthquake, Lessor shall
forthwith repair the same, provided such repairs can be made
within one hundred eighty (180) days under the laws and
regulations of Sate, Federal, County or Municipal authorities, but
such partial destruction shall in no Way annul or void this Lease,
except that Lessee shall be entitled to a proportionate reduction
of rent while suck repairs are being made, such proportionate
reduction to be based upon the extent to which the making of such
repairs shall interfere with the business carried on by Lessee in
the Premises. If such repairs cannot be made within one hundred
eighty (180) days, Lessor may, at his opinion, make same within a
reasonable time, this Lease continuing in full force and effect
and the rent to be proportionately reduced as aforesaid in this
paragraph provided. In the event that Lessor does not elect to
make such repairs which cannot be made within one hundred eighty
(180) days, or such repairs cannot be made under such laws and
regulations, this Lease may be terminated at the option of either
party. In respect to any partial destruction which Lessor is
obligated to repair may elect to repair under the terms of this
paragraph, the provisions of Section 1932, Subdivision 2, and of
Section 1993, Subdivision 4, of the Civil Code of the State of
California are waived by Lessee. In the event that the building in
which the Premise may be situated by the extent of no less than 33
1/3% of the replacement cost thereof, Lessor may elect to
terminate this Lease, whether the Premises is injured or not. A
totally destruction of the building in which the Premises may be
situated shall terminate this Lease. In the event of any dispute
between Lessor and Lessee relative to the previsions of this
paragraph, they shall each elect and arbitrator, the two
arbitrators so selected shall select a thud arbitrator and the
three arbitrators so selected shall hear and determine the
controversy and there decision thereon shall be final and binding
upon both Lessor and Lessee, who shall bear the cost of such
arbitration equally between them. Lessee has the right to
terminate if the damage or destruction occurs
<PAGE>
during the last 12 months of the term or if Lessor fails to
complete repairs XXXXXXXXXXXXXXXXXXXXXXX days after the date of
damage or destruction.
ASSIGNMENT 26. The Lessee shall not assign, transfer, or hypothecate the
AND SUBLETING leasehold estate under the Lease, or any interest therein, and
shall not sublet the Premises, or any part thereof, or any right
of 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 consent of the Lessor. Lessor
agrees to not unreasonably withhold or delay consent to sublet or
assign. As a condition for granting its consent to any subletting
the Lessor may require the Lessee to agree to pay to the Lessor,
as additional rental 50% of all rents after expenses, received by
the Lessee from its Sublessee which are in excess of the amount
payable to the Lessee to the Lessor hereunder. The Lessee shall,
by thirty (30) days written notice, advise the Lessor of its
intent to sublet the Premises or any portion thereof for any part
of the term hereof. Within fifteen (15) days after receipt of
Lessee's notice, Lessor shall either give approval to Lessee to
sublease the portion of the Premises. described in Lessee's
notice, or Lessor shall terminate this Lease as to the portion of
the Premises described in Lessee's notice on the day specified in
Lessee's notice. If, however, Lessor elects to terminate Lessee
shall have the right upon five (5) days notice to Lessor to recind
it's request for consent, in which case this Lease shall remain in
full force and effect. If Lessee intends to sublet the entire
Premises and Lessor elects to terminate this Lease, this Lease
shall be terminated on the date specified in the Lessee'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 herein above shall be adjusted, on a prorata basis to
the number of square feet retained by Lessee, and this Lease as so
amended shall continue in full force and effect. If the Lessor
approves a subletting, the Lessee may sublet immediately after
receipt of the Lessor's written approval. In the event Lessee is
allowed to assign, transfer or sublet the whole or any part of the
Premises, with the prior consent of the Lessor, no assignee,
transferee or sublesee 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 the Lessor. A consent of Lessor to one assignment, transfer,
hypothecation, subletting, occupation of use by any other person
shall not release Lessee from any Lessee's obligations hereunder
or be deemed to be a consent to any subsequent similar of
dissimilar assignment, transfer, hypothecation, subletting,
occupation or use by any other person. Any such assignment,
transfer, hypothecation, subletting, occupation or use without
such consent shall be void and shall constitute a breach of this
Lease by Lessee and shall, at the opinion of Lessor exercised by
written notice to Lessee, terminate this Lease. The leasehold
estate under this Lease shall not, nor shall any interest therein,
be assignable of any purpose by operation of law without the
written consent of Lessor. As a condition to its consent, Lessor
may require Lessee to pay all expense in connection with the
assignment not to exceed five thousand dollars ($5000) per
request, and Lessor may require Lessee's assignee or transferee
(or other assignees of transferees)to assume in writing all of the
obligations under this Lease.
CONDEMNATION 27. If any part of the Premises shall be taken for any public or
quasi-public use, under any statute or by right of eminent domain
or private purchase in lieu thereof, and a part thereof remains
which is susceptible of occupation hereunder, this Lease shall as
to the part so taken, terminate as of the date title shall vest in
the condemnor or purchaser, and the rent payable hereunder shall
be adjusted so that the Lessee shall be required to pay for the
remainder of the term only such portion of such rent as the value
of the part remaining after such taking bears to the value of the
entire Premises prior to such taking; but in such event Lessor
shall have the potion to terminate this Lease as of the day when
title to the part so taken vests in the condemnor or purchaser. If
all of the Premises, or such part thereof to be taken so that
there does not remain a portion susceptible for occupation
hereunder, this Lease shall be thereupon terminated. If a part or
all the Premises be taken, all compensation awarded upon such
taking shall go to the Lessor and the Lessee shall be entitled to
any separate award made by the condemning authority for moving
costs, relocation expenses, loss of good will, and improvements
paid for by Lessee.
EFFECT OF 28. The term "Lessor" as used in this Lease, means only the owner
CONVEYANCE for the time being of the land and building containing the
Premises, so that, in the event of any sale of said land or
building, or in the event of lease of said building, the Lessor
shall be and hereby is entirely free and relieved of all covenants
and obligations of the Lessor hereunder, and it shall be deemed
and construed, without further agreement between the parties and
the purchaser at any such sale, or the Lessee of the building,
that the purchaser
<PAGE>
or Lessee of the building has assumed and agreed to carry out any
and all covenants and obligations of the Lessor hereunder. If any
security be given by the Lessee to secure the faithful performance
of all or any of the covenants of this Lease on the part of the
Lessee, the Lessor shall transfer and deliver the security, as
suck, to the purchaser at any such sale or the lessee of the
building, and thereupon the Lessor shall be discharged from any
further liability in reference thereto.
SUBORDI- 29. Lessee agrees that this Lease may, at the opinion of Lessor,
NATION be subject and subordinate to any mortgage, deed of trust or other
instrument of security which has been or shall be placed on the
land and building of which the Premises form a part, and this
subordination is hereby made effective without any further act of
Lessee. The Lessee shall, at any time hereinafter, on demand,
execute any instruments, releases, or other documents that may be
required by a mortgagee, mortgagor, or trustor or beneficiary
under any deed of trust for the purpose of subjecting and
subordinating this Lease to the lien of any such mortgage, deed of
trust or any other instrument of security, and the failure of the
Lessee to execute any such instruments, releases or documents,
shall constitute default hereunder. Any subordination persuant to
this section shall not be effective unless the holder of any such
instrument executes a nondisturbance and attornment agreement
showing the Lessee to continue enjoying the tennancy without
interruption or obstruction.
WAIVER 30. The waiver by Lessor of any branch of any term, covenant or
condition, herein contained shall be deemed to be a waiver of such
a term, Covenant or condition of any subsequent breech of the same
or any other term, covenant of condition therein contained. The
subsequent acceptance of rent hereunder by Lessor shall not be
deemed to be a waiver of any preceding breach by Lessee by any
term, covenant or condition of this Lease, other than the failure
of Lessee to pay the particular rent so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
HOLDING OVER 31. Any holding over after the expiration of the said term, with
the consent of Lessor, shall be construed to be a tenancy from
month to month, at a rental to be negotiated by Lessor and Lessee
prior to the expiration of said term, and shall otherwise be on
the terms and conditions herein specified, so far applicable.
SUCCESSORS 32. The covenants and conditions herein contained shall, subject
AND ASSIGNS to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns for all of all
the parties hereto; and all of the parties hereto shall be jointly
and severally liable hereunder.
TIME 33. Time is of the essence of this Lease.
MARGINAL 34. The marginal headings or title to the paragraphs of this Lease
CAPTIONS are not a part of this Lease and shall have no effect upon the
construction and interpretation of any part thereof. This
instrument contains all of the agreements and conditions made
between the parties hereto and may not be modified orally or in
any other manner than by an agreement in writing signed by all of
the parties hereto in there respective successors in interest.
Paragraphs 35, 36, and Memorandum of Understanding are hereby made a part
of this Lease.
THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY WHO WILL REVIEW THE
DOCUMENT AND ASSIST YOU TO DETERMINE WHETHER YOUR LEGAL RIGHTS ARE ADEQUATELY
PROTECTED. RENAULT & HANDLEY IS NOT AUTHORIZED TO GIVE LEGAL AND TAX ADVICE.
NO REPRESENTATION OR RECOMMENDATION IS MADE BY RENAULT & HANDLEY OR ITS AGENTS
OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF
THIS DOCUMENT OR ANY TRANSACTION RELATING THERETO. THESE ARE QUESTIONS FOR YOUR
ATTORNEY WITH WHOM YOU SHOULD CONSULT BEFORE SIGNING THIS DOCUMENT.
<PAGE>
ADDITIONAL PARAGRAPH
The additional paragraphs are hereby made a part of that certain Lease
dated July 14, 1998 by and between Renault & Handley Solar Ellis Join Venture,
Lessor and Cobalt Networks, Inc., Lessee covering the Premises at 555 Ellis
Street, Mountain View, California.
35. Lessor grants to Lessee the option of renewing this Lease for one (1)
additional 2 year term commencing on the termination day of the Lease. The
option period shall be governed by all the same tetras and conditions as
contained in the original Lease excepting the monthly rental which shall be then
fair market for comparable office/R&D buildings in the Ellis/Middlefield area.
Lessor and Lessee shall reasonably negotiate fair market value for a period of
thirty (30) days. If at the end of the thirty (30) day period, Lessor and Lessee
have not agreed upon Fair Market rental value, Lessee shall have the right to
recind it's exercised options. In no event however, shall the monthly rental for
the option period be less than $70,343.00. In order to exercise this option,
Lessee must give Lessor six (6) months written notice prior to the termination
of the origional term.
36. Lessor will hold Lessee harmless from and against all costs of response,
corrective action, remedial action, claims, demands, losses and liabilities
arising from any pre-existing environmental contamination which may have
occurred prior to the Lessee taking possession of the Premises.
Lessee will only be responsible for contamination of the Premises of the soils
or ground water thereon or thereunder in violation of Hazardous Materials Law,
that is caused by Lessee or Lessee's agents, contractors or invitees during the
term as may be extended. All hazardous materials and toxic wastes that Lessee
brings on the Premises shall be stored according to Hazardous Materials' Law.
All hazardous materials and toxic wastes that Lessee brings on the Site shall be
stored according to all local, sate and national regulations. Hazardous
materials shall be defined as those substances that are recognized as posing a
risk of injury to health or safety by the Santa Clare Fire Department, the Santa
Clara Health Department, the Regional Water Quality Control Board, the State Of
California or Federal Government.
For the purpose of this Lease, "Hazardous Materials Law" shall meant all local,
state, and federal laws, statues, ordinances, rules, regulations, judgements,
injunctions, stipulations, decrees, orders, permits, approval, treaties or
protocols now of hereafter enacted, issued of promulgated by any government
authority which relate to any Hazardous Materials of the use, handling,
transportation, production, disposal, discharge, release, emission, sale or
storage of, or the exposure of any person to, a Hazardous Material.
<PAGE>
REVISED INSURANCE CLAUSE
Lease Clause replaces the Insurance Clause (11.) in the Renault & Handley Net
Lease Form
11. Lessee shall not use, or permit on the Premises, or any part thereof, to be
used, for any purpose other than that for which the Premises are hereby Leased;
and no use shall be made or permitted to be made on the Premises nor acre done,
which will cause a cancellation of any insurance policy covering the said
building, or any part thereof, or shall Lessee sell or permit to keep, used or
sold, in or about the Premises, any article which may be prohibited by the
standard form of fire insurance policies. Lessee shall, at his whole cost and
expense, comply with any and all requirements, pertaining to the Presses, of my
insurance organization of company, necessary for the maintenance of reasonable
fire and public liability insurance, covering said building and appurtenances.
11.1 Lessee shall, at its expense, obtain and keep in force during the term of
this Lease a policy of comprehensive public liability insurance insuring Lessee,
Lessor, and any third parties named by Lessor which may include only Lessor's
lender and property manager, if any, against any Liability arising out of the
condition, use, occupancy or maintenance of the Premises. Such insurance shall
have a combined single Limit for both bodily injury and property damage in an
amount no less than One Million and No/100ths Dollars ($1,000,000.00). The
limits of said insurance shall not limit the liability of Lessee hereunder.
11.2 Lessee shall, at its expense, keep in force during the term of this Lease,
a policy of fire and property damage insurance in an "all risk" with a sprinkler
leakage endorsement, insuring Lessee's inventory, fixtures, equipment and
personal property wither, the Premises for the Rill replacement value thereof.
11.3 Lessor shall maintain a policy or policies of fire a property damage
insurance in an "all risk" form, with sprinkler and, at the option of Lessor,
earthquake endorsements, covering loss or damage of the building, including
Lessee's leasehold improvements installed with the written consent of the
Lessor, in such amounts and with such coverage as Fair Market Value of the
building deems advisable.
11.4 Lessee shall pay to Lessor as an additional rent, during the term thereof,
within twenty (20) days after receipt of an invoice therefore, 100 percent of
the premiums for any insurance obtained by Lessor pursuant to 11.3 above.
Lessor may obtain such insurance for the Building separately, or together with
other buildings and improvements which Lessor elects to insure together under
blanket policies of insurance. In such case Lessee shall be liable for only
such portion of the premium for such blanket policies as are allocable to the
Premises. It is understood and agreed that Lessee's obligation under this
paragraph shall be prorated to reflect the Commencement Date and Expiration Date
of the Lease.
11.5 Lessee and Lessor hereby waiver any and all rights of recovery against the
other, or against the officers, directors, employees, partners; agents and
representative of the other, for loss or damage to the property of the waiving
party or the property of others under its control, to the extent such loss or
damage is insured against any under insurance policy carried by Lessor or Lessee
hereunder. Each party shall notify their respective insurance carriers of this
waiver.
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have executed there presents, the day and
year first written above.
LESSOR LESSEE
Renault & Handley Solar Ellis J.V. Cobalt Networks, Inc.
by: /s/ George O. McKee by: /s/ Kenton D. Chow
----------------------------- -------------------------------
printed George O. McKee printed Kenton D. Chow
------------------------- ---------------------------
date: 8/07/98 date 8/5/98
---------------------------- -------------------------------
<PAGE>
MEMORANDUM OF UNDERSTANDING
Parties: Cobalt Networks, Incorporated
Renault & Handley Solar Ellis Joint Venture
Date: August 4, 1998
RE: That certain Lease dated August 4, 1998 by and between Renault &
Handley, Solar Ellis Join Venture, Lessor and Cobalt Networks, Inc.,
Lessee for and approximate 28,137 square foot industrial building
commonly know as 555 Ellis Street, Mountain View, California.
It is agreed as follows:
Lessor grants to Lessee the First Right of Refusal to lease the adjacent
building 515 Ellis Street, Mountain View when it become available under the
following terms and conditions. If 515 Ellis Street becomes available, Lessor
shall advise Lessee by written notification of its availability and of Lessor's
terms and conditions including monthly rental amount The Lessee shall have 20
days after the date of the notification of availability to accept or reject
Lessor's terms and conditions. If no written acceptance is received by the
Lessor from the Lessee within 20 day period, Lessor shall be free to offer the
space on the open market on the same terms and at the same rental as it was
offered to the Lessee. If, however, Lessor should decide to lease the space at
a different rental or under different terms and conditions, then Lessee shall be
given 3 business days to accept or reject the new proposal. If no written
acceptance is received by the Lessor within the above three day period, Lessor
shall be free to lease the space at the different price or different terms and
conditions without further obligations to Lessee.
Lessor agrees that Lessee shall have full and unrestricted access to the
Property for 31 days prior to lease commencement for the purpose of equipment
installation and fixturing the Property for Lessee's use. Said early access
shall be extended rent free to Lessee, but in all other respects shall be
governed by the terms of this lease including the payment of utilities and
insurance costs.
Lessor as part of the consideration for the execution of this Lease, power-wash
the exterior or the Premises, clean up the landscape area and repair damaged
asphalt in the parking lot. Lessee is entitled to all parking designated for
the Property.
Notwithstanding anything to the contrary contained in par 10 of the above Lease,
Lessor shall be responsible for landscaping and parking lot maintenance,
including resealing and restriping the parking areas when needed. Lessor shall
also be responsible for the maintenance of the roofing fabric including the
clearing of drains, resealing of penetrations when necessary and all service
calls due to water leaks. Lessor shall also pay for a service which will
provide monthly HVAC inspections and maintenance. Lessee shall be responsible
for all HVAC repair as specific in par 10 of the Lease. Lessee agrees to pay to
Lessor for this common area maintenance (CAM) the sum of 930.00/mo. Which sum
shall be payable with the monthly rental amount.
READ & AGREED:
Renault & Handly Cobalt Networks, Inc.
By: /s/ George O. McKee By: /s/ Kenton D. Chow
Date: 8/7/98 Date 8/5/98
<PAGE>
Exhibit 10.7.1
ASSIGNMENT OF LEASE
This Assignment of Lease ("Assignment") is made this 2nd day of September,
1998 by and between Netscape Communications, Inc., a Delaware corporation, whose
address is 501 East Middlefield Road, Mountain View, California 94043
("Netscape") and Cobalt Networks, Inc., a California corporation, whose address,
from and after the Effective Date will be 555 Ellis Street, Mountain View,
California 94043 ("Assignee").
RECITALS
A. Netscape leases certain premises consisting of a portion of an
industrial building containing approximately 15,350 square feet, located at 555
Ellis Street, Mountain View, California, pursuant to that certain Sublease dated
as of October 28, 1996 between Banta Corporation (the "Master Sublandlord"), as
sublandlord, and Netscape, as subtenant, as amended by that certain Addendum One
to Sublease dated as of November 6, 1996 (as so amended, the "Master Sublease"),
as more particularly described therein (the "Premises"). The Master Sublease is
attached hereto as Exhibit A. Master Sublandlord leases the Premises under a
Lease (the "Master Lease") dated August 10, 1993, between Renault & Handley
Solar Ellis Joint Venture, as lessor ("Master Landlord") and Sublandlord, as
lessee. The Master Lease is attached hereto as Exhibit B; and
B. Netscape now wishes to assign all of its right, title and interest in
the Master Sublease to Assignee and Assignee wishes to accept the assignment
from Netscape and assume all of the Netscape's obligations under the Master
Sublease; and
C. The Master Sublease requires Master Sublandlord's and Master
Landlord's respective consents to an assignment of Netscape's interest in the
Master Sublease.
AGREEMENT
The parties agree as follows:
1. Effective Date of Assignment: This Agreement shall take effect on
----------------------------
September 3, 1998 (the "Effective Date"). Netscape shall give possession of the
Premises to Assignee on that date.
