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As filed with the Securities and Exchange Commission on November 22, 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
TURNSTONE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3669 77-047640
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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274 FERGUSON DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 404-0200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RICHARD N. TINSLEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TURNSTONE SYSTEMS, INC.
274 FERGUSON DRIVE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 404-0200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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THOMAS C. DEFILIPPS, ESQ. JOHN L. SAVVA, ESQ.
ROBERT F. KORNEGAY, ESQ. ALBERT Y. LIU, ESQ.
TED S. HOLLIFIELD, ESQ. JAMES OEHLER, ESQ.
SANDRA PAK KNOX, ESQ. SULLIVAN & CROMWELL
WILSON SONSINI GOODRICH & ROSATI 1888 CENTURY PARK EAST
PROFESSIONAL CORPORATION LOS ANGELES, CALIFORNIA 90067
650 PAGE MILL ROAD (310) 712-6600
PALO ALTO, CA 94304
(650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO AGGREGATE OFFERING REGISTRATION
BE REGISTERED PRICE(1) FEE
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Common Stock ($0.001 par value).. $48,300,000 $13,427
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(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.
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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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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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 NOVEMBER 22, 1999.
Shares
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[Turnstone Systems, Inc.
Logo] TURNSTONE SYSTEMS, INC.
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Common Stock
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This is an initial public offering of shares of common stock of Turnstone
Systems, Inc. All of the shares of common stock are being sold by
Turnstone Systems.
Prior to this offering, there has been no public market for our common
stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. Application has been made for quotation
of our common stock on the Nasdaq National Market under the symbol "TSTN".
See "Risk Factors" beginning on page 4 to read about 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.
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<CAPTION>
Per Share Total
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Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Turnstone Systems............. $ $
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To the extent the underwriters sell more than shares of
common stock, the underwriters have the option to purchase up to an additional
shares from Turnstone Systems at the initial public offering
price less the underwriting discount.
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The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
DAIN RAUSCHER WESSELS
ROBERTSON STEPHENS
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Prospectus dated , 2000.
<PAGE> 3
Inside Cover:
Title: The Turnstone Loop Management Solution
Diagram depicting the Copper CrossConnect(TM) CX100 being used in the copper
local loop network by CLEC DSL service provider. At the top of the diagram is a
gray shaded area representing the Central Office including a physical
connection point, ILEC voice equipment, and two leased CLEC spaces. Copper
wires connect from the physical connection point to the ILEC voice equipment,
and from the physical connection point to each of the leased CLEC spaces. The
diagram highlights one of the leased CLEC spaces to show the equipment deployed
by the CLEC, including a CX100 and two DSLAMs. This is shown just to the right
of the Leased CLEC space in a circle. Exiting the Central office, copper wires
extend to another physical connection point, and then from there to multiple
DSL subscribers, both businesses and homes. On the bottom right-hand side of
the diagram is the Network Operations Center, with a logical link to the CX100
in the Central office, representing software control. The bottom of the diagram
shows the horizontal version of the Turnstone logo.
<PAGE> 4
PROSPECTUS SUMMARY
This summary does not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, especially "Risk Factors" beginning on page 4. Unless
otherwise indicated, this prospectus (A) assumes the exercise of a warrant to
purchase 90,000 shares of our Series A Preferred Stock, (B) gives effect to the
automatic conversion of our outstanding preferred stock into common stock upon
the closing of the offering and (C) assumes that the underwriters do not
exercise their option to purchase additional shares in this offering.
TURNSTONE SYSTEMS, INC.
We are a leading provider of loop management solutions that enable local
exchange carriers to rapidly deploy and efficiently maintain Digital Subscriber
Line, or DSL, services. Loop management is the term we use to describe the
automation and remote control of installation, qualification and maintenance of
copper telephone lines. The Copper CrossConnect CX100, our first product, is
currently being installed in telephone company central offices by Competitive
Local Exchange Carriers, or CLECs, to speed their deployment of DSL services. We
sell our CX100 through our direct sales force and through an original equipment
manufacturer relationship with Lucent Technologies, who has chosen to sell the
CX100 as a co-branded system. As of October 31, 1999, our products have been
deployed by Bluestar Communications, Covad Communications, DSL.net, Jato
Communications, MGC Communications, Network Access Solutions and Rhythms
NetConnections. For the nine months ended September 30, 1999, we recognized
$14.7 million in revenues and shipped over 1,500 CX100 systems.
OUR INDUSTRY
We believe that Internet content and the number of users accessing the
Internet will continue to grow rapidly. As more users access more content, the
ability to connect to the Internet at high speeds is becoming increasingly
important for businesses and consumers. Growing demand for high-speed Internet
access, increased competition resulting from telecommunications deregulation and
pressure from alternative means of providing high-speed access services have led
both traditional and new telecommunications service providers to deploy new
networks using DSL technology.
DSL networks are an attractive means of providing high-speed access
services because they can be deployed over existing copper telephone lines,
substantially reducing the cost of building a new network. In addition,
significant portions of the cost of a DSL network can be deferred until
subscribers are added, reducing the initial fixed cost of the network.
Despite these inherent advantages, DSL deployment and maintenance has
to-date been difficult, expensive and labor intensive. DSL operates at higher
frequencies than traditional analog voice service and is therefore more
dependent on the length and quality of the copper line. These copper lines were
installed as part of analog telephone networks developed and deployed over the
past 100 years to carry voice traffic, and frequently require qualification and
preparation to support DSL deployment. Most equipment vendors have focused on
the needs of the traditional local exchange carriers and their analog voice
service offerings. These vendors have not developed products optimized for the
unique requirements of new local exchange carriers and DSL services. Traditional
systems, often based on proprietary software and requiring on-site technicians
using hand-held test equipment, are difficult and expensive to integrate with
new DSL equipment and modern operational support systems. These traditional
systems limit the ability of telecommunications service providers to rapidly
scale their networks and expand their subscriber base for high-speed digital
services. We believe widespread deployment of competitive DSL services requires
a shift from labor-intensive processes to new infrastructure equipment providing
for the automation and remote management of line installation, qualification and
maintenance.
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OUR SOLUTION AND STRATEGY
We believe that our CX100 and CrossWorks software represent the first
commercially available loop management solution specifically designed and built
to meet the requirements of local exchange carriers deploying DSL. The CX100
product family enables the rapid and efficient deployment of high-speed digital
services on existing copper telephone lines.
The benefits of our loop management solution include:
- RAPID AND EFFICIENT DSL DEPLOYMENT. Our CX100 enables carriers to
remotely identify and qualify any line connected through the system.
Accurate line identification and qualification, without the need for
on-site labor, enable local exchange carriers to rapidly and efficiently
deploy DSL services.
- IMPROVED NETWORK RELIABILITY. The CX100 improves network reliability and
availability, enabling local exchange carriers to offer guaranteed levels
of service. Using our CX100, local exchange carriers can rapidly restore
service in the event of failure in DSL equipment by remotely reconnecting
affected lines around a problem. This process, which we call protection
switching, enables services to be restored rapidly without requiring the
costly dispatch of personnel on-site.
- AUTOMATED OPERATIONS. Our CrossWorks software operates in conjunction
with the CX100 to automate the collection, analysis and archiving of
information regarding subscribers, line quality, test histories and other
loop management information. Raw test data can be automatically gathered
at programmed intervals and analyzed, generating pass/fail notifications
based on user-defined thresholds for particular services. CrossWorks also
includes automated network administration capabilities such as software
upgrades, backups and alarm tracking.
- COMPATIBLE WITH ALL SERVICES AND PLATFORMS. The CX100 is based on a
physical connection architecture that is compatible with all types of
services delivered on copper telephone lines and all types of Digital
Subscriber Line Access Multiplexers, or DSLAMs. A DSLAM is a network
device that receives signals from multiple DSL connections and puts the
signals on a larger, high-speed transmission line. A single CX100 may be
deployed with multiple DSLAMs from a variety of vendors, including
Alcatel, Cisco, Copper Mountain, Lucent, Nokia and Paradyne. With our
solution in place, local exchange carriers can deploy next-generation
equipment to support emerging DSL services as well as leverage existing
investments in networking equipment that support more traditional
services.
Our objective is to be the leading provider of loop management solutions
for local exchange carriers. The following are key elements of our strategy:
- increase our penetration of competitive local exchange carriers and
penetrate new markets as they emerge;
- enhance product offerings to provide better value to existing and new
customers;
- leverage relationships with original equipment manufacturers and
complementary equipment vendors; and
- outsource manufacturing of our products to lower manufacturing costs and
enhance flexibility.
CORPORATE INFORMATION
We were incorporated in Delaware in January 1998. Our principal executive
offices are located at 274 Ferguson Drive, Mountain View, California 94043, and
our telephone number is (650) 404-0200.
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THE OFFERING
Shares offered........................ shares
Shares to be outstanding after the
offering.............................. shares
Proposed Nasdaq National Market
symbol................................ "TSTN"
Use of proceeds....................... For general corporate purposes,
including working capital and
capital expenditures and potential
acquisitions of, or investments in,
complementary businesses,
technologies and products.
The total number of shares outstanding after the offering is based on
shares outstanding as of September 30, 1999, assuming the exercise for cash of a
warrant to acquire 90,000 shares that would otherwise expire upon the closing of
this offering. It excludes:
- 2,999,000 shares of common stock issuable upon exercise of options
outstanding under our 1998 Stock Plan at a weighted average exercise
price of $1.754 per share;
- 480,776 shares available for future issuance under our 1998 Stock Plan;
- 5,000,000 shares available for issuance under our 2000 Stock Plan;
- 500,000 shares available for issuance under our 2000 Employee Stock
Purchase Plan; and
- 45,000 shares of common stock issuable upon exercise of an outstanding
warrant at an exercise price of $0.50 per share.
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS)
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PERIOD FROM NINE MONTHS ENDED
INCEPTION SEPTEMBER 30,
(JANUARY 2, 1998) TO ------------------
DECEMBER 31, 1998 1998 1999
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STATEMENT OF OPERATIONS DATA:
Net revenues....................................... $ -- $ -- $14,704
Gross profit....................................... -- -- 7,784
Operating loss..................................... (4,941) (3,075) (756)
Net loss........................................... (4,749) (2,904) (707)
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The balance sheet data displayed in the "Pro Forma As Adjusted" column
below reflects (A) the exercise for cash of a warrant to purchase 90,000 shares
of our Series A Preferred Stock, (B) the automatic conversion of our outstanding
preferred stock into common stock upon the closing of the offering and (C) our
sale of shares of common stock offered by this prospectus at an assumed initial
public offering price of $ per share and the application of our net proceeds
from the offering, after deducting an assumed underwriting discount and
estimated offering expenses payable by us, as described in "Use of Proceeds".
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SEPTEMBER 30, 1999
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PRO FORMA
ACTUAL AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,952 $
Working capital............................................. 8,538
Total assets................................................ 16,197
Long-term obligations under capital leases, less current
portion................................................... 300
Stockholders' equity........................................ 9,231
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RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the risks described below before making
an investment decision. If any of the following risks actually occurs, our
business, financial condition and results of operations could be seriously
harmed. In that case, the trading price of our common stock could decline, and
you could lose all or part of your investment.
WE ONLY BEGAN SELLING OUR PRODUCTS IN THE FIRST QUARTER OF 1999, AND AS A
RESULT, IT IS DIFFICULT TO FORECAST OUR FUTURE OPERATING RESULTS.
Due to our limited operating history, it is difficult or impossible to
accurately forecast our revenues. In addition, we have limited meaningful
historical financial data upon which to base planned operating expenses.
Specifically, we began operations in January 1998, introduced our Copper
CrossConnect CX100 in October 1998 and only began shipping the CX100 in the
first quarter of 1999. The revenue and income potential of our products and
business are unproven and you should not rely on the results for any historic
period as an indication of our future performance. If we do not achieve our
expected revenue growth, our operating results will be below our expectations
and the expectations of investors and market analysts, which could cause the
price of our common stock to decline substantially.
WE HAVE LOST MONEY IN THE PAST AND MAY EXPERIENCE LOSSES IN THE FUTURE, WHICH
COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
We lost $4.7 million in our first year of operations which ended December
1998. Although we recently achieved profitability on a quarterly basis, we
cannot be certain that we will maintain profitability in the future. In
addition, we had an accumulated deficit of $5.5 million as of September 30,
1999. We expect to continue to incur significant product development, sales and
marketing and administrative expenses. In particular, we anticipate that our
expenses will increase substantially in the next 12 months as we:
- increase our sales and marketing activities, particularly by expanding
our direct sales force;
- develop our technology, expand our existing product lines and add new
features to penetrate new markets; and
- develop additional infrastructure and hire additional management to keep
pace with our growth.
Our operating expenses are largely based on currently anticipated revenue
trends, which may not be realized, and a high percentage of our expenses are and
will continue to be fixed in the short term. We will need to generate
significant revenues to maintain profitability. We cannot be certain that we can
generate revenue growth consistent with our recent experience, or that our
revenues will be sufficient to maintain profitability. If we incur losses, the
market price of our common stock may decline substantially.
OUR SUCCESS WILL DEPEND ON THE BROADER ACCEPTANCE OF DSL TECHNOLOGIES FOR HIGH
SPEED DATA ACCESS.
Our products are primarily used by local exchange carriers who offer
Digital Subscriber Line, or DSL, based services. DSL technology allows
communications companies to offer high-speed services over standard copper
telephone lines. Our future success is substantially dependent upon whether DSL
technology gains widespread market acceptance by local exchange carriers, of
which there are a limited number, and end users of their services. Local
exchange carriers are continuously evaluating alternative high-speed data access
technologies and may at any time adopt technologies other than DSL. Numerous
other high-speed access technologies, including cable modems, wireless
technology and satellite technologies compete with DSL-based services. These
competing technologies may ultimately prove to be superior to DSL-based services
and reduce or eliminate the demand for our
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products. If DSL technology fails to gain widespread acceptance, our revenues
and results of operations would be adversely affected.
THE CX100 IS CURRENTLY OUR ONLY VOLUME PRODUCT, AND OUR FUTURE REVENUES WILL
DEPEND ON ITS MARKET ACCEPTANCE.
Our future growth and a significant portion of our future revenue depend on
the success of our CX100, which is the only volume product that we currently
offer. We only began shipping the CX100 in the first quarter of 1999 and cannot
be certain that it will gain widespread market acceptance. Factors that may
affect the market acceptance of the CX100 include market acceptance of DSL
technology as well as the performance and price of the CX100 relative to
competing products. Potential customers may not become aware of the CX100 or may
choose not to evaluate it. Many potential customers who have evaluated the CX100
have not yet deployed the product in production network environments and may
choose not to deploy our current product or any of our future products. Other
potential customers may have already deployed another technology and may
therefore be unwilling to deploy the CX100.
Even when customers do purchase and deploy our product, it may not operate
as expected. Failure of the CX100 to operate as expected could delay or prevent
its volume deployment, which could decrease our revenues and increase our
expenses as we devote additional development resources to improving product
performance. The success and deployment into our customers' networks of the
CX100 will also depend on customer satisfaction with our products and numerous
other factors, including:
- the realization of operating cost efficiencies for our customers when
CX100 products are deployed and our customers' ability to quantify these
operational efficiencies;
- our successful development of systems and software that address customer
infrastructure requirements; and
- our customers' successful integration of our CrossWorks software into
their operational support systems.
Failure of the CX100 or future products to maintain and achieve meaningful
levels of market acceptance and customer satisfaction would limit our sales, and
harm our results of operations.
WE DERIVE OUR REVENUES FROM A SMALL NUMBER OF CUSTOMERS, AND ANY DECREASE IN
REVENUES FROM A MAJOR CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS.
We began recognizing revenues from the CX100 in the quarter ended March 31,
1999. Our revenues to date have been recognized from a small number of
customers. Revenues from significant customers as a percentage of our total
revenues for the nine months ended September 30, 1999 were as follows:
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NINE MONTHS ENDED
SEPTEMBER 30, 1999
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Rhythms NetConnections.................................... 55%
Network Access Solutions.................................. 24%
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We expect that the majority of our revenues will continue to depend on
sales of the CX100 to a small number of customers, specifically Competitive
Local Exchange Carriers, or CLECs. A CLEC is a company that, following the
Telecommunications Act of 1996, is authorized to compete in the local
communications services market. In addition, a small number of customers may
account for substantially all of our revenues in any particular quarter, and
these customers may change from quarter to quarter. For the quarter ended
September 30, 1999, Rhythms NetConnections accounted for 55%, Network Access
Solutions accounted for 24% and DSL.net accounted for 11% of our revenues.
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There is a limited number of local exchange carriers that are potential
customers, and we cannot be certain that this number will increase in the
future. Accordingly, unless we expand our customer base, our future revenues
will significantly depend upon the timing and size of future purchase orders
from our largest customers. Purchases by large customers and, therefore, our
revenues, may vary significantly from quarter to quarter. The loss of any one of
our major customers or a reduction or delay in purchases of our products from
any one of these customers would cause our revenues to decline and could
seriously harm our business.
In addition, because we are dependent on a limited number of customers, we
expect to experience volatility relating to the budgeting cycles of our
customers and the telecommunications industry in general. Adverse changes in our
revenues or operating results as a result of these budgeting cycles or any other
reduction in capital expenditures by our large customers could result in a
substantial reduction in the trading price of our stock.
Our customers tend to be significantly larger than us and are able to exert
a high degree of influence over us. They have sufficient bargaining power to
demand low prices and other terms and conditions that may negatively affect our
business and results of operations.
SUBSTANTIALLY ALL OF OUR REVENUES COME FROM EMERGING CLECS THAT MAY REDUCE OR
DISCONTINUE THEIR PURCHASE OF OUR PRODUCTS AT ANY TIME.
Our customers to date have predominantly been CLECs. Many of these CLECs
are new companies without substantial operating histories and have yet to earn a
profit or demonstrate sustainable business models. The market for the services
provided by these CLECs has only begun to emerge since the passage of the
Telecommunications Act of 1996, and many CLECs are still building their
infrastructure and developing their sales and marketing processes. These CLECs
require substantial capital for the development, construction and expansion of
their networks and the introduction of their services. Financing may not be
available to emerging CLECs on favorable terms, if at all. A reduction in the
financing available to our customers, or the inability of our customers to
obtain financing, could impair our ability to make future sales as well as to
collect for sales we have already made. In addition, we may choose to provide
financing to our customers which may subject us to additional financial risk and
reduce our profitability.
Our customers have no minimum purchase obligations and may reduce or
discontinue purchases of our products at any time. To date our customers have
deployed DSL equipment, including our products, in substantially larger volumes
than their current subscriber count. The inability of our current or future CLEC
customers to acquire and retain subscribers as planned, or to respond to
competition for their services or reduced demand for their services, could
adversely affect their operating results or cause them to reduce or eliminate
their DSL deployment plans. If our customers are forced to reduce or eliminate
their DSL deployment plans, our sales to them would decline and our business
would be seriously harmed.
In addition, the telecommunications service provider industry has recently
experienced consolidation. The loss of a customer, through industry
consolidation or otherwise, could reduce or eliminate our sales to that customer
and cause our operating results to suffer.
THE LONG SALES CYCLE FOR THE CX100 MAY CAUSE OUR REVENUES AND OPERATING RESULTS
TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER.
A customer's network planning and purchase decisions normally involve a
significant commitment of its resources and a lengthy evaluation and product
qualification process. Since the decision to purchase the CX100 is made as part
of this network planning process, our sales cycle is lengthy, often as long as
one year or more. Throughout the sales cycle, we often spend considerable time
and resources educating and providing information to prospective customers
regarding the use and
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<PAGE> 10
benefits of the CX100. Even after making the decision to purchase the CX100, our
customers may delay or cancel the deployment of the CX100. Timing of deployment
can vary widely and depends on:
- customers' current network deployment procedures;
- customers' level of expertise;
- status and performance of customers' other network equipment;
- size of the deployment;
- market acceptance of DSL-based services;
- complexity of the customer's network environment;
- degree of software development and integration necessary for the customer
to deploy the CX100; and
- financial and administrative resources of the customer.
We cannot predict these sales and deployment cycles. These long cycles may
cause our revenues and operating results to vary significantly and unexpectedly
from quarter to quarter.
INTENSE COMPETITION IN OUR INDUSTRY COULD SUBSTANTIALLY IMPAIR OUR BUSINESS AND
OUR OPERATING RESULTS.
The market for telecommunications equipment is highly competitive. A number
of companies produce products that compete with ours, including Harris
Corporation, Hekimian Laboratories, Hewlett-Packard Company, Lucent
Technologies, Nortel Networks, Teradyne Corporation and Tollgrade
Communications. In addition, a number of smaller companies are expected to
produce products that compete with ours. Due to the rapidly evolving market in
which we compete, additional competitors with significant market presence and
financial resources, including other large telecommunications equipment
manufacturers, may enter that market, thereby further intensifying competition.
If we are unable to compete effectively in the market for loop management
equipment, our revenues could decline, our expenses could increase, and our
earnings could decrease or we could experience losses.
We also compete with DSL equipment providers, including Alcatel, Lucent,
Nokia and Nortel, who have each announced plans to incorporate competitive
features and functionality into their Digital Subscriber Line Access
Multiplexers, or DSLAMs. A DSLAM is a network device, usually located at a
telephone company's central office, that receives signals from multiple DSL
connections and puts the signal on a larger, high-speed transmission line.
Lucent has announced plans to produce DSLAM products that will include some of
the same features and functions as our CX100 product. If our current and
potential customers choose to deploy DSLAMs that include features and functions
that are competitive with our products, or delay purchases of our products to
evaluate these DSLAMs, our business could be seriously harmed. To the extent we
expand the capabilities of our products to incorporate functionality
traditionally contained in other equipment, we may also face increased
competition from other vendors.
Many of our current and potential competitors have significantly greater
selling and marketing, technical, manufacturing, financial, and other resources.
Moreover, current or future competitors may foresee the course of market
developments more accurately than we do and could in the future develop new
technologies that compete with our products or render our products obsolete. To
compete, we will need to make significant investments in research and
development, marketing, and customer service and support. We may not have
sufficient resources to continue to make the investments or achieve the
technological advances necessary to compete successfully.
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WE EXPECT AVERAGE SELLING PRICES AND GROSS MARGINS OF OUR PRODUCTS TO DECREASE.
The market for telecommunications equipment is characterized by declining
prices due to increased competition, new products and increasing unit volumes.
Due to competition and potential pricing pressures from large customers in the
future, we expect that the average selling price and gross margins for our
products will decline over time. If we fail to reduce our production costs, our
gross margins will decline rapidly. We may not be successful in redesigning our
products or achieving cost reductions in a timely manner, particularly as we
introduce new products. We cannot be certain that any redesign will provide
sufficient cost reductions to allow us to remain competitive.
IF WE FAIL TO ENHANCE EXISTING PRODUCTS OR DEVELOP AND SELL NEW PRODUCTS THAT
MEET CUSTOMER REQUIREMENTS, OUR SALES WILL SUFFER.
Many of our current and potential customers may require product features
that our CX100 product does not have. For instance, some of our potential
customers, particularly Incumbent Local Exchange Carriers, or ILECs, require
management and testing capabilities for traditional analog telephone services,
and our products do not currently offer this functionality. An ILEC is a
communications company that held an exclusive license to offer local telephone
services prior to the Telecommunication Act of 1996. In addition, some potential
customers have sought to use our products for uses we have not anticipated, and
we have been required to determine whether the requested functionality could be
integrated into our product. To the extent we are required to add features to
our products in order to achieve a sale, our sales cycle will lengthen, and we
will incur increased development costs for our products. To increase our sales,
we must effectively anticipate and adapt to customer requirements and offer
products and services that meet customer demands. Our failure to develop
products or offer services that satisfy customer requirements would reduce our
sales and harm our operating results.
We intend to continue to invest in product and technology development. The
development of new or enhanced products is a complex and uncertain process that
requires the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. The introduction of new or enhanced products also requires that we
manage the transition from older products in order to minimize disruption in
customer ordering patterns and ensure that adequate supplies of new products can
be delivered to meet anticipated customer demand. The introduction of new and
enhanced products may cause certain customers to defer or cancel orders for, or
to return, existing products. Although we maintain reserves for product returns,
these reserves may prove inadequate. In addition, the development of new or
enhanced products could cause inventory held by our contract manufacturer,
A-Plus Manufacturing, to become obsolete. In that event, we could be obligated
to purchase that inventory from A-Plus Manufacturing. Our inability to
effectively manage a product transition would reduce our sales and increase our
expenses, and could result in our experiencing substantial losses.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY REGULATION OF THE COMMUNICATIONS
INDUSTRY.
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the communications industry, to our customers and to the products and
services that our customers offer. Future FCC regulations, or regulations set
forth by other regulatory bodies, may reduce the demand for our products. For
example, the FCC regulates access to copper telephone lines and the ability of
CLECs to deploy equipment at an ILEC's facility. In addition, international
regulatory bodies are beginning to adopt standards for the communications
industry. The delays that these governmental processes entail may cause order
cancellations or postponements of product purchases by our customers, which
would reduce our revenues and harm our operating results.
The operational and regulatory relationship between ILECs and CLECs could
change in ways that would reduce the need for our products. Substantially all of
our revenue is derived from CLECs who
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lease copper lines from ILECs in the United States. Because the CLECs do not
have access to the ILECs' line maintenance systems, the CLECs have typically
implemented an independent line maintenance system and may deploy the CX100 as a
key component of this system. In the future, CLECs may gain access to ILEC's
line maintenance infrastructure if mandated by the FCC, which would eliminate or
reduce the need for our products.
On November 18, 1999, the FCC ordered line sharing, a network arrangement
in which ILECs must share the existing subscriber line with CLECs. Some of the
functions of our CX100 product line may not function as effectively or at all in
a shared line configuration. To the extent that CLECs elect to provide DSL
services on shared lines that they would have otherwise deployed on separate
lines, the demand for our products could be significantly reduced or eliminated.
In addition, we may need to redesign or modify our products for shared line
configurations.
In addition to complying with FCC regulations, our products are required to
meet certain safety requirements. Typically, our products must be Network
Equipment Building Standard, or NEBS, compliant and certified by Underwriters
Laboratory before they may be deployed in central office applications. We cannot
be sure that we will be able to obtain the regulatory approvals and
certifications we need to sell our products on a timely basis, or at all. If we
fail to obtain these approvals and certifications on a timely basis, our future
revenues and business could suffer.
IF WE FAIL TO ACCURATELY PREDICT OUR MANUFACTURING REQUIREMENTS, WE COULD INCUR
ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS.
We have a supply contract with A-Plus Manufacturing to build our products.
We provide product demand forecasts to A-Plus Manufacturing no less than six
months prior to scheduled delivery of products to our customers. If we
overestimate our requirements, A-Plus Manufacturing may have excess inventory,
which we could be obligated to purchase. If we underestimate our requirements,
A-Plus Manufacturing may have inadequate inventory, which could interrupt
manufacturing of our products and result in delays in shipments and revenues, or
add additional costs to our products to expedite delivery of certain long lead
time components.
In addition, lead times for some of the materials and components we use are
very long and depend on factors such as the specific supplier, contract terms
and demand for each component at a given time. We also may experience shortages
of components from time to time, which also could delay the manufacturing of our
products. Additionally, long lead times for some materials and components have
in the past, and may in the future, cause us to attempt to mitigate these lead
times by purchasing inventories of some parts ourselves, increasing our costs
and risk of obsolescence. If we fail to carry a sufficient inventory of long
lead time items, if lead times increase or if demand for our products increases
unexpectedly, we may have insufficient access to components necessary to meet
demand for our products on a timely basis.
SOME KEY COMPONENTS IN OUR PRODUCTS COME FROM SOLE OR LIMITED SOURCES OF SUPPLY,
WHICH EXPOSES US TO POTENTIAL SUPPLY INTERRUPTION.
We currently purchase a number of key components used in the manufacture of
our CX100 product from sole or limited sources of supply for which alternative
sources are not currently qualified and may not be available. We have no
guaranteed supply arrangement with these suppliers, and we or our contract
manufacturer may fail to obtain these supplies in a timely manner in the future.
Delivery delays, supply interruptions or the discontinuation of these components
could result in delays or reductions in product shipments and revenues. In
addition, the purchase of these components on a sole source basis subjects us to
risks of price increases and potential quality assurance problems.
We currently purchase key components for which there are currently no
substitutes available from approximately 12 suppliers. All of these components
are critical to the production of our products, and we may also compete with
other manufacturers for these key components. While alternative suppliers may be
available to us, we must first identify these suppliers and qualify them.
Qualifying additional
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suppliers is time-consuming and expensive. We cannot be certain that we will be
able to qualify or identify alternative suppliers in a timely fashion, or at
all. In addition, we may not be able to obtain sufficient quantities of these
components from our existing or future suppliers on the same or substantially
the same terms as are currently available to us. Consolidations involving
suppliers could further reduce the number of alternatives for us and affect the
cost of components. An increase in the cost of components could make our
products less competitive and result in lower margins.
One supplier, Burr-Brown, has stopped manufacturing a sole source component
that we use to manufacture the CX100. We are working to identify and implement
an alternative. We may not, however, successfully accomplish this prior to
depleting our supply of the component.
Financial or other difficulties faced by these suppliers or significant
changes in market demand for these components could limit the availability to us
of these components. Any interruption or delay in the supply of any of these
components, or the inability to obtain these components from alternate sources
at acceptable prices and within a reasonable amount of time, would adversely
affect our ability to meet scheduled product deliveries to our customers, cause
us to lose sales to existing and future customers and harm our operating results
and financial condition.
WE DEPEND ON A SINGLE CONTRACT MANUFACTURER WHOSE FAILURE TO MEET OUR
REQUIREMENTS COULD SEVERELY HARM OUR BUSINESS.
We rely on a single contract manufacturer, A-Plus Manufacturing, to build
our products. Because we currently do not have a long-term supply contract with
A-Plus Manufacturing, they are not obligated to supply products to us for any
specific period, in any specific quantity or at any certain price, except as may
be specified in a particular purchase order. Our current supply contract with
A-Plus Manufacturing can be terminated by either party with 120 days notice for
any reason. If the contract is terminated, we would be required to purchase any
excess inventory held by A-Plus Manufacturing, they would no longer be obligated
to manufacture products for us and our ability to supply products to our
customers could be seriously harmed. We may be unable to develop alternative
manufacturing arrangements on a timely basis, or at all. In addition, A-Plus
Manufacturing may not meet our future requirements for product quality or timely
delivery. The inability of A-Plus Manufacturing to provide us with adequate
supplies of high-quality products, or the termination of our relationship with
A-Plus Manufacturing, would delay the fulfillment of customer orders, harm our
relationships with our customers and adversely affect our financial condition
and results of operations.
BECAUSE OUR PRODUCTS ARE DEPLOYED IN COMPLEX ENVIRONMENTS, THEY MAY HAVE ERRORS
OR DEFECTS THAT ARE FOUND ONLY AFTER FULL DEPLOYMENT, WHICH COULD SERIOUSLY HARM
OUR BUSINESS.
The CX100 is designed for large and complex networks. The CX100 was only
recently introduced and, to date, has been deployed on a limited basis.
Consequently, our customers may discover errors or defects in our hardware or
software only after it has been fully deployed and operated as part of their
infrastructure in connection with products from other vendors, especially DSLAMs
and DSL modems. Errors or other problems that may be identified in full
deployment could result in:
- loss of or delay in revenues and loss of customers or market share;
- failure to achieve market acceptance;
- diversion of development resources;
- increased service and warranty costs;
- legal actions by our customers; and
- increased insurance costs.
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Because our products are designed to provide critical services, in the
event errors, defects or failures are discovered with respect to our current or
future products, or as new versions are released, we may incur significant
liabilities. Although we maintain product liability insurance covering some
damages arising from implementation and use of our products, our insurance may
not fully cover claims sought against us. Liability claims could require us to
spend significant time and money in litigation or to pay significant damages.
Any claims, whether or not successful, could damage our reputation and our
business, increase our expenses and impair our operating results.
OUR BUSINESS MAY BE SERIOUSLY HARMED IF WE ARE UNABLE TO DEVELOP AND MAINTAIN
RELATIONSHIPS WITH THIRD PARTIES TO MARKET AND SELL OUR PRODUCTS.
Our growth will largely be dependent upon relationships with third parties
who market and sell our products. In particular, we have entered an original
equipment manufacturer agreement with Lucent Technologies under which we have
agreed to co-brand and sell our products to Lucent. The amount and timing of
resources that Lucent devotes to our business is not within our control, and our
agreement does not require Lucent to sell specified volumes of our products. If
Lucent reduces its purchases of our products or breaches or terminates the
agreement, our business will be harmed. In the event that this agreement is
terminated, we may not be able to establish another suitable original equipment
manufacturer relationship. In addition to our CX100 products, Lucent resells
products manufactured by Tollgrade, our direct competitor. Lucent has also
announced plans to produce DSLAM products that will include some of the same
features and functions as our CX100 product. Lucent may choose to sell Tollgrade
or other competing products instead of our products.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET AND IF WE ARE UNABLE TO RETAIN OUR KEY PERSONNEL OR HIRE
ADDITIONAL PERSONNEL, OUR ABILITY TO EXECUTE OUR BUSINESS STRATEGY OR GENERATE
SALES COULD BE HARMED.
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing and support personnel. In
particular, Richard N. Tinsley, President and Chief Executive Officer, and P.
Kingston Duffie, Chief Technology Officer, possess industry and technical
knowledge and are especially critical to our future success. None of our
officers or key employees is bound by an employment agreement for any specific
term, nor do we have "key person" life insurance policies covering any of our
employees.
Our products and services require a sophisticated selling effort targeted
at several key people within our prospective customers' organizations. This
process requires the efforts of experienced sales personnel as well as
specialized systems and consulting engineers. In addition, the complexity of our
products and the difficulty of configuring and maintaining them require highly
trained customer service and support personnel. We intend to hire a significant
number of engineering, sales, marketing and customer service and support
personnel in the future, and we believe our success depends, in large part, upon
our ability to attract and retain these key employees. Competition for these
personnel is intense, especially in the San Francisco Bay area. There can be no
assurance that we will be successful in attracting and retaining these
individuals.
The loss of the services of any of our key employees, the inability to
attract or retain qualified personnel in the future, or delays in hiring
required personnel, particularly engineers and sales personnel, could impair our
ability to develop, introduce and sell our products. In addition, companies in
the telecommunications industry whose employees accept positions with
competitors frequently claim that such competitors have engaged in unfair hiring
practices. We could incur substantial costs in defending ourselves against these
claims, regardless of their merits.
WE DEPEND ON A SINGLE APPLICATION SERVICE PROVIDER FOR INFORMATION SYSTEMS AND
SERVICES.
We rely on a single application service provider, AristaSoft Corporation,
to provide accounting and operations software and support. AristaSoft began
providing information systems and services to us
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on a regular basis in August 1999, at which time we were their only customer. We
do not have an agreement with AristaSoft requiring them to provide services to
us for any specified period, and AristaSoft could terminate their relationship
with us on short notice. If we needed to qualify a new application servicer
provider, we might be unable to do so on a timely basis, or at all. AristaSoft's
services are provided on application and database servers located at offsite
data facilities and accessed via communications links from our facility. We
cannot be certain that AristaSoft will be able to manage a scalable and reliable
information technology infrastructure to support the growth of our business. If
AristaSoft stops providing services to us or if there is a service interruption,
our ability to process orders, ship products, prepare invoices and manage our
day-to-day financial transactions would be harmed, and our results of operations
would suffer.
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, OUR BUSINESS, FINANCIAL CONDITION
AND PROSPECTS COULD BE SERIOUSLY HARMED.
We have expanded our operations rapidly since our inception. The number of
our employees increased from eight in January 1998 to 69 in October 1999. We
intend to continue to expand in order to pursue existing and potential market
opportunities. Our planned rapid growth places a significant strain on
management and operational resources.
Our contract manufacturer, A-Plus Manufacturing, and our application
service provider, AristaSoft, must also be able to expand in order to support
us. If either of them is unable to do so, our ability to grow our business and
our results of operations would be harmed.
We expect to require additional office space within the next 12 months. We
may be unable to locate necessary office space on commercially reasonable terms
or in a timely manner. Failure to do so would disrupt our business and could
harm our operating results and financial condition.
RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE.
The markets for high-speed telecommunications products are characterized by
rapid technological developments, frequent enhancements to existing products and
new product introductions, changes in customer requirements and evolving
industry standards. The emerging nature of these products and services and their
rapid evolution will require us to continually improve the performance, features
and reliability of our products, particularly in response to competitive product
offerings. We cannot be sure that we will be able to respond quickly and
effectively to these developments. The introduction or market acceptance of
products incorporating superior technologies or the emergence of alternative
technologies or new industry standards could render our existing products, as
well as products currently under development, less economical, obsolete and
unmarketable. For example, if semiconductor, robotic or other technologies
become effective alternatives for our product architecture, our business would
be seriously harmed.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY.
We presently have no patents and no patent applications. Future patent
applications, if any, may not be approved, any issued patents may not protect
our intellectual property and any issued patents could be challenged by third
parties. Furthermore, other parties may independently develop similar or
competing technology or design around any patents that may be issued to us.
Attempts may be made to copy or reverse engineer aspects of our products or to
obtain and use information that we regard as proprietary. We attempt to protect
our intellectual property rights by limiting access to the distribution of our
software, documentation and other proprietary information and by relying on a
combination of copyright, trademark and trade secret laws. In addition, we enter
into confidentiality agreements with our employees and certain customers,
vendors and strategic partners. These steps may fail to prevent the
misappropriation of our intellectual property, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States. If we fail to
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adequately protect our proprietary rights, our competitors could offer similar
products, potentially harming our competitive position and decreasing our
revenues.
IF WE BECOME INVOLVED IN A PROTRACTED INTELLECTUAL PROPERTY DISPUTE, OR ONE WITH
A SIGNIFICANT DAMAGES AWARD, OR WHICH REQUIRES US TO CEASE SELLING OUR PRODUCTS,
OUR OPERATING RESULTS WOULD SUFFER.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although we have never
been involved in any intellectual property litigation, we may be a party to
litigation in the future to protect our intellectual property or as a result of
an alleged infringement of others' intellectual property. These claims and any
resulting lawsuit, if successful, could subject us to significant liability for
damages and invalidate our proprietary rights. These lawsuits, regardless of
their success, would likely be time-consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:
- cease selling, incorporating or using products or services that
incorporate the infringed intellectual property;
- obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on acceptable terms, if at all; or
- redesign those products or services that incorporate the disputed
technology.
In the future, we may be subject to a successful claim of infringement
against us and our failure or inability to develop non-infringing technology or
license the infringed technology on acceptable terms and on a timely basis,
would harm our business by reducing our revenues or increasing our expenses.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights or to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel. As a result, our operating results could
suffer and our financial condition could be harmed.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS.
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
We have designed the CX100 product line and accompanying software for use
in the year 2000 and beyond and believe it is year 2000 compliant. We cannot be
certain, however, that an undetected programming error will not result in the
CX100 failing to be year 2000 compliant, in which case our business would
suffer. Our products are generally integrated into larger networks involving
sophisticated hardware and software products supplied by other vendors. Each of
our customers' networks involves different combinations of third party products.
We cannot evaluate whether all of their products are year 2000 compliant. We may
face claims based on year 2000 problems in other companies' products or based on
issues arising from the integration of multiple products within the overall
network. Although no claims of this kind have been made against us, we may in
the future be required to defend our products in legal proceedings that could be
expensive regardless of the merits of these claims.
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If our suppliers, vendors, major distributors, partners, customers, service
providers and our contract manufacturer, A-Plus Manufacturing, and our
applications service provider, AristaSoft, and their partners and suppliers, in
particular, fail to correct their year 2000 problems, these failures could
result in an interruption in, or a failure of, our normal business activities or
operations. If a year 2000 problem occurs, it may be difficult to determine
which party's products have caused the problem. These failures could interrupt
our operations and damage our relationships with our customers.
Due to the general uncertainty inherent in the year 2000 problem, we are
unable to determine at this time whether year 2000 failures could harm our
business and our financial results. However, a reasonable "worst case" scenario
might include:
- delay or loss of revenues;
- cancellation of customer orders;
- diversion of development resources;
- damage to our reputation;
- increased maintenance and warranty costs; or
- litigation costs;
any of which could harm our business, financial condition and results of
operations. We have not developed, and we have no plans to develop, a
contingency plan to deal with the effects of this worst case scenario.
Year 2000 issues could affect our customers' purchasing plans if they need
to expend significant resources to fix their existing systems to become year
2000 compliant. This situation may reduce funds available to purchase our
products. In addition, some customers may wait to purchase our products until
after the year 2000, which may reduce our revenue.
OUR HEADQUARTERS, CONTRACT MANUFACTURER AND APPLICATION SERVICE PROVIDER ARE
LOCATED IN NORTHERN CALIFORNIA WHERE NATURAL DISASTERS MAY OCCUR.
Currently, our corporate headquarters, contract manufacturer and
application service provider are located in Northern California. This area has
historically been vulnerable to natural disasters and other risks such as
earthquakes, fires, and floods, which at times have disrupted the local economy
and posed physical risks to property. In the event of a natural disaster in
Northern California, our business could suffer.
WE MAY ENGAGE IN ACQUISITIONS, AND WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE
ANY NEW OPERATIONS, TECHNOLOGIES, PRODUCTS OR PERSONNEL.
Recently, the telecommunications industry has experienced substantial
mergers and acquisitions activity. We may in the future engage in acquisitions
of product lines, technologies and businesses. We currently have no commitments
or agreements with respect to any such acquisition. In the event that such an
acquisition does occur, because of the small size of our management team, we may
be particularly susceptible to risks associated with the assimilation of
operations, technologies, products and personnel and the diversion of
management's attention from other business concerns.
CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME
OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL.
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will own 24,037,260 shares or
approximately % of the outstanding shares of common stock. These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the
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effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which
in turn could cause the market price of our common stock to fall or prevent our
stockholders from realizing a premium in the market price associated with the
prospect of an acquisition. For information about the ownership of common stock
by our executive officers, directors and principal stockholders, see "Principal
Stockholders".
WE EXPECT OUR REVENUES AND OPERATING RESULTS TO FLUCTUATE SIGNIFICANTLY FROM
QUARTER TO QUARTER.
Our revenues and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. The primary factors that
may affect us include the following:
- demand for the CX100;
- the timing of sales of the CX100;
- the timing of product acceptance by some of our customers;
- new product introductions by our competitors;
- changes in our pricing policies or the pricing policies of our
competitors;
- our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
- our ability to obtain sufficient supplies of sole or limited source
components;
- increases in the prices of the components we purchase;
- our ability to plan, attain and maintain production volumes and quality
levels for our products;
- prototype expenses;
- costs related to acquisitions of technology or businesses; and
- general economic conditions as well as those specific to local exchange
carriers and related industries.
Accordingly, we believe that quarter to quarter comparisons of our
operating results are not necessarily meaningful and are not a good indication
of our future performance. It is likely that in some future quarters, our
operating results may be below the expectations of public market analysts and
investors. In that event, the price of our common stock may fall.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. The market for technology stocks has been
extremely volatile. The following factors could cause the market price of our
common stock to fluctuate significantly from the price paid by investors in this
offering:
- our loss of a major customer;
- the addition or the departure of key personnel;
- actual or anticipated variations in our quarterly operating results;
- announcements by us or our competitors of significant contracts, new
products or technological innovations, acquisitions, strategic
relationships, joint ventures or capital commitments;
- changes in financial estimates by securities analysts;
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- sales by us or our current stockholders of common stock or other
securities;
- changes in market valuations of networking and telecommunications
companies; and
- fluctuations in stock market prices and volumes.
SHOULD OUR STOCKHOLDERS SELL A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK
IN THE PUBLIC MARKET, THE PRICE OF OUR COMMON STOCK COULD FALL.
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 after this offering could
reduce the market price of our common stock. In addition, the sale of these
shares could impair our ability to raise capital through the sale of additional
equity securities. See "Management -- Stock Plans" and "Shares Eligible for
Future Sale".
PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT COULD
PREVENT A CHANGE IN CONTROL.
Provisions of our amended and restated certificate of incorporation,
bylaws, and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. See
"Description of Capital Stock".
YOU WILL EXPERIENCE IMMEDIATE DILUTION IN THE BOOK VALUE PER SHARE OF THE COMMON
STOCK YOU PURCHASE.
The initial public offering price of our common stock is expected to be
substantially higher than the book value per share of our outstanding common
stock immediately after the offering. Accordingly, if you purchase our common
stock in this offering, you will incur immediate dilution of approximately
$ in the book value per share of our common stock from the price you
pay for our common stock. This calculation assumes that you purchased our common
stock for $ per share.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus, all of which
are subject to risks and uncertainties. Forward-looking statements include
information concerning our possible or assumed future business success or
financial results. Such forward-looking statements include, but are not limited
to, statements as to our expectations regarding:
- our future revenue opportunities;
- future market acceptance of DSL technology and our products;
- our dependence on sales to a small number of large customers;
- the future growth of our customer base;
- our future expense levels (including research and development, selling,
general and administrative expenses and amortization of goodwill and
other intangibles);
- our future capital needs;
- the effect of future FCC regulations;
- the emergence of new technologies;
- our expansion of our marketing and direct sales force;
- our current and future original equipment manufacturer relationships;
- our investment in new product development and enhancements;
- our expansion into new markets;
- the effect of year 2000 problems;
- our acquisitions of complementary products, technologies and businesses;
- our use of net proceeds;
- our intentions regarding retained earnings and dividends; and
- future financial accounting pronouncements.
When we use words such as "believe," "expect," "anticipate" or similar
words, we are making forward-looking statements.
You should note that an investment in our common stock involves risks and
uncertainties that could affect our future business success or financial
results. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of a number of factors, including
those set forth in "Risk Factors" and elsewhere in this prospectus.
We believe that it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. Before you invest in our
common stock, you should be aware that the occurrence of the events described in
"Risk Factors" and elsewhere in this prospectus could materially and adversely
affect our business, financial condition and operating results. We undertake no
obligation to publicly update any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the
shares of common stock we are offering will be approximately $ million, or
$ million if the underwriters exercise in full their option to purchase
additional shares in the offering, at an assumed initial public offering price
of $ per share and after deducting the underwriting discount and estimated
offering expenses of $ payable by us.
We expect to use the net proceeds from this offering for general corporate
purposes, including working capital and capital expenditures. A portion of the
net proceeds may also be used to acquire or invest in complementary businesses,
technologies, product lines or products. We have no current plans, agreements or
commitments with respect to any acquisitions or investments, and are not engaged
in any negotiations with respect to any acquisitions or investments. Our
management will have broad discretion concerning the use of the net proceeds of
this offering. Pending use of the net proceeds of this offering, we intend to
invest the net proceeds in short-term, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock or other
securities and do not currently anticipate paying cash dividends in the future.
Any future determination to pay cash dividends will be at the discretion of the
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, general business conditions and other
factors that the board of directors may deem relevant.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis to reflect the issuance of 90,000 shares of Series A
Preferred Stock upon the assumed exercise for cash of $45,000 of a
warrant and the automatic conversion of our outstanding preferred stock
into common stock upon the closing of the offering; and
- on a pro forma as adjusted basis to reflect the sale of the
shares of common stock offered in this offering at an
assumed initial public offering price of $ per share after deducting
an assumed underwriting discount and estimated offering expenses payable
by us.
You should read this information together with our financial statements and
the notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term obligations under capital leases, net of current
portion.................................................. $ 300 $ 300 $
------- ------- -------
Stockholders' equity:
Convertible preferred stock, $0.001 par value, 15,577,000
shares authorized; 14,856,930 shares issued and
outstanding actual; none, pro forma or pro forma as
adjusted.............................................. 15 --
Common stock, $0.001 par value, 35,000,000 shares
authorized; 11,319,724 shares issued and outstanding
actual; 26,266,654 shares issued and outstanding pro
forma; shares issued and outstanding pro forma as
adjusted.............................................. 11 26
Additional paid-in capital................................. 21,075 21,120
Deferred stock compensation................................ (6,414) (6,414)
Accumulated deficit........................................ (5,456) (5,456)
------- ------- -------
Total stockholders' equity............................... 9,231 9,276
------- ------- -------
Total capitalization............................. $ 9,531 $ 9,576
======= ======= =======
</TABLE>
The outstanding share information in the table above excludes:
- 2,999,000 shares of common stock issuable upon exercise of options
outstanding under our 1998 Stock Plan at a weighted average exercise
price of $1.754 per share;
- 480,776 shares available for future issuance under our 1998 Stock Plan;
- 5,000,000 shares available for issuance under our 2000 Stock Plan;
- 500,000 shares available for issuance under our 2000 Employee Stock
Purchase Plan; and
- 45,000 shares issuable upon exercise of an outstanding warrant.
19
<PAGE> 23
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma as adjusted net tangible book value per share
of our common stock after this offering. We calculate net tangible book value
per share by dividing the net tangible book value (total assets less intangible
assets and total liabilities) by the number of outstanding shares of common
stock.
Our pro forma net tangible book value at September 30, 1999, after giving
effect to the issuance of 90,000 shares of Series A Preferred Stock upon the
cash exercise of a warrant and the automatic conversion of all outstanding
shares of our preferred stock into 14,856,930 shares of common stock upon the
closing of this offering, was $ , or $ per share of common stock.
After giving effect to the sale of the shares of common stock at
an assumed initial public offering price of $ per share, less an assumed
underwriting discount and estimated offering expenses payable by us, our pro
forma net tangible book value at September 30, 1999 would be $ ,
or $ per share. This represents an immediate increase in the pro forma net
tangible book value of $ per share to existing stockholders and an immediate
dilution of $ per share to new investors, or approximately % of the
assumed offering price of $ per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at September
30, 1999............................................... $
Increase per share attributable to new investors..........
------
Pro forma net tangible book value per share after the
offering..................................................
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table shows on a pro forma basis at September 30, 1999, the
total number of shares of common stock purchased from us, the total
consideration paid to us and the average price paid per share by existing
stockholders and by new investors purchasing common stock in this offering.
These figures give effect to the issuance of 90,000 shares of Series A Preferred
Stock upon the cash exercise of a warrant and the conversion of all outstanding
shares of convertible preferred stock into common stock.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- -------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------ ---------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. % $ % $
New investors.....................
Total................... 100% $ 100%
==== === ==== ===
</TABLE>
The information in the table above excludes:
- 2,999,000 shares of common stock issuable upon exercise of options
outstanding under our 1998 Stock Plan at a weighted average exercise
price of $1.754 per share;
- 480,776 shares available for future issuance under our 1998 Stock Plan;
- 5,000,000 shares available for issuance under our 2000 Stock Plan;
- 500,000 shares available for issuance under our 2000 Employee Stock
Purchase Plan; and
- 45,000 shares issuable upon exercise of an outstanding warrant.
20
<PAGE> 24
SELECTED FINANCIAL DATA
The statement of operations data set forth below for the period from
January 2, 1998 (inception) to December 31, 1998 and the balance sheet data as
of December 31, 1998 have been derived from our financial statements, which have
been audited by KPMG LLP, independent auditors, and are included elsewhere in
this prospectus. The statement of operations data for the nine-month periods
ended September 30, 1998 and 1999, and the balance sheet data as of September
30, 1999 are unaudited. In the opinion of management, these unaudited interim
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of our financial condition and
results of operations. The historical results are not necessarily indicative of
results to be expected for any future period. You should read the data presented
below in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes to
those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JANUARY 2, NINE MONTHS ENDED
1998) TO SEPTEMBER 30,
DECEMBER 31, --------------------
1998 1998 1999
------------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................. $ -- $ -- $14,704
Cost of revenues......................................... -- -- 6,920
------- ------- -------
Gross profit............................................. -- -- 7,784
Operating expenses:
Research and development............................... 3,462 2,236 3,609
Sales and marketing.................................... 737 339 2,429
General and administrative............................. 713 493 943
Amortization of deferred stock compensation............ 29 7 1,559
------- ------- -------
Total operating expenses....................... 4,941 3,075 8,540
------- ------- -------
Operating loss........................................... (4,941) (3,075) (756)
Interest income (expense) and other, net................. 193 171 112
------- ------- -------
Loss before income tax expense........................... $(4,748) $(2,904) $ (644)
------- ------- -------
Income tax expense....................................... 1 -- 63
------- ------- -------
Net loss................................................. $(4,749) $(2,904) $ (707)
======= ======= =======
Basic and diluted net loss per share(1).................. $ (3.51) $ (2.81) $ (0.18)
======= ======= =======
Shares used in computing basic and diluted net loss per
share.................................................. 1,354 1,035 3,971
======= ======= =======
Pro forma basic and diluted net loss per share(1)........ $ (0.38) $ (0.04)
======= =======
Shares used in computing pro forma basic and diluted net
loss per share......................................... 12,636 18,718
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $1,338 $6,952
Working capital............................................. 960 8,538
Total assets................................................ 1,970 16,197
Long-term obligations under capital leases, less current
portion................................................... 270 300
Total stockholders' equity.................................. 1,226 9,231
</TABLE>
- -------------------------
(1) See Note 2 of our Notes to Financial Statements for information concerning
the computation of the shares used to compute net loss per share and pro
forma net loss per share.
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the related notes
included elsewhere in this prospectus. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of a number of factors, including the risks discussed in "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
We are a leading provider of loop management solutions that enable local
exchange carriers to rapidly deploy and efficiently maintain Digital Subscriber
Line, or DSL, services. Loop management is the term we use to describe the
automation and remote control of installation, qualification and maintenance of
copper telephone lines. Our hardware and software solution for loop management
improves the efficiency of installing and managing DSL services while delivering
the high levels of reliability and scalability needed in a large, complex
network. We believe that our Copper CrossConnect CX100 and our CrossWorks
software represent the first commercially available loop management solution
designed and built to meet the requirements of local exchange carriers deploying
DSL.
From inception on January 2, 1998 through December 1998, our operating
activities consisted primarily of research and development and building our
management team. We introduced our first products in October 1998, and entered
live service trials in November 1998. In January 1999, our CX100 successfully
completed Network Equipment Building Standards testing. We began shipping our
products in the first quarter of 1999.
To date, we have derived substantially all of our revenues from sales of
our CX100. Revenues from our CrossWorks software have not been material. Our
success will depend on our ability to sell our CX100 to additional customers as
well as our ability to develop and sell additional products. We cannot be
certain that the CX100 or any future products will achieve widespread market
acceptance.
We recognize product revenues at the time of shipment unless we have future
obligations or customer acceptance is required, in which case revenue is
recognized when these obligations have been met or the customer accepts the
product. Revenues from maintenance contracts are deferred and recognized ratably
over the term of the contracts. Currently, all of our product sales and service
arrangements provide for pricing and payment in U.S. dollars.
We sell our products to local exchange carriers through our direct sales
force and through an indirect original equipment manufacturer channel. A
customer's network planning and purchase decisions normally involve a
significant commitment of its resources and a lengthy evaluation and product
qualification process. Since the decision to purchase the CX100 is made as part
of this network planning process, our sales cycle is lengthy, often as long as
one year or more. Substantially all of our sales are made on the basis of
purchase orders rather than long-term agreements. As a result, we commit
resources to the development and production of products without having received
advance purchase commitments from customers.
To date, a significant portion of our revenues has resulted from a small
number of relatively large orders from a limited number of customers. We
anticipate that our operating results for any given period will continue to be
dependent to a significant extent on large purchase orders, which can be delayed
or cancelled by our customers without penalty. In addition, we anticipate that
our operating results for a given period will continue to be dependent on a
small number of customers. If we fail to receive a significant purchase order
that we expect for a given quarter, our revenues for that quarter, and possibly
following quarters, will be adversely affected. Furthermore, if any of our
customers experience financial difficulties, our sales to that customer may be
reduced and we may have difficulty in collecting accounts receivable from that
customer.
22
<PAGE> 26
We currently use A-Plus Manufacturing, a contract manufacturer, to
manufacture our products. This subcontracting arrangement includes material
procurement, board level assembly, final assembly, test and shipment to our
customers. If our contract with A-Plus Manufacturing is terminated, we would be
required to purchase any excess inventory held by them. In addition, the
development of new or enhanced products could cause inventory held by A-Plus
Manufacturing to become obsolete. In that event, we would also be obligated to
purchase that inventory from them. We use a combination of standard parts and
components, that are generally available from more than one vendor, and certain
key components that are purchased from sole or limited source vendors for which
alternative sources are not currently available. In addition, lead times for
some of the materials and components we use are very long. These long lead times
have in the past, and may in the future, cause us to attempt to mitigate these
lead times by purchasing inventories of some parts ourselves. Any subsequent
write-off of inventory could harm our results of operations and financial
condition.
We continue to develop additional products and product features based on
our assessment of the needs of our customers. This has resulted in increased
research and development expenses and may result in reduced operating margins on
our products and a longer sales cycle.
Currently, competition in our market is intense. Due to competition and
potential pricing pressures from large customers in the future, we expect that
the average selling price and gross margins for our products will decline over
time. If we fail to reduce our production costs, our gross margins will decline
rapidly.
In 1998, we recorded total deferred stock compensation of approximately
$195,000 in connection with stock and stock options granted during 1998 at
prices subsequently deemed to be below fair value on the date of grant. Options
granted are typically subject to a four year vesting period. Stock options are
exercisable immediately, and are generally subject to our right to repurchase
the stock, which lapses ratably over a four year period. We are amortizing the
deferred stock compensation over the vesting periods of the applicable options
and the repurchase periods for restricted stock purchases. The service period
over which deferred stock compensation is amortized is determined separately for
each 25 percent portion of the total award, in accordance with Financial
Accounting Standards Board Interpretation No. 28, or FIN, 28. The result of
applying FIN 28 is that approximately 52% of the unearned deferred compensation
will be amortized in the first year, 27% in the second year, 15% in the third
year and 6% in the fourth year following the date of the grant. We amortized
$29,000 of deferred stock compensation in the year ended December 31, 1998,
leaving approximately $166,000 to be amortized over the remaining vesting
periods. In 1999, we recorded approximately $7.8 million in additional deferred
stock compensation for stock options granted in the nine months ended September
30, 1999 at prices subsequently deemed to be below fair value on the date of
grant. We amortized a total of approximately $1.6 million of deferred stock
compensation during the nine months ended September 30, 1999.
RESULTS OF OPERATIONS
NET REVENUES
The quarter ended March 31, 1999 was our first quarter of revenue. Net
revenues were $14.7 million for the nine months ended September 30, 1999, due to
the introduction and increasing unit sales of our CX100. To date, we have
derived substantially all of our revenues from sales of our CX100.
COST OF REVENUES
Cost of revenues includes amounts paid to A-Plus Manufacturing and related
overhead expenses. Cost of revenues for the nine months ended September 30, 1999
was $6.9 million, due to the commencement of manufacturing and sales of our
CX100.
23
<PAGE> 27
RESEARCH AND DEVELOPMENT
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, cost of certification and compliance
testing, 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 for the nine months ended September 30, 1999 were $3.6
million, an increase of $1.4 million over the comparable period of 1998. The
increase was due primarily to a significant increase in personnel and related
costs associated with new product development, verification testing,
certification and compliance testing and other engineering expenses. Development
is essential to our future success and we expect that research and development
expenses will increase in absolute dollars in future periods.
SALES AND MARKETING
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 and public relations. Sales and marketing expenses for the nine
months ended September 30, 1999 were $2.4 million, an increase of $2.1 million
over the comparable period of 1998. This increase was primarily due to an
increase in the number of sales and marketing personnel, increased marketing
expenses and other customer-related costs. 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. We expect that sales and marketing expenses will increase in
absolute dollars in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, facilities and human
resources personnel, professional fees, and costs associated with expanding our
information systems. General and administrative expenses for the nine months
ended September 30, 1999 were $943,000, an increase of $450,000 over the
comparable period of 1998. This increase was primarily due to an increase in the
number of general and administrative personnel, increased facilities costs, and
increased legal and accounting expenses associated with our growing business
activities. We expect these expenses to increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business,
expanding our information infrastructure and our operation as a public company.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
In connection with the grant of stock options to employees, we recorded
amortization of deferred stock compensation of approximately $1.6 million for
the nine months ended September 30, 1999. We recorded amortization of deferred
stock compensation of $7,000 during the comparable period of 1998.