2. Assignment and Assumption: Netscape assigns and transfers to Assignee
-------------------------
all of its right, title and interest in the Master Sublease and Assignee accepts
the assignment and assumes and agree to perform, from the Effective Date, as a
direct obligation to Master Sublandlord, all of the provisions of the Master
Sublease.
3. Netscape's Liability: From and after the Effective Date, Netscape
--------------------
shall have no liability for performance of the provisions of the Master
Sublease.
4. Hold Harmless: Netscape shall indemnify and hold harmless Assignee
-------------
from all damages, liabilities, claims, judgments, actions, reasonable attorneys'
fees, consultants' fees, cost and expenses arising from any breach by Netscape
of any terms on the Sublease prior to the Effective Date, or any
misrepresentation made by Netscape herein. Assignee shall indemnify and hold
harmless Netscape from all damages, liabilities, claims, judgments, actions,
reasonable attorneys' fees, consultants' fees, cost and expenses arising from
any breach by Assignee of any terms of the Lease from or after the Effective
Date.
1
<PAGE>
5. Payment: Assignee agrees that it will pay Netscape the sum of thirteen
-------
thousand, seventy six dollars ($13,076.00). Such amount will be paid to Netscape
at the address set forth above, on or before the Effective Date.
6. Security Deposit: The parties acknowledge that Master Sublandlord
----------------
holds a security deposit in the amount of $18,420 (the "Security Deposit").
Netscape releases all claims to the Security Deposit for the benefit of
Assignee, subject to the provisions of the Master Sublease.
7. Attorney's Fees: If there is any legal or arbitration action or
---------------
proceeding between the parties to enforce any provision of this Assignment or to
protect or establish any right or remedy of any of the parties, the unsuccessful
party to such action or proceeding will pay to the prevailing party all costs
and expenses, including reasonable attorney's fees (including allocated costs of
Netscape's in-house attorney) incurred by such prevailing party in such action
or proceeding and in any appearance in connection therewith, and if such
prevailing party recovers a judgment in any such action, proceeding or appeal,
such costs, expenses and attorney's fees will be determined by the court or
arbitration panel handling the proceeding and will be included in and as a part
of such judgment.
8. Representations and Warranties: Netscape represents and warrants to
------------------------------
Assignee as of the date hereof and as of the Effective Date: (i) the Master
Sublease attached as Exhibit A hereto and the Master Lease attached as Exhibit B
hereto are true, correct and complete copies of the Master Sublease and the
Master Lease, and there has been no amendment or modification of either of the
documents except as expressly set forth therein; (ii) the Sublease represents
the entire agreement of Master Sublandlord and Netscape with respect to the
sublease of the Premises, and there are no oral understandings or other
agreements with respect thereto, except as set forth in the Sublease; (iii)
there is no default on the part of either party to the Sublease, nor any
condition which, with the passage of time or the giving of notice, or both,
would constitute a default thereunder; and (iv) Netscape has made no prior or
inconsistent assignment, encumbrance or other transfer of the Sublease, or any
interest therein, or of the Premises, or any portion thereof.
9. Miscellaneous:
-------------
(a) Notice: Any notices or other communications required, or
------
permitted under this Assignment will be in writing and either served personally
or sent by prepaid, first-class mail and addressed to the other party at the
address set forth in the introductory paragraph of this Assignment. Either party
may change its address by notifying the other party of the change of address.
(b) Successors: This Assignment shall be binding on and inure to the
----------
benefit of the parties and their successors.
(c) Entire Agreement: This Assignment constitutes the entire
----------------
agreement between the parties hereto and may not be modified except by an
instrument in writing signed by the party to be charged.
(d) Governing Law: This Assignment will be governed by the laws of
-------------
the State of California.
(e) Time: The parties hereto agree that time is strictly of the
----
essence with respect to each and every term, condition, obligation and provision
hereof.
(f) Waiver: No failure of any party to enforce any term of this
------
Assignment shall be deemed to be a waiver of that party's right to enforce the
term.
(g) Construction: The parties agree that this Assignment will be
------------
construed to effectuate the normal and reasonable expectations of a
sophisticated Landlord, Netscape and assignee. No party will take actions which
would frustrate the other's reasonable expectations concerning the benefits of
this Assignment. The parties further agree that this Assignment expresses the
terms of their agreement and that it should not be interpreted in favor or
against any party.
2
<PAGE>
In Witness Whereof, the parties hereto have set their hands as of the date
and year first above written.
"ASSIGNEE" "NETSCAPE"
Cobalt Networks, Inc., Netscape Communications, Inc.
a California corporation
By: /s/ Kenton D. Chow By: /s/ [SIGNATURE ILLEGIBLE]
------------------------------- -------------------------------
Title: Vice President of Finance & CFO Title: Director
---------------------------- ----------------------------
By:_______________________________
Title:_________________________
3
<PAGE>
CONSENT OF MASTER SUBLANDLORD
-----------------------------
Banta Corporation, the Master Sublandlord under the Master Sublease
attached hereto as Exhibit A hereby consents to the Assignment attached hereto,
and all of the terms and conditions contained therein, including Netscape's
release from any liability under the Master Sublease. This Consent applies only
to this Assignment and shall not be deemed to be a consent to any other
Assignment.
BANTA CORPORATION
a_________________________________
By:_______________________________
Title:____________________________
Date:_____________________________
CONSENT OF MASTER LANDLORD
--------------------------
Renault & Handley Solar Ellis Joint Venture, the Master Landlord under the
Master Lease attached hereto as Exhibit B hereby consents to the Assignment
attached hereto, and all of the terms and conditions contained therein,
including Netscape's release from any liability under the Master Sublease. This
Consent applies only to this Assignment and shall not be deemed to be a consent
to any other Assignment.
RENAULT & HANDLEY JOINT VENTURE
a_________________________________
By:_______________________________
Title:____________________________
Date:_____________________________
4
<PAGE>
EXHIBIT 10.7.2
SUBLEASE
Sublandlord: Banta Corporation Subject Property: 555 Ellis
St. Mountain View, CA
Subtenant: Netscape Communications, Inc. Date: October ____, 1996
1. Parties:
This Sublease is made and entered into as of October ___, 1996, by and between
Banta Corporation ("Sublandlord"), and Netscape Communications, Inc.
("Subtenant"), under the Lease (the "Master Lease") dated August 10, 1993,
between Renault & Handley Solar Ellis Joint Venture, as lessor (the "Master
Landlord") and Sublandlord under this Sublease, as lessee. A copy of the Master
Lease is attached hereto as Attachment I and incorporated herein by this
reference.
2. Subleased Premises and Rent:
2.1 Subleased Premises:
Sublandlord leases to Subtenant and Subtenant leases from Sublandlord the
premises outlined on Attachment H attached hereto and incorporated herein
by this reference (the "Subleased Premises") upon all of the terms,
covenants and conditions contained in this Sublease, together with the
exclusive use of four (4) vehicle parking spaces per 1000 feet of leased
space as further provided herein. The Subleased Premises consist of
approximately 15,350 square feet, which is a portion of the building
located at 555 Ellis Street, Mountain View, California.
2.2 Rent:
Subtenant shall pay to Sublandlord as rent ("Rent") for the Subleased
Premises according to the following schedule:
<TABLE>
<CAPTION>
FULL SERVICE RENT MONTHLY RENT
----------------- ------------
<S> <C> <C>
11/01/96 - 11/30/96 $1.20/Square Foot/Month ($18,420.00)
12/01/96 - 11/30/97 $1.25/Square Foot/Month ($19,187.50) + 1635.11
12/01/97 - 11/30/98 $1.35/Square Foot/Month ($20,722.50) + 1635.11
</TABLE>
The parties hereto agree that the above-referenced Rent paid by Subtenant
includes Subtenant's share of all operating expenses including but not
limited to the following: real property taxes and assessments, building
insurance ("all risk" fire and property damage coverage), trash removal,
all interior and exterior repair and maintenance costs (including
janitorial), all utility costs, and any other reasonable costs necessary
for the operation and/or maintenance of the Subleased Premises. A schedule
of the specific maintenance and janitorial services included as part of the
operating expenses hereunder will be provided to Subtenant by Sublandlord
upon request.
<PAGE>
Rent shall be payable by Subtenant to Sublandlord in consecutive monthly
installments on or before the first day of each calendar month during the
Sublease Term (as hereinafter defined) at the address provided below for
Sublandlord. If the Sublease commencement date or the termination date of
the Sublease occurs on a date other than the first day or the last day,
respectively, of a calendar month, then the Rent for such partial month
shall be prorated and the prorated Rent shall be payable on the Sublease
commencement date or on the first day of the calendar month in which the
Sublease termination date occurs, respectively.
2.3 Security Deposit:
In addition to the Rent specified above, Subtenant shall pay to Sublandlord
an equivalent of one month's rent ($18,420.00) as a non-interest bearing
Security Deposit. In the event Subtenant has performed all of the terms and
conditions of this Sublease during the term hereof, Sublandlord shall
return to Subtenant, within ten days after Subtenant has vacated the
Subleased Premises, the Security Deposit, less any sums due and owing to
Sublandlord.
3. Sublease Term:
3.1 Sublease Term:
The Sublease Term shall be for the period commencing on November 1, 1996,
and continuing through November 30, 1998. In no event shall the Sublease
Term extend beyond the term of the Master Lease.
3.2 Inability to Deliver Possession:
In the event Sublandlord is unable to deliver possession of the Subleased
Premises at the commencement of the Sublease Term, Sublandlord shall not be
liable for any damage caused thereby, nor shall this Sublease be void or
voidable but Subtenant shall not be liable for Rent until such time as
Sublandlord offers to deliver possession of the Subleased Premises to
Subtenant; nor shall the term hereof be extended by such delay.
Notwithstanding the foregoing, in the event that Sublandlord fails to
deliver the Subleased Premises to Subtenant on or before December 1, 1996,
Subtenant shall have the right to terminate this Sublease and both parties
hereto shall be released from their obligations hereunder, except that
Sublandlord shall be required to return the Security Deposit and any other
funds deposited by Subtenant, to Subtenant.
3.3 Early Occupancy:
Notwithstanding the foregoing, upon execution of this Sublease and consent
hereto by the Master Landlord, Subtenant shall have the right to enter the
Subleased Premises on any date prior to November 1, 1996 (the "Early
Occupancy Date") to take reasonable preparatory measures for its occupancy
of the Subleased Premises, including, without limitation, the installation
of its security systems, trade fixtures, furnishings, and telephone and
computer equipment. Any such installations, refurbishments and other
2
<PAGE>
alterations shall comply with all requirements of the Master Lease. In
addition, any such early entry shall be subject to all of the terms and
conditions of this Sublease, except that Subtenant shall not be required to
pay any Rent on account thereof; provided, however, that if Subtenant shall
at any time during such early occupancy take full beneficial occupancy of
the Subleased Premises and conduct its business from the Subleased
Premises, Subtenant shall pay Rent for the period ending with the
commencement of the-term at the same rental as that prescribed for the
first month of the term prorated at the rate of 1/30th thereof per day.
3.4 Right of First Refusal:
Subtenant acknowledges that Sublandlord has an option to renew the Master
Lease. In the event that Sublandlord intends to exercise said option,
Sublandlord shall give Subtenant the opportunity to sublease those portions
of the Subleased Premises then occupied by Subtenant, as designated by
Sublandlord and upon mutually agreeable terms and conditions. Sublandlord
shall give Subtenant written notice of this opportunity no later than
ninety (90) days prior to the expiration of the Sublease Term, and
Subtenant shall have twenty (20) days thereafter to notify Sublandlord in
writing of its desire to sublease said space.
4. Use:
Subtenant shall use the Subleased Premises only for those purposes
permitted in the Master Lease, unless Sublandlord and Master Landlord
consent in writing to other uses prior to the commencement thereof.
5. Provisions Constituting Sublease:
5.1 This Sublease is subject to all of the terms and conditions of the
Master Lease. Subtenant hereby assumes and agrees to perform all of the
obligations of "Lessee" under the Master Lease to the extent such
obligations apply to the Subleased Premises and Subtenant's use of the
Common Areas, except as specifically set forth herein. Sublandlord hereby
agrees to cause Master Landlord under the Master Lease to perform all of
the obligations of Master Landlord thereunder to the extent said
obligations apply to the Subleased Premises and Subtenant's use of the
Common Areas. Subtenant shall not commit or permit to be committed on the
Subleased Premises, the Common Areas, or on any other portion of the
property any act or omission which violates any term or condition of the
Master Lease. Except to the extent waived or consented to in writing by the
other party or parties hereto who are affected thereby, neither of the
parties hereto will, by renegotiation of the Master Lease, assignment,
subletting, default or any other voluntary action, avoid or seek to avoid
the observance or performance of the terms to be observed or performed
hereunder by such party, but will at all times in good faith assist in
carrying out all the terms of this Sublease and in taking all such action
as may be necessary or appropriate to protect the rights of the other party
or parties hereto who are affected thereby against impairment. Subject to
the foregoing and except as otherwise provided
3
<PAGE>
herein, nothing in this Sublease shall prevent or prohibit Sublandlord (a)
from exercising its right to terminate the Master Lease pursuant to the
terms thereof or (b) from assigning its interests in this Sublease to any
affiliate of Sublandlord, or from subletting any other portion of the
Premises to any other third party.
5.2 This Sublease shall be subject and subordinate to all of the terms and
provisions of the Master lease, and Master Landlord shall have all rights
in respect of the Master Lease and the Subleased Premises as set forth
therein. Except for payments of rent under Section 4 of the Master Lease
(which payments shall be made by Sublandlord), and, except as otherwise
provided in Section 7 hereof, Subtenant hereby assumes and agrees to
perform for Sublandlord's benefit, during the term of this Sublease, all of
Sublandlord's obligations under the Master lease insofar as they relate to
the Subleased Premises (hereinafter the "Assumed Obligations"), which
accrue during the term of this Sublease.
6. Notices:
All notices, demands, consents and approval which may or are required to be
given by either party to the other hereunder shall be given in the manner
provided herein, at the addresses shown on the signature page hereof.
Sublandlord shall notify Subtenant of any Event of Default under the Master
Lease, or of any other event of which Sublandlord has actual knowledge which
will impair Subtenant's ability to conduct its normal business at the Subleased
Premises within 24 hours following Sublandlord's receipt of notice from the
Master Landlord of an Event of Default or actual knowledge of such impairment.
If Sublandlord elects to terminate the Master Lease, Sublandlord shall so notify
Subtenant by giving at least 30 days notice prior to the effective date of such
termination, during which time Subtenant shall have the right to cure outlined
in Paragraph 9. Should Subtenant fail to exercise said right, then the Master
Lease shall terminate on the effective date of termination stated in the notice.
7. Incorporation of Master Lease:
7.1 Except as otherwise provided in this Sublease, all of the terms and
provisions of the Master Lease are incorporated into and made a part of this
Sublease, and the rights and obligations of the parties under the Master Lease
are hereby imposed upon the parties hereto with respect to the Subleased
Premises. For purposes of this Sublease, with respect to those paragraphs
incorporated from the Master Lease, all references to "Landlord" or "Tenant"
shall-be deemed to be references to "Sublandlord" and "Subtenant", respectively,
and all references to the "Lease" shall be deemed to be references to this
"Sublease".
7.2 Notwithstanding the foregoing:
(a) the following Paragraphs of the Master Lease are not incorporated
herein: 1, 3, 4, 5, 11.4, 17 and 22 (except that Subtenant shall be
responsible for all
4
<PAGE>
taxes on its personal property and trade or business fixtures); Addendum
One to Lease paragraphs 2 and 12; Agreement re: Lease provisions entitled
"Operating Expenses" and "Lessee Improvement Allowance".
(b) Subtenant shall indemnify, defend, protect, and hold Sublandlord
harmless from and against all actions, claims, demands, costs, liabilities,
losses, reasonable attorneys' fees, damages, penalties, and expenses
(collectively "Claims") which may be brought or made against Sublandlord or
which Sublandlord may pay or incur to the extent caused by a breach of this
Sublease or the Master Lease by Subtenant.
(c) Sublandlord shall indemnify, defend, protect, and hold Subtenant
harmless from and against all actions, claims which may be brought or made
against Subtenant or which Subtenant may pay or incur to the extent caused
by (i) a breach of this Sublease or the Master Lease by Sublandlord, (ii)
the negligence or willful misconduct of Sublandlord or its agents,
officers, directors, invitees or guests or (iii) obligations of Sublandlord
which arise prior to the commencement date of this Sublease.
7.3 For the purposes of incorporating the terms and provisions of the
Master Lease into this Sublease, the Master Lease is hereby amended as follows
(references are to paragraphs of the Master Lease):
Paragraph Comments
7(d) Subtenant's removal and restoration obligations with
respect to alterations, additions, improvements and
installations on the Subleased Premises shall apply
only to such work performed by Subtenant.
9 Sublandlord hereby consents to the improvements,
alterations and changes to be made and installed by
Subtenant (collectively, the "Tenant Improvements")
to the extent such Tenant Improvements are approved
in writing by Master Landlord.
19 In the event of a default by Subtenant under this
Sublease, prior to Sublandlord's exercise of any of
its rights and remedies hereunder, Subtenant shall
have the following periods, following receipt of
written notice from Sublandlord of such default, to
cure such default: in the event of a monetary
default, three business days, and, in the event of a
non-monetary default, thirty calendar days.
5
<PAGE>
24 Sublandlord shall provide Subtenant with not less
than twenty-four (24) hours' prior notice before any
entry onto the Subleased Premises by Sublandlord or
its agents, employees or contractors for maintenance
or repair, except in the event of an emergency.
Subtenant shall have the right to accompany
Sublandlord during any such entry and shall have the
right to designate certain "secured areas" that
Sublandlord shall not have the right to enter except
in the case of an emergency. Sublandlord shall use
its best efforts not to interfere with the conduct
of Subtenant's business during any such entry.
26 Subtenant may assign or sublet any part or all of
the Subleased Premises or hypothecate or otherwise
encumber its interest under this Sublease, with
Sublandlord's prior written consent, which shall not
be unreasonably withheld or delayed. Sublandlord
shall approve or disapprove Subtenant's request to
assign or sublet within 30 days of its receipt of
such request, and shall have no right to terminate
this Sublease in connection with arty such
disapproval. In addition, Subtenant shall have the
right to assign or sublet any part or all of the
Subleased Premises to an entity directly
controlling, controlled by, or under common control
with, Subtenant, or any entity resulting from a
Consolidation or merger with Subtenant, provided
that, in either case, the lessor under the Master
lease has granted its unconditional consent to such
assignment or sublease in writing.
31 All notices, approvals, consents and other
communications under this Sublease shall be provided
in writing and may be given by personal delivery, a
reputable overnight courier service or prepaid
first-class mail, certified or registered with
return receipt requested. Notices shall be deemed to
have been given and received on the earlier of
actual receipt, refusal to accept delivery and three
(3) business days after the day of deposit into
prepaid registered or certified U.S. mail.
Addendum #5 Notwithstanding any provision of the Master lease or
this Sublease to the contrary, Sublandlord shall
perform all of the maintenance obligations set forth
in Paragraph 10(b) of the Master Lease.
6
<PAGE>
8. Early Termination of Master Lease. If, without the fault of Sublandlord
hereunder the Master Lease should terminate prior to the expiration of this
Sublease, Sublandlord shall have no liability to Subtenant. To the extent that
the Master Lease grants Sublandlord any discretionary right to terminate the
Master lease, whether due to casualty, condemnation, or otherwise, Sublandlord
may exercise such right without Subtenant's prior written consent; provided,
however, that Sublandlord shall first offer to assign the Master Lease (and all
of Sublandlord's rights, obligations and interests therein) to Subtenant,
together with Sublandlord's pledge to use all commercially reasonable efforts to
obtain the consent of Master Landlord to such assignment. Subtenant shall have
ten (10) days after said offer to agree to accept assignment of the Master Lease
(which, upon the consent of Master Landlord, shall terminate this Sublease).
Furthermore, Sublessor shall not enter into any amendment or modification of the
Master Lease which (a) affects the Subleased Premises or (b) adversely impacts
Subtenant's rights under the Sublease, without the prior written consent of
Subtenant.
9. Subtenant's Right to Cure. In the event that Sublandlord is in default of
the Master Lease, Sublessee shall have the right, but not the obligation, to
cure the default so long as Master Landlord agrees to accept such performance.
Sublandlord agrees to reimburse Subtenant for all costs and expenses reasonably
incurred therefore within ten (10) days following Subtenant's request for
reimbursement.
10. Master Landlord Consent. This Sublease is subject to the consent of the
Master Landlord. Sublandlord agrees to use commercially reasonable efforts to
obtain the consent of Master Landlord to this Sublease as soon as reasonably
possible following execution of this Sublease by Subtenant and Sublandlord, and
shall provide Subtenant with notice of Sublandlord's submittal of this Sublease
to Master Landlord for approval. In the event that Master Landlord's consent is
not obtained within twenty (20) days following the submittal of this Sublease by
Sublandlord to Master Landlord for consent, Subtenant shall have the right to
terminate this Sublease by providing written notice thereof to Sublandlord
within three (3) days after the expiration of such twenty (20) day period. For
purposes of this paragraph, Master Landlord's consent shall be deemed to have
been given as of the date when Master Landlord's unconditional consent to this
Sublease has been obtainable, or, in the event such consent is conditional, the
date upon which such conditions have been fully satisfied or waived by Master
Landlord.
11. Status of Lease
Sublandlord hereby represents and warrants to Subtenant that (i) the Master
Lease attached hereto as Attachment I has been executed and delivered by Master
Landlord and Sublandlord and constitutes the entire agreement of the parties
thereto relating to the lease of the Subleased Premises, (ii) no default or
breach by Sublandlord or, to the best of Sublandlord's knowledge, by Master
Landlord, exists under the Master Lease, (iii) no event has occurred that, with
the passage of time, the giving of notice, or both, would constitute a default
or breach by Sublandlord or, to the best of Sublandlord's knowledge, by Master
Landlord under the Master Lease, and (iv) subject to receipt of Master
Landlord's written consent hereto, Sublandlord has
7
<PAGE>
the right and power to execute and deliver this Sublease and to perform its
obligations hereunder. Sublandlord shall not modify the Master Lease in such a
manner as to materially increase the obligations of Subtenant hereunder or under
the Master Lease, without the prior written consent of Subtenant.
12. Broker Fee:
Each party warrants and represents to the other that such party has not retained
the services of any real estate broker, finder or any other person whose
services would form the basis for any claim for any commission or fee in
connection with this Sublease or the transactions contemplated hereby, except
for brokerage services rendered by Cornish & Carey Commercial ("Cornish &
Carey"). Sublandlord shall pay directly to Cornish & Carey its fees due on
account thereof, in accordance with its listing agreement. Each party agrees to
save, defend, indemnify and hold the other party free and harmless from any
breach of its warranty and representation as set forth in the preening sentence,
including the other party's attorneys' fees.
13. Compliance with Nondiscrimination Regulations:
It is understood that it is illegal for Sublandlord to refuse to display or
sublease the Subleased Premises, or to assign, surrender or sell the Master
Lease, to any person because of race, color, religion, national origin, sex,
sexual orientation, marital status or disability.
14. Toxic Contamination Disclosure:
Sublandlord and Subtenant each acknowledge that they have been advised that
numerous federal, state, and/or local laws, ordinances and regulations ("Laws")
affect the existence and removal, storage, disposal, leakage of and
contamination by materials designated as hazardous or toxic ("Toxics"). Many
materials, some utilized in everyday business activities and property
maintenance, are designated as hazardous or toxic.
Some of the Laws require that Toxics be removed or cleaned up by landowners,
future landowners or former landowners without regard to whether the party
required to pay for "clean up" caused the contamination, owned the property at
the time the contamination occurred or even knew about the contamination. Some
items, such as asbestos or PCBs, which were legal when installed, now are
classified as Toxics, and are subject to removal requirements. Civil lawsuits
for damages resulting from Toxics may be filed by third parties in certain
circumstances.
Sublandlord and Subtenant each acknowledge that Broker has not specific
expertise with respect to environmental assessment or physical condition of the
Subleased Premises, including, but not limited to, matters relating to (i)
problems which may be posed by the presence or disposal of hazardous or toxic
substances on or from the Subleased Premises, (ii) problems which may be posed
by the Subleased Premises being within the Special Studies Zone, as designed
under the Alquist-Priolo Special Studies Zone Act (Earthquake Zones), Section
2621-2630, inclusive of California Public Resources Code, and (iii) problems
which may be posed by the Subleased
8
<PAGE>
Premises being within a HUD Flood Zone as set forth in the U.S. Department of
Housing and Urban Development "Special Flood Zone Area Maps," as applicable.
Sublandlord and Subtenant each acknowledge that Broker has not made an
independent investigation or determination of the physical or environmental
condition of the Subleased Premises, including but not limited to, the existence
or nonexistence of any underground tanks, sumps, piping, toxic or hazardous
substances on the Subleased Premises. Subtenant agrees that it will rely solely
upon its own investigation and/or the investigation of professionals retained by
it or Sublandlord, and neither Sublandlord nor Subtenant shall rely upon Broker
to determine the physical and environmental condition of the Subleased Premises
or to determine whether, to what extent or in what manner, such condition must
be disclosed to potential sublessees, assignees, purchasers or other interested
parties.
15. Tenant Improvements:
Sublandlord shall be responsible for all costs associated with the. demise of
the Subleased Premises, excluding the costs to demise the kitchen area.
Subtenant shall be responsible for all costs associated with Subtenant
improvements to the Subleased Premises, and for the demise of the kitchen area.
If any of said improvements made by or on behalf of Subtenant (whether the
responsibility of Subtenant or Sublandlord) require additional construction (i)
necessary for compliance with the Americans with Disabilities Act of 1990, or
(ii) relocation, enhancement or repair of the HVAC, electrical or sprinkler
systems, or any part thereof; Subtenant shall be responsible for and shall
perform such construction. If required by Master Landlord or Sublandlord,
Subtenant shall return the Demised Premises to the original configuration
(including removal of all demising walls) at the expiration of the Sublease
term; provided however, nothing herein shall be deemed to impose liabilities on
Subtenant for any alterations or improvements not associated with this Sublease.
16. Reasonable Consent or Approval:
When any provision of this Sublease, the Master Lease or the accompanying-Rules
and Regulations, calls for a party's consent or approval, Sublandlord and
Subtenant each agree that such consent or approval shall not be unreasonably
withheld or delayed.
17. Counterparts:
This Sublease may be executed in any number of counterparts, each of which
counterparts shall be deemed to be an original, and all of which together shall
constitute one and the same instrument.
Sublandlord: BANTA CORPORATION Address: 555 Ellis Street
Mountain View, CA 94043
By: /s/ Gerald A. Henseler Date: 10/8/96
------------------------------ ------------------------------------
Gerald A. Henseler,
Executive Vice President & CFO
9
<PAGE>
Subtenant: NETSCAPE COMMUNICATIONS, Address: 555 Ellis Street
INC Mountain View, CA 94043
By: /s/ [SIGNATURE ILLEGIBLE] Date: 10/28/96
------------------------------ ------------------------------------
NOTICE TO SUBLANDLORD AND SUBTENANT: CORNISH & CAREY COMMERCIAL, IS NOT
AUTHORIZED TO GIVE LEGAL OR TAX ADVICE; NOTHING CONTAINED IN THIS SUBLEASE OR
ANY DISCUSSION BETWEEN CORNISH & CAREY AND SUBLANDLORD AND SUBTENANT SHALL BE
DEEMED TO BE A REPRESENTATION OR RECOMMENDATION BY CORNISH & CAREY COMMERCIAL,
OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL EFFECT OR TAX CONSEQUENCES OF THIS
DOCUMENT OR ANY TRANSACTION RELATING THERETO. ALL PARTIES ARE ENCOURAGED TO
CONSULT WITH THEIR INDEPENDENT FINANCIAL CONSULTANTS AND/OR ATTORNEYS REGARDING
THE TRANSACTION CONTEMPLATED BY THIS PROPOSAL.
10
<PAGE>
MASTER LANDLORD CONSENT
The undersigned, Master Landlord under the Master Lease attached as Attachment
I, hereby consents to the subletting of the Subleased Premises described herein
on the terms and conditions contained in this Sublease. This Consent shall apply
only to this Sublease and shall not be deemed to be a consent to any other
Sublease.
Master Landlord: RENAULT & HANDLEY SOLAR ELLIS JOINT VENTURE
By: /s/ George O. McKee Date: 11/1/96
------------------------------- -----------------------------------
Master Landlord: RENAULT & HANDLEY SOLAR ELLIS JOINT VENTURE
By: /s/ George O. McKee Date: 11/04/96
------------------------------- -----------------------------------
Subtenant: NETSCAPE COMMUNICATIONS, INC.
By: [SIGNATURE ILLEGIBLE] Date: 11/6/96
------------------------------- -----------------------------------
11
<PAGE>
EXHIBIT 10.7.3
ADDENDUM ONE TO SUBLEASE
This Addendum One to Lease ("Addendum") is entered into as of
________________, 1996, by and among BANTA CORPORATION ("Sublandlord"), NETSCAPE
COMMUNICATIONS, INC. ("Subtenant") and RENAULT & HANDLEY SOLAR ELLIS JOINT
VENTURE ("Master Landlord"), to be part of that certain Sublease dated October
______ 1996 (the "Sublease"). between Sublandlord and Subtenant and to which
Master Landlord has granted its consent. The parties agree that the Sublease
shall be amended, supplemented and modified as follows:
1. Definitions. Unless otherwise defined in this Addendum all the terms
used herein shall have the meaning and definitions given them in the Sublease.
2. Rent for Subleased Premises. Under the of section 2.2 of the
Sublease, installments of Rent are due from Subtenant to Sublandlord on November
1, 1996 and December 1, 1996 in the amounts of $18,420.00 and $19,187.50,
respective, however, the parties desire to amend the Sublease to defer these
installments (hereinafter the "Deferred Rent"). Accordingly, the parties hereby
agree that section 2.2 of the Sublease shall be modified to provide that
consecutive monthly installments of Rent shall commence of January 1, 1997,
continuing on or before the first day of each calendar month during the Sublease
Term. The parties hereby further agree that the total Deferred Rent be paid by
Subtenant to Sublandlord in equal monthly installments beginning January 1, 1997
and continuing on or before the first day of each calendar month during the
Sublease Term, and that such Deferred Rent shall not be construed as "additional
rent" under paragraph 26 of the Master Lease.
3. Other Provisions. All other terms and conditions of the Sublease
shall remain in force and effect, unaltered by this Addendum.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the day
and year first above written.
BANTA CORPORATION NETSCAPE COMMUNICATIONS, INC.
By: /s/ [SIGNATURE ILLEGIBLE] By: /s/[SIGNATURE ILLEGIBLE]
------------------------------ --------------------------
Vice President, Secretary & Gen. Counsel
Date: October 30, 1996 Date: 10/31/96
------------------------------ --------------------------
RENAULT & HANDLEY SOLAR ELLIS
JOINT VENTURE
By: George O. McKee
--------------------------------
Date: 11/1/96
--------------------------------
<PAGE>
EXHIBIT 10.7.4
Renault & Handley
INDUSTRIAL & COMMERCIAL REAL ESTATE
This Lease, executed in duplicate at Palo Alto, California,
PARTIES this 10th day of August, 1993, by and between
Renault & Handley Solar Ellis Joint Venture.
and
Banta Digital Services, Inc.
hereinafter called respectively Lessor and Lessee, without regard
to number or gender,
PREMISES 1. WITNESSETH: That Lessor hereby leases to Lessee, and
Lessee hires from Lessor, those certain premises, hereinafter in
this lease designated as "the Premises," with the appurtenances,
situated in the City of Mountain View County of Santa Clara,
State of California, and more particularly described as follows,
to-wit:
Premises commonly known as 555 Ellis Street, and which
include an approximate 28,157 square foot industrial
building.
USE 2. The Premises shall be used and occupied by Lessee for
General office, sales, administration, printing services and
other legal uses, and for no other purpose without the prior
written consent of Lessor,
TERM 3. The term shall be for Five (5) years, commencing on the
1st day of December, 1993, and ending on the 30th day of
November, 1998.
RENTAL 4. Rent shall be payable to the Lessor without deduction
or offset at such place or places as may be designated from time
to time by the Lessor as follows:
<PAGE>
[??] as security for [??] full and faithful performance of each
and every term, provision, covenant and condition of this Lease.
In the event that Lessee defaults in respect of any of the terms,
provisions, covenants or conditions of this Lease, including, but
not limited to the payment of rent, Lessor may use, apply or
retain the whole or any part of such security for the payment of
any rent in a default or for any other sum which all of the
terms, provisions, covenants, and conditions of this Lease, the
security of any balance thereof shall be returned to Lessee or,
at the option of Lessor, to the last assignee of Lessee's
interest in this Lease at the expiration of the term hereof,
Lessee shall not be entitled to any interest on said security
deposit.
POSSESSION 6. If Lessor, for any reason whatsoever, cannot deliver
possession of the Premises to Lessee at the commencement of the
said term, as hereinbefore specified, this Lease shall not be
void or voidable, nor shall Lessor, or Lessor's agents, be liable
to Lessee 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 revised to conform
to the date of Lessor's delivery of possession. The above is
however, subject to the provision that the period of delay of
delivery of the Premises shall not exceed sixty (60) days from
the commencement date herein. If the period of delay of delivery
exceeds the foregoing, Lessee, at his or its option, may declare
this Lease null and void.
USES 8. Lessee shall not commit, or suffer to be committed, any
PROHIBITED waste upon the Premises, or any nuisance, or other act or thing
which may disturb the quiet enjoyment of any other tenant in or
around the buildings in which the Premises may be located, or
allow any sale by auction upon the Premises, or allow the
Premises to be used for any improper, immoral, unlawful or
objectionable purpose, or place any loads upon the floor, walls,
or roof which endanger the structure, or place any harmful
liquids in the drainage system of the building. No waste
materials or refuse shall be dumped upon or permitted to remain
upon any part of the Premises outside or the building proper. No
materials, supplies, equipment, finished products or semi-
finished products, raw materials or articles of any nature shall
be stored upon or permitted to remain on any portion of the
Premises outside of the buildings proper.
<PAGE>
SEE REVISED INSURANCE CLAUSE ATTACHED
ABANDONMENT 12. Lessee shall not vacate or abandon the Premises at any
time during the term: and if Lessee shall abandon, vacate or
surrender the premises, or be dispossessed by process of law, or
otherwise, any personal property belonging to Lessee and left on
the Premises shall be deemed to be abandoned, at the option of
Lessor, except such property as may be mortgaged to Lessor.
FREE FROM 13. Lessee shall keep the Premises and the property in
LIENS which the Premises are situated, free from any liens arising out
of any work performed, materials furnished, or obligations
incurred by Lessee.
INDEMNI- 15. The Lessee, as a material part of the consideration to
FICATION OF be rendered to the Lessor, hereby waives all claims against the
LESSOR AND Lessor for damages to goods, wares and merchandise, and all other
LESSEE'S personal property in, upon, or about the Premises and for
LIABILITY injuries to persons in or about the Premises, from any cause
INSURANCE arising at any time, excepting claims arising from the Lessor's
negligence, and the Lessee will hold the Lessor exempt and
harmless from any damage or injury to any person, or to the
goods, wares and merchandise and all other personal property of
any person, arising from the use of the Premises by the Lessee,
or from the failure of the Lessee to keep the Premises in good
condition and repair, as herein provided.
SEE REVISED INSURANCE CLAUSE ATTACHED
ADVERTISE- 16. Lessee will not place or permit to be placed, in, upon
MENTS AND or about the Premises any unusual or extraordinary signs, or any
SIGNS signs not approved by the city or other governing authority. The
Lessee will not place, or permit to be placed, upon the Premises,
any signs, advertisements or notices without the written consent
of the Lessor first had and obtained. Any sign so placed on the
Premises shall be so placed upon the understanding and agreement
that Lessee will remove same at the termination of the tenancy
herein created and repair any damage or injury to the Premises
caused thereby, and if not so removed by Lessee then Lessor may
have same so removed at Lessee's expense.
UTILITIES 17. Lessee shall pay for all water, gas, heat, light,
power, telephone service and all other service supplied to the
Premises.
ATTORNEY'S 18. In case suit should be brought for the possession of
FEES the Premises, for the recovery or any sum due hereunder, or
because of the breach of any other covenant herein, the losing
party shall pay to the prevailing party a reasonable attorney's
fee, which shall be deemed to have accrued on the commencement of
such action and shall be enforceable whether or not such action
is prosecuted to judgment.
DEFAULT 19. In the event of any breach of this Lease by the Lessee,
or an abandonment of the Premises by the Lessee, the Lessor has
the option of 1) removing all persons and property from the
Premises and repossessing the Premises in which case any of the
Lessee's property which the Lessor removes from the Premises may
be stored in a public warehouse or elsewhere at the cost of, and
for the account of Lessee, or 2) allowing the Lessee to remain in
full possession and control of the Premises. If the Lessor
chooses to repossess the Premises, the Lease will automatically
terminate in accordance with provisions or the California Civil
Code, Section 1951.2. In the event of such termination of the
Lease, the Lessor may recover from the Lessee; 1) the worth at
the time of award of the unpaid rent which had been earned at the
time of termination including interest at 7% per annum; 2) the
worth at the time of award of the amount by which the unpaid rent
which would have been earned after termination until the time or
award exceeds the amount of such rental loss that the Lessee
proves could have been reasonably avoided including interest at
7% per annum; 3) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time
of award exceeds the amount of such rental loss that the Lessee
proves could be reasonably avoided; and 4) any other amount
necessary to compensate the Lessor for all the detriment
proximately caused by the Lessee's failure to perform his
obligations under the Lease or which in the ordinary course of
things would be likely to result therefrom. If the Lessor chooses
not to repossess the premises, but allows the Lessee to remain in
full possession and control of the Premises, then accordance with
provisions of the California Civil Code, Section 1951.4, the
Lessor may treat the Lease as being in full force and effect, and
may collect from the Lessee all rents as they become due through
the termination date of the lease as specified in the lease. For
the purposes of this paragraph, the following do not constitute a
termination of Lessee's right to possession:
a) Acts of maintenance for preservation or efforts to relet the
property.
b) The appointment of a receiver on the initiative of the
Lessor to protect his interest under this Lease.
LATE CHARGES 20. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor
to incur costs not contemplated by this lease, the exact amount
of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting
charges, and late charges which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee
within ten (10) days after such amount shall be due, Lessee shall
pay to Lessor a late charge equal to ten percent (10%) of such
overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payment by Lessee. Acceptance of
such late charge by Lessor shall [??]