INTEREST INCOME (EXPENSE) AND OTHER, NET
Interest income (expense) and other, net includes income from our cash
investments net of expenses related to our lease financing obligations. We had
net interest income of $171,000 for the nine months ended September 30, 1998 and
net interest income of $112,000 in the nine months ended September 30, 1999. The
change from the nine months ended September 30, 1998 was primarily due to a
decrease in interest income earned on proceeds from issuances of our preferred
stock and an increase in interest charges on capital lease obligations.
24
<PAGE> 28
INCOME TAX EXPENSE
Income tax expense for 1998 was comprised of minimum state taxes, and for
the nine months ended September 30, 1999 was comprised of Alternative Minimum
Taxes and minimum state taxes.
As of December 31, 1998, we had net operating loss carryforwards and tax
credits for federal income tax purposes of approximately $2,956,000 and for
state income tax purposes of approximately $1,300,000. These net operating loss
carryforwards and tax credits are available to reduce future income subject to
income taxes. The federal net operating loss carryforwards and tax credits
expire in 2018 through 2019, and the state net operating loss carryforwards
expire in 2006. We have recorded these net operating loss carryforwards and tax
credits as deferred tax assets and have established a full valuation allowance
for them as their realization is uncertain.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and credit carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the Internal
Revenue Code. We have not yet determined if an ownership change has occurred or
if utilization of the net operating losses will be subject to an annual
limitation in future years.
25
<PAGE> 29
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the three
quarters in the period from January 1, 1999 to September 30, 1999. The
information for each of these quarters is unaudited and has been prepared on the
same basis as our audited financial statements appearing elsewhere in this
prospectus. In the opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments, have been included to present fairly the
unaudited quarterly results when read in conjunction with our audited financial
statements and the related notes appearing elsewhere in this prospectus. These
operating results are not necessarily indicative of the results of any future
period. Accordingly, we believe that quarter to quarter comparisons of our
operating results are not necessarily meaningful and are not a good indication
of our future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
1999 1999 1999
--------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................. $ 952 $4,719 $9,033
Cost of revenues......................................... 576 2,510 3,834
------- ------ ------
Gross profit............................................. 376 2,209 5,199
------- ------ ------
Operating expenses:
Research and development............................... 830 1,023 1,756
Sales and marketing.................................... 508 821 1,100
General and administrative............................. 191 308 444
Amortization of deferred stock compensation............ 80 846 633
------- ------ ------
Total operating expenses....................... 1,609 2,998 3,933
------- ------ ------
Operating income (loss).................................. (1,233) (789) 1,266
Interest income (expense) and other, net................. 42 41 29
------- ------ ------
Loss before income tax expenses.......................... 1,191 748 1,295
Income tax expense....................................... -- -- 63
------- ------ ------
Net profit (loss)........................................ $(1,191) $ (748) $1,232
======= ====== ======
AS A PERCENTAGE OF NET REVENUES:
Net revenues............................................. 100.0% 100.0% 100.0%
Cost of revenues......................................... 60.5 53.2 42.4
------- ------ ------
Gross profit (loss)...................................... 39.5 46.8 57.6
------- ------ ------
Operating expenses:
Research and development............................... 87.2 21.7 19.5
Sales and marketing.................................... 53.3 17.4 12.2
General and administrative............................. 20.1 6.5 4.9
Amortization of deferred stock compensation............ 8.4 17.9 7.0
------- ------ ------
Total operating expenses....................... 169.0 63.5 43.6
------- ------ ------
Operating income (loss).................................. (129.5) (16.7) 14.0
Interest income (expense) and other, net................. 4.4 0.9 0.3
------- ------ ------
Loss before income taxes................................. (125.1) (15.8) 14.3
Income tax expense....................................... -- -- 0.7
------- ------ ------
Net profit (loss)........................................ (125.1) (15.8) 13.6
======= ====== ======
</TABLE>
Net revenues increased in each of the three quarters in the nine month
period ended September 30, 1999. These quarterly increases were primarily due to
the introduction and increasing unit sales of our CX100. Because we are
dependent on a limited number of customers, we expect to
26
<PAGE> 30
experience volatility relating to the budgeting cycles of our customers and the
telecommunications industry in general.
Cost of revenues increased in each of the three quarters in the nine month
period ended September 30, 1999 as a result of increased unit sales. Gross
profit increased in each of the three quarters in the nine month period ended
September 30, 1999 due to increases in the volume of sales and the realization
of associated economies of scale. We expect that the average selling price and
gross margins for our products will decline over time. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview".
Research and development expenses increased in each of the three quarters
in the nine month period ended September 30, 1999 primarily due to the addition
of personnel and costs incurred in the development of new products. We expect
that in the future costs associated with new product development, particularly
prototyping and compliance testing, may cause research and development expenses
to increase significantly as a percentage of revenues in a particular quarter.
Sales and marketing expenses increased in each of the three quarters in the
nine month period ended September 30, 1999 primarily due to the hiring of
additional sales personnel, higher commission expense resulting from increased
unit sales, customer support, marketing programs and tradeshows.
General and administrative expenses increased in each of the three quarters
in the nine month period ended September 30, 1999 primarily due to the addition
of personnel and increased accounting and consulting activities.
Amortization of deferred stock compensation for the quarter ended June 30,
1999 includes a compensation expense of (i) $325,000 related to the issuance of
Series B preferred stock at a price below the deemed fair value of the preferred
stock, and (ii) $262,000 related to immediately vested common stock options
granted at exercise prices below the deemed fair value of the common stock.
We plan to significantly increase our operating expenses to fund greater
levels of research and development, expand our sales and marketing operations
and broaden our customer support capabilities. We also plan to expand our
general and administrative functions to address the increased reporting and
other administrative demands which will result from this offering and the
increasing size of our business.
As a result of our limited operating history, we cannot accurately 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 our revenues do not meet projections.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of approximately $12.0 million of convertible preferred stock as well as
through capital leases for computers, office equipment, software and furniture.
We used $4.3 million in cash for operations in the period from inception to
December 31, 1998, primarily due to our net loss of $4.7 million, partially
offset by non-cash charges. We used $937,000 in cash for operations in the nine
months ended September 30, 1999, as a result of our net loss of $707,000 and
increase in accounts receivable and inventory balances, partially offset by an
increase in deferred revenue and accounts payable, as well as non-cash charges.
We used $222,000 in cash from investing activities in the period from
inception to December 31, 1998 and used $437,000 in cash from investing
activities in the nine months ended September 30,
27
<PAGE> 31
1999, primarily for acquisition of property and equipment. We generated $5.9
million in cash in the period from inception to December 31, 1998 and $7.0
million in cash in the nine months ended September 30, 1999, from financing
activities, primarily from private sales of convertible preferred stock. We have
used leases to partially finance capital purchases. We had $399,000 in
capitalized lease obligations outstanding at December 31, 1998, and $513,000 at
September 30, 1999.
At September 30, 1999, cash and cash equivalents totaled $7.0 million, an
increase of $5.6 million from December 31, 1998. The increase was due to the
receipt of $6.2 million from the sale of convertible preferred stock in January
1999, partially offset by cash used in operating and investing activities.
Our capital requirements depend on numerous factors, including:
- timing and amount of sales of our products;
- market acceptance of our products;
- the resources we devote to developing, marketing, selling and supporting
our products; and
- the timing and extent of establishing international operations.
We expect to devote substantial capital resources to continue our research
and development efforts, to hire and expand our sales, support, marketing and
product development organizations, to expand marketing programs, and for other
general corporate activities. We believe that our current cash balances will be
sufficient to fund our operations for at least the next 12 months. However, we
may require additional financing within this time frame. Any additional funding,
if needed, may not be available on terms acceptable to us or at all.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently transact business in any foreign countries or
currencies and have therefore not engaged in any currency hedging activities to
date. We do not use derivative financial instruments for speculative trading
purposes and to date have not been a party to any financial instruments or
contracts that expose us to material market risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 will be
effective for the Company's fiscal year ended December 31, 2001. We do not
expect SFAS 133 to have a material effect on our financial position or results
of operations.
YEAR 2000 COMPLIANCE
THE YEAR 2000 PROBLEM
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000.
READINESS OF OUR PRODUCTS
We have designed the CX100 for use in the year 2000 and beyond and believe
it is year 2000 compliant. However, an undetected programming error could result
in the CX100 failing to be year 2000 compliant, in which case, our business
would suffer. We represent to our customers that upon
28
<PAGE> 32
notification of any year 2000 problems with our products, we will remedy it by
product repair or replacement.
Our products are generally integrated into larger networks involving
sophisticated hardware and software products supplied by other vendors. 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. Each of
our customers' networks involves different combinations of third party products.
We cannot evaluate whether all of their products are year 2000 compliant. We may
face claims based on year 2000 problems in other companies' products or based on
issues arising from the integration of multiple products within the overall
network. Although no claims of this kind have been made against us, we may in
the future be required to defend our products in legal proceedings that could be
expensive regardless of the merits of these claims.
READINESS OF OUR SYSTEMS AND FACILITIES
Our business may be affected by year 2000 issues. We have completed our
systems updates and upgrades 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. If our suppliers, vendors,
major distributors, partners, customers, service providers and our contract
manufacturer, A-Plus Manufacturing, and our applications service provider,
AristaSoft, and their partners and suppliers, in particular, fail to correct
their year 2000 problems, these failures could result in an interruption in, or
a failure of, our normal business activities or operations. If a year 2000
problem occurs, it may be difficult to determine which party's products have
caused the problem. These failures could interrupt our operations and damage our
relationships with our customers.
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
that are not operated for us by outside vendors have been acquired as new
product in the last two years. Most of it is standard commercial 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 older hardware or software that would be more likely to have
calendar issues because of its age. We have contacted A-Plus Manufacturing and
AristaSoft to determine whether their systems are year 2000 compliant. Both have
reported their internal systems are expected to be year 2000 compliant or will
be compliant by December 31, 1999.
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. We have not developed,
and have no plans to develop, a contingency plan to address situations that may
result from failure to achieve year 2000 readiness of our critical operations.
The costs of developing and implementing a plan, if necessary, could be
significant. Based on the information available to us at this time, we do not
believe we need a contingency plan for our internal systems or our products.
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
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and shipment of products. The cost of recovery from failures could be
significant and result in lost revenues.
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. We are also unable to determine the costs and
consequences to us of year 2000 failures we, our vendors, customers or
manufacturing contractors experience due to the scope and complexity of the
manner in which these failures may manifest. In particular, it is difficult to
assess the readiness of external service providers, including utilities,
government entities and other vendors. However, a reasonable "worst case"
scenario might include:
- delay or loss of revenues;
- cancellation of customer orders;
- diversion of development resources;
- damage to our reputation;
- increased maintenance and warranty costs; or
- litigation costs;
any of which could harm our business, financial condition and results of
operations. We have not developed, and we have no current plans to develop 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 loop management solutions that enable local
exchange carriers to rapidly deploy and efficiently maintain Digital Subscriber
Line, or DSL, services. Loop management is the term we use to describe the
automation and remote control of installation, qualification and maintenance of
copper telephone lines. The Copper CrossConnect CX100, our first product, is
currently being installed in telephone company central offices by Competitive
Local Exchange Carriers, or CLECs, to speed their deployment of DSL services. We
believe that our CX100 and our CrossWorks software represent the first
commercially available loop management solution designed and built to meet the
requirements of local exchange carriers deploying DSL. The CX100 product family
enables the rapid and efficient deployment of high-speed digital services on
existing copper telephone lines.
As of October 31, 1999, our products have been deployed by Bluestar
Communications, Covad Communications, DSL.net, Jato Communications, MGC
Communications, Network Access Solutions and Rhythms NetConnections. We have
formed an original equipment manufacturer relationship with Lucent Technologies,
which has chosen to sell the CX100 as a co-branded system. For the nine months
ended September 30, 1999, we recognized $14.7 million in revenues and shipped
over 1,500 CX100 systems.
INDUSTRY BACKGROUND
INCREASING NEED FOR HIGH SPEED ACCESS
Internet content and the number of users accessing the Internet are
expected to continue to grow rapidly. International Data Corporation projects
the number of worldwide users accessing the Internet to grow from approximately
142 million in 1998 to more than 500 million by 2003. In addition, content is
becoming more data-intensive as websites increasingly offer streaming video and
audio, animation and software downloads. As more users access more Internet
content, the ability to connect to the Internet at high speeds is becoming more
important. To remain competitive, businesses are using high-speed connections to
access and provide information via the Internet, conduct transactions with
customers and suppliers, and communicate more effectively with remote employees.
Consumers are also increasingly accessing the Internet to communicate, collect
and publish data-intensive information, conduct retail purchases and access
online entertainment.
To meet this demand, a growing number of local exchange carriers are
increasingly offering high-
speed Internet access and other services, often over existing telephone lines.
These existing lines,
commonly referred to as the local loop,
extend from telephone companies' central
offices out to businesses and residences.
The local loop is part of analog telephone
networks developed and deployed over the
last 100 years to carry voice traffic. Local
exchange carriers are taking advantage of
the underutilized capacity of this telephone
network infrastructure to deliver high-speed
Internet connections to businesses and
residences.
LOCAL LOOP
The copper telephone lines
that extend from telephone
companies' central offices
to businesses and
residences are commonly
called the local loop.
EMERGING DSL SERVICES AND LOCAL EXCHANGE CARRIERS
One of the network service types deployed in the local loop today for
high-speed access is Digital Subscriber Line, or DSL. A growing number of local
exchange carriers are deploying DSL to offer high-speed, cost-effective, access
services on existing copper lines. Because DSL networks reuse the existing local
loop, they are less expensive to deploy than alternative access technologies. In
addition, significant portions of the cost of a DSL network can be deferred
until subscribers are added, reducing the initial fixed cost of the network.
Other advantages of DSL include the ability to
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leverage more of the underutilized capacity of the telephone line, offer
multiple services on the same line and operate as a dedicated, "always-on"
service, not requiring subscribers to initiate a dial-up connection each time
the service is used. For these reasons, we believe a growing number of local
exchange carriers will deploy DSL instead of alternatives such as cable modems,
wireless or satellite technology.
In the mid-to-late 1990's, various competitive dynamics prompted local
exchange carriers to target either the consumer or business market segments
using DSL technology. Cable operators, such
ILEC
An Incumbent Local Exchange
Carrier, or ILEC, is a
communications company that
held an exclusive license
to offer local telephone
services prior to the
Telecommunications Act of
1996. ILECs include the
regional Bell operating
companies and other
independent telephone
companies.
as AT&T@Home and RoadRunner, began
delivering high-speed consumer services,
prompting the incumbent local exchange
carriers, or ILECs, to respond by
accelerating their investments in DSL
technologies. To date, ILECs have generally
focused their DSL deployments on the
consumer segment by using versions of DSL
that work in conjunction with existing
analog voice services as well as the
associated line maintenance procedures.
However, these consumer-oriented versions of
DSL typically have limitations that make
them unattractive for businesses. We believe
many ILECs will gradually convert their
existing local loop equipment from analog to
digital to deliver more competitive business
services as well as voice services in a more
cost-effective manner.
Prior to 1996, ILECs held an exclusive license to operate the local loop
and offer associated telephone services. The Telecommunications Act of 1996
deregulated the local loop and created a legal framework enabling new,
competitive local exchange carriers, or CLECs, to provide competing
CLEC
A Competitive Local
Exchange Carrier, or CLEC,
is a company that,
following the
Telecommunications Act of
1996, is authorized to
compete with ILECs in
providing local
communications services.
services. It also eliminated a substantial
barrier to CLECs by allowing access to the
ILECs' facilities in order to utilize the
existing local loop network infrastructure.
Many of these CLECs are new companies
without a significant installed base of
traditional analog voice equipment and as a
result, are aggressively deploying modern
DSL equipment and implementing new line
maintenance procedures in the incumbent
carriers' facilities. This has enabled a
growing number of CLECs to use the local
loop to offer competitively priced,
high-speed services to business customers.
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DSL LINE INSTALLATION AND MAINTENANCE
CLECs gain access to the local loop and deploy DSL by leasing space in an
ILEC's central office, installing network equipment in this space and leasing
specific copper telephone lines to connect subscribers. ILECs must connect
copper lines as requested from the CLECs' leased space to subscriber locations,
a process that tends to be labor intensive. When a CLEC orders a line from their
equipment to the subscriber's site, the ILEC's personnel must manually complete
one or more connections. These include connections inside the central office, at
the subscriber's site and possibly at various points throughout the local loop.
The following diagram illustrates a typical network configuration and
installation procedures for CLEC DSL deployment.
LOGO
[Manual Loop Management Title: Manual DSL Line Installation and Maintenance
Diagram showing copper local loop network used for DSL services without a loop
management solution. The Central Office is depicting on the right-hand side of
the diagram, including a physical connection point, ILEC voice equipment and
CLEC owned DSL equipment (DSLAMs). A technician is shown between the DSL
equipment and the physical connection point, representing the manual labor
required without an automated loop management solution. Exiting the central
office are copper loops connected to other physical connection points, and then
to DSL subscribers (business and homes).]
DSL DEPLOYMENT CHALLENGES
Despite the new revenue opportunity DSL provides for local exchange
carriers, there are several major challenges in deploying and maintaining a new
DSL infrastructure that have slowed deployment. The challenges include:
DSL INSTALLATION IS DIFFICULT, EXPENSIVE AND LABOR INTENSIVE. DSL
installation requires one or more connections to the copper line in a process
that uses manual labor and hand-held test tools. A common problem that arises
with local exchange carriers deploying DSL is human error in installing the
copper line. To ensure that the line has been correctly connected, technicians
rely on standard analog voice tools that attach to the copper lines at any point
in order to correctly identify the line. This technique relies upon ILEC voice
equipment that generates audible dial tones as well as an audible identification
code associated with a particular line. Since a CLEC's DSL lines are not
connected to this voice equipment, an audible dial tone is not available.
Without this line identification information, connections are often performed
incorrectly at one or more of the various points throughout the network.
Discovering and correcting these mistakes by dispatching service personnel into
the field is costly and leads to delays in establishing service.
DSL SERVICES ARE DEPENDENT ON COPPER LINE LENGTH AND QUALITY. DSL operates
at higher frequencies than traditional analog voice service and is therefore
more dependent on the length and quality of the copper line and more easily
affected by electrical interference. Because various devices connected to, or
faults occurring on, the copper line can cause problems for DSL, they must be
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identified in advance so that the line can be properly prepared for DSL service.
In addition, a greater range of frequencies must be monitored to fully qualify
the line and detect electrical interference. For local exchange carriers to
efficiently maintain DSL services, they must be able to qualify and monitor
copper lines. To date, a significant amount of on-site labor and expensive
hand-held test equipment has been required to install, qualify, maintain and
troubleshoot lines for DSL.
DSLAM
A Digital Subscriber Line
Access Multiplexer, or
DSLAM, is a network device,
usually located at a
telephone company's central
office, that receives
signals from multiple DSL
connections and puts the
signals on a larger,
high-speed transmission
line.
DSL MAINTENANCE IS COMPLEX. Because DSL
runs on the local loop, DSL networks require
local exchange carriers to deploy DSL
equipment in a large number of central
offices in order to provide service in a
broad geographic region. Local exchange
carriers must sometimes send technicians to
individual central offices to reconnect
lines, to correct equipment failures or to
change subscriber services. For example, in
the event of a DSLAM failure, the local
exchange carrier would need to either
replace the defective equipment or manually
reconnect the subscriber lines around the
failure. These on-site service calls to the
central office can be costly and lead to
delays in service availability. Given the rapid and wide-scale deployment of DSL
technology and the need for guaranteed levels of service, local exchange
carriers are increasingly automating and remotely managing activities related to
DSL deployment and maintenance.
NEED FOR A PURPOSE-BUILT SOLUTION
Given the historically exclusive use of the copper local loop
infrastructure by ILECs for voice traffic, most equipment vendors have focused
on the needs of the ILECs and their traditional analog voice services. These
vendors have not developed products optimized for the unique requirements of
CLECs and new digital services. Traditional systems, often based on proprietary
software, are difficult and expensive to integrate with new DSL equipment and
modern operational support systems. We believe widespread deployment of
competitive DSL services requires new infrastructure equipment with standard
interfaces providing for the automation and remote management of line
installation, qualification and maintenance that would otherwise be manually
implemented.
THE TURNSTONE SOLUTION
We are a leading provider of loop management solutions that enable local
exchange carriers to rapidly deploy and efficiently maintain DSL services. Loop
management is the term we use to describe the automation and remote control of
installation, qualification and maintenance of copper lines in a local loop. Our
hardware and software solution for loop management improves the efficiency of
installing and managing DSL services while delivering the high levels of
reliability and scalability needed in a large, complex network. We believe that
our Copper CrossConnect CX100 product family represents the first loop
management solution designed and built to meet the requirements of local
exchange carriers deploying DSL. Our CX100 product family consists of the Copper
CrossConnect CX100 and associated modules and the CrossWorks suite of software
applications. The CX100 product family is designed specifically to enable the
rapid and efficient deployment of high-speed digital services on the existing
local loop. The CX100 is typically deployed between one or more DSLAMs and the
copper subscriber lines. CX100 line cards may be added over time as subscriber
count increases and as more DSLAM line cards are added. The CX100 enables local
exchange carriers to remotely qualify, manage and control the copper lines.
CrossWorks can operate independently or be integrated with a local exchange
carrier's operational support system, enabling an efficient and scalable loop
management process.
The benefits of our loop management solution include:
RAPID AND EFFICIENT DSL DEPLOYMENT. Our CX100 enables carriers to remotely
perform line qualification, testing and maintenance on any line connected
through the system. Accurate line
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qualification and testing enable local exchange carriers to rapidly and
efficiently deploy DSL services. The CX100 provides local exchange carriers with
critical testing capabilities, including traditional tests performed on analog
lines as well as advanced tests that are appropriate for DSL network
environments. Our customers can remotely confirm if a particular copper line is
properly connected into the central office, and whether it can support a
specific type and speed of DSL service prior to deploying field personnel for
installation at the subscriber site. The CX100 can also generate audible tones
on any set of lines, providing field personnel with a convenient mechanism for
ensuring lines are correctly connected during DSL installation. These features
are also useful for performing fault isolation and maintenance on DSL subscriber
lines after service is installed and operational.
IMPROVED NETWORK RELIABILITY. The CX100 improves network reliability and
availability by providing local exchange carriers with remote service
modification and restoration capabilities, enabling local exchange carriers to
offer guaranteed levels of service. For example, in the event of a DSLAM
failure, our customers can rapidly restore services by remotely reconnecting the
affected lines around the problem, a process we call protection switching.
Carriers can also use the protection switching capability to remotely modify a
customer's service type quickly and cost effectively. The ability to remotely
modify a customer's services is useful for handling unforeseen installation
problems or responding quickly to service change requests without the
requirement for costly on-site labor.
AUTOMATED OPERATIONS. Our CrossWorks software operates in conjunction with
the CX100 to automate the collection, analysis and archiving of information
regarding subscribers, line assignments, test histories and other loop
management information. Raw test data can be automatically gathered at
programmed intervals and analyzed, generating pass/fail notifications based on
user-defined thresholds for particular services. All of the information is
automatically stored and is available for future troubleshooting or trend
analysis. CrossWorks also includes automated network administration capabilities
such as software upgrades, backups and alarm tracking. CrossWorks may be
integrated with service providers' existing operational support systems using
open, standard interfaces or operated as a stand-alone application.
COMPATIBLE WITH ALL SERVICES AND PLATFORMS. The CX100 is based on a
physical connection architecture that is compatible with all types of local loop
services and all types of DSLAMs. A single CX100 may be deployed with multiple
DSLAMs from a variety of vendors, including Alcatel, Cisco, Copper Mountain,
Lucent, Nokia and Paradyne. With our solution in place, local exchange carriers
can deploy next-generation equipment to support emerging DSL services as well as
leverage existing investments in networking equipment that support more
traditional services.
STRATEGY
Our objective is to be the leading provider of digital loop management
solutions for local exchange carriers. Key elements of our strategy include:
INCREASE PENETRATION IN THE CLEC MARKET. Our initial target customers are
CLECs specifically focused on offering DSL services to business users. We expect
that our target market will grow as new CLECs emerge and as established CLECs
supplement their existing services with DSL service offerings for businesses. We
believe our early success with CLECs such as BlueStar, Covad Communications,
DSL.net, Jato Communications, Network Access Solutions and Rhythms
NetConnections Inc. will better enable us to market to other CLECs as they
deploy DSL.
PENETRATE NEW MARKETS AS THEY EMERGE. We believe ILECs and local exchange
carriers in other countries will gradually convert their installed base of
analog, voice equipment to more efficient DSL equipment due to superior
economics, demand for new services and continued deregulation. We intend to add
features to our existing products to make our solutions more attractive to ILECs
and local exchange carriers in other countries. We plan to expand our sales,
marketing and support capabilities to meet the growing demand for high-speed
access solutions and increase our brand recognition both domestically and
internationally.
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ENHANCE PRODUCT OFFERINGS. We believe that our core product offerings can
be enhanced to offer better value to existing and new customers and plan to
continue adding features and functionality to increase the utility and
applicability of our product offerings. Since our products have been deployed by
a number of our customers, we have developed an understanding of the challenges
facing these carriers, which better enables us to design additional features and
capabilities into the CX100 product family. We expect to invest significant
development resources in the areas of service qualifications, network
management, operational support system interfaces and manufacturing cost
reductions. In addition, we plan to seek regulatory approvals and certifications
so that our products may be deployed outside the United States.
DEVELOP RELATIONSHIPS WITH ORIGINAL EQUIPMENT MANUFACTURERS. Although we
primarily market our products through our direct sales force, we believe
original equipment manufacturer relationships can enhance our market position
and make us a more attractive vendor to a broader base of customers. We have
formed an original equipment manufacturer relationship with Lucent Technologies,
who has chosen to resell the CX100 as a co-branded system. We expect this
relationship to expand our distribution and customer support capacity globally
as well as satisfy the equipment financing requirements of certain customers. In
the future, we expect to develop other original equipment manufacturer
relationships in order to penetrate additional customer segments or market our
products in international markets.
LEVERAGE RELATIONSHIPS WITH COMPLEMENTARY EQUIPMENT VENDORS. The CX100 is
compatible with a variety of DSL equipment as well as analog telephone
equipment. The CX100 may be used with multiple DSLAMs from a number of vendors,
including Alcatel, Cisco, Copper Mountain, Lucent, Nokia and Paradyne. Because
our solution is complementary to DSLAMs, we believe DSLAM vendors are likely to
recommend our products to their customers. We intend to make our product an
attractive complement to all DSLAM vendors and to further encourage joint sales
and marketing activities. We are also working with vendors of hand-held line
test equipment in order to provide more sophisticated loop management
capabilities.
OUTSOURCE MANUFACTURING. We outsource manufacturing of our products
including material procurement, board level assembly, final assembly, test and
shipment to our customers. We use automated design, manufacturing and test
processes to minimize cycle times and improve product quality. We believe that
continuing this arrangement will lower our manufacturing costs, provide us with
more flexibility to scale our operations to meet changing demand and allow us to
focus our engineering resources on new product development and product
enhancements.
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PRODUCTS
The CX100 is typically deployed in a telephone company's central office
between one or more DSLAMs and the copper subscriber lines. CX100 line cards may
be added over time as subscriber count increases and as more DSLAM line cards
are added. With the CX100 our customers can remotely qualify and monitor copper
lines as well as verify connections to subscriber sites. We also offer a suite
of software modules, called CrossWorks, which enables our customers to more
efficiently control the CX100, enhancing remote or automated management of the
local loop. We expect that these core technologies will serve as the basis for
future generations of products.
Pictured below is the CX100 deployed in the telephone company's central
office, representing the first loop management solution specifically designed
for rapid and efficient deployment of DSL.
LOGO
[Automated Loop Management:
Title: Automated Loop Management
Diagram showing the Copper CrossConnect CX100 being used in the copper local
loop network by CLEC DSL service provider. The Central office is depicted on the
right-hand side of the diagram, including a physical connection point, ILEC
voice equipment and CLEC owned DSL equipment (DSLAMs). The CX100 is shown
between the DSLAMs and the physical connection point in the Central Office.
Existing the Central Office are copper loops connected to other physical
connection points, and then to DSL subscribers (businesses and homes). At the
bottom of the picture, a remote Network Operations Center is controlling the
CX100 in the Central office through software.]
COPPER CROSSCONNECT CX100. The CX100 is a modular product designed for
central office environments and is compliant with Network Equipment Building
Standards. The base system, which depends on customer configuration, typically
consists of one CX100 chassis, one P100 processor card and one or more L140 line
cards. The base system is installed and fully cabled in a central office, with
additional line cards added over time as subscriber count increases and as more
DSLAM line cards are added. All modules may be inserted or removed while the
system is operational and are automatically recognized and inventoried by the
system upon insertion. All modules, indicators and switches are accessible from
the front of the system, consistent with current industry practices. The CX100
supports dual 48-volt power feeds. In the event of loss of power, the CX100
maintains all connections with no loss of subscriber service. The CX100 chassis
is available in 19 and 23 inch configurations. The 19 inch version supports 425
lines, and the 23 inch version supports 550 lines. The following modules are
currently available:
P100. The P100 processor card provides management and control functions for
the system and has line qualification functionality. The P100 supports Ethernet,
serial port or dial-up modem access for management, as well as access for
interfacing to external test gear.
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L140. The L140 line card provides access to the P100 and connections for up
to 25 copper lines. L140 line cards may be added over time as subscriber count
increases and as more DSLAM line cards are added.
M101. The M101 central office management card provides a six-port Ethernet
hub and four contacts for monitoring physical alarms in central offices. This
optional card provides a convenient management connectivity solution between
multiple network products within the central office.
CROSSWORKS. CrossWorks is a suite of software products that enable service
providers to automate physical management of a large volume of copper lines when
using CX100 systems.
The following diagram shows how our CrossWorks software interfaces with a
CLEC's operational support system.
LOGO
[CrossWorks:
Title: CrossWorks Architecture
Diagram showing the CrossWorks architecture. On the right-hand side of the
diagram are several Copper CrossConnects in different Central Offices being
controlled by CrossWorks. In the middle of the diagram is the CrossWorks server,
located at the Network Operations Center. The CrossWorks server is being
accessed by several mechanisms, including a Voice Response System for field
personnel, web interfaces for Network Operators and the Carrier's OSS and
Database. The Carrier's OSS and Database interfaces to CrossWorks via standard
APIs such as Corba, Java, etc. Additionally, the Carrier's OSS is shown
accessing the Copper CrossConnects directly with SNMP or console interfaces.]
CrossWorks employs a client-server architecture that offers flexible
integration with existing operations and support systems. The CrossWorks server,
which performs most of the automation work, can be accessed via standard
interfaces, such as CORBA, JAVA, RMI, SNMP or DCOM, allowing a service provider
to use its own user interface. Alternatively, a service provider can use
CrossWorks as a standalone client-server application. With either of these
approaches, CrossWorks is designed to interface with the service provider's
existing database through a standard application programming interface. These
options are designed to provide the service provider with automated system
capabilities while leveraging its existing operational support systems
infrastructure.
The CrossWorks suite consists of the following modules:
- CROSSTEST for line qualification and line history tracking;
- CROSSSCOPE for frequency analysis of local loops;
- CROSSCONFIG for comprehensive network configuration and administration of
multiple CX100s; and
- CROSSVIEW for basic management of individual CX100s.
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CUSTOMERS
As of September 30, 1999, our customers were Bluestar Communications,
DSL.net, Jato Communications, MGC Communications, Network Access Solutions and
Rhythms NetConnections. As of September 30, 1999, we had shipped over 1,500
CX100 systems. In the nine months ended September 30, 1999, Rhythms
NetConnections accounted for approximately 55% of our revenues, and Network
Access Solutions accounted for approximately 24% of our revenues.
SALES AND MARKETING
We sell and market our products through our direct sales force and an
indirect channel.
DIRECT SALES. Our direct sales effort in North America is directed by four
regional sales managers. To date, our direct sales efforts have been primarily
focused on CLECs deploying DSL, and we expect to target other local exchange
carriers who deploy DSL in the future. We plan to expand our direct sales
organization internationally in the future. We also have seven systems engineers
who support our regional sales managers and work with customers' engineering and
operations personnel to improve their ability to use and integrate our products.
Direct sales accounted for approximately 93% of our revenues for the nine months
ended September 30, 1999.
INDIRECT SALES. We have entered into an original equipment manufacturer
agreement with Lucent Technologies, a leader in the global telecommunications
equipment market. Under this agreement, we co-brand the CX100 with Lucent, which
resells the CX100 products. Lucent offers DSL access equipment and services,
including vendor financing, which facilitate the sale of our products and
services. Lucent generally provides first level support for our products to its
customers. Our agreement allows Lucent to sell our product on a worldwide,
nonexclusive basis. Sales to Lucent accounted for approximately seven percent of
our revenues for the nine months ended September 30, 1999.
Our marketing organization is responsible for sales support, product
presentations, documentation and pricing, as well as new product and feature
definition. Our marketing organization also performs activities such as
marketing communications, marketing research, trademark administration and other
support functions.
CUSTOMER SERVICE AND SUPPORT
We believe a high level of continuing service and support is critical to
our long-term success. We offer comprehensive hardware and software maintenance
and support programs for our products. The majority of our service and support
activities are related to training, troubleshooting and network management.
These services are provided by telephone, email and directly at customer
locations using personnel from our customer support group. We also offer various
training courses for our direct customers and original equipment manufacturers.
RESEARCH AND DEVELOPMENT
We have assembled a team of highly skilled engineering professionals who
are experienced at designing data networking equipment and network management
software. Our engineering personnel have expertise in a number of fields,
including digital loop carrier design, voice and data switching technology,
local loop equipment design and operations support systems. During the nine
months ended September 30, 1999, we spent $3.6 million on research and
development. As of October 31, 1999, we had a total of 31 employees engaged in
research and development.
We believe that our future success depends on our continued ability to
adapt to the rapidly changing local loop market, to maintain our expertise in
loop management and to continue anticipating and satisfying our customers'
evolving needs. We continually review and evaluate technological and regulatory
changes affecting the local exchange carrier market and seek to offer products
and capabilities that solve customers' operational challenges and improve their
efficiency.
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Through our research and development efforts, we created our CrossWorks
suite of software products that enable more efficient integration of our CX100
systems' functions into our customers' operations support systems. We believe
that our extensive experience designing and implementing high-quality network
components has enabled us to develop high-value integrated systems solutions.
From these development efforts, we believe we have created an industry-leading
platform for scalable, cost-effective, loop management.
We are currently investing significant resources in operational support
systems interfaces and capabilities, automated testing, new line cards optimized
for specific applications and support for additional industry standards,
including international compliance testing for our products.
COMPETITION
The market for telecommunications equipment is highly competitive. A number
of companies that have traditionally produced products for analog voice networks
market products that compete with ours. These companies include: Harris
Corporation, Hekimian Laboratories, Hewlett-Packard Company, Inrange
Technologies Corporation, Lucent Technologies, Nortel Networks, Teradyne
Corporation and Tollgrade Communications. In addition, a number of smaller
companies are expected to introduce products that will compete with ours.
We also compete with DSL equipment providers including Lucent, Nortel,
Nokia and Alcatel, who have announced plans to incorporate competitive features
and functionality into their DSLAMs. To the extent we expand the capabilities of
our products to incorporate functionality traditionally contained in other
equipment, we may also face increased competition from other vendors.
Remaining competitive in our markets will require a continued high level of
investment in research and development, marketing, and customer service. The
principal competitive factors in our market include:
- speed of new product introductions to market;
- depth of product functionality;
- ease of installation, integration and use;
- system reliability and performance;
- price and financing terms;
- technical support and customer service;
- size and stability of the vendor's operations; and
- compliance with government and industry standards.
Due to the rapidly evolving markets in which we compete, additional
competitors with significant market presence and financial resources, including
other large telecommunications equipment manufacturers, may enter our markets,
thereby further intensifying competition. We may not have sufficient resources
to continue to make the investments or achieve the technological advances
necessary to compete successfully.
The markets for high-speed telecommunications products are characterized by
rapid technological developments, frequent enhancements to existing products and
new product introductions, changes in end user requirements and evolving
industry standards. The emerging nature of these products and services and their
rapid evolution requires us to continually improve the performance, features and
reliability of our products, particularly in response to competitive product
offerings. Current or future competitors may foresee the course of market
developments more accurately than we do and may introduce products incorporating
superior or alternative technologies that could render our products obsolete.
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<PAGE> 44
Our products are primarily used in DSL-based service applications that use
copper lines. Numerous other high-speed access technologies, including cable
modems, satellite technology and wireless technologies compete with DSL-based
services. These competing technologies may ultimately prove to be superior to
DSL-based services and reduce or eliminate the demand for our products. The
properties of copper lines limit the speed and distance over which data can be
transmitted. Service levels degrade as distance from the central switching
station increases. Other competing technologies, such as wireless and cable, are
not subject to such limitations. Our products may become obsolete as a result of
the development of competing technologies that are more reliable, faster and
less expensive than DSL.
MANUFACTURING
Our manufacturing operation is entirely outsourced. We have entered into an
agreement with A-Plus Manufacturing, under which we subcontract manufacturing of
our products. A-Plus Manufacturing, located in San Jose, California, is an
established contract manufacturer with ISO 9002 and Telecordia, formerly
Bellcore, certifications. This subcontracting arrangement includes material
procurement, board level assembly, final assembly, test and shipment to our
customers. We utilize automated design, manufacturing and test processes to
minimize cycle times and improve product quality. We design and implement all of
the tests that are required to meet internal and external quality standards, and
routinely monitor product quality via on-site inspections. This arrangement
provides us with the following benefits:
- we operate without substantial space dedicated to manufacturing
operations;
- we conserve a significant portion of the working capital that would be
required for funding inventory; and
- we can more easily adjust manufacturing volumes to meet changes in
demand.
We use a combination of standard parts and components, which are generally
available from more than one vendor, and a number of key components that are
purchased from sole or limited source vendors for which alternative sources are
not currently available. In addition, lead times for some of the materials and
components we use are very long. See "Risk Factors -- If we fail to accurately
predict our manufacturing requirements, we could incur additional costs or
experience manufacturing delays" and "-- Some key components in our products
come from sole or limited sources of supply, which exposes us to potential
supply interruption".
One supplier, Burr-Brown, has stopped manufacturing a sole source component
that we use to manufacture the CX100. We are working to identify and implement
an alternative. We may not, however, successfully accomplish this prior to
depleting our supply of the component.
INTELLECTUAL PROPERTY
We rely on a combination of copyright, trademark, trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We attempt to protect our
intellectual property rights by limiting access to the distribution of our
software, documentation and other proprietary information. In addition, we enter
into confidentiality agreements with our employees and certain customers,
vendors and strategic partners. These steps may fail to prevent the
misappropriation of our intellectual property, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States. Other parties may independently develop competing technology. Attempts
may be made to copy or reverse engineer aspects of our products or to obtain and
use information that we regard as proprietary. We presently have no patents and
no patent applications. Future patent applications, if any, may not be approved,
any issued patents may not protect our intellectual property, and any issued
patents may be challenged by third parties. Any failure to adequately protect
our proprietary rights could result in our
41
<PAGE> 45
competitors offering similar products, potentially resulting in loss of a
competitive advantage and decreased revenues.
We employ a variety of intellectual property in the development and
manufacturing of our products. We believe that the loss of all or a substantial
portion of our intellectual property rights could have a material adverse effect
on our results of operations. We cannot be sure that our intellectual property
protection measures will be sufficient to prevent misappropriation of our
technology. In addition, the laws of many foreign countries do not protect our
intellectual properties to the same extent as the laws of the United States.
From time to time, we may desire or be required to renew or to obtain licenses
from others in order to further develop and market commercially viable products
effectively. We cannot be sure that any necessary licenses will be available on
reasonable terms.
To date, we have not been notified that our products infringe the
proprietary rights of third parties, but we cannot be certain that third parties
will not claim infringement by us with respect to our current or future
products. See "Risk Factors -- If we become involved in a protracted
intellectual property dispute, or one with a significant damages award, or which
requires us to cease selling our products, our operating results would suffer".
We have registered Turnstone Systems and the Turnstone Systems logo as
trademarks. Copper CrossConnect CX100 is also our trademark. Each trademark,
trade name or service mark of any other company appearing in this prospectus
belongs to its holder.
EMPLOYEES
At October 31, 1999, we had a total of 69 employees, all of whom were based
in the United States. Of the total, 31 were engaged in research and development,
19 were engaged in sales, marketing and customer support, 10 were engaged in
operations, and 9 were in administration and finance. None of our employees is
subject to a collective bargaining agreement and we believe that our relations
with our employees are good.
FACILITIES
As of October 31, 1999, our principal administrative, sales, marketing and
research and development facility occupied approximately 20,300 square feet in
Mountain View, California pursuant to a sublease that expires in September 2002.
We have sales offices throughout the United States, including regional sales
offices in Colorado, Illinois, Massachusetts, and Virginia. We expect to require
additional office space within the next 12 months.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to our executive
officers and directors as of September 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard N. Tinsley(1)............. 35 President, Chief Executive Officer and Director
P. Kingston Duffie(1)............. 38 Chief Technology Officer and Director
M. Denise Savoie.................. 43 Chief Financial Officer and Vice President, Business
Operations
Eric J. Andrews................... 34 Vice President, Marketing
Michael A. Crumlin................ 38 Vice President, Sales and Customer Service
John Loiacono IV.................. 35 Vice President, Business Development
Catherine Millet.................. 47 Vice President, Engineering
Shames S. Panahi.................. 41 Vice President, Operations
Robert J. Finocchio, Jr.(2)....... 48 Director
John K. Peters(3)................. 51 Director
Andrew W. Verhalen(2)............. 43 Director
Geoffrey Y. Yang(3)............... 40 Director
</TABLE>
- -------------------------
(1) Member of Stock Option Grant Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
RICHARD N. TINSLEY cofounded Turnstone Systems in January 1998 and has
served as President and Chief Executive Officer and as a director since that
time. From August 1997 to December 1997, Mr. Tinsley was a consultant to the
venture capital firms Institutional Venture Partners and Benchmark Capital
Partners. From September 1993 to August 1997, Mr. Tinsley held various positions
at Newbridge Networks, a designer and manufacturer of networking products, most
recently as Vice President and General Manager, VIVID Business Unit. Mr. Tinsley
holds an M.B.A from the University of Dallas and a B.S. in electrical
engineering from Rensselaer Polytechnic Institute.
P. KINGSTON DUFFIE cofounded Turnstone Systems in January 1998 and has
served as Chief Technology Officer and as a director since that time. From
January 1998 to April 1999, he also served as Vice President, Engineering. From
August 1997 to January 1998, Mr. Duffie was a consultant to Institutional
Venture Partners and Matrix Partners. From May 1997 to July 1997, Mr. Duffie was
Assistant Vice President, Engineering, Data Communications division, for Ascend
Communications, a developer and manufacturer of wide area networking equipment.
From March 1993 until April 1997, Mr. Duffie was Chief Technology Officer at
Whitetree, Inc., a developer and manufacturer of high-speed switching products,
which was acquired by Ascend Communications in April 1997. From April 1994 until
August 1996, he also served as Vice President, Engineering of Whitetree. Mr.
Duffie holds an M.S. in electrical engineering from McGill University in
Montreal and a B.Sc. (Eng.) in engineering physics from Queen's University in
Kingston, Ontario.
M. DENISE SAVOIE cofounded Turnstone Systems in January 1998 and has served
as Chief Financial Officer and Vice President of Business Operations since that
time. From May 1997 to December 1997 Ms. Savoie worked as an independent
consultant. From May 1993 until May 1997, Ms. Savoie served as Vice President of
Business Operations and Chief Financial Officer at Whitetree. Ms. Savoie holds a
B.A. in economics from the University of Michigan and a B.A. in art from Whitman
College.
ERIC J. ANDREWS joined Turnstone Systems in February 1998 and has served as
Vice President, Marketing since that time. From April 1993 to January 1998, Mr.
Andrews held various marketing positions at Newbridge Networks, most recently as
Assistant Vice President of Marketing, VIVID Business Unit. Mr. Andrews holds an
M.S. and a B.S. in computer science and electrical engineering from the
Massachusetts Institute of Technology.
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<PAGE> 47
MICHAEL A. CRUMLIN joined Turnstone Systems in March 1999 and has served as
Vice President, Sales and Customer Service since that time. From August 1998 to
February 1999, Mr. Crumlin was Vice President of Business Development for
e.spire Communications, a provider of integrated communications services. From
November 1996 to August 1998, Mr. Crumlin was Director of Marketing of Yurie
Systems, a manufacturer of telecommunications equipment, which was acquired by
Lucent Technologies, a provider of communications and networking products, in
May 1998. From April 1995 to August 1996, Mr. Crumlin was a co-founder and
Director of Marketing & Business Development of TSI TelSys, a developer of
satellite data processing systems. Mr. Crumlin holds an M.B.A from the Harvard
University Graduate School of Business and a B.S. in engineering from the United
States Military Academy at West Point.
JOHN LOIACONO IV joined Turnstone Systems in September 1999 and has served
as Vice President, Business Development since that time. From September 1994 to
September 1999, Mr. Loiacono was Director of Systems Engineering, Europe,
Middle-East, Africa at Bay Networks, Inc., a provider of internetworking
solutions, which was acquired by Nortel Networks, a supplier of
telecommunications equipment products, in August 1998. Mr. Loiacono holds a B.S.
in computer science from California State University -- San Francisco.
CATHERINE MILLET joined Turnstone Systems in April 1999 and has served as
Vice President, Engineering since that time. From December 1997 to April 1999,
Ms. Millet held various senior management positions at Advanced Fibre
Communications, a designer and manufacturer of multi-service access solutions
for telecommunications providers, most recently as Vice President of
Engineering. From September 1994 to December 1997, Ms. Millet held various
senior management positions at DSC Communications, a provider of
telecommunications products, most recently as Vice President of Advanced
Planning. Ms. Millet holds an M.S.E.E from the Ecole Superieure d' Electricite
in Paris.
SHAMES S. PANAHI joined Turnstone Systems in February 1998 and has served
as Vice President, Operations since that time. From October 1995 to June 1997,
Ms. Panahi was Director of Manufacturing at Whitetree. From June 1992 to October
1995, Ms. Panahi was Manufacturing Engineering Manager at Adaptive/Network
Equipment Technologies, a designer and manufacturer of wide area networks. Ms.
Panahi holds a B.S. in industrial engineering from Northwestern University.
ROBERT J. FINOCCHIO, JR. has been a director of Turnstone Systems since
September 1999. He has served as Chairman of the Board of Informix Corporation,
a provider of database systems, since July 1997 and served as President and
Chief Executive Officer of Informix from July 1997 to July 1999. From December
1988 until April 1997, Mr. Finocchio was employed with 3Com Corporation, a
global data networking company, where he held various positions, most recently
serving as President, 3Com Systems. Mr. Finocchio also serves as a director of
Latitude Communications, a teleconferencing company, and Echelon Corporation, a
developer of open, interoperable control networks. Mr. Finocchio is also a
Regent of Santa Clara University. Mr. Finocchio holds an M.B.A. from the Harvard
University Graduate School of Business and a B.S. in economics from Santa Clara
University.
JOHN K. PETERS has been a director of Turnstone Systems since June 1999.
From July 1995 to present Mr. Peters has held the position of Executive Vice
President as well as various other senior management positions at Concentric
Network Corporation, a provider of Internet protocol-based network services.
From February 1993 to July 1995, Mr. Peters served as President of Venture
Development Consulting, a consulting firm specializing in new communications and
information services. Mr. Peters holds an M.B.A. from the Stanford University
Graduate School of Business and a B.S. in Statistics from Stanford University.
ANDREW W. VERHALEN has been a director of Turnstone Systems since January
1998. Mr. Verhalen has been a partner of Matrix Partners, a venture capital
firm, since April 1992. He also serves on the board of directors of Alteon
WebSystems, a provider of Internet infrastructure solutions, Copper Mountain, a
supplier of digital subscriber line-based communications products, Phone.com, a
provider of Internet-based services for wireless telephones, and Watchguard
Technologies, a provider
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<PAGE> 48
of Internet security software. Mr. Verhalen holds M.B.A, M.Eng. and B.S.E.E
degrees from Cornell University.
GEOFFREY Y. YANG has been a director of Turnstone Systems since January
1998. Since June 1989, Mr. Yang has been a general partner of Institutional
Venture Partners, a venture capital firm. He has also been a Managing Director
of Redpoint Ventures, a venture capital firm, since October 1999. Mr. Yang is a
director of MMC Networks, Inc., a developer of network processors, Ask Jeeves,
Inc., a provider of natural-language question answering services on the
Internet, and TiVo, a provider of personalized television services. Mr. Yang
holds an M.B.A. from the Stanford University Graduate School of Business, a
B.S.E. in Information Systems Engineering from Princeton University and a B.A.
in economics from Princeton University.
Upon completion of the offering, our bylaws will provide that executive
officers are appointed by the board of directors and serve for periods as
determined by the board of directors. Ms. Savoie is married to Mr. Duffie's
brother. There are no other family relationships among any of our directors,
officers or key employees.
BOARD OF DIRECTORS
Upon completion of this offering, our bylaws will provide for a board of
directors consisting of six members. Our certificate of incorporation will
provide for a classified board of directors consisting of three classes of
directors, each serving staggered three-year terms. As a result, a portion of
our board of directors will be elected each year. To implement the classified
structure, prior to the consummation of the offering, two of the nominees to the
board of directors will be elected to terms expiring at the first annual meeting
of stockholders after the closing of this offering, two will be elected to terms
expiring at the second annual meeting of stockholders after the closing of this
offering, and two will be elected to terms expiring at the third annual meeting
of stockholders after the closing of this offering. Thereafter, each class of
directors will be elected for three-year terms. Messrs. Tinsley and Duffie have
been designated Class I Directors, whose term will expire at the annual meeting
of stockholders held in 2000. Messrs. Verhalen and Yang have been designated
Class II Directors, whose term will expire at the annual meeting of stockholders
held in 2001. Messrs. Peters and Finocchio have been designated Class III
Directors, whose term will expire at the annual meeting of stockholders held in
2002. This classification of the board of directors may delay or prevent a
change in control of our company or in our management. See "Description of
Capital Stock -- Antitakeover Effects of Provisions of Our Charter Documents".
BOARD COMMITTEES
We established an audit committee in October 1999. The audit committee
consists of Messrs. Verhalen and Finocchio. The audit committee reviews our
internal accounting procedures and consults with and reviews the services
provided by our independent accountants.
We established a compensation committee in March 1999. The compensation
committee consists of Messrs. Peters and Yang. The compensation committee
reviews and recommends to the board of directors the compensation of all of our
officers and directors, including stock compensation and loans, and establishes
and reviews general policies relating to the compensation and benefits of our
employees.
We established a stock option grant committee in March 1999. The stock
option grant committee consists of Messrs. Duffie and Tinsley. The board of
directors delegated the stock option grant committee the authority to act as
administrator of the 1998 Stock Plan solely for the purpose of granting stock
options to new and current employees within Board-approved guidelines, including
those set forth in the 1998 and 2000 Stock Plans. The stock option grant
committee is not authorized to grant stock options to our directors or executive
officers.
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<PAGE> 49
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between any member of our board of directors or
our compensation committee and any member of the board of directors or
compensation committee of any other company.
DIRECTOR COMPENSATION
We do not currently compensate our directors in cash for their service as
members of the board of directors, although they are reimbursed for certain
expenses in connection with attendance at board of director and committee
meetings. Under our 1998 Stock Plan, which will terminate upon completion of
this offering, nonemployee directors are eligible to receive stock option grants
at the discretion of the board of directors. We have previously granted options
to Messrs. Peters and Finocchio. These grants are described under the caption
"Certain Transactions -- Stock Option Grants to Directors". Upon completion of
this offering, under our 2000 Stock Plan, nonemployee directors will receive
automatic annual nondiscretionary stock option grants and will also be eligible
to receive additional stock option grants at the discretion of the board of
directors. For further information regarding the provisions of the 1998 Stock
Plan and the 2000 Stock Plan, please refer to the discussion under the caption
"Incentive Stock Plans".
LIMITATIONS ON LIABILITY AND INDEMNIFICATION
Upon completion of the offering, our certificate of incorporation will
limit the liability of directors to the fullest 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:
- a breach of their duty of loyalty to the corporation or its stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Upon completion of this offering, our certificate of incorporation will
provide that we will indemnify our directors, officers and employees 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 will also permit us to secure insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in their capacity as an officer, director,
employee or other agent, regardless of whether we would have the power to
indemnify him or her under Delaware law.
In addition, we have entered into agreements to indemnify our directors and
executive officers. These agreements, among other things, provide for
indemnification of our directors and executive officers for judgments, fines,
settlement amounts and certain expenses, including attorneys' fees incurred by
the director or executive officer in any action or proceeding, including any
action by or in the right of Turnstone Systems, arising out of the person's
services as a director or executive officer of Turnstone Systems, any of our
subsidiaries or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
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<PAGE> 50
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. A stockholder's investment in us may be adversely affected to the
extent we pay the costs of settlement or damage awards against our directors and
officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
EXECUTIVE COMPENSATION
The following table indicates the compensation earned for services rendered
to Turnstone Systems in all capacities for the fiscal year ended December 31,
1998 by our Chief Executive Officer and our next most highly compensated
executive officers who earned more than $100,000 during the fiscal year. We
refer to the officers identified in the table as the "Named Executive Officers".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS COMPENSATION
---------------------------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Richard N. Tinsley.................. $163,109 $ -- -- $34,361(1)
President and Chief Executive
Officer
P. Kingston Duffie.................. 146,058 -- -- 574(2)
Chief Technology Officer
Eric J. Andrews..................... 116,667 -- 632,500 19,852(3)
Vice President, Marketing
</TABLE>
- -------------------------
(1) Represents $33,177 in relocation expenses, $1,168 in medical insurance
premiums and $16 in life insurance premiums.
(2) Represents $558 in medical insurance premiums and $16 in life insurance
premiums.
(3) Represents $19,433 in relocation expenses, $403 in medical insurance
premiums and $16 in life insurance premiums.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information relating to stock options granted
to each of the Named Executive Officers during the fiscal year ended December
31, 1998. All of these options were granted under our 1998 Stock Plan and have a
term of 10 years, subject to earlier termination in the event the optionee's
services to us cease.
The exercise prices of the options we grant are equal to the fair market
value of our common stock, as determined by our board of directors, on the date
of grant. The exercise price may be paid by cash or check.
Under our 1998 Stock Plan, in the event of an acquisition of Turnstone
Systems by merger or asset purchase, the vesting of each outstanding option
listed below will accelerate to the extent that it would have been vested on the
date twelve months following the effectiveness of the acquisition. Furthermore,
if the acquiring corporation fails to assume or substitute the remaining
unvested options,
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<PAGE> 51
then all of the option shares will become immediately vested. See "-- Incentive
Stock Plans -- 1998 Stock Plan".
The potential realizable values at 5% and 10% appreciation are calculated
by assuming that the fair market value of the common stock on the date of grant
appreciates at the indicated annual rate, compounded annually for the entire
ten-year term of the option. In addition, we have assumed that the option is
exercised and sold on the last day of its term at the appreciated price. Stock
price appreciation rates of 5% and 10% are assumed based on the rules of the
Securities and Exchange Commission and do not represent our prediction of the
performance of our stock price.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS DURING PRICE PER EXPIRATION ---------------------
NAME GRANTED PERIOD SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard N. Tinsley............. -- --% $ -- -- $ -- $ --
P. Kingston Duffie............. -- -- -- -- -- --
Eric J. Andrews................ 632,500 19.01 0.05 2/9/08 19,889 50,402
</TABLE>
AGGREGATE OPTION EXERCISES AND OPTION VALUES
The following table provides information relating to option exercises by
the Named Executive Officers during the fiscal year ended December 31, 1998, and
the number and value of vested and unvested options held by the Named Executive
Officers as of December 31, 1998.
The amounts in the "Value Realized" column are equal to the fair market
value of the purchased shares on the option exercise date, less the exercise
price paid for such shares.
Options granted under our 1998 Stock Plan are immediately exercisable for
all the option shares, but we may repurchase, at the original exercise price,
any shares purchased under such options if the optionee's service relationship
with us terminates before the shares are vested. The 1998 Stock Plan will
terminate upon the closing of this offering, and no further option grants will
be made under this plan. Options granted under the 2000 Stock Plan, which will
become effective upon the closing of this offering, will not be exercisable
prior to vesting.
No Named Executive Officer held an outstanding option to acquire our stock
at December 31, 1998. All shares held by Mr. Andrews were unvested and subject
to a repurchase option in favor of Turnstone Systems in the event of a
termination of Mr. Andrew's employment.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
SHARES AT OPTIONS AT
ACQUIRED ON DECEMBER 31, 1998 DECEMBER 31, 1998
EXERCISE VALUE -------------------- --------------------
NAME OPTIONS REALIZED VESTED UNVESTED VESTED UNVESTED
---- ------------ ------------ -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard N. Tinsley............ -- $ -- -- -- $ -- $ --
P. Kingston Duffie............ -- -- -- -- -- --
Eric J. Andrews............... 632,500 31,625 -- -- -- --
</TABLE>
CHANGE OF CONTROL AGREEMENTS
Our 1998 Stock Plan and our 2000 Stock Plan provide, under certain
circumstances, for accelerated vesting upon a change of control of Turnstone
Systems. The terms of this accelerated vesting are disclosed in detail below
under "Incentive Stock Plans".
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<PAGE> 52
In January 1998, Richard N. Tinsley, P. Kingston Duffie and M. Denise
Savoie each purchased shares of our common stock pursuant to founders'
restricted stock purchase agreements. These agreements contain vesting
provisions that give us the option to repurchase unvested shares at the original
purchase price if the purchaser's service to the company is terminated. Upon a
change of control of Turnstone, in each case, 75% of their shares that have not
yet vested will vest and will no longer be subject to repurchase by us. If his
or her employment with the surviving corporation is terminated within twelve
months following the change of control, then all of his or her shares that have
not yet vested will vest and will no longer be subject to repurchase.
INCENTIVE STOCK PLANS
1998 STOCK PLAN
Our 1998 Stock Plan was adopted by our board of directors in January 1998
and subsequently approved by our stockholders. Our 1998 Stock Plan provides for
the grant of incentive stock options, nonstatutory stock options, or stock
purchase rights to employees, directors and consultants. A total of 6,324,000
shares of common stock have been reserved for issuance under the 1998 Stock
Plan.
As of September 30, 1999, options to purchase 2,999,000 shares of common
stock were outstanding and 480,776 shares were available for future grant. Upon
completion of this offering, the 1998 Stock Plan will terminate, no further
option grants will be made under the 1998 Stock Plan, and any shares reserved
but not yet issued under the 1998 Stock Plan will be available for grant under
the 2000 Stock Plan.
Our board of directors administers the 1998 Stock Plan and may determine
the terms of options granted, including the exercise price, the number of shares
subject to individual option awards and the vesting period of the options. The
board of directors has delegated responsibility for approving option grants to
non-officer employees to the stock option grant committee. These grants must be
within guidelines prescribed by the board of directors. Grants to executive
officers or directors, however, require approval of the board of directors. The
exercise price of incentive stock option grants to employees cannot be lower
than 100% of the fair market value of the common stock on the date of grant. In
the case of incentive stock options granted to employees who are holders of more
than 10% of our voting power, the exercise price cannot be less than 110% of the
fair market value. The term of an incentive stock option cannot exceed ten
years, and the term of an incentive stock option granted to a holder of more
than 10% of our voting power cannot exceed five years. Nonstatutory options
granted to an employee, consultant or director who, at the time of grant, holds
stock representing more than ten percent of the voting power of our capital
stock, must have an exercise price of least 110% of the fair market value on the
date of grant. Nonstatutory options granted to any other employee, consultant or
director must have an exercise price of at least 85% of the fair market value on
the date of grant. Stock purchase rights may be issued either alone, in addition
to, or in tandem with other awards granted under the 1998 Stock Plan and/or cash
awards made outside of the 1998 Stock Plan. Options and stock purchase rights
granted under our 1998 Stock Plan generally become exercisable at the rate of
25% of the total number of shares subject to the option twelve months after the
date of grant, and approximately 2.1% of the shares subject to the option each
month thereafter. The board of directors may amend, modify or terminate the 1998
Stock Plan at any time as long as such amendment, modification or termination
does not impair the rights of plan participants with respect to outstanding
options under the 1998 Stock Plan.
Option agreements under the 1998 Stock Plan between Turnstone Systems and
each optionholder allow optionholders to purchase shares issuable under their
option agreements before the shares have vested. All unvested shares issued
pursuant to this early exercise provision are subject to repurchase by us at the
original exercise price. All stock certificates representing exercised but
unvested shares are held in escrow until the shares have vested.
In the event we are acquired in a merger or asset purchase, each
outstanding option and stock purchase right granted under the 1998 Stock Plan
will vest to the extent that the option or stock
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<PAGE> 53
purchase right would have been vested on the date twelve months following the
effectiveness of the acquisition, and the successor corporation will assume or
substitute an equivalent option for each outstanding option under the 1998 Stock
Plan. In the event that the successor corporation refuses to assume or issue an
equivalent option for each outstanding option, these options will become fully
vested. Following an assumption or substitution in connection with a merger, if
the successor corporation terminates an optionholder's status as an employee or
consultant, other than for cause, within twelve months following the merger,
then the optionholder's options will become fully vested. Furthermore, in event
of a merger, options or stock purchase rights held by an outside director will
become fully vested.
2000 STOCK PLAN
Our 2000 Stock Plan was adopted by our Board of Directors in November 1999.
It will become effective upon the effectiveness of this offering. The 2000 Stock
Plan provides for the grant of incentive stock options, nonstatutory stock
options and stock purchase rights to employees, directors and consultants. The
2000 Stock Plan also provides for nondiscretionary grants of nonstatutory
options to outside directors. Under this nondiscretionary grant mechanism, each
outside director will receive an option to purchase 30,000 shares of our common
stock at the time he or she first becomes a director. This initial grant will
vest over three years in three equal annual installments. In addition, beginning
with the 2001 Annual Meeting of Stockholders, each outside director who has
served as a director for at least the six preceding months will receive an
option to acquire an additional 10,000 shares. Each of these incremental option
grants will vest in full one year after all options previously granted to the
director have fully vested. All options granted to outside directors under this
nondiscretionary grant mechanism will have an exercise price equal to the fair
market value of our common stock on the date of grant.
A total of 5,000,000 shares of common stock have been reserved for issuance
under the 2000 Stock Plan. No shares or options have been issued under the 2000
Stock Plan prior to this offering. An annual increase in the share reserve will
be added on the first day of our fiscal year, beginning in 2001, equal to the
lesser of:
- 5,000,000 shares;
- 6% of the outstanding shares on that date; or
- a lesser amount determined by the board of directors.
Our board of directors will administer the 2000 Stock Plan and will
determine the terms of options granted, including the exercise price, the number
of shares subject to individual option awards and the vesting period of options.
The exercise price of incentive stock option grants to employees cannot be lower
than 100% of the fair market value on the date of grant and, in the case of
incentive stock options granted to employees who are holders of more than 10% of
our voting power, not less than 110% of the fair market value. The exercise
price of options granted to outside directors will be 100% of the fair market
value on the date of grant. The term of an incentive stock option cannot exceed
ten years, and the term of an incentive stock option granted to a holder of more
than 10% of our voting power cannot exceed five years. Stock purchase rights may
be issued either alone, in addition to, or in tandem with other awards granted
under the 2000 Stock Plan and/or cash awards made outside of the 2000 Stock
Plan. Options and stock purchase rights granted under our 2000 Stock Plan
generally become exercisable at the rate of 25% of the total number of shares
subject to the option twelve months after the date of grant and approximately
2.1% of the shares subject to the option each month thereafter.
In the event we are acquired in a merger or asset purchase, each
outstanding option and stock purchase right granted under the 2000 Stock Plan
will vest to the extent that such option or stock purchase right would have been
vested on the date twelve months following the effectiveness of the acquisition,
provided the successor corporation assumes or substitutes an equivalent option
for each
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<PAGE> 54
outstanding option. In the event that the successor corporation refuses to
assume or issue an equivalent option for each outstanding option, such options
will become fully vested and exercisable. Following an assumption or
substitution in connection with a merger, if the successor corporation
terminates an optionholder's status as an employee or consultant other than for
cause within twelve months following such merger, then the optionholder's
options will become fully vested. Furthermore, in event of a merger, options or
stock purchase rights held by an outside director will vest fully.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan was adopted by our Board of Directors
in November 1999. It will become effective upon the effectiveness of this
offering. The 2000 Employee Stock Purchase Plan provides our employees with an
opportunity to purchase our common stock through accumulated payroll deductions.
A total of 500,000 shares of common stock has been reserved for issuance under
the 2000 Employee Stock Purchase Plan, none of which has been issued prior to
this offering. An annual increase in the share reserve under the 2000 Employee
Stock Purchase Plan will be added on the first day of our fiscal year, beginning
in 2001, equal to the lesser of:
- 750,000 shares;
- 2% of the outstanding shares on that date; or
- a lesser amount determined by the board of directors.
The 2000 Employee Stock Purchase Plan will be administered by our board of
directors or by a committee appointed by the board of directors. The 2000
Employee Stock Purchase Plan will permit eligible employees to purchase common
stock through payroll deductions of up to 15% of an employee's base compensation
on each pay day during the offering period, provided that no employee may
purchase more than 1,000 shares in any six-month purchase period, and in no
event may an employee purchase more than $25,000 worth of stock, determined at
the fair market value of the shares at the time the option is granted, in one
calendar year. Any employee employed by us on a given enrollment date is
eligible to participate during that offering period, provided they remain
employed by us for the duration of that offering period. Unless the board of
directors or its committee determines otherwise, the 2000 Employee Stock
Purchase Plan will be implemented in a series of overlapping offering periods,
each approximately twenty-four months in duration. However, the first offering
period will be approximately 27 months in duration, ending on the last trading
day on or before October 31, 2001. Offering periods contain four consecutive,
six-month purchase periods, and will begin on the first trading day on or after
May 1 and November 1 of each year and terminate on the last trading day in the
period twenty-four months later. The first purchase period will commence on the
date upon which the registration statement, of which this prospectus is a part,
is declared effective by the Securities and Exchange Commission and terminate on
the last trading day in the period ending October 31, 2000. In the event we are
acquired, offering and purchase periods then in progress will be shortened and
all options automatically exercised. The price at which common stock will be
purchased under the 2000 Employee Stock Purchase Plan is equal to 85% of the
fair market value of our common stock on the first day of the applicable
offering period or the last day of the applicable purchase period, whichever is
lower. Employees may end their participation in the offering period at any time,
and participation automatically ends on termination of employment. The board of
directors may amend, modify or terminate the 2000 Employee Stock Purchase Plan
at any time as long as the amendment, modification or termination does not
impair vesting rights of plan participants. The 2000 Employee Stock Purchase
Plan will terminate in January 2010, unless terminated earlier in accordance
with its provisions.
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CERTAIN TRANSACTIONS
The following is a description of transactions since inception (January
1998) to which we have been a party, in which the amount involved in the
transaction exceeds $60,000 and in which any director, executive officer or
holder of more than 5% of our capital stock had or will have a direct or
indirect material interest other than compensation arrangements which are
otherwise required to be described under "Management".
COMMON STOCK
On January 2, 1998, we issued 3,027,145 shares of common stock to P.
Kingston Duffie, one of our founders and directors and our Chief Technical
Officer; 2,421,210 shares of common stock to M. Denise Savoie, one of our
founders and our Chief Financial Officer; and 3,027,145 shares of common stock
to Richard N. Tinsley, one of our founders and directors and our President and
Chief Executive Officer, in each case at a price per share of $0.001. All these
shares were issued pursuant to founders' restricted stock purchase agreements
and are subject to a right of repurchase by Turnstone Systems, which lapses
monthly over a period of four years. Mr. Duffie's and Mr. Tinsley's shares will
become fully vested on October 1, 2001, and Ms. Savoie's shares will become
fully vested on January 19, 2002. Vesting is subject to acceleration upon a
change of control involving a merger, sale of all or substantially all of our
assets or a shift in 50% or more of the voting power of our capital stock. Our
repurchase rights lapse immediately after a change of control with respect to
75% of the shares then subject to the repurchase right and lapse with respect to
all remaining unvested shares in the event the individual is constructively
terminated or terminated without cause within twelve months after the change in
control.
PREFERRED STOCK
The following table summarizes the sales of preferred stock to our
executive officers, directors and principal stockholders, and persons and
entities associated with them, since our inception. Each share of Series A
Preferred Stock and Series B Preferred Stock automatically converts into one
share of common stock upon the closing of this offering. See "Principal
Stockholders" for a summary of the affiliations of each of the persons and
entities described below.
<TABLE>
<CAPTION>
TOTAL VALUE OF
SERIES A SERIES B PREFERRED STOCK
PREFERRED STOCK PREFERRED STOCK PURCHASED
--------------- --------------- ---------------
<S> <C> <C> <C>
Date of sale..................................... January 1998 January 1999
Price per share.................................. $ 0.50 $ 1.95
Entities associated with our directors
Entities Associated with Institutional Venture
Partners.................................... 4,800,000 1,213,882 $4,767,070
Entities Associated with Benchmark Capital..... 1,900,000 480,496 1,886,967
Entities Associated with Matrix Partners....... 4,800,000 1,213,882 4,767,070
</TABLE>
Andrew W. Verhalen, one of our directors, is a general partner of Matrix
Partners, one of our investors. Geoffrey Y. Yang, another director, is a general
partner of Institutional Venture Partners.
STOCK OPTION GRANTS TO DIRECTORS
In June 1999, we granted to John K. Peters an option to purchase 40,000
shares of our common stock under our 1998 Stock Plan at a per-share exercise
price of $1.75, the fair market value of a share of our common stock as
determined by the board of directors on the date of the grant. The option was
fully vested at the time of grant. Mr. Peters exercised the entire option in
June 1999.
In September 1999, we granted to Mr. Peters an option to purchase 60,000
shares under our 1998 Stock Plan at a per-share exercise price of $5.00, the
fair market value of a share of our common stock as determined by the board of
directors on the date of the grant. The option is subject
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<PAGE> 56
to vesting over a four year period. None of these shares will vest during the
twelve months after the grant date. The shares will begin vesting on the first
anniversary of the date of grant on a monthly basis thereafter until all the
shares are vested. The stock option agreement between Turnstone Systems and Mr.
Peters provides for the early exercise of the option, and Mr. Peters exercised
the entire option in September 1999. Under the 1998 Stock Plan, if Mr. Peters'
service as a director is terminated, any unvested shares are subject to
repurchase by us at the original per-share purchase price.
In September 1999, we granted to Robert J. Finocchio, Jr. a stock option to
purchase 100,000 shares under our 1998 Stock Plan at a per-share exercise price
of $5.00, the fair market value of a share of our common stock on the date of
the grant. The option is subject to vesting over a four year period, with an
equal portion of the shares subject to the option vesting each month until all
the shares are vested.
INDEMNIFICATION
We have entered into indemnification agreements with each of our directors
and executive officers. These indemnification agreements require us to indemnify
our directors and officers to the fullest extent permitted by Delaware law. See
"Management -- Limitations on Liability and Indemnification".
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<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table provides information relating to the beneficial
ownership of our common stock by each of the following as of September 30, 1999
and after completion of this offering:
- each stockholder who owns at least 5% of our common stock;
- each of the Named Executive Officers and each of our directors; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined based on the rules of the Securities and
Exchange Commission. The column entitled "Number of Shares Underlying Options
Beneficially Owned" indicates the number of shares of common stock subject to
options or warrants held by that person that are currently exercisable or that
will become exercisable within 60 days after September 30, 1999. These shares
are not deemed outstanding for purposes of computing percentage ownership of any
other person. Unless otherwise indicated in the footnotes, these stockholders
have sole voting or investment power with respect to all shares, subject to
applicable community property laws.
The number and percentage of shares beneficially owned are based on (A)
26,266,654 shares outstanding as of September 30, 1999, (B) the issuance of
shares in connection with this offering in this offering, and (C)
the assumed exercise for cash of a warrant to purchase 90,000 shares.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES SHARES
NUMBER OF UNDERLYING BENEFICIALLY OWNED
SHARES OPTIONS --------------------
BENEFICIALLY BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OWNED OFFERING OFFERING
------------------------------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Institutional Venture Partners(2).......... 6,013,882 -- 22.9%
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, California 94025
Matrix Partners(3)......................... 6,013,882 -- 22.9%
Bay Colony Corporate Center
1000 Winter Street, Suite 4500
Waltham, Massachusetts 02451
Benchmark Capital Partners(4).............. 2,380,496 -- 9.1%
2480 Sand Hill Road
Suite 200
Menlo Park, California 94025
Andrew W. Verhalen(5)...................... 6,013,882 -- 22.9%
Geoffrey Y. Yang(6)........................ 6,013,882 -- 22.9%
P. Kingston Duffie(7)...................... 3,027,145 -- 11.5%
Richard N. Tinsley(8)...................... 3,027,145 -- 11.5%
M. Denise Savoie(9)........................ 2,421,210 -- 9.2%
Eric Andrews(10)........................... 632,500 -- 2.4%
John K. Peters............................. 100,000 -- * *
Robert J. Finocchio, Jr.................... -- 100,000 * *
All directors and officers as a group (12
persons)(11)............................. 21,656,764 1,044,000 83.1%
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1%.
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<PAGE> 58
(1) Excludes shares issuable upon options exercisable within 60 days of
September 30, 1999.
(2) Includes 5,595,719 shares held by Institutional Venture Partners VII, L.P.,
117,850 shares held by Institutional Venture Management VII, L.P., 178,925
shares held by IVP Founders Fund I, L.P., and 121,388 shares held by IVP
Broadband Fund L.P. Geoffrey Y. Yang, a director of Turnstone Systems, is a
general partner of Institutional Venture Partners.
(3) Includes 5,412,493 shares held by Matrix Partners V, L.P. and 601,389
shares held by Matrix Entrepreneurs Fund. Andrew Verhalen, a director of
Turnstone Systems, is a general partner of Matrix Partners.
(4) Includes 1,614,548 shares held by Benchmark Capital Partners II, L.P.,
170,927 shares held by Benchmark Founders' Fund II, L.P., 87,401 shares
held by Benchmark Founders' Fund II-A, L.P., 27,124 shares held by
Benchmark Members' Fund, L.P., and 480,496 shares held by Benchmark Capital
Partners II, L.P. as nominee for Benchmark Capital Partners II, L.P.,
Benchmark Founders' Fund II, L.P., Benchmark Founders' Fund II-A, L.P. and
Benchmark Members' Fund, L.P.
(5) Includes 6,013,882 shares held by entities affiliated with Matrix Partners,
of which Mr. Verhalen is a general partner. Mr. Verhalen disclaims
beneficial ownership of the shares held by the entities affiliated with
Matrix Partners, except to the extent of his pecuniary interest as a
general partner.
(6) Includes 6,013,882 shares held by entities affiliated with Institutional
Venture Partners, of which Mr. Yang is a general partner. Mr. Yang
disclaims beneficial ownership of the shares held by the entities
affiliated with Institutional Venture Partners, except to the extent of his
pecuniary interest as a general partner.
(7) Includes 1,576,638 shares subject to repurchase as of September 30, 1999 by
Turnstone Systems upon a termination of employment.
(8) Includes 1,576,638 shares subject to repurchase as of September 30, 1999 by
Turnstone Systems upon a termination of employment.
(9) Includes 1,412,373 shares subject to repurchase as of September 30, 1999 by
Turnstone Systems upon a termination of employment.
(10) Includes 382,135 shares subject to repurchase as of September 30, 1999 by
Turnstone Systems upon a termination of employment.
(11) Includes a total of 5,333,160 shares subject to repurchase as of September
30, 1999 by Turnstone Systems upon a termination of employment.
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<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, we will be authorized to issue
200,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value. Immediately after this offering,
based on shares outstanding as of September 30, 1999, we estimate there will be
approximately shares of common stock outstanding, 2,999,000 shares of
common stock will be issuable upon exercise of outstanding options assuming
there are no additional option grants after September 30, 1999 and that no
shares of preferred stock will be issued and outstanding.
The figure for outstanding shares of common stock upon completion of this
offering reflects the issuance and conversion into common stock of 90,000 shares
of Series A Preferred Stock in connection with the assumed exercise for cash of
a warrant.
Upon completion of this offering, our certificate of incorporation and
bylaws will contain provisions that are intended to enhance the likelihood of
continuity and stability in the composition of the board of directors and which
may have the effect of delaying, deferring, or preventing a future takeover or
change in control of Turnstone Systems unless such takeover or change in control
is approved by our board of directors.
COMMON STOCK
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Holders of common stock do not have
cumulative voting rights, and therefore, holders of a majority of the shares
voting for the election of directors can elect all of the directors. If this
occurs, the holders of the remaining shares will not be able to elect any
directors.
Holders of our common stock are entitled to receive any dividends that our
board of directors may declare from funds legally available for distribution. We
have never declared or paid cash dividends on our capital stock and expect to
retain future earnings, if any, for use in the operation and expansion of our
business. As a result, we do not anticipate paying any cash dividends in the
foreseeable future. In addition, we may in the future enter agreements with
lenders that could prohibit our paying cash dividends. In the event of
liquidation, dissolution or winding up of Turnstone, the holders of common stock
are entitled to share ratably in all assets legally available for distribution
after payment of all debts and other liabilities and subject to the prior rights
of any holders of preferred stock then outstanding. Holders of common stock have
no preemptive or other subscription or conversion rights. There are no
redemption or sinking fund provisions applicable to the common stock.
PREFERRED STOCK
Effective upon the closing of this offering, we will be authorized to issue
5,000,000 shares of undesignated preferred stock. The board of directors has the
authority to issue the preferred stock in one or more series and to fix the
price, rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption price, liquidation preferences and the number of shares
constituting a series or the designation of such series, without any further
vote or action by our stockholders. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control of Turnstone without further action by the
stockholders and may adversely affect the market price of, and the voting and
other rights of, the holders of common stock. The issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. We have
no current plans to issue any shares of preferred stock.
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<PAGE> 60
WARRANTS
As of September 30, 1999, there were warrants outstanding to purchase
135,000 shares of Series A Preferred Stock.
Comdisco holds a warrant to purchase 90,000 shares of Series A Preferred
Stock that will expire on the effectiveness of our initial public offering. We
have presumed this warrant will be exercised prior to the closing of this
offering. The Comdisco warrant is exercisable at a price of $0.50 per share and
may be exercised on a cash or cashless basis. In order to effect a cashless
exercise, Comdisco would surrender the right to acquire shares under the warrant
with a fair market value equal to the aggregate exercise price of the shares
being exercised. For purposes of determining our outstanding capitalization in
this Prospectus, we have assumed that Comdisco exercises its warrant for cash in
connection with the offering.
Silicon Valley Bank holds a warrant to purchase 45,000 shares of Series A
Preferred Stock, expiring on June 1, 2003. The exercise price for this warrant
is $0.50 per share. The exercise price for the warrant issued to Silicon Valley
Bank is payable by cash, cancellation of indebtedness or a combination of the
two.
REGISTRATION RIGHTS
Set forth below is a summary of the registration rights of the holders of
our Series A Preferred Stock and Series B Preferred Stock, each of which will
convert into common stock immediately prior to the consummation of this
offering.
DEMAND REGISTRATION. Beginning six months following the closing date of the
initial public offering of our common stock, the holders of registration rights
may request us to register shares of common stock subject to our right, upon
advice of our underwriters, to reduce the number of shares proposed to be
registered. In order to exercise these rights, at least 66 2/3% of the holders
of registrable securities must make the request for registration, and these
holders must request registration of at least 33 1/3% of the registrable
securities then outstanding. We are obligated to effect only two registrations
under this provision. If shares requested to be included in a registration must
be excluded due to market factors, as determined by the managing underwriter,
the shares registered on behalf of the selling stockholders will be allocated
among all holders of shares with rights to be included in the registration on
the basis of the number of shares with such rights held by such stockholders.
PIGGYBACK REGISTRATION RIGHTS. Holders of registration rights have
unlimited rights to request that shares be included in any company-initiated
registration of common stock other than registrations of employee benefit plans
or relating to this offering or business combinations subject to Rule 145 under
the Securities Act. The underwriters may, for marketing reasons, limit the
shares requested to be registered on behalf of all stockholders having the right
to request inclusion in such registration. In addition, we have the right to
terminate any registration we initiated prior to its effectiveness regardless of
any request for inclusion by any stockholders.
FORM S-3 REGISTRATIONS. After we have qualified for registration on Form
S-3, which will not be available until at least 12 months after we become a
public reporting company, holders of registration rights may request in writing
that we effect an unlimited number of registrations of such shares on Form S-3
if the gross offering price of the shares to be so registered in each such
registration exceeds $1,000,000. We are not obligated to effect a registration
on Form S-3 prior to expiration of 90 days following effectiveness of the most
recent registration requested by the holders.
TRANSFERABILITY. The registration rights are transferable upon notice by
the holder to us of the transfer, provided that the transferee or assignee is an
affiliate or constituent partner of the transferor or assignor, or the
transferee or assignee acquires at least 500,000 shares, and assumes the rights
and obligations of the transferor for such shares.
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<PAGE> 61
TERMINATION. The registration rights will terminate for holders of less
than 500,000 shares at such time after this offering as the registrable shares
held by that holder may be sold within any three-month period pursuant to Rule
144 of the Securities Act of 1933, and for holders of 500,000 or more shares, on
the first to occur of three years after the date we become subject to the
reporting requirements of Section 12 of the Exchange Act, and the date on which
the holder may sell all its shares pursuant to Rule 144.
ANTITAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER DOCUMENTS
Some of the provisions of our certificate of incorporation and bylaws that
will become effective upon the completion of this offering could make the
following more difficult:
- acquisition of Turnstone Systems by means of a tender offer;
- acquisition of Turnstone Systems by means of a proxy contest or
otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are generally expected to discourage
coercive takeover practices and inadequate takeover bids. These provisions are
also designed to encourage persons seeking to acquire control of Turnstone
Systems to first negotiate with our board. We believe that the benefits of
increased protection resulting from our potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure
Turnstone Systems outweigh the disadvantages of discouraging these proposals
because we believe that the negotiation of these proposals could result in an
improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS. Upon completion of this offering, our
board of directors will be divided into three classes. The directors in each
class will serve for a three-year term, one class being elected each year by our
stockholders. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of Turnstone Systems because it generally makes it more difficult
for stockholders to replace a majority of the directors. See
"Management -- Board of Directors" for a further discussion of the structure of
the Board of Directors.
STOCKHOLDER MEETINGS. Upon completion of this offering, under our bylaws,
only the board of directors, the chairman of the board, the president and chief
executive officer may call special meetings of stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Upon completion of this offering, our bylaws will contain advance
notice procedures with respect to stockholder proposals and the nomination of
candidates for election as directors, other than nominations made by or at the
direction of the board of directors or a committee of the board.
ELIMINATION OF CUMULATIVE VOTING. Upon completion of this offering, our
certificate of incorporation and bylaws will not provide for cumulate voting in
the election of directors.
UNDESIGNATED PREFERRED STOCK. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other right or preferences that could impede the success of any
attempt to change control of Turnstone Systems. These and other provisions may
have the effect of deferring hostile takeovers or delaying changes in control or
management of Turnstone.
AMENDMENT OF CHARTER PROVISIONS. The amendment of the above provisions
relating to the election and removal of directors and stockholder meetings will
require approval by holders of at least 66 2/3% of the outstanding common stock.
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EFFECT OF DELAWARE ANTITAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation law which
regulates corporate acquisitions. Section 203 generally prevents Delaware
corporations, including those whose securities are listed for trading on the
Nasdaq National Market, from engaging in a business combination with any
interested stockholder for three years following the date that such stockholder
became an interested stockholder. A business combination includes, among other
things, a merger or consolidation involving Turnstone Systems and the interested
stockholder and the sale of more than 10% of our assets. Generally, an
interested stockholder is any entity or person beneficially owning 15% or more
of our outstanding voting stock and any entity or person affiliated with or
controlling or controlled by such entity or person. A Delaware corporation may
"opt out" of Section 203 with an express provision in its original certificate
of incorporation or an express provision in its certification of incorporation
or bylaws resulting from amendments approved by the holders of at least a
majority of the corporation's outstanding voting shares. We have not "opted out"
of Section 203.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is BankBoston, N.A.
and can be contacted by phone at (781) 575-3120.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of our common stock.
Upon completion of this offering, we will have outstanding shares
of common stock, assuming the issuance of shares of common stock
offered hereby, the exercise for cash of a warrant to acquire 90,000 shares of
our capital stock that would otherwise expire upon this offering and no other
exercise of outstanding options or warrants after September 30, 1999. Of these
shares, the shares sold in the offering will be freely tradable
without restriction or further registration under the Securities Act. However,
if shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act, their sales of shares would be subject to certain
limitations and restrictions that are described below.
The remaining 26,266,654 shares of common stock held by existing
stockholders were issued and sold by Turnstone Systems in reliance on exemptions
from the registration requirements of the Securities Act. Of these shares,
26,266,654 shares will be subject to "lock-up" agreements described below on the
effective date of the offering. On the effective date of the offering, all
shares that would otherwise be eligible for sale pursuant to Rule 144(k) will be
subject to lock-up agreements with the underwriters. Upon expiration of the
lock-up agreements 180 days after the date of this Prospectus, 26,266,654 shares
will become eligible for sale, subject in most cases to the limitations of Rule
144. In addition, Silicon Valley Bank could exercise its warrant for 45,000
shares of our capital stock and holders of stock options could exercise such
options and sell certain of the shares issued upon exercise as described below.
<TABLE>
<CAPTION>
APPROXIMATE SHARES
ELIGIBLE
DAYS AFTER EFFECTIVE DATE OF THIS PROSPECTUS FOR FUTURE SALE COMMENT
- -------------------------------------------- ------------------ -------
<S> <C> <C>
On Effective Date......................... Shares sold in the offering
90 Days after Effective Date.............. Freely tradable shares saleable
under Rule 144(k) that are not
subject to the Lock-up.
May 15, 2000.............................. 10% of shares subject to lock-up
released; shares saleable under
Rules 144 and 701.
3 days after results for the fiscal quarter
ended June 30, 2000 are released........ Additional 25% of shares subject to
lock-up released; shares saleable
under Rules 144 and 701.
180 Days after Effective Date............. Lock-up on remaining shares
released; shares saleable under
Rules 144 and 701.
</TABLE>
As of September 30, 1999, assuming the exercise of the Comdisco warrant for
90,000 shares of our capital stock, there was one warrant for the purchase of
45,000 shares of our capital stock at a per share exercise price of $0.50 per
share, and there were a total of 2,999,000 shares of common stock subject to
outstanding options under our 1998 Stock Plan, all of which are subject to
lock-up agreements. Immediately after the completion of the offering, we intend
to file registration statements on Form S-8 under the Securities Act to register
all of the shares of common stock issued or reserved for future issuance under
our 1998 Stock Plan, as amended, the 2000 Stock Plan, and 2000 Employee Stock
Purchase Plan. On the date 180 days after the effective date of this Prospectus,
a total of shares of common stock subject to outstanding options
will be vested. After the effective dates of the registration statements on Form
S-8, shares purchased upon
60
<PAGE> 64
exercise of options granted pursuant to the 1998 Stock Plan, as amended, the
2000 Stock Plan, and 2000 Employee Stock Purchase Plan generally would be
available for resale in the public market.
Our officers, directors and stockholders have agreed not to sell or
otherwise dispose of any of their shares for the time periods described above.
Goldman Sachs & Co., however, may in its sole discretion, at any time without
notice, release all or any portion of the shares subject to lock-up agreements.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchases shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of the offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other than
"affiliates," as defined in Rule 144, subject only to the manner of sale
provisions of Rule 144 and by "affiliates" under Rule 144 without compliance
with its one year minimum holding period requirement.
61
<PAGE> 65
UNDERWRITING
Turnstone Systems and the underwriters for the offering (the
"Underwriters") 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., Dain Rauscher Incorporated and
BancBoston Robertson Stephens Inc. are the representatives of the Underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .......................................
Dain Rauscher 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 Turnstone Systems to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the Underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the Underwriters by Turnstone Systems. Such
amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Turnstone Systems
----------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share................................................... $ $
Total....................................................... $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the Underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
Turnstone Systems and its directors, officers and significant stockholders
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 the representatives and except as described in "Shares Eligible for
Future Sale". This agreement does not apply to any existing employee benefit
plans. See "Shares Eligible for Future Sale" for a discussion of certain
transfer restrictions.
Prior to the offering, there has been no public market for our common
stock. The initial public offering price was negotiated among Turnstone Systems
and the representatives. Among the factors considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, were Turnstone Systems' historical performance, estimates of the
business potential and earnings prospects of Turnstone Systems, an assessment of
Turnstone Systems' management and the consideration of the above factors in
relation to market valuation of companies in related business.
62
<PAGE> 66
The common stock will be quoted on the Nasdaq National Market under the
symbol "TSTN".
In connection with the offerings, 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 certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such Underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
Underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The Underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Turnstone Systems estimates that its share of the total expenses of the
offering, excluding underwriting discounts and commissions, will be
approximately $ .
Turnstone Systems has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
63
<PAGE> 67
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California, and for the underwriters by Sullivan & Cromwell, Los Angeles,
California. Thomas C. DeFilipps, a member of Wilson Sonsini Goodrich & Rosati,
is Secretary of Turnstone Systems. As of the date of this prospectus, WS
Investment Company 97B and WS Investment Company 98B, each an investment
partnership composed of certain current and former members of and persons
associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, in
addition to certain current individual members of Wilson Sonsini Goodrich &
Rosati, Professional Corporation, beneficially own an aggregate of 125,290
shares of preferred stock which will automatically convert into our common stock
upon the close of this offering.
EXPERTS
The financial statements of Turnstone Systems, Inc. as of December 31, 1998
and for the period from January 2, 1998 (inception) to December 31, 1998, have
been included herein and in the registration statement in reliance on the report
of KPMG LLP, independent auditors, appearing elsewhere herein, and upon the
authority of that firm as experts in accounting and auditing.
WHERE YOU MAY FIND ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the shares of common stock in
this offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to Turnstone
Systems and our common stock, we refer you to the registration statement and the
exhibits and schedule that were filed with the registration statement.
Statements contained in this prospectus about the contents of any contract or
any other document that is filed as an exhibit to the registration statement are
not necessarily complete, and we refer you to the full text of the contract or
other document filed as an exhibit to the registration statement. A copy of the
registration statement and the exhibits and schedule that were filed with the
registration statement may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of
the registration statement may be obtained from the SEC upon payment of the
prescribed fee. You may call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. The Securities and Exchange Commission maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The address of the site is http://www.sec.gov.
Upon completion of this offering, Turnstone Systems will become subject to
the information and periodic reporting requirements of the Securities Exchange
Act of 1934, and, in accordance with the requirements of the Securities Exchange
Act of 1934, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. These periodic reports, proxy
statements and other information will be available for inspection and copying at
the regional offices, public reference facilities and web site of the Securities
and Exchange Commission referred to above.
We intend to send to our stockholders annual reports containing audited
financial statements for each fiscal year and quarterly reports containing
unaudited interim financial statements for the first three quarters of each
fiscal year.
64
<PAGE> 68
TURNSTONE SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG LLP Independent Auditors..................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 69
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Turnstone Systems, Inc.
We have audited the accompanying balance sheet of Turnstone Systems, Inc.
(the Company), a development stage company, as of December 31, 1998, and the
related statements of operations, stockholders' equity, and cash flows for the
period from January 2, 1998 (inception) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Turnstone Systems, Inc. (a
development stage company) as of December 31, 1998, and the results of its
operations and its cash flows for the period from January 2, 1998 (inception) to
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
KPMG LLP
Mountain View, California
November 5, 1999
F-2
<PAGE> 70
TURNSTONE SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
DECEMBER 31, ------------------------------
1998 ACTUAL PRO FORMA
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $1,338 $ 6,952 $ 6,997
Accounts receivable, net of allowance for doubtful
accounts and sales returns of $0 at December 31, 1998
and $226 at September 30, 1999........................ -- 4,776 4,776
Inventory................................................ -- 3,281 3,281
Prepaid expenses and other current assets................ 96 161 161
------ ------- -------
Total current assets............................. 1,434 15,170 15,215
Property and equipment net................................. 508 894 894
Other assets............................................... 28 133 133
------ ------- -------
Total assets..................................... $1,970 $16,197 $16,242
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current obligations under capital leases................. $ 129 $ 213 $ 213
Accounts payable......................................... 182 3,817 3,817
Accrued compensation and benefits........................ 129 924 924
Other accrued expenses................................... 34 526 526
Deferred revenue......................................... -- 1,152 1,152
------ ------- -------
Total current liabilities........................ 474 6,632 6,632
Long-term obligations under capital leases, net of current
portion.................................................. 270 300 300
Other long-term liabilities................................ -- 34 34
------ ------- -------
Total liabilities................................ 744 6,966 6,966
------ ------- -------
Commitments
Stockholders' equity:
Convertible preferred stock Series A, $0.001 par value,
12,100 shares authorized; 11,680 shares issued and
outstanding; aggregate liquidation preference of
$5,840 (Pro forma -- no shares outstanding).......... 12 12 --
Convertible preferred stock Series B, $0.001 par value, 0
and 3,477 shares authorized; 0 and 3,177 shares issued
and outstanding at December 31, 1998 and September 30,
1999, respectively; aggregate liquidation preference
of $6,195 (Pro forma -- no shares outstanding)....... -- 3 --
Common stock, $0.001 stated value, 35,000 shares
authorized; 10,162 and 11,320 shares issued and
outstanding at December 31, 1998 and September 30,
1999, respectively (pro forma -- 26,267 shares
outstanding);......................................... 10 11 26
Additional paid-in capital............................... 6,119 21,075 21,120
Deferred stock compensation.............................. (166) (6,414) (6,414)
Accumulated deficit...................................... (4,749) (5,456) (5,456)
------ ------- -------
Total stockholders' equity....................... 1,226 9,231 9,276
------ ------- -------
$1,970 $16,197 $16,242
====== ======= =======
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 71
TURNSTONE SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ ------------------
1998 1998 1999
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues............................................. $ -- $ -- $14,704
Cost of revenues......................................... -- -- 6,920
------- ------- -------
Gross profit............................................. -- -- 7,784
Operating expenses:
Research and development............................... 3,462 2,236 3,609
Sales and marketing.................................... 737 339 2,429
General and administrative............................. 713 493 943
Amortization of deferred stock compensation............ 29 7 1,559
------- ------- -------
Total operating expenses....................... 4,941 3,075 8,540
------- ------- -------
Operating loss........................................... (4,941) (3,075) (756)
------- ------- -------
Interest income.......................................... 205 175 149
Interest and other expense............................... (12) (4) (37)
------- ------- -------
Total interest and other income................ 193 171 112
------- ------- -------
Loss before income tax expense........................... (4,748) (2,904) (644)
Income tax expense....................................... 1 -- 63
------- ------- -------
Net loss................................................. $(4,749) $(2,904) $ (707)
======= ======= =======
Basic and diluted net loss per share..................... $ (3.51) $ (2.81) $ (0.18)
======= ======= =======
Weighted-average shares outstanding used in computing
basic and diluted net loss per share................... 1,354 1,035 3,971
======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 72
TURNSTONE SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- --------------- PAID-IN DEFERRED STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
------ ------ ------ ------ ---------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of restricted common
stock to founders................. -- $-- 8,475 $ 8 $ -- $ -- $ -- $ 8
Issuance of Series A preferred
stock, net of issuance costs.... 11,680 12 -- -- 5,801 -- -- 5,813
Issuance of common stock pursuant
to stock plans to employees and
consultants..................... -- -- 1,687 2 83 -- -- 85
Issuance of convertible preferred
stock warrants.................. -- -- -- -- 40 -- -- 40
Deferred stock compensation....... -- -- -- -- 195 (195) -- --
Amortization of deferred stock
compensation.................... -- -- -- -- -- 29 -- 29
Net loss.......................... -- -- -- -- -- -- (4,749) (4,749)
------ --- ------ --- ------- ------- ------- -------
Balance at December 31, 1998...... 11,680 12 10,162 10 6,119 (166) (4,749) 1,226
Issuance of Series B preferred
stock, net of issuance costs
(unaudited)..................... 3,177 3 -- -- 6,171 -- -- 6,174
Issuance of common stock pursuant
to stock plans to employees and
consultants (unaudited)......... -- -- 1,158 1 978 -- -- 979
Deferred stock compensation
(unaudited)..................... -- -- -- -- 7,807 (7,807) -- --
Amortization of deferred stock
compensation (unaudited)........ -- -- -- -- -- 1,559 -- 1,559
Net loss (unaudited).............. -- -- -- -- -- -- (707) (707)
------ --- ------ --- ------- ------- ------- -------
Balance at September 30, 1999
(unaudited)..................... 14,857 $15 11,320 $11 $21,075 $(6,414) $(5,456) $ 9,231
====== === ====== === ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 73
TURNSTONE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1998 1998 1999
------------ -------- -------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $ (4,749) $ (2,904) $ (707)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation...................................... 108 64 212
Amortization of deferred stock compensation....... 29 7 1,559
Common stock issued for services.................. 2 2 13
Provision for doubtful accounts and sales
returns......................................... -- -- 226
Changes in assets and liabilities:
Accounts receivable............................. -- -- (5,002)
Inventory....................................... -- -- (3,281)
Prepaid expenses and other current assets....... (56) (68) (65)
Accounts payable................................ 182 219 3,635
Accrued compensation and benefits............... 129 82 795
Other current and long-term liabilities......... 34 -- 526
Deferred revenue................................ -- -- 1,152
-------- -------- -------
Net cash used in operating activities........ (4,321) (2,598) (937)
INVESTING ACTIVITIES
Acquisition of property and equipment.................. (194) (490) (332)
Increase in other assets............................... (28) (29) (105)
-------- -------- -------
Net cash used in investing activities........ (222) (519) (437)
FINANCING ACTIVITIES
Net proceeds from issuance of convertible preferred
stock................................................ 5,813 5,813 6,174
Proceeds from issuance of common stock................. 91 71 966
Principal payments of capital lease obligations........ (23) -- (152)
-------- -------- -------
Net cash provided by financing activities.... 5,881 5,884 6,988
-------- -------- -------
Net increase in cash and cash equivalents.............. 1,338 2,767 5,614
Cash and cash equivalents at beginning of period....... -- -- 1,338
-------- -------- -------
Cash and cash equivalents at end of period............. $ 1,338 $ 2,767 $ 6,952
======== ======== =======
Supplemental disclosures of cash flow information:
Cash paid for interest............................... $ -- $ -- $ 14
Noncash investing and financing activities:
Equipment purchases under capital leases........ $ 422 $ 10 $ 266
Deferred stock compensation..................... $ 195 $ 8 $ 7,807
Convertible preferred stock warrant issuances... $ 40 $ -- $ --
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 74
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY
Turnstone Systems, Inc. (the Company) has been engaged in the development
and marketing of the Copper CrossConnect(TM) family of products, which enable
the automation and remote management of line installation, qualification and
maintenance. The Company commenced the commercial sale of its products in the
first quarter of 1999.
During 1998, the Company was considered to be in the development stage as
the Company was engaged primarily in obtaining financing and personnel and in
developing its products.
The Company was incorporated on January 2, 1998. The period from this date
to December 31, 1998 is referred to in the accompanying financial statements and
notes as "1998" or the "Year ended December 31, 1998".
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of 90
days or less when acquired to be cash equivalents. Cash equivalents as of
December 31, 1998 and September 30, 1999 consist primarily of money market
funds.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities. SFAS No. 115 requires entities to classify investments in debt and
equity securities with readily determined fair values as "held-to-maturity,"
"available-for-sale" or "trading" and establishes accounting and reporting
requirements for each classification. The Company has classified its investment
securities as available-for-sale. Available-for-sale securities are carried at
fair value, which approximates amortized cost for debt securities.
INVENTORIES
Inventories consist of finished products which a third party manufactures
for the Company. Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market. Under the contract with the third-party
manufacturer, the Company has liability for inventories of component parts which
become excess or obsolete to the manufacturer as a result of certain Company
actions, including the effect of product design changes. As of September 30,
1999 the Company had no reserves for excess or obsolete inventory.
LONG-LIVED ASSETS
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the straight-line method over the estimated useful
lives of the respective assets or, if shorter, the lease terms for assets
acquired under capital leases. Useful lives and lease terms generally have been
three years.
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,
F-7
<PAGE> 75
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment, assuming
collectibility of the resulting receivable is probable. When the arrangement
with the customer includes future obligations or obtaining customer acceptance,
revenue is recognized when those obligations have been met or customer
acceptance has been received.
Revenue from services and support provided under the Company's
comprehensive maintenance programs is deferred and recognized on a straight line
basis over the period of the contract.
Deferred revenue represents amounts received from customers in respect of
the comprehensive maintenance program in advance of services and support to be
provided.
Revenue from transactions involving the Company's software application
products is accounted for in accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, SOP 98-4, Deferral of Effective Date of SOP 97-2,
and SOP 98-9, Software Revenue Recognition with Respect to Certain Arrangements.
To date, revenue from such transactions has not been significant.
RESEARCH AND DEVELOPMENT COSTS
Development costs incurred in the research and development of new products
and enhancements to existing products are expensed as incurred until the product
has been completed, tested and is ready for commercial manufacturing. To date,
hardware development projects have been completed concurrent with the
establishment of commercial manufacturing and accordingly no costs have been
capitalized. To date, software development projects have been completed
concurrent with the establishment of technological feasibility in the form of a
working model and, accordingly, no costs have been capitalized.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, to account for
employee stock-based compensation. Accordingly, compensation cost is recorded on
the date of grant to the extent the fair value of the underlying share of common
stock exceeds the exercise price for a stock option or the purchase price for a
share of common stock. The compensation cost is amortized as a charge against
income on an accelerated basis over the vesting terms of stock options in
accordance with Financial Accounting Standards Board (FASB) Interpretation No.
28. Pursuant to SFAS No. 123, the Company discloses the pro-forma effect of
using the fair value method of accounting for employee stock-based compensation
arrangements.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those
F-8
<PAGE> 76
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the statement of operations in the period that includes the enactment date. A
valuation allowance is established when necessary to reduce deferred tax assets
to the amounts expected to be recovered.
COMPREHENSIVE LOSS
The Company has no significant components of other comprehensive loss, and,
accordingly, the comprehensive loss is the same as net loss for the periods
presented.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock excluding shares of restricted stock subject
to repurchase summarized below. Dilutive net loss per share is computed using
the weighted-average number of shares of common stock outstanding and, when
dilutive, potential shares of restricted common stock subject to repurchase,
common stock from options and warrants using the treasury stock method and from
convertible securities using the "as-if converted basis". Potential common
shares that could dilute earnings per share in future periods but which have
been excluded from the determination of diluted net loss per share because the
effect of such shares would have been anti-dilutive are as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ----------------
1998 1998 1999
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Shares issuable under stock options................ 1,500 1,226 2,999
Shares of restricted stock subject to repurchase
Founders......................................... 6,155 6,685 4,566
Other employees.................................. 1,664 1,664 1,762
Shares issuable pursuant to warrants to purchase
convertible preferred stock...................... 135 135 135
Shares of convertible preferred stock on an "as-if-
converted" basis................................. 11,680 11,680 14,857
------ ------ ------
21,134 21,390 24,319
====== ====== ======
</TABLE>
The weighted-average exercise price of stock options outstanding was $0.07
for the year ended December 31, 1998, $0.05 for the nine months ended September
30, 1998, and $1.75 for the nine months ended September 30, 1999. The
weighted-average purchase price of shares of common stock subject to the
Company's right of repurchase was $0.001 for each period for shares issued to
the Company's founders and was $0.05 for the year ended December 31, 1998 and
the nine months ended September 30, 1998 and $0.44 for the nine month period
ended September 30, 1999 for shares issued to other employees. The exercise
price of warrants to purchase shares of convertible preferred stock is $0.50 for
each period. Each share of Series A and Series B convertible preferred stock is
convertible into one share of common stock.
F-9
<PAGE> 77
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The carrying values of the Company's financial instruments, consisting of
cash and cash equivalents, accounts receivable, accounts payable and obligations
under capital leases, approximate fair values.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents and
accounts receivable. The Company's cash and cash equivalents are maintained with
three highly accredited financial institutions. To reduce credit risk with
respect to accounts receivable, the Company performs ongoing evaluations of the
financial condition of its customers. The Company does not require collateral
from its customers. As of September 30, 1999, three of the Company's customers
accounted for 37%, 28%, and 23% of the accounts receivable balance.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain 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 expenses during the reporting period.
Actual results could differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company is required to adopt SFAS No.
133 as amended by SFAS No. 137, in 2001. SFAS No. 133 establishes methods of
accounting for derivative financial activities related to those instruments as
well as to other activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited. In the opinion of management,
the accompanying unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial position at such date and the
operations and cash flows for the periods then ended. Operating results for the
nine months ended September 30, 1999 are not necessarily indicative of results
that may be expected for the year ending December 31, 1999.
INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA BALANCE SHEET
In November 1999, the Board of Directors authorized the filing of a
registration statement with the SEC that would permit the Company to sell shares
of the Company's common stock in connection with a proposed initial public
offering (IPO). If the offering is consummated under the terms presently
anticipated, the warrants to purchase 90,000 shares of Series A convertible
preferred stock issued to a financing company will be exercised for cash of
$45,000 and all shares of Series A and Series B convertible preferred stock will
be converted into shares of common stock upon closing of the
F-10
<PAGE> 78
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
proposed IPO. The exercise of the warrants and the conversion of the convertible
preferred stock have been reflected in the accompanying unaudited pro forma
balance sheet at September 30, 1999.
Pro forma basic and diluted net loss per share data assuming conversion of
the shares of Series A and Series B convertible preferred stock into shares of
common stock had occurred at the beginning of the period (or date of issuance if
later) are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
-------------
<S> <C> <C>
Pro forma net loss........................................ $(4,749) $ (707)
Pro forma basic and diluted net loss per share............ $ (0.38) $ (0.04)
======= =======
Shares used in calculation of pro forma basic and diluted
net loss per share...................................... 12,636 18,718
======= =======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures.................................. $ 93 $ 238
Computer equipment and software......................... 444 789
Test equipment.......................................... 79 187
---- ------
616 1,214
Less accumulated depreciation and amortization.......... 108 320
---- ------
$508 $ 894
---- ------
</TABLE>
Property and equipment includes assets under capital leases of $447,000
less accumulated depreciation of $93,000 at December 31, 1998 and $718,000 less
accumulated depreciation of $229,000 at September 30, 1999.
F-11
<PAGE> 79
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
4. INCOME TAXES
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Current:
Federal............................................... $ -- $ 45
State................................................. 1 18
---- ------
Total current tax expense.......................... 1 63
---- ------
Deferred:
Federal............................................... -- --
State................................................. -- --
---- ------
Total deferred tax expense......................... -- --
---- ------
Total income tax expense........................... $ 1 $ 63
==== ======
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34% to pretax loss as a result of the following (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Federal tax at statutory rate........................... $(1,662) $ (240)
State taxes, net of federal income tax benefit.......... 1 19
Alternative minimum taxes............................... -- 45
Permanent differences -- primarily nondeductible
compensation.......................................... 2 613
Net operating losses (utilized) not benefited........... 1,660 (374)
------- -------
Total income tax expense.............................. $ 1 $ 63
======= =======
</TABLE>
F-12
<PAGE> 80
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
The types of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities consist of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves................................. $ 24 $ 279
State income taxes.................................... -- 6
Plant and equipment................................... 23 --
Startup costs......................................... 814 680
Deferred revenues..................................... -- 222
Net operating loss and credit carryforwards........... 1,410 864
------- -------
Gross deferred tax assets.......................... 2,271 2,051
Valuation allowance..................................... (2,271) (2,044)
------- -------
Total deferred tax assets.......................... -- 7
------- -------
Deferred tax liabilities:
Property and equipment................................ -- (7)
------- -------
Total deferred tax liabilities..................... -- (7)
------- -------
Net deferred tax assets................................. $ -- $ --
======= =======
</TABLE>
Management has established a valuation allowance for the portion of
deferred tax assets for which realization is uncertain. The change in the
valuation allowance for deferred tax assets as of December 31, 1998 and
September 30, 1999 was an increase of $2,271,000 and a decrease of $227,000,
respectively.
As of December 31, 1998, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $2,704,000 and
$770,000, respectively, available to reduce future income subject to income
taxes. The federal and state net operating loss carryforwards expire in 2018
through 2019 and 2006, respectively.
As of December 31, 1998, the Company has research and other credit
carryforwards for federal income tax purposes of approximately $142,000 and
$350,000, respectively, available to reduce future income taxes. The federal
research credit carryforwards expire in 2018 through 2019. As of December 31,
1998, the Company also has research and other credit carryforwards for state
income tax purposes of approximately $110,000 and $180,000, respectively,
available to reduce future income taxes.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and credit carryforwards in the event of an
"ownership change" for tax purposes, as defined in Section 382 of the Internal
Revenue Code. The company has not yet determined if an ownership change has
occurred. If such ownership change has occurred, utilization of the net
operating losses will be subject to an annual limitation in future years.
F-13
<PAGE> 81
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
5. BANK LINE OF CREDIT
On June 1, 1998, the Company entered into a $900,000 line of credit
agreement with a bank. Borrowings under the line of credit bear interest at the
bank's prime rate, mature on December 1, 1999, and are collateralized by certain
assets of the Company other than intellectual property. As of December 31, 1998
and September 30, 1999 there were no borrowings outstanding under this
agreement.
In connection with the line of credit agreement, the Company issued to the
bank warrants to purchase 45,000 shares of Series A convertible preferred stock
at an exercise price of $0.50 per share. The warrants are exercisable through
June 1, 2008. No warrants have been exercised as of September 30, 1999. The fair
value of the warrants was determined to be $13,000, calculated using the
Black-Scholes option pricing model, using the following assumptions: no
dividends; contractual term of five years; risk-free interest rate of 5.5%; and
expected volatility of 65%. The fair value of the warrants has been recorded as
additional paid-in capital and is being amortized as interest expense over the
term of the line of credit agreement.
6. LEASE OBLIGATIONS AND COMMITMENTS
In July 1998, the Company entered into an leasing agreement with a
financing company, which allows the Company through October 29, 1999 to draw up
to $900,000 for the lease of hardware and $600,000 for the lease of software.
The leases are accounted for as capital leases. The lease obligations under this
agreement are repayable in 36 equal monthly installments of principal plus
interest commencing on the individual lease inception dates and are secured by
the leased assets.
In connection with the equipment leasing agreement, the Company issued to
the financing company warrants to purchase 90,000 shares of Series A convertible
preferred stock at a price of $0.50 per share. The warrants expire on July 30,
2003 or upon the effectiveness of the Company's initial public offering, if
earlier. No warrants have been exercised as of September 30, 1999. The fair
value of the warrants was determined to be $27,000, calculated using the
Black-Scholes option pricing model, using the following assumptions: no
dividends; contractual term of five years; risk-free interest rate of 5.5%; and
expected volatility of 65%. The fair value of the warrants has been recorded as
additional paid-in capital and is being amortized as interest expense over the
term of the lease agreement.
The Company is also obligated under certain noncancelable operating leases
for office space, which requires the Company to pay related property taxes and
normal maintenance. The leases expire in 2002 and 2003.
F-14
<PAGE> 82
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
Future minimum payments required under capital and operating leases as of
September 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1999 (three months)......................................... $ 60 $ 142
2000........................................................ 240 567
2001........................................................ 216 567
2002........................................................ 39 320
2003........................................................ -- 12
---- ------
Total future minimum lease payments......................... 555 $1,608
======
Less imputed interest....................................... 42
----
Present value of future minimum lease payments under capital
leases.................................................... 513
Less current portion........................................ 213
----
Long-term portion........................................... $300
====
</TABLE>
In September 1999, the Company entered into a noncancelable operating
sublease of a facility the Company previously occupied. Payments to be received
under this sublease are as follows: 1999 -- $23,000; 2000 -- $193,000;
2001 -- $199,000; 2002 -- $205,000; and 2003 -- $17,000.
7. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In 1998, the Company issued 11,680,000 shares of Series A convertible
preferred stock at a price of $0.50 per share for cash proceeds of $5,813,000,
net of issuance costs of $27,000.
In 1999, the Company issued 3,176,930 shares of Series B convertible
preferred stock at a price of $1.95 per share for cash proceeds of $6,174,000,
net of issuance costs of $21,000. Amortization of deferred stock compensation in
the nine month period ended September 30, 1999 includes $325,000 of compensation
related to the issuance of Series B convertible preferred stock at a price less
than deemed fair value.
The rights, preferences, and privileges of the holders of Series A and
Series B convertible preferred stock are as follows:
- - each share of Series A and Series B preferred stock is convertible into one
share of common stock, subject to certain antidilution provisions.
- - shares of Series A and Series B preferred stock automatically convert to
common stock on the earlier of consummation of an underwritten initial public
offering in which the aggregate proceeds are at least $10,000,000 or $1.50 per
share offering; or the date specified by written consent or agreement of at
least two-thirds of the Series A and Series B stockholders. Holders of Series
A and Series B preferred stock are entitled to noncumulative annual dividends
of $0.04 per share and $0.16 per share, respectively, if and when declared by
the Company's Board of Directors.
- - Series A and Series B preferred stock votes equally with the shares of common
stock on an "as-if-converted" basis, but also has class voting rights as
provided by law and in the Certificate of Incorporation.
F-15
<PAGE> 83
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
- - holders of Series A and Series B preferred stock have a liquidation preference
of $0.50 per share and $1.95 per share, respectively, plus all declared but
unpaid dividends.
COMMON STOCK
In 1998, the Company issued 8,475,500 shares of restricted common stock to
the three founding members of the Company at a price of $0.001 per share. The
shares are subject to a right of repurchase by the Company, which lapses monthly
over four year periods ending in October 2001 and January 2002, or on the
occurrence of a change of control event. Upon termination of employment, the
Company may repurchase all unvested shares at $0.001 per share. The Company
maintains a right of first refusal with respect to restricted common stock.
STOCK PLAN
The 1998 Stock Plan permits the Company to grant employees, outside
directors, and consultants qualified stock options, nonstatutory stock options
or stock purchase rights to purchase shares of the Company's common stock.
Options generally vest 25% with respect to the number granted upon the first
anniversary date of the option grant and the remainder vest in equal monthly
installments over the 36 months thereafter. Options are exercisable immediately.
Shares issued upon exercise of non-vested stock options are subject to the
Company's right to repurchase at the original exercise price. The Company's
repurchase right lapses in accordance with the vesting schedule for the stock
options.
Under the 1998 Stock Plan, the Company issued 22,690 shares of common stock
in 1998 and 15,534 shares during the nine months ended September 30, 1999 in
exchange for consulting services. The aggregate estimated fair value of these
shares and the resulting expense was $2,000 for the 1998 issuances and $25,000
for the 1999 issuances.
In July 1999, the Company approved an increase in the number of shares of
Common Stock reserved for issuance under the Company's 1998 Stock Plan from
5,324,000 to 6,324,000 shares.
F-16
<PAGE> 84
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
A summary of the status of the Company's 1998 Stock Plan is as follows (in
thousands except for per share data):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------
WEIGHTED- WEIGHTED-
SHARES AVERAGE AVERAGE
AVAILABLE FOR NUMBER EXERCISE GRANT DATE
GRANT OF SHARES PRICE FAIR VALUE
------------- --------- --------- ----------
<S> <C> <C> <C> <C>
Authorized................................... 5,324 --
Granted with exercise price:
Less than fair value....................... (520) 520 $0.13 $0.50
Equal to fair value........................ (2,807) 2,807 0.05
Exercised.................................... -- (1,687) 0.05
Canceled..................................... 140 (140) 0.05
Forfeited.................................... -- -- --
------ ------
Balances as of December 31, 1998............. 2,137 1,500 0.07
Authorized (unaudited)....................... 1,000 -- --
Granted with exercise price:
Less than fair value (unaudited)........... (2,656) 2,656 2.31 $5.12
Exercised (unaudited)........................ -- (1,157) 0.85
------ ------
Balance as of September 30, 1999
(unaudited)................................ 481 2,999 $1.75
====== ======
Options exercisable as of September 30, 1999
(unaudited)................................ 2,999
======
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING
RANGE OF CONTRACTUAL
EXERCISE NUMBER LIFE
PRICES OUTSTANDING (YEAR)
- ------------ -------------- -----------
(IN THOUSANDS)
--------------
<S> <C> <C>
$0.05 - 0.07 874 8.61
0.20 - 0.50 443 9.37
0.95 508 9.58
1.15 - 1.95 214 9.69
2.05 - 3.15 372 9.81
3.65 - 4.15 190 9.90
5.00 100 9.94
6.45 - 7.05 298 9.98
-----
2,999
=====
</TABLE>
The Company uses the intrinsic-value method prescribed by APB No. 25 in
accounting for its stock-based compensation arrangements for employees whereby
compensation cost is recognized to the extent the fair value of the underlying
common stock exceeds the exercise price of the stock options at the date of
grant. Deferred stock compensation of $195,000 in 1998 and $7,807,000 in the
nine-month period ended September 30, 1999 has been recorded for the excess of
the fair value of
F-17
<PAGE> 85
TURNSTONE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
the common stock underlying the options at the grant date over the exercise
price of the options. These amounts are being amortized on an accelerated basis
over the vesting period, generally four years, consistent with the method
described in FASB Interpretation No. 28. Amortization of deferred compensation
was $29,000 in 1998 and $1,559,000 in the nine-month period ended September 30,
1999. Had compensation cost for the Company's stock-based compensation plan been
determined consistent with the fair value approach set forth in SFAS No. 123,
the Company's net losses would have been as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -----------------
(UNAUDITED)
<S> <C> <C>
Net loss -- as reported............................. $(4,749) $ (707)
======= ======
Net loss -- pro forma............................... $(4,750) $ (990)
======= ======
Basic and diluted net loss per share -- as
reported.......................................... $ (3.51) $(0.18)
======= ======
Basic and diluted net loss per share -- pro forma... $ (3.51) $(0.25)
======= ======
</TABLE>
The fair value of options granted are estimated on the date of grant using
the minimum value method with the following weighted-average assumptions: no
dividend yield; risk-free interest rates of 5.12% in 1998 and 5.21% in the
nine-month period ended September 30, 1999, and an expected life of four years.
8. SEGMENT INFORMATION
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information," establishes standards for the manner in which public companies
report information about operating segments, products and services, geographic
areas and major customers in annual and interim financial statements. The method
of determining what information to report is based on the way that management
organizes the operating segments within the enterprise for making operating
decisions and assessing financial performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). From inception of the Company through
September 30, 1999, the Company has consisted of one product line. The CEO
reviews financial information on an entity level basis for purposes of making
operating decisions and assessing financial performance. The entity level
financial information is the same as the information presented in the
accompanying statements of operations. Accordingly, the Company has determined
that it is engaged in a single operating segment.