<PAGE>
XXX XXX XXX XXX XXX XXX XX XXX XXX XXX X amount, nor prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
SURRENDER 2l. The voluntary or other surrender of this Lease by
OF LEASE Lessee, or a mutual cancellation thereof, shall not work a
merger, and shall, at the option of Lessor, terminate all or any
existing subleases or subtenancies, or may, at the option of
Lessor, operate as an assignment to him or any or all such
subleases or subtenancies.
TAXES 22. The Lessee shall be liable for . all taxes levied
against personal property and trade or business fixtures. The
Lessee also agrees to pay, as additional rental, during the term
of this Lease and any extensions thereof, all real estate taxes
plus the yearly installments of any special assessments which are
of record or which may become of record during the term of this
lease. If said taxes and assessments are assessed against the
entire building and building site, and this Lease does not cover
the entire building or building site, the taxes and assessment
installments allocated to the Premises shall be pro-rated on a
square footage or other equitable basis, as calculated by the
Lessor. It is understood and agreed that the Lessee's obligation
under this paragraph will be pro-rated to reflect the
commencement and termination date of this Lease.
NOTICES 23. All notices to be given to Lessee may be given in
writing personally or by depositing the same in the United States
mail, postage prepaid, and addressed to Lessee at the said
Premises, whether or not Lessee has departed from, abandoned or
vacated the Premises.
ENTRY BY 24. Lessee shall permit Lessor and his agents to enter
LESSOR into and upon the Premises at all reasonable times for the
purpose of inspecting the same or for the purpose of maintaining
the building in which the Premises are situated, or for the
purpose of making repairs, alterations or additions to any other
portion of said building, including the erection and maintenance
of such scaffolding, canopies, fences and props as may be
required without any rebate of rent and without any liability to
Lessee for any loss of occupation or quiet enjoyment of the
Premises thereby occasioned; and shall permit Lessor and his
agents, at any time within ninety days prior to the expiration of
this Lease, to place upon the Premises any usual or ordinary "For
Sale" or "To Lease" signs and exhibit the Premises to prospective
tenants at reasonable hours.
DESTRUCTION 25. In the event of a partial destruction of the Premises
OF PREMISES during the said term from any cause, Lessor shall forthwith
repair the same, provided such repairs can be made within ninety
(90) days under the laws and regulations of State, Federal,
County or Municipal authorities, but such partial destruction
shall in no way annul or void this Lease, except that Lessee
shall be entitled to a proportionate reduction of rent while such
repairs are being made, such proportionate reduction to be based
upon the extent to which the making of such repairs shall
interfere with the business carried on by Lessee in the Premises.
If such repairs cannot be made in ninety (90) days, this Lease
may be terminated at the option of either party. In respect to
any partial destruction which Lessor is obligated to repair or
may elect to repair under the terms of this paragraph, the
provision of Section 1932, Subdivision 2, and of Section 1933,
Subdivision 4, of the Civil Code of the State of California are
waived by Lessee. In the event that the building in which the
Premises may be situated be destroyed to the extent of not less
than 33 1/2% of the replacement cost thereof, Lessor may elect to
terminate this Lease, whether the Premises be injured or not. A
total destruction of the building in which the Premises may be
situated shall terminate this Lease. In the event of any dispute
between Lessor and Lessee relative to the provisions of this
paragraph, they shall each select an arbitrator, the two
arbitrators so selected shall select an arbitrator and two
arbitrators so selected shall select a third arbitrator and the
three arbitrators so selected shall hear and determine the
controversy and their decision thereon shall be final and binding
upon both Lessor and Lessee, who shall bear the cost of such
arbitration equally between them.
ASSIGNMENT 26. The Lessee shall not assign, transfer, or hypothecate
AND the leasehold estate under this Lease, or any interest therein,
SUBLETTING 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 the
Lessor. *As a condition for granting its consent to any
subletting the Lessor may require the Lessee to agree to pay to
the Lessor, as additional rental, all rents received by the
Lessee from its Sublessee which are in excess of the amount
payable by the Lessee to the Lessor hereunder. The Lessee shall,
by one hundred twenty (120) days written notice, advise the
Lessor of its intent to sublet the Premises or any portion
thereof for any part of the term hereof. Within thirty (30) days
after receipt of Lessee's notice, Lessor shall either give
approval to Lessee to sublease the portion of the Premises
described in Lessee's notice, or Lessor shall terminate this
Lease as to the portion of the Premises described in Lessee's
notice on the date specified in Lessee's notice. If Lessee
intends to sublet the entire Premises and Lessor elects to
terminate this Lease, this Lease shall be terminated on the date
specified in Lessee'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 herein above
shall be adjusted on a prorata basis to the number of square feet
retained by Lessee, and this Lease as so amended shall continue
in full force and effect. If the Lessor approves a subletting,
the Lessee may sublet immediately after receipt of the Lessor's
written approval. In the event Lessee is allowed to assign,
transfer or sublet the whole or any part of the Premises, with
the prior written consent of Lessor, no assignee, transferee or
sublessee 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 the Lessor. A
consent of Lessor to one assignment, transfer, hypothecation,
subletting, occupation or use by any other person shall not
release Lessee From any of Lessee's obligations hereunder or be
deemed to be a consent to any subsequent similar or dissimilar
assignment, transfer, hypothecation, subletting, occupation or
use by any other person. Any such assignment, transfer,
hypothecation, subletting, occupation or use without such consent
shall be void and shall constitute a breach of this Lease by
Lessee and shall, at the option of Lessor exercised by written
notice to Lessee, terminate this Lease. The leasehold estate
under this Lease shall not, nor shall any interest therein, be
assignable for any purpose by operation of law without the
written consent of Lessor. As a condition to its consent, Lessor
may require Lessee to pay all expenses in connection with the
assignment, and Lessor may require Lessee's assignee or
transferee (or other assignees or transferees) to assume in
writing all of the obligations under this Lease.
*whose consent shall not be unreasonably withheld.
CONDEMNATION 27. If any part of the premises shall be taken for any
public or quasi-public use, under any statute or by right of
eminent domain or private purchase in lieu thereof, and a part
thereof remains which is susceptible of occupation hereunder,
this Lease shall, as to the part so taken, terminate as of the
date title shall vest in the condemnor or purchaser, and the rent
payable hereunder shall be adjusted so that the Lessee shall be
required to pay for the remainder of the term only such portion
of such rent as the value of the part remaining after such ?????
<PAGE>
Premises prior to such taking; but in such event Lessor shall
have the option to terminate this Lease as of the date when title
to the part so taken vests in the condemnor or purchaser. If all
of the premises, or such part thereof be taken so that there does
not remain a portion susceptible for occupation hereunder, this
Lease shall thereupon terminate. If a part or all of the Premises
be taken all compensation awarded upon such taking shall go to
the Lessor and the Lessee shall have no claim thereto.
EFFECT OF 28. The term "Lessor" as used in this Lease, means only the
CONVEYANCE owner for time being of the land and building containing the
Premises, so that, in the event of any sale of said land or
building, or in the event of a lease of said building, the Lessor
shall be and hereby is entirely freed and relieved of all
covenants and obligations of the Lessor hereunder, and it shall
be deemed and construed, without Further agreement between the
parties and the purchaser at any such sale, or the Lessee of the
building, that the purchaser or lessee of the building has
assumed and agreed to carry out any and all covenants and
obligations of the Lessor hereunder. If any security be given by
the Lessee to secure the faithful performance of all or any of
the covenants or this Lease on the part of the Lessee, the Lessor
may transfer and deliver the security, as such, to the purchaser
at any such sale or the lessee of the building, and thereupon
the Lessor shall be discharged from any further liability in
reference thereto.
SUBORDINATION 29. Lessee agrees that this Lease may, at the option of
Lessor, be subject and subordinate to any mortgage, deed of trust
or other instrument of security which has been or shall be placed
on the land and building or land or building of which the
Premises form a part, and this subordination is hereby made
effective without any further act of Lessee. The Lessee shall, at
any time hereinafter, on demand, execute any instruments,
releases, or other documents that may be required by any
mortgagee, mortgagor, or trustor or beneficiary under any deed of
trust for the purpose or subjecting and subordinating this Lease
to the lien or any such mortgage, deed or trust or other
instrument of security, and the failure of the Lessee to execute
any such instruments, releases or documents, shall constitute a
default hereunder.
WAIVER 30. The waiver by Lessor of any breach of any term,
covenant or condition, herein contained shall not be deemed to be
a waiver of such term, covenant or condition or any subsequent
breach of the same or any other term, covenant or condition
therein contained. The subsequent acceptance of rent hereunder by
Lessor shall not be deemed to be a waiver of any preceding breach
by Lessee of any term, covenant or condition of this Lease, other
than the failure of Lessee to pay the particular rental so
accepted, regardless of Lessor's knowledge of such preceding
breach at the time of acceptance of such rent.
HOLDING OVER 31. Any holding over after the expiration of the said term,
with the consent of Lessor, shall be construed to be a tenancy
from month to month, at a rental to be negotiated by Lessor and
Lessee prior to the expiration of said term, and shall otherwise
be on the terms and conditions herein specified, so far as
applicable.
SUCCESSORS 32. The covenants and conditions herein contained shall,
AND subject to the provisions as to assignment, apply to and bind the
ASSIGNS heirs, successors, executors, administrators and assigns of all
of the parties hereto; and al1 of the parties hereto shall be
jointly and severally liable hereunder.
TIME 33. Time is of the essence of this Lease.
MARGINAL 34. The marginal headings or titles to the paragraphs of
CAPTIONS this Lease are not a part of this Lease and shall have no effect
upon the construction or interpretation or any part thereof. This
Instrument contains all of the agreements and conditions made
between the parties hereto and may not be modified orally or in
any other manner than by an agreement in writing signed by all
the parties hereto or their respective successors in interest.
PARAGRAPH 35 BELOW IS HEREBY MADE A PART OF THIS LEASE, THIS
LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY WHO WILL
REVIEW THE DOCUMENT AND ASSIST YOU TO DETERMINE WHETHER YOUR
LEGAL RIGHTS ARE ADEQUATELY PROTECTED RENAULT & HANDLEY IS NOT
AUTHORIZED TO GIVE LEGAL AND TAX ADVICE. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY RENAULT & HANDLEY OR ITS AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS DOCUMENT OR ANY TRANSACTION RELATING
THERETO THESE ARE QUESTIONS FOR YOUR ATTORNEY WITH WHOM YOU
SHOULD CONSULT BEFORE SIGNING THIS DOCUMENT.
IN WITNESS WHEREOF, Lessor and Lessee have executed these
presents, the day and year first above written.
LESSOR LESSEE
RENAULT & HANDLEY SOLAR BANTA
ELLIS JOINT VENTURE DIGITAL SERVICES, INC.
_____________________________ ___________________________
/s/ George O. McKee /s/ [SIGNATURE ILLEGIBLE]
----------------------------- ---------------------------
Gen. Partner President
----------------------------- ---------------------------
OPTION 35. The Lessor grants to Lessee the option of renewing this
TO Lease for one (1) additional five (5) year period commencing on
RENEW the termination date of this Lease. The option period shall be
governed by all the same terms and conditions as contained in the
original Lease excepting the monthly rental amount which shall be
95% or the then fair market value for comparable office/R&D
buildings in the Mountain View area. [??]
<PAGE>
REVISED INSURANCE CLAUSE
This Lease Clause replaces the Insurance Clause (11.) in the
Renault & Handley Net Lease Form.
11. Lessee shall not use, or permit the Premises or any
part thereof, to be used, for any* purposes other than that for
which the Premises are hereby leased; and no use shall be made or
permitted to be made on the Premises, nor acts done, which will
cause a cancellation of any insurance policy covering said
building, or any part thereof, nor shall lessee sell or permit to
be kept, used or sold, in or about the Premises, any article
which may be prohibited by the standard form of fire insurance
policies. Lessee shall, at his sole cost and expense, comply with
any and all requirements, pertaining to the Premises, of any
insurance organization or company, necessary for the maintenance
of reasonable fire and public liability insurance, covering said
building and appurtenances.
11.1 Lessee shall, at its expense, obtain and keep in force
during the term of this Lease a policy or comprehensive public
liability insurance insuring lessee, Lessor, and any third
parties named by Lessor which may include Lessor's lender,
against any liability arising out of the condition, use,
occupancy or maintenance of the Premises. Such insurance policy
shall have a combined single limit for both bodily injury and
property damage in an amount not less than One Million &
-------------
no/100ths........Dollars ($1,000,000). The limits of said
----------------- ----------
insurance shall not limit the liability of Lessee hereunder.
INSURANCE 11.2 Lessee shall, at its expense, keep in force during the
term of this Lease, a policy of fire and property damage
insurance in an "all risk" form with a sprinkler leakage
endorsement, insuring Lessee's inventory, fixtures, equipment and
personal property within the Premises for the full replacement
value thereof.
11.3 Lessor shall maintain a policy or policies of fire and
property damage insurance in an "all risk" form with sprinkler
and, at the option of the Lessor, earthquake endorsements,
covering loss or damage to the building, including Lessee's
leasehold improvements installed with the written consent of the
Lessor, in such amounts and with such coverage as Lessor deems
advisable.
11.4 Lessee shall pay to Lessor as additional rent, during
the term hereof, upon receipt of an invoice therefore. 100%
----
percent of the premiums for any insurance obtained by lessor
pursuant to 11.3 above. Lessor may obtain such insurance for the
Building separately, or together with other buildings and
improvements which Lessors elects to insure together under
blanket policies of insurance. In such case Lessee shall be
liable for only such portion of the premiums blanket policies as
are allocable to the Premises. It is understood and agreed that
Lessee's obligation under this paragraph shall be prorated to
reflect the Commencement Date and Expiration Date of the Lease.
11.5 Lessee and Lessor each hereby waives any and all rights
of recovery against the other, or against the officers,
directors, employees, partners;, agents and representatives of
the other, for loss of or damage to the property of the waiving
party or the property of others under its control, to the extent
such loss or damage is insured against under any insurance policy
carried by Lessor or Lessee hereunder. Each party shall notify
their respective insurance carriers of this waiver.
<PAGE>
ADDENDUM ONE TO LEASE
This Addendum One to Lease ("Addendum") is entered into as of ____________,
1993, and is made between RENAULT & HANDLEY SOLAR ELLIS JOINT VENTURE ("Lessor")
and BANTA DIGITAL SERVICES, INC. ("Lessee"), to be a part of that certain Lease,
of even date herewith, by and between Lessor and Lessee, concerning premises
commonly known as 555 Ellis Street, Mountain View, California, and as more
particularly described in the Lease ("Premises"). Lessor and Lessee agree that
the Lease Form (as hereinafter defined) shall be amended, supplemented and
modified as follows:
1. Definitions. Unless otherwise defined in this Addendum, all the terms
used in this Addendum shall have the same meaning and definition given them in
the Lease Form. As used in this Addendum, the term "Lease Form" shall mean the
lease form, together with all exhibits and attachments thereto, to which this
Addendum is attached. As used in this Addendum, the term "Lease" shall mean the
Lease Form, this Addendum, and all other addenda, exhibits and attachments to
the form referred to in the Lease Form or in this Addendum.
2. Rental. Paragraph 4 of the Lease shall be revised to read as follows:
"Eighteen Thousand Two Hundred Eighty Nine & no/100ths Dollars
($18,289.00) on execution of this lease, constituting monthly rental
for the period December 1, 1993 through December 31, 1993. Eighteen
Thousand Two Hundred Eighty Nine & no/100ths Dollars ($18,289.00) will
be due on January 1, 1994, and on the 1st day of each succeeding month
to and including November 1, 1994. Nineteen Thousand Six Hundred
Ninety Six & no/100ths Dollars ($19,696.00) will be due on December 1,
1994, and on the 1st day of each succeeding month to and including
November 1, 1995. Twenty One Thousand One Hundred & no/100ths Dollars
($21,100.00) will due on December 1, 1995, and on the 1st day of each
succeeding month to and including November 1, 1996. Twenty Two
Thousand Five Hundred Ten & no/100ths Dollar ($22,510.00) will be due
on December 1, 1996, and on the 1st day of each succeeding month to
and including November 1, 1997. Twenty Five Thousand Three Hundred
Twenty Three & no/100ths Dollars ($25,323.00) will be due on December
1, 1997, and on the 1st day of each succeeding month to and including
November 1, 1998."
3. Acceptance of Premises and Consent to Surrender. Paragraph 7 of the
Lease shall be deleted in its entirety and replaced with the following
provisions:
* 7(a). Acceptance of Premises. Lessor represents and warrants that
the Premises are in fit condition for use by Lessee, and to the best
of Lessor's knowledge, the Premises are free from adverse
environmental conditions and/or environmental contamination, and
further agrees to indemnify and hold Lessee harmless for the same as
provided in Paragraph 36 herein. Acceptance of the Premises by Lessee
shall be construed as recognition that the Premises
<PAGE>
are, subject to latent and patent defects, in good repair and sanitary
condition unless within forty-five (45) days after such entry, Lessee
shall give Lessor written notice specifying in reasonable detail the
respects in which the Premises were not in satisfactory condition.
7(b). Americans with Disabilities Act. Lessor represents and
warrants that as of the Commencement Date, the Premises comply with
all provisions of the Americans with Disabilities Act of 1990 (the
"ADA"). Lessor shall be responsible for, and shall bear all costs and
expenses associated with, any and all alterations to the Premises
which may be required by the ADA, for the accommodation of disabled
individuals who may be employed from time to time by Lessee, or any
disabled customers, clients, guests, or invitees of Lessee. Lessor
shall indemnify and hold Lessee harmless from and against any and all
liability incurred arising from the failure of Premises to conform
with the ADA, including the cost of making any alterations,
renovations or accommodations required by the ADA, or any government
enforcement agency, or any court, any and all fines, civil penalties,
and damages awarded against Lessee resulting from a violation or
violations of the ADA, and all reasonable legal expenses and court
costs incurred in defending claims made under the ADA, including
without limitation reasonable consultants' and attorneys' fees,
expenses and court costs; provided, however, that Lessee shall be
responsible for all costs associated with ADA compliance for interior
improvements installed by the Lessee and all changes to the building
made by Lessee, and shall indemnify and hold harmless Lessor from all
liability for the same.
7(c). Code Compliance; Compliance with Laws. Lessor will, at
Lessor's sole expense and without unreasonable delay, make all repairs
and alterations necessary to the Premises which may be required by
reason of any nonconformity with, or violation of, any applicable
laws, ordinances, codes and regulations (including, without
limitation, zoning and building codes) existing at the Commencement
Date or thereafter enacted or promulgated, including any such
nonconformity or violation which is otherwise excused by any
"grandfather" provision of such laws, ordinances, code and
regulations, notwithstanding the cause of the removal of the
"grandfather" provision. Notwithstanding, Lessee shall be responsible
for any costs of compliance with codes, regulations, laws, or
ordinances which may be required because of any alterations or
improvements to the Premises made by Lessee, excluding the cost of
containing any asbestos currently on the Premises, if any. Except as
otherwise provided herein, the Lessee shall also be responsible for
any costs of compliance with codes, laws or ordinances attributable to
any operations of Lessee which necessitate special alterations or
improvements to the Premises.
7(d). Consent to Surrender. The Lessee agrees on the last day of the
term hereof, or on sooner termination of this Lease, to surrender the
Premises,
2
<PAGE>
together with all alterations, additions, and improvements which may
have been made in, to, or on the Premises by Lessor, unto Lessor in
the same good condition as at Lessee's entry into the Premises
excepting for such wear and tear as would be normal for the period of
the Lessee's occupancy. The Lessee, on or before the end of the term
or sooner termination of the Lease, shall remove all Lessee's personal
property and trade fixtures from the premises and all property not so
removed shall be deemed to be abandoned by the Lessee. If the Premises
be not surrendered at the end of the term or sooner termination of
this Lease, the Lessee shall indemnify the Lessor against loss or
liability resulting from delay by the Lessee in so surrendering the
Premises including, without limitation, any claims made by any
succeeding tenant founded on such delay."