All of the Company's revenues have been derived from customers located in
the United States and all of the Company's assets are located in the United
States.
For the nine-month period ended September 30, 1999, 55% and 24% of the
Company's revenues were attributable to two separate customers.
F-18
<PAGE> 86
TURNSTONE SYSTEMS
[ART WORK]
<PAGE> 87
- ------------------------------------------------------
- ------------------------------------------------------
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................... 1
Risk Factors......................... 4
Note Regarding Forward-looking
Statements......................... 17
Use of Proceeds...................... 18
Dividend Policy...................... 18
Capitalization....................... 19
Dilution............................. 20
Selected Financial Data.............. 21
Management's Discussion And Analysis
of Financial Condition And Results
of Operations...................... 22
Business............................. 31
Management........................... 43
Certain Transactions................. 52
Principal Stockholders............... 54
Description of Capital Stock......... 56
Shares Eligible For Future Sale...... 60
Underwriting......................... 62
Validity of Common Stock............. 64
Experts.............................. 64
Where You May Find Additional
Information........................ 64
Index To Financial Statements........ F-1
</TABLE>
-------------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
Shares
TURNSTONE SYSTEMS, INC.
Common Stock
-------------------------
[Turnstone Systems, Inc. Logo]
-------------------------
GOLDMAN, SACHS & CO.
DAIN RAUSCHER WESSELS
ROBERTSON STEPHENS
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Turnstone Systems in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 13,427
NASD filing fee............................................. 5,330
Nasdaq National Market listing fee.......................... 22,250
Printing and engraving costs................................ 300,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 400,000
Blue Sky fees and expenses.................................. 20,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous expenses...................................... 28,993
----------
Total............................................. $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article XI of Turnstone Systems' Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
Article VI of Turnstone Systems' Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of Turnstone Systems if
such person acted in good faith and in a manner reasonably believed to be in and
not opposed to the best interest of Turnstone Systems, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his or her conduct was unlawful.
Turnstone Systems has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
Turnstone Systems' Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our incorporation in January 1998, we have issued unregistered
securities to a limited number of persons as described below.
None of these transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule
701 pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients of securities in
each such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with Turnstone Systems, to
information about Turnstone Systems.
II-1
<PAGE> 89
1. In January 1998, we issued and sold 8,475,500 shares of common stock to
founders at a purchase price per share of $0.001.
2. Pursuant to our 1998 Stock Plan, from inception to September 30, 1999 we
issued and sold an aggregate of 2,844,224 shares of common stock to
certain employees, officers, directors and consultants.
3. On January 12, 1998 and February 27, 1998, we issued and sold a total of
11,680,000 shares of Series A Preferred Stock to a total of 13 investors
for an aggregate purchase price of $5,840,000.
4. On June 1, 1998, in connection with a credit facility, we issued to one
party a warrant to purchase 45,000 shares of our Series A Preferred
Stock for an aggregate exercise price of $22,500.
5. One July 29, 1998, in connection with certain equipment leases, we
issued to one party a warrant to purchase 90,000 shares of our Series A
Preferred Stock for an aggregate exercise price of $45,000.
6. On January 12, 1999 and June 21, 1999, we issued and sold a total of
3,176,930 shares of Series B Preferred Stock to a total of 12 investors
for an aggregate purchase price of $6,195,013.50.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1A Certificate of Incorporation of Turnstone Systems currently
in effect
3.1B Certificate of Incorporation of Turnstone Systems to be in
effect after the closing of the offering made under this
Registration Statement
3.2A Bylaws of Turnstone Systems currently in effect
3.2B Bylaws of Turnstone Systems to be in effect after the
closing of the offering made under this Registration
Statement
4.1* Form of Common Stock certificate
4.2 Registration Rights Agreement, dated January 12, 1998 by and
among Turnstone Systems and certain stockholders of
Turnstone Systems named therein, as amended as of January
12, 1999
4.3 Warrant to purchase shares of Series A Preferred Stock of
Turnstone Systems issued to Silicon Valley Bank
4.4 Form of Founder's Restricted Stock Purchase Agreement
entered into as of January 2, 1998 between Turnstone Systems
and each of P. Kingston Duffie, M. Denise Savoie and Richard
N. Tinsley
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 Form of Indemnification Agreement entered into by Turnstone
Systems with each of its directors and executive officers
10.2 1998 Stock Plan and forms of agreement thereunder
10.3 2000 Stock Plan and forms of agreement thereunder
10.4 2000 Employee Stock Purchase Plan and forms of agreement
thereunder
10.5** Manufacturing Agreement dated as of October 16, 1998,
between Turnstone Systems and A-Plus Manufacturing
Corporation
10.6* OEM Purchase Agreement, dated effective as of September 1,
1999, between Turnstone Systems and Lucent Technologies
Inc., as amended as of September 28, 1999
10.7 Sublease dated June 16, 1999, between Turnstone Systems and
Finisar Corporation
</TABLE>
II-2
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
23.1 Consent of KPMG LLP, independent auditors
23.2* Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-4)
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment.
** Confidential treatment requested.
(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
Turnstone Systems hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by Turnstone Systems for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of Turnstone Systems pursuant to the provisions referenced in Item 14 of
this registration statement or otherwise, Turnstone Systems 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 Turnstone Systems of
expenses incurred or paid by a director, officer, or controlling person of
Turnstone Systems in the successful defense of any action, suit or proceeding)
is asserted by a director, officer or controlling person in connection with the
securities being registered hereunder, Turnstone Systems 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.
Turnstone Systems hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by Turnstone Systems pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 91
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 the 22nd day of November, 1999.
TURNSTONE SYSTEMS, INC.
By: /s/ RICHARD N. TINSLEY
------------------------------------
Richard N. Tinsley
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 Richard N. Tinsley and Denise
Savoie, and each of them acting individually, as his or her true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him or
her in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments or any abbreviated
registration statement and any amendments thereto filed pursuant to Rule 462(b)
increasing the number of securities for which registration is sought), and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, with full power of each to act alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his, her or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD N. TINSLEY President, Chief Executive November 22, 1999
- ----------------------------------------------------- Officer and Director
Richard N. Tinsley (Principal Executive
Officer)
/s/ P. KINGSTON DUFFIE Chief Technology Officer November 22, 1999
- ----------------------------------------------------- and Director
P. Kingston Duffie
/s/ M. DENISE SAVOIE Chief Financial Officer and November 22, 1999
- ----------------------------------------------------- Vice President, Business
M. Denise Savoie Operations (Principal
Financial and Accounting
Officer)
/s/ ROBERT J. FINOCCHIO, JR. Director November 22, 1999
- -----------------------------------------------------
Robert J. Finocchio, Jr.
/s/ JOHN K. PETERS Director November 22, 1999
- -----------------------------------------------------
John K. Peters
</TABLE>
II-4
<PAGE> 92
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ANDREW W. VERHALEN Director November 22, 1999
- -----------------------------------------------------
Andrew W. Verhalen
/s/ GEOFFREY Y. YANG Director November 22, 1999
- -----------------------------------------------------
Geoffrey Y. Yang
</TABLE>
II-5
<PAGE> 93
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1A Certificate of Incorporation of Turnstone Systems currently
in effect
3.1B Certificate of Incorporation of Turnstone Systems to be in
effect after the closing of the offering made under this
Registration Statement
3.2A Bylaws of Turnstone Systems currently in effect
3.2B Bylaws of Turnstone Systems to be in effect after the
closing of the offering made under this Registration
Statement
4.1* Form of Common Stock certificate
4.2 Registration Rights Agreement, dated January 12, 1998 by and
among Turnstone Systems and certain stockholders of
Turnstone Systems named therein, as amended as of January
12, 1999
4.3 Warrant to purchase shares of Series A Preferred Stock of
Turnstone Systems issued to Silicon Valley Bank
4.4 Form of Founder's Restricted Stock Purchase Agreement
entered into as of January 2, 1998 between Turnstone Systems
and each of P. Kingston Duffie, M. Denise Savoie and Richard
N. Tinsley
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 Form of Indemnification Agreement entered into by Turnstone
Systems with each of its directors and executive officers
10.2 1998 Stock Plan and forms of agreement thereunder
10.3 2000 Stock Plan and forms of agreement thereunder
10.4 2000 Employee Stock Purchase Plan and forms of agreement
thereunder
10.5** Manufacturing Agreement dated as of October 16, 1998,
between Turnstone Systems and A-Plus Manufacturing
Corporation
10.6* OEM Purchase Agreement, dated effective as of September 1,
1999, between Turnstone Systems and Lucent Technologies
Inc., as amended as of September 28, 1999
10.7 Sublease dated June 16, 1999, between Turnstone Systems and
Finisar Corporation
23.1 Consent of KPMG, LLP, independent auditors
23.2* Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-4)
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment.
** Confidential treatment requested.
<PAGE> 1
EXHIBIT 1.1
TURNSTONE SYSTEMS, INC.
COMMON STOCK
-------------------------------------------------
UNDERWRITING AGREEMENT
_____________,2000
Goldman, Sachs & Co.,
BancBoston Robertson Stephens, Inc.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Turnstone Systems, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of _________ shares (the "Firm Shares") and, at the election of the
Underwriters, up to ______ additional shares (the "Optional Shares") of Common
Stock ("Stock") of the Company (the Firm Shares and the Optional Shares that the
Underwriters elect to purchase pursuant to Section 2 hereof being collectively
called the "Shares").
1. The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-....) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and regulations of the Commission under the Act is hereinafter called
a "Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any,
<PAGE> 2
including all exhibits thereto and including the information contained in the
form of final prospectus filed with the Commission pursuant to Rule 424(b) under
the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A
under the Act to be part of the Initial Registration Statement at the time it
was declared effective, each as amended at the time such part of the Initial
Registration Statement became effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement"; and such final
prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is
hereinafter called the "Prospectus";
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein:
(d) The Company has no subsidiaries and does not otherwise own or
control, directly or indirectly, any equity or similar ownership interest in any
corporation, association, joint venture, partnership, or similar business
arrangement or entity.
(e) The Company has not sustained since the date of the latest
audited financial statements included in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
not been any change in the capital stock (other than the exercise of stock
options or warrants and grants under the employee stock plans described in the
Prospectus) or long-term debt of the Company or any material adverse change, or
any development involving a prospective material adverse change, in or affecting
the general affairs, management, financial position, stockholders' equity or
results of operations of the Company, otherwise than as set forth or
contemplated in the Prospectus;
(f) The Company has good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned by
it, in each case free and clear of all liens, encumbrances and defects except
such as are described in the Prospectus or such as do not
2
<PAGE> 3
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company; and any real
property and buildings held under lease by the Company are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company;
(g) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction;
(h) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus
(provided that the rights, preferences and privileges of the currently
outstanding shares of the Company's preferred stock, all of which will convert
automatically into shares of Stock upon the Closing, are not described in the
Prospectus);
(i) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(j) The issue and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party or by
which the Company is bound or to which any of the property or assets of the
Company is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any of
their properties; and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the Company
of the transactions contemplated by this Agreement, except the registration
under the Act of the Shares and such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(k) The Company is not in violation of its Certificate of
Incorporation or By-laws or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any material
indenture, mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which it is a party or by which it or any of its properties may be
bound;
(l) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock, and under the
3
<PAGE> 4
caption "Underwriting", insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and fair;
(m) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a party or of which any
property of the Company is the subject which, if determined adversely to the
Company, would individually or in the aggregate have a material adverse effect
on the current or future financial position, stockholders' equity or results of
operations of the Company; and, to the Company's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or threatened by
others;
(n) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company", as such term is defined
in the Investment Company Act of 1940, as amended (the "Investment Company
Act");
(o) To the Company's knowledge, KPMG Peat Marwick, LLP, who have
certified certain financial statements of the Company and its subsidiaries, are
independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder; and (p) The Company has reviewed its
operations and any third parties with which the Company has a material
relationship to evaluate the extent to which the business or operations of the
Company will be affected by the Year 2000 Problem. As a result of such review,
the Company has no reason to believe, and does not believe, that the Year 2000
Problem will have a material adverse effect on the general affairs, management,
the current or future financial position, business prospects, stockholders'
equity or results of operations of the Company or result in any material loss or
interference with the Company's business or operations. The "Year 2000 Problem"
as used herein means any significant risk that computer hardware or software
used in the receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of mechanical or
electrical systems of any kind will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000.
2. Subject to the terms and conditions herein set forth, (a) the
Company agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $_____________, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to issue and sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company, at the purchase price per share set
forth in clause (a) of this Section 2, that portion of the number of Optional
Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Optional Shares by a fraction, the numerator of which is the maximum number
of Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to __________________ Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
sales of shares in excess of the number of Firm Shares. Any such election to
purchase Optional Shares may be exercised only by written notice from you to the
4
<PAGE> 5
Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be purchased
and the date on which such Optional Shares are to be delivered, as determined by
you but in no event earlier than the First Time of Delivery (as defined in
Section 4 hereof) or, unless you and the Company otherwise agree in writing,
earlier than two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in
such names as Goldman, Sachs & Co. may request upon at least forty-eight
hours' prior notice to the Company shall be delivered by or on behalf of
the Company to Goldman, Sachs & Co., through the facilities of the
Depository Trust Company ("DTC"), for the account of such Underwriter,
against payment by or on behalf of such Underwriter of the purchase
price therefor by wire transfer of Federal (same-day) funds to the
account specified by the Company to Goldman, Sachs & Co. at least
forty-eight hours in advance. The Company will cause the certificates
representing the Shares to be made available for checking and packaging
at least twenty-four hours prior to the Time of Delivery (as defined
below) with respect thereto at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of such delivery
and payment shall be, with respect to the Firm Shares, 9:30 a.m., New
York City time, on _____________, 2000 or such other time and date as
Goldman, Sachs & Co. and the Company may agree upon in writing, and,
with respect to the Optional Shares, 9:30 a.m., New York time, on the
date specified by Goldman, Sachs & Co. in the written notice given by
Goldman, Sachs & Co. of the Underwriters' election to purchase such
Optional Shares, or such other time and date as Goldman, Sachs & Co. and
the Company may agree upon in writing. Such time and date for delivery
of the Firm Shares is herein called the "First Time of Delivery", such
time and date for delivery of the Optional Shares, if not the First Time
of Delivery, is herein called the "Second Time of Delivery", and each
such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by
the Underwriters pursuant to Section 7 hereof, will be delivered at the
offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
650 Page Mill Road, Palo Alto, California 94304 (the "Closing
Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing
Location at 5:00 p.m., New York City time, on the New York Business Day
next preceding such Time of Delivery, at which meeting the final drafts
of the documents to be delivered pursuant to the preceding sentence will
be available for review by the parties hereto. For the purposes of this
Section 4, "New York Business Day" shall mean each Monday, Tuesday,
Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
5
<PAGE> 6
(a) To prepare the Prospectus in a form approved by you and
to file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus which shall be disapproved by you
promptly after reasonable notice thereof; to advise you, promptly after
it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed
and to furnish you with copies thereof; to advise you, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, of
the initiation or threatening of any proceeding for any such purpose, or
of any request by the Commission for the amending or supplementing of
the Registration Statement or Prospectus or for additional information;
and, in the event of the issuance of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use its
best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you
may reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as you may request and to
comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary
to complete the distribution of the Shares, provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time to
time, to furnish the Underwriters with copies of the Prospectus in New
York City in such quantities as you may reasonably request, and, if the
delivery of a prospectus is required at any time prior to the expiration
of nine months after the time of issue of the Prospectus in connection
with the offering or sale of the Shares and if at such time any event
shall have occurred as a result of which the Prospectus as then amended
or supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading, or, if for
any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to notify you
and upon your request to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies as you may
from time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or
omission or effect such compliance, and in case any Underwriter is
required to deliver a prospectus in connection with sales of any of the
Shares at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter, to
prepare and deliver to such Underwriter as many copies as you may
request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
6
<PAGE> 7
(d) To make generally available to its securityholders as
soon as practicable, but in any event not later than eighteen months
after the effective date of the Registration Statement (as defined in
Rule 158(c) under the Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a) of
the Act and the rules and regulations thereunder (including, at the
option of the Company, Rule 158),
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, (i) not to offer, sell, contract to sell or otherwise
dispose of, except as provided hereunder any securities of the Company
that are substantially similar to the Shares, including but not limited
to any securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially similar
securities (other than (A) pursuant to employee stock option plans
existing on, or upon the conversion or exchange of convertible or
exchangeable securities, or the exercise of warrants outstanding as of,
the date of this Agreement or (B) as contemplated in Section 7(h)
hereof), (ii) to take reasonable steps to enforce, and not to
release any securityholder of the Company from, its obligations under
any agreement pursuant to which such securityholder has agreed not to
offer, sell, contract to sell or otherwise dispose of any securities of
the Company, and (iii) not to accelerate or otherwise alter the vesting
of any security subject to an agreement not to offer, sell, contract to
sell or otherwise dispose of for a period of less than 180 days after
the date of the Prospectus, in any of the above cases, without your
prior written consent;
(f) To furnish to its stockholders as soon as practicable
after the end of each fiscal year an annual report (including a balance
sheet and statements of income, stockholders' equity and cash flows of
the Company and its consolidated subsidiaries certified by independent
public accountants) and, as soon as practicable after the end of each of
the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement),
to make available to its stockholders consolidated summary financial
information of the Company and its subsidiaries for such quarter in
reasonable detail;
(g) During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to stockholders, and
to deliver to you (i) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the
Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of
the Company and its subsidiaries, if any, are consolidated in reports
furnished to its stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of
the Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds";
(i) To take all steps reasonably necessary to ensure that
the Company is not deemed an "investment company," as such term is
defined in the Investment Company Act, including,
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<PAGE> 8
if and to the extent necessary, the investment of the net proceeds
received by it from the sale of the Shares in "government securities,"
as such term is defined in the Investment Company Act;
(j) To use its best efforts to list for quotation the Shares
on the National Association of Securities Dealers Automated Quotations
National Market System ("NASDAQ"); and
(k) If the Company elects to rely upon Rule 462(b), the
Company shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 P.M., Washington,
D.C. time, on the date of this Agreement, and the Company shall at the
time of filing either pay to the Commission the filing fee for the Rule
462(b) Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters
that the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on NASDAQ; (v)
the filing fees incident to, and the fees and disbursements of counsel for the
Underwriters in connection with, securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the Shares;
(vi) the cost of preparing stock certificates; (vii) the cost and charges of any
transfer agent or registrar; and (viii) all other costs and expenses incident to
the performance of its obligations hereunder which are not otherwise
specifically provided for in this Section. It is understood, however, that,
except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares
to be delivered at each Time of Delivery, shall be subject, in their discretion,
to the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for
such filing by the rules and regulations under the Act and in accordance
with Section 5(a) hereof; if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have become
effective by 10:00 P.M., Washington, D.C. time, on the date of this
Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and
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<PAGE> 9
no proceeding for that purpose shall have been initiated or threatened
by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall
have furnished to you such written opinion or opinions, dated such Time
of Delivery, with respect to such matters as you may reasonably request,
and such counsel shall have received such papers and information as they
may reasonably request to enable them to pass upon such matters;
(c) Wilson Sonsini Goodrich & Rosati, a Professional
Corporation, counsel for the Company, shall have furnished to you their
written opinion (a draft of such opinion is attached as Annex II(b)
hereto), dated such Time of Delivery, in form and substance satisfactory
to you, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware, with power and authority
(corporate and other) to own its properties and conduct its
business as described in the Prospectus;
(ii) The Company has an authorized capitalization as
set forth in the Prospectus, and all of the issued shares of
capital stock of the Company (including the Shares being
delivered at such Time of Delivery) have been duly and validly
authorized and issued and are fully paid and non-assessable; and
the Shares conform to the description of the Stock contained in
the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it
owns or leases properties or conducts any business so as to
require such qualification or is subject to no material
liability or disability by reason of failure to be so qualified
in any such jurisdiction (such counsel being entitled to rely in
respect of the opinion in this clause upon opinions of local
counsel and in respect of matters of fact upon certificates of
officers of the Company, provided that such counsel shall state
that they believe that both you and they are justified in
relying upon such opinions and certificates);
(iv) To such counsel's knowledge, the Company has no
subsidiaries and does not own or control directly or indirectly
any equity or similar interest in any corporation, association,
joint venture, partnership, or similar business arrangement or
entity.
(v) To such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company is a party or of which
any property of the Company is the subject which, if determined
adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect
on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company;
and, to such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(vi) This Agreement has been duly authorized,
executed and delivered by the Company;
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<PAGE> 10
(vii) The issue and sale of the Shares being delivered
at such Time of Delivery by the Company and the compliance by
the Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument, identified to such counsel as material
pursuant to a certificate executed by an officer of the Company,
to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any
violation of the provisions of the Certificate of Incorporation
or By-laws of the Company or any statute or any order, rule or
regulation known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or any of
its properties;
(viii) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale
of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the
registration under the Act of the Shares, and such consents,
approvals, authorizations, registrations or qualifications as
may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by
the Underwriters;
(ix) To such counsel's knowledge, the Company is not
in violation of its Certificate of Incorporation or By-laws;
(x) The statements set forth in the Prospectus under
the caption "Description of Capital Stock", insofar as they
purport to constitute a summary of the terms of the Stock, and
under the caption "Underwriting", insofar as they purport to
describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair;
(xi) The Company is not an "investment company", as
such term is defined in the Investment Company Act assuming
that, pending their uses identified in the Prospectus, the net
proceeds of the Offering will be invested in "government
securities" within the meaning of the Investment Company Act;
and
(xii) The Registration Statement and the Prospectus
and any further amendments and supplements thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such
counsel need express no opinion) comply as to form in all
material respects with the requirements of the Act and the rules
and regulations thereunder; although they do not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the
Prospectus, except for those referred to in the opinion in
subsection (xi) of this section 7(c), they have no reason to
believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company
prior to such Time of Delivery (other than the financial
statements and related schedules and financial data therein, as
to which such counsel need express no
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<PAGE> 11
opinion) contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or
that, as of its date, the Prospectus or any further amendment or
supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related
schedules and financial data therein, as to which such counsel
need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading or that, as of such
Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made
by the Company prior to such Time of Delivery (other than the
financial statements and related schedules and financial data
therein, as to which such counsel need express no opinion)
contains an untrue statement of a material fact or omits to
state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made,
not misleading; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts
or other documents of a character required to be filed as an
exhibit to the Registration Statement or required to be
described in the Registration Statement or the Prospectus which
are not filed or described as required;
(d) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at
each Time of Delivery, KPMG Peat Marwick, LLP shall have furnished to
you a letter or letters, dated the respective dates of delivery thereof,
in form and substance satisfactory to you, to the effect set forth in
Annex I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft
of the form of letter to be delivered on the effective date of any
post-effective amendment to the Registration Statement and as of each
Time of Delivery is attached as Annex I(b) hereto);
(e) (i) Neither the Company nor any of its subsidiaries
shall have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in
the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company or any of
its subsidiaries or any change (except upon exercise of outstanding
securities exercisable for or convertible into capital stock of the
Company, if such securities were outstanding as of such date and except
for grants made after such date under the equity incentive plans
described in the Prospectus consistent with past grants), or any
development involving a prospective change, in or affecting the general
affairs, management, financial position, stockholders' equity or results
of operations of the Company and its subsidiaries, otherwise than as set
forth or contemplated in the Prospectus, the effect of which, in any
such case described in clause (i) or (ii), is in the judgment of the
Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
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(f) On or after the date hereof there shall not have
occurred any of the following: (i) a suspension or material limitation
in trading in securities generally on the New York Stock Exchange or on
NASDAQ; (ii) a suspension or material limitation in trading in the
Company's securities on NASDAQ; (iii) a general moratorium on commercial
banking activities declared by either Federal or New York or California
State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in
this clause (iv) in the judgment of the Representatives makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(g) The Shares to be sold at such Time of Delivery shall
have been duly listed, subject to notice of issuance, for quotation on
NASDAQ;
(h) The Company shall have obtained and delivered to the
Underwriters executed copies of an agreement from (i) each officer and
director of the Company and (ii) each stockholder of 1% or more of the
outstanding capital stock of the Company, substantially to the effect
set forth in Subsection 5(e) hereof in form and substance satisfactory
to you; provided, however, the restrictions in Subsection 5(e) shall not
be applicable on May 15, 2000, with respect to 10% of the outstanding
capital stock of the Company held by such stockholders, and shall not be
applicable on the date that is three days after the Company has made
publicly available its financial statements for the fiscal quarter ended
June 30, 2000, with respect to an additional 25% of the outstanding
capital stock of the Company held by such stockholders;
(i) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on
the New York Business Day next succeeding the date of this Agreement;
and
(j) The Company shall have furnished or caused to be
furnished to you at such Time of Delivery certificates of officers of
the Company satisfactory to you as to the accuracy of the
representations and warranties of the Company herein at and as of such
Time of Delivery, as to the performance by the Company of all of its
obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this
Section and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the
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<PAGE> 13
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman, Sachs
& Co. expressly for use therein; and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the
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<PAGE> 14
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company shall be entitled to a further
period of thirty-six hours within which to procure another party or other
parties satisfactory to you to purchase such Shares on such terms. In
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<PAGE> 15
the event that, within the respective prescribed periods, you notify the Company
that you have so arranged for the purchase of such Shares, or the Company
notifies you that it has so arranged for the purchase of such Shares, you or the
Company shall have the right to postpone such Time of Delivery for a period of
not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of
the Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them, respectively,
pursuant to this Agreement, shall remain in full force and effect, regardless of
any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter or any controlling person of any Underwriter, or the
Company, or any officer or director or controlling person of the Company, and
shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Sections 6 and 8 hereof; but, if for any other reason, any
Shares are not delivered by or on behalf of the Company as provided herein, the
Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Shares not so
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delivered, but the Company shall then be under no further liability to any
Underwriter except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of
the Underwriters, and the parties hereto shall be entitled to act and rely upon
any statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention: Chief
Financial Officer; provided, however, that any notice to an Underwriter pursuant
to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and, to the extent provided in
Sections 8 and 10 hereof, the officers and directors of the Company and each
person who controls the Company or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Shares from any Underwriter shall be deemed a successor or assign by
reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein,
the term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
16
<PAGE> 17
If the foregoing is in accordance with your understanding, please sign
and return to us six counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Underwriters and the
Company. It is understood that your acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company for examination upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
Turnstone Systems, Inc.
By:
-------------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
BancBoston Robertson Stephens Inc.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated
By:
------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
17
<PAGE> 18
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co...................................
BancBoston Robertson Stephens Inc.....................
Dain Rauscher Wesels, a division of Dain Rausher
Incorporated........................................
--------------- ------------------
Total..................................
=============== ==================
</TABLE>
18
<PAGE> 19
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the
accountants shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the
Act and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance
with standards established by the American Institute of Certified Public
Accountants of the unaudited consolidated interim financial statements,
selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have been
furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus as indicated in their reports thereon copies of which have
been furnished to the Representatives, and on the basis of specified
procedures including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether
the unaudited condensed consolidated financial statements referred to in
paragraph (vi)(A)(i) below comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published rules and regulations, nothing came to their attention that
cause them to believe that the unaudited condensed consolidated
financial statements do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published rules and regulations;
(iv) The unaudited selected financial information with
respect to the consolidated results of operations and financial position
of the Company for the five most recent fiscal years included in the
Prospectus agrees with the corresponding amounts (after restatements
where applicable) in the audited consolidated financial statements for
such five fiscal years which were included or incorporated by reference
in the Company's Annual Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus
under selected captions with the disclosure requirements of Regulation
S-K and on the basis of limited procedures specified in such letter
nothing came to their attention as a result of the foregoing procedures
that caused them to believe that this information does not conform in
all material respects with the disclosure requirements of Items 301,
302, 402 and 503(d), respectively, of Regulation S-K;
19
<PAGE> 20
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of
the minute books of the Company and its subsidiaries since the date of
the latest audited financial statements included in the Prospectus,
inquiries of officials of the Company and its subsidiaries responsible
for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of
income, consolidated balance sheets and consolidated statements
of cash flows included in the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations, or (ii) any material modifications should be made
to the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus for them to be in conformity
with generally accepted accounting principles;
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree with
the corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements
included in the Prospectus;
(C) the unaudited financial statements which were
not included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in clause
(A) and any unaudited income statement data and balance sheet
items included in the Prospectus and referred to in clause (B)
were not determined on a basis substantially consistent with the
basis for the audited consolidated financial statements included
in the Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the published rules and regulations
thereunder or the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five days
prior to the date of such letter, there have been any changes in
the consolidated capital stock (other than issuances of capital
stock upon exercise of options and stock appreciation rights,
upon earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on
the date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt
of the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity or other
items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared
with amounts shown in the latest
20
<PAGE> 21
balance sheet included in the Prospectus, except in each case
for changes, increases or decreases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(F) for the period from the date of the latest
financial statements included in the Prospectus to the specified
date referred to in clause (E) there were any decreases in
consolidated net revenues or operating profit or the total or
per share amounts of consolidated net income or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
the comparable period of the preceding year and with any other
period of corresponding length specified by the Representatives,
except in each case for decreases or increases which the
Prospectus discloses have occurred or may occur or which are
described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and (vi)
above, they have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified by
the Representatives, which are derived from the general accounting records of
the Company and its subsidiaries, which appear in the Prospectus, or in Part II
of, or in exhibits and schedules to, the Registration Statement specified by the
Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
21
<PAGE> 1
Exhibit 3.1A
CERTIFICATE OF AMENDMENT OF
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
TURNSTONE SYSTEMS, INC.
Turnstone Systems, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Turnstone Systems, Inc. The corporation
was originally incorporated under the same name, and the original Certificate of
Incorporation of the corporation was filed with the Secretary of State of the
State of Delaware on January 2, 1998.
B. This Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation has been duly adopted in accordance with the
provisions of the General Corporation Law of the State of Delaware by the Board
of Directors and the stockholders of the corporation.
C. Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, this Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation amends the provisions of this corporation's
Certificate of Incorporation as set forth herein.
D. The first three sentences of Article Four of the Company's Second
Amended and Restated Certificate of Incorporation shall read in their entirety
as follows:
"The Company is authorized to issue two classes of stock, designated
"Common Stock" and "Preferred Stock," respectively. The total number of
shares which the Company is authorized to issue is 55,177,000 shares, $.001
par value. The number of shares of Common Stock ("Common") which the
Company is authorized to issue is 40,000,000 shares, and the number of
shares of Preferred Stock ("Preferred") which the Company is authorized to
issue is 15,177,000 shares, of which 12,100,000 shares shall be designated
"Series A Preferred" and of which 3,077,000 shares shall be designated
"Series B Preferred."
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 2
IN WITNESS WHEREOF, this Certificate of Amendment is deemed effective as of
the date set forth above.
/s/ RICHARD N. TINSLEY
-----------------------------------------
Richard N. Tinsley, President
and Chief Executive Officer
Turnstone Systems, Inc.
[SIGNATURE PAGE TO CERTIFICATE OF AMENDMENT TO TURNSTONE SYSTEMS, INC.'S SECOND
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION]
2
<PAGE> 3
CERTIFICATE OF AMENDMENT
OF SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF TURNSTONE SYSTEMS, INC.
Turnstone Systems, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Turnstone Systems, Inc. The
corporation was originally incorporated under the same name, and the original
Certificate of Incorporation of the corporation was filed with the Secretary of
State of the State of Delaware on January 2, 1998.
B. This Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation has been duly adopted in accordance with the
provisions of the General Corporation Law of the State of Delaware by the Board
of Directors and the stockholders of the corporation.
C. Pursuant to Section 242 of the General Corporation Law of the State
of Delaware, this Certificate of Amendment of Second Amended and Restated
Certificate of Incorporation amends the provisions of this corporation's
Certificate of Incorporation as set forth herein.
D. Article IV of the Certificate of Incorporation is hereby amended to
read in its entirety as follows:
ARTICLE IV
The Company is authorized to issue two classes of stock, designated
"Common Stock" and "Preferred Stock," respectively. The total number of shares
which the Company is authorized to issue is 50,577,000, $0.001 par value. The
number of shares of Common Stock ("Common") which the Company is authorized to
issue is 35,000,000 shares, and the number of shares of Preferred Stock
("Preferred") which the Company is authorized to issue is 15,577,000 shares, of
which 12,100,000 shares shall be designated "Series A Preferred" and of which
3,477,000 shares shall be designated "Series B Preferred." The Board of
Directors is authorized to determine or alter the rights, preferences,
privileges, and restrictions granted to or imposed upon any wholly unissued
series of Preferred, and within the limitations or restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series, to increase or decrease (but not below the
number of shares of any such series then outstanding) the number of shares of
any such series subsequent to the issuance of shares of that series, to
determine the designation of any series, and to fix the number of shares of any
series.
<PAGE> 4
IN WITNESS WHEREOF, the Company has caused this Certificate of
Amendment of Second Amended and Restated Certificate of Incorporation to be
signed by Richard N Tinsley, its President and Chief Executive Officer,
effective as of April 26, 1999.
TURNSTONE SYSTEMS, INC.
By: /s/ Richard N. Tinsley
-------------------------------------
Richard N. Tinsley
President and Chief Executive Officer
Attest:
/s/ M. D. Savoie
- ----------------------------------------
M. Denise Savoie
Vice President and Chief Financial Officer
-2-
<PAGE> 5
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF TURNSTONE SYSTEMS, INC.
Turnstone Systems, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Turnstone Systems, Inc. The
corporation was originally incorporated under the same name and the original
Certificate of Incorporation of the corporation was filed with the Secretary of
State of the State of Delaware on January 2, 1998.
B. This Second Amended and Restated Certificate of Incorporation has
been duly adopted in accordance with the provisions of the General Corporation
Law of the State of Delaware by the Board of Directors and the stockholders of
the corporation.
C. Pursuant to Sections 242 and 245 of the General Corporation Law of
the State of Delaware, this Second Amended and Restated Certificate of
Incorporation restates and integrates and further amends the provisions of the
Certificate of Incorporation of this corporation.
D. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:
ARTICLE I.
The name of the corporation is Turnstone Systems, Inc. (the "Company").
ARTICLE II.
The address of the Company's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, State of
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
-2-
<PAGE> 6
ARTICLE III.
The purpose of the Company is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV.
The Company is authorized to issue two classes of stock, designated
"Common Stock" and "Preferred Stock," respectively. The total number of shares
which the Company is authorized to issue is 50,177,000 shares, $.001 par value.
The number of shares of Common Stock ("Common") which the Company is authorized
to issue is 35,000,000 shares, and the number of shares of Preferred Stock
("Preferred") which the Company is authorized to issue is 15,177,000 shares, of
which 12,100,000 shares shall be designated "Series A Preferred" and of which
3,077,000 shares shall be designated "Series B Preferred." The Board of
Directors is authorized to determine or alter the rights, preferences,
privileges, and restrictions granted to or imposed upon any wholly unissued
series of Preferred, and within the limitations or restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series, to increase or decrease (but not below the
number of shares of any such series then outstanding) the number of shares of
any such series subsequent to the issuance of shares of that series, to
determine the designation of any series, and to fix the number of shares of any
series.
ARTICLE V.
The relative rights, preferences, privileges, and restrictions granted
to or imposed on the respective classes of the shares of capital stock or the
holders thereof are as follows:
1. Dividends. The holders of the Preferred shall be entitled to
receive, when and as declared by the Board of Directors, dividends out of funds
legally available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock or other securities
and rights convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock of the Company) on the Common
Stock of the Company, at the rates of $0.04 and $0.16 per share of Series A
Preferred and Series B Preferred, respectively, per annum (each as adjusted for
stock splits, stock dividends or distributions, recapitalizations, and similar
events). Such dividends shall not be cumulative, and no right to such dividends
shall accrue to holders of the Preferred unless declared by the Board of
Directors. No dividends or other distributions shall be made with respect to the
Common Stock, other than dividends payable solely in Common Stock, unless at the
same time an equivalent dividend with respect to each series of the Preferred
has been paid or set apart for payment.
2. Liquidation Preference. In the event of any liquidation,
dissolution, or winding up of the Company (a "Liquidation"), either voluntary or
involuntary, distributions to the stockholders of the Company shall be made in
the following manner:
(a) (i) The holders of the Preferred shall be entitled to receive,
prior and in preference to any distribution of any of the assets or surplus
funds of the Company to the holders of
-2-
<PAGE> 7
the Common Stock by reason of their ownership of such stock, the amounts of
$0.50 and $1.95, respectively, for each share of Series A Preferred or Series B
Preferred then held by them (each as adjusted for any stock splits, stock
dividends or distributions, recapitalizations, and similar events) and, in
addition, an amount equal to all declared but unpaid dividends on each of the
Preferred, as the case may be. If the assets and funds thus distributed among
the holders of the Preferred shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amount, then the entire assets and
funds of the Company legally available for distribution shall be distributed
pro-rata among the holders of the Preferred in the same proportion as the
relative aggregate amounts obtained by multiplying the number of shares of
Series B Preferred then held by such holder by $1.95 per share and multiplying
the number of shares of Series A Preferred then held by each such holder by
$0.50 per share.
(ii) After giving effect to the provisions of Section 2(a)(i),
all of the assets of the Company shall be distributed to the holders of Common
Stock pro rata based on the number of shares of Common Stock held by each.
(b) For purposes of this Section 2, a merger or consolidation of the
Company with or into any other corporation or corporations (but excluding any
merger effected solely for the purpose of reincorporating in another state), or
the merger of any other corporation or corporations into the Company, in which
consolidation or merger the stockholders of the Company receive distributions in
cash or securities of another corporation or corporations as a result of such
consolidation or merger, a sale of all or substantially all of the assets of the
Company, or the undertaking by the Company of a transaction or series of
transactions in which more than 50% of the voting power of the Company is
disposed of, shall be treated as a Liquidation.
(c) Any securities to be delivered pursuant to Section 2(b) above
shall be valued as follows:
(i) securities not subject to investment letter or other similar
restrictions on free marketability:
(A) if traded on a nationally recognized securities
exchange, the value shall be deemed to be the average of the closing prices of
the securities on such exchange over the 30-day period ending three (3) days
prior to the closing;
(B) if actively traded over-the-counter or through an
automated dealer quotation system, the value shall be deemed to be the average
of the closing bid or sale prices (whichever are applicable) over the 30-day
period ending three (3) days prior to the closing; and
(C) if there is no active public market, the value shall be
the fair market value thereof, as mutually determined by the Company and the
holders of a majority-in-interest of the then-outstanding Preferred.
(ii) 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
-3-
<PAGE> 8
value determined as above in subparagraphs 2(c)(i)(A), (B), or (C) to reflect
the approximate fair market value thereof, as mutually determined by the Company
and the holders of at least 66-2/3% of the then outstanding Preferred.
(d) As authorized by Section 402.5(c) of the California
Corporations Code, the provisions of Sections 502, 503, and 506 of the
California Corporations Code shall not apply with respect to the repurchase by
the Company of shares of Common Stock issued to or held by employees or
consultants of the Company or its subsidiaries upon termination of their
employment or services pursuant to agreements providing for the right of
repurchase.
3. Redemption. The Company shall not have the right to call or
redeem at any time all or any shares of Preferred.
4. Conversion. The holders of the Preferred shall have conversion
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Subject to Section 4(b) below, each share
of Series A Preferred 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
Company or any transfer agent for the Series A Preferred, into such number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
$0.50 by the Series A Conversion Price, determined as hereinafter provided, in
effect at the time of conversion (the "Series A Conversion Rate"). The "Series A
Conversion Price" shall initially be $0.50 per share of Common Stock. The Series
A Conversion Price and the Series A Conversion Rate shall be subject to further
adjustment as hereinafter provided.
Subject to Section 4(b) below, each share of Series B Preferred 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 Company or any transfer agent of
the Series B Preferred, into such number of fully paid and nonassessable shares
of Common Stock as is determined by dividing $1.95 by the Series B Conversion
Price, determined as hereinafter provided, in effect at the time of conversion
(the "Series B Conversion Rate"). The "Series B Conversion Price" shall
initially be $1.95 per share of Common Stock. The Series B Conversion Price and
the Series B Conversion Rate shall be subject to further adjustment as
hereinafter provided.
The "Series A Conversion Price" and the "Series B Conversion Price" are
hereinafter at times together referred to as the "Conversion Price." The "Series
A Conversion Rate" and the "Series B Conversion Rate" are at times together
referred to as the "Conversion Rate."
(b) Automatic Conversion. Each share of Preferred shall
automatically be converted into shares of Common Stock at its then effective
respective Conversion Rate upon either (i) the date of the closing (the "Public
Offering Closing Date") of a firm commitment underwritten public offering (the
"Public Offering") pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale to the public of
Common Stock for the account of the Company with a public offering price of not
less than $1.50 per share (as adjusted
-4-
<PAGE> 9
for stock splits, stock dividends or distributions, recapitalizations, and
similar events) and $10,000,000 in cash proceeds to the Company, net of
underwriting discounts and commissions or (ii) the written consent of the
holders of not less than 66"% of the then outstanding Preferred. In the event of
the automatic conversion of the Preferred in connection with a Public Offering,
the person(s) entitled to receive the Common Stock issuable upon such conversion
of Preferred shall be deemed to have converted such Preferred immediately prior
to the closing of such sale and issuance of securities.
(c) Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of the Preferred. In lieu of any
fractional shares to which the holder would otherwise be entitled, the Company
shall pay cash equal to such fraction multiplied by the then effective
Conversion Price of the applicable series. Before any holder of Preferred shall
be entitled to convert the same into full shares of Common Stock and to receive
certificates therefor, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Company or of any transfer agent
for the Preferred, and shall give written notice to the Company at such office
that he elects to convert the same; provided, however, that in the event of an
automatic conversion pursuant to Section 4(b), the outstanding shares of
Preferred 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 Company or its transfer agent, and provided
further that the Company shall not be obligated to issue certificates evidencing
the shares of Common Stock issuable upon such automatic conversion unless the
certificates evidencing such shares of Preferred are either delivered to the
Company or its transfer agent as provided above, or the holder notifies the
Company or its transfer agent that such certificates have been lost, stolen, or
destroyed and executes an agreement satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection with such certificates. The
Company shall, as soon as practicable after such delivery, or such agreement and
indemnification in the case of a lost certificate, issue and deliver at such
office to such holder of Preferred, a certificate or certificates for the number
of shares of Common Stock to which he shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Preferred to be converted, or in the case of
automatic conversion on the Public Offering Closing Date or the effective date
of such written consent, as the case may be, and the person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.
(d) Adjustments for Diluting Issues.
(i) Special Definitions. For purposes of this Section 4(d),
the following definitions shall apply:
(A) 'Options' shall mean rights, options or warrants
to subscribe for, purchase, or otherwise acquire either Common Stock or
Convertible Securities.
-5-
<PAGE> 10
(B) 'Original Issue Date' shall mean the date on which
the first share of Series A Preferred or Series B Preferred was first issued, as
the case may be.
(C) 'Convertible Securities' shall mean shares (other
than the Common Stock) convertible into or exchangeable for Common Stock.
(D) 'Additional Shares of Common Stock' shall mean all
shares of Common Stock issued (or, pursuant to Section 4(d)(iii), deemed to be
issued) by the Company after the Original Issue Date, other than shares of
Common Stock issued or issuable at any time:
(1) upon conversion of the shares of the Preferred
authorized herein or upon conversion of Convertible Securities, provided that
such Convertible Securities shall be deemed to be Additional Shares of Common
Stock;
(2) to officers, directors, and employees of, and
consultants to, the Company to be designated and approved by the Board of
Directors;
(3) in connection with issuances of the Company's
capital stock as consideration in an acquisition or asset purchase approved by
the Board of Directors;
(4) in connection with debt financing transactions
with commercial lenders or lease financing transactions;
(5) as a dividend or distribution on any series of
the Preferred, or any event for which adjustment is made pursuant to
subparagraph (d)(iv) hereof; or
(6) by way of dividend or other distribution on
shares of Common Stock excluded from the definition of Additional Shares of
Common Stock by the foregoing clauses (1), (2), (3), (4), (5), or this clause
(6), or on shares of Common Stock so excluded.
(ii) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common Stock. In the event the Company shall issue
Additional Shares of Common Stock without consideration or for a consideration
per share less than the respective Conversion Price (as the case may be) in
effect on the date of and immediately prior to such issue, then in such event,
the Series A Conversion Price or the Series B Conversion Price (as the case may
be) shall be reduced, concurrently with such issue, to a price determined by
multiplying such Series A Conversion Price or Series B Conversion Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue (including shares excluded from the
definition of Additional Shares of Common Stock by Section 4(d)(i)(D)(2) hereof)
plus the number of shares of Common Stock which the aggregate consideration
received by the Company for the total number of Additional Shares of Common
Stock so issued would purchase at such Series A Conversion Price or Series B
Conversion Price (as the case may be); and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issue
(including shares excluded from the definition of Additional Shares of Common
Stock by Section 4(d)(i)(D)(2) hereof) plus the number of such Additional Shares
of Common Stock so issued;
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<PAGE> 11
provided that, for the purposes of this Section
4(d)(ii), all shares of Common Stock issued or issuable upon conversion of the
then outstanding Preferred shall be deemed to be outstanding.
(iii) Determination of Consideration. For purposes of this
Section 4(d), the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property: Such consideration shall:
(1) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the Company without any deduction for
commissions and excluding amounts paid or payable for accrued interest or
accrued dividends;
(2) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board; and
(3) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (1) and (2) above, as
determined in good faith by the Board.
(B) Options and Convertible Securities. In the case of
issuance of options to purchase or rights to subscribe for Common Stock, or
securities by their terms convertible into or exchangeable for Common Stock, the
following provisions shall apply for all purposes of Section 4(d):
(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to be Additional Shares of Common
issued at the time such options or rights were issued and for a consideration
equal to the consideration (determined in the manner provided in subparagraph
4(d)(iii)(A)), if any, received by the Company upon the issuance of such options
or rights plus the exercise price provided in such options or rights for the
Common Stock covered thereby.
(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion or in exchange for such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to be Additional Shares of Common
issued at the time such securities were issued or such options or rights were
issued and for a consideration equal to the consideration, if any, received by
the Company for any such securities and related options or rights (excluding any
cash received on account of accrued interest or accrued dividends), plus the
additional consideration, if any, to be received by the Company upon the
conversion or exchange of such securities or the exercise of any related options
or rights (the consideration in each case to be determined in the manner
provided in subparagraph 4(d)(iii)(A)).
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<PAGE> 12
(3) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to this
Company upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Series A Conversion Price and the Series B Conversion Price to the extent in any
way affected by or computed using such options, rights, or securities, shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of such
securities.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Series A Conversion Price and the Series B Conversion Price to
the extent in any way affected by or computed using such options, rights, or
securities, shall be recomputed to reflect the issuance of only the number of
shares of Common Stock (and convertible or exchangeable securities which remain
in effect) actually issued upon the conversion or exchange of such securities or
upon the exercise of the options or rights related to such securities.
(5) The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to subparagraphs
4(d)(iii)(B)(1) and (2) shall be appropriately adjusted to reflect any change,
termination or expiration of the type described in either subparagraph
4(d)(iii)(B)(3) or (4).
(iv) Adjustments for Subdivisions or Combinations of or
Stock Dividends on Common Stock. In the event the outstanding shares of Common
Stock shall be subdivided (by stock split or otherwise), into a greater number
of shares of Common Stock, or the Company at any time or from time to time after
the Original Issue Date shall declare or pay any dividend on the Common Stock
payable in Common Stock, the Series A Conversion Rate and the Series B
Conversion Price then in effect shall, concurrently with the effectiveness of
such subdivision or stock dividend, be proportionately increased based on the
ratio of (A) the number of shares of Common Stock outstanding immediately after
such subdivision or stock dividend to (B) the number of shares of Common Stock
outstanding immediately prior to such subdivision or stock dividend. 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 Series A Conversion Rate and the Series B Conversion Rate then in
effect shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately decreased on the same basis.
(v) Adjustments for Other Distributions. In the event the
Company 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 (A) securities of the Company or other entities (other than shares of
Common Stock and other than as otherwise adjusted in this Section 4 or as
otherwise provided in Section 1), (B) evidences of indebtedness issued by the
Company or other persons, or (C) assets (excluding cash dividends) or options or
rights not referred to in subparagraph
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<PAGE> 13
4(d)(iii)(B), then and in each such event provision shall be made so that the
holders of Preferred shall receive upon conversion thereof, in addition to the
number of shares of Common Stock receivable thereupon, the amount of such
distribution which they would have received had their Preferred 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 with respect to the rights of the holders of the Preferred.
(vi) Adjustments for Recapitalization,
Reclassification, Exchange and Substitution. If at any time or from time to time
the Common Stock issuable upon conversion of the Series A Preferred or the
Series B Preferred shall be changed into the same or a different number of
shares of any other class or classes of stock, whether by recapitalization,
capital reorganization, reclassification or otherwise (other than a subdivision,
combination of shares or merger or sale of assets transaction provided for above
or in Section 2(b)), the Conversion Rate of each series of Preferred then in
effect shall, concurrently with the effectiveness of such recapitalization,
reorganization or reclassification, be proportionately adjusted such that the
Preferred shall be convertible into, in lieu of the number of shares of Common
Stock which the holders thereof 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 the Preferred immediately before that change. In
addition, to the extent applicable in any reorganization or recapitalization,
provision shall be made so that the holders of the Preferred shall thereafter be
entitled to receive upon conversion of the Preferred the number of shares of
stock or other securities or property of the Company or otherwise, to which a
holder of Common Stock deliverable upon conversion would have been entitled on
such reorganization or recapitalization.
(e) No Impairment. Except as provided in Section 5, the Company
will not, by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, 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.
(f) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price or Conversion Rate of any
series of Preferred pursuant to this Section 4, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each holder of Series A Preferred a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Company shall, upon the written
request at any time of any holder of Preferred, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the respective Conversion Price and the Conversion Rate at
the time in effect, and (iii) the number of shares of Common Stock and the
amount, if any, of other property which at the time would be received upon the
conversion of the Preferred.
-9-
<PAGE> 14
(g) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Preferred such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
the Preferred; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Preferred, in addition to such other remedies as shall
be available to the holder of such Preferred, the Company will take such
corporate action as may, in the opinion of 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.
(h) Notices of Record Date. In the event that the Company shall
propose at any time:
(i) to declare any dividend or distribution upon its
Common Stock, whether in cash, property, stock or other securities, whether or
not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the holders
of any class or series of its stock any additional shares of stock of any class
or series or other rights;
(iii) to effect any reclassification or recapitalization
of its Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up; then, in connection with each
such event, the Company shall send to the holders of the Preferred:
(A) in the case of the matters referred to in (i)
and (ii) above, 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 and the amount and character of such dividend, distribution or right);
and
(B) in the case of the matters referred to in
(iii) and (iv) above, at least 20 days' prior written notice of the date when
the same shall take place (and specifying the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event or the record date
for the determination of such holders if such record date is earlier).
Each such written notice shall be delivered personally or given by
first class mail, postage prepaid, addressed to the holders of the Preferred at
the address for each such holder as shown on the books of the Company.
5. Covenants. In addition to any other rights provided by law, so long
as at least 500,000 shares (subject to adjustment for stock splits, stock
dividends or distributions,
-10-
<PAGE> 15
recapitalizations, and similar events) of the Preferred shall be outstanding,
the Company shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than a majority of the then outstanding
voting power of the Preferred (such Preferred voting or acting by written
consent as a single class, except as may otherwise be required by law):
(a) amend or repeal any provision of, or add any provision to,
the Company's Certificate of Incorporation or Bylaws if such action would (i)
increase or decrease the size of the Board of Directors; (ii) adversely alter or
change the preferences, rights, privileges, or powers of, or the restrictions
provided for the benefit of, any series of the Preferred; (iii) increase or
decrease the authorized number of any series of the Preferred; or (iv) create
any series of stock having any preference over or parity with any of the
outstanding series of Preferred.
(b) authorize or issue any securities (including but not limited
to any Options or Convertible Securities as defined in Section 4(d) hereof, but
excluding any debt securities that do not contain any equity features) having
any preference or priority as to rights or privileges superior to or on a parity
with any such preference or priority of the series of the Preferred;
(c) merge or consolidate with any other corporation or sell,
lease, or convey all or substantially all of the assets of the Company or
otherwise effect a recapitalization or reorganization of the Company;
(d) pay or declare any dividend on any shares of Common Stock or
apply any of its assets to the redemption, retirement, purchase or acquisition
directly or indirectly, through subsidiaries or otherwise, of any shares of
Common Stock or Preferred Stock, (i) except as expressly permitted herein and
(ii) except from employees or consultants of the Company upon termination of
employment or association pursuant to the terms of restrictive stock purchase
agreements providing for the repurchase of such shares at cost entered into with
such employees or consultants.
6. Voting Rights.
(a) Holders of the Preferred shall have full voting rights and
powers equal to the voting rights and powers of the holders of Common Stock and
shall be entitled to vote, together with the holders of Common Stock, with
respect to any questions upon which holders of Common Stock have the right to
vote. Except as otherwise required by law or by Sections 5 and 6(b) hereof, the
holder of each share of Common Stock issued and outstanding shall have one vote,
and the holder of each share of Preferred shall be entitled to the number of
votes equal to the number of shares of Common Stock into which such share of
Preferred could be converted at the record date for determination of the
stockholders entitled to vote on such matters, or, if no such record date is
established, at the date such vote is taken or any written consent of
stockholders is solicited, such votes to be counted together with all other
shares of stock of the Company having general voting power and not separately as
a class. Fractional votes by the holders of Preferred shall not, however, be
permitted and any fractional voting rights shall (after aggregating all shares
into which shares of Preferred held by each holder could be converted) be
rounded to the nearest whole number. Holders
-11-
<PAGE> 16
of Common Stock and Preferred shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of the Company.
(b) Election of Directors. So long as at least 50% of the
originally issued shares of Preferred remain outstanding, the holders of the
Preferred shall be entitled, voting as a separate class, to elect two (2)
directors of the Company at each annual election of directors. The holders of
shares of Common Stock shall be entitled to elect three directors of the Company
at each annual election of directors. In the case of any vacancy in the office
of a director elected by the holders of the Preferred, the remaining director
solely elected by that class may elect a successor to hold office for the
unexpired term of the director whose place shall be vacant. In the case of any
vacancy in the office of a director elected by the holders of the Common Stock,
the holders of the then outstanding Common Stock (as the case may be) shall be
entitled, voting as a separate class either by written consent or at a special
meeting, to elect a successor to hold office for the unexpired term of the
director whose respective place shall be vacant
(c) General Election of Remaining Directors. Except as provided
in Section 6(b) above, the holders of Common Stock and the Preferred shall be
entitled to vote together in accordance with the requirements of Section 6(a)
with respect to the election of any other director or directors to the Board of
Directors.
ARTICLE VI.
The Company is to have perpetual existence.
ARTICLE VII.
Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Company shall so provide.
ARTICLE VIII.
The number of directors which constitute the whole Board of Directors
of the Company shall be designated in the Bylaws of the Company.
ARTICLE IX.
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 Company.
ARTICLE X.
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 Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director.
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<PAGE> 17
2. The Company shall 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, his testator or intestate is or was a director, officer or employee of
the Company or any predecessor of the Company, or serves or served at any other
enterprise as a director, officer or employee at the request of the Company or
any predecessor to the Company.
3. Neither any amendment nor repeal of this Article X, nor the
adoption of any provision of the Company's Certificate of Incorporation
inconsistent with this Article X, shall eliminate or reduce the effect of this
Article X, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article X, would accrue or arise,
prior to such amendment, repeal or adoption of an inconsistent provision.
ARTICLE XI.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Company 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 Company.
ARTICLE XII.
Vacancies created by the resignation of one or more members of the
Board of Directors and newly created directorships, created in accordance with
the Bylaws of this Company, may be filled by the vote of a majority, although
less than a quorum, of the directors then in office, or by a sole remaining
director.
ARTICLE XIII.
Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the Company.
ARTICLE XIV.
Stockholders shall be entitled to cumulative voting rights in the
election of directors as set forth in this Article XIV and the Bylaws of the
Company, but only until cumulative voting rights are not required under Section
2115 of the California Corporations Code. Subject to such limitation, at all
elections of directors of the Company, each holder of stock or of any class or
classes or of a series or series thereof shall be entitled to as many votes as
shall equal the number of votes which (except for this provision as to
cumulative voting) such stockholder would be entitled to cast for the election
of directors with respect to such stockholder's shares of stock multiplied by
the number of directors to be elected, and such stockholder may cast all of such
votes for a single director or may distribute them among the number of directors
to be voted for, or for any two or more of them as such stockholder may see fit.
At such time as cumulative voting rights are not required under Section
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<PAGE> 18
2115 of the California Corporations Code, this Article XIV shall no longer be
effective and may be deleted herefrom upon any restatement of this Certificate
of Incorporation.
ARTICLE XV.
The Company reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
-14-
<PAGE> 19
IN WITNESS WHEREOF, the Company has caused this Second Amended and
Restated Certificate of Incorporation to be signed by Richard N. Tinsley, its
President and Chief Executive Officer, effective as of December 21, 1998.
TURNSTONE SYSTEMS, INC.
By: /s/ Richard N. Tinsley
--------------------------------------
Richard N. Tinsley
President and Chief Executive Officer
Attest:
/s/ M. D. Savoie
- ------------------------------------------
M. Denise Savoie
Vice President and Chief Financial Officer
-15-
<PAGE> 1
EXHIBIT 3.1B
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
TURNSTONE SYSTEMS, INC.
Turnstone Systems, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Turnstone Systems, Inc. The
corporation was originally incorporated under the same name and the original
Certificate of Incorporation of the corporation was filed with the Secretary of
State of the State of Delaware on January 2, 1998.
B. This Amended and Restated Certificate of Incorporation has been duly
adopted in accordance with the provisions of the General Corporation Law of the
State of Delaware by the Board of Directors and the Stockholders of the
corporation.
C. Pursuant to Section 242 and Section 245 of the General Corporation
Law of the State of Delaware, this Amended and Restated Certificate of
Incorporation amends and restates the provisions of the Certificate of
Incorporation of this corporation.
D. The text of the Certificate of Incorporation is hereby restated in
its entirety to read as follows:
<PAGE> 2
"Article I.
The name of the corporation is Turnstone Systems, Inc. (the
"Corporation").
Article II.
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, Delaware 19801,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
Article III.
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
Article IV.
This Corporation is authorized to issue two classes of stock to be
designated, respectively, Common Stock and Preferred Stock. The total number of
shares of Common Stock which the Company is authorized to issue is 200,000,000,
$0.001 par value, and the total number of shares of Preferred Stock the Company
is authorized to issue is 5,000,000, $0.001 par value. The Preferred Stock may
be issued from time to time in one or more series pursuant to a resolution or
resolutions providing for such issue duly adopted by the Board of Directors
(authority to do so being hereby expressly vested in the Board). The Board of
Directors is further authorized to determine or alter the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and to fix the number of shares of any series of
Preferred Stock and the designation of any such series of Preferred Stock. The
Board of Directors, within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors originally fixing the number of shares
constituting any series, may increase or decrease (but not below the number of
shares in any such series then outstanding), the number of shares of any series
subsequent to the issue of shares of that series.
Article V.
The Corporation is to have perpetual existence.
Article VI.
Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
<PAGE> 3
Article VII.
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 constitute the whole Board of Directors of the corporation shall be
designated in the Bylaws of the corporation.
2. 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.
3. 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.
4. 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 ("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 in which the new directorship was created or the
vacancy occurred and until such director's successor shall have been elected and
qualified.
5. 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: 2.2 (Annual Meeting), 2.3 (Special Meeting), 2.5 (Advance
Notice of Stockholder Nominees and Stockholder Business) and 2.11 (No
Stockholder Action by Written Consent Without A Meeting).
6. 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.
<PAGE> 4
7. Any director, or the entire Board of Directors, may be removed from
office at any time (i) with cause only 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 only
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
ARTICLE VIII.
Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal any aspect of
ARTICLE VII or this ARTICLE VIII.
ARTICLE IX.
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 VIII of this
Certificate, and all rights conferred upon the stockholders herein are granted
subject to this right.
ARTICLE X.
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.
<PAGE> 5
ARTICLE XI.
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 be indemnified by the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
2. The Corporation shall 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, his 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 any amendment nor repeal of this Article XI, nor the
adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article XI, shall eliminate or reduce the effect of this
Article XI, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article XI, would accrue or arise,
prior to such amendment, repeal or adoption of an inconsistent provision.
ARTICLE XII.
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.
ARTICLE XIII.
Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the Corporation."
<PAGE> 6
IN WITNESS WHEREOF, the Board of Directors of the Company has caused
this Certificate of Incorporation to be signed by Richard N. Tinsley, its
President and Chief Executive Officer, effective as of _________________, 1999.
TURNSTONE SYSTEMS, INC.
By:
-------------------------------
Richard N. Tinsley
President and Chief Executive Officer
Attest:
- ----------------------------------
M. Denise Savoie, Chief Financial
Officer and Vice President,
Business Operations
<PAGE> 1
EXHIBIT 3.2A
CERTIFICATE OF AMENDMENT OF BYLAWS OF
TURNSTONE SYSTEMS, INC.
Thomas C. DeFilipps, the Secretary of Turnstone Systems, Inc., a
Delaware corporation (the "Company"), hereby certifies that at its meeting on
September 8, 1999, the Company's Board of Directors approved and authorized the
amendment of the first sentence of Section 3.2 of the Company's Bylaws.
Section 3.2 of the Company's Bylaws shall in its entirety read as
follows:
"The authorized number of directors shall be six (6). No reduction of
the authorized number of directors shall have the effect of removing any
director before that director's term of office expires."
Executed effective as of September 8, 1999
/s/ Thomas C. DeFilipps
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Thomas C. DeFilipps, Secretary
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BYLAWS
OF
TURNSTONE SYSTEMS, INC.
(A DELAWARE CORPORATION)
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TABLE OF CONTENTS
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ARTICLE I - CORPORATE OFFICES........................................................1
1.1 REGISTERED OFFICE..................................................1
1.2 OTHER OFFICES......................................................1
ARTICLE II - MEETINGS OF STOCKHOLDERS................................................1
2.1 PLACE OF MEETINGS..................................................1
2.2 ANNUAL MEETING.....................................................1
2.3 SPECIAL MEETING....................................................3
2.4 NOTICE OF STOCKHOLDERS' MEETINGS...................................3
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.......................4
2.6 QUORUM.............................................................4
2.7 ADJOURNED MEETING; NOTICE..........................................4
2.8 VOTING.............................................................5
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT..................5
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING............6
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS........6
2.12 PROXIES............................................................7
2.13 INSPECTORS OF ELECTION.............................................7
ARTICLE III - DIRECTORS..............................................................8
3.1 POWERS.............................................................8
3.2 NUMBER.............................................................8
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS............8
3.4 RESIGNATION AND VACANCIES..........................................8
3.5 REMOVAL............................................................9
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..........................10
3.7 FIRST MEETINGS....................................................10
3.8 REGULAR MEETINGS..................................................10
3.9 SPECIAL MEETINGS; NOTICE..........................................10
3.10 QUORUM............................................................11
3.11 WAIVER OF NOTICE..................................................11
3.12 ADJOURNMENT.......................................................11
3.13 NOTICE OF ADJOURNMENT.............................................11
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TABLE OF CONTENTS
(CONTINUED)
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3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.................11
3.15 FEES AND COMPENSATION OF DIRECTORS................................12
3.16 APPROVAL OF LOANS TO OFFICERS.....................................12
ARTICLE IV - COMMITTEES.............................................................12
4.1 COMMITTEES OF DIRECTORS...........................................12
4.2 MEETINGS AND ACTION OF COMMITTEES.................................13
ARTICLE V - OFFICERS................................................................13
5.1 OFFICERS..........................................................13
5.2 ELECTION OF OFFICERS..............................................13
5.3 SUBORDINATE OFFICERS..............................................13
5.4 REMOVAL AND RESIGNATION OF OFFICERS...............................14
5.5 VACANCIES IN OFFICES..............................................14
5.6 CHAIRMAN OF THE BOARD.............................................14
5.7 CHIEF EXECUTIVE OFFICER...........................................14
5.8 VICE PRESIDENTS...................................................14
5.9 SECRETARY.........................................................15
5.10 CHIEF FINANCIAL OFFICER...........................................15
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS.....16
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.........................16
6.2 INDEMNIFICATION OF OTHERS.........................................16
6.3 INSURANCE.........................................................16
ARTICLE VII - RECORDS AND REPORTS...................................................17
7.1 MAINTENANCE AND INSPECTION OF RECORDS.............................17
7.2 INSPECTION BY DIRECTORS...........................................17
7.3 ANNUAL STATEMENT TO STOCKHOLDERS..................................18
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS....................18
ARTICLE VIII GENERAL MATTERS........................................................18
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.............18
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS.........................18
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED................19
8.4 STOCK CERTIFICATES; PARTLY PAID SHARES............................19
8.5 SPECIAL DESIGNATION ON CERTIFICATES...............................19
8.6 LOST CERTIFICATES.................................................20
8.7 CONSTRUCTION; DEFINITIONS.........................................20
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ARTICLE IX - AMENDMENTS.............................................................20
ARTICLE X - DISSOLUTION.............................................................20
ARTICLE XI - CUSTODIAN..............................................................21
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES.......................21
11.2 DUTIES OF CUSTODIAN...............................................22
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BYLAWS
OF
TURNSTONE SYSTEMS, INC.
(A DELAWARE CORPORATION)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be fixed in the
Certificate of Incorporation of the corporation.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside
the State of Delaware designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 ANNUAL MEETING
(a) The annual meeting of stockholders shall be held each year on a
date and at a time designated by the board of directors. At the meeting,
directors shall be elected, and any other proper business may be transacted.
(b) At an annual meeting of the stockholders, only such business shall
be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly 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
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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 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
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(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.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
Board of Directors, or by the chairman of the board, or in the absence of the
chairman of the board by the chief executive officer, or by one or more
shareholders holding shares in the aggregate entitled to cast not less than ten
percent (10%) of the votes at that meeting, but such special meetings may not be
called by any other person or persons.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, chief
executive officer, or the secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5, that a meeting will be held at the time requested by the person or
persons who called the meeting, not less than thirty-five (35) nor more than
sixty (60) days after the receipt of the request. If the notice is not given
within twenty (20) days after the receipt of the request, the person or persons
requesting the meeting may give the notice. Nothing contained in this paragraph
of this Section 2.3 shall be construed as limiting, fixing, or affecting the
time when a meeting of stockholders called by action of the board of directors
may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
Except as set forth in Section 2.3, all notices of meetings of
stockholders shall be sent or otherwise given in accordance with Section 2.5 of
these bylaws not less than ten (10) nor more than sixty (60) days before the
date of the meeting. The notice shall specify the place, date, and hour of the
meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted (no business other than that specified in the notice
may be transacted) or (ii) in the case of the annual meeting, those matters
which the board of directors, at the time of giving the notice, intends to
present for action by the stockholders (but any proper matter may be presented
at the meeting for such action). The notice of any meeting at which directors
are to be elected shall include the name of any nominee or nominees who, at the
time of the notice, the board intends to present for election.
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2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that stockholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a stockholder at the address of that
stockholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the stockholder
at that address, then all future notices or reports shall be deemed to have been
duly given without further mailing if the same shall be available to the
stockholder on written demand of the stockholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 QUORUM
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of stockholders. The stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough stockholders 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.
2.7 ADJOURNED MEETING; NOTICE
Any stockholders' meeting, annual or special, whether or not a quorum
is present, may be adjourned from time to time by the vote of the majority of
the shares represented at that meeting, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting except
as provided in Section 2.6 of these bylaws.
When any meeting of stockholders, 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 are announced at the meeting at which the
adjournment is taken. However, if a new record date for the adjourned meeting is
fixed or if the adjournment is for more than thirty (30) days from the date set
for the original
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meeting, then notice of the adjourned meeting shall be given. Notice of any such
adjourned meeting shall be given to each stockholder of record entitled to vote
at the adjourned meeting in accordance with the provisions of Sections 2.4 and
2.5 of these bylaws. At any adjourned meeting the corporation may transact any
business which might have been transacted at the original meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the Certificate of
Incorporation, each outstanding share, regardless of class, shall be entitled to
one vote on each matter submitted to a vote of the stockholders. Any stockholder
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, except when the matter
is the election of directors, may vote them against the proposal; but, if the
stockholder fails to specify the number of shares which the stockholder is
voting affirmatively, it will be conclusively presumed that the stockholder's
approving vote is with respect to all shares which the stockholder is entitled
to vote.
If a quorum is present, the affirmative vote of the majority of the
shares represented and voting at a duly held meeting (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the stockholders, unless the vote of a greater number or a vote by
classes is required by law or by the Certificate of Incorporation.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of stockholders, either annual or
special, however called and noticed, and wherever held, shall be as valid as
though they had been taken 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, who was not present in person
or by proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of stockholders. All such waivers, consents,
and approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that 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. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by law to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
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2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A 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.
Notwithstanding the foregoing, effective upon the registration of any
class of securities of the Corporation pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, the stockholders of the Corporation
may not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only stockholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date.
If the board of directors does not so fix a record date:
(a) the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the 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; and
(b) the record date for determining stockholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the board has been taken, shall
be at the close of business on the day on which the board adopts the resolution
relating to that action.
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The record date for any other purpose shall be as provided in Article
VIII of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the secretary
of the corporation, but no such proxy shall be voted or acted upon after three
(3) years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.13 INSPECTORS OF ELECTION
Before any meeting of stockholders, the board of directors may appoint
an inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any stockholder or a stockholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The number
of inspectors shall be either one (1) or three (3). If inspectors are appointed
at a meeting pursuant to the request of one (1) or more stockholders or proxies,
then the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
then the chairman of the meeting may, and upon the request of any stockholder or
a stockholder's proxy shall, appoint a person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence of
a quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election
or vote with fairness to all stockholders.
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ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and to any limitations in the Certificate of Incorporation or these bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
3.2 NUMBER
The authorized number of directors shall be three (3). No reduction of
the authorized number of directors shall have the effect of removing any
director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these Bylaws, at each annual
meeting of stockholders, directors of the Corporation shall be elected to hold
office until the expiration of the term for which they are elected, and until
their successors have been duly elected and qualified; except that if any such
election shall not be so held, such election shall take place at a stockholders'
meeting called and held in accordance with the Delaware General Corporation Law.
Directors need not be stockholders unless so required by the
Certificate of Incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed.
Elections of directors need not be by written ballot.
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.
3.4 RESIGNATION AND VACANCIES
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
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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.
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.
3.5 REMOVAL
Subject to any limitations imposed by law, and unless otherwise
provided in the Certificate of Incorporation, the Board of Directors, or any
individual Director, may be removed from office at any time by the affirmative
vote of the holders of at least a majority of the then outstanding shares of the
capital stock of the corporation entitled to vote at an election of Directors.
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3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place
within or outside the State of Delaware that has been designated from time to
time by resolution of the board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held at any place within or outside the
State of Delaware that has been designated in the notice of the meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.7 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be
held at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.8 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice
if the times of such meetings are fixed by the board of directors.
3.9 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 in the absence of the
chairman of the board by the chief executive officer or any three 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, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not
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specify the purpose or the place of the meeting, if the meeting is to be held at
the principal executive office of the corporation.
3.10 QUORUM
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in Section
3.10 of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
Certificate of Incorporation and applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.11 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) 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 (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.12 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.
3.13 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not
be given unless the meeting is adjourned for more than twenty-four (24) hours.
If the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.8 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
board of directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the board.
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3.15 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.16 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, but no such committee shall have the power or authority to (i) amend
the Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the board of directors as provided in Section 151(a) of the
General Corporation Law of Delaware, fix any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
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authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings), Section 3.7 (regular meetings), Section 3.8 (special
meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice),
Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section
3.13 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a chairman of the board, a
chief executive officer, a secretary and a chief financial officer. The
corporation may also have, at the discretion of the board of directors, a
president, one or more vice presidents, one or more assistant secretaries, one
or more assistant treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 5.3 of these bylaws. Any number of
offices may be held by the same person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
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5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall serve
as the corporation's general manager, and shall have general supervision,
direction and control of the corporation's business and its officers, and, if
present, preside at meetings of the stockholders and the board of directors and
exercise and perform such other powers and duties as may from time to time be
assigned to him by the board of directors or as may be prescribed by these
bylaws. If there is no chief executive officer, then the chairman of the board
shall also be the chief executive officer of the corporation and shall have the
powers and duties prescribed in Section 5.7 of these bylaws.
The chairman of the board shall report to the board of directors.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the chief
executive officer shall, subject to the control of the chairman of the board, or
the board of directors if there is no chairman of the board, have general
supervision, direction, and control of the business and the officers of the
corporation. He or she shall preside at all meetings of the stockholders and the
board of directors, in the absence or nonexistence of a chairman of the board.
He or she shall have the general powers and duties of management usually vested
in the office of president of a corporation, and shall have such other powers
and duties as may be prescribed by the board of directors or these bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform all
the duties of the president and when so acting shall have all the powers
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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,
these bylaws, the president or the chairman of the board.
5.9 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 direct, a book of minutes of all meetings and actions of
directors, committees of directors and stockholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, 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 these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositaries as may
be designated by the board of directors. He or she shall disburse the funds of
the corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the 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.
6.3 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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ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his or her position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
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7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action (other than action by stockholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
stockholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided by law.
If the board of directors does not so fix a record date, then the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the board adopts the applicable resolution
or the sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
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8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the chief
financial officer, the secretary or an assistant secretary of such corporation
representing the number of shares registered in certificate form. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if he or she were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock
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a statement that the corporation will furnish without charge to each stockholder
who so requests the powers, the designations, the preferences, and the relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended
or repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its Certificate of Incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of
directors of the corporation that the corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
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At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent
in writing, either in person or by duly authorized attorney, to a dissolution,
no meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall have
attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
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11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver
appointed under Section 291 of the General Corporation Law of Delaware, but the
authority of the custodian shall be to continue the business of the corporation
and not to liquidate its affairs and distribute its assets, except when the
Court of Chancery otherwise orders and except in cases arising under Sections
226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.
-22-
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CERTIFICATE OF ADOPTION OF BYLAWS
OF
TURNSTONE SYSTEMS, INC.
ADOPTION BY INCORPORATOR
The undersigned person appointed in the Certificate of Incorporation to
act as the Incorporator of Turnstone Systems, Inc. hereby adopts the foregoing
bylaws, comprising twenty-three (23) pages, as the Bylaws of the corporation.
Executed this 2nd day of January 1998.
/s/ Thomas C. DeFilipps
------------------------------
Thomas C. DeFilipps
Incorporator
Certificate by Secretary of Adoption by Incorporator
The undersigned hereby certifies that he is the duly elected,
qualified, and acting Secretary of Turnstone Systems, Inc. and that the
foregoing Bylaws, comprising twenty-three (23) pages, were adopted as the Bylaws
of the corporation on January 2, 1998, 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 January 1998.
/s/ Thomas C. DeFilipps
------------------------------
Thomas C. DeFilipps
Secretary
<PAGE> 1
Exhibit 3.2B
AMENDED AND RESTATED BYLAWS OF
TURNSTONE SYSTEMS, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the Corporation shall be 1209 Orange Street, in
the City of Wilmington, County of New Castle, State of Delaware, 19801. The name
of the registered agent of the Corporation at such location is The Corporation
Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place
or places where the Corporation is qualified to do business. ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the Corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. At the meeting, directors shall be
elected and any other proper business may be transacted.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time only by (i)
the board of directors, (ii) the chairman of the board, (iii) the president or
(iv) the chief executive officer.
If a special meeting is called by any person other than the board of
directors, the request shall be in writing, specifying the time of such meeting
and the general nature of the business proposed to
<PAGE> 2
be transacted, and shall be delivered personally or sent by registered mail or
by telegraphic or other facsimile transmission to the chairman of the board, the
president, any vice president, or the secretary of the corporation. No business
may be transacted at such special meeting otherwise than specified in such
notice. The officer receiving the request shall cause notice to be promptly
given to the stockholders entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time
requested by the person or persons who called the meeting, not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the request.
If the notice is not given within twenty (20) days after the receipt of the
request, the person or persons requesting the meeting may give the notice.
Nothing contained in this paragraph of this Section 2.3 shall be construed as
limiting, fixing, or affecting the time when a meeting of stockholders called by
action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.6 of these Bylaws not less
than 10 nor more than 60 days before the date of the meeting to each stockholder
entitled to vote at such meeting. The notice shall specify the place, date and
hour of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other 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 such nominations or
other business to be considered properly brought before the meeting by a
stockholder, such stockholder must have given timely notice and in proper form
of his intent to bring such business before such meeting. To be timely, such
stockholder's notice must be delivered to or mailed and received by the
secretary of the Corporation not less than 90 days prior to the meeting;
provided, however, that in the event that less than 100 days notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. To be in
proper form, a stockholder's notice to the secretary shall set forth:
(i) the name and address of the stockholder who intends to make the
nominations, propose the business, and, as the case may be, the
name and address of the person or persons to be nominated or the
nature of the business to be proposed;
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(ii) a representation that the stockholder is a holder of record of
stock of the Corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice
or introduce the business specified in the notice;
(iii) if applicable, 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 nomination or nominations are to be made by the
stockholder;
(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required
to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had the nominee
been nominated, or intended to be nominated, or the matter been
proposed, or intended to be proposed by the board of directors;
and
(v) if applicable, the consent of each nominee to serve as director
of the Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the foregoing
procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.7 QUORUM
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (i) the chairman of the meeting, or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
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When a quorum is present or represented at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, by express provisions of the statutes or
of the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of the question.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these Bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than 30 days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Sections 2.12 and 2.14 of these
Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.
2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
2.11 NO STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
The stockholders of the Corporation may not take action by written consent
without a meeting but must take any such actions at a duly called annual or
special meeting.
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2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than 60 nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other action.
If the board of directors does not so fix a record date, the fixing of such
record date shall be governed by the provisions of Section 213 of the General
Corporation Law of Delaware.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the Corporation, but no such
proxy shall be voted or acted upon after 3 years from its date, unless the proxy
provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a Corporation shall
prepare and make, at least 10 days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The stock ledger 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. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the
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Corporation, or to vote in person or by proxy at any meeting of stockholders and
of the number of shares held by each such stockholder.
2.15 CONDUCT OF BUSINESS
Meetings of stockholders shall be presided over by the chairman of the
board, if any, or in his absence by the president, or in his absence by a vice
president, or in the absence of the foregoing persons by a chairman designated
by the board of directors, or in the absence of such designation by a chairman
chosen at the meeting. The secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting. The chairman of any meeting of stockholders shall
determine the order of business and the procedures at the meeting, including
such matters as the regulation of the manner of voting and conduct of business.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these Bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER
The authorized number of directors of the Corporation shall be six (6). No
reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 CLASSES OF DIRECTORS
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 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
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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.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the Corporation.
Subject to the requirements, if any, set forth in the certificate of
incorporation, stockholders may remove directors with or without cause. Unless
otherwise provided in the certificate of incorporation, any vacancy occurring in
the board of directors with or without cause may be filled by a majority of the
remaining members of the board of directors, although such majority is less than
a quorum, or by a plurality of the votes cast at a meeting of stockholders, and
each director so elected shall hold office until the expiration of the term of
office of the director whom he has replaced.
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 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 10% 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
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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.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the Corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.7 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, the president, any vice
president, the secretary or 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, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the Corporation. If the notice is mailed, it
shall be deposited in the United States mail at least 4 days before the time of
the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least 48 hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
Corporation.
3.8 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation.
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3.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
3.10 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.11 CONDUCT OF BUSINESS
Meetings of the board of directors shall be presided over by the chairman
of the board, if any, or in his absence by the chief executive officer, or in
their absence by a chairman chosen at the meeting. The secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting. The chairman of any
meeting shall determine the order of business and the procedures at the meeting.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, the board of directors shall have the authority to fix the compensation
of directors. The directors may be paid their expenses, if any, of attendance at
each meeting of the board of directors and may be paid a fixed sum for
attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
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3.14 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, any director or the entire board of
directors may only be removed pursuant to the provisions set forth in the
certificate of incorporation. If at any time a class or series of shares is
entitled to elect one or more directors, the provisions of this Article 3.14
shall apply to the vote of that class or series and not to the vote of the
outstanding shares as a whole.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the Corporation. The board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolutions of the
board of directors or in the Bylaws of the Corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the Corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the Corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the Corporation or a revocation
of a dissolution, or (v) amend the Bylaws of the Corporation; and, unless the
board resolution establishing the committee, the Bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
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4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these Bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.6 (regular meetings),
Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9
(waiver of notice), Section 3.10 (adjournment and notice of adjournment),
Section 3.11 (conduct of business) and 3.12 (action without a meeting), with
such changes in the context of those Bylaws as are necessary to substitute the
committee and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may also be called by
resolution of the board of directors and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the Corporation shall be a chief executive officer, one or
more vice presidents, a secretary and a chief financial officer. The Corporation
may also have, at the discretion of the board of directors, a chairman of the
board, a president, a chief operating officer, one or more executive, senior or
assistant vice presidents, assistant secretaries and any such other officers as
may be appointed in accordance with the provisions of Section 5.2 of these
Bylaws. Any number of offices may be held by the same person.
5.2 APPOINTMENT OF OFFICERS
Except as otherwise provided in this Section 5.2, the officers of the
Corporation shall be appointed by the board of directors, subject to the rights,
if any, of an officer under any contract of employment. The board of directors
may appoint, or empower an officer to appoint, such officers and agents of the
business as the Corporation may require (whether or not such officer or agent is
described in this Article V), each of whom shall hold office for such period,
have such authority, and perform such duties as are provided in these Bylaws or
as the board of directors may from time to time determine. Any vacancy occurring
in any office of the Corporation shall be filled by the board of directors or
may be filled by the officer, if any, who appointed such officer.
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5.3 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors or, in the case of an officer appointed by
another officer, by such other officer.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Corporation under any contract to which the officer is a
party.
5.4 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these Bylaws. If there is no chief
executive officer, then the chairman of the board shall also be the chief
executive officer of the Corporation and shall have the powers and duties
prescribed in Section 5.5 of these Bylaws.
5.5 CHIEF EXECUTIVE OFFICER
The Chief Executive Officer of the Corporation shall, subject to the
control of the Board of Directors, have general supervision, direction and
control of the business and the officers of the Corporation. He or she shall
preside at all meetings of the stockholders and, in the absence or nonexistence
of a Chairman of the Board at all meetings of the Board of Directors. He or she
shall have the general powers and duties of management usually vested in the
chief executive officer of a Corporation, including general supervision,
direction and control of the business and supervision of other officers of the
Corporation, and shall have such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws.
The Chief Executive Officer shall, without limitation, have the authority
to execute bonds, mortgages and other contracts requiring a seal, under the seal
of the Corporation, except where required or permitted by law to be otherwise
signed and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation.
5.6 PRESIDENT
Subject to such supervisory powers as may be given by these Bylaws or the
Board of Directors to the Chairman of the Board or the Chief Executive Officer,
if there be such officers, the president shall have general supervision,
direction and control of the business and supervision of
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other officers of the Corporation, and shall have such other powers and duties
as may be prescribed by the Board of Directors or these Bylaws. In the event a
Chief Executive Officer shall not be appointed, the President shall have the
duties of such office.
5.7 VICE PRESIDENT
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the chief executive officer and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the chief executive
officer. 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, these Bylaws, the chief executive officer or the chairman of the
board.
5.8 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
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the Corporation or at the office of the Corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these Bylaws. He shall keep the seal of the Corporation, if one be adopted, 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 these Bylaws.
5.9 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director.
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The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the Corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
Corporation as may be ordered by the board of directors, shall render to the
chief executive officer and directors, whenever they request it, an account of
all of his transactions as treasurer and of the financial condition of the
Corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these Bylaws.
5.10 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.11 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
Corporation shall respectively have such authority and perform such duties in
the management of the business of the Corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 THIRD PARTY ACTIONS
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation to procure a
judgement in its favor) by reason of the fact that he is or was 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
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably
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believed to be in or not opposed to the best interest of the Corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
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 expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper.
6.3 SUCCESSFUL DEFENSE
To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
6.4 DETERMINATION OF CONDUCT
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a court)
shall be made by the Corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in Sections 6.1 and 6.2. Such determination shall be made
(1) by the board of Directors or the Executive Committee by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) or if such quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by the stockholders.
6.5 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of
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an undertaking by or on behalf of the director, officer, employee or agent to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
The indemnification and advancement of expenses provided or granted
pursuant to the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another while holding such office.
6.7 INSURANCE INDEMNIFICATION
The Corporation shall have the power to 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
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.
6.8 THE CORPORATION
For purposes of this Article VI, references to "the Corporation" shall
include, in addition to the resulting Corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
and subject to the provisions of this Article VI (including, without limitation
the provisions of Section 6.4) with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
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reasonably deemed to have acted in a manner "not opposed to the best interests
of the Corporation" as referred to in this Article VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The indemnification and advanced of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The Corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his position as a director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine whether a director is
entitled to the inspection sought. The Court may summarily order the Corporation
to permit the director to inspect any and all books and records, the stock
ledger, and the stock list and to make copies or extracts therefrom. The Court
may, in its discretion, prescribe any limitations or conditions with reference
to the inspection, or award such other and further relief as the Court may deem
just and proper.
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7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the chief executive officer, any vice president,
the chief financial officer, the secretary or assistant secretary of this
Corporation, or any other person authorized by the board of directors or the
chief executive officer or a vice president, is authorized to vote, represent,
and exercise on behalf of this Corporation all rights incident to any and all
shares of any other corporation or corporations standing in the name of this
Corporation. The authority granted herein may be exercised either by such person
directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the Corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these Bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the Corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
Corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a
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facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
The Corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the Corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the Corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the Corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the Corporation shall issue to represent
such class or series of stock a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and cancelled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws.
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Without limiting the generality of this provision, the singular number includes
the plural, the plural number includes the singular, and the term "person"
includes both a Corporation and a natural person.
8.7 DIVIDENDS
The directors of the Corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the Corporation's
capital stock.
The directors of the Corporation may set apart out of any of the funds of
the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
The Corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the Corporation or the transfer agent of the Corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The Corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
Corporation to restrict the transfer of shares of stock of the Corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
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8.12 REGISTERED STOCKHOLDERS
The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The original or other Bylaws of the Corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
Corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal Bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal Bylaws.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the Corporation that the Corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the Corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the Corporation shall be dissolved.
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ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the Corporation is insolvent, to be
receivers, of and for the Corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect
successors to directors whose terms have expired or would have
expired upon qualification of their successors; or
(ii) the business of the Corporation is suffering or is threatened
with irreparable injury because the directors are so divided
respecting the management of the affairs of the Corporation that
the required vote for action by the board of directors cannot be
obtained and the stockholders are unable to terminate this
division; or
(iii) the Corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or
distribute its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the Corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
ARTICLE XII
LOANS TO OFFICERS
The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of its
subsidiaries, including any officer or employee who is a Director of the
Corporation or its subsidiaries, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the Corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this Bylaw shall be deemed to deny, limit
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or restrict the powers of guaranty or warranty of the Corporation at common law
or under any statute.
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AMENDED AND RESTATED BYLAWS
OF
TURNSTONE SYSTEMS, INC.
A DELAWARE CORPORATION
EFFECTIVE AS OF __________
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C>
ARTICLE I CORPORATE OFFICES...........................................................................................1
1.1 REGISTERED OFFICE...................................................................................1
1.2 OTHER OFFICES.......................................................................................1
ARTICLE II MEETINGS OF STOCKHOLDERS...................................................................................1
2.1 PLACE OF MEETINGS...................................................................................1
2.2 ANNUAL MEETING......................................................................................1
2.3 SPECIAL MEETING.....................................................................................1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS....................................................................2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS.....................................2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE........................................................3
2.7 QUORUM..............................................................................................3
2.8 ADJOURNED MEETING; NOTICE...........................................................................4
2.9 VOTING..............................................................................................4
2.10 WAIVER OF NOTICE....................................................................................4
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.............................................4
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.........................................5
2.13 PROXIES.............................................................................................5
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE...............................................................5
2.15 CONDUCT OF BUSINESS.................................................................................6
ARTICLE III DIRECTORS.................................................................................................6
3.1 POWERS..............................................................................................6
3.2 NUMBER..............................................................................................6
3.3 CLASSES OF DIRECTORS................................................................................6
3.4 RESIGNATION AND VACANCIES...........................................................................7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............................................................8
3.6 REGULAR MEETINGS....................................................................................8
3.7 SPECIAL MEETINGS; NOTICE............................................................................8
3.8 QUORUM..............................................................................................8
3.9 WAIVER OF NOTICE....................................................................................9
3.10 ADJOURNED MEETING; NOTICE...........................................................................9
3.11 CONDUCT OF BUSINESS.................................................................................9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING...................................................9
3.13 FEES AND COMPENSATION OF DIRECTORS..................................................................9
3.14 REMOVAL OF DIRECTORS...............................................................................10
</TABLE>
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TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
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<S> <C> <C> <C>
ARTICLE IV COMMITTEES................................................................................................10
4.1 COMMITTEES OF DIRECTORS............................................................................10
4.2 COMMITTEE MINUTES..................................................................................11
4.3 MEETINGS AND ACTION OF COMMITTEES..................................................................11
ARTICLE V OFFICERS...................................................................................................11
5.1 OFFICERS...........................................................................................11
5.2 APPOINTMENT OF OFFICERS............................................................................11
5.3 REMOVAL AND RESIGNATION OF OFFICERS................................................................12
5.4 CHAIRMAN OF THE BOARD..............................................................................12
5.5 CHIEF EXECUTIVE OFFICER............................................................................12
5.6 PRESIDENT..........................................................................................12
5.7 VICE PRESIDENT.....................................................................................13
5.8 SECRETARY..........................................................................................13
5.9 CHIEF FINANCIAL OFFICER............................................................................13
5.10 ASSISTANT SECRETARY................................................................................14
5.11 AUTHORITY AND DUTIES OF OFFICERS...................................................................14
ARTICLE VI INDEMNITY.................................................................................................14
6.1 THIRD PARTY ACTIONS................................................................................14
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION......................................................15
6.3 SUCCESSFUL DEFENSE.................................................................................15
6.4 DETERMINATION OF CONDUCT...........................................................................15
6.5 PAYMENT OF EXPENSES IN ADVANCE.....................................................................15
6.6 INDEMNITY NOT EXCLUSIVE............................................................................16
6.7 INSURANCE INDEMNIFICATION..........................................................................16
6.8 THE CORPORATION....................................................................................16
6.9 EMPLOYEE BENEFIT PLANS.............................................................................16
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES........................................17
ARTICLE VII RECORDS AND REPORTS......................................................................................17
7.1 MAINTENANCE AND INSPECTION OF RECORDS..............................................................17
7.2 INSPECTION BY DIRECTORS............................................................................17
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.....................................................18
ARTICLE VIII GENERAL MATTERS.........................................................................................18
8.1 CHECKS.............................................................................................18
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS...................................................18
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C>
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.............................................................18
8.4 SPECIAL DESIGNATION ON CERTIFICATES................................................................19
8.5 LOST CERTIFICATES..................................................................................19
8.6 CONSTRUCTION; DEFINITIONS..........................................................................19
8.7 DIVIDENDS..........................................................................................20
8.8 FISCAL YEAR........................................................................................20
8.9 SEAL...............................................................................................20
8.10 TRANSFER OF STOCK..................................................................................20
8.11 STOCK TRANSFER AGREEMENTS..........................................................................20
8.12 REGISTERED STOCKHOLDERS............................................................................21
ARTICLE IX AMENDMENTS................................................................................................21
ARTICLE X DISSOLUTION................................................................................................21
ARTICLE XI CUSTODIAN.................................................................................................22
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES........................................................22
11.2 DUTIES OF CUSTODIAN................................................................................22
ARTICLE XII LOANS TO OFFICERS........................................................................................22
</TABLE>
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EXHIBIT 4.2
AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT
This Amendment No. 1 (the "Amendment") to Registration Rights Agreement
dated as of January 12, 1998 (the "Rights Agreement") is made and entered into
as of January 12, 1999 pursuant to Section 19 of the Rights Agreement by and
among Turnstone Systems, Inc., a Delaware corporation, and the purchasers of the
Company's Series A Preferred Stock pursuant to the Series A Preferred Stock
Purchase Agreement dated January 12, 1998 (the "Series A Purchasers").
Capitalized terms used in this Amendment that are not otherwise defined herein
shall have the respective meanings assigned to them in the Rights Agreement.
RECITALS
WHEREAS, Section 20(b) of the Rights Agreement permits the Company to
grant additional registration rights on a pari passu basis with those granted to
the Series A Purchasers pursuant to the Rights Agreement, and Section 19 of the
Rights Agreement permits amendment thereof by written consent of the Company and
holders of 66-2/3% of the outstanding shares of Registrable Securities;
WHEREAS, certain of the Series A Purchasers and certain other entities
have agreed to purchase shares of the Company's Series B Preferred Stock (the
"Series B Shares") pursuant to the Series B Preferred Stock Purchase Agreement
dated December 23, 1998;
WHEREAS, the Company has agreed to grant the purchasers of the Series B
Shares registration rights on a pari passu basis with those currently held by
the Series A Purchasers.
WHEREAS, the Series A Purchasers and the Company wish to enter this
Amendment to clarify the definition section of the Rights Agreement and to
include as Registrable Securities thereunder future series of Preferred Stock of
the Company (including the Series B Shares) that may be issued pursuant to stock
purchase agreements approved by the Board of Directors.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. For purposes of the Rights Agreement, each reference to "Series A
Preferred" shall hereafter be deemed to refer to the "Preferred."
2. For purposes of the Rights Agreement, "Preferred" shall mean shares
of any series of the Preferred Stock of the Company issued and sold by the
Company pursuant to a stock purchase agreement approved by the Company's Board
of Directors.
3. The definition of "Series A Preferred" in Section 1 of the Rights
Agreement shall be deleted in its entirety.
4. The definition of Purchaser in Section 1 of the Rights Agreements is
hereby amended and restated to read as follows:
<PAGE> 2
"Purchaser" shall mean each person or entity who has acquired
shares of Preferred and who is a signatory to this Agreement or who
holds Registrable Securities and may become a signatory pursuant to
Section 20(b) hereof.
5. This Amendment shall also be deemed to make each of the undersigned
a signatory to the Rights Agreement pursuant to Section 20(b) thereof.
6. Except as expressly set forth in this Amendment, the Rights
Agreement shall continue in full force and effect in accordance with its terms.
7. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. This Amendment shall be governed by and construed
and enforced in accordance with the laws of the State of California, without
reference to the conflict of laws provisions thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this AMENDMENT NO. 1
TO REGISTRATION RIGHTS AGREEMENT to be executed as of the date first above
written.
"COMPANY" TURNSTONE SYSTEMS
A DELAWARE CORPORATION
By: /s/ Richard N. Tinsley
--------------------------------
Name: Richard N. Tinsely
------------------------------
Title: CEO
-----------------------------
"PURCHASERS" INSTITUTIONAL VENTURE PARTNERS
VII, L.P.,
BY ITS GENERAL PARTNER
INSTITUTIONAL VENTURE MANAGEMENT VII, L.P.
/s/ Geoffrey Yang
-----------------------------------
Geoffrey Y. Yang, General Partner
INSTITUTIONAL VENTURE
MANAGEMENT VII, L.P.
/s/ Geoffrey Yang
-----------------------------------
Geoffrey Y. Yang, General Partner
IVP FOUNDERS FUND I, L.P.,
BY ITS GENERAL PARTNER
INSTITUTIONAL VENTURE MANAGEMENT VI, L.P.
/s/ Geoffrey Yang
-----------------------------------
Geoffrey Y. Yang, General Partner
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT]
<PAGE> 4
"PURCHASERS" (CONT'D) MATRIX PARTNERS V, L.P.
By: Matrix V Management Company, L.L.C.
Its General Partner
/s/ Andrew Verhalen
-----------------------------------
By: Andrew W. Verhalen, Member
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT]
<PAGE> 5
"PURCHASERS" (CONT'D) BENCHMARK CAPITAL PARTNERS II, L.P.
as nominee for
BENCHMARK CAPITAL PARTNERS, II, L.P.
BENCHMARK FOUNDERS' FUND II, L.P.
BENCHMARK FOUNDERS' FUND II-A, L.P.
BENCHMARK MEMBERS' FUND II, L.P.
By: Benchmark Capital Management
Co. II, L.L.C.
Its General Partner
By: /s/ Andrew S. Rachleff
-------------------------------
Managing Member
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT]
<PAGE> 6
"PURCHASERS" (CONT'D) WS INVESTMENT COMPANY 97B
By: /s/ Thomas C. DeFilipps
----------------------------------
Thomas C. DeFilipps, General Partner
/s/ Thomas C. DeFilipps
-------------------------------------
Thomas C. DeFilipps
COMDISCO, INC.
By: /s/ James P. Labe
---------------------------------
Name: James P. Labe
-------------------------------
Title: President, Comdisco Ventures Division
-------------------------------------
IVP BROADBAND FUND, L.P.,
BY ITS GENERAL PARTNER
IVP BROADBAND MANAGEMENT, LLC
BY ITS MANAGING DIRECTOR,
INSTITUTIONAL VENTURE MANAGEMENT VIII, LLC
By: /s/ Geoffrey Yang
---------------------------------
Geoffrey Y. Yang, Managing Director
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT]
<PAGE> 7
"PURCHASERS" (CONT'D) STANFORD UNIVERSITY
By: /s/ H. A. Turner
---------------------------------
Name: Harry A. Turner
-------------------------------
Title: Managing Director,
Stanford Management Company
------------------------------
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT]
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Addendum
Signature Page to Registration Rights Agreement to be executed as of the date
first above written.
"COMPANY" TURNSTONE SYSTEMS, INC.
A DELAWARE CORPORATION
By: /s/ Richard N. Tinsley
--------------------------------
Name: Richard N. Tinsley
------------------------------
Title: CEO
-----------------------------
"ADDITIONAL PURCHASER" CHARLES ROSS PARTNERS INVESTMENT
FUND NUMBER 7
By: /s/ Gregory E. Lawler
--------------------------------
Name: Gregory E. Lawler
------------------------------
Title: General Partner
-----------------------------
[SIGNATURE PAGE TO ADDENDUM TO REGISTRATION RIGHTS AGREEMENT]
<PAGE> 9
TURNSTONE SYSTEMS, INC.
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made as of
January 12, 1998 by and among Turnstone Systems, Inc., a Delaware corporation
(the "Company"), and each of the persons and entities who have purchased shares
of the Company's Series A Preferred Stock (individually, a "Purchaser," and
collectively, the "Purchasers") pursuant to the Series A Preferred Stock
Purchase Agreement of even date herewith between the Company and the Purchasers
(the "Purchase Agreement").
NOW, THEREFORE, the parties hereto agree as follows:
AGREEMENT
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
successor agency.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any successor law thereto.
"Holder" shall mean each Purchaser, and any transferee of Registrable
Securities who pursuant to Section 15 below is entitled to registration rights
hereunder.
"Purchaser" shall mean each person or entity who has acquired shares of
Series A Preferred Company and who is a signatory to this Agreement or who holds
Registrable Securities and may become a signatory pursuant to Section 20(b)
hereof.
"Registrable Securities" shall mean (i) shares of the Company's Common
Stock issued or issuable upon the conversion of the Series A Preferred; (ii) any
Common Stock of the Company issued or issuable in respect of shares of the
Series A Preferred; (iii) shares of the Company's Common Stock issued or
issuable upon any conversion of the Series A Preferred upon any stock split,
stock dividend, recapitalization, or similar event; and (iv) any shares of the
Company's Common Stock issued or issuable upon conversion or exercise of any
convertible security for which subsequent registration rights are granted in
accordance with Section 20(b); provided, however, that Registrable Securities
shall not include shares of Common Stock that have been sold to or though a
broker or dealer or underwriter in a public distribution or public securities
transaction, sold in a transaction exempt from the registration and prospectus
delivery requirements of the Securities Act under Section 4(1) thereof so that
all transfer restrictions and restrictive legends with respect thereto, if any,
are removed upon the consummation of such sale, or Registrable Securities sold
by a person in a transaction in which rights under this Agreement are not
assigned.
<PAGE> 10
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company
in complying with Sections 5, 6, and 7 hereof, including, without limitation,
all registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, fees and disbursements of one
special counsel to the Holders, blue sky fees and expenses, and the expense of
any special audits incident to or required by any such registration but
excluding all Selling Expenses.
"Restricted Securities" shall mean the securities of the Company
required to bear the legend set forth in Section 3 hereof (or any similar
legend).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any successor law thereto.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions, and stock transfer taxes applicable to the securities registered by
the Holders and any fees of counsel to any Holder.
"Series A Preferred" shall mean shares of the Company's Series A
Preferred Stock issued and sold by the Company pursuant to the Purchase
Agreement.
2. Restrictions on Transferability. The Restricted Securities shall not be
transferable except upon the conditions specified in this Agreement, which
conditions are intended to ensure compliance with the provisions of the
Securities Act. Until the Company's initial public offering pursuant to a
registration statement filed with and declared effective by the Commission under
the Securities Act, the Restricted Securities shall not, without the prior
written consent of the Company, be transferred to any entity (or any affiliate
thereof) which is engaged in the development, marketing or sale of products that
are, in the Company's judgment, the same or similar to those of the Company, and
any such attempted transfer shall be void ab initio. Each holder of Restricted
Securities will cause any proposed transferee of the Restricted Securities held
by such holder to agree to take and hold such Restricted Securities subject to
the provisions and upon the conditions specified in this Agreement.
3. Restrictive Legend. Each certificate representing (i) the Series A
Preferred, (ii) shares of the Company's Common Stock issued upon conversion of
the Series A Preferred, and (iii) any other securities issued in respect of the
Series A Preferred (or Common Stock issued upon conversion of the Series A
Preferred) upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of Section 4 below) be stamped or otherwise imprinted with a legend
in substantially the following form (in addition to any legend required under
applicable state securities laws):
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<PAGE> 11
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). THESE SECURITIES MAY NOT BE
OFFERED, SOLD, PLEDGED OR TRANSFERRED UNLESS (I) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT IS EFFECTIVE COVERING SUCH TRANSFER
OR (II) THERE IS AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY,
THAT AN EXEMPTION THEREFROM IS AVAILABLE. COPIES OF THE AGREEMENT
COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR
TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE
HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT
ITS PRINCIPAL EXECUTIVE OFFICES.
Each Purchaser and Holder consents to the Company's making a notation
on its records and giving instructions to any transfer agent of the Series A
Preferred or the Common Stock in order to implement the restrictions on transfer
established in this Section.
4. Notice of Proposed Transfers. The holder of each certificate
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section. Prior to any proposed transfer of
any Restricted Securities, unless there is in effect a registration statement
under the Securities Act covering the proposed transfer, the holder thereof
shall give written notice to the Company of such Holder's intention to effect
such transfer. Each such notice shall describe the manner and circumstances of
the proposed transfer in sufficient detail, and shall be accompanied by either
(i) a written opinion of legal counsel, who shall be reasonably satisfactory to
the Company, addressed to the Company and reasonably satisfactory in form and
substance to the Company's counsel, to the effect that the proposed transfer of
the Restricted Securities may be effected without registration under the
Securities Act or (ii) a "No Action" letter from the Commission to the effect
that the transfer of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with respect
thereto, whereupon the holder of such Restricted Securities shall be entitled to
transfer such Restricted Securities in accordance with the terms of the notice
delivered by the holder to the Company. Each certificate evidencing the
Restricted Securities transferred as above provided shall bear the appropriate
restrictive legends described above, except that such certificate shall not bear
any such restrictive legend if in the opinion of counsel for the Company such
legend is not required.
5. Requested Registration. (a) Request for Registration. If at any time
after the expiration of six months following the Company's initial registered
public offering, the Company shall receive from any Holder or group of Holders
of Registrable Securities, representing not less than 66-2/3% of the Registrable
Securities then outstanding (assuming conversion of all shares of the Series A
Preferred), a written request that the Company effect any registration,
qualification or compliance with respect
-3-
<PAGE> 12
to Registrable Securities representing at least 33-1/3% of the Registrable
Securities then outstanding, the Company will:
(x) promptly give written notice of the proposed registration,
qualification, or compliance to all other Holders; and
(y) as soon as practicable, use its best efforts to effect within
120 days of the receipt of such request such registration, qualification or
compliance (including, without limitation, the execution of an undertaking to
file post-effective amendments, appropriate qualification under applicable blue
sky or other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act and any other governmental
requirements or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are 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 received by the Company within 15 days
after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to take any action to
effect any such registration, qualification or compliance pursuant to this
Section:
(A) in any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) prior to 90 days immediately following the effective
date of any registration statement pertaining to securities of the Company
(other than a registration of securities in a Rule 145 transaction or with
respect to an employee benefit plan); or
(C) after the Company has effected two such registrations
pursuant to this Section and such registration has been declared or ordered
effective.
Subject to the foregoing clauses, the Company shall file a registration
statement covering the Registrable Securities so requested to be registered as
soon as practicable after receipt of the request or requests of any Holder or
Holders. If, however, the Company shall furnish to the Holder or Holders
requesting a registration statement pursuant to this Section a certificate
signed by the President of the Company stating that, in the good faith judgment
of the Board of Directors of the Company, it would be seriously detrimental to
the Company and its stockholders for such registration statement to be filed and
it is therefore essential to defer the filing of such registration statement,
the Company shall have the right to defer such filing for a period of not more
than 120 days after receipt of the request of the Holder or Holders requesting
such registration; provided, however, that the Company may not utilize this
right more than once in any 12-month period.
(b) Underwriting. If the 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
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<PAGE> 13
their request and the Company shall include such information in its written
notice to the other Holders. The right of any Holder to registration pursuant to
this Section 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.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by
the Holders of a majority of the Registrable Securities proposed by such Holders
to be distributed through such underwriting. Notwithstanding any other provision
of this Section, if the managing underwriter advises the Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then, subject to the provisions of Section 5(a), the Company shall
so advise all Holders and the number of shares of Registrable Securities that
may be included in the registration and underwriting shall be allocated among
all Holders requesting inclusion in the registration in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities originally
requested by such Holders to be included in the registration statement. No
Registrable Securities excluded from the underwriting by reason of the managing
underwriter's marketing limitation shall be included in such registration.
If the managing 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 others 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,
and provided that the Company or the other selling stockholders shall bear an
equitable share of the Registration Expenses in connection with such
registration and underwriting.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the other Holders. The Registrable
Securities and/or other securities so withdrawn shall also be withdrawn from
registration; provided, however, that if, by the withdrawal of such Registrable
Securities, a greater number of Registrable Securities held by other Holders may
be included in such registration (up to the maximum of any limitation imposed by
the underwriters), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportion used in determining the
underwriter limitation in this Section. If the registration does not become
effective due to the withdrawal of Registrable Securities, then either (1) the
Holders requesting registration shall reimburse the Company for expenses
incurred in complying with the request or (2) the aborted registration shall be
treated as effected for purposes of Section 5(a)(C).
6. Company Registration.
(a) Notice of Registration. If the Company shall determine to register
any of its securities, either for its own account or the account of a security
holder or holders exercising their respective demand registration rights, other
than: (i) a registration relating solely to employee benefit
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<PAGE> 14
plans or (ii) a registration relating solely to a transaction pursuant to Rule
145 promulgated under the Securities Act, the Company will:
(x) promptly give to each Holder written notice thereof; and
(y) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within 30 days after receipt of such written notice from the
Company, by any Holder or Holders.
(b) Cut-back and Allocation. Notwithstanding any other provision of
this Section, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may limit the number of Registrable Securities to be included in the
registration and underwriting, provided that except in the case of the Company's
initial public offering, the managing underwriter shall include in such offering
at least 25% of the Registrable Securities requested to be included in such
offering. In such event, the Company shall so 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 the 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, such Holder may elect to withdraw therefrom by written notice
to the Company and the managing underwriter. Any Registrable Securities excluded
or withdrawn from such underwriting shall be withdrawn from such registration.
(c) Right to Terminate Registration. The Company shall have the right
to terminate or withdraw any registration initiated by it under this Section
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration.
7. Registration on Form S-3. The Company shall use its best efforts to
qualify for registration on Form S-3, and to that end, the Company shall comply
with the reporting requirements of the Exchange Act. After the Company has
qualified for the use of Form S-3, each Holder shall have the right to request
an unlimited number of 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 such shares by each such
Holder), subject to the following limitations:
(i) the Company shall not be obligated to cause a registration on
Form S-3 to become effective prior to 90 days following the effective date of a
Company-initiated registration (other than a registration effected solely to
qualify an employee benefit plan or to effect a business combination pursuant to
Rule 145);
(ii) the Company shall not be obligated to cause a registration
on Form S-3 to become effective prior to expiration of 90 days following the
effective date of the most recent registration pursuant to a request under
Section 5 of this Agreement or pursuant to a request by a
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<PAGE> 15
holder of registration rights under any other agreement of the Company granting
Form S-3 demand registration rights;
(iii) the Company shall not be required to
effect a registration on Form S-3 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 $1,000,000; and
(iv) the Company shall not be required to maintain and keep any
such registration on Form S-3 effective for a period greater than the period
equal to the shorter of (x) 90 days or (y) that time reasonably necessary to
permit the disposition of the Registrable Securities subject to such
registration. The Company shall give notice to all Holders of the receipt of a
request for registration pursuant to this Section and shall provide a reasonable
opportunity for all such other Holders, to participate in the registration.
Subject to the foregoing, the Company will use its best efforts to effect
promptly 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.
8. Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Section 5, Section 6, or Section 7 shall be borne by the Company. All Selling
Expenses relating to securities registered by the Holders pursuant to either
Section 5, Section 6, or Section 7 shall be borne by the Holders of such
securities pro rata on the basis of the number of shares so registered.
Notwithstanding the foregoing, the Company shall not be required to pay for
Registration Expenses pursuant to Section 5 if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered (which Holders shall bear such
expenses), unless the Holders of a majority of the Registrable Securities agree
to forfeit their right to demand registration pursuant to Section 5; provided,
however, that if at the time of such withdrawal, the Holders have learned of a
material adverse change in the condition, business or prospects of the Company
from that known to the Holders at the time of their request, then the Holders
shall not be required to pay any of such Registration Expenses and shall retain
their rights pursuant to Section 5.
9. Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will furnish such number of prospectuses and
other documents incident thereto as a Holder from time to time may reasonably
request.
10. Termination of Registration Rights. The registration rights granted
pursuant to this Agreement shall terminate (i) as to any Holder of less than
500,000 shares of Registrable Securities, at such time after the Company's
initial public offering as the Registrable Securities held by such Holder may be
sold within any three month period pursuant to Rule 144 and (ii) as to any
Holder of 500,000 or more shares of Registrable Securities (as adjusted for
stock splits, stock dividends or distributions, recapitalizations, and similar
events), on the earlier to occur of (A) the date such Registrable Securities
held by such Holder may be sold pursuant to Rule 144(k) and (B) the third
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<PAGE> 16
anniversary of the date on which the Company first becomes subject to the
reporting requirements under Section 12 of the Exchange Act.
11. Lock-up Agreement. In consideration for the Company agreeing to its
obligations under this Agreement, each Holder of Registrable Securities and each
transferee pursuant to Section 15 hereof agrees, in connection with the first
registration of the Company's securities, upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities, not
to sell, make any short sale of, loan, grant any option for the purchase of or
otherwise dispose of any securities of the Company (other than those included in
the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as the Company or the
underwriters may specify, provided that each officer and director of the Company
is similarly bound. Each Holder agrees that the Company may instruct its
transfer agent to place stop-transfer notations in its records to enforce the
provisions of this Section. This Section 11 shall supersede any conflicting
provision of Section 5 or Section 7 above. Notwithstanding any other provision
of this Agreement, the Company may assign each Holder's obligations under this
Section 11 to any underwriter of the Company's initial public offering of
securities.
12. Indemnification.
(a) The Company will indemnify each Holder, each of its officers,
directors and partners and such Holder's legal counsel and independent
accountants, and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof), including any
of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any registration statement,
prospectus, offering circular or other document, or any amendment or supplement
thereto, incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, or any
violation by the Company of the Securities Act or the Exchange Act or securities
act of any state or any rule or regulation thereunder, and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such Holder, each of its
officers, directors and partners and such Holder's legal counsel and independent
accountants, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder or underwriter and stated to be
specifically for use therein; and provided,
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<PAGE> 17
further, that the Company will not be liable to any such person or entity with
respect to any such untrue statement or omission or alleged untrue statement or
omission made in any preliminary prospectus that is corrected in the final
prospectus filed with the Commission pursuant to Rule 424(b) promulgated under
the Securities Act (or any amendment or supplement to such prospectus) if the
person asserting any such loss, claim, damage or liability purchased securities
but was not sent or given a copy of the prospectus (as amended or supplemented)
at or prior to the written confirmation of the sale of such securities to such
person in any case where such delivery of the prospectus (as amended or
supplemented) is required by the Securities Act, unless such failure to deliver
the prospectus (as amended or supplemented) was a result of the Company's
failure to provide such prospectus (as amended or supplemented).
(b) Each Holder will, severally and not jointly, if Registrable
Securities held by such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers and its legal counsel and
independent accountants, each underwriter, if any, of the Company's securities
covered by such a registration statement, each person who controls the Company
or such underwriter within the meaning of Section 15 of the Securities Act, and
each other such Holder, each of its officers, directors and partners and each
person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Holders, such directors, officers, legal counsel, independent
accountants, underwriters or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein;
provided, however, that the obligations of such Holders hereunder shall be
limited to an amount equal to the proceeds, net of underwriting discounts and
commissions but not expenses, to each such Holder of Registrable Securities sold
as contemplated herein.
(c) Each party entitled to indemnification under this Section (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Agreement, except to the extent, but only to the
extent, that the Indemnifying Party's ability to defend against
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<PAGE> 18
such claim or litigation is impaired as a result of such failure to give notice.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
(d) If the indemnification provided for in this Section 12 is held by
a court of competent jurisdiction to be unavailable 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 well 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. In no event shall
any contribution by a Holder under this Section 12(d) exceed the proceeds, net
of underwriting discounts and commissions but not expenses, from the offering
received by such Holder.
13. Information by Holder. The Holder or Holders of Registrable Securities
included in any registration shall furnish to the Company such information
regarding such Holder or Holders and the distribution proposed by such Holder or
Holders as the Company may request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
this Agreement.
14. Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 promulgated under the Securities Act, at all
times after the effective date of the first registration under the Securities
Act filed by the Company for an offering of its securities to the general
public;
(b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and
(c) furnish to Holders upon request a written statement as to its
compliance with the reporting requirements of Rule 144 (at any time after 90
days after the effective date of the first registration statement filed by the
Company for an offering of its securities to the general public),
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<PAGE> 19
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 of the
Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing such Holder to sell any such securities
without registration.
15. Transfer of Rights. Provided that the Company is given prior written
notice of such assignment, the rights granted hereunder to cause the Company to
register securities may be assigned to (i) a transferee or assignee who acquires
at least 500,000 shares of Registrable Securities (appropriately adjusted for
stock splits, recapitalizations and like after the date hereof) and (ii) any
affiliate or constituent partner, including limited partner, of a Purchaser.
16. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California as applied to agreements
among California residents entered and to be performed entirely within
California. The parties hereto agree to submit to the jurisdiction of the
federal and state courts of the State of California with respect to the breach
or interpretation of this Agreement or the enforcement of any and all rights,
duties, liabilities, obligations, powers and other relations between the parties
arising under this Agreement.
17. Entire Agreement. This Agreement constitutes the full and entire
understanding among the parties regarding the subject matter herein. Except as
otherwise expressly provided herein, the provisions hereof shall inure to the
benefit of, and be binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto.
18. Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effectively given
upon delivery to the party to be notified in person or by courier service or
five (5) days after deposit with the United States mail, by registered or
certified mail, postage prepaid, addressed (a) if to a holder of any Registrable
Securities, to such address as such holder shall have furnished the Company in
writing, or, until any such holder so furnishes an address to the Company, then
to and at the address of the last holder of such securities who has so furnished
an address to the Company, or (b) if to the Company, to its address set forth on
the first page of this Agreement and addressed to the attention of the Chief
Financial Officer, or at such other address as the Company shall have furnished
to the Holders in writing.
19. Amendment. Any provision of this Agreement may be amended, waived or
modified upon the written consent of (i) the Company and (ii) holders of 66-2/3%
of the outstanding shares of Registrable Securities. Any Holder may waive any of
his or her rights or the Company's obligations hereunder without obtaining the
consent of any other person.
20. Limitations on Subsequent Registration Rights.
(a) From and after the date of this Agreement, the Company shall not
enter into any agreement granting any holder or prospective holder of any
securities of the Company registration rights with respect to such securities
without the prior written consent of 66-2/3% of the Registrable Securities then
outstanding unless (1) such new registration rights, including standoff
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<PAGE> 20
obligations, are on a pari passu basis with those rights of the Holders
hereunder or (2) such new registration rights, including standoff obligations,
are subordinate to the registration rights granted the Holders hereunder.
(b) Where the Company determines to grant any holder or prospective
holder of any securities of the Company registration rights that are on a pari
passu basis with those rights of the Holders hereunder and determines that the
grant of such rights shall be made pursuant to this Agreement, then such grant
shall be evidenced by the execution of an additional signature page to this
Agreement by the Company and such holder, without any requirement on the part of
the Company to seek the consent or approval of the Holders.
21. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of which together shall
constitute one instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 21
[REGISTRATION RIGHTS AGREEMENT]
IN WITNESS WHEREOF, the undersigned have executed this Registration
Rights Agreement as of the date set forth above.
"COMPANY" TURNSTONE SYSTEMS, INC.,
A DELAWARE CORPORATION
By: /s/ Richard N. Tinsley
-------------------------------------
Name: Richard N. Tinsley
-----------------------------------
Title: CEO
----------------------------------
"PURCHASERS" INSTITUTIONAL VENTURE PARTNERS VII, L.P.,
BY ITS GENERAL PARTNER
INSTITUTIONAL VENTURE MANAGEMENT VII, L.P.
/s/ Geoffrey Yang
----------------------------------------
Geoffrey Y. Yang, General Partner
INSTITUTIONAL VENTURE MANAGEMENT VII, L.P.
/s/ Geoffrey Yang
----------------------------------------
Geoffrey Y. Yang, General Partner
IVP FOUNDERS FUND I, L.P.,
BY ITS GENERAL PARTNER
INSTITUTIONAL VENTURE MANAGEMENT VI, L.P.
/s/ Geoffrey Yang
----------------------------------------
Geoffrey Y. Yang, General Partner
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<PAGE> 22
[REGISTRATION RIGHTS AGREEMENT]
"PURCHASERS" (cont'd) MATRIX PARTNERS V, L.P.
By: Matrix V Management Company, L.L.C.
Its General Partner
/s/ A. Verhalen
-------------------------------------------
By: Andrew W. Verhalen, Member
BENCHMARK CAPITAL PARTNERS II, L.P.