4. Alterations and Additions. Paragraph 9 of the Lease shall be deleted
in its entirety and replaced with the following provisions:
* 9. Lessee shall not make any alterations or additions to the
Premises costing over $15,000 per occasion, without the prior written
consent of Lessor, which consent Lessor agrees not to unreasonably
withhold or delay. Lessor agrees that Lessee may at any time and from
time to time make any alterations, other improvements, additions or
installations costing less than $15,000 per installation, to the
Premises without the consent of the Lessor. All alterations, additions
or other improvements that may be made on or to the Premises by Lessor
shall be the property of Lessor and shall remain on and be surrendered
with the Premises as a part thereof at the termination of this Lease,
without hindrance, molestation or injury by Lessee. Each nonstructural
alteration, addition, or other improvement that may be made on or to
the Premises by Lessee without requiring consent of Lessor shall
remain the property of Lessee, except those not removed by Lessee at
the termination of this Lease, which shall then become the property of
Lessor. All of Lessee's moveable furniture, business and trade
fixtures and machinery and equipment shall remain the property of
Lessee and may be removed by Lessee at any time during the lease term.
For all alterations, additions or improvements contemplated by Lessee
and requiring consent of Lessor, at the time of such consent Lessor
shall inform Lessee as to whether Lessor shall or shall not require
them to be removed at the termination of the Lease, and all such
alterations, additions or improvements not so specified to be removed
shall become the property of Lessor at the expiration or earlier
termination of the Lease."
5. Maintenance of Premises. Paragraph 10 of the Lease shall be deleted in
its entirety and replaced with the following provisions:
* 10(a). Maintenance. Lessor, at Lessor's sole cost and expense, shall
maintain in good condition and repair (and replace as necessary) (i)
the
3
<PAGE>
structural elements and components of the Premises (including, without
limitation, walls, foundation, roof and floors) and (ii) the roof
covering. Lessor warrants and represents that as of the commencement
date of this Lease, the electrical, plumbing, and heating, ventilating
and air conditioning systems at or serving the Premises, and paving
are in good working condition, free from defects, and shall maintain
same in good condition and repair (and replace as necessary) for a
period of nine (9) months from the commencement of this Lease.
Notwithstanding the foregoing, Lessor shall not be obligated to make
any repairs caused by the wrongful act of the Lessee or Lessee's
agents. Lessor shall be obligated to make any repairs under this
Section 10(a) within sixty (60) days after receipt of a written notice
from Lessee of the need for such repairs.
10(b). Lessee's Maintenance. With the exception of matters for which
Lessor is responsible under Section 10(a) above, Lessee, at Lessee's
sole cost and expense, shall maintain the Premises and appurtenances
and every part thereof, and keep them in good repair, ordinary wear
and tear excepted. Beginning with the date nine (9) months from the
commencement of this Lease, Lessee, at Lessee's sole cost and
expense, shall contract for the maintenance and repair of the
electrical, plumbing, and heating, ventilating and air conditioning
systems at or serving the Premises. The Lessee shall water, maintain
and repair, when necessary, any shrubbery and landscaping provided by
the Lessor in the Premises."
6. Compliance with Laws. Paragraph 14 of the Lease shall be deleted in
its entirety.
7. Indemnification of Lessor. Paragraph 15 of the Lease shall be amended
by inserting the words "or willful misconduct, or the negligence or willful
misconduct of Lessor's employees and agents" after the word "negligence," in
Line 4.
8. Advertisements and Signs. Paragraph 16 of the Lease shall be amended
by inserting the words "which consent shall not be unreasonably withheld" at the
end of the second sentence.
9. Default. Paragraph 19 of the Lease shall be amended by adding the
following provision:
"If default be made in the performance or observance by Lessor of any
covenant or condition herein contained, and such default shall
continue for thirty (30) days after written notice thereof shall have
been given to Lessor, then Lessee may elect to perform such covenant
or condition and may offset the cost of such performance against
future rents and/or may proceed to collect such cost from Lessor in a
court of competent jurisdiction."
10. Assignment and Subletting. Paragraph 26 of the Lease shall be amended
by substituting the word "ninety (90)" for the words "one hundred twenty (120)"
in Line 6.
4
<PAGE>
11. Condemnation. Paragraph 27 of the Lease shall be amended by (a)
inserting the words "either Lessee or" after the word "event" in Line 6, and (b)
substituting the words "except that Lessee shall be entitled to receive such
portions thereof as may be allocated to compensate Lessee for Lessee's trade
fixtures, improvements and moving expenses" for the words "and the Lessee shall
have no claims thereto" in Lines 9 and 10.
12. Option to Renew. Paragraph 35 of the Lease shall be amended by
deleting the third sentence of the paragraph, and adding the following language:
"The "fair market rental value" of the Premises shall be defined to
mean the fair market rental value of the Premises as of the time the
option is exercised, taking into consideration all relevant factors,
including length of term, the uses permitted under the Lease, the
quality, size, design and location of the Premises, and the monthly
base rent paid by tenants for premises comparable to the Premises
located in the same general area as the Premises.
Within thirty (30) days after Lessee has given such notice, each
party, at its sole cost and by giving notice to the other party, shall
appoint a real estate appraiser with at least five years' full-time
commercial appraisal experience in the area in which the Premises are
located to appraise and set the then fair market rental value of the
Premises. If a party does not appoint an appraiser within this time
period, the single appraiser appointed shall be the sole appraiser and
shall set the then fair market rental value of the Premises. If two
appraisers are appointed by the parties, they shall meet promptly and
attempt to set the then fair market rental value of the Premises. If
they are unable to agree within thirty (30) days after the second
appraiser has been appointed, they shall attempt to elect a 'third
appraiser meeting the requisite qualifications within five (5) days.
If they are unable to agree on the third appraiser, either of the
parties to this Lease, by giving five (5) days notice to the other
party, can apply to the then president of the real estate board for
the city in which the Premises are located, or the then Presiding
Judge of the Santa Clara County Superior Court, for the selection of a
third appraiser who meets the qualifications stated in this paragraph.
Each of the parties shall bear one-half (1/2) of the cost of
appointing the third appraiser and of paying the third appraiser's
fee. The third appraiser however selected shall be a person who has
not previously acted in any capacity for either party.
Within twenty (20) days after the election of the third appraiser, a
majority of the appraiser shall set the then fair market rental value
of the Premises. If a majority of the appraisers are unable to set the
then fair market value of the Premises within the stipulated period of
time, the three appraisals shall be added together and their total
divided by three (3); subject to the next sentence, the resulting
quotient shall be the then fair market rental value of the Premises.
If, however, the low appraisal and/or high appraisal are/is more than
ten percent (10%) lower and/or higher than the middle appraisal, the
low
5
<PAGE>
appraisal and/or high appraisal shall be disregarded. If only one
appraisal is disregarded, the remaining two appraisals shall be added
together and their total divided by two (2); the resulting quotient
shall be the then fair market rental value of the Premises. If both
the low appraisal and the high appraisal are disregarded, the middle
appraisal shall be the then fair market rental value of the Premises.
After the then fair market rental value of the Premises has been set,
the appraisers shall immediately notify the parties of such value and
the monthly Base Rent for the option period shall be the amount which
is ninety-five (95%) of the fair market rental value of the Premises
so set."
13. Environmental Indemnity. A new Paragraph 36 of the Lease shall be
added as follows:
"36. Environmental Indemnity. If the presence, release, threat of
release, placement on or in the Premises during the term of this
Lease, or the generation, transportation, storage, treatment, or
disposal at the Premises during the term of this Lease of any
hazardous or toxic material: (i) gives rise to liability (including,
but not limited to, a response action, remedial action, or removal
action) under any Environmental Laws (as hereinafter defined) or any
common law theory based on nuisance, trespass or strict liability;
(ii) causes a significant public health effect; or (iii) pollutes or
threatens to pollute the environment, Lessor shall, at its sole cost
and expense, take any remedial and removal action necessary to clean
up the Premises and mitigate exposure to liability arising from the
hazardous or toxic material.
Lessor agrees to indemnify, defend and hold harmless Lessee, and its
respective agents, officers, directors and employees (collectively,
"Indemnitees"), from and against any and all debts, liens, claims,
causes of action, administrative orders or notices, costs, personal
injuries, losses, actual damages, liabilities, demands, interest,
fines, penalties or expenses (including attorneys' and consultants'
fees and expenses) and costs, suffered or incurred by Indemnitees, or
any of them, resulting, directly or indirectly, from the presence in,
upon or under the surface of the Premises or in any surface waters or
ground waters on or off the Premises or any migration of hazardous or
toxic material off the Premises if such materials were generated or
stored prior to or during the term of this Lease. Notwithstanding
anything to the contrary contained herein, Lessor shall not be liable
to Indemnitees for hazardous or toxic materials introduced to the
Premises by Lessee, its agents or employees, and Lessee shall be
responsible for cleanup and shall be fully liable for any damages
caused by any hazardous or toxic material introduced to the Premises
by Lessee.
For purposes of this Paragraph 36, "hazardous or toxic material" shall
be defined to include, without limitation, (a) asbestos or any
material composed of or containing asbestos in any form and type, (b)
polychlorinated biphenyl
6
<PAGE>
compounds ("PCB") or any material composed of or containing PCB, or
(c) any hazardous, toxic or dangerous waste, substance, material,
smoke, gas or particulate matter, as from time to time defined by or
for purposes of the Comprehensive Environmental Response, Compensation
and Liability Act, as amended, and any law commonly referred to as
"Superfund" or any successor to such laws, or any other federal, state
or local environmental, health or safety statute, ordinance, code,
rule, regulation, order or decree now or hereafter in force
regulating, relating to or imposing liability or standards concerning
or in connection with hazardous, toxic or dangerous wastes,
substances, material, smoke, gas or particulate matters (collectively,
the "Environmental Laws")."
14. Parking. A new Paragraph 37 of the Lease shall be added as follows:
"37. Parking. Lessee shall be entitled to 4 vehicle parking spaces per
1000 feet of space leased hereunder without paying any additional
rent. Such parking spaces shall be reserved for Lessee's exclusive
use."
IN WITNESS WHEREOF, Lessor and Lessee have executed this Addendum as of the
day and year first above written.
Renault & Handley Solar Ellis Joint
Venture ("Lessor")
By: /s/ George O. McKee
------------------------------------
Date: 11/3/93
----------------------------------
Banta Digital Services, Inc. ("Lessee")
By: /s/ [SIGNATURE ILLEGIBLE]
------------------------------------
President
Date: October 27, 1993
----------------------------------
7
<PAGE>
AGREEMENT
RE: That certain lease dated August 10, 1993 by and between Renault & Handley
Solar Ellis Joint Venture, as Lessor, and Banta Digital Services, Inc., as
Lessee, for premises located at 555 Ellis Street, Mountain View. It is
agreed as follows:
Operating Expenses. The current net net net annual expenses on 555 Ellis
are as follows:
Taxes $16,399.00
Insurance $ 2,703.00
----------
Total $19,102.00
The above translates into $0.0566/sq.ft./month and,
while there is no reason to expect that this number
will increase, Lessor agrees that it will pay the
excess amount over a 5% annual increase in this figure
per year during the lease term. Lessor agrees that it
will exempt Lessee from any real estate tax increase
brought about by sale or transfer of the property
during the initial lease term.
Lessee Improvement
Allowance. Lessor agrees that it will contribute up to $84,411.00
for Lessee's interior improvements and modifications,
including costs of space planning and construction
drawings. Said interior improvements shall be subject
to final approval by Lessor, which approval shall not
be unreasonably withheld.
Environmental
Indemnity. Lessor acknowledges that the results of certain
groundwater sampling conducted in September 1992
indicated the presence of the following compounds in
groundwater monitoring wells adjacent to the premises:
Bromodichloromethane, Bromoform, Chloroform,
Dibromochloromethane, Toluene, Trichloroethane, and
cis -1,2 - Dichloroethene (the "Compounds"). Lessor
agrees that, for purposes of Paragraph 36 of the
Lease, such Compounds shall be deemed to have been
generated or stored prior to the Lease, and Lessor will
indemnify and hold Lessee harmless from the presence of
such Compounds on the Premises.
<PAGE>
ADDENDUM ONE TO SUBLEASE
This Addendum One to Lease ("Addendum") is entered into as of ____________,
1996, by and among BANTA CORPORATION ("Sublandlord"), NETSCAPE COMMUNICATIONS,
INC. ("Subtenant") and RENAULT & HANDLEY SOLAR ELLIS JOINT VENTURE ("Master
Landlord), to be part of that certain Sublease dated October _______, 1996 (the
"Sublease"), between Sublandlord and Subtenant and to which Master Landlord has
granted its consent. The parties agree that the Sublease shall be amended,
supplemented and modified as follows:
1. Definitions. Unless otherwise defined in this Addendum, all the terms
used herein shall have the meaning and definitions given them in the Sublease.
2. Rent for Subleased Premises. Under the terms of section 2.2 of the
Sublease, installments of Rent are due from Subtenant to Sublandlord on November
1, 1996 and December 1, 1996 in the amounts of $18,420.00 and $19,187.50,
respectively; however, the parties desire to amend the Sublease to defer these
installments (hereinafter the "Deferred Rent"). Accordingly, the parties hereby
agree that section 2.2 of the Sublease shall be modified to provide that
consecutive monthly installments of Rent shall commence of January 1, 1997,
continuing on or before the first day of each calendar month during the Sublease
Term. The parties hereby further agree that the total Deferred Rent be paid by
Subtenant to Sublandlord in equal monthly installments beginning January 1, 1997
and continuing on or before the first day of each calendar month during the
Sublease Term, and that such Deferred Rent shall not be construed as "additional
rent" under paragraph 26 of the Master Lease.
3. Other Provisions. All other terms and conditions of the Sublease shall
remain in full force and effect, unaltered by this Addendum.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the day
and year first above written.
BANTA CORPORATION NETSCAPE COMMUNICATIONS, INC.
By: /s/ [SIGNATURE ILLEGIBLE] By: /s/ [SIGNATURE ILLEGIBLE]
--------------------------- ---------------------------
Vice President, Secretary & General
Counsel
Date: October 30, 1996 Date: 10/31/96
------------------------- -------------------------
RENAULT & HANDLEY SOLAR ELLIS
JOINT VENTURE
By: /s/ George O. McKee
---------------------------
Date: 11/04/96
-------------------------
<PAGE>
Lessor Lessee
Renault & Handley Solar Ellis Banta Digital Services, Inc.
Joint Venture
By: /s/ George O. McKee By: /s/ [SIGNATURE ILLEGIBLE]
--------------------------- ---------------------------
President
Date: 11/3/93 Date: October 27, 1993
------------------------- -------------------------
2
<PAGE>
EXHIBIT 10.8
COBALT NETWORKS, INC.
EMPLOYEE STOCK PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
George Korchinsky ISO - 44
[Address]
____________________________
____________________________
You have been granted an option, consisting of the Stock Option Agreement
attached hereto as Exhibit A and this Notice of Stock Option Grant (together,
the "Option") to purchase Common Stock of COBALT NETWORKS, INC. (the "Company")
as follows:
Date of Grant: 7/15/98
------------
Vesting Date: 07/08/98
------------
Option Price Per Share: 0.50
------------
Total Number of Shares Granted: 120,000
------------
Total Price of Shares Granted: $60,000
------------
Type of Option: X Incentive Stock Option
-------
_______ Nonqualified Stock Option
Term/Expiration Date: 10 07/15/08
years/ _____________
Exercise Schedule:
------------------
This Option may be exercised, in whole or in part, in accordance with the
Vesting Schedule set out below;
Vesting Schedule:
----------------
<TABLE>
<CAPTION>
Date of Vesting Number of Shares
---------------------------------------- ---------------------------------------------
<S> <C>
Each Monthly Anniversary of Vesting Date 1/48th of the total Shares until fully vested
</TABLE>
Notwithstanding the foregoing, in the event of a Change in Control of the
Company, the lessor of 50% of the Shares or all the remaining shares of Stock
will become fully vested. For the purposes of this section "Change in Control"
-----------------
means the occurrence of any of the following events:
<PAGE>
(A) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended), excluding existing beneficial
owners as of the date of adoption of the Plan, is or becomes the "beneficial
owner" (as defined in Section 13d-3 of said Act), directly or indirectly, of
securities of the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities;
(B) The shareholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets;
(C) Any other provision of this subsection notwithstanding, the term
Change in Control shall not include either of the following events undertaken at
the election of the Company:
(i) Any transaction, the sole purpose of which is to change the
state of the Company's incorporation; or
(ii) A transaction, the result of which is to sell all or
substantially all of the assets of the Company to another corporation (the
"surviving corporation") provided that the surviving corporation is owned
directly or indirectly by the shareholders of the company immediately following
such transaction in substantially the same proportions as their ownership of the
Company's common stock immediately preceding such transaction.
Termination Period:
-------------------
Option may be exercised for 90 days after termination of employment or
consulting relationship except as set out in Sections 7 and 8 of the Stock
Option Agreement (but in no event later than the Expiration Date).
Additional Forms of Consideration:
----------------------------------
In addition to the forms of consideration set out in Section 3 of the Stock
Option Agreement, this Option may be exercised using the following forms of
consideration:
___ No Additional Forms
___ Additional Forms as noted:
Promissory Note at the
discretion of the
Company. ________________
_______________________________________________________________________________
_______________________________________________________________________________
-2-
<PAGE>
Exercise of this Option shall be on a form of Exercise Notice provided by the
Company.
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THIS OPTION IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S EMPLOYEE STOCK PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS
EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain information
related to it and represents that he or she is familiar with the terms and
provisions of the Plan and this Option. Optionee accepts this Option subject to
all such terms and provisions. Optionee has reviewed the Plan and this Option
in their entirety, has had an opportunity to obtain the advice of counsel prior
to executing this Option and fully understands all provisions of the Option.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Employee Stock Plan and the Incentive Stock Option
Agreement, all of which are attached and made a part of this document.
OPTIONEE: COBALT NETWORKS, INC., a
California company
/s/ George Korchinsky
- -------------------------------- By /s/ Kenton D. Chow
Signature ------------------------------------------
George Korchinsky
- -------------------------------- Title Chief Financial Officer
Print Name ---------------------------------------
-3-
<PAGE>
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Stock Option. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Stock Option, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Stock Option
and further agrees that any community property interest shall be similarly
bound. The undersigned hereby appoints the undersigned's spouse as attorney-in-
fact for the undersigned with respect to any amendment or exercise of rights
under the Plan or this Stock Option.
_______________________________________
Spouse of Purchaser
<PAGE>
EXHIBIT 10.9
[LOGO OF COABLT NETWORKS]
Gary Martell July 20, 1999
[Address]
Dear Gary,
I am pleased to offer you the position of Chief Operating Officer with Cobalt
Networks, Inc. This is a full time position reporting to me, Stephen DeWitt,
President & CEO. You will be paid, in accordance with Cobalt's usual payroll
procedures, an annual base salary of $200,000.00 paid semi-monthly. As part of
your joining Cobalt , you will be eligible for an annual bonus of up to
$50,000.00 payable upon mutually agreed upon deliverables. You and I will
establish these deliverables and the bonus pay out date(s) within the first 30
days of your employment with Cobalt.