By: BENCHMARK CAPITAL MANAGEMENT CO. II, L.L.C.
Its General Partner
By: /s/ Andrew S. Rachleff
-------------------------------------------
Member
BENCHMARK FOUNDERS' FUND II, L.P.
By: BENCHMARK CAPITAL MANAGEMENT CO. II, L.L.C.
Its General Partner
By: /s/ Andrew S. Rachleff
-------------------------------------------
Member
BENCHMARK FOUNDERS' FUND II-A, L.P.
By: BENCHMARK CAPITAL MANAGEMENT CO. II, L.L.C.
Its General Partner
By: /s/ Andrew S. Rachleff
-------------------------------------------
Member
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<PAGE> 23
[REGISTRATION RIGHTS AGREEMENT]
"PURCHASERS" (cont'd) BENCHMARK MEMBERS' FUND II, L.P.
By: BENCHMARK CAPITAL MANAGEMENT CO. II, L.L.C.
Its General Partner
By: /s/ Andrew S. Rachleff
-------------------------------------------
Member
WS INVESTMENT COMPANY 97B
By: /s/ Thomas C. DeFilipps
-------------------------------------------
Thomas C. DeFilipps, Esq., Member
/s/ Thomas C. DeFilipps
------------------------------------------------
Thomas C. DeFilipps, Esq. (individually)
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<PAGE> 24
[REGISTRATION RIGHTS AGREEMENT SECOND CLOSING FEBRUARY 27, 1998]
IN WITNESS WHEREOF, the undersigned have executed this Registration
Rights Agreement as of the date set forth above.
"COMPANY" TURNSTONE SYSTEMS, INC.,
a Delaware corporation
By: /s/ Richard N. Tinsley
--------------------------------------------------
Name: Richard N. Tinsley
--------------------------------------------------
Title: CEO
--------------------------------------------------
"PURCHASERS" STANFORD UNIVERSITY
By: /s/ Carol Gilmer
--------------------------------------------------
Name: Carol Gilmer
--------------------------------------------------
Title: Assistant Secretary, Board of Trustees of the
Leland Stanford Junior University
----------------------------------------------
/s/ Tim Latchem
-----------------------------------------------------
Timothy Latchem
/s/ Patricia A. Crowe
-----------------------------------------------------
Patricia Crowe
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<PAGE> 1
EXHIBIT 4.3
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
QUICKSTART
WARRANT TO PURCHASE STOCK
Corporation: Turnstone Systems, Inc., a Delaware corporation
Number of Shares: 45,000
Class of Stock: Series A Preferred:
Initial Exercise Price: $0.50 per share
Issue Date: June 1, 1998
Expiration Date: June 1, 2003
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, SILICON VALLEY BANK ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth in this Warrant.
ARTICLE 1. EXERCISE.
1.1 Method of Exercise. Holder may exercise this Warrant by delivering a
duly executed Notice of Exercise in substantially the form attached as Appendix
1 to the principal office of the Company. Unless Holder is exercising the
conversion right set forth in Section 1.2, Holder shall also deliver to the
Company a check for the aggregate Warrant Price for the Shares being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.4.
1.3 Intentionally Omitted
1.4 Fair Market Value. If the Shares are traded in a public market, the
fair market value of the Shares shall be the closing price of the Shares (or the
closing price of the Company's stock into which the Shares are convertible)
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company. If the Shares are not traded in a public market, the
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<PAGE> 2
Board of Directors of the Company shall determine fair market value in its
reasonable good faith judgment.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
1.7.1 "Acquisition". For the purpose of this Warrant,
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2 Assumption of Warrant. Upon the closing of any Acquisition
the successor entity may, at its option, assume the obligations of this Warrant,
and this Warrant shall be exercisable for the same securities, cash, and
property as would be payable for the Shares issuable upon exercise of the
unexercised portion of this Warrant as if such Shares were outstanding on the
record date for the Acquisition and subsequent closing. The Warrant Price shall
be adjusted accordingly. If the successor entity does not assume the obligations
of the Company under this Warrant, then this Warrant shall be deemed to have
been automatically converted pursuant to Section 1.2 and thereafter Holder shall
participate in the Acquisition as a holder of the Shares (or other securities
issuable upon exercise of this Warrant) on the same terms as other holders of
the same class of securities of the Company.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
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<PAGE> 3
2.2 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the number
of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred
Stock, the number of shares of common stock issuable upon conversion of the
Shares, shall be subject to adjustment, from time to time in the manner set
forth in the Company's Articles of Incorporation, as amended from time to time.
2.5 No Impairment. The Company shall not, by amendment of its Articles
of Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out of all the provisions of this Article 2 and
in taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
2.6 Fractional Shares. No fractional Shares shall be issuable upon
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying Holder amount computed by
multiplying the fractional interest by the fair market value of a full Share.
2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such
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<PAGE> 4
adjustment is based. The Company shall, upon written request, furnish Holder a
certificate setting forth the Warrant Price in effect upon the date thereof and
the series of adjustments leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby represents and
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of
this Warrant is not greater than the fair market value of the Shares as of the
date of this Warrant.
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least 10 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 10 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or
any of the Shares, the Company shall deliver to the Holder promptly upon
Holder's reasonable request, copies of all notices or other written
communications provided generally to the shareholders of the Company, the annual
audited financial statements of the Company certified by independent public
accountants of recognized standing and the Company's quarterly, unaudited
financial statements.
ARTICLE 4. MISCELLANEOUS.
4.1 Term; Notice of Expiration. This Warrant is exercisable, in whole or
in part, at any time and from time to time on or before the Expiration Date set
forth above.
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<PAGE> 5
4.2 Legends. This Warrant and the Shares (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH
ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the availability of current information as referenced
in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e)
in reasonable detail, the selling broker represents that it has complied with
Rule 144(f), and the Company is provided with a copy of Holder s notice of
proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.3 and
4.6, Holder may transfer all or part of this Warrant or the Shares issuable upon
exercise of this Warrant (or the securities issuable, directly or indirectly,
upon conversion of the Shares, if any) by giving the Company notice of the
portion of the Warrant being transferred setting forth the name, address and
taxpayer identification number of the transferee and surrendering this Warrant
to the Company for reissuance to the transferee(s) (and Holder if applicable);
provided, however, that Holder may transfer all or part of this Warrant to
Silicon Valley Bancshares, The Silicon Valley Bank Foundation, and any other
affiliate of Holder at any time without notice to the Company. The terms and
conditions of this Warrant shall inure to the benefit of, and be binding upon,
the Company and the holders hereof and their respective permitted successors and
assigns. Unless the Company is filing financial information with the SEC
pursuant to the Securities Exchange Act of 1934, the Company shall have the
right to refuse to transfer any portion of this Warrant to any party who
directly competes with the Company.
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<PAGE> 6
4.5 Notices. All notices and other communications from the Company to
the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or the Holder from time to
time. The Company shall sent all notices to Holder to the following address:
TREASURY DEPARTMENT
SILICON VALLEY BANK
3003 TASMAN DRIVE NC821
SANTA CLARA, CA 95054
4.6 Company's Right of First Refusal. Before this Warrant or any Shares
issued or issuable upon exercise of this Warrant (collectively, the
"Securities") held by the Warrant Holder or any transferee (either being
sometimes referred to herein as the "Holder") may be sold or otherwise
transferred (including transfers by gift or operation of law, however subject to
Section (f) hereof), the Company or its assignee(s) shall have a right of first
refusal to purchase the Securities on the terms and conditions set forth in this
Section (the "Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Securities
shall deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer such Securities; (ii)
the name of each proposed purchaser or other transferee (the "Proposed
Transferee"); (iii) the number of Securities to be transferred to each Proposed
Transferee; and (iv) the bona fide cash price or other consideration for which
the Holder proposes to transfer the Securities (the "Offered Price"), and the
Holder shall offer the Securities at the Offered Price to the Company or its
assignee(s).
(b) Exercise of Right of First Refusal. At any time within ten
(10) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Securities proposed to be transferred to any one or more of the
Proposed Transferees, at the purchase price determined in accordance with
subsection (c) below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
Securities purchased by the Company or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the cash equivalent value of the non-cash consideration shall be
determined by the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Securities proposed
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company and/or its assignee(s) as provided in this Section, then the
Holder may sell or otherwise transfer such Securities to that Proposed
Transferee at the Offered Price or at a higher price, provided that such sale or
other
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<PAGE> 7
transfer is consummated within 90 days after the date of the Notice and provided
further that any such sale or other transfer is effected in accordance with any
applicable laws and the Proposed Transferee agrees in writing that the
provisions of this Section shall continue to apply to the Securities in the
hands of such Proposed Transferee. If the Securities described in the Notice are
not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Company, and the Company and/or its assignees shall again
be offered the Right of First Refusal before any Securities held by the Holder
may be sold or otherwise transferred.
(f) Exception for Certain Transfers. Notwithstanding anything to
the contrary contained in this Section, the transfer of any or all of the
Securities to any parent, subsidiary, or other affiliate (as defined in Rule 144
under the Securities Act of 1933, as amended (the "Securities Act")) including,
without limitation, Silicon Valley Bancshares, The Silicon Valley Foundation or
other affiliate of Holder, of the Warrant Holder shall be exempt from the
provisions of this Section. In such case, the transferee or other recipient
shall receive and hold the Securities so transferred subject to the provisions
of this Section.
(g) Termination of Right of First Refusal. The Right of First
Refusal shall terminate as to any Securities upon the first sale of Common Stock
of the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act.
4.7 Lock-Up Agreement.
(a) Agreement. Holder, if requested by the Company and the lead
underwriter of any public offering of the Common Stock or other securities of
the Company (the "Lead Underwriter"), hereby irrevocably agrees not to sell,
contract to sell, grant any option to purchase, transfer the economic risk of
ownership in, make any short sale of, pledge or otherwise transfer or dispose of
any interest in any Common Stock or any securities convertible into or
exchangeable or exercisable for or any other rights to purchase or acquire
Common Stock (except Common Stock included in such public offering or acquired
on the public market after such offering) during the 180-day period following
the effective date of a registration statement of the Company filed under the
Securities Act of 1933 (the "Securities Act"), or such shorter period of time as
the Lead Underwriter shall specify, provided that each officer and director of
the Company is similarly bound. Holder further agrees to sign such documents as
may be requested by the Lead Underwriter to effect the foregoing and agrees that
the Company may impose stop-transfer instructions with respect to such Common
Stock until the end of such period. The Company and Holder acknowledge that each
Lead Underwriter of a public offering of the Company's stock, during the period
of such offering and for the 180-day period thereafter, is an intended
beneficiary of this Section.
4.8 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.9 Attorneys' Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
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<PAGE> 8
4.10 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
"COMPANY"
TURNSTONE SYSTEMS, INC.
By: /s/ Richard N. Tinsley By: /s/ Kingston Duffie
--------------------------------- ------------------------------------
Name: Richard N. Tinsley Name: Kingston Duffie
------------------------------- ----------------------------------
(Print)
Title: Chairman of the Board, President or Vice President
"HOLDER"
SILICON VALLEY BANK
By: /s/ TIMOTHY M. WALSH
--------------------------------
Name: Timothy M. Walsh
------------------------------
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<PAGE> 9
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase shares of the
Common/Series Preferred [strike one] Stock of pursuant to the
terms of the attached Warrant, and tenders herewith payment of the purchase
price of such shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This conversion
is exercised with respect to of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name as is specified below:
--------------------------------------
(Name)
--------------------------------------
--------------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
-------------------------------------
(Signature)
- ------------------
(Date)
<PAGE> 1
EXHIBIT 4.4
TURNSTONE SYSTEMS INC.
FOUNDERS RESTRICTED STOCK PURCHASE AGREEMENT
This Founders Restricted Stock Purchase Agreement (the "Agreement") is
made as of the 2nd day of January 1998, between Turnstone Systems, Inc., a
Delaware corporation (the "Company "), and ______________________ (the
"Purchaser").
RECITALS
A. The Purchaser is an employee of the Company, and the Purchaser's
continued participation with the Company is considered by the Company to be
important for the Company's growth.
B. In order the give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to continue to provide
services to the Company, the Company is willing to sell to the Purchaser and the
Purchaser desires to purchase shares of the Company's Common Stock according to
the terms and conditions hereof.
C. Whereas in consideration of the Company's sale to the Purchaser of
its Common Stock, the Purchaser has assigned to the Company all his or her
right, title, and interest in and to certain assets which are necessary to the
Company's business (the "Assignment") pursuant to the Assignment Agreement
between the Company and the Purchaser of even date herewith (the "Assignment
Agreement").
NOW, THEREFORE, for good and valuable consideration, the parties hereto
agree as follows:
1. PURCHASE AND SALE OF THE COMMON STOCK.
(a) The Company hereby sells to the Purchaser, and the Purchaser
hereby purchases from the Company, ___________ shares of the Company's Common
Stock (the "Shares") at a price of $.001 per share, payable (i) for an aggregate
cash purchase price of $_________ and (ii) by assignment to the Company of
certain intellectual property and other assets of the Purchaser, which the
Company has deemed necessary to its business and prospects. Subject to the
provisions of Section 8 hereof, the Company will promptly, after delivery of
this Agreement, issue a certificate representing the Shares registered in the
name of the Purchaser.
(b) The purchase price for the Shares shall be paid at the time of
delivery of this Agreement by delivery of (i) a check made payable to the
Company in the amount of the aggregate cash purchase price and (ii) by delivery
of the Assignment Agreement between the Company and the Purchaser, in
substantially the form attached hereto as Exhibit A, pursuant to which the
Purchaser will assign to the Company all his or her right, title, and interest
in the assets designated therein.
<PAGE> 2
2. REPURCHASE OPTION.
(a) All of the Shares shall be subject to the right of the Company
to repurchase the Shares as set forth in this Section 2 (the "Repurchase
Option"). In the event the Purchaser shall cease to be employed by the Company,
including any parent or subsidiary of the Company, for any reason, with or
without cause, including involuntary termination, death, or temporary or
permanent disability (a "Termination"), the Repurchase Option shall come into
effect. Following a Termination, the Company shall have the right, as provided
in subsection (c) of this Section 2, to repurchase from the Purchaser or his
successor, as the case may be, at the purchase price per share originally paid
as set forth in Section 1 ("Option Price"), a portion of the Shares computed as
follows:
(i) All of the Shares shall be deemed subject to the Repurchase
Option effective as of October 1, 1997;
(ii) Subject to the Purchaser's continued employment with the
Company, the Repurchase Option shall lapse with respect to 1/48th of the Shares
on the first day of each calendar month following _____________________ (the
"Commencement Date"), such that, subject to continued employment with the
Company, all the Shares shall be released from the Repurchase Option effective
________________.
(iii) In the event of (A) a merger or consolidation of the
Company with or into any other corporation or corporations (but excluding any
transaction or series of transactions effected solely for the purpose of
reincorporating the Company into another jurisdiction and any transaction(s) in
which the stockholders of the Company immediately prior to such transaction(s)
control, immediately after consummation of the transaction(s), more than 50% of
the voting power of the surviving entity) or (B) a sale of all or substantially
all the assets of the Company, then, immediately upon the closing of such
transactions or series of transactions, (the "Transaction Closing"), the
Repurchase Option shall lapse as to 75% of the Shares then subject to the
Repurchase Option (subject to adjustments for stock splits, stock dividends and
the like). In the event of the involuntary termination of the Purchaser's
employment (other than by death or disability) with the Company (or any parent,
subsidiary, or other related corporation of any surviving entity or any acquiror
or related party of an acquiror of all or substantially all of the assets of the
Company) within twelve months of the date of the Transaction Closing, the
Repurchase Option shall immediately lapse with respect to any Shares then
subject thereto. For purposes only of this section 2(a)(iii), "involuntary
termination" shall mean (i) without the Purchaser's express written consent, a
significant reduction of the Purchaser's duties, position, or responsibilities,
as an employee of the Company or the removal of the Purchaser from such position
and responsibilities, unless the Purchaser is provided with a comparable
position (i.e., a position of equal or greater organizational level, duties,
authority, compensation and status); (ii) a significant reduction by the Company
in the base salary of the Purchaser as in effect immediately prior to such
reduction; (iii) a material reduction by the Company in the kind or level of
employee benefits to which the Purchaser is entitled immediately prior to such
reduction with the result that the Purchaser's overall benefits package is
significantly reduced; or (iv) without the Purchaser's express written consent,
the relocation
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<PAGE> 3
of the Purchaser to a facility or a location more than fifty (50) miles from the
Company's offices immediately prior to the date of the Transaction Closing.
(b) Within 90 days following a Termination, the Company may exercise
the Repurchase Option by written notice delivered or mailed as provided in
Section 14 (with a copy to the Escrow Holder referred to in Section 8). At the
Company's option, the Option Price for the Shares repurchased may be paid (i) by
delivery with such notice of a check to the Purchaser or his executor in the
amount of the purchase price for the Shares being repurchased, (ii) by
cancellation by the Company of an amount of the Purchaser's indebtedness to the
Company equal to the purchase price for the Shares being repurchased, or (iii)
by a combination of (i) and (ii) so that the combined payment and cancellation
of indebtedness equals such repurchase price. Upon delivery of such notice and
payment of the repurchase price, the Shares being repurchased and all rights and
interests therein shall be canceled, and the Purchaser shall no longer be
considered the owner of the Shares repurchased for record or any other purposes.
3. STOCK SPLITS, ETC. If, from time to time during the term of this
Agreement:
(a) there is any stock dividend or liquidating dividend of cash
and/or property, stock split, or other change in the character or amount of any
of the outstanding securities of the Company; or
(b) there is any liquidation or consolidation;
then, in such event, any and all new, substituted or additional
securities, or other property to which the Purchaser is entitled by reason of
his ownership of Shares shall be immediately subject to this Agreement and be
included in the word "Shares" for all purposes with the same force and effect as
the Shares presently subject to the Repurchase Option, right of first refusal,
and other terms of this Agreement. While the aggregate Option Price shall remain
the same after each such event, the Option Price per Share upon execution of the
Repurchase Option shall be appropriately adjusted. In the event of any cash
dividend or liquidating distribution made with respect to the Shares, the
Company may apply the amount thereof against any indebtedness owed by Purchaser
to the Company.
4. RESTRICTION ON TRANSFER. The Purchaser shall not sell, transfer,
pledge, or otherwise dispose of any Shares which remain subject to the
Repurchase Option other than a pledge in connection with indebtedness owed to
the Company.
5. RIGHT OF FIRST REFUSAL. Before any Shares registered in the name of
the Purchaser or of any transferee thereof, that are no longer subject to the
Repurchase Option, may be sold or transferred (including transfer by operation
of law), such Shares shall first be offered to the Company as follows:
(a) The Purchaser shall deliver a notice to the Company stating (i)
the Purchaser's bona fide intention to sell or transfer such Shares, (ii) the
number of such Shares to be sold or
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<PAGE> 4
transferred, (iii) the price for which the Purchaser proposes to sell or
transfer such Shares, and (iv) the name of the proposed purchaser or transferee.
(b) Within thirty (30) days after receipt of such notice, the
Company or its assignee may elect to purchase all or part of the Shares to which
the notice refers, at the price per share specified in the notice. Full payment
for all the Shares to be purchased by the Company shall be made by cash, check,
or cancellation of indebtedness by the Company or its assignee to the Purchaser
within thirty (30) days after receipt of the notice.
(c) If the Shares to which the notice refers are not elected to be
purchased as provided in Section 5(b), the Purchaser may sell the Shares to any
person named in the notice at the price specified in the notice or at a higher
price, provided that such sale or transfer is consummated within 60 days of the
date of the notice to the Company, and, provided further, that any such sale is
in accordance with all the terms and conditions hereof.
(d) Any shares so transferred will continue to be subject to the
right of first refusal provided in this Section 5.
The provisions of this Section 5 shall terminate on (i) the
effective date of a registration statement filed by the Company under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to an
underwritten public offering of Common Stock of the Company or (ii) the closing
date of a sale of assets or merger of the Company or other acquisition
transaction pursuant to which stockholders of the Company receive securities of
a buyer whose shares are publicly traded.
The provisions of Sections 5(a), 5(b) and 5(c) shall not apply to a
transfer of any Shares by the Purchaser, either during his lifetime or on death
by will or intestacy, to his ancestors, descendants, or spouse, or any custodian
or trustee for the account of the Purchaser or the Purchaser's ancestors,
descendants, or spouse; provided that, in each such case, any such transferee
shall receive and hold such Shares subject to the provisions of this Section 5,
and that there shall be no further transfer of such Shares except in accordance
herewith.
The Company shall not be required (i) to transfer on its share
register any Shares which shall have been purportedly sold or transferred if
such transfer would be in violation of this Agreement, or (ii) to treat as owner
of such Shares, to accord the right to vote as such owner, or to pay dividends
to any purported transferee to whom such Shares shall have purportedly been so
transferred.
6. LEGENDS. All certificates representing any of the Shares shall have
endorsed thereon legends in substantially the following form:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER, INCLUDING A RIGHT OF FIRST REFUSAL ON
TRANSFERS, SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE
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<PAGE> 5
REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST, A COPY OF WHICH
IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY."
(b) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE
SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATION IS NOT REQUIRED."
(c) Any legend required to be placed thereon by the California
Commissioner of Corporations or required by the applicable blue sky laws of any
state.
7. PURCHASER'S REPRESENTATIONS. In connection with his or her purchase
of the Shares, the Purchaser hereby represents and warrants to the Company as
follows:
(a) INVESTMENT INTENT; CAPACITY TO PROTECT INTERESTS. The Purchaser
is purchasing the Shares solely for investment and not with any present
intention of selling or otherwise disposing of the Shares or any portion thereof
in any transaction other than a transaction exempt from registration under the
Securities Act. The Purchaser also represents that the entire legal and
beneficial interest of the Shares is being purchased, and will be held, for the
Purchaser's account only, and neither in whole nor in part for any other person
except to the extent held jointly with Purchaser's spouse.
(b) RESIDENCE. The Purchaser's principal residence is located at the
address indicated beneath the Purchaser's signature below.
(c) INFORMATION CONCERNING COMPANY. The Purchaser has had the
opportunity to discuss the plans, operations, and financial condition of the
Company with its officers and has received all information the Purchaser has
deemed appropriate to enable the Purchaser to evaluate the financial risk
inherent in investing in the Shares. Purchaser either has a preexisting business
or personal relationship with the Company or any of its officers, directors, or
controlling persons or by reason of Purchaser's business or financial experience
or the business or financial experience of Purchaser's professional advisors who
are unaffiliated with and who are not compensated by the Company, directly or
indirectly, could be reasonably assumed to have the capacity to evaluate the
merits and risks of an investment in the Company and to protect Purchaser's own
interests in connection with these transactions.
(d) ECONOMIC RISK. The Purchaser realizes that the purchase of the
Shares involves a high degree of risk, and the Purchaser is able, without
impairing his or her financial condition, to hold the Shares for an indefinite
period of time and to suffer a complete loss of their value.
(e) RESTRICTED SECURITIES. The Purchaser acknowledges that the sale
of the Shares has not been registered under the Securities Act. The Shares must
be held indefinitely unless
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<PAGE> 6
subsequently registered under the Securities Act or an exemption from such
registration is available, and the Company is under no obligation to register
the Shares.
(f) DISPOSITION UNDER RULE 144. The Purchaser understands:
(i) that the Shares are restricted securities within the meaning
of Rule 144 promulgated under the Act which limits the sale of the Shares in a
public market transaction;
(ii) that (unless Rule 701 promulgated under the Act is
available) the exemption from registration under Rule 144 will not be available,
in any event, for at least one year from the date of purchase of and actual
payment for the Shares, and even then will not be available unless (A) a public
trading market then exists for the Common Stock of the Company, (B) adequate
information concerning the Company is then available to the public, and (C)
other terms and conditions of Rule 144 are complied with; and
(iii) that certain sales of the Shares may be made only in
limited amounts in accordance with such terms and conditions.
(iv) that the resale provisions of Rule 701, if available, will
not apply until 90 days after the Company becomes subject to the reporting
obligations under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(v) that there can be no assurance that the requirements of Rule
144 or Rule 701 will be met, or that the stock will ever be saleable.
(g) FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting
the representations set forth above, the Purchaser further agrees that he shall
in no event make any disposition of any portion of the Shares unless and until:
(i) (A) there is in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with said registration statement; (B) the resale provisions of
Rule 701 or Rule 144 are available in the opinion of counsel to the Company; or
(C)(1) the Purchaser shall have notified the Company of the proposed disposition
and shall have furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition, (2) the Purchaser shall have
furnished the Company with an opinion of the Purchaser's counsel, reasonably
acceptable to the Company to the effect that such disposition will not require
registration of such shares under the Act, and (3) such opinion of the
Purchaser's counsel shall have been concurred in by counsel for the Company and
the Company shall have advised the Purchaser of such concurrence; and,
(ii) the Shares proposed to be transferred are no longer subject
to the Repurchase Option and the Purchaser shall have complied with the right of
first refusal set forth in Section 5.
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<PAGE> 7
(h) VALUATION OF SHARES. The Purchaser understands that the Shares
have been valued by the Company's Board of Directors for the purpose of this
sale and that the Company believes this valuation represents a fair attempt at
reaching an accurate appraisal of its worth. The Purchaser also understands,
however, that the Company cannot give any assurances that such price is in fact
the fair market value of the Shares.
(i) SECTION 83(b) ELECTION. The Purchaser understands that Section
83 of the Internal Revenue Code of 1986, as amended (the "Code"), taxes as
ordinary income the difference between the amount paid for the Shares and the
fair market value of the Shares as of the date any restrictions on the Shares
lapse. In this context, "restriction" means the right of the Company to buy back
the Shares pursuant to the Repurchase Option. The Purchaser understands that he
or she may elect to be taxed at the time the Shares are purchased rather than
when and as the Repurchase Option expires, by filing an election under Section
83(b) of the Code with the Internal Revenue Service within 30 days from the date
of purchase. Even if the fair market value of the Shares equals the amount paid
for the Shares, the election must be made to avoid adverse tax consequences in
the future. The Purchaser understands that failure to make this filing in a
timely manner will result in the recognition of ordinary income by the
Purchaser, as the Repurchase Option lapses on any difference between the
purchase price and the fair market value of the Shares at the time such
restrictions lapse.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO TIMELY FILE THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
(j) Responsibility for Tax Consequences. Each Purchaser has reviewed
the federal, state, local and foreign tax consequences of this investment and
the transactions contemplated by this Agreement (including any tax consequences
that may result now or in the future under recently enacted tax legislation) and
has had the opportunity to consult with his or her tax advisors, if any,
regarding such consequences. Each Purchaser acknowledges that he or she is not
relying on any statements or representations of the Company or any of its agents
in regard to such tax consequences and understands that he or she (and not the
Company) shall be responsible for his or her own tax liability that may arise as
a result of this investment or the transactions contemplated by this Agreement.
Each Purchaser acknowledges that the Company has no obligation in regard to the
future conduct of its business, to act or refrain from acting in any manner,
regardless of the loss of any tax benefit to Purchaser in connection with the
purchase, ownership, or sale of the Stock, which may result from such action or
inaction.
8. ESCROW. As security for the faithful performance of the terms of
this Agreement and to insure the availability for delivery of unvested Shares
upon exercise of the Repurchase Option, the Purchaser hereby pledges and
delivers for deposit with the Secretary of the Company, or such other person
designated by the Company, as escrow agent in this transaction ("Escrow Agent"),
two stock assignments duly endorsed (with date and number of shares blank)
together with the certificates evidencing the Shares. Such documents are to be
held by the Escrow Agent and delivered by the Escrow Agent pursuant to the
following instructions of the Company and the Purchaser:
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<PAGE> 8
(a) In the event the Company and/or any assignee of the Company
exercises the Repurchase Option, Purchaser and the Company hereby irrevocably
authorize and direct the Escrow Agent to execute the transaction contemplated by
the notice of repurchase in accordance with the terms of such notice.
(b) In connection with such transaction, the Escrow Agent is
directed (i) to date the stock assignment necessary for the transfer in
question, (ii) to fill in the number of shares being transferred, and (iii) to
deliver such assignment, together with the certificate evidencing the Shares to
be transferred, to the Company against the delivery of the purchase price for
the number of shares of stock being purchased pursuant to the exercise of the
Repurchase Option.
(c) Purchaser irrevocably authorizes the Company to deposit with the
Escrow Agent any certificates evidencing the Shares to be held by the Escrow
Agent hereunder and any additions and substitutions to said shares as defined
herein. Purchaser irrevocably constitutes and appoints the Escrow Agent as his
attorney-in-fact and agent for the term of this escrow to execute all documents
appropriate to make such securities negotiable and to complete any transaction
herein contemplated.
(d) Upon written request of the Purchaser, but no more than once per
calendar year, unless the Repurchase Option has been exercised, the Escrow Agent
will deliver to the Purchaser a certificate or certificates representing so many
of the Shares as are not then subject to the Repurchase Option. Within 180 days
after Purchaser is no longer employed by the Company or any parent or subsidiary
of the Company, the Escrow Agent will deliver to Purchaser a certificate or
certificates representing the aggregate number of Shares sold pursuant to this
Agreement and not repurchased by the Company or its assignees pursuant to
exercise of the Repurchase Option.
(e) If at the time of termination of this escrow, the Escrow Agent
has in his possession any documents, securities, or other property belonging to
the Purchaser, the Escrow Agent shall deliver such property to the Purchaser and
be discharged of all further obligations hereunder.
(f) The responsibilities of the Escrow Agent hereunder shall
terminate if he shall cease to be Secretary of the Company or if he shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent. In the absence of such
appointment, the President of the Company shall be the Escrow Agent.
(g) It is understood and agreed that should any dispute arise with
respect to the delivery, ownership, or right of possession of the Shares held by
the Escrow Agent hereunder, the Escrow Agent is authorized to retain without
liability to anyone all or any part of said Shares until such disputes shall
have been settled either by mutual written agreement or by a final order,
decree, or judgment of the arbitrator, if applicable, or of a court of competent
jurisdiction after the time for appeal has expired and no appeal has been
perfected, but the Escrow Agent shall be under no duty whatsoever to institute
or defend such proceedings.
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<PAGE> 9
(h) By signing this Agreement, the Escrow Agent becomes a party
hereto only for the purpose of executing the instructions set forth in this
Section 8 and does not otherwise become a party to this Agreement.
9. MARKET STANDOFF AGREEMENT. In the event that the Company should
propose to offer its securities to the general public in an initial public
offering, the Purchaser agrees, at the option of the managing underwriters of
such offering, not to sell any securities of the Company, other than securities
registered in such offering, for a period specified by the Company not to exceed
180 days from the effective date of the registration statement filed with the
Securities and Exchange Commission, pursuant to which such offering is to be
made. The Purchaser agrees that the Company may assign his or her obligations
hereunder to any managing underwriter of such offering. The Purchaser further
agrees, upon the request of such managing underwriter or underwriters, to
execute and deliver such further agreements and instruments, consistent
herewith, as it or they may reasonably request to effect this limitation.
10. ARBITRATION. At the option of either party, any and all disputes or
controversies, whether of law or fact, and of any nature whatsoever arising from
or respecting this Agreement, unless otherwise expressly provided herein, shall
be decided by arbitration by the American Arbitration Association in accordance
with the rules and regulations of that Association.
(a) The arbitrators shall be selected as follows: In the event the
Company and Purchaser agree on one arbitrator, the arbitration shall be
conducted by such arbitrator. In the event the Company and Purchaser do not so
agree, the Company and Purchaser shall each select one independent, qualified
arbitrator and these two arbitrators shall select a third arbitrator. The
Company reserves the right to reject any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(b) Arbitration shall take place at Palo Alto, California, or any
other location mutually agreeable to the parties. At the request of either
party, arbitration proceedings will be conducted in secrecy. In such case all
documents, testimony, and records shall be received, heard, and maintained by
the arbitrators in secrecy under seal, available for inspection only by the
Company and the Purchaser and their respective attorneys and their respective
experts who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known. The arbitrator, who shall act by
majority vote, shall be able to decree any and all relief of an equitable
nature, including but not limited to such relief as a temporary restraining
order, a temporary or a permanent injunction, or both, and shall also be able to
award damages, with or without an accounting, costs, and reasonable attorneys'
fees. The decree or judgment of an award rendered by the arbitrators may be
entered in any court having jurisdiction thereof.
(c) Reasonable notice of the time and place of arbitration shall be
given to all persons, other than the parties, as shall be required by law, in
which case such persons or their authorized
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<PAGE> 10
representatives shall have the right to attend and participate in all the
arbitration hearings to the extent and in such manner as the law shall require.
11. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California as applied to agreements among California residents entered
and to be performed entirely within California.
12. RIGHTS AS STOCKHOLDERS. Subject to the provisions and limitations
hereof, Purchaser may, during the term of this Agreement, exercise all rights
and privileges of a stockholder of the Company with respect to the Shares.
13. ADDITIONAL ACTIONS. The parties will execute such further
instruments and take such further action as may reasonably be necessary to carry
out the intent of this Agreement.
14. NOTICES. Any notice required or permitted hereunder shall be given
in writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by regular or certified mail with
postage and fees prepaid, addressed, if to Purchaser, at his address shown on
the Company's records and, if to the Company, at the address of its principal
corporate offices (Attention: Chief Financial Officer) or at such other address
as such party may designate by ten days' advance written notice to the other
party.
15. ASSIGNMENT. The Company may assign its rights and delegate its
duties under this Agreement. If any such assignment or delegation requires
consent of the California Commissioner of Corporations, the parties agree to
cooperate in requesting such consent. This Agreement shall inure to the benefit
of the successors and assigns of the Company and, subject to the restrictions on
transfer herein set forth, be binding upon Purchaser, his or her heirs,
executors, administrators, successors, and assigns.
16. EMPLOYMENT AT WILL. The Purchaser acknowledges that Purchaser's
employment relationship with the Company is at the will of either the Purchaser
or the Company, unless otherwise agreed in writing, and that nothing in this
Agreement shall affect in any manner whatsoever the right or power of the
Purchaser or the Company, or a parent or subsidiary of the Company, to terminate
Purchaser's employment, for any reason, with or without cause. This Agreement
does not constitute an express or implied promise of continued employment for
the vesting period or any other period.
THE VESTING OF SHARES PURSUANT TO THIS AGREEMENT IS EARNED BY CONTINUED
EMPLOYMENT, AND THE COMPANY'S RIGHT TO REPURCHASE UNVESTED SHARES UPON
TERMINATION OF SUCH EMPLOYMENT, IS ABSOLUTE, WHETHER THE TERMINATION IS
VOLUNTARY OR INVOLUNTARY, OR WITH OR WITHOUT CAUSE.
[Remainder of page intentionally blank]
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Founder's
Stock Purchase Agreement as of the day and year first above written.
"COMPANY" TURNSTONE SYSTEMS, INC.
BY:
--------------------------------
NAME:
------------------------------
TITLE:
-----------------------------
"PURCHASER"
------------------------------------
Address:
"ESCROW AGENT"
BY:
--------------------------------
NAME:
------------------------------
TITLE:
-----------------------------
[Turnstone Systems, Inc. Founder's Stock Purchase Agreement Signature Page]
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<PAGE> 12
EXHIBIT A
FORM OF ASSIGNMENT AGREEMENT
This Founder's Assignment Agreement (the "Agreement") is made by and
between Turnstone Systems, Inc., a Delaware corporation (the "Company"), and
____________________ (the "Founder") and is effective as of January 2, 1998.
RECITALS
A. The Company and the Founder are parties to the Founder's Restricted
Stock Purchase Agreement dated January 2, 1998 (the "Purchase Agreement")
pursuant to which the Company agrees to sell and the Founder agrees to purchase
shares of the Company's Common Stock (the "Shares").
B. As consideration for the Company's selling and issuing the Shares to
the Founder, the Founder has agreed to assign to the Company all of his or her
right, title, and interests in certain assets and properties set forth on
EXHIBIT A attached hereto, which the Company has deemed necessary to the conduct
of and prospects for its business (the "Assets").
NOW, THEREFORE, in consideration of the mutual representations
contained herein and for other good and valuable consideration, the parties
hereby agree as follows:
1. ASSIGNMENT OF PROPERTY INTERESTS. For value received pursuant to
this Agreement and the Purchase Agreement, the Executive hereby assigns to the
Company all of his or her right, title, and interests in and to the Assets.
2. GOOD AND MARKETABLE TITLE. The Founder hereby represents and
warrants to the Company that, other than such interests as may be held by P.
Kingston Duffie and M. Denise Savoie, whose interests are being conveyed to the
Company pursuant to substantially similar agreements simultaneously with the
execution and delivery of this Agreement, the Founder has good and marketable
title to the Assets, subject to no mortgage, pledge, lien, lease, encumbrance or
charge. The Founder knows of no adverse claim that would interfere with its
right to assign or the Company's right to use the Assets. The Founder has no
known obligation to compensate any person for the use of any of the Assets, and
the Founder has not knowingly granted any person or entity any license or other
right to use in any manner any of the Assets, whether requiring the payment of
royalties or not.
3. GENERAL PROVISIONS.
(a) GOVERNING LAW. This Agreement is governed by the laws of the State
of California as applied to agreements between California residents entered and
to be performed entirely within California.
<PAGE> 13
(b) ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
and understanding between the parties hereto relating to the subject matter
herein and merges all prior discussions between them. No modification of or
amendment to this Agreement, nor any waiver of any rights under this Agreement,
will be effective unless in writing signed by the party to be charged.
(c) SEVERABILITY. If one or more of the provisions of this Agreement is
deemed void by law, the remaining provisions will continue in full force and
effect.
(d) SUCCESSORS AND ASSIGNS. This agreement is binding upon and inures
to the benefit of the Founder and the Company and any successor organization or
organizations which will succeed to substantially all of the business and
property of the Company, whether by means of merger, consolidation, acquisitions
of substantially all of the assets of the Company or otherwise, including by
operation of law.
(e) LEGAL EXPENSES. The prevailing party in any legal action between
the parties hereto, arising out of this Agreement, will be entitled, in addition
to any other rights and remedies it may have, to reimbursement for its legal
expenses, including court costs and reasonable attorneys' fees.
(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, and all such counterparts together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
"COMPANY" TURNSTONE SYSTEMS, INC.
BY:
----------------------------------------
NAME:
--------------------------------------
TITLE:
-------------------------------------
"FOUNDER"
- -----------------------------------
<PAGE> 14
EXHIBIT A
ASSETS ASSIGNED TO TURNSTONE SYSTEMS, INC.
Signature of Founder:
-----------------------------
Print Name of Founder:
----------------------------
Date: January __, 1998
<PAGE> 15
CONSENT OF SPOUSE
The undersigned spouse of Purchaser has read and hereby approves the
foregoing Founder's Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of the grant by Turnstone Systems, Inc. to my spouse of the right
to purchase the Shares as set forth in the Agreement, the undersigned hereby
agrees to be irrevocably bound by the Agreement and further agrees that any
community property interest shall be similarly bound by the Agreement. I hereby
irrevocably appoint my spouse as my attorney-in-fact with respect to any
amendment or exercise of any rights under the Agreement.
Dated: January __, 1998
-----------------------------------
(signature of spouse)
-----------------------------------
(print name)
<PAGE> 16
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, ___________________________ hereby sells, assigns,
and transfers unto _________________________, (_________) shares of the Common
Stock of ________________, Inc., standing in the undersigned's name on the books
of said corporation, represented by Certificate No. ______, and does hereby
irrevocably constitute and appoint attorney to transfer the said stock on the
books of the said corporation with full power of substitution in the premises.
Dated: _____________, 19__
-----------------------------------
(signature)
-----------------------------------
(print name)
[This assignment may only be completed and delivered in accordance with
the terms of the Restricted Stock Purchase Agreement between the signatory
hereof and the above-mentioned corporation.]
<PAGE> 17
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, _________________________ hereby sells, assigns,
and transfers unto ______________________, _______________ (___________) shares
of the Common Stock of _______________, Inc., standing in the undersigned's name
on the books of said corporation, represented by Certificate No. ______, and
does hereby irrevocably constitute and appoint _______________________ attorney
to transfer the said stock on the books of the said corporation with full power
of substitution in the premises.
Dated: _____________, 19__
-----------------------------------
(signature)
-----------------------------------
(print name)
[This assignment may only be completed and delivered in accordance with
the terms of the Restricted Stock Purchase Agreement between the signatory
hereof and the above-mentioned corporation.]
<PAGE> 18
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in his gross income for
the current taxable year, the amount of any compensation taxable to him in
connection with his receipt of the property described below:
1. The name, address, taxpayer identification number, and taxable year of the
undersigned and his or her spouse, if applicable, are as follows:
TAXPAYER SPOUSE
NAME
--------------------- ---------------------
ADDRESS
--------------------- ---------------------
--------------------- ---------------------
IDENTIFICATION
NUMBER --------------------- ---------------------
TAXABLE YEAR: ---------------------
2. The property with respect to which the election is made is described as
follows: __________ shares of Common Stock of Turnstone Systems, Inc., a
Delaware corporation (the "Company").
3. The date on which the property was transferred is: _____________________.
4. The property is subject to the following restrictions: The right of the
Company to repurchase the shares, or a portion thereof, at the original
purchase price of the shares.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is: $_______ ($_______ per share).
6. The amount (if any) paid for such property: $________ ($______ per share).
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated: ______________________, 19__
----------------------------------
Taxpayer
The undersigned spouse of taxpayer joins
in this election.
Dated: ______________________, 19__
----------------------------------
Spouse of Taxpayer
<PAGE> 1
EXHIBIT 10.1
TURNSTONE SYSTEMS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of
__________________ by and between Turnstone Systems, 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 incorporation, the Company
and Indemnitee desire to continue to have in place the additional protection
provided by an indemnification agreement 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) or group acting in concert, 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 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
<PAGE> 2
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 Turnstone
Systems, Inc., any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which Turnstone Systems,
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.
(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 witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to
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<PAGE> 3
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
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<PAGE> 4
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
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<PAGE> 5
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 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
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<PAGE> 6
against Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) 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
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<PAGE> 7
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.
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.
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<PAGE> 8
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 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 crossclaim, 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
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<PAGE> 9
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 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.
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<PAGE> 10
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
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.
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this
Indemnification Agreement as of the date first above written.
TURNSTONE SYSTEMS, INC.
By:
--------------------------------
Richard N. Tinsley, President
AGREED TO AND ACCEPTED
INDEMNITEE:
---------------------------------------
(signature)
Print Name:
----------------------------
Address:
-------------------------------
-------------------------------
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<PAGE> 1
EXHIBIT 10.2
TURNSTONE SYSTEMS, INC.
1998 STOCK PLAN
EFFECTIVE JANUARY 5, 1998
1. Purposes of the Plan. The purposes of this 1998 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 of an Option
and subject to the applicable provisions of Section 422 of the code and the
regulations promulgated thereunder. Stock Purchase Rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under the various state corporate laws of
the United States, the federal and state securities laws of the United States,
the Code, the rules and regulations of any stock exchange or market quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
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 hereof.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Turnstone Systems, Inc., a Delaware
corporation.
(h) "Consultant" means any person who is engaged by the Company or
any Parent or Subsidiary to render consulting or advisory services to such
entity.
(i) "Director" means a member of the Board of Directors of the
Company.
(j) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
<PAGE> 2
(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, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
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<PAGE> 3
(r) "Option Agreement" means a written 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.
(s) "Option Exchange Program" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option
or a Stock Purchase Right.
(u) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(v) "Outside Director" means a Director who is not an Employee
(other than by virtue of being a Director) or an affiliate of a holder of ten
percent (10%) or more of the Company's outstanding voting stock (assuming
conversion into Common Stock of all outstanding Preferred Stock).
(w) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1998 Stock Plan.
(y) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 11 below.
(z) "Section 16(b)" means Section 16(b) of the Securities Exchange
Act of 1934, as amended.
(aa) "Service Provider" means an Employee, Director or Consultant.
(bb) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 below.
(cc) "Stock Purchase Right" means a right to purchase Common Stock
pursuant to Section 11 below.
(dd) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 5,324,000 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
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<PAGE> 4
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 that 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, upon exercise
of either an Option or Stock Purchase Right, however, 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) Administrator. The Plan shall be administered by the Board or
a Committee appointed by the Board, which Committee shall be constituted to
comply with Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, 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 from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, 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
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
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<PAGE> 5
(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 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 Optionees
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; and
(xi) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.
5. Eligibility.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees. A Service Provider who has been granted an Option or Stock Purchase
Right may, if otherwise eligible, be granted additional Options or Stock
Purchase Rights.
(b) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. Notwithstanding
such designation, however, 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 excess Options
shall be treated as Nonstatutory Stock Options. For purposes of this Section
5(b), Incentive Stock Options shall be taken into account in the order in which
they were granted. The Fair Market Value of the Shares shall be determined as of
the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of 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 sooner
terminated under Section 14 of the Plan.
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<PAGE> 6
7. Term of Option. The term of each Option shall be stated in the Option
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option granted
to an Optionee who, at the time the Option is granted, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant or such shorter term as may be provided in the
Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant
of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Employee, 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
(A) granted to a Service Provider who, at the time of
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Service Provider, the per
Share exercise price shall be no less than 85% 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 other than as required above pursuant to a
merger or other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares that (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any
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<PAGE> 7
combination of the foregoing methods of payment. In making its determination as
to the type of consideration to accept, the Administrator shall consider if
acceptance of such consideration may be reasonably expected to benefit the
Company.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Except in the case of an Option granted to an Officer,
Director or Consultant, an Option shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Option is granted.
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
both (i) written notice of exercise (in accordance with the Option Agreement)
from the person entitled to exercise the Option and (ii) full payment for the
Shares with respect to which the Option is exercised. Full payment may consist
of any consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the Shares
are issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to the
Shares, notwithstanding the exercise of the Option. The Company shall issue (or
cause to be issued) certificates representing 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 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in 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, such Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement (of at
least thirty (30) days) 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 the 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 90 days following the
Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
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<PAGE> 8
(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
(of at least six (6) months) 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 (of at least six (6) months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement) by the Optionee's
estate or by a person who acquires the right to exercise the Option by bequest
or inheritance. 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 the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. 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.
10. Non-Transferability of Options and Stock Purchase Rights. The Options
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer. The terms of the offer shall comply in all respects with
Section 260.140.42 of Title 10 of the California Code of Regulations. The offer
shall be accepted by execution of a Restricted Stock purchase agreement in the
form determined by the Administrator.
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<PAGE> 9
(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 such rate as the
Administrator may determine. Except with respect to Shares purchased by
Officers, Directors and Consultants, the repurchase option shall in no case
lapse at a rate of less than 20% per year over five (5) years from the date of
purchase.
(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 Stockholder. Once the Stock Purchase Right is
exercised, the purchaser shall have rights equivalent to those of a stockholder
and shall be a stockholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days
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<PAGE> 10
prior to such transaction as to all of the Optioned Stock covered thereby,
including Shares as to which the Option or Stock Purchase Right 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.
(i) Employee and Consultant Options.
1) General. In the event of a merger of the Company
with or into another corporation or the sale of all or substantially all of the
assets of the Company (a "Merger"), then (i) the vesting of each outstanding
Option and Stock Purchase Right shall be deemed vested to the extent each such
outstanding Option and Stock Purchase Right would have been vested on the date
twelve (12) months following the effectiveness of the Merger and (ii) each
outstanding Option and Stock Purchase Right held by an Employee or Consultant
(and granted to such person in such capacity) shall be assumed or an equivalent
option or right substituted by the successor corporation, or a Parent or
Subsidiary of the successor corporation (the "Successor Corporation"). In the
event that the Successor Corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Employee or Consultant shall fully vest in
and have the right to exercise such Option or Stock Purchase Right as to all of
the Optioned Stock, including Shares as to which the Employee or Consultant
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
as provided in this paragraph, the Administrator shall notify the Optionee in
writing 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.
2) Employee and Consultant Options Following
Assumption or Substitution. Following an assumption or substitution in
connection with a Merger, if an Employee
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<PAGE> 11
or Consultant's status as an Employee (or employee) or Consultant (or
consultant) of the Successor Corporation, as applicable, is terminated by the
Successor Corporation as a result of an involuntary termination (other than for
cause) within twelve months following a Merger, the Optionee shall fully vest in
and have the right to exercise Optionee's Option or Stock Purchase Right as to
all of the Optioned Stock, including Shares as to which Optionee would not
otherwise be vested or exercisable. Thereafter, the Option or Stock Purchase
Right shall remain exercisable in accordance with Section 9.
(ii) Outside Director Options. In the event of a Merger, each
outstanding Option and Stock Purchase Right held by an Outside Director (and
granted to such person in such capacity) shall fully vest as to all of the
Optioned Stock, including Shares as to which the Outside Director would not
otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes
fully vested and exercisable as provided in this paragraph, 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.
13. Time of Granting Options and Stock Purchase Rights. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator. Notice
of the determination shall be given to each Service Provider to whom an Option
or Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Board shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. 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 shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
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<PAGE> 12
(b) Investment Representations. As a condition to the exercise of an
Option, the Administrator 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.
16. 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.
17. Reservation of Shares. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Administrator shall approve from time to
time.
19. Stockholder Approval. The Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under Applicable Laws.
20. Information to Optionees and Purchasers. The Company shall provide to
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
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<PAGE> 13
TURNSTONE SYSTEMS, INC.
1998 STOCK PLAN
NOTICE OF STOCK OPTION GRANT
Unless otherwise defined herein, the terms defined in the Turnstone
Systems, Inc. 1998 Stock Plan (the "Plan") shall have the same defined meanings
in this Stock Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
DEAR: ______________________
You have been granted an option to purchase Common Stock of Turnstone
Systems, Inc. (the "Company"), subject to the terms and conditions of the Plan
and this Stock Option Agreement, as follows:
Date of Grant _________________
Vesting Commencement Date ________________
Exercise Price per Share $________________
Total Number of Shares Granted ________________
Total Exercise Price $________________
Type of Option: Unless otherwise indicated by
checking the box marked
"Nonstatutory Stock Option" below,
this Option shall be an Incentive
Stock Option to the extent
permitted by the Code and
Applicable Laws.
[ ] Nonstatutory Stock Option
Term/Expiration Date: ________________
Exercise and Vesting Schedule:
This Option may (i) be exercised, in whole or in part, at such times as
established under the Company's policies regarding exercise of options or as
otherwise permitted by the Company and (ii) may be exercised prior to the full
vesting of Option Shares, conditioned upon Optionee's entering into a Restricted
Stock Purchase Agreement with respect to any unvested Option Shares. The Shares
subject to this Option shall vest and/or be released from the Company's
repurchase option, as set forth in the Restricted Stock Purchase Agreement,
according to the following schedule:
<PAGE> 14
25% of the Shares subject to the Option shall vest one year after the
Vesting Commencement Date, and 1/48th of the Shares subject to the Option shall
vest each month thereafter, so that all of the Shares shall be vested 48 months
after the Vesting Commencement Date.
Termination Period:
This Option may be exercised, to the extent vested, for 90 days after
Optionee ceases to be a Service Provider to the Company. Upon Optionee's death
or Disability, this Option may be exercised as set forth in Section 7 or 8, as
the case may be, of the Option Agreement. In no event may Optionee exercise this
Option after the Term/Expiration Date as provided above.
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE VESTING SCHEDULE OF THE OPTION GRANTED HEREBY IS EARNED ONLY BY CONTINUING
TO ACT AS A SERVICE PROVIDER (AS DEFINED IN THE PLAN) 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 1998 STOCK PLAN, WHICH IS INCORPORATED HEREIN BY
REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUED
ENGAGEMENT BY THE COMPANY AS A SERVICE PROVIDER, NOR SHALL IT INTERFERE IN ANY
WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S STATUS
AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Option Agreement and the
Plan 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 has reviewed the Plan, the Option Agreement, 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, the Option Agreement, and the Plan. Optionee hereby agrees to accept
as binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan, the Option Agreement or
this Option. Optionee further agrees to notify the Company upon any change in
the residence address indicated below.
OPTIONEE: COMPANY:
By:
- ----------------------------------- ---------------------------------
[NAME]
Title:
------------------------------
Residence Address:
- ----------------------------------- -------------------------------------
- ----------------------------------- -------------------------------------
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<PAGE> 15
TURNSTONE SYSTEMS, INC.
1998 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the 1998 Stock Plan
shall have the same defined meanings in this Stock Option Agreement.
I. AGREEMENT
1. Grant of Option. Turnstone Systems, Inc., a Delaware corporation (the
"Company"), hereby grants to the Optionee (the "Optionee") named in the Notice
of Stock Option Grant (the "Notice of Grant"), an option (the "Option") to
purchase the total number of shares of Common Stock (the "Shares") set forth in
the Notice of Grant, at the exercise price per share set forth in the Notice of
Grant (the "Exercise Price") subject to the terms, definitions and provisions of
the 1998 Stock Plan (the "Plan") adopted by the Company, which is incorporated
herein by reference. Subject to Section 14(c) of the Plan, in the event of a
conflict between the terms and conditions of the Plan and this Option Agreement,
the terms and conditions of the Plan shall prevail.
Unless designated in the Notice of Grant as a Nonstatutory Stock
Option ("NSO"), this Option is intended to qualify as an Incentive Stock Option
("ISO") as defined in Section 422 of the Code. Nevertheless, to the extent that
it exceeds the $100,000 rule of Code Section 422(d), it shall be treated as an
NSO.
2. Exercise of Option. This Option shall be exercisable during its term in
accordance with the provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
(a) Subject to subsections 2(i)(b) through 2(i)(e) below,
this Option shall be exercisable cumulatively according to the vesting schedule
set out in the Notice of Grant. Alternatively, at the election of the Optionee,
this Option may be exercised in whole or in part at such times as indicated in
the Notice of Grant as to Shares which have not yet vested. For purposes of this
Stock Option Agreement, Shares subject to Option shall vest based on the
continued status of the Optionee as a Service Provider with the Company. Vested
Shares shall not be subject to the Company's repurchase right (as set forth in
the Restricted Stock Purchase Agreement, attached hereto as Exhibit C-1).
(b) As a condition to exercising this Option for unvested
Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.
(c) This Option may not be exercised for a fraction of a
Share.
<PAGE> 16
(d) In the event of Optionee's death, Disability or other
termination of the Optionee's status as a Service Provider, exercisability of
the Option is governed by Sections 5, 6 and 7 below, as the case may be, subject
to the limitation contained in subsection 2(i)(e).
(e) In no event may this Option be exercised after the date
of expiration of the term of this Option as set forth in the Notice of Grant.
(ii) Method of Exercise. This Option shall be exercisable by
written notice (in the form attached hereto as Exhibit A), which shall state the
election to exercise the Option, the number of Shares in respect of which the
Option is being exercised, and such other representations and agreements with
respect to such shares of Common Stock as may be required by the Company
pursuant to the provisions of the Plan. Such written notice shall be signed by
the Optionee and, together with an executed copy of the Restricted Stock
Purchase Agreement, if applicable, shall be delivered in person or by certified
mail to the Chief Financial Officer of the Company. The written notice and
Restricted Stock Purchase Agreement shall be accompanied by payment of the
Exercise Price. This Option shall be deemed to be exercised upon receipt by the
Company of such written notice and Restricted Stock Purchase Agreement
accompanied by the Exercise Price.
No Shares shall be issued pursuant to the exercise of an Option
unless such issuance and such exercise shall comply with all relevant provisions
of law and the requirements of any stock exchange or quotation system upon which
the Shares may then be listed. Assuming such compliance, for income tax purposes
the Shares shall be considered transferred to the Optionee on the date on which
the Option is exercised with respect to such Shares.
3. Optionee's Representations. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, if required by the Company, concurrently with the exercise of
all or any portion of this Option, deliver to the Company his or her Investment
Representation Statement in the form attached hereto as Exhibit B.
4. Method of Payment. Payment of the aggregate Exercise Price shall be by
any of the following, or a combination thereof, at the election of the Optionee:
(i) cash; or
(ii) check; or
(iii) to the extent permitted by the Administrator, delivery
of a properly executed exercise notice together with such other documentation as
the Administrator and the broker, if applicable, shall require to effect an
exercise of the Option and delivery to the Company of the sale or loan proceeds
required to pay the Exercise Price.
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<PAGE> 17
5. Restrictions on Exercise. This Option may not be exercised until such
time as the Plan has been approved by the stockholders of the Company, or 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 regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. 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.
6. Termination of Status as a Service Provider. In the event an Optionee's
status as a Service Provider to the Company terminates, Optionee may, to the
extent the Option was vested at the date of such termination, exercise this
Option during the Termination Period set out in the Notice of Grant. To the
extent that Optionee was not vested in this Option at the date of such
termination, or if Optionee does not exercise this Option within the time
specified herein, the Option shall terminate.
7. Disability of Optionee. Notwithstanding the provisions of Section 6
above, in the event of termination of an Optionee's status as a Service Provider
to the Company as a result of his or her Disability, Optionee may, but only
within twelve (12) months from the date of such termination (and in no event
later than the expiration date of the term of such Option as set forth in the
Stock Option Agreement), exercise the Option to the extent the Option was vested
at the date of such termination. To the extent that Optionee is not vested in
the Option at the date of such termination, or if Optionee does not exercise
such Option within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.
8. Death of Optionee. In the event of termination of Optionee's status as
a Service Provider to the Company as a result of the death of Optionee, the
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the date of expiration of the term of this
Option as set forth in Section 10 below), by Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or inheritance, but
only to the extent the Option was vested at the date of death. To the extent
that Optionee is not vested in the Option at the date of death, or if the Option
is not exercised within the time specified herein, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
9. 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 Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
10. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in Section 7 of the Plan regarding Options designated as ISOs and Options
granted to more than ten percent (10%) stockholders shall apply to this Option.
-3-
<PAGE> 18
11. Tax Consequences. Set forth below is a brief summary as of the date of
this Option of some the tax consequences under federal and state laws of the
United States of exercise of this Option and disposition of the Shares. THIS
SUMMARY IS NECESSARILY INCOMPLETE, AND FEDERAL AND STATE TAX LAWS AND
REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE
EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(i) Exercise of ISO. If this Option qualifies as an ISO, there
will be no regular federal income tax liability or state income tax liability
upon the exercise of the Option, although the excess, if any, of the Fair Market
Value of the Shares on the date of exercise over the Exercise Price will be
treated as an adjustment to the alternative minimum tax for federal tax purposes
and may subject the Optionee to the alternative minimum tax in the year of
exercise.
(ii) Exercise of NSO. There may be a regular federal income tax
liability and state income tax liability upon the exercise of an NSO. The
Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If Optionee is an
Employee or former Employee, the Company will be required to withhold from
Optionee's compensation or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise and may refuse to honor the exercise and refuse to
deliver shares if such withholding amounts are not delivered at the time of
exercise.
(iii) Disposition of Shares. In the case of an NSO, if Shares are
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for federal and state income tax purposes,
subject to decreases in the applicable federal long-term capital gain rate if
the Shares are held for longer than one year. In the case of an ISO, if Shares
transferred pursuant to the Option are held for at least one year after exercise
and are disposed of at least two years after the Date of Grant, any gain
realized on disposition of the Shares will also be treated as long-term capital
gain for federal and state income tax purposes. If Shares purchased under an ISO
are disposed of within such one-year period or within two years after the Date
of Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price and the lesser of (1) the Fair Market Value of the
Shares on the date of exercise, or (2) the sale price of the Shares.
(iv) Notice of Disqualifying Disposition of ISO Shares. If the
Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant or (2) the date one year
after the date of exercise, the Optionee shall immediately notify the Company in
writing of such disposition. Optionee agrees that Optionee may be subject to
income tax withholding by the Company on the compensation income recognized by
the Optionee.