You will also be eligible to participate in company sponsored benefits that are
made available to employees, as set forth in Cobalt's employee handbook. After
you begin employment, and subject to approval by the Cobalt Board of Directors,
you will be granted stock options to purchase 400,000 shares of Common Stock in
Cobalt at a price to be determined by the Board of Directors. Stock options vest
in accordance with the terms of the Cobalt Networks, Inc. Employee Stock Plan.
Your option will be vested over four years starting from your date of employment
and will be subject to a 12-month cliff vesting with 25% on the first
anniversary of the vesting start date and then 1/48th monthly thereafter until
fully vested. You will be eligible for additional stock option shares in future
years at the discretion of the CEO and the Board of Directors. The date you
terminate employment from Cobalt such options will cease to vest and be subject
to such conditions as stipulated in the Employee Stock Plan.
In the event there is a material change in the ownership of Cobalt Networks
(greater than 50% ownership) the company will accelerate vesting of the options
granted in this offer up to a maximum of 50% of your unvested shares.
In the event that you are terminated for reasons other than cause your
salary and benefits will be continued for a period of six months.
As an employee of Cobalt you will be expected to abide by Cobalt's rules and
regulations, adhere to defined work schedules and to devote all of your
business time, skill, attention and best efforts to Cobalt's business to
fulfill the responsibilities assigned to you. Your employment will be at-will,
and either you or Cobalt may terminate the employment relationship at any time
and for any reason, with or without cause. As a condition of your employment,
you will be required to sign and comply with Cobalt's
<PAGE>
standard form Employee Confidential Information and Inventions Agreement,
attached to this letter. You will also be required to submit documentation of
your identify and your eligibility for employment at Cobalt.
The agreement set forth in this letter, which can not be modified except in
writing signed by you and myself, sets forth our entire understanding regarding
your employment and relationship with Cobalt and supersedes any other
negotiations or written or oral agreements regarding your prospective employment
with Cobalt. The offer described in this letter will remain open for 10 days
from the date of this letter unless we notify you otherwise.
We hope very much that you will accept our offer and look forward to having you
join us an becoming a key part of Cobalt's future success. Please confirm your
acceptance by signing a copy of this letter in the space indicated below and
returning it to me.
Very truly yours,
/s/ Stephen DeWitt
- ---------------------------
Stephen DeWitt
President & CEO
Cobalt Networks, Inc.
AGREED AND ACCEPTED:
/s/ Gary Martell 7/20/99
- --------------------------- ------------
Gary Martell Date
7/25/99
- ---------------------------
Planned Start Date
Enclosures: Duplicate Letter
Employee Confidential Information and Inventions Agreement
<PAGE>
Exhibit 10.10
July 28, 1999
Ms. Robin Porter
[Address]
Re: Separation Agreement
Dear Robin:
This letter constitutes the Separation Agreement (hereinafter the
"Agreement") between Robin Porter and Cobalt Networks, Inc. (hereinafter
"Cobalt" or the "Company") containing the terms of Ms. Porter's separation from
employment with Cobalt.
1. Ms. Porter's term of active employment at Cobalt will end July 31,
1999. At that time she will be paid in one lump sum, subject to appropriate tax
withholding, all accrued vacation, any employee expense reimbursements, as well
as her final wages as a regular employee. Her final termination date, as
explained below, will be October 31, 1999. For the time period from August 1,
1999 until October 31, 1999 (the "Extended Service Period"), the Company will
not expect Ms. Porter to report for regular work hours, but will expect her to
maintain telephone availability to Stephen DeWitt to assist in issues relating
to manufacturing operations. Ms. Porter will receive her regular salary and all
Company benefits other than accrued vacation pay through the Extended Service
Period. Please note that the 90 day exercise period, as set forth in Cobalt
Employee Stock Plan document, will begin to run on October 31, 1999, (the
conclusion of her Extended Service Period) with regard to any vested options and
that this exercise period will expire on January 29, 2000. This will be the last
day Ms. Porter will be able to exercise her option whether or not she accepts
this agreement.
2. Ms. Porter will receive under separate cover information regarding her
rights to continued benefits coverage as well as her stock option exercise
procedure. To the extent she has such rights, nothing in this agreement will
impair those rights.
3. Ms. Porter confirms her ongoing legal duties of confidentiality, as
set forth in the Cobalt Networks, Inc. Employee Confidential Information and
Inventions Agreement which she signed on October 20, 1997, incorporated herein
and attached as Exhibit A.
4. Ms. Porter further confirms that she does not have in her possession
or control and she has not failed to return to Cobalt any devices, data,
specifications, drawings, equipment, products, or property or may reproductions
of these materials belonging to Cobalt. Ms. Porter will ensure that any such
items currently in her possession are returned to Gary Bencomo, Director of
Human Resources, on or before July 31, 1999.
5. Although Ms. Porter is not otherwise entitled to it, in consideration
of her acceptance of this Separation Agreement, Cobalt agrees to accelerate her
vesting schedule by amending the terms of her Stock Option Agreement with regard
to the Vesting Schedule in her Notice of Stock
<PAGE>
Option Grant so that a total of 75,000 shares, including previously vested
shares, will become vested on October 31, 1999. Additionally, in consideration
of Ms. Porter's acceptance of this Separation Agreement, the Company has also
agreed to provide electronic mail and voicemail capabilities through Cobalt's
internal network until October 31, 1999.
6. Ms. Porter agrees that the foregoing consideration represents
settlement in full of any claims that could be asserted against Cobalt and on
behalf of herself and her legal successors and assigns, she hereby releases
Cobalt and its officers, directors, employees, investors, administrators,
insurers, predecessor and successor corporations, agents, and legal successors
and assigns (collectively, the "Release Parties") from any claim, duty,
obligation or cause of action, whether now known or unknown, suspected or
unsuspected, which she now has, owns or holds, or at any other time had, owned
or held or shall or may have, own or hold against the Released Parties based
upon or arising out of any agreement, matter, cause, fact, thing, act or
omission whatsoever occurring or existing at any time up to and including the
date hereof, including but not limited to matters arising from her employment
relationship with Cobalt and the termination of that relationship as well as any
claims arising from her equity interest in the Company. These claims include,
but are not limited to, claims arising under federal, state and local statutory
or common law, such as Title VII of the Civil Rights Act of 1964, the California
Fair Employment and Housing Act, the California Labor Code, the Age
Discrimination in Employment Act, the Family and Medical Leave Act, the
California Family Rights Act, any other state or federal employment
discrimination statues, and the law of contract and tort (collectively, the
"Released Claims").
Ms. Porter agrees that she will not sue or initiate against any Released
Party any compliance review, action, or proceeding, or participate in same,
individually or as a member of a class, under any contract (express or implied),
law, or regulation, federal, state or local, pertaining in any manner whatsoever
to the Released Claims.
Ms. Porter understands that the Released Claims include not only claims
presently known to her, but also includes all unknown claims and causes of
action of any kind which would otherwise come within the scope of the Released
Claims as described above in this section. Ms. Porter therefore waives her
rights under sections 1542 of the Civil Code of California which states:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known to him must have materially affected his settlement with the
debtor.
7. Ms. Porter will not, unless required or otherwise permitted by law,
disclose to others any information regarding the terms of this Separation
Agreement, the benefit being paid under it or the fact of its payment, except
that she may disclose this information to her attorney, accountant or other
professional advisor to whom she must make the disclosure in order for them to
render professional services to her. Ms. Porter will instruct them, however, to
maintain the confidentiality of this information just as she must.
8. Cobalt and Ms. Porter understand and acknowledge that this Agreement
constitutes a compromise and settlement. No action taken by either of them,
either previously or in connection with this Agreement shall be deemed to be (a)
an admission of the truth or falsity of any claims previously made or (b) an
acknowledgment or admission by either Cobalt or Ms. Porter of any fault or
liability whatsoever to the other or to any third party.
2
<PAGE>
9. Ms. Porter acknowledges that she has been provided more than 21 days
to consider this Agreement from the day that it was first presented to her. She
was advised to consult with an attorney regarding this agreement. After Ms.
Porter signs, she will have a 7 day period in which she may revoke her
acceptance. If Ms. Porter wishes to revoke, she must do so in writing before the
7 day revocation period expires. The agreement will become effective only upon
the expiration of the revocation period.
Cobalt Networks, Inc.
By: /s/ Gary Bencomo
-----------------------------------
Title: Director of Human Resources
--------------------------------
Enc. Employee Confidential Information and Inventions Agreement; Copy of
Separation Agreement
By signing this letter, I acknowledge that I have had the opportunity to review
this Separation Agreement carefully with an attorney of my choice, that I
understand the terms of the Agreement, and that I voluntarily agree to them.
/s/ Robin Porter
- ----------------------------
Robin Porter
July 28, 1999
- ----------------------------
Dated
3
<PAGE>
EXHIBIT 10.11
TURNKEY SERVICE AND PURCHASE AGREEMENT
This Agreement is effective as of August 31, 1999 and is between Cobalt
Networks, Inc., a California corporation ("Cobalt"), having offices located at
555 Ellis Street, Mountain View, CA, 94043 and SMTC Manufacturing Corporation, a
California corporation ("SMTC"), having office at 2302 Trade Zone Blvd, San
Jose, CA 95131.
RECITALS
A. Cobalt is a developer and marketer of network appliances and SMTC is a
provider of turnkey contract manufacturing and order fulfillment services to
technology companies.
B. Cobalt wishes to utilize A services to manufacture Cobalt's network
appliance products and fulfill orders for such products and SMTC wishes to
provide such services to Cobalt.
In consideration of the premises and mutual covenants contained herein, the
parties agree as follows:
1. DEFINITIONS
1.1 "Assembly" means a hardware reference design and associated
--------
documentation which provides the design and associated bill of materials
for a Cobalt network appliance product to enable SMTC to manufacture such
product for Cobalt and package such product for shipment to customers.
1.2 "Board" means a fully assembled printed circuit board subassembly for
-----
a Cobalt network appliance product.
1.3 "A" means an engineering change order or notice from Cobalt
---
requiring a change in the Assembly for a particular Cobalt network
appliance product.
1.4 "Finished Good" means a fully assembled Cobalt network appliance
-------------
product packaged and ready to ship to a customer.
1.5 "Intellectual Property Rights" means all intellectual or proprietary
----------------------------
rights, including but not limited to, copyrights, moral rights, patent
rights (including patent applications and disclosures), rights of privacy,
mask work rights, and trade secret rights, recognized in any country or
jurisdiction in the world.
1.6 "Product" means a particular Cobalt network appliance product listed
-------
on Appendix A, which Appendix also sets forth the initial prices and
----------
material costs applicable to each such Product.
1.7 "Manufacturing Site" means the SMTC manufacturing site selected by
------------------
mutual agreement of Cobalt and SMTC to manufacture and assemble Boards. The
initial manufacturing site will be the SMTC facility in San Jose, CA.
2.0 APPOINTMENT
2.1 Appointment. Cobalt hereby appoints, and SMTC hereby accepts
-----------
appointment, as an independent, nonexclusive contract manufacturer and
order fulfillment service for all Cobalt Products.
<PAGE>
3.0 SPECIAL PURCHASE ORDER PROCEDURE FOR FIRST 90 DAYS
3.1 Special Purchase Order. On the effective date of this Agreement,
----------------------
Cobalt shall place a firm written purchase order (the "Special Purchase
Order") to purchase Finished Goods for delivery to Cobalt customers during
the first 90 days of this Agreement (the "Initial Term"). The purchase
order will specify the number of Finished Goods of a particular Product
which Cobalt desires to purchase, the requested date(s) for availability of
such Finished Goods for delivery to Cobalt customers and the prices
applicable to such Finished Goods. The Special Purchase Order is non-
cancelable.
3.2 Rescheduling; Increased Quantities. Cobalt may reschedule the monthly
----------------------------------
portion of the Special Purchase Order once per month by giving written
notice to SMTC, provided that the rescheduled date for availability to
Cobalt customers is within thirty (30) days of the originally scheduled
date. During the Initial Term, Cobalt may increase the quantity of Finished
Goods ordered for a particular month upon written notice to SMTC prior to
the end of the preceding month; provided, however, that SMTC will not be
obligated to accept any portion of a purchase order which is more than
[***] above the amount originally ordered for a particular month. SMTC will
confirm acceptance of this increase in writing within 5 days. For the
purposes of this Agreement, months shall be calculated from the effective
date of this Agreement.
4.0 BUILD-TO-ORDER AND ORDER FULFILLMENT
4.1 Rolling Forecast. On the effective date of this Agreement and on each
----------------
monthly anniversary thereafter, Cobalt shall provide SMTC with a six (6)
month rolling forecast of requirements for Boards for each Product in the
form attached hereto as Appendix B (the "Forecast"). The Forecast will be
----------
non-binding; provided, however, that commencing with the Forecast delivered
on the third monthly anniversary of this Agreement, the first month of each
Forecast will be binding. Cobalt is liable for all completed Boards covered
by Notices (defined in Section 4.3) and work in process Boards covered by a
binding Forecast. A list of the completed Boards covered by Notices and the
work in process Boards shall be provided by SMTC if requested in writing by
Cobalt.
4.2 Manufacturing; Inventory of Assembly Components. During the term of
-----------------------------------------------
this Agreement, SMTC shall direct its Manufacturing Site to manufacture and
configure Finished Goods per Notices and have Finished Goods available for
delivery to Cobalt's customers at all times. SMTC agrees to provide upside
flexibility of [***] additional demand during [***] period, based on a
[***] average of rolling demand forecasts provided to SMTC by Cobalt. SMTC
shall at all times maintain sufficient quantities of Assembly components in
inventory to timely manufacture such Finished Goods determined by Cobalt
Notices. In addition, during each month for which the Forecast has become
binding, SMTC shall order a sufficient number of the long lead time items,
including those items set forth on Appendix C, within the lead times as
----------
would enable it to manufacture a number of Finished Goods in the second and
third months of such Forecast corresponding to the number of Boards in the
Forecast for such months. SMTC shall stock pile Boards at the Manufacturing
site for assembly into Finished Goods per Cobalt Notice. SMTC shall use its
best efforts to reduce the Assembly component supplier lead times and shall
promptly notify Cobalt of any change in such lead times. Cobalt may elect
to purchase Assembly components and consign them to SMTC for assembly into
Finished Goods.
4.3 Customer Supplied Components. In the event that Cobalt supplies
----------------------------
components to SMTC, these components are being purchased by SMTC with
terms of payment of [***] days. The pricing for such customer
supplied components are set forth in Appendix A. In the event that the
----------
components have not been consumed by Cobalt
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
2
<PAGE>
requirements within [***] of receipt, SMTC has the right to return these
parts to Cobalt for immediate credit or, as an alternative, to mutually
agree to extend payment terms for an additional period until all components
are consumed in assemblies shipped to Cobalt. Cobalt remains liable for the
Cobalt unique components until they are consumed by assemblies build and
shipped by Cobalt.
4.4 Order Fulfillment. Cobalt shall have sole responsibility for
-----------------
soliciting and accepting orders from its customers for Finished Goods and
shall invoice its customers directly for Finished Goods ordered from
Cobalt. Cobalt shall provide SMTC with an order tracking number, customer
name, shipping address, method of shipping and promised delivery date for
each order accepted by Cobalt from a customer of the Products in the form
of notice or any other mechanism agreed to by Cobalt and SMTC (a "Notice").
SMTC shall fulfill each customer order to meet the promised delivery date
set forth in the Notice form. SMTC shall provide a variety of shipping
options for Cobalt's customers and shall ship Finished Goods to customers
at the most favorable rate available to SMTC for the chosen shipping
option. To the extent that Cobalt's customer has specific shipping
instructions or routing guides, SMTC shall ship Finished Goods to Cobalt's
customers in accordance with the specific shipping instructions or routing
guides. All freight, federal, state, and local sales, use, excise, and
similar taxes and charges arising in connection with the sale and delivery
of the Products to Cobalt's customers shall be borne by Cobalt. All
expenses relating to interfacing Cobalt's MRP system with SMTC shall be
borne by SMTC.
4.5 System Interfaces. SMTC shall be responsible for the expenses related
-----------------
to the interface between Cobalt's MRP system and SMTC's systems, including
all data transmission lines mutually agreed upon and any related costs for
wiring required at the SMTC manufacturing facility. SMTC shall not be
responsible for the cost of any Cobalt specific hardware, such as servers,
computers and printers.
4.6 Inspection. Cobalt shall inspect the first production run of Boards
----------
and Finished Goods at the Manufacturing site and verify conformance
requirements, which may include Cobalt engineering or manufacturing
inspection. After Cobalt has reviewed the first Boards and authorized their
release to production, SMTC shall use its best efforts to ensure that the
Manufacturing Site maintains conformance to Assembly requirements.
SMTC will provide incoming and outgoing inspection, assembly and test
methods consistent with generally accepted industry standards and/or Cobalt
specific inspection requirements mutually agreed to by both parties. The
incoming inspection includes, but is not limited to, component level
inspection.
4.7 Designated Suppliers. SMTC will issue purchase orders for Assembly and
--------------------
Boards to Suppliers Listed on Appendix D, and for Assembly components to
---------
the suppliers listed on Cobalt Approved Vendor List. SMTC shall only
purchase Assembly components specified and approved by Cobalt. Any changes
in Assembly components or suppliers are subject to Cobalt's advance written
consent.
4.8 Returns. SMTC shall not accept any returns of Finished Goods from
-------
Cobalt customers unless authorized by Cobalt in writing pursuant to
the return material authorization procedures set forth on Appendix E.
----------
SMTC shall maintain a cross-ship warehousing area to handle returns and
cross shipments required to replenish failed units. Data on this stock
shall be reported weekly. SMTC shall provide serialization and failure
analysis data to Cobalt for design and customer feedback. In the event of
epidemic failures [to be defined by Cobalt and SMTC], SMTC will reimburse
Cobalt for all reasonable costs associated with maintaining customer
goodwill if the failures are due to a manufacturing defect including, but
not limited to, product logistics, expediting of repairs, and negotiations
with component suppliers
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
3
<PAGE>
with prior mutual agreement between the parties. In any event, Cobalt shall
not be entitled to and SMTC shall not be liable for indirect, special,
incidental, or consequential damages of any nature, including but not
limited to loss of profit, promotional or manufacturing expenses, overhead,
injury to reputation or loss of Cobalt customer networks. If the failures
are not due to a SMTC manufacturing defect, SMTC will assist Cobalt as
required in the areas of logistics, expediting of repairs, and negotiations
with component suppliers and will charge for these activities on a cobalt
pre-approved, written basis.
4.9 Product Changes and Discontinuation. Cobalt reserves the right to
-----------------------------------
modify or change the Assembly for any of the Products by providing an ECO
to SMTC; provided that Cobalt shall be obligated to reimburse SMTC for the
cost of any applicable charge, including restocking charge, due to the
return of replaced or superceded Assembly components to a vendor or, if
SMTC is unable to return replaced or superceded Assembly components listed
in Appendix C to a vendor, Cobalt shall be obligated to accept such
delivery of, and reimburse SMTC for, such Cobalt unique components. Cobalt
acknowledges that ECOs may result in price changes and changes in the
delivery schedules of Boards and/or Finished Goods. SMTC shall notify
Cobalt of any changes in delivery schedules caused by SMTC's suppliers
under ECO or otherwise. SMTC agrees to respond to Cobalt with the impact of
any ECO on the price, delivery, one time costs and quality of an Assembly
within the following schedule, based on the urgency of the change upon
receipt of the order or notice:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
ECO PRIORITY CODE SMTC RESPONSE TIME
------------------------------------------------------------------------------------------------------
<S> <C>
Emergency 1 business day
------------------------------------------------------------------------------------------------------
Routine 1 business week
------------------------------------------------------------------------------------------------------
</TABLE>
SMTC and Cobalt will review and mutually agree upon the material impact of
any ECO. All Finished Goods and work-in-process requiring treatment by any
ECO will be considered rework. Cobalt may negotiate price changes caused by
an ECO directly with SMTC. Cobalt shall bear the costs of any assembly
rework or delays prior to delivery if such rework or delay is due to Cobalt
design of Assembly, engineering changes or products or parts that have been
supplied to and/or purchased by SMTC from Cobalt. Such products are listed
in Appendix F.
---------
5.0 Payment Terms
5.1 Prices. The initial prices for each Product are set forth on Appendix
------ --------
A. Cobalt may add additional Products to Appendix A during the term of this
- -----------
Agreement. Cobalt shall pay SMTC for each Finished Product shipped by SMTC
to a customer [***] from the date of invoice.
5.2 Price Changes. SMTC shall immediately notify Cobalt in writing of any
-------------
change in price of any Assembly component that increases the total cost of
a Finished Good by more than [***] or any increase of more than [***] in
price of any Assembly component with a cost of [***] or more. In such
event, Cobalt and SMTC shall negotiate an appropriate price change. If
Cobalt and SMTC are unable to agree to a new price, SMTC and/or Cobalt may
delete the affected items from the Assembly and Cobalt may elect to
purchase Assembly components and consign them to SMTC for assembly into
Finished Goods.
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
4
<PAGE>
In the event that Cobalt consigns Assembly components to the SMTC, pursuant
to this section, the applicable prices shall be reduced by the listed
material cost of such deleted Assembly components as indicated in Appendix
--------
A.. SMTC shall warehouse any consigned Assembly components from Cobalt and
-
be liable for theft or shrinkage of such Assembly components. SMTC shall
receive a fee for warehousing and handling any Assembly components
consigned by Cobalt as set forth in Appendix A.
----------
5.3 Price Review on Hard Drives and Memory. Cobalt and SMTC agree to
mutually review pricing on hard drives and memory on a monthly basis. SMTC
will provide pricing for these commodities to Cobalt on or before the
20/th/ day of each calendar month. Acceptance of revised pricing for these
hard drive and memory commodity components is by mutual agreement between
Cobalt and SMTC by no later than the 25/th/ day of each calendar month. The
selling price of assemblies affected by revised hard drive or memory costs
will be adjusted for the calendar month following the cost revision. Any on
hand raw material, work in process, finished goods inventories or material
in transit will have the appropriate debt or credit applied based on the
monthly pricing review.
5.4 Cost Reductions. During the term of this Agreement and any renewal
---------------
period, SMTC shall make reasonable efforts to reduce the cost of each
Product by a minimum of [***] per calendar quarter, excluding Cobalt
consigned Assembly Components. Cobalt and SMTC shall each designate a
representative to coordinate such cost reduction efforts. Cobalt and SMTC
shall review Product cost and quality monthly for existing products and
shall mutually establish costs for new Product(s) as released from Cobalt.
In the event that this Agreement is renewed, Cobalt and SMTC shall
establish the initial costs for the Products during the renewal terms 30
days prior to the start of the renewal period.
5.5 Special Provision for Non Cancelable Items and Boards. In the event
-----------------------------------------------------
that this Agreement is terminated for any reason, Cobalt shall reimburse
SMTC for the non-cancelable Assembly components within the leadtimes set
forth on Appendix C, completed and work-in-process Boards covered by a
----------
binding Forecast, Finished Goods that are in RMA stockroom or under RMA
repair, and past due rework charges outstanding.
5.6 Special Performance Bonuses and Penalties. Cobalt and SMTC agree that
-----------------------------------------
available-to-promise("ATP"), on time delivery of Finished Goods ("OTD")and
out-of-box audit ("OBA") are critical to Cobalt's customers satisfaction.
SMTC's compensation under this Agreement shall be adjusted monthly after
the Initial Term based on the foregoing criteria in accordance with the
following matrix:
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
5
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Type of Cobalt Customer Criteria Cobalt Req. Monthly
ship date (mo. Bonus
ave)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
OEM type customer (larger OTD late or Less than 1 day Add [***]
volumes with scheduled early OBA
delivery over time) Yield Greater than 99.95 Add [***]
- ----------------------------------------------------------------------------------------
Direct Sales (smaller ATP Less than 2 days Add [***]
immediate ship orders) OBAYield Greater than 99.95% Add [***]
- ----------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Type of Cobalt Customer Criteria Penalty
not met
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
OEM type customer (larger Greater than 1 day Subtract [***] for every day late
volumes with scheduled or early
delivery over time) Less than 99.95 Subtract [***] for every .05% yield
- ---------------------------------------------------------------------------------------------------
Direct Sales (smaller Greater than 2 days Subtract [***] for every day late
immediate ship orders) Less than 99.95 Subtract [***] for every .05% yield
- ---------------------------------------------------------------------------------------------------
</TABLE>
All time based criteria shall be measured from the time Cobalt submits a
customer's order to SMTC until such customer's Finished Good(s) leaves
SMTC's premises or designated point of distribution. Compensation shall be
adjusted monthly and calculated as a percentage of the total cost of Boards
and Assembly components procured by SMTC for the Finished Goods shipped to
a particular type of customer during a particular month and based on the
average number of days late/early all shipments to such type of customer
were in a particular month. A sample calculation is contained in Appendix
--------
H. Bonus payments shall be paid quarterly. Penalties shall be payable by
offsetting amounts due SMTC under this Agreement. There is a [***] limit as
to the OTD penalty that may be imposed in a particular quarter. There is a
[***] limit to the ATP penalty that may be imposed in a particular month.
There is a [***] limit to the OBA Yield that may be imposed in a particular
month. Cobalt may conduct OBA audits of packaged Finished Goods at SMTC
shipping facility during normal business hours.
6.0 QUALITY AND GENERAL REPORTING REQUIREMENTS
6.1 SMTC shall provide the following reports or information to Cobalt:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
REPORT / INFORMATION FREQUENCY
-------------------- ---------
- ---------------------------------------------------------------------------------
<S> <C>
Available to Promise Report Daily
- ---------------------------------------------------------------------------------
Final Assembly Schedule Twice Weekly
- ---------------------------------------------------------------------------------
FGI Receiving / Shipping Log Daily
- ---------------------------------------------------------------------------------
MFG WIP reports (by board type & system level) Twice Weekly
- Qty in 1st OP.
- Qty in 2nd OP.
- Qty in Box Build
- Qty in test
- Qty in Debug
- ---------------------------------------------------------------------------------
YIELD reports (by board type & system Ivl) Weekly
- Inspection
- 1/st/ Functional
- ---------------------------------------------------------------------------------
</TABLE>
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
-
- ------------------------------------------------------------------------------------------------------
<S> <C>
RMA Reports Weekly
- Number of units returned
- Turnaround time
- Failure report
- Circuit Location of fault
- ------------------------------------------------------------------------------------------------------
- Materials PPV report Monthly
- ------------------------------------------------------------------------------------------------------
Labor Variance report Monthly
- ------------------------------------------------------------------------------------------------------
</TABLE>
7.0 COBALT DELIVERABLES
7.1 Unless otherwise agreed, Cobalt shall provide SMTC all information
required for the manufacture of Cobalt products. Cobalt will also provide
SMTC all unique test equipment, test procedures, and software code for
loading of production disk drives and programmable devices. The above
information, software code, and equipment remain the proprietary property
of Cobalt.
8.0 NEW PRODUCT INTRODUCTION AND DESIGN SUPPORT
8.1 Relations with SMTC. SMTC will coordinate with Cobalt in the design
-------------------
and procurement of all tooling and fixtures required for the build and
assembly process. Cobalt shall bear the cost of all capital expenditures
for Cobalt-unique tooling and fixturing. All Cobalt owned equipment and
tools shall be marked with a Cobalt control number prior to installation at
SMTC. If SMTC purchases such equipment or tools on Cobalt's behalf, Cobalt
will provide the appropriate control numbers for marking.
8.2 New Products. SMTC and Cobalt will jointly perform a detailed design
------------
for manufacturing, design for assembly and design for test analysis on new
products and assemblies. Upon [***] written notice, SMTC shall provide a
[***] business day turnaround for prototypes for new products at no
additional charge. SMTC shall source and kit components for Cobalt
prototype system level bills of material within [***] days for new product
designs and [***] days for existing product design modifications from
written notification from Cobalt. SMTC shall provide a [***] turnaround
on prototype repairs.
9.0 TERM AND TERMINATION
9.1 Term. The initial term of this Agreement shall be one (1) year
----
commencing on the effective date, unless terminated in accordance with the
provisions of this Section 9. This Agreement shall be automatically renewed
at the end of each one year period unless either party terminates this
Agreement pursuant to Section 9.2 or 9.3. In the event that this Agreement
is terminated for any reason, Cobalt may place a one time purchase order
for a mutually agreed to quantity of Finished Goods and/or Boards.
9.2 Termination. This Agreement may be terminated at any time, without
-----------
cause, by either party upon giving the other party at least ninety (90)
days written notice, or by either party on ninety (90) days notice if there
is failure to agree on a price increase according to Section 5..2. Such
termination shall be effective on the date stated in such notice.
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
7
<PAGE>
9.3 Termination for Cause. This agreement may be terminated immediately
---------------------
for cause by either party in the event the other party (i) files a
voluntary petition in bankruptcy, (ii)has an involuntary petition of
bankruptcy filed against it which is not discharged within 60 days, (iii)
makes a general assignment for the benefit of creditors, (iv)is unable to
pay its debts as they become due, (iv) has a receiver appointed on account
of its insolvency or (v) fails to pay amounts due under agreed upon terms
and conditions hereunder so as to be in default and fails to cure any such
default within thirty (30) days after written notice.
9.4 Effect of Termination. In the event of any termination or expiration
---------------------
of this Agreement, the parties shall, within thirty (30) days after such
termination or expiration, return or destroy all copies of any Confidential
Information provided hereunder in such party's possession or control and,
upon request, shall furnish to such other party an affidavit or declaration
signed by an officer of such party certifying that such delivery or
destruction has been fully effected. Notwithstanding termination of this
Agreement, Cobalt shall be liable within lead times for the Cobalt unique
non-cancelable items listed in Appendix C, Boards covered by a binding
Forecast, Finished Goods in an RMA stockroom or under RMA repair, and past
due rework charges outstanding.
9.5 Survival of Obligations. The following provisions shall survive any
-----------------------
termination or expiration of this Agreement: Section 5.4 (Special Provision
for Non-Cancelable Items and Boards), Section 9.4 (Effect of Termination),
Section 9.5 (Survival of Obligations), Section 12 (Confidentiality and
Intellectual Property Rights), Section 14 (SMTC Limited Warranty and
Limitations of Liability), and Section 17 (General Provisions).
10. FORCE MAJEURE
10.1 Force Majeure. Neither party shall be liable for failure to fulfill
-------------
its obligations under this Agreement, or for delays in delivery, due to
causes beyond its reasonable control, including-but not limited to - acts
of God or nature, acts or omissions of civil or military authority,
Government priorities, fires, strikes, floods, epidemics, quarantine
restrictions, riots, war, and delays in transportation. The time for
performance of any such obligation shall be extended for the time period
lost by the reason of the delay. Cobalt, SMTC and the SMTC shall use their
best efforts to recover from any such delay.
11. INSURANCE
11.1 Insurance. SMTC shall maintain adequate insurance no less than
---------
$2,000,000 against fire, theft and damage for the inventory of Finished
Goods, work-in-process, and Assembly component inventories that Cobalt is
liable for. Cobalt shall maintain adequate insurance against fire, theft,
and damage to cover any Cobalt consigned material, test fixtures, capital
equipment, and other Cobalt material in the hands of SMTC.
11.2 Due Care. The parties agree to take all reasonable precautions to
--------
prevent injury to any persons or damage to property during the terms of
this Agreement and shall defend, indemnify, and hold (each other, its
officers, directors, agents and employees) harmless from and against any
and all claims, losses, expenses (including reasonable attorney's fees),
demands, or judgements ("Claims") which result from or arise out of: (1)
the presence of the other or equipment or tools used by either in the
performance of this Agreement on the property of the other; or (2), the use
of equipment, tools, or facilities ("Equipment") whether or not any Claims
are based upon the condition of the equipment or any agent's, or employee's
alleged negligence in permitting its use.
12. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY RIGHTS
8
<PAGE>
12.1 Confidential Information. "Confidential Information" means
------------------------
confidential and proprietary information of either party ("Disclosing
Party") that is disclosed to the other party ("Receiving Party") pursuant
to this Agreement, including, but not be limited to any trade secrets,
knowledge, data or other information of the disclosing party relating to
products, research-and development activities, processes, software,
concepts, know-how, designs, test data, customer lists, business plan,
marketing plans, which in the case of written information is marked
"confidential" or "proprietary", and which in the case of information
disclosed orally is identified at the time of the disclosure as
confidential and proprietary and will be summarized and confirmed in
writing as such by the Disclosing Party within ten (10) days after the
disclosure. Confidential Information shall not include information that:
(i) is generally available to the public through no fault or breach of the
Receiving Party; (ii) the Receiving Party can demonstrate to have had
rightfully in its possession prior to disclosure by the Disclosing Party;
(iii) is independently developed by the Receiving Party without the use of
any Confidential Information; (iv) the Receiving Party rightfully obtains
from a third party who has the right to transfer or disclose it; or (v) is
required to be disclosed by an order of a court or governmental agency,
provided that the Receiving Party shall have first given notice to the
Disclosing Party to allow the Disclosing Party to make a reasonable effort
to obtain a protective order or other confidential treatment for the
Confidential Information.
12.2 Nondisclosure. Each party shall not disclose, publish, or
-------------
disseminate the Confidential Information of the other party to anyone other
than those of such Receiving Party's employees and consultants with a need
to know, or as may by required by legal process, and each party agrees to
take reasonable precautions, but in no event less than due care, to prevent
any unauthorized use, disclosure, publication, or dissemination of the
other party's Confidential Information; provided that each party to whom
such Confidential Information is disclosed agrees to be bound by the
provisions of Sections 12.1 and 12.2. Each party agrees to accept the other
party's Confidential Information for the sole purpose of carrying out such
Receiving Party's authorized activities under this Agreement. Each party
agrees not to use the Confidential Information of the other party otherwise
for its own or any third party's benefit other than as contemplated herein
without the prior written approval of an authorized representative of the
Disclosing Party in each instance.
12.3 Intellectual Property Rights. As between the parties, except as
----------------------------
otherwise provided in this Agreement, all Intellectual Property
embodied in the Products, Assemblies and the Finished Goods belong to
and will remain exclusively with Cobalt. During the term of this
Agreement, SMTC shall have a non-exclusive license to use the
Intellectual Property soley for the purposes contemplated by this
Agreement.
12.4 Confidentiality of this Agreement. The terms of this Agreement shall
---------------------------------
be deemed to be the confidential information of each party. In the
event of a disclosure of this Agreement or its terms required by law,
including a disclosure required by the Securities and Exchange
Commission, the disclosing party shall use all reasonable efforts to
obtain confidential treatment of materials so disclosed.
13. CERTIFICATIONS
13.1 Certifications. SMTC shall maintain all necessary certifications,
--------------
including without limitation ISO9000 and UL certification status, and
verify SMTC's certifications, including its ISO9000 and UL certification
status, on a periodic basis and shall notify Cobalt immediately in
9
<PAGE>
writing upon loss of any such certifications. SMTC shall use its best
efforts to obtain, and cause SMTC to obtain, BABT certification and other
similar certifications required by Cobalt.
14. SMTC LIMITED WARRANTY AND LIMITATIONS OF LIABILITIES
14.1 Warranty. SMTC warrants to Cobalt that Assembly components purchased
--------
pursuant to this Agreement will conform to the manufacturer's
specifications for such products and that any value-added work performed by
SMTC on any such products will conform to applicable Cobalt specifications
relating to such work. IN PARTICULAR, SMTC MAKES NO WARRANTY RESPECTING THE
MERCHANTABILITY OF THE FINISHED GOODS OR BOARDS OR THEIR SUITABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE OR USE.
14.2 Transfer of Warranty. SMTC will grant to Cobalt a minimum fifteen
--------------------
(15) month transferable manufacturer's warranty and any indemnification
that SMTC receives from the manufacturer. SMTC will also transfer to Cobalt
whatever warranties and indemnities SMTC receives from the manufactures of
the Assembly components, subject to any manufacturer imposed restrictions.
With respect to Assembly components that do not meet applicable
manufacturer's specifications, SMTC's liability is limited (at SMTC's
discretion) to (1.) Refund of Cobalt purchase price for such products
(without interest); (2.) Repair of such products, or; (3.) Replacement of
such products provided, however, such products must be returned to SMTC,
transportation charges collect to SMTC. Cobalt shall not, in any event, be
entitled to, and SMTC shall not be liable for indirect, special,
incidental, or consequential damages of any nature including - without
being limited to -loss of profit, promotional or manufacturing expenses,
overhead, injury to reputation or loss of Cobalt customer networks.
Cobalt's recovery from SMTC from any claim shall not exceed SMTC's purchase
price for such Assembly components and shipping charges if applicable,
irrespective of the nature of the claim, whether in contract, tort,
warranty, or otherwise.
14.3 Finished Goods Warranty. SMTC warrants that the Finished Goods sold
-----------------------
under this Agreement will be free from manufacturing defects for a period
of [***] from date of shipment to customer (OEM, Distributor, VAR,
reseller, or direct sales). The warranty period for returned Finished Goods
shall be the balance of the original warranty period or [***] whichever is
greater. The warranty is void if product(s) have been subjected to abuse,
misuse, accident, alteration, neglect, operation outside of parameters or
environments specified in Cobalt's product specifications or unauthorized
repair, installation, or alterations by anyone other than SMTC. if SMTC and
Cobalt jointly determine that a Finished Good under warranty product is
irreparable, or SMTC no longer possesses the tools and equipment necessary
to perform the repairs, SMTC shall have the option to refund the cost of
replacement.
15. GENERAL
15.1 Assignment. Neither party may assign its rights or delegate its
----------
obligations under this Agreement, either in whole or in part, without the
prior written consent of the other party other than an assignment by either
party of this Agreement by merger, acquisition, or sale of all or
substantially all of its assets. Any attempted assignment or delegation
without such prior consent will be null and void. The rights and
liabilities of the parties under this Agreement will bind and inure to the
benefit of the parties' respective successors and permitted assigns.
15.2 Relationship of Parties. The parties to this Agreement are
------------------------
independent contractors and this Agreement will not establish any
relationship of partnership, joint venture, employment, franchise, or
agency between the parties. Except as provided in
10
<PAGE>
this Agreement neither party will have the power to bind the other or incur
obligations on the other's behalf without the other's prior written
consent.
15.3 Notices. Any notice or payment required or permitted to be made or
-------
given by either party hereto pursuant to this Agreement will be deemed
delivered on the date of issuance if sent by such party to the other party
by mail certified, return receipt requested, commercial courier, personal
delivery, or a similar reliable delivery method with proof of delivery,
addressed to the addresses set forth above or to such other address as a
party shall designated by written notice given to the other party.