(vi) Section 83(b) Election for Unvested Shares Purchased Pursuant
to Nonqualified Stock Options. With respect to the exercise of a nonqualified
stock option for unvested Shares, an
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<PAGE> 19
election may be filed by the Optionee with the Internal Revenue Service and, if
necessary, the proper state taxing authorities, WITHIN 30 DAYS of the purchase
of the Shares, electing pursuant to Section 83(b) of the Code (and similar state
tax provisions if applicable) to be taxed currently on any difference between
the purchase price of the Shares and their Fair Market Value on the date of
purchase. This will result in a recognition of taxable income to the Optionee on
the date of exercise, measured by the excess, if any, of the fair market value
of the Shares, at the time the Option is exercised over the purchase price for
the Shares. Absent such an election, taxable income will be measured and
recognized by Optionee at the time or times on which the Company's Repurchase
Option lapses. Optionee is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing of the Election under Section 83(b) and similar tax
provisions. A form of Election under Section 83(b) is attached hereto as Exhibit
C-5 for reference.
(vii) Section 83(b) Election for Unvested Shares Purchased Pursuant
to Incentive Stock Options. With respect to the exercise of an incentive stock
option for unvested Shares, an election may be filed by the Optionee with the
Internal Revenue Service and, if necessary, the proper state taxing authorities,
WITHIN 30 DAYS of the purchase of the Shares, electing pursuant to Section 83(b)
of the Code (and similar state tax provisions if applicable) to be taxed
currently on any difference between the purchase price of the Shares and their
Fair Market Value on the date of purchase for alternative minimum tax purposes.
This will result in a recognition of income to the Optionee on the date of
exercise, for alternative minimum tax purposes, measured by the excess, if any,
of the fair market value of the Shares, at the time the option is exercised,
over the purchase price for the Shares. Absent such an election, alternative
minimum taxable income will be measured and recognized by Optionee at the time
or times on which the Company's Repurchase Option lapses. Optionee is strongly
encouraged to seek the advice of his or her tax consultants in connection with
the purchase of the Shares and the advisability of filing of the Election under
Section 83(b) and similar tax provisions. A form of Election under Section 83(b)
for alternative minimum tax purposes is attached hereto as Exhibit C-5 for
reference.
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT
THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S
BEHALF.
TURNSTONE SYSTEMS, INC.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
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<PAGE> 20
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE VESTING SCHEDULE OF THE OPTION GRANTED HEREBY IS EARNED ONLY BY CONTINUING
TO ACT AS A SERVICE PROVIDER (AS DEFINED IN THE PLAN) 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 1998 STOCK PLAN, WHICH IS INCORPORATED HEREIN BY
REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUED
ENGAGEMENT BY THE COMPANY AS A SERVICE PROVIDER, NOR SHALL IT INTERFERE IN ANY
WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S STATUS
AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Company's 1998 Stock
Plan 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 has reviewed the 1998 Stock Plan, the Notice of
Grant, and this Option Agreement in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option Agreement and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option. Optionee
further agrees to notify the Company upon any change in the residence address
indicated below.
Dated:
---------------------------
Optionee:
------------------------------
Print Name:
----------------------------
Signature:
-----------------------------
Residence Address:
---------------------------------------
---------------------------------------
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<PAGE> 21
EXHIBIT A
1998 STOCK PLAN
EXERCISE NOTICE
To the Chief Financial Officer of Turnstone Systems, Inc.:
1. Exercise of Option. Effective as of today, ___________, ____, the
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of Turnstone Systems, Inc.
(the "Company") under and pursuant to the Turnstone Systems, Inc. 1998 Stock
Plan, as amended (the "Plan") and the Incentive Stock Option Agreement (unless
otherwise indicated in the Notice of Grant as being a Nonstatutory Stock Option
Agreement), dated _________, (the "Option Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understood the Plan and the Option Agreement (including the
Notice of Grant) and agrees to abide by and be bound by their terms and
conditions.
3. Rights as Stockholder. Until the stock certificate evidencing such
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a stockholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate 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 stock certificate
is issued, except as provided in Section 12 of the Plan.
Optionee shall enjoy rights as a stockholder until such time as
Optionee disposes of the Shares or the Company and/or its assignee(s) exercises
the Right of First Refusal hereunder. Upon such exercise, Optionee shall have no
further rights as a holder of the Shares so purchased except the right to
receive payment for the Shares so purchased in accordance with the provisions of
this Agreement, and Optionee shall forthwith cause the certificate(s) evidencing
the Shares so purchased to be surrendered to the Company for transfer or
cancellation.
4. Company's Right of First Refusal. Before any Shares held by Optionee or
any transferee (either being sometimes referred to herein as the "Holder") may
be sold or otherwise transferred (including transfers by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee (the "Proposed Transferee"); (iii)
the number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona
<PAGE> 22
fide cash price or other consideration for which the Holder proposes to transfer
the Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section, then the Holder
may sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 90 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
Applicable Laws and the Proposed Transferee agrees in writing that the
provisions of this Section shall continue to apply to the Shares in the hands of
such Pro posed Transferee. If the Shares described in the Notice are not
transferred to the Proposed Transferee within such period, a new Notice shall be
given to the Company, and the Company and/or its assignees shall again be
offered the Right of First Refusal before any Shares held by the Holder may be
sold or otherwise transferred.
(f) Exception for Certain Family Transfers. Notwithstanding
anything to the contrary contained in this Section, the transfer of any or all
of the Shares during the Optionee's lifetime or on the Optionee's death by will
or intestacy to the Optionee's immediate family or a trust for the benefit of
the Optionee's immediate family shall be exempt from the provisions of this
Section. "Immediate Family" as used herein shall mean a spouse, lineal
descendant or antecedent, father, mother, brother or sister of the Optionee. In
such case, the transferee or other recipient shall receive and hold the Shares
so transferred subject to the provisions of this Section, and there shall be no
further transfer of such Shares except in accordance with the terms of this
Section.
(g) Termination of Right of First Refusal. The Right of First
Refusal shall terminate as to any Shares 90 days after the first sale of Common
Stock of the Company to the general public
-2-
<PAGE> 23
pursuant to a registration statement filed with and declared effective by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act").
5. Market Stand-Off Agreement. Optionee hereby agrees that if so requested
by the Company or any representative of the underwriters in connection with any
registration of the offering of any securities of the Company under the
Securities Act, Optionee shall not sell or otherwise transfer any Shares or
other securities of the Company during the 180-day period following the
effective date of a registration statement of the Company filed under the
Securities Act; provided, however, that such restriction shall only apply to the
first registration statement of the Company to become effective under the
Securities Act which includes securities to be sold on behalf of the Company to
the public in an underwritten public offering under the Securities Act. The
Company may impose stop-transfer instructions with respect to securities subject
to the foregoing restrictions until the end of such 180-day period. Optionee
agrees that the Company may assign his or her obligation hereunder to any
underwriter of the Company's initial public offering.
6. Tax Consultation. 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 consultants
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.
7. Restrictive Legends and Stop-Transfer Orders.
(a) Legends. Optionee understands and agrees that the Company shall
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares
(together with any other legends that may be required by state or federal
securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR SUCH OFFER, SALE OR TRANSFER, PLEDGE OR
HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN
THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY
BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER
RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF
THESE SHARES.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
-3-
<PAGE> 24
(c) Refusal to Transfer. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
8. Successors and Assigns. The Company may assign any of its rights under
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
9. Interpretation. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors or the committee thereof that administers the Plan,
which shall review such dispute at its next regular meeting. The resolution of
such a dispute by the Board or committee shall be final and binding on the
Company and on Optionee.
10. Governing Law; Severability. This Agreement shall be governed by and
construed in accordance with the laws of the State of California as applied to
agreements between California residents entered and to be performed entirely
within California. Should any provision of this Agreement be determined by a
court of law to be illegal or unenforceable, the other provisions shall
nevertheless remain effective and shall remain enforceable.
11. Notices. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed, in the case of the Company, to the address of its principal
executive offices to the attention of its Chief Financial Officer, and in the
case of the Optionee (or Optionee's assignee) at his or her address as shown
below beneath his or her signature, or to such other address as such party may
designate in writing from time to time to the other party.
12. Further Instruments. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
13. Delivery of Payment. Optionee herewith delivers to the Company the
full Exercise Price for the Shares.
14. Entire Agreement. The Plan and Notice of Grant/Option Agreement are
incorporated herein by reference. This Agreement, the Plan, the Option
Agreement, the Restricted Stock Purchase Agreement (if applicable), and the
Investment Representation Statement 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 subject matter hereof.
-4-
<PAGE> 25
Submitted by: Accepted by:
OPTIONEE: TURNSTONE SYSTEMS, INC.
- ------------------------------ By:
(Print name) ---------------------------------
Title:
- ------------------------------ ------------------------------
(Signature)
Address:
- ------------------------------
- ------------------------------
[SIGNATURE PAGE TO TURNSTONE SYSTEMS, INC.
1998 STOCK PLAN EXERCISE NOTICE]
-5-
<PAGE> 26
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
---------------------------------
COMPANY : TURNSTONE SYSTEMS, INC.
SECURITY : COMMON STOCK
AMOUNT : ---------------------------------
DATE :
---------------------------------
In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Securities. Optionee
is acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities.
(c) Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or
such longer period as any market stand-off agreement may require), the
Securities exempt under Rule 701 may be resold, subject to the satisfaction of
certain of the conditions specified by Rule 144, including: (1) the resale
<PAGE> 27
being made through a broker in an unsolicited "broker's transaction" or in
transactions directly with a market maker (as such term is defined under the
Securities Exchange Act of 1934, as amended); and, in the case of an affiliate,
(2) the availability of certain public information about the Company, (3) the
amount of Securities being sold during any three month period not exceeding the
limitations specified in Rule 144(e), and (4) the timely filing of a Form 144,
if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold only in certain
limited circumstances subject to the provisions of Rule 144, which requires the
resale to occur not less than one year after the later of the date the
Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than two years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
(d) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other exemption from
the registration requirements of the Securities Act will be required; and that,
notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of
the Securities and Exchange Commission has expressed its opinion that persons
proposing to sell private placement securities other than in a registered
offering and otherwise than pursuant to Rules 144 or 701 will have a substantial
burden of proof in establishing that an exemption from registration is available
for such offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk. Optionee understands
that no assurances can be given that any such other exemption from the
registration requirements of the Securities Act will be available in such event.
Signature of Optionee:
----------------------------------
Print Name of Optionee:
----------------------------------
Date:_______________________, 19__
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<PAGE> 28
EXHIBIT C-1
1998 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made between ____________________________________
(the "Purchaser") and Turnstone Systems, Inc., a Delaware corporation (the
"Company"), as of ______________________, __________.
RECITALS
(1) Pursuant to the exercise of the stock option granted to
Purchaser under the Company's 1998 Stock Plan and pursuant to the Stock Option
Agreement (the "Option Agreement") dated ___________ by and between the Company
and Purchaser with respect to such grant, which Option Agreement is hereby
incorporated by reference, Purchaser has elected to purchase _________ shares of
the Company's Common Stock, of which ________ shares are not, as of the date
hereof, vested (the "Unvested Shares") under the vesting schedule set forth in
the Notice of Stock Option Grant included as part of the Option Agreement, which
for purposes of the definition of "Unvested Shares" shall continue to be given
effect in this Restricted Stock Purchase Agreement. The Unvested Shares and the
shares subject to the Option Agreement that have become vested are sometimes
collectively referred to herein as the "Shares."
(2) As required by the Option Agreement, as a condition to
Purchaser's election to exercise the option, Purchaser must execute this
Restricted Stock Purchase Agreement, which sets forth the rights and obligations
of the parties with respect to Shares acquired upon exercise of the Option.
1. Repurchase Option.
(a) If Purchaser's employment or consulting relationship with the
Company is terminated for any reason, including for cause, death, or Disability,
the Company shall have the right and option to purchase from Purchaser, or
Purchaser's personal representative, as the case may be, all of the Purchaser's
Unvested Shares as of the date of such termination at the price originally paid
by the Purchaser for such Shares (the "Repurchase Option").
(b) Upon the occurrence of a termination, the Company may exercise
its Repurchase Option by delivering personally or by registered mail, to
Purchaser (or his transferee or legal representative, as the case may be),
within ninety (90) days of the termination, a notice in writing indicating the
Company's intention to exercise the Repurchase Option and setting forth a date
for closing not later than thirty (30) days from the mailing of such notice. The
closing shall take place at the Company's office. At the closing, the holder of
the certificates for the Unvested Shares being transferred shall deliver the
stock certificate or certificates evidencing the Unvested Shares, and the
Company shall deliver the purchase price therefor.
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<PAGE> 29
(c) At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.
(d) If the Company does not elect to exercise the Repurchase
Option conferred above by giving the requisite notice within ninety (90) days
following the termination, the Repurchase Option shall terminate.
2. Transferability of the Shares; Escrow.
(a) Purchaser hereby authorizes and directs the Secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.
(b) To insure the availability for delivery of Purchaser's
Unvested Shares upon repurchase by the Company pursuant to the Repurchase Option
under Section 1, Purchaser hereby appoints the secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit C-3 hereto, until the Company
exercises its purchase right as provided in Section 1, until such Unvested
Shares are vested, or until such time as this Agreement no longer is in effect.
As a further condition to the Company's obligations under this Agreement, the
spouse of the Purchaser, if any, shall execute and deliver to the Company the
Consent of Spouse attached hereto as Exhibit C-4. Upon vesting of the Unvested
Shares, the escrow agent shall promptly deliver to the Purchaser the certificate
or certificates representing such Shares in the escrow agent's possession
belonging to the Purchaser, and the escrow agent shall be discharged of all
further obligations hereunder; provided, however, that the escrow agent shall
nevertheless retain such certificate or certificates as escrow agent if so
required pursuant to other restrictions imposed pursuant to this Agreement.
(c) The Company, or its designee, shall not be liable for any act
it may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.
(d) Transfer or sale of the Shares is subject to restrictions on
transfer imposed by Applicable Laws. Any transferee shall hold such Shares
subject to all the provisions hereof and the Exercise Notice executed by the
Purchaser with respect to any Unvested Shares purchased by Purchaser and shall
acknowledge the same by signing a copy of this Agreement.
-2-
<PAGE> 30
3. Market Stand-Off Agreement. Purchaser hereby agrees that if so
requested by the Company or any representative of the underwriters in connection
with any registration of the offering of any securities of the Company under the
Securities Act, Purchaser shall not sell or otherwise transfer any Shares or
other securities of the Company during the 180-day period following the
effective date of a registration statement of the Company filed under the
Securities Act; provided, however, that such restriction shall only apply to the
first registration statement of the Company to become effective under the
Securities Act which includes securities to be sold on behalf of the Company to
the public in an underwritten public offering under the Securities Act. The
Company may impose stop-transfer instructions with respect to securities subject
to the foregoing restrictions until the end of such 180-day period. Purchaser
agrees that the Company may assign his or her obligation hereunder to any
underwriter of the Company's initial underwritten public offering.
4. Ownership, Voting Rights, Duties. This Agreement shall not affect in
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.
5. Legends. The share certificate evidencing the Shares issued hereunder
shall be endorsed with the following legend (in addition to any legend required
under applicable state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND
MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED,
OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR
SUCH OFFER, SALE, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE
THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER, INCLUDING A RIGHT OF FIRST
REFUSAL AND/OR RIGHT OF REPURCHASE, AS SET FORTH IN AN
AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
6. Adjustment for Stock Splits. All references to the number of Shares and
the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
7. Notices. Notices required hereunder shall be given in person or by
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.
-3-
<PAGE> 31
8. Survival of Terms. This Agreement shall apply to and bind Purchaser and
the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.
9. Section 83(b) Elections.
(a) Election for Unvested Shares Purchased Pursuant to
Nonqualified Stock Options. Purchaser hereby acknowledges that he or she has
been informed that, with respect to the exercise of a nonqualified stock option
for Unvested Shares, that unless an election is filed by the Purchaser with the
Internal Revenue Service and, if necessary, the proper state taxing authorities,
WITHIN 30 DAYS of the purchase of the Shares, electing pursuant to Section 83(b)
of the Code (and similar state tax provisions if applicable) to be taxed
currently on any difference between the purchase price of the Shares and their
Fair Market Value on the date of purchase, there will be a recognition of
taxable income to the Optionee, measured by the excess, if any, of the fair
market value of the Shares, at the time the Company's Repurchase Option lapses
over the purchase price for the Shares. Optionee represents that Optionee has
consulted any tax consultant(s) Optionee deems advisable in connection with the
purchase of the Shares or the filing of the Election under Section 83(b) and
similar tax provisions. A form of Election under Section 83(b) is attached
hereto as Exhibit C-5 for reference.
(b) Election for Unvested Shares Purchased Pursuant to Incentive
Stock Options. Purchaser hereby acknowledges that he or she has been informed
that, with respect to the exercise of an incentive stock option for Unvested
Shares, that unless an election is filed by the Purchaser with the Internal
Revenue Service and, if necessary, the proper state taxing authorities, WITHIN
30 DAYS of the purchase of the Shares, electing pursuant to Section 83(b) of the
Code (and similar state tax provisions if applicable) to be taxed currently on
any difference between the purchase price of the Shares and their Fair Market
Value on the date of purchase, there will be a recognition of income to the
Optionee, for alternative minimum tax purposes, measured by the excess, if any,
of the fair market value of the Shares, at the time the Company's Repurchase
Option lapses over the purchase price for the Shares. Optionee represents that
Optionee has consulted any tax consultant(s) Optionee deems advisable in
connection with the purchase of the Shares or the filing of the Election under
Section 83(b) and similar tax provisions. A form of Election under Section 83(b)
for alternative minimum tax purposes is attached hereto as Exhibit C-5 for
reference.
PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND
NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(B), EVEN
IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS
FILING ON PURCHASER'S BEHALF.
10. Representations. Purchaser has reviewed with his own tax advisors the
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on such
advisors and not on any statements or represen-
-4-
<PAGE> 32
tations of the Company or any of its agents. Purchaser understands that he or
she (and not the Company) shall be responsible for his or her own tax liability
that may arise as a result of this investment or the transactions contemplated
by this Agreement.
11. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California as applied to
agreements between California residents entered and to be performed entirely
within California.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 33
Purchaser represents that he has read this Restricted Stock Purchase
Agreement and is familiar with its terms and provisions. Purchaser hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of
the Board upon any questions arising under this Agreement.
IN WITNESS WHEREOF, this Restricted Stock Purchase Agreement is deemed
made as of the date first set forth above.
"COMPANY" TURNSTONE SYSTEMS, INC.
By:
-------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
"PURCHASER"
-----------------------------------------
(Signature)
-----------------------------------------
(Print Name)
Address:
---------------------------------
---------------------------------
---------------------------------
Soc. Sec. No.:
---------------------------
[SIGNATURE PAGE TO RESTRICTED STOCK PURCHASE AGREEMENT]
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<PAGE> 34
EXHIBIT C-2
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign
and transfer unto (__________) shares of the Common Stock of
__________________________ standing in my name of the books of said corporation
represented by Certificate No. _____ herewith and do hereby irrevocably
constitute and appoint to transfer the said stock on the books of the within
named corporation with full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the
Restricted Stock Purchase Agreement between ________________________ and the
undersigned dated ______________, 19__.
Dated: _______________, 19
Signature:______________________________
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<PAGE> 35
EXHIBIT C-3
JOINT ESCROW INSTRUCTIONS
_____________ , ____
To the Chief Financial Officer of Turnstone Systems, Inc.
Dear Chief Financial Officer:
As escrow agent for both Turnstone Systems, Inc. (the "Company") and
the undersigned purchaser of stock of the Company (the "Purchaser"), you or your
assignee (the "Escrow Agent") are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement ("Agreement") between the Company and the undersigned,
in accordance with the following instructions:
1. In the event the Company and/or any assignee of the Company
(referred to collectively for convenience herein as the "Company") exercises the
Company's repurchase option set forth in the Agreement, the Company shall give
to Purchaser and you a written notice specifying the number of shares of stock
to be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the
<PAGE> 36
Company's repurchase option. Within 120 days after cessation of Purchaser's
continuous employment by or services to the Company, or any parent or subsidiary
of the Company, you will deliver to Purchaser a certificate or certificates
representing the aggregate number of shares held or issued pursuant to the
Agreement and not purchased by the Company or its assignees pursuant to exercise
of the Company's repurchase option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree, you
shall not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limita tions with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other
experts as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be an officer or agent of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent.
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<PAGE> 37
13. If you reasonably require other or further instruments in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to each of the other parties thereunto
entitled at the following addresses or at such other addresses as a party may
designate by ten days' advance written notice to each of the other parties
hereto.
COMPANY: Turnstone Systems, Inc.
-------------------------
-------------------------
Attention: Chief Financial Officer
PURCHASER:
--------------------------------------------
--------------------------------------------
--------------------------------------------
ESCROW AGENT:
-------------------------
-------------------------
-------------------------
-------------------------
16. By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California as applied
to agreements between California residents entered and to be performed entirely
within California.
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<PAGE> 38
TURNSTONE SYSTEMS, INC.
By:
--------------------------------------------------
Title:
-----------------------------------------------
Purchaser:
-------------------------------------------
(Signature)
-------------------------------------------
(Typed or Printed Name)
Escrow Agent:
---------------------------------------
Chief Financial Officer
[SIGNATURE PAGE TO JOINT ESCROW INSTRUCTIONS]
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<PAGE> 39
EXHIBIT C-4
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have read and
approve the foregoing Agreement. In consideration of granting of the right to my
spouse to purchase shares of ____________________________, as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the
exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said Agreement
or any shares issued pursuant thereto under the community property laws or
similar laws relating to marital prop erty in effect in the state of our
residence as of the date of the signing of the foregoing Agreement.
Dated: _______________, 19
-------------------------------------
(Signature)
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<PAGE> 40
EXHIBIT C-5
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
or alternative minimum taxable income, as the case may be, for the current
taxable year the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: shares (the "Shares") of the Common Stock of
___________________________ (the "Company").
3. The date on which the property was transferred is: ______________ ,
19 __.
4. The property is subject to the following restrictions:
The Shares may not be transferred and are subject to forfeiture under
the terms of an agreement between the taxpayer and the Company. These
restrictions lapse upon the satisfaction of certain conditions contained
in such agreement.
5. The fair market value at the time of transfer, determined without regard
to any restriction other than a restriction which by its terms will
never lapse, of such property is:
$______________________.
6. The amount (if any) paid for such property is:
$______________________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated: ___________________, 19___ ________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: ___________________, 19___ ________________________________________
Spouse of Taxpayer
<PAGE> 1
EXHIBIT 10.3
TURNSTONE SYSTEMS, INC.
2000 STOCK PLAN
1. Purposes of the Plan. The purposes of this 2000 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) "Cause" means (i) any act of personal dishonesty taken by the
Optionee in connection with his responsibilities as an Employee which is
intended to result in personal enrichment of the Optionee, (ii) the Optionee's
conviction of a felony, (iii) any act by the Optionee that constitutes
misconduct, and (iv) continued violations by the Optionee of the Optionee's
obligations to the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means a committee of Directors appointed by the Board
in accordance with Section 4 of the Plan.
(g) "Common Stock" means the common stock of the Company.
(h) "Company" means Turnstone Systems, Inc., a Delaware corporation.
<PAGE> 2
(i) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(j) "Director" means a member of the Board.
(k) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(l) "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.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(n) "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.
(o) "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.
(p) "Inside Director" means a Director who is an Employee.
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<PAGE> 3
(q) "IPO Effective Date" means the date upon which the Securities and
Exchange Commission declares the initial public offering of the Company's Common
Stock as effective.
(r) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(s) "Notice of Grant" means a written or electronic notice evidencing
certain times and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(t) "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.
(u) "Option" means a stock option granted pursuant to the Plan.
(v) "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.
(w) "Option Exchange Program" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise price.
(x) "Optioned Stock" means the Common Stock subject to an Option or
Stock Purchase Right.
(y) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(z) "Outside Director" means a Director who is not an Employee and
who is not the "beneficial owner" (as defined in Rule 13d-3 of the Securities
Exchange Act of 1934, as amended), directly or indirectly, of securities of the
Company representing 1% or more of the total voting power represented by the
Company's outstanding voting securities on the date of any grant hereunder.
(aa) "Plan" means this 2000 Stock Option Plan, as amended and
restated.
(bb) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.
(cc) "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.
(dd) "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.
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<PAGE> 4
(ee) "Section 16(b) " means Section 16(b) of the Exchange Act.
(ff) "Service Provider" means an Employee, Director or Consultant.
(gg) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 14 of the Plan.
(hh) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ii) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 14 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 5,000,000 Shares, plus an annual increase to be added on the
first day of the Company's fiscal year beginning in 2000 equal to the lesser of
(i) 5,000,000 shares, (ii) 6% of the outstanding shares on such date or (iii) an
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.
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<PAGE> 5
(iv) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Option or Stock Purchase Right granted hereunder.
Such terms and conditions include, but are not limited to, the exercise price,
the time or times when Options or Stock Purchase Rights may be exercised (which
may be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to reduce the exercise price of any Option or Stock Purchase
Right to the then current Fair Market Value if the Fair Market Value of the
Common Stock covered by such Option or Stock Purchase Right shall have declined
since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 16(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
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<PAGE> 6
withheld. The Fair Market Value of the Shares to be withheld shall be determined
on the date that the amount of tax to be withheld is to be determined. All
elections by an Optionee to have Shares withheld for this purpose shall be made
in such form and under such conditions as the Administrator may deem necessary
or advisable;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without Cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 1,000,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 2,000,000
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 14.
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<PAGE> 7
(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 14), 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 20 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 16 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be ten (10) 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.
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<PAGE> 8
(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 (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
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<PAGE> 9
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 14 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. Subject to
Section 14, if an Optionee ceases to be a Service Provider (but not in the event
of an Optionee's change of status from Employee to Consultant (in which case an
Employee's Incentive Stock Option shall automatically convert to a Nonstatutory
Stock Option on the ninety-first (91st) day following such change of status) or
from Consultant to Employee), such Optionee may, but only within such period of
time as is specified in the Option Agreement (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that Optionee was entitled
to exercise it at the date of such termination. In the absence of a specified
time in the Option Agreement, the Option shall remain exercisable for three (3)
months following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified by
the Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may, but only
within twelve (12) months from the date of such termination (and in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Option is
vested on the date of 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 at any time within twelve (12) months following the
date of death (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who 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. 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
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<PAGE> 10
exercised within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(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 14
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. Formula Option Grants to Outside Directors. Outside Directors shall
be granted Options each year in accordance with the following provisions:
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<PAGE> 11
(a) All Options granted pursuant to this Section shall be
Nonstatutory Stock Options and, except as otherwise provided herein, shall be
subject to the other terms and conditions of the Plan.
(b) Except as provided in subsection (d) below, each person who
first becomes an Outside Director on or after the IPO Effective Date, whether
through election by the stockholders of the Company or appointment by the Board
to fill a vacancy shall be automatically granted an Option to purchase up to
30,000 Shares (the "First Option"), as determined by the Board in its sole and
absolute discretion, on the date he or she first becomes an Outside Director;
provided, however, that an Inside Director who ceases to be an Inside Director
but who remains a Director shall not receive a First Option.
(c) Except as provided in subsection (d) below, each Outside
Director shall be automatically granted an Option to purchase up to 10,000
Shares (a "Subsequent Option") following each annual meeting of the stockholders
of the Company occurring after the end of the Company's fiscal year 2000, if as
of such date, he or she shall continue to serve on the Board and shall have
served on the Board for at least the preceding six (6) months.
(d) Notwithstanding the provisions of subsections (b) and (c)
hereof, any exercise of an Option granted before the Company has obtained
stockholder approval of the Plan in accordance with Section 20 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 20 hereof.
(e) The terms of each First Option granted pursuant to this Section
shall be as follows:
(i)the term of the Option shall be ten (10) years.
(ii) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Option.
(iii) the Option shall vest and become exercisable in three (3)
equal annual installments on each of the first three anniversaries of its date
of grant; provided that the Outside Director shall continue to serve on the
Board on such dates.
(f) The terms of each Subsequent Option granted pursuant to this
Section shall be as follows:
(i)the term of the Option shall be ten (10) years.
(ii) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Option.
(iii) the Option shall vest and become exercisable on the first
anniversary of the date that all stock options have vested that were granted to
the Outside Director by the Company before the Option; provided, however, that
the Option shall in all events vest and become
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<PAGE> 12
exercisable on the last day of its ten-year term; provided, further, that in
each case the Outside Director shall continue to serve on the Board on such
date.
14. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option or Stock Purchase Right
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.
(i) General. Subject to subsections (ii) and (iii) below, 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 (a "Merger"), 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 (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
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<PAGE> 13
Purchase Right becomes fully vested and exercisable in lieu of assumption or
substitution in the event of a Merger, 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 Section 14(c), the
Option or Stock Purchase Right shall be considered assumed if, following the
Merger, 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, the consideration (whether stock, cash, or
other securities or property) received in the Merger by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the Merger 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.
(ii) Employee and Consultant Options.
(A) General. In the event of a Merger in which the
stockholders immediately prior to the Merger hold less than 50% of the
outstanding voting equity securities of the Successor Corporation immediately
after such Merger (a "Change of Control Merger"), then (i) the vesting of each
outstanding Option and Stock Purchase Right shall be deemed vested to the extent
each such outstanding Option and Stock Purchase Right would have been vested on
the date twelve (12) months following the effectiveness of the Change of Control
Merger and (ii) each outstanding Option and Stock Purchase Right held by an
Employee or Consultant (and granted to such person in such capacity) shall be
assumed or an equivalent option or right substituted by the Successor
Corporation. In the event that the Successor Corporation refuses to assume or
substitute for the Option or Stock Purchase Right, the Employee or Consultant
shall, as set forth in subsection (i) above, fully vest in and have the right to
exercise such Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which the Employee or Consultant would not otherwise be
vested or exercisable.
(B) Employee and Consultant Options Following Assumption or
Substitution. Following an assumption or substitution in connection with a
Merger or Change of Control Merger, if an Employee or Consultant's status as an
Employee (or employee) or Consultant (or consultant) of the Successor
Corporation, as applicable, is terminated by the Successor Corporation as a
result of an involuntary termination (other than for Cause) within twelve months
following the Merger, the Optionee shall fully vest in and have the right to
exercise Optionee's Option or Stock Purchase Right as to all of the Optioned
Stock, including Shares as to which Optionee would not otherwise be vested or
exercisable. Thereafter, the Option or Stock Purchase Right shall remain
exercisable in accordance with Section 10.
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<PAGE> 14
(iii) Outside Director Options. In the event of a Change of
Control Merger, each outstanding Option and Stock Purchase Right held by an
Outside Director (and granted to such person in such capacity) shall fully vest
as to all of the Optioned Stock, including Shares as to which the Outside
Director would not otherwise be vested or exercisable. If an Option or Stock
Purchase Right becomes fully vested and exercisable as provided in this
paragraph, 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.
15. 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.
16. 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.
17. 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.
18. 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
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<PAGE> 15
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
19. 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.
20. 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.
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<PAGE> 16
TURNSTONE SYSTEMS, INC.
2000 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number ____________________________________
Date of Grant ____________________________________
Vesting Commencement Date ____________________________________
Exercise Price per Share $___________________________________
Total Number of Shares Granted ____________________________________
Total Exercise Price $___________________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: 10 years from the Date of Grant
Vesting Schedule:
Subject to accelerated vesting as set forth in the Plan, this Option may
be exercised, in whole or in part, in accordance with the following schedule:
25% of the Shares subject to the Option shall vest twelve months after
the Vesting Commencement Date, and 1/48 of the Shares subject to the Option
shall vest each month thereafter, provided that on such dates the Optionee
remains in Continuous status as a Service Provider on such dates.
Termination Period:
This Option may be exercised for three months after Optionee ceases to
be a Service Provider. Upon the death or Disability of the Optionee, this Option
may be exercised for twelve months after Optionee ceases to be a Service
Provider. In no event shall this Option be exercised later than the
Term/Expiration Date as provided above.
<PAGE> 17
II. AGREEMENT
A. Grant of Option.
The Plan Administrator of the Company hereby grants to the Optionee
named in the Notice of Grant attached as Part I of this Agreement (the
"Optionee") an option (the "Option") to purchase the number of Shares, as set
forth in the Notice of Grant, at the exercise price per share set forth in the
Notice of Grant (the "Exercise Price"), subject to the terms and conditions of
the Plan, which is incorporated herein by reference. Subject to Section 15(c) of
the Plan, in the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
B. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of
an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to the Stock Plan Administrator of the Company.
The Exercise Notice shall be accompanied by payment of the aggregate Exercise
Price as to all Exercised Shares. This Option shall be deemed to be exercised
upon receipt by the Company of such fully executed Exercise Notice accompanied
by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
C. Method of Payment.
Payment of the aggregate Exercise Price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
1. cash; or
2. check; or
3. consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
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<PAGE> 18
4. surrender of other Shares which (i) 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 (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares; or
5. 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; or
6. such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
D. 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 the Plan and this Option
Agreement shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
E. Term of Option.
This Option may be exercised only within the term set out in the
Notice of Grant, and may be exercised during such term only in accordance with
the Plan and the terms of this Option Agreement.
F. Tax Consequences.
Some of the federal tax consequences relating to this Option, as of
the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE
SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE
SHARES.
G. Exercising the Option.
1. Nonstatutory Stock Option. The Optionee may incur regular
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If the
Optionee is an Employee or a former Employee, the Company will be required to
withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
2. Incentive Stock Option. If this Option qualifies as an ISO, the
Optionee will have no regular federal income tax liability upon its exercise,
although the excess, if any, of the Fair Market Value of the Exercised Shares on
the date of exercise over their aggregate Exercise Price will be treated as an
adjustment to alternative minimum taxable income for federal tax purposes and
may
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<PAGE> 19
subject the Optionee to alternative minimum tax in the year of exercise. In the
event that the Optionee ceases to be an Employee but remains a Service Provider,
any Incentive Stock Option of the Optionee that remains unexercised shall cease
to qualify as an Incentive Stock Option and will be treated for tax purposes as
a Nonstatutory Stock Option on the date three (3) months and one (1) day
following such change of status.
3. Disposition of Shares.
(a) NSO. If the Optionee holds NSO Shares for at least one year,
any gain realized on disposition of the Shares will be treated as long-term
capital gain for federal income tax purposes.
(b) ISO. If the Optionee holds ISO Shares for at least one year
after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
H. Entire Agreement; Governing Law.
The Plan is incorporated herein by reference. The Plan and this
Option Agreement constitute the entire agreement of the parties with respect to
the subject matter hereof and supersede in their entirety all prior undertakings
and agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
I. NO GUARANTEE OF CONTINUED SERVICE.
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT
TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE
PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED,
BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER
ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED
HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS
OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING
PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH
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<PAGE> 20
OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS
A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
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 Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: TURNSTONE SYSTEMS, INC.
- ------------------------------------- --------------------------------------
Signature By
- ------------------------------------- --------------------------------------
Print Name Title
- -------------------------------------
Residence Address
- -------------------------------------
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<PAGE> 21
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the
terms and conditions of the Plan and this Option Agreement. In consideration of
the Company's granting his or her spouse the right to purchase Shares as set
forth in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement 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 Option Agreement.
--------------------------------------
Spouse of Optionee
<PAGE> 22
EXHIBIT A
TURNSTONE SYSTEMS, INC.
2000 STOCK OPTION PLAN
EXERCISE NOTICE
Turnstone Systems, Inc.
274 Ferguson Drive
Mountain View, CA 94043
Attention: Corporate Secretary
1. Exercise of Option. Effective as of today, ________________, 2000,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Turnstone Systems, Inc. (the "Company")
under and pursuant to the Turnstone Systems, Inc. 2000 Stock Plan (the "Plan")
and the Stock Option Agreement dated, _____ (the "Option Agreement"). The
purchase price for the Shares shall be $_____, as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. 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 Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
<PAGE> 23
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
Submitted by: Accepted by:
PURCHASER: TURNSTONE SYSTEMS, INC.
- ----------------------------------- --------------------------------------
Signature By
- ----------------------------------- --------------------------------------
Print Name Its
Address: Address:
- ----------------------------------- Turnstone Systems, Inc
274 Ferguson Drive
- ----------------------------------- Mountain View, CA 94043
--------------------------------------
Date Received
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<PAGE> 1
EXHIBIT 10.4
TURNSTONE SYSTEMS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 2000 Employee Stock
Purchase Plan of Turnstone Systems, 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 Turnstone Systems, Inc., a Delaware
Corporation, and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary 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> 2
(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 November 1 and May
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 end 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 2000 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; provided, however, that
the first Purchase 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 end on the last
Trading Day on or before October 31, 2000.
(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.
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<PAGE> 3
(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after November 1 and May 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. The Board shall have the power to establish a
date prior to the applicable Enrollment Date by which all enrollment forms for
that Enrollment Date must be received by the Company.
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<PAGE> 4
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding 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. 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 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
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<PAGE> 5
Date by the applicable Purchase Price; provided that in no event shall an
Employee be permitted to purchase during each Purchase Period more than 1,000
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be 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 returned to the participant 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.
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<PAGE> 6
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions shall not resume at the
beginning of the succeeding Offering Period unless the participant delivers to
the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
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 500,000 shares plus an annual increase to be added on the first day of
the Company's fiscal year beginning in 2000, equal to the lesser of (i) 750,000
shares, (ii) 2% of the outstanding shares on such date, or (iii) a lesser amount
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.
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
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<PAGE> 7
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.
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
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<PAGE> 8
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 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.
-8-
<PAGE> 9
(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.
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.
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<PAGE> 10
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. 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.
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<PAGE> 11
EXHIBIT A
TURNSTONE SYSTEMS, INC.
2000 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 Turnstone
Systems, 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 (from 0 to _____%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note 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
<PAGE> 12
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 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)
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<PAGE> 13
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)
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<PAGE> 14
EXHIBIT B
TURNSTONE SYSTEMS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Turnstone
Systems, Inc. Employee Stock Purchase Plan that 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> 1
EXHIBIT 10.5
AMENDMENT TO MANUFACTURING AGREEMENT
Turnstone Systems, Inc. ("Customer"), a Delaware corporation with its principal
place of business at 980 Linda Vista Avenue, Mountain View, California 94043 and
A-Plus Manufacturing Corporation ("A-Plus"), a California corporation with its
principal place of business at 2381 Bering Drive, San Jose, CA 95131 hereby
agree to clarify that certain Manufacturing Agreement they entered into as of
October 16, 1998 (hereinafter the "Agreement") by amending that Agreement,
pursuant to its Section 12.3, as follows:
Section 5.3 is hereby amended by deleting the second sentence in its
entirety and replacing it with the following: "Title to such Products shall
pass to Customer upon shipment to such storage facility, and A-Plus shall
properly insure such Products and shall bear the risk of loss for any
Product located in such storage facility."
THIS AMENDMENT AND THE AGREEMENT AS AMENDED BY THIS AMENDMENT SETS FORTH
THE ENTIRE AGREEMENT AND UNDERSTANDING OF THE PARTIES WITH RESPECT TO THE
SUBJECT MATTER HEREOF, AND SUPERSEDES ALL PRIOR DISCUSSIONS, AGREEMENTS AND
WRITINGS IN RELATION THERETO.
Except as stated in this Amendment, all other elements of the original
Agreement and Exhibits remain unchanged. This Amendment may be executed in
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year written below.
"TURNSTONE SYSTEMS, INC. "A-PLUS MFG. CORP."
/s/ Shames Panahi /s/ David R. Kichar
- ------------------------------------ ------------------------------------
Signature Signature
Shames Panahi David R. Kichar
- ------------------------------------ ------------------------------------
Print Name Print Name
VP Operations VP Materials
- ------------------------------------ ------------------------------------
Title Title
11-9-99 11-9-99
- ------------------------------------ ------------------------------------
Date Date
<PAGE> 2
MANUFACTURING AGREEMENT
This Agreement is entered into on October 16, 1998 ("Effective Date") by and
between Turnstone Systems, Inc. ("Customer"), a Delaware corporation with its
principal place of business at 980 Linda Vista Avenue, Mountain View, California
94043 and A-Plus Manufacturing Corporation ("A-Plus"), a California corporation
with its principal place of business at 2381 Bering Drive, San Jose, CA 95131
(together "the Parties").
The Customer and A-Plus hereby agree as follows:
1. DEFINITIONS
1.1 "Approved Vendor List" shall mean the list of vendors to be used to
supply Inventory listed on the Bill of Materials included with the
Specifications, a copy of which is to be attached as Exhibit A which
may be revised in accordance with Section 2.1.
1.2 "Bill of Materials" shall mean the document specifying those
components and materials required to manufacture the Products and to
be provided by Customer as part of the Specifications.
1.3 "Confidential Information" shall mean any information disclosed by one
Party to the other which is in written, graphic, machine readable or
other tangible form and is marked "Confidential", "Proprietary" or in
some other manner to indicate its confidential nature. Confidential
information may also include oral information disclosed by one Party
to the other pursuant to this Agreement, provided that such
information is designated as confidential at the time of disclosure
and is reduced to writing by the disclosing Party within a reasonable
time (not to exceed thirty (30) days) after its oral disclosure, and
such writing is marked in a manner to indicate its confidential nature
and delivered to the receiving Party. Customer's Specifications,
Customer Technology and Developments shall be deemed to be
Confidential Information of Customer whether or not marked.
1.4 "Engineering Change Order (ECO)" shall mean the document that details
a change in the Specifications and/or design of a Product.
1.5 "Excess Inventory" shall mean the quantity of components, that are in
A-Plus' or its subcontractor's possession on the referenced date, that
exceed Customer's order requirements. Excess Inventory shall not
include components purchased due to A-Plus ordering errors, purchased
to account for attrition in the manufacturing process or Products that
fail to meet Customer's quality assurance guidelines.
1.6 "Intellectual Property" shall mean all rights held by each Party in
its Products and/or Confidential Information, including, but not
limited to such Party's patents, copyrights, authors' rights,
trademarks, trade names, mask works, "know-how" and trade secrets,
irrespective of whether such rights arise under U.S. or international
intellectual property, unfair competition or trade secret laws.
1.7 "Inventory" shall mean raw materials, supplies, and components that
comprise Products pursuant to this Agreement.
1.8 "Long Lead Time Components and Materials" shall mean components or raw
materials used in the manufacture of the Products that require a
longer lead time to procure than the lead times provided for in
Section 5.1 for the Products. The Long Lead Time Components are listed
on Exhibit B and may be updated from time to time by mutual agreement
1.9 "Minimum Order Components and Materials" shall mean the components and
materials that are procurable only in minimum quantities that exceed
the quantities required for Customer's Purchase Orders.
1.10 "Non-Cancelable, Non-Returnable (NCNR) Components and Materials" shall
mean (i) Inventory listed on the Bill of Materials that is to be
procured from suppliers that will not accept returns or cancellations
once such inventory is ordered or (ii) Inventory that may not be
returned because the right of return has expired.
<PAGE> 3
1.11 "Premium Charge" shall mean an additional charge mutually agreed upon
in advance in writing by the Parties for a special service requested
by Customer, including, but not limited to time worked outside of
normal business hours to fill expedited delivery dates or increases in
orders, special material handling, storage, re-inventorying and/or
restocking.
1.12 "Product" or "Products" shall mean the PCB assemblies and/or system
level assemblies of Customer to be manufactured by A-Plus under this
Agreement as set forth in Exhibit C to this Agreement, as such Exhibit
may be modified from time to time by mutual agreement.
1.13 "Purchase Order" shall mean a Customer Purchase Order substantially in
the form attached as Exhibit D.
1.14 "Specifications" shall mean the written specifications provided by
Customer to A-Plus for the manufacture and test of Products,
including, but not limited to, the Approved Vendor List, Bill of
Materials, current revision level number, drawings, documentation,
manufacturing and test procedures, and schematics and performance
criteria.
1.15 "Work" shall mean to procure materials and to engage in the
manufacture, assembly and/or test of Products according to Customer's
Specifications and to deliver such Products in accordance with
Customer's purchase orders.
<TABLE>
<S> <C> <C>
1.16 "Exhibits" Exhibit A Approved Vendor List
Exhibit B Long Lead Time Components and Materials
Exhibit C Products
Exhibit D Form of Purchase Order
Exhibit E Product Pricing
Exhibit F Other Special Inventory
Exhibit G NCNR Components and Materials
Exhibit H Tooling and Equipment
</TABLE>
2. MANUFACTURE, PAYMENT, PRICE, TAXES, AND SUBCONTRACTORS
2.1 Manufacture. A-Plus agrees to perform the Work pursuant to Purchase
Orders or Engineering Change Orders issued by the Customer. A-Plus
will accept all Customer Purchase Orders that are consistent with this
Agreement. For each Product or revision thereof, Customer shall
provide A-Plus with applicable Specifications. Each Product will be
tested in accordance with the Specifications prior to shipment.
Customer and A-Plus will discuss the approval of vendors not on the
Approved Vendor List and any changes will be agreed upon in writing.
2.2 Payment. Terms of payment shall be net thirty (30) days from the date
of invoice, payable in U.S. dollars. Invoices more than ten (10) days
past due shall incur late charges at the rate of one and one-half
percent (1.5%) per month past due. A-Plus will invoice Customer for a
Product when the Product has been completed and A-Plus has provided
Customer with the serial number of such Product and such additional
information regarding the Product as the parties mutually agree upon
("Product Information").
2.3 Price.
(a) Initial Pricing. Prices for the Products shall be based on (i)
the approved cost of components from the Approved Bill of
Materials for Products actually delivered plus (ii) a percentage
charge for overhead not to exceed [***] and (iii) an additional
charge for actual costs of labor and assembly/test and quantity
breakdown (the "Pricing Formula"). Once Customer delivers the
documentation necessary to determine the above costs, A-Plus will
deliver a quotation consistent with the Pricing Formula proposing
the percentage and charge referred to in (ii) and (iii) above and
a proposed price including breakdown of costs as outlined in the
pricing formula. When the parties have mutually agreed on the
amounts included in the Pricing Formula it will be set forth in a
Pricing Exhibit to be attached hereto as Exhibit E. The mutually
agreed upon actual initial price ("Price") for the Products shall
also be set forth in the Pricing Exhibit. The Price shall remain
in effect until a change is mutually agreed upon in writing after
quarterly reviews pursuant to Section 2.3(b) below.
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separately with the Commission. Confidential treatment has
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<PAGE> 4
(b) Pricing Changes. The Price is to be formally reviewed by the
parties at the start of each calendar quarter and, after a good
faith negotiation, the Price will be adjusted by mutual agreement
in writing including an effective date of the adjusted price and
the Pricing Exhibit shall be updated to reflect the adjusted
Price. Such adjustment shall take into account market
fluctuations in component prices, Product purchase volume
increases or decreases for forecasted volumes, costs saving
measures taken by A-Plus and such other factors reasonably
impacting the costs of performing the Work consistent with the
Pricing Formula.
(c) Cost Reductions. With respect to any engineering changes
implemented by A-Plus that result in a reduction in cost, A-Plus
will receive one hundred percent (100%) of the demonstrated price
reduction for ninety (90) days after such implementation and then
transfer the price reduction 100% to Customer minus the costs of
implementation pre-approved by Customer. Upon implementation of
Customer initiated engineering changes that result in changes to
the cost of the Products, the Customer will receive one hundred
percent (100%) of the demonstrated price reduction minus the
costs of implementation pre-approved by Customer. All Products
shipped after the agreed upon effective Price adjustment date
will be invoiced at the Price in effect at the time of shipment.
If the parties fail to concur on a Price adjustment within thirty
(30) days of the commencement of said quarterly review, the
Product Price will not change except that to the extent the costs
of components has decreased, Customer shall receive a
corresponding decrease in the Price.
2.4 Taxes. Customer shall, in addition to prices specified herein, pay any
sales, use, excise or similar tax attributable to the sale of the
Products, or in lieu thereof, provide A-Plus with a tax exemption
certificate acceptable to the taxing authorities.
2.5 Testing Failures. With respect to Products manufactured according to
the Specifications but which nevertheless experience testing failures
despite the reasonable efforts of the parties to resolve such
failures, Customer will pay for such Products subject to the prior
written approval of Customer.
2.6 Subcontractors. The Work may be performed, in whole or in part, by
third parties selected by A-Plus subject to approval by Customer
("Subcontractors"), which shall not unreasonably be withheld. Such
Subcontractors shall be subject to a written agreement containing the
material provisions of this Agreement, including without limitation,
the confidentiality provisions hereof and naming Customer as a third
party beneficiary under such agreement. A-Plus guarantees the
performance of Subcontractors under this Agreement.
3. COMPONENTS, WARRANTY AND RETURNS
3.1 Consigned Materials. Upon reasonable notice to A-Plus and upon the
execution of an appropriate agreement, Customer may supply consigned
materials to A-Plus ("Consigned Materials"). Customer shall take
reasonable measures to ensure that all Consigned Materials shall be
delivered to A-Plus in sufficient time and in sufficient quantities,
taking into account customary attrition levels, to allow A-Plus to
meet scheduled delivery dates for the applicable Products. Customer
shall take reasonable measures to ensure that all Consigned Materials
shall be in good condition, meet Product Specifications, be packaged
in a readily usable format, and be free of any defects or
deficiencies. Customer shall retain title to Consigned Materials and
A-Plus shall not be obligated to purchase any Consigned Materials.
Premium Charges may apply in the event of late delivery of Consigned
Materials, or the delivery of defective Consigned Materials, subject
to Customer's prior written approval. Except with respect to Consigned
Materials, all components, other materials and equipment required in
connection with the Work will be acquired or supplied by A-Plus
pursuant to the Specifications. A-Plus shall bear the risk of loss for
Consigned Materials that are in A-Plus' care or custody.
3.2 A-Plus Warranty. A-Plus warrants to the Customer that the Products
when delivered by A-Plus shall conform to the then current
Specifications and be free from defects in workmanship for a period of
one year from the date of shipment to Customer's designated location.
Any Products that do not meet the foregoing warranty shall be repaired
or replaced at A-Plus's sole option and expense, within ten (10)
business days of receipt by A-Plus of the returned Product; provided
that (i) Customer obtains a Return Material Authorization ("RMA") from
A-Plus prior to returning the Products, (ii) the Products are returned
within one (1) year of the date the Product was delivered to
Customer's designated location, and (iii) a failure analysis shall
accompany the Product. Such warranty shall not apply if Customer
alters, misuses, neglects, or abnormally stresses the Products. With
respect to any components acquired or
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<PAGE> 5
supplied by A-Plus that are incorporated into the Products, A-Plus
makes no representation or warranty, except that A-Plus agrees to pass
through to Customer the warranty, if any, originally provided to
A-Plus by the manufacturer of such components. A-Plus agrees to use
reasonable commercial efforts to ensure that such warranties may be
passed through to Customer.
3.3 Representations and Warranties.
(a) By Customer. Customer represents and warrants to A-Plus that (i)
it has the right to provide A-Plus with Consigned Materials, (ii)
to the best of Customer's current knowledge, the Customer's
Intellectual Property provided to A-Plus hereunder, including
without limitation, the Specifications, does not infringe the
proprietary rights of any third party, and (iii) Customer has the
right and power to enter into this Agreement. CUSTOMER MAKES NO
OTHER REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THIS
AGREEMENT AND DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NON-INFRINGEMENT, OR ARISING FROM A COURSE
OF DEALING, USAGE OR TRADE PRACTICE.
(b) By A-Plus. A-Plus represents and that (i) the methods and
processes employed by A-Plus in manufacturing the Products (other
than those specifically required by the Specifications) shall not
violate the trade secrets or other proprietary rights of any
third party, (ii) the Product shall be delivered free of any
liens or encumbrances, and (iii) it has the right and power to
enter into this Agreement. EXCEPT FOR THE WARRANTIES IN SECTIONS
3.2 AND THIS SECTION 3.3(b), A-PLUS MAKES NO OTHER WARRANTIES,
EXPRESSED OR IMPLIED, WITH RESPECT TO THE COMPONENTS, PRODUCTS OR
ANY SERVICES PROVIDED UNDER THIS AGREEMENT, AND DISCLAIMS ALL
OTHER WARRANTIES INCLUDING THE WARRANTIES OF MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT.
(c) Indemnity. Each party agrees to indemnify the other party and
hold the other party harmless from and against any and all
losses, liabilities, damages, expenses and costs (including
attorneys' fees and court costs) arising from a third party claim
directly resulting from breach or alleged breach of the
indemnifying party's representations and warranties or incurred
in the settlement or avoidance of any such claim. This indemnity
shall not apply (i) if the indemnified party fails to give the
indemnifying party prompt notice of any such claim or threatened
claim and such failure materially prejudices the indemnifying
party, and (ii) unless the indemnifying party is given the
opportunity to assume full control of the defense or settlement
and the indemnified party provides reasonable assistance.
Furthermore, if the indemnified party assumes such control, it
shall only be responsible for the legal fees and litigation
expenses of the attorneys it designates to assume control of the
litigation.
3.4 Odd Units. The Parties acknowledge and agree that Customer may from
time to time, request in writing the manufacture and testing of first
articles, prototypes, pre-production units, test units or other
similar products ("Odd Units"). A-Plus makes no representations or
warranty as to Odd Units identified as such by Customer and assumes no
liability for or obligation for such Odd Units related to yield,
performance, accuracy, specifications, defects of or due to (i)
fixtures, designs or instructions produced or supplied by Customer,
(ii) Consigned Materials, (iii) components or other equipment from any
vendor on the Approved Vendor List or (iv) printed circuit boards or
any other Customer designated components that are manufactured
pursuant to Customer's Specifications.
3.5 Repair. At Customer's request, A-Plus will perform repair work on
out-of-warranty Products pursuant to terms and conditions to be set
forth in a separate written agreement.
3.6 Source Inspection. Upon request from Customer, and with at least one
(1) business day notice and during normal business hours, A-Plus will
grant access to its manufacturing facilities to Customer's inspectors.
Such inspection and any related testing may take place prior to the
shipment of Customer's Products.
4. PROPRIETARY MATERIALS
4.1 Delivery of Technology. Customer shall provide to A-Plus Customer's
proprietary information necessary for the assembly and testing of the
Products ("Customer Technology") solely for the purpose
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<PAGE> 6
of performing the Work pursuant to Purchase Orders issued by the
Customer. All Customer Technology is and shall remain the
property of the Customer and A-Plus is not granted any license
under such Customer Technology. A-Plus shall not be provided with
or have the right to use the source code form of any software
provided to A-Plus by Customer.
4.2 Rights in the Product. The Intellectual Property rights in and to the
Products are owned by the Customer and are protected by United States
and international copyright and patent laws and treaty provisions.
This Agreement does not constitute a sale and does not transfer to
A-Plus any title or ownership interest in or to the Products or any
patent, copyright, trade secret, trade name, trademark, or other
proprietary or Intellectual Property rights related to the Products.
Except for the rights expressly granted herein, Customer retains all
of its right, title and interest to and to the Products and to any
modifications, improvements, reports, designs, inventions,
specifications or other materials developed in connection with A-Plus'
manufacture of the Products and all Intellectual Property rights
therein (collectively, "Developments") prepared by Customer.
4.3 Confidential Information. Each Party agrees that neither it nor any of
its employees will use for their own account (except as expressly
permitted under this Agreement) or for the account of any third party
or disclose to any third party any Confidential Information of the
other party. The parties understand, however, that Confidential
Information shall not include any information which the other party
can demonstrate was (a) generally known and available in the public
domain at the time of disclosure, (b) known to the receiving party
prior to disclosure, or (c) hereafter rightfully furnished to the
receiving party by a third party without restrictions or disclosure
and without breach of confidentially restriction. Each Party agrees
that it will use all reasonable efforts to protect the secrecy of and
avoid disclosure or unauthorized use of Confidential Information of
the other Party, which measures shall include the highest degree of
care that such party utilizes to protect its own confidential
information of a similar nature.
5. PURCHASE ORDER COMMITMENTS, SCHEDULE CHANGES, CANCELLATION, AND INVENTORY
5.1 Purchase Order. Customer will place Purchase Orders by the 20th day of
each month and at least [***] days in advance of its required
delivery dates. Each Purchase Order shall reference the applicable
written Specifications. Customer will also provide a non-binding
forecast on a rolling monthly basis by the 20th day of each month of
its requirements for the [***]-day period following the month for
which it has issued the most recent Purchase Order ("Forecast").
5.2 Purchase of Materials.
(a) Long Lead Time Components. The parties will mutually agree upon a
list of Long Lead Time Components and Materials to be attached as
Exhibit B. Thereafter, A-Plus will provide Customer with any
updates to the list of Long Lead Time Components and Materials.
Customer shall review the such list on a quarterly basis and,
following such review, the parties shall agree in writing on
which Long Lead Time Components and Materials A-Plus may purchase
on behalf of Customer in accordance with this Section 5.2. A-Plus
may purchase Long Lead Time Components based on Customer's
Forecast but in quantities no greater than necessary to fill
orders projected in Customer's Forecast and not in advance of the
lead time actually necessary to enable A-Plus to fill the
projected orders identified in the Forecast.
(b) Other Special Inventory. Upon written approval from Customer,
A-Plus will be authorized to purchase inventory beyond the amount
necessary to fill accepted Purchase Orders as follows: (i)
inventory purchased in quantities above the required amount in
order to achieve price targets ("Economic Order Inventory"); and
(ii) Minimum Order Components and Materials which shall be
mutually agreed upon and set forth on Exhibit F. Economic Order
Inventory, Minimum Order Components and Materials and Long Lead
Time Components together are called "Special Inventory." The
parties shall review the mutually agreed upon Special Inventory
on a quarterly basis and update the applicable Exhibits. A-Plus
will utilize any excess Special Inventory prior to ordering
additional Special Inventory. A-Plus will purchase material on
behalf of Customer only upon receipt of a hardcopy Purchase
Order, except for Special Inventory which A-Plus may purchase as
discussed above.
(c) NCNR Components and Materials. The parties will mutually agree
upon a list of NCNR Components and Materials and set forth such
list as Exhibit G. Thereafter A-Plus will provide
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 7
Customer with quarterly updates to the list and after review, the
parties shall mutually agree upon revisions to Exhibit G.
(d) Engineering Changes. Customer will notify A-Plus in writing of
material and engineering changes to be implemented indicating the
proposed date of such changes, including appropriate
specifications and updated drawing revisions and specifying the
change as mandatory or production convenient. A-Plus will
acknowledge receipt of such ECO in writing ("Engineering Change
Notice").. A-Plus shall review the ECO, determine the cost,
schedule effects, Inventory effects and related issues resulting
from implementing the change within three (3) business days
("A-Plus Response"). Customer shall provide a written acceptance
or rejection of the A-Plus Response within three (3) business
days from receipt. A-Plus shall not implement the change until it
receives from Customer a written authorization to implement the
Engineering Change Notice indicating the date of implementation
("Authorization to Implement"). Upon receipt of an Authorization
to Implement A-Plus shall take all action necessary to reduce any
liability of the parties for NCNR Components and Materials.
Customer shall pay A-Plus for its actual costs plus a mutually
agreed upon mark-up not to exceed [***]% (the "Mark-up") of
Inventory which would become obsolete as a result of such change
existing as of the date of implementation specified in the
Authorization to Implement, whereupon Customer shall take title
to such obsolete Inventory and A-Plus shall deliver such obsolete
Inventory to Customer or otherwise dispose of such obsolete
Inventory in accordance with Customer's instructions. Upon
receipt of the Authorization to Implement, A-Plus shall implement
immediately or on the next unreleased order the change specified
in the Authorization to Implement subject to material
availability and to mutual agreement of any resulting cost
increase.
5.3 Inventory of Finished Products. Upon completion of manufacture of the
Products, if Customer has not provided shipping instructions to
A-Plus, at Customer's written request, A-Plus shall hold such finished
Products ("Finished Product Inventory") in an appropriate storage
facility. A-Plus shall properly insure such Products and shall bear
the risk of loss for any Product located in such storage facility.