Electronic mail and facsimile may be used; provided, that any document so
delivered is also reduced to hard copy and delivered by one of the
foregoing methods.
15.4 Governing Law. This Agreement shall be construed and interpreted in
-------------
accordance with the laws of the State of California without reference to or
application of conflict of law rules.
15.5 Export Administration Act and Related Laws. To the extent that the
------------------------------------------
export, resale and re-export of the Finished Goods is subject to the U.S.
Export Administration Act of 1979, as amended (the "Export Act"), and the
regulations promulgated thereunder, and any other regulation of any
jurisdiction with respect to export or import, SMTC will comply with its
obligations under the Export Act and such regulations.
15.6 Severability. if any part of this Agreement is found to be invalid
------------
or unenforceable by a court of competent jurisdiction, then it will be
enforced to the maximum extent permitted by law and the remaining
provisions shall remain in full force and effect. Furthermore, the parties
agree to substitute for the invalid or unenforceable provision a valid and
enforceable provision which most closely approximates the intent and
economic effect of the invalid or unenforceable provision.
15.7 Waiver. The waiver of any breach of any provision of this Agreement
------
shall not constitute a waiver of any subsequent breach of the same other
provisions herein. To be effective, a Waiver must be in writing and signed
by the waiving party.
15.8 Rights of Third Parties. Nothing contained in this Agreement,
-----------------------
express or implied, shall be deemed to confer any rights or remedies upon,
nor obligate any of the parties hereto, to any person or entity other than
such parties, unless expressly stated to the contrary.
15.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable and all of which together
shall constitute one instrument.
15.10 Headings. All section headings provided herein are for convenience
--------
only, and shall not be used as a basis for construction or interpretation
of this Agreement.
15.11 Entire Agreement. This Agreement, including the Appendices hereto
----------------
which are expressly incorporated herein by reference, constitutes the
complete and exclusive understanding and agreement between the parties and
supersedes all prior understandings and agreements, whether written or
oral, with respect to the subject matter hereof. This Agreement may not be
altered, modified, amended, changed, rescinded or discharged, in whole or
in part, except by written agreement executed by both parties.
Acceptance of this Agreement shall be indicated by signature of
authorized persons of both parties below:
11
<PAGE>
SMTC, Inc. Cobalt Networks, Inc.
By:/s/ Gary Walker By: /s/ Gary Martell
------------------- --------------------------
Printed: Gary Walker Printed: Gary Martell
------------- ----------------------
Title: Vice President Title: Chief Operating Officer
--------------- ------------------------
Date: September 3, 1999 Date: September 3, 1999
----------------- -------------------------
Address: 2302 Trade Zone Lane Address: 555 Ellis Street
---------------------- -----------------------
San Jose, CA 95131 Mountain View, CA 94043
---------------------- -----------------------
Phone: (408) 934-7100 Phone: (650) 623-2500
------------------------ -------------------------
CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
12
<PAGE>
List of Appendices
------------------
Appendix A Products, prices, and material costs
Appendix B Form of Forecast
Appendix C Cobalt Unique Parts and Leadtimes
Appendix D List of suppliers
Appendix E Returns Policy
Appendix F Cobalt Supplied Products
Appendix G Changes to Contract
Appendix H Sample calculation of Bonus and Penalty structure
13
<PAGE>
APPENDIX A
PRICING FOR TURNKEY SERVICE AND PURCHASE AGREEMENT
This Appendix constitutes the pricing structure for the contract between SMTC
and Cobalt as of the effective date. The charges consist of three major
categories: Materials, Turnkey Material Cost Charges, Customer Supplied
Component Material Cost, Customer Supplied Component Material Cost Turnkey
Charge, Labor and SMTC Profit on Materials.
Definitions
- -----------
Material Cost - shall consist of all Assembly components necessary to build a
Cobalt product as indicated on the product specific bill of material. These
components are procured and/or supplied by SMTC and are not consigned customer
supplied components.
Customer Supplied Components - shall consist of all assembly components procured
and/or supplied by Cobalt necessary to build a Cobalt product as indicated on
the product specific bill of material. These components are procured and/or
supplied by Cobalt and are not procured and/or supplied by SMTC.
Bill of Material - The Cobalt bill of material is the summary of all necessary
assembly components necessary to build any specific Cobalt product.
Material Turnkey Charge - indicates the percentage SMTC shall charge Cobalt in
addition to the material cost.
Customer Supplied Component Turnkey Charge - shall consist of the percentage
SMTC shall charge Cobalt for warehousing and handling consigned customer
supplied components, such as [***].
Labor - shall consist of SMTC's labor costs necessary to build any Cobalt
product. These labor costs are mutually agreed upon between SMTC and Cobalt on a
[***] basis.
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
14
<PAGE>
Pricing Model
- -------------
Cobalt Part Number Description QPA Cost Ext. Cost
Final Assemblies [***] [***] [***] [***]
[***] Labor[***] [***] [***] [***]
[***] [***]
Sub Assemblies
[***] [***] [***] [***] [***]
Labor[***] [***] [***] [***]
[***] [***]
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
15
<PAGE>
Volume Pricing Table (based on SMTC procured and/or supplied material)
- --------------------
[***]
Example (This calculation is for illustration purposes only)
[***]
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
16
<PAGE>
[***]
Product:
[***]
- --------------------------------------------------------------------------------
COBALT BILL OF MATERIAL COST ROLL UP - [***]
AS OF: [***]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cobalt Part Number Description QPA Cost Ext. Cost
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <X> <C> <C> <C>
FINAL ASSEMBLIES
[***] [***] [***] [***]
SUB ASSEMBLIES
[***] [***] [***] [***]
</TABLE>
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
17
<PAGE>
APPENDIX B
FORM OF FORECAST
<TABLE>
<CAPTION>
Cobalt Networks Inc., Product Forecast
AS OF:
8/23/99 19 98 JAN 99' FEB MAR APR MAY JUN
- -------------------------------------------------- ----------------------------------------------------------
FG Q4 YR Q1 Q2
- -----------------------------
LOC
--------
MIN B
- -------------------------------------------------- ------------------------------------------------------------
----------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
- --------------------- ------------- ----------------------------------------------------------
TOTAL [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
- -------------------------------------------------- ----------------------------------------------------------
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] FRCST [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
- --------------------- ------------- ----------------------------------------------------------
TOTAL [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
- -------------------------------------------------- ----------------------------------------------------------
- --------------------- ------------- ----------------------------------------------------------
TOTAL [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
- --------------------- ------------- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF:
8/23/99 JUL AUG SEP OCT NOV DEC
- --------------------- --------------------------- -----------------------------
Q3 Q4 YR Q1
1999 2000
- --------------------- ------------------------------------------------------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
- --------------------- ------------------------------------------------------------- -------- --------
TOTAL [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
- --------------------- ------------------------------------------------------------- -------- --------
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
- --------------------- ------------------------------------------------------------- -------- --------
TOTAL [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
- --------------------- ------------------------------------------------------------- -------- --------
- --------------------- ------------------------------------------------------------- -------- --------
TOTAL [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
- --------------------- ------------------------------------------------------------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
NOTES:
<S> <C>
1. This forecast includes new product introduction of [***] time frame
2. Changes from [***]
3. Changes from [***]
4. Changes from [***]
5. Changes from [***]
Actual orders for product in May 99' was [***] systems. Backlog of [***] units carried into June
Actual orders for product in June 99' was [***] systems. Backlog of [***] units carried into July
Actual orders for product in July 99' was [***] systems. Backlog of [***] units carried into August
</TABLE>
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
18
<PAGE>
APPENDIX C
COBALT UNIQUE MATERIALS
<TABLE>
<CAPTION>
APPENDIX C
COBALT UNIQUE MATERIALS LIST
6/22/99
- ----------------------------------------------------------------------------------------------------------------------------------
Cobalt Part Number Description 1 Supplier Item cost LEAD TIME
(in weeks)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
[***] COVERED BY BINDING FORECAST
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL UNIQUE COMPONENTS $[***]
- ---------------------------------------------------------------------------------------------------------------------
[***] COVERED BY BINDING FORECAST
- ----------------------------------------------------------------------------------------------------------------------------------
[***]
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL UNIQUE [***] $[***]
- --------------------------------------------------------------------------------------------------------------------------
UNIQUE COMPONENTS THAT ARE INCLUDED IN THE COST OF ABOVE ROLLED-UP ASSYS
- ------------------------------------------------------------------------------------------------------------------------------------
[***]
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
19
<PAGE>
APPENDIX D
LIST OF SUPPLIERS
Cobalt directs SMTC to use the Manufacturing site(s) as listed below in
performance of this agreement:
1. Name: Service Mount Technology Centre
Address: 2302 Trade Zone Blvd, San Jose, California 95131
2. Name:
Address:
3. Name:
Address:
20
<PAGE>
Appendix E
RETURN MATERIALS AUTHORIZATION PROCESS
[***]
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
21
<PAGE>
APPENDIX F
COBALT SUPPLIED PRODUCTS
Product Supplied from Cobalt to SMTC
PART # DESCRIPTION COBALT PART # MFR PART # REVISION
- ------------------ ------------- ---------- --------
[***] [***] [***] [***]
[***] [***] [***] [***]
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
22
<PAGE>
APPENDIX G
CHANGES TO CONTRACT
The following changes or additions to the attached agreement have been agreed
upon by both SMTC and Cobalt:
23
<PAGE>
APPENDIX H
SAMPLE CALCULATION OF BONUS/PENALTY STRUCTURE
1. All times are measured from time of notice to time shipped from dock.
2. Example: [***] OEM units OTD at [***] day, [***] Direct ship [***] [***]
than [***] days, [***] greater than [***] SMTC would receive a bonus of
[***] by SMTC for that assembly. If [***] was [***], and [***] units were
shipped that [***], SMTC would receive a [***] bonus of [***]
ATP bonus of [***]
OBA bonus of [***] for a total of an $[***] bonus for the month.
3. Example: If the monthly average of [***] is [***] for all [***] and the
[***] for [***] is lower than [***], but [***] exceeds [***] and is measured
for the [***] at [***] ([***] in excess of need) for total monthly direct
shipments of [***], the calculation would be as follows:
OBA bonus: [***]
OTD bonus [***]
ATP [***]
Amounts normalized by [***].
3. Example of how [***] is calculated. On [***] in the month that are
shipped to direct customers (not scheduled [***] shipments), for [***] of
the month, the published [***] is [***], on [***] of the [***] the [***]
is published at [***], but for [***] of the month, the published [***]
days, therefore the average [***] is [***] and the [***] is applied as
[***]. If [***] of [***], and [***] of [***], the [***] would be
calculated as [***] and the penalty would be [***]. If [***] the [***],
and [***], the monthly average [***] would be calculated as [***] and the
[***] would be [***]. Amounts normalized by [***]
4. On time delivery reports are measured and calculated as in Example 3 above,
except measure from the time the order is scheduled to ship to time actual
shipment occurs from SMTC dock. Transit time issues from the freight
carrier to customer dock are not part of this calculation. For [***]
metric, [***] or [***] are measured in absolute value. If [***] are [***],
the [***] is applied. If [***] are [***] and [***], the [***] is deemed
[***].
5. [***] is measured by the [***] on Finished Goods. [***] averages will be
compiled into a monthly [***] specifying [***] average.
[***] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 10.12
FULL RECOURSE PROMISSORY NOTE
------------- ---------------
$500,000
Mountain View, California
August 20, 1999
For value received, the undersigned (the "Maker") promises to pay to
Cobalt Networks, Inc., a California corporation (the "Company"), or order, at
its principal office, the principal sum of Five Hundred Thousand Dollars
($500,000) without interest. Said principal shall be due as follows:
This Note shall be due and payable on August 20, 2003; provided, however,
that this Note shall be due and payable 60 days following the termination of the
Maker's employment with the Company.
All payments are to be made in lawful money of the United States of
America. The privilege is reserved to prepay any portion of the Note at any
time.
Should suit be commenced to collect this Note or any portion thereof, such
sum as the Court may deem reasonable shall be added hereto as attorneys' fees.
The Maker waives presentment for payment, protest, notice of protest, and notice
of non-payment of this Note.
This Note is secured by a pledge of certain shares of the Company's
Series B Preferred Stock pursuant to a Security Agreement between the Company
and the Maker of even date herewith, and is subject to all the provisions
thereof.
The holder of this Note shall have full recourse against the Maker, and
shall not be required to proceed against the collateral security pledged to
secure this Note in the event of default.
/s/ Stephen DeWitt
_________________________________________
Stephen DeWitt
<PAGE>
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT is made as of August 20, 1999, between Cobalt
Networks, Inc., a California corporation ("Pledgee" or the "Company"), and
Stephen DeWitt ("Pledgor").
Recitals
--------
On August 20, 1999, Pledgee loaned Pledgor $500,000 and Pledgor
delivered a promissory note (the "Note") in the total principal amount of
$500,000 to Pledgee. The Note and the obligations thereunder are as set forth
in that certain Promissory Noted dated August 20, 1999 issued by Pledgor to the
Pledgee and are to be secured by 50,000 shares of the Series B Preferred Stock
of Pledgee held by Pledgor (the "Stock").
NOW THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In order to secure
---------------------------------------------
Pledgor's obligation to pay the Note in full, Pledgor, pursuant to the
Commercial Code of the State of California, hereby pledges all of the Stock
(herein sometimes referred to as the "Collateral") represented by certificate
number SB-4.
The pledged Stock (together with an executed blank stock assignment for
use in transferring all or a portion of the Stock to Pledgee if, as and when
required pursuant to this Security Agreement) shall be delivered to the
Secretary of Pledgee, or such other person designated by the Company ("Escrow
Agent") to be held pursuant to an Escrow Agreement in the form of Exhibit A
hereto (the "Escrow Agreement") as security for the repayment of the Note, and
any extensions or renewals thereof.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
---------------------------------------
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
(a) Payment of Indebtedness. Pledgor will pay the principal sum of
-----------------------
the Note secured hereby at the time and in the manner provided in the Note.
-2-
<PAGE>
(b) Encumbrances. The Stock is not subject to any encumbrances,
------------
defenses and liens other than the security interest granted hereunder, and
Pledgor will not further encumber the Stock in any manner without the prior
written consent of Pledgee.
(c) Margin Regulations. In the event that Pledgee's Common Stock
------------------
becomes margin-listed by the Federal Reserve Board subsequent to the execution
of this Security Agreement, and Pledgee is classified as a "lender" within the
meaning of the regulations under Part 207 of Title 12 of the Code of Federal
Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making
any amendment to the Note or providing any additional collateral as may be
necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
-------------
payments of principal are made as they become due under the terms of the Note,
Pledgor shall have the right to vote all of the Stock pledged hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
-----------------
any stock dividend, reclassification, readjustment or other changes declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee and Escrow Agent under the terms of this
Security Agreement and the Escrow Agreement in the same manner as the Stock
originally pledged hereunder. In the event of substitution of such securities,
Pledgor and Pledgee shall cooperate and execute such documents as are reasonable
so as to provide for the substitution of such Collateral and, upon such
substitution, references to "Stock" in this Security Agreement shall include the
substituted shares of capital stock of Pledgor as a result thereof.
5. Warrants and Rights. In the event that, during the term of this
-------------------
pledge, subscription warrants or other rights or options shall be issued in
connection with the pledged Stock, such rights, warrants and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Stock then held
by Escrow Agent shall be immediately delivered to Escrow Agent, to be held under
the terms of this Security Agreement in the same manner as the Stock pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and
-------
of this Security Agreement in the event:
-3-
<PAGE>
(a) Payment of principal on the Note shall be delinquent for a
period of ten (10) days or more; or
(b) Pledgor fails to perform any of the covenants contained in
this Security Agreement for a period of ten (10) days after written notice
thereof from Pledgee.
In the case of an event of default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
7. Withdrawal or Substitution of Collateral. Until the Note has been
----------------------------------------
paid in full, Pledgor shall not sell, withdraw, pledge, substitute or otherwise
dispose of all or any part of the Collateral without the prior written consent
of Pledgee.
8. Term. The within pledge of Stock shall continue until the payment
----
of all indebtedness secured hereby, at which time the remaining pledged Stock
shall be promptly delivered to Pledgor, subject to the terms of any other
agreement between Pledgor and Pledgee.
9. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
----------
proceeding is instituted by or against him or her, or if a receiver is appointed
for the property of Pledgor, or if Pledgor makes an assignment for the benefit
of creditors, the entire amount unpaid on the Note shall become immediately due
and payable, and Pledgee may proceed as provided in the case of default.
10. Escrow Agent Liability. The liability of the Escrow Agent shall be
----------------------
limited as provided in the Escrow Agreement.
11. Miscellaneous.
-------------
(a) Invalidity of Particular Provisions. Pledgor and Pledgee agree
-----------------------------------
that the enforceability or invalidity of any provision or provisions of this
Security Agreement shall not render any other provision or provisions herein
contained unenforceable or invalid.
(b) Successors or Assigns. Pledgor and Pledgee agree that all of
---------------------
the terms of this Security Agreement shall be binding on their respective
successors and assigns, and that the term "Pledgor" and the term "Pledgee" as
used
-4-
<PAGE>
herein shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
(c) Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California as applied to
contracts between California residents to be wholly performed within the State
of California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"PLEDGEE"
COBALT NETWORKS, INC.
a California corporation
By: /s/ Kenton D. Chow
------------------------------------------
Title: Chief Financial Officer
---------------------------------------
"PLEDGOR"
/s/ Stephen DeWitt
---------------------------------------------
Stephen DeWitt
Address:
_____________________________________________
_____________________________________________
-5-
<PAGE>
Exhibit 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction
of
Name Incorporation
---- --------------
<S> <C>
Cobalt Networks K.K. Japan
Cobalt Networks Limited United Kingdom
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated January 18, 1999 except as to Note 11 which is as of
September 1, 1999, relating to the financial statements of Cobalt Networks,
Inc., which appears in such Registration Statement. We also consent to the
references to us under the headings "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
San Jose, California
September 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> OTHER YEAR YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> OCT-18-1996 JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998 JUL-02-1999
<CASH> 0 1,738 2,090 27,426
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 0 2,040 4,829
<ALLOWANCES> 0 0 335 485
<INVENTORY> 0 20 514 1,019
<CURRENT-ASSETS> 0 1,836 4,883 33,581
<PP&E> 0 180 1,603 2,031
<DEPRECIATION> 0 18 341 710
<TOTAL-ASSETS> 0 1,998 6,145 34,902
<CURRENT-LIABILITIES> 0 294 6,795 9,042
<BONDS> 0 0 0 0
0 0 12,339 45,646
0 0 0 0
<COMMON> 0 4 5 5
<OTHER-SE> 0 (1,851) (13,073) (19,850)
<TOTAL-LIABILITY-AND-EQUITY> 0 1,998 6,145 34,902
<SALES> 0 0 3,537 7,663
<TOTAL-REVENUES> 0 0 3,537 7,663
<CGS> 0 0 3,123 5,156
<TOTAL-COSTS> 0 0 3,123 5,156
<OTHER-EXPENSES> 82 1,757 10,959 10,751
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 29 15 217
<INCOME-PRETAX> (82) (1,769) (10,478) (8,244)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (82) (1,769) (10,478) (8,244)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (82) (1,769) (10,478) (8,209)
<EPS-BASIC> 0 (4.10) (5.47) (3.18)
<EPS-DILUTED> 0 (4.10) (5.47) (3.18)
</TABLE>