Such storage may be subject to a Premium Charge to be determined on a
case by case basis and subject to Customer's prior written approval.
5.4 Schedule Change. Customer may change the quantity of Products or their
delivery date as contained in any accepted Purchase Order only with
A-Plus' prior written consent which shall not be unreasonably
withheld, or as provided in the table below:
Maximum Allowable Variance From
Purchase Order Quantities/Shipment Dates
<TABLE>
<CAPTION>
# of days before Shipment Allowable Quantity Allowable Quantity Allowable Shipment
Date on Purchase Order Increases Decreases Date Slip
------------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
[***] [***]% [***] [***]
[***] [***]% [***]% [***] days
[***] [***]% [***]% [***] days
</TABLE>
In the event of quantity decreases, A-Plus will use all reasonable
efforts to mitigate Customer's material liability. Customer
acknowledges that a Premium Charge may be incurred, subject to
Customer's prior approval. In the event of quantity increases A-Plus
will use best efforts and worldwide procurement resources to fill such
orders. If meeting a schedule increase would result in costs in excess
of the costs agreed upon pursuant to Section 2.3, A-Plus will provide
the Premium Charge to the Customer in writing for approval in advance.
5.5 Cancellation. In the event the Customer wishes to cancel any order,
the cancellation shall be in writing.
(a) Within [***] days from the scheduled delivery date orders shall
be non-cancelable.
(b) Beyond [***] days of the scheduled delivery date, Customer may
cancel orders and A-Plus shall make reasonable commercial efforts
to (i) return components which were to be used to fill cancelled
orders to the supplier of the components or otherwise utilize any
such components; or (ii) cancel A-Plus's order for such
components; or (iii) at Customer's option, carry such
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 8
components in Inventory for utilization in future orders subject to
the charges described in Section 5.5(c).
(c) Components carried in inventory pursuant to Section 5.5 (b) above
along with any Special Inventory and NCNR Components and
Materials which is reasonably allocable to Products that are the
subject of canceled orders (based on previous allocations of
Special Inventory and NCNR Components and Materials to Product
orders) ("Cancellation Excess Inventory") will be reviewed on a
monthly basis and identified by using A-Plus' MRP system INFIMACS
II Excess Inventory Dollar Report. A-Plus may charge a fee of
[***] percent ([***]%) per month for on-hand Cancellation Excess
Inventory.
(d) A-Plus shall provide Customer with a list of restocking charges,
"bill-backs", cancellation charges or any other charges that
would be incurred by A-Plus in returning components and materials
to suppliers that had been purchased in support of Customer
Purchase Orders of Products. Customer may elect to have A-Plus
return the components and materials and shall pay all such
charges plus the applicable Mark-up charge as set forth in
Exhibit E, or to purchase the components and materials from
A-Plus at cost plus the applicable Mark-up not to exceed [***]
percent ([***]%).
(e) A-Plus shall use its best efforts to minimize cancellation
charges by returning inventory and material for credit, canceling
material on order, applying material to other A-Plus business,
and minimizing all work-in-process and finished goods to support
the final production schedule. Upon payment of the charges
described in Section 5.5(d) above relating thereto, all finished
goods inventory of Products, work-in-process, and NCNR Components
and Materials at A-Plus or on order shall be delivered to
Customer if so requested.
5.6 Tooling and Equipment. Customer will provide to A-Plus tooling and
equipment as set forth by Customer in Exhibit H to be prepared by
Customer and attached to this Agreement and which shall be updated
from time to time ("Tooling"). Any such Tooling supplied by Customer
shall remain the property of Customer and will be only used to supply
Product to Customer.
6. SHIPPING
A-Plus shall ship Products FOB A-Plus, San Jose, California. A-Plus shall
deliver Products in accordance with the requested delivery dates as
specified on Customer's Purchase Orders. A-Plus shall deliver Products to
Customer or drop ship Products to other locations identified by Customer in
accordance with detailed shipping instructions to be provided by Customer.
A-Plus shall ship Products within 24 hours from receipt of Customer's
shipping instructions if finished Products are available in inventory or
within 24 hours from completion of the manufacture of the Product if no
finished Products are in inventory. Upon learning of any potential delays,
A-Plus shall immediately notify the Customer in writing as to the cause and
extent of any such delay and A-Plus' plan to remedy or reduce such delay.
All Products delivered pursuant to the terms of this Agreement shall be
suitably packed for shipment in the Customer's specified and approved
shipping containers, marked for shipment to the destination specified in
the applicable Purchase Order or shipping instructions and delivered to a
carrier or forwarding agent. At Customer's request and expense, A-Plus will
arrange for shipment of Products by preferred carrier(s) specified from
time by time by Customer. Such shipment will be F.O.B. A-Plus' facility in
San Jose, California, at which time risk of loss and title will then pass
to Customer. The Customer will pay for all freight, insurance, and other
shipping expenses, as well as any special packaging expenses not included
in the Price for the Products. A-Plus will provide shipping confirmation to
Customer within twenty-four (24) hours of shipment, listing all pertinent
information to enable Customer to invoice Customer's own customers for such
shipments, including without limitation, for each shipment quantity
shipped, description and serial numbers of the Product, date of shipment
and ship to destination.
7. TERM AND TERMINATION
7.1 Term. This Agreement shall begin upon the Effective Date and shall
remain in full force until terminated as provided below.
7.2 Termination.
(a) For Convenience. This Agreement may be terminated by either party
for any reason, with or without cause, upon one hundred twenty
(120) days written notice to the other party.
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been requested with respect to the omitted portions.
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(b) For Cause. This Agreement may be terminated by a Party for cause
immediately by written notice upon the occurrence of any of the
following events:
(i) If the other ceases to do business, or otherwise terminates
its business operations; or
(ii) If the other breaches any material provision of this
Agreement and fails to cure such breach within sixty (60)
days of written notice describing the breach; or
(iii) If the other seeks liquidation under any bankruptcy or
receivership proceedings, or if any such proceeding is
instituted against such party and not dismissed within
ninety (90) days.
7.3 Effect of Termination and Survival. Sections 3.2, 3.3, 4.2, 4.3, 7, 8,
9, 10, 11, 12, and all payment obligations incurred prior to
termination shall survive. Upon termination of the Agreement, Customer
shall pay A-Plus' actual cost plus the applicable Mark-up not to
exceed [***] percent ([***]%) and take title to all Excess Inventory.
Upon termination A-Plus will return all Tooling to Customer and shall
return or destroy, at Customer's option, all Customer Confidential
Information in the possession of A-Plus or its subcontractors.
8. LIABILITY LIMITATION
A-Plus will indemnify and hold Customer harmless from any losses, costs,
liabilities or expenses, including reasonable attorney fees ("Liabilities")
incurred by Customer as a result of defects in the manufacture of the
Products which are not directly attributable to the manufacturing
Specifications provided by Customer to A-Plus. Except with respect to
payment of third party claims for which one party is obligated to so
indemnify the other, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR
ANY LOSS OF PROFITS OR FOR ANY CONSEQUENTIAL, INDIRECT OR SPECIAL DAMAGES
ARISING OUT OF THIS AGREEMENT ON ANY THEORY OF LIABILITY INCLUDING UNDER
ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE
THEORY.
9. RELATIONSHIP OF PARTIES
The relationship between the parties to this Agreement is that of
independent contractors and this Agreement does not create a general
agency, joint venture, partnership, employment relationship, or franchise
between A-Plus and Customer. Each Party assumes full responsibility for its
employees, agents or other personnel assigned by it to perform work
pursuant to this Agreement, regardless of their place of work, and shall be
solely responsible for payment of salary, including withholding of federal
and state income taxes, social security, worker's compensation and the
like.
10. DISPUTE RESOLUTION
10.1 Binding Arbitration. Any controversy or claim between the parties
hereto arising out of this Agreement shall be settled by binding
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect. The arbitration shall
be conducted in Santa Clara County, California, before the American
Arbitration Association or such other arbitration service as the
parties may, by mutual agreement, select. In the event of a
disagreement as to the selection of an arbitrator, the presiding Judge
of the Superior Court having jurisdiction to enforce the arbitration
award shall select the arbitrator. Judgment on the award the
arbitrator renders may be entered in any court having jurisdiction
over the parties. Each party shall pay one half of the cost of
arbitration.
10.2 Attorney's Fees. The prevailing party in any legal action or
proceeding to enforce this Agreement shall be entitled to recover from
the unsuccessful party its reasonable attorney's fees and all other
costs incurred in connection with such proceeding or the enforcement
of the Agreement.
11. FORCE MAJEURE
Neither party to this Agreement shall be liable for its failure to perform
any obligations under this Agreement if such performance is prevented or
delayed or due to causes beyond its reasonable control, including without
limitation, fires, floods, earthquakes, accidents, Acts of God,
governmental laws or regulations.
- ------
***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.
-8-
<PAGE> 10
12. MISCELLANEOUS
12.1 Governing Law. This Agreement shall in all respects be governed by and
constructed in accordance with the laws of the State of California,
excluding that body of laws known as conflict of laws.
12.2 Assignability. Neither party may assign this Agreement without prior
written consent of the other party, which consent shall not be
unreasonably withheld, provided that either party may assign this
Agreement to a party that succeeds to all or substantially all such
party's business or assets relating to this Agreement, whether by
sale, merger, operation of law or otherwise.
12.3 Amendment and Waiver. Except as otherwise expressly provided herein,
any provision of this Agreement may be amended and the observance of
any provision of this Agreement may be waived (either generally or in
any particular instance and either retroactively) only with the
written consent of the parties. This Agreement shall be controlling
over additional or different terms of any purchase order,
confirmation, invoice or similar document. A waiver by any party of
any term or condition of this Agreement in any one instance shall not
be deemed or construed to be a waiver of such term or condition for
any similar instance in the future or of any subsequent breach hereof.
12.4 Notice. Notices under this Agreement shall be sufficient only if
personally delivered or delivered by a major rapid delivery courier
service or mailed by certified or registered mail, return receipt
requested to a party at its addresses first set forth herein or as
amended by notice pursuant to this subsection. If not received sooner,
notice by mail shall be deemed received five (5) days after deposit in
the U.S. mail.
12.5 Entire Agreement. This Agreement supersedes all proposals, oral or
written, all negotiations, conversations, or discussions between or
among parties relating to the subject matter of this Agreement and all
past dealing or industry custom.
12.6 Severability. If any provision of this Agreement is held to be illegal
or unenforceable, that provision shall be limited or eliminated to the
minimum necessary so that this Agreement shall otherwise remain in
full force and effect and enforceable
-9-
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year, first above written.
"CUSTOMER" "A-PLUS MFG. CORP."
/s/ Shames Panahi /s/ David R. Kichar
- ------------------------------------ ----------------------------------------
Signature Signature
Shames Panahi David R. Kichar
- ------------------------------------ ----------------------------------------
Print Name Print Name
VP Operations Materials Director
- ------------------------------------ ----------------------------------------
Title Title
10-16-98 10-16-98
- ------------------------------------ ----------------------------------------
Date Date
-10-
<PAGE> 12
EXHIBIT A
APPROVED VENDOR LIST
<PAGE> 13
TURNSTONE SYSTEMS APPROVED SUPPLIER LIST
SHEET METAL FABRICATION
Shulze Manufacturing Vanderbend
50 Ingold Road -- Bldg 1 123 Uranium Rd
Burlingame, CA 94010 Sunnyvale, CA 94086
650-259-1944 Tel: 408-245-5150
PRINTED CIRCUIT BOARDS
TYCO LA Division
Printed Circuit Group Dynamic Details, Inc.
8636 S. Aviation Blvd. 1831 Tarob Court
Inglewood, CA 90301 Milpitas, CA 95035
310-649-2411 Tel: 408-263-0940
BACKPLANE ASSEMBLY
TYCO Hayward Division
30962 Santana Street
Hayward, CA 94544
Tel: 510-476-5600
LABELS
Cello Tape Valmark Industries
47623 Fremont Blvd. 3393 W. Warren Avenue
P.O. Box 4904 Fremont, CA 94538
Fremont, CA 94538 Tel: 510-770-0330
Tel: 510-651-5551
PACKAGING
Kent Landsberg
31067 San Clemente
Hayward, CA 94544
Tel: 510-489-8200
-14-
<PAGE> 14
EXHIBIT B
LONG LEAD TIME COMPONENTS AND MATERIALS
<PAGE> 15
Turnstone Systems Long Lead material List
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG MFG MODEL 1 COST L/T COMMENT
- -------- --- ---------------- ---- ----- ----------- ----- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
A-Plus Confidential
- ------
***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> 16
Turnstone Systems Long Lead material List
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG MFG MODEL 1 COST L/T COMMENT
- -------- --- ---------------- ---- ----- ----------- ----- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
Page 2/5
A-Plus Confidential
- ------
***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> 17
Turnstone Systems Long Lead material List
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG MFG MODEL 1 COST L/T COMMENT
- -------- --- ---------------- ---- ----- ----------- ----- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
Page 3/5
A-Plus Confidential
- ------
***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> 18
Turnstone Systems Long Lead material List
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG MFG MODEL 1 COST L/T COMMENT
- -------- --- ---------------- ---- ----- ----------- ----- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
Page 4/5
A-Plus Confidential
- ------
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 19
Turnstone Systems Long Lead material List
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG MFG MODEL 1 COST L/T COMMENT
- -------- --- ---------------- ---- ----- ----------- ----- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[***]
Approved by: Accepted by:
---------------------------------- -----------------------------------------------------
A-Plus Mftg., Corp. Date Turnstone Systems Date
</TABLE>
Page 5/5
A-Plus Confidential
***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> 20
EXHIBIT C
PRODUCTS
<PAGE> 21
EXHIBIT C
Turnstone Products
Assembly, Chassis, Copper Cross Connect, 23", CX100-23
Assembly, Chassis, Copper Cross Connect, 19", CX100-19
PCA, Base Line Card, L140
PCA, Processor Card, P100
PCA, Base Line Card, M101
Approved By:
/s/ [illegible] 10/12/99 /s/ Shames Panahi 10/12/99
- ------------------------------------ ------------------------------------
A-Plus Manufacturing Turnstone Systems
<PAGE> 22
EXHIBIT D
FORM OF PURCHASE ORDER
<PAGE> 23
EXAMPLE
[TURNSTONE LOGO] Purchase Order 10/8/99
Turnstone, Inc. Page - 1
TURNSTONE
PO Number 1008 - 000 -OP
Branch/Plant APLS
Shipped From A-PLUS MFG CORPORATION Ship To Turnstone Systems, Inc.
569 Charcot Avenue 980 Linda Vista Avenue
San Jose CA 95131 Mountain View CA 94043
- --------------------------------------------------------------------------------
Ordered 8/6/99 FOB Freight Pre-pay and Add Ship Via Vendor Truck
Requested 11/1/99 Order Taken by KATHY HAN
Delivery
<TABLE>
<CAPTION>
PR Promised
Line Rev Description / Supplier Item Ordered UOM Unit Price UM Extended Price Delivery Order No
- ---- --- --------------------------- ------- --- ---------- -- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.000 F ASSY, CHASSIS, CX100,23" 100 EA [***] EA [***] 11/1/99
200000
</TABLE>
This Change Order #1 is being issued to add the cost of ICT for W100 card only.
Pricing on this order is subject to review prior to shipment.
Actual delivery schedule will be driven by build plan not by PO date.
All other terms and conditions remain the same. 8/30/99 SR
<TABLE>
<S> <C>
----------
Total Order [***]
</TABLE>
<TABLE>
<CAPTION>
Sales Tax Total Order
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Term Net 30 Days Tax Rate 8.250 .00 [***]
</TABLE>
For Resale:
Yes [ ] No [ ]
- -------------------------------- ------------
AUTHORIZED SIGNATURE DATE RESALE # : SRGH 97304004
- ------
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 24
EXHIBIT E
PRODUCT PRICING
<PAGE> 25
Turnstone Systems
[***] P100 [***]
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY QTY/QTR MFG
- -------- --- ---------------- --- ------- -----
<S> <C> <C> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST EXT COST MIM L/T COMMENT
- -------- --- ----------- -------- -------- -------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------
[***]
</TABLE>
A-Plus Confidential Page 1/3
- ------
***Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 26
Turnstone Systems
[***] P100 [***]
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY QTY/QTR MFG
- -------- --- ---------------- --- ------- -----
<S> <C> <C> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG. MODEL 1 COST EXT COST MIM L/T COMMENT
- -------- --- ------------ -------- -------- --- --- -------
<S> <C> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
A-Plus Confidential Page 2/3
- ------
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 27
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY QTY/QTR MFG
- -------- --- ---------------- --- ------- -----
<S> <C> <C> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST EXT COST MIM L/T COMMENT
- -------- --- ----------- -------- -------- ---- --- -------
<S> <C> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
A-Plus Confidential Page 3/3
- ------
***Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 28
Turnstone Systems [***] P100 [***]
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG
- -------- --- ---------------- --- -----
<S> <C> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST EXT COST MIM L/T COMMENT
- -------- --- ----------- ----- -------- --- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
[***]
</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.
A-Plus Confidential Page 1/1
<PAGE> 29
Turnstone Systems
[***] W100 [***]
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG
- -------- ------ ---------------- --- ---
<S> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST EXT COST MIM L/T COMMENT
- -------- --- ----------- -------- -------- --- --- -------
<S> <C> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
- ------
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
A-PLUS CONFIDENTIAL Page 1/1
<PAGE> 30
Turnstone Systems
[***] Chassis [***]
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG
- -------- --- ---------------- --- -----
<S> <C> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST EXT COST MIM L/T COMMENT
- -------- --- ----------- -------- -------- --- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
[***]
</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.
A-PLUS CONFIDENTIAL Page 1/1
<PAGE> 31
Turnstone Systems
[***]
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG
- -------- ------ ---------------- --- -----
<S> <C> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST EXT COST MIM L/T COMMENT
- -------- ------ ----------- -------- -------- --- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
A-PLUS CONFIDENTIAL Page 1/2
- ------
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the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 32
Turnstone Systems
[***]
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG
- -------- ------ ---------------- --- -----
<S> <C> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST EXT COST MIM L/T COMMENT
- -------- ------ ----------- -------- -------- --- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
A-PLUS CONFIDENTIAL
- ------
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
Page 2/2
<PAGE> 33
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG MFG MODEL 1 COST EXT COST MIM L/T COMMENT
- -------- --- ---------------- --- ----- ----------- ------- -------- --- --- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
A-PLUS CONFIDENTIAL Page 1/1
- ------
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 34
EXHIBIT F
OTHER SPECIAL INVENTORY
<PAGE> 35
Min Purchase Qty Information
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG
- -------- --- ---------------- --- -----
<S> <C> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST MIM
- -------- --- ----------- ---- ---
<S> <C> <C> <C> <C>
[***]
</TABLE>
- ------
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
Page 1/4
<PAGE> 36
Min Purchase Qty Information 10/7/99
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG
- -------- --- ---------------- --- -----
<S> <C> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST MIM
- -------- --- ----------- -------- ---
<S> <C> <C> <C>
[***]
</TABLE>
A-Plus Confidential Page 2/4
- ------
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 37
Min Purchase Qty Information 10/7/99
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG
- -------- --- ---------------- --- -----
<S> <C> <C> <C> <C>
[***]
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST MIM
- -------- --- ----------- -------- ---
<S> <C> <C> <C> <C>
[***]
</TABLE>
A-Plus Confidential Page 3/4
- ------
***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> 38
Min Purchase Qty Information 10/7/99
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION
- -------- ------ ----------------
<S> <C> <C>
[***]
Approved by: Accepted by :
------------------------------- ---------------------------------------------
A-Plus Mftg., Corp. Date Turnstone Systems Date
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N QTY MFG MFG MODEL 1 COST MIM
- -------- ------ --- --- ----------- --------- ---
<S> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
A-Plus Confidential
***Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
Page 4/4
<PAGE> 39
EXHIBIT G
NCNR COMPONENTS AND MATERIALS
<PAGE> 40
Turnstone Systems NCNR part list 10/1/99
<TABLE>
<CAPTION>
ASSEMBLY P/N PART DESCRIPTION QTY MFG
- -------- --- ---------------- --- -----
<S> <C> <C> <C> <C>
[***]
Approved by: Accepted by :
------------------------------ -----------------------------------------------------------------------
A-Plus Mftg., Corp. Date Turnstone Systems Turnstone Systems Date
</TABLE>
<TABLE>
<CAPTION>
ASSEMBLY P/N MFG MODEL 1 COST MIM L/T COMMENT
- -------- --- ----------- --------- --- ---- -------
<S> <C> <C> <C> <C> <C> <C>
[***]
</TABLE>
A-Plus Confidential Page 1/1
- ------
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separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 41
EXHIBIT H
TOOLING AND EQUIPMENT
<PAGE> 42
TEST EQUIPMENT AT A PLUS
<TABLE>
<CAPTION>
DESCRIPTION SERIAL NUMBER TURNSTONE ASSET NUMBER
<S> <C> <C>
Monitor Optiquest 2J82700938 00252
Monitor Optiquest 2J82700942 00119
Monitor Optiquest 2J85101628 00201
Monitor Optiquest 2J85101624 00200
Monitor Optiquest 2J83900540 00155
Monitor Optiquest 2J82700945 00117
Monitor Optiquest 2J83800508 00147
Monitor Optiquest 8G83904233 00137
Monitor M110 6981EAORKGC8 00258
Monitor M110 6981EAON3GB8 00256
Monitor M110 6981EAORTYC8 00255
Computer Dell Dimension EQVK0 ComDisco 140723
Computer Dell Dimension FZDD6 ComDisco 140702
Computer Dell Dimension UWK2K ComDisco 140797
Computer Dell Dimension UWK2L ComDisco 140799
Computer Dell Dimension HSL7X ComDisco 140779
Computer Dell Dimension OPY9G 00260
Computer Dell Dimension FZDCY ComDisco 140713
Computer Dell Dimension GR0B2 ComDisco 140714
Computer Dell Dimension OTQ9N 00257
Computer Dell Dimension F2DD5 ComDisco 140702
Computer Dell Dimension OPY9L 00254
Power Supply HSM 48-21 H189082 00251
Power Supply HSM 48-21 H189067 00259
Power Supply LL59060 (LAMBA) N/A 00261
PS Sorensen LM 60-3 N/A
PS Sorensen LM 60-3 N/A 00122
2 Power Supplies HSM 48-21 in Burn in N/A
Phone Line simulator PL6-001 D9812216 00263
</TABLE>
1 of 4
<PAGE> 43
<TABLE>
<CAPTION>
DESCRIPTION SERIAL NUMBER TURNSTONE ASSET NUMBER
<S> <C> <C>
Phone Line simulator PL6-001 D9812192 00264
Phone Line simulator PL6-001 D9812189 00185
Phone Line simulator PL6-001 D9812191 00262
Modem 33.6 21NJ21F885NO N/A
Modem 33.6 22TSB1D96563 N/A
Modem 33.6 22TSB3I9CA96 N/A
Modem 33.6 22TSB1D965Q7 N/A
CAMI N/A 00127
CAMI N/A 00128
CAMI N/A 00123
CAMI N/A 00124
Printer HP Laser Jet 6P N/A 00165
Label Printer 2edar 105 Se N/A COMDISCO 140769
Label Printer Zebra 105Se N/A COMDISCO 140770
1SNAPSHOT Decoded P/N # 00-000-96 SL079839 N/A
1 Easy-Scanner RF Link P/N # CCL901 DP 12148 N/A
3Com Hub Super Stack 7xxV02F5D8 N/A
1 3Com Hubs Super Stack in burn in N/A
2 Circuits breakers in burn in N/A
24 CX-100-23 P/N # 200000 00-98410022-4; N/A
198 boards L140 01-98460002, 01-98460004, 01-98460071, N/A
01-99220222, 01-99200344, 01-99220369
01-98460088, 01-98390030-8, 01-98430002-4
01-98460025, 0098430001-5, 01-98460021,
01-98460097, 00-98390031-7, 00-98390035-5
01-98460039, 01-98460028, 01-98460061,
01-98460053, 01-98460105, 01-98460089,
01-98460093, 01-98460041, 01-98460094,
</TABLE>
2 of 4
<PAGE> 44
<TABLE>
<CAPTION>
DESCRIPTION SERIAL NUMBER TURNSTONE ASSET NUMBER
<S> <C> <C>
01-98460044, 01-98460087, 01-98460000,
01-98460055, 01-98460102, 01-98460052,
01-98460063, 01-98460030, 01-98460040,
01-98460103, 01-98460110, 01-98460104,
01-98460050, 01-98460058, 01-98460014,
01-98460048, 01-98460015, 01-98460101,
01-98460029, 01-98460001, 01-98460035,
01-98460111, 01-98460019, 01-98460068,
01-98460085, 01-98460092, 01-9846460083,
01-98460112, 01-98460059, 01-98460023,
01-98460070, 01-98460099, 01-98460012,
01-98460065, 01-98460072, 01-98460034,
01-99200233, 01-99220390, 01-99200310,
01-99200162, 01-99220434, 01-99220446,
01-98460027, 01-9846008, 01-99200316,
01-99200319, 01-99220545, 01-99200161,
01-99200304, 01-99220509, 01-98460011,
01-98460003, 01-98460038, 01-98460031,
01-99200240, 01-99200255, 01-99200327,
01-98460043, 01-99330023, 01-99200302,
01-98460060, 01-98460032, 01-99200339,
01-99013247, 01-99200313, 01-99200245,
01-99200349, 01-99200340, 01-99200127,
01-98460042, 01-99200097, 01-99200270,
01-99220445, 01-99220512, 01-99220443,
01-99200249, 01-99220511, 01-99200342,
01-99200309, 01-99200325, 01-99200053,
01-99200311, 01-99200346, 01-98460009,
01-99220326, 01-99200135, 01-99200320,
01-99200306, 01-99200328, 01-99200252,
01-99200155, 01-99220104, 01-99200343,
01-99271591, 01-99271585, 01-99271759,
01-99271581, 01-99271632, 01-99271587,
</TABLE>
3 of 4
<PAGE> 45
<TABLE>
<CAPTION>
DESCRIPTION SERIAL NUMBER TURNSTONE ASSET NUMBER
<S> <C> <C>
01-99200307, 01-99271477, 01-99271765,
01-99271595, 01-99271637, 01-99271948,
01-99310303, 01-99271772, 01-99310574,
01-99271890, 01-99310575, 01-99310421,
01-99310504, 01-99310285, 01-99310473,
01-99310424, 01-99310418, 01-99310385,
01-99310511, 01-99310566, 01-99310318,
01-99310324, 01-99310401, 01-99310559,
01-99310487, 01-99270716, 01-99310556,
01-99310423, 01-99200287, 01-99200073,
01-99200326, 01-99180446, 01-99310304,
01-99310475, 01-99271601, 01-99271769,
01-99220547, 01-99220301, 01-99200337,
01-99200322, 01-99200266, 01-99220224,
01-99220444, 01-99200129, 01-99200206,
01-99200315, 01-99200324, 01-99200321,
01-99200314, 01-99200318, 01-99200303,
01-99200133, 01-99200317, 01-99200018,
01-99200312, 01-99220525, 01-99200283,
01-99200276, 01-99271624, 01-99200265,
01-99200267, 01-99200336, 01-99200150,
01-99220340, 01-99220513, 01-99200300,
01-99200347, 01-99220253, 01-99200345,
01-99200277, 01-98460006, 01-99220317,
01-98460007, 01-99200125, 01-99220549.
7 P100 00-98460009-4, 00-98460007-6, 01-99180528,
01-99070008, 01-99070084, 01-991820550,
01-99070024.
5 W100 01-98450033, 01-99180772, 01-99070167,
01-99070157, 01-99070157
</TABLE>
4 of 4
<PAGE> 1
EXHIBIT 10.7
STANDARD SUBLEASE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. PARTIES. This Sublease, dated, for reference purposes only, June 16, 1999, is
made by and between Finisar Corporation, a California corporation (herein called
"Sublessor") and Turnstone Systems, Inc., a Delaware corporation (herein called
"Sublessee").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property situated in the County
of Santa Clara State of California, commonly known as 274 Ferguson Drive,
Mountain View and described as An approximately 20,140 square foot
R&D building, Said real property, including the land and all improvements
thereon, is hereinafter called the "Premises".
3. TERM.
3.1 Term. The term of this Sublease shall be for 34 months commencing on
August 1, 1999 and ending on May 31, 2002 unless sooner terminated pursuant to
any provision hereof.
3.2 Delay in Commencement. Notwithstanding said commencement date, if
for any reason Sublessor cannot deliver possession of the Premises to Sublessee
on said date, Sublessor shall not be subject to any liability therefore, nor
shall such failure affect the validity of this Lease or the obligations of
Sublessee hereunder or extend the term hereof, but in such case Sublessee shall
not be obligated to pay rent until possession of the Premises is tendered to
Sublessee; provided, however, that if Sublessor shall not have delivered
possession of the Premises within sixty (60) days from said commencement date,
Sublessee may, at Sublessee's option, by notice in writing to Sublessor within
ten (10) days thereafter, cancel this Sublease, in which event the parties shall
be discharged from all obligations thereunder. If Sublessee occupies the
Premises prior to said commencement date, such occupancy shall be subject to all
provisions hereof, such occupancy shall not advance the termination date and
Sublessee shall pay rent for such period at the initial monthly rates set forth
below.
4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal monthly
payments of $35,245.00, in advance, on the first day of each month of the term
hereof. Sublessee shall pay Sublessor upon the execution hereof $35,245.00 as
rent for the first month of the Sublease term. Rent for any period during the
term hereof which is for less than one month shall be a pro rata portion of the
monthly installment. Rent shall be payable in lawful money of the United States
to Sublessor at the address stated herein or to such other persons or at such
other places as Sublessor may designate in writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
hereof $105,735.00 as security for Sublesee's faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay rent
-1-
<PAGE> 2
or other charges due hereunder, or otherwise defaults with respect to any
provision of this Sublease, Sublessor may use, apply or retain all or any
portion of said deposit for the payment of any rent or other charge in default
or for the payment of any other sum to which Sublessor may become obligated by
reason of Sublessee's default, or to compensate Sublessor for any loss or damage
which Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Sublessee shall within ten (10) days after written
demand therefore deposit cash with Sublessor in an amount sufficient to restore
said deposit to the full amount hereinabove stated and Sublessee's failure to do
so shall be a material breach of this Sublease. Sublessor shall not be required
to keep said deposit separate from its general accounts. If Sublessee performs
all of Sublessee's obligations hereunder, said deposit, or so much thereof as
has not heretofore been applied by Sublessor, shall be returned, without payment
of interest or other increment for its use to Sublessee (or at Sublessor's
option, to the last assignee, if any, of Sublessee's interest hereunder) at the
expiration of the term hereof, and after Sublessee has vacated the Premises. No
trust relationship is created herein between Sublessor and Sublessee with
respect to said Security Deposit. IF SUBLESSEE IS SUCCESSFUL IN RAISING AT LEAST
$18 MILLION AND IS NOT THEN IN DEFAULT OF THIS SUBLEASE, THEN THE SECURITY
DEPOSIT SHALL BE REDUCED TO $35,245.00.
6. USE.
6.1 Use. The Premises shall be used and occupied only for Light
manufacturing, research and development, general office and storage and for no
other purpose.
6.2 Compliance with Law.
(a) Sublessor warrants to Sublessee that the Premises, in its
existing state, but without regard to the use for which Sublessee will use the
Premises, does not violate any applicable building code regulation or ordinance
at the time that this Sublease is executed. In the event it is determined that
this warranty has been violated, then it shall be the obligation of the
Sublessor, after written notice from Sublessee, to promptly, at Sublessor's sole
cost and expense, rectify any such violation. In the event that Sublessee does
not give to Sublessor written notice of the violation of this warranty within
one (1) year from the commencement of the term of this Sublease, it shall be
conclusively deemed that such violation did not exist and the correction of the
same shall be the obligation of the Sublessee.
(b) Except as provided in paragraph 6.2(a), Sublessee shall, at
Sublessee's expense, comply promptly with all applicable statutes: ordinances,
rules, regulations, orders, restrictions of record, and requirements in effect
during the term or any part of the term hereof regulating the use by Sublessee
of the Premises. Sublessee shall not use or permit the use of the Premises in
any manner that will tend to create waste or a nuisance or, if there shall be
more than one tenant of the building containing the Premises, which shall tend
to disturb such other tenants.
6.3 Condition of Premises. Except as provided in paragraph 6.2(a)
Sublessee hereby accepts the Premises in their condition existing as of the date
of the execution hereof, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use of the
Premises, and accepts this Sublease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. Sublessee acknowledges that neither
Sublessor nor Sublessor's agents have made any representation or warranty as to
the suitability of the Premises for the conduct of Sublessee's business.
-2-
<PAGE> 3
7. MASTER LEASE.
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter referred to as the "Master Lease", a copy of which is attached
hereto marked Exhibit 1, dated April 30, 1997, wherein DM Group VIII & DM GROUP
VIII-E is the lessor, hereinafter referred to as the "Master Lessor."
7.2 The Sublease is and shall be at all times subject and subordinate to
the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions of
the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease in which event the terms of this Sublease
document shall control over the Master Lease. Therefore, for the purposes of
this Sublease, wherever in the Master Lease the word "Lessor" is used it shall
be deemed to mean the Sublessor herein and wherever in the Master Lease the word
"Lessee" is used it shall be deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with, for
the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom: paragraphs 4.a, 5.b, 6.a., 24.
7.5 The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "Sublessee's Assumed Obligations." The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations."
7.6 Sublessee shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire term
of this Sublease, subject, however, to any earlier termination of the Master
Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless of and
from all liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that no default exists on the part of any party to the
Master Lease.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT.
8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease and all rentals and income arising
therefrom, subject however to the terms of paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document, agrees that until a
default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the rents accruing
under this Sublease. However, if Sublessor shall default in the performance of
its obligations to Master Lessor then Master Lessor may, at its option, receive
and collect, directly from Sublessee, all rent
-3-
<PAGE> 4
owing and to be owed under this Sublease. Master Lessor shall not, by reason of
this assignment of the Sublease nor by reason of the collection of the rents
from the Sublessee, be deemed liable to Sublessee for any failure of the
Sublessor to perform and comply with Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee, upon
receipt of any written notice from the Master Lessor stating that a default
exists in the performance of Sublessor's Obligations under the Master Lease, to
pay Master Lessor the rents due and to become due under the Sublease. Sublessor
agrees that Sublessee shall have the right to rely upon any such statement and
request from Master Lessor and that Sublessee shall pay such rents to Master
Lessor without any obligation or right to inquire as to whether such default
exists and notwithstanding any notice from or claim from Sublessor to the
contrary and Sublessor shall have no right or claim against Sublessee for any
such rents so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without
the consent of Master Lessor.
9. CONSENT OF MASTER LESSOR.
9.1 In the event that the Master Lease requires that Sublessor obtain
the consent of Master Lessor to any subletting by Sublessor, then this Sublease
shall not be effective unless, within ten (10) days of the date hereof, Master
Lessor signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the Master
Lease have been guaranteed by third parties then neither this Sublease, nor the
Master Lessor's consent, shall be effective unless, within ten (10) days of the
date hereof, said guarantors sign this Sublease thereby giving guarantors
consent to this Sublease and the terms thereof.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its obligations or
alter the primary liability of Sublessor to pay the rent and perform and comply
with all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of rent by Master Lessor from Sublessee or any
one else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent
to any subsequent subletting or assignment.
(d) In the event of any default of Sublessor under the Master
Lease, Master Lessor may proceed directly against Sublessor, any guarantors or
any one else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and
assignments of the Master Lease or this Sublease or any amendments or
modifications thereto without notifying Sublessor nor anyone else liable under
the Master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.
-4-
<PAGE> 5
(f) In the event that Sublessor shall default in its obligations
under the Master Lease, then Master Lessor, at its option and without being
obligated to do so, may require Sublessee to attorn to Master Lessor in which
event Master Lessor shall undertake the obligations of Sublessor under this
Sublease from the time of the exercise of said option to termination of this
Sublease but Master Lessor shall not be liable for any prepaid rents nor any
security deposit paid by Sublessee, nor shall Master Lessor be liable for any
other defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of Sublessor
at the end of this document shall constitute their consent to the terms of this
Sublease.
10. BROKER'S FEES.
10.1 Upon execution hereof by all parties, Sublessor shall pay to BT
Commercial a licensed real estate broker (herein called "Broker"), a fee as set
forth in a separate agreement between Sublessor and Broker or, in the event
there is no separate agreement between Sublessor and Broker, the sum of $ N/A
for brokerage services rendered by Broker to Sublessor in this transaction. BT
COMMERCIAL WILL PAY CORNISH & CAREY COMMERCIAL AN AMOUNT EQUAL TO 3% OF YEAR 1,
PLUS 2.5% OF YEAR 2, PLUS 2.5% OF THE REMAINDER OF THE TERM.
10.2 Sublessor agrees that if Sublessee exercises any option or right of
first refusal granted by Sublessor herein, or any option or right substantially
similar thereto, either to extend the term of this Sublease, to renew this
Sublease, to purchase the Premises, or to lease or purchase adjacent property
which Sublessor may own or in which Sublessor has an interest, or if Broker is
the procuring cause of any lease, sublease, or sale pertaining to the Premises
or any adjacent property which Sublessor may own or in which Sublessor has an
interest, then as to any of said transactions Sublessor shall pay to Broker a
fee, in cash, in accordance with the schedule of Broker in effect at the time of
the execution of this Sublease. Notwithstanding the foregoing, Sublessor's
obligation under this paragraph 10.2 is limited to a transaction in which
Sublessor is acting as a sublessor, lessor or seller.
11. ATTORNEY'S FEES. If any party or the Broker named herein brings an action to
enforce the terms hereof or to declare rights hereunder, the prevailing party in
any such action, on trial and appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the Court. The
provision of this paragraph shall inure to the benefit of the Broker named
herein who seeks to enforce a right hereunder.
12. ADDITIONAL PROVISIONS. [If there are no additional provisions draw a line
from this point to the next printed word after the space left here. If there are
additional provisions place the same here.]
12.a RENT INCREASES: AT THE BEGINNING OF THE THIRTEENTH MONTH OF THIS
SUBLEASE THE RENT DESCRIBED IN PARAGRAPH 4 ABOVE SHALL BE INCREASED TO
$36,252.00 AND AT THE BEGINNING OF THE TWENTY-FIFTH MONTH SAID RENT SHALL BE
INCREASED TO $37,259.00.
12.b CONDITION OF PREMISES: SUBLESSOR, AT SUBLESSOR'S COST AND EXPENSE,
WARRANTS THAT ALL ELECTRICAL, HVAC AND PLUMBING SHALL BE IN GOOD WORKING ORDER
UPON SUBLEASE COMMENCEMENT. SUBLESSOR SHALL STEAM CLEAN ALL CARPETED AREAS PRIOR
TO SUBLEASE COMMENCEMENT. SUBLESSEE ASSUMES THE SPACE IN AN OTHERWISE "AS IS"
CONDITION.
-5-
<PAGE> 6
IF THIS SUBLEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE TRANSACTION INVOLVED HEREIN.
Executed at Finisar Corporation, a California corporation
-------------------- -----------------------------------------------
on By /s/ Jerry Rawls
----------------------------- --------------------------------------------
JERRY RAWLS, PRESIDENT
address: 274 Ferguson Drive By /s/ S. K. Workman
----------------------- --------------------------------------------
STEVE WORKMAN, CFO
Mountain View, CA 94043 "Sublessor"
-----------------------
Executed at Turnstone Systems, Inc., a Delaware corporation
-------------------- -----------------------------------------------
on By /s/ M. D. Savoie
----------------------------- --------------------------------------------
DENISE SAVOIE, CFO & VP, BUSINESS
OPERATIONS
address: 980 Linda Vista Avenue By /s/ Richard N. Tinsley
----------------------- --------------------------------------------
RICK TINSLEY, CEO
Mountain View, CA 94043 "Sublessee"
-----------------------
Executed at DM GROUP VIII, a California Limited partnership
-------------------- -----------------------------------------------
on By /s/ Gary L. Christensen
----------------------------- --------------------------------------------
GARY L. CHRISTENSEN, AUTHORIZED AGENT
address
------------------------
- -------------------------------
DM GROUP VIII-E, a California limited partnership
-------------------------------------------------
By /s/ Gary L. Christensen
----------------------------------------------
GARY L. CHRISTENSEN, AUTHORIZED AGENT
"Master Lessor"
NOTE: For these forms write or call the American Industrial Real Estate
Association, 350 S. Figueroa Street, Suite 275, Los Angeles, CA 90071.
213-687-8777.
-6-
<PAGE> 7
EXHIBIT 10.7
TABLE OF CONTENTS
COMMERCIAL LEASE
FERGUSON OAKS BUSINESS PARK
FINISAR CORPORATION
AND
DM GROUP VIII & DM GROUP VIII-E
APRIL 30, 1997
<TABLE>
PAGE
-----
<S> <C>
1. Parties.............................................................................. 1
2. Premises............................................................................. 1
3. Use.................................................................................. 1
4. Term................................................................................. 2
5. Acceptance of Premises and Tenant Improvement Allowance.............................. 2
6. Rent................................................................................. 3
7. Services............................................................................. 7
8. Personal Property Taxes.............................................................. 7
9. Compliance with Laws................................................................. 7
10. Tenant's Repairs and Alterations..................................................... 8
11. Landlord Repairs..................................................................... 11
12. Tenant's Indemnity; Waiver of Subrogation............................................ 11
13. Landlord's Indemnity................................................................. 13
14. Insurance............................................................................ 13
15. Common Areas and Parking............................................................. 15
16. Entry by Landlord.................................................................... 15
17. Assignment and Subletting............................................................ 15
18. Damage by Casualty:.................................................................. 17
19. Eminent Domain and Condemnation...................................................... 19
20. Default by Tenant.................................................................... 21
21. Landlord's Breach; Tenant's Remedies................................................. 23
22. Subordination, Non-disturbance, and Attornment....................................... 23
23. Signs and Advertising................................................................ 23
24. Brokers.............................................................................. 24
25. Notices.............................................................................. 24
26. Estoppel Statement................................................................... 25
27. Attorney's Fees...................................................................... 25
28. Surrender of Premises; Holding Over.................................................. 26
29. No Waste............................................................................. 27
30. No Waiver............................................................................ 27
31. Effect of Landlord's Conveyance...................................................... 27
32. Authority to Execute Lease........................................................... 28
33. Mortgage Protection.................................................................. 28
</TABLE>
-i-
<PAGE> 8
<TABLE>
<S> <C>
34. Time of the Essence.................................................................. 28
35. Covenant of Quiet Possession......................................................... 28
36. General Provisions................................................................... 28
</TABLE>
Exhibit A - Legal Description of Premises
Exhibit B - Legal Description of Project
Exhibit C - Occupied Area Defined
-ii-
<PAGE> 9
COMMERCIAL LEASE
FERGUSON OAKS BUSINESS PARK
MOUNTAIN VIEW, CALIFORNIA
1. Parties. THIS LEASE is made and entered into as of the 30th day of April
1997, by and between DM GROUP VIII, a California limited partnership, and DM
Group VIII-E, a California limited partnership (hereinafter collectively called
"Landlord"), and Finisar Corporation, a California corporation, having a mailing
address of 274 Ferguson Drive, Mountain View, California 94043 (hereinafter
called "Tenant").
2. Premises. Landlord leases to Tenant and Tenant leases from Landlord
those certain premises consisting of a freestanding, single story research and
development building containing approximately 20,140 square feet of space,
located at 274 Ferguson Drive, Mountain View, California (the "Premises"), for
the term, at the rental rate, and upon all of the terms, covenants, and
conditions set forth in this Lease. The Premises are described on Exhibit "A",
which Exhibit is attached hereto and is incorporated herein. The Premises are a
portion of, and are incorporated in, a unified planned development of three (3)
research and development buildings and associates common areas, commonly known
as the Ferguson Oaks Business Park (the "Project"). The legal description of the
real property comprising the Project is attached hereto as Exhibit "B", which
Exhibit is attached hereto and incorporated herein. In addition to the exclusive
use of the Premises, Tenant shall also have the right to non-exclusive use of
all Common Areas (as that term is hereinafter defined in Paragraph 6(e), below)
in the Project designated by Landlord for use by tenants of the Project, in
accordance with and subject to the provisions of this lease.
This Lease is subject to the following:
(a) All those documents and matters of record, known or recorded as of
the Commencement Date (as defined below), including the effect thereof,
including but not limited to any covenants, conditions, restrictions, easements,
mortgages, deeds of trust, and rights of way;
(b) General and special taxes not delinquent; and
(c) The effect of any zoning and building codes of the City of Mountain
View, County of Santa Clara, or State of California.
3. Use.
(a) Permitted Use. Tenant shall use the Premises for general office,
engineering, research, and production of Tenant's products and equipment, for
the education and training of Tenant's clients and employees, and all other uses
related or incidental thereto.
<PAGE> 10
(b) Uses Prohibited. Tenant agrees that no portion of the Premises shall
be used:
(i) in any manner inconsistent with, contrary to, or in
violation of the requirements of any laws, rules, regulations, or ordinances, of
any local, regional, state or federal governmental authority now in force, or
which may hereafter be in force, or which violates the terms or conditions of
any covenants, easements, or restrictions of record binding on the Project or
the Property;
(ii) in any manner which shall present a danger or hazard to the
premises or the Project, or any other tenant or user thereof; or which violate
the requirements of any applicable fire insurance underwriter or rating bureau;
(iii) for any trade, service, activity or purpose which is
excessively obnoxious or offensive, or be a nuisance by reason of unsightliness
or excess emission of odors, dust, fumes, smoke, liquid waste, noise, glare,
vibration, radiation or other similar condition;
(iv) in any manner which will increase the existing rate of any
insurance upon the Premises or the Project, or cause a cancellation of such
insurance, or which will interfere with other tenants at the Project;
(v) for any unlawful purpose.
(c) Floor Loads. Tenant shall not place a load upon the Premises
exceeding the floor load per square foot area which it was designed to carry.
Landlord reserves the right to prescribe the weight and position of all safes,
business machines and mechanical equipment. Such installations shall be placed
and maintained by Tenant, at Tenant's expense, in settings sufficient, in
Landlord's reasonable judgment, to absorb and prevent vibration, noise and
annoyance.
4. Term.
(a) Primary Term. The term of this lease ("the Primary Term") shall
begin on the first day of June, 1997 (the "Commencement Date") and, unless
sooner terminated in accordance with the provisions of this Lease, extend until
the 31st day of May, 2002 (the "Termination Date"). The first full monthly
installment of Base Rent shall be due on the Commencement Date.
5. Acceptance of Premises and Tenant Improvement Allowance.
(a) Premises. Landlord shall deliver the existing improvements to the
Tenant with the current floor plan and finishes.
(b) Landlord's Limited Warranty. Landlord warrants that the HVAC for the
area defined in Exhibit C shall be, as of the Commencement Date, and shall
remain, for a period of sixty (60) days after the Commencement Date (the
"Warranty Period") in a state of good condition, order, and repair. If, during
the Warranty Period, Landlord is notified in writing that any of the equipment
are in a state of disrepair, Landlord, at its sole and exclusive cost and
expense, shall, at its option,
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<PAGE> 11
replace, restore, or repair said equipment. The cost of repair, restoration, or
replacement shall be Landlord's sole obligation pursuant to this Warranty, and
Landlord shall under no circumstances be liable, to Tenant or to any third
party, for any other damages including, without limitation, for any incidental
or consequential damages including, without limitation, damages for loss of use
or loss of profits.
(c) Landlord shall have no obligation with respect to the construction,
improvement, alteration, or modification of the Premises. Tenant has had the
opportunity to fully inspect the Premises and accepts the condition of the
Premises in an "AS-IS" condition as of the date hereof. Tenant shall be
responsible for performing any and all tenant improvement work at the Premises
at Tenant's expense in accordance with the provisions of Paragraph 10, below.
Neither Landlord nor Landlord's agents have made any representations, warranties
or promises with respect to the physical condition of the Premises, the land
upon which it is erected, or the Premises, or any matter or thing affecting or
related to the Premises, except as is set forth in this Lease.
6. Rent.
Tenant shall pay to Landlord, without offset, deduction (except as
provided herein), notice, or demand, the following items as rent ("Rent") for
the Premises:
(a) Base Rent. Tenant shall pay to Landlord as base rent ("Base Rent")
during the Primary Term hereof the sum of One Million, Seven-Hundred Fifty-Four
Thousand, One Hundred Dollars ($1,754,100) payable as follows:
<TABLE>
<S> <C> <C>
June 1, 1997 - May 31, 1998 $26,988 per month
June 1, 1998 - May 31, 1999 $28,067 per month
June 1, 1999 - May 31, 2000 $29,190 per month
June 1, 2000 - May 31, 2001 $30,358 per month
June 1, 2001 - May 31, 2002 $31,572 per month
</TABLE>
All rental payments shall be payable in advance, on or before the first
day of each and every calendar month during the term hereof, in advance, and the
first rental payment shall be due on the Commencement Date. Rent shall be paid
to Landlord in lawful money of the United States of America at the address set
forth in Paragraph 25, below, for the giving of notices.
(b) Real Estate Taxes. Tenant shall pay to Landlord, as Additional Rent,
the real estate taxes and assessments ("Real Estate Taxes") levied against the
Premises paid by Landlord.
Real Estate Taxes shall include all real property taxes and assessments
levied against the Premises by any governmental or quasi-governmental authority,
including any taxes, assessments, surcharges, or service or other fees of a
nature not presently in effect which shall hereafter be levied on the Project as
a result of the use, ownership or operation of the Project or for any other
reason, whether in lieu of or in addition to any current real estate taxes and
assessments; provided, however, that any taxes which shall be levied on the
rentals of the Building shall be determined as if the
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Building were Landlord's only property and provided further, that in no event
shall the term Real Estate Taxes include any federal, state or local income
taxes levied or assessed on landlord, unless such taxes are a specific
substitute for real property taxes; such term shall, however, include gross
taxes on rental and expenses incurred by Landlord for tax consultants and in
contesting the amount or validity of any Real Estate Taxes. Assessments shall
include any and all so-called special assessments, license tax, business license
fee, business license tax, commercial rental tax, levy, charge or tax imposed by
any authority having the direct power to tax, including any city, county, state
or federal government, or any school, agricultural, lighting, water, drainage
other improvement or special district thereof, against the Project, or any part
thereof, or against any legal or equitable interest of Landlord therein. For the
purposes of this Lease, any special assessment shall be deemed payable in such
number of installments as if actually paid.
Landlord shall give Tenant written notice of the amount of Tenant's
liability for payment of taxes and assessments hereunder on or before sixty (60)
days prior to the delinquency date for payment of such taxes and assessments.
Tenant shall pay to Landlord the amount of Tenant's liability hereunder for
taxes and assessments within fifteen (15) days of Tenant's receipt of such
written notice. Landlord shall pay the Real Estate Taxes and assessments levied
against the Premises prior to delinquency and shall, at Tenant's written
request, send Tenant proof that the Real Estate Taxes and assessments have been
paid. Landlord may estimate the annual Real Estate Taxes liability of Tenant and
based on Landlord's written estimate, Tenant shall pay to Landlord in the same
manner as the Common Area Expenses described in Paragraph 6(g). This Real Estate
Tax impound shall be reconciled on an annual basis.
(c) Landlord's Insurance.
Tenant shall pay to Landlord, as Additional Rent, any amounts paid by
Landlord for insurance premiums under paragraph 14(a), below, and Tenant's Pro
Rata Share (as hereinafter defined) of amounts paid by Landlord for insurance
premiums under Paragraph 14(b), below. Tenant shall pay such amounts to Landlord
within fifteen (15) days of Landlord's written request for same, which request
shall set forth the kind and amount of insurance and the premium (or allocated
portion of premium) therefor. Based on Landlord's written estimate of the annual
insurance liability of Tenant, Tenant shall pay to Landlord in the same manner
as the Common Area Expenses described in Paragraph 6(g). This insurance impound
shall be reconciled on an annual basis.
(d) Property Repairs and Reimbursement.
Except for those repairs, restorations, and replacements which are
herein stated to be the sole responsibility of, and to be made at the sole and
exclusive expense of, the Landlord, Tenant shall pay to Landlord, as Additional
Rent, any amounts paid or incurred by Landlord for the repair, maintenance,
restoration, or replacement of any portion of the Premises. Notwithstanding the
foregoing, if the useful life of any such restoration or replacement exceeds the
term of this Lease (inclusive of any options to extend this Lease), such as
repairs to the structural portion of the Premises made by Landlord pursuant to
Paragraph 11(a), below, Tenant shall reimburse Landlord as Additional Rent only
for Tenant's proportionate share of such repairs, restoration or replacement.
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As used in this Paragraph, Tenant's proportionate share shall be equal to the
total cost of such repairs, restoration or replacement, multiplied by a
fraction, the numerator of which shall be the number of months remaining in the
term of this Lease (inclusive of any options to extend this Lease) at the time
of such repair, restoration or replacement, and the denominator of which shall
be the useful life of the system repaired, restored or replaced. Tenant shall
pay to Landlord monthly, in advance, as Additional Rent, an amount equal to the
cost of such repairs, restoration or replacement divided by the number of months
then remaining under this Lease (inclusive of any options to extend this Lease).
(e) Common Areas; Common Area Maintenance Expenses.
The term "Common Areas", as used herein, means all areas or facilities
outside the Premises and within the exterior boundaries of the Project that are
provided and designated by Landlord from time to time for general non-exclusive
use and convenience of Tenant and of other tenants of the Project. Common Areas
include, without limitation, parking areas, pedestrian walkways, landscaped
areas, sidewalks, service corridors, trash enclosures, loading areas, and roads.
Tenant shall have a non-exclusive right to use the Common Areas. Landlord shall
maintain reasonable rules and regulations applicable to all tenants concerning
the maintenance, management, use, and operation of the Common Areas.
Tenant shall pay to Landlord, as Additional Rent, Tenant's Pro Rata
Share (as hereinafter defined) of the Common Area Maintenance Expenses. "Common
Area Maintenance Expenses" shall mean all expenses of any kind or nature which
are necessary, ordinary or customarily incurred with respect to the operation,
repair, maintenance, or replacement of the Common Areas of the Project as
determined in accordance with generally accepted accounting principles and shall
include, but not be limited to, all sums expended in connection within the
Common Areas for all general operation, maintenance, replacement, and repairs,
repainting, restriping or resurfacing of parking areas, cleaning, sweeping and
janitorial services; sidewalks, curbs, and signs in the Project, sprinkler
systems, planting and landscaping; lighting and other utilities; directional
signs and other markers and bumpers; maintenance and repair of any lighting
systems, storm drainage systems, and any other utility systems; costs of
improvements made by Landlord to the Common Areas as mandated by any
governmental authority, the cost of any improvements to bring the Common Areas
into compliance with those requirements of ADA which are required by changes in
existing laws or regulations, and amounts paid to a third party, firm, or
corporation (which may be related to landlord) for the management of the
Project. Landlord may cause any or all of said services to be provided by an
independent contractor or contractors.
(f) Tenant's Pro Rata Share. Tenant's Pro Rata Share, for the purposes
of this Lease, shall be a fraction, the numerator of which is the total square
footage of the Premises and the denominator of which is the total square footage
in all of the buildings at the Project and is equal to 24.1%. Tenant
acknowledges that Landlord has not made any representation that the Common Area
Maintenance Expenses, Taxes, or Insurance will equal any specific amount or will
remain constant during the term.
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(g) Payment of Common Area Maintenance Expenses. Tenant shall pay to
Landlord, as Additional Rent, Tenant's Pro Rata Share of Common Area Maintenance
Expenses, Real Estate Taxes and Insurance in the following manner:
(i) Beginning with the Commencement Date, but subject to
adjustment as provided herein, Tenant shall pay to Landlord on the first day of
each calendar month of the term of this Lease an amount estimated by Landlord to
be a monthly installment of Tenant's Pro Rata Share of such Common Area
Maintenance Expenses. At any time, Landlord may adjust the estimated monthly
charge, based on Landlord's experience, costs incurred to the date of such
adjustment, and costs that Landlord reasonably anticipates to be incurred in the
future.
(ii) Within one hundred twenty (120) days following the end of
each calendar year, or, at the termination of Lease, within one hundred twenty
(120) days following such termination, Landlord shall furnish Tenant a statement
covering the calendar year just expired (the "Statement"), showing the total of
such charges, the amount of Tenant's Pro Rata Share thereof for such calendar
year, and the payments actually paid by Tenant during such period. If Tenant's
Pro Rata Share of such charges exceeds payments made by Tenant, Tenant shall pay
Landlord the deficiency within thirty (30) days after receipt of such Statement.
If the estimated payments made exceed Tenant's Pro Rata Share thereof, Landlord
shall credit the excess against any amounts then owing or thereafter becoming
due from Tenant to Landlord. In any Lease Year which is not a full calendar
year, a proportionate reduction shall be made in Tenant's Pro Rata Share of
Common Area Maintenance Expenses. Tenant's liability for Common Area Maintenance
Expenses shall survive the expiration or earlier termination of this Lease for a
period of one (1) year.
(iii) Tenant shall have the right, at its own expense and at a
reasonable time (after written notice to Landlord) within thirty (30) days after
receipt of the Statement to audit Landlord's books relevant to the Tenant's Pro
Rata share of Common Area Maintenance Expenses, Real Estate Taxes, and Insurance
due hereunder. In the event Tenant does not audit Landlord's books and deliver
the results thereof to Landlord within said 30-day period, the terms and amounts
set forth in the Statement from Landlord to Tenant shall be deemed conclusive
and final and Tenant shall have no further right to adjustment. In the event
Tenant's examination reveals that an error has been made in Landlord's
determination of Tenant's Pro Rata share of such charges, and Landlord agrees
with such determination, then the amount of such adjustment shall be payable by
Landlord or Tenant, to the other party as the case may be in accordance with
subparagraph (ii) hereof. In the event Tenant's examination reveals an error has
been made in Landlord's determination of Tenant's Pro Rata share, and Landlord
disagrees with the results thereof, Landlord shall have thirty (30) days to
obtain an audit from an accountant of its choice to determine Tenant's Pro Rata
share of such charges. In the event Landlord's accountant and Tenant's
accountant are unable to reconcile their audits, both accountants shall mutually
agree upon a third accountant, whose determination of Tenant's Pro Rata share of
the charges shall be conclusive. (However, regardless of the third accountant's
determination, Tenant's Pro Rata share shall in no event be more than Landlord's
accountant's determination or less than Tenant's accountant's determination). In
the event the amount of error by Landlord is determined by said third accountant
to be five percent (5%) more, the reasonable costs of the third audit made
pursuant to this subparagraph shall be paid by Landlord. In
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the event the amount of error by Landlord is determined to be less than five
percent (5%), the reasonable costs of the third audit made pursuant to this
subparagraph shall be paid by Tenant.
(h) Late Charge. Tenant hereby acknowledges that late payment by Tenant
to Landlord of Base Rent, Additional Rent, or other sums due hereunder will
cause Landlord to incur costs which will be difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Landlord by terms of any mortgage or trust
deed encumbering the Project. Accordingly, except as expressly stated
hereinafter, if any installment of Base Rent, Additional Rent, or any other sum
due from Tenant shall not be received by Landlord within five (5) business days
after said amount is due, Tenant shall pay to Landlord on demand a late charge
of five percent (5%) of such overdue amount. All such charges shall be deemed
Additional Rent hereunder.
7. Services.
(a) Services Available at the Premises. The Premises are currently
served by water, sewer, gas, electric, and telephone utilities.
(b) Service Interruption. Landlord shall not be liable for failure to
provide any required services. Services may be discontinued due to accident,
repairs, strikes, acts of God, or any other event beyond the reasonable control
of Landlord. In such event, Landlord shall not be liable for such failure or
discontinuance, nor shall such failure or discontinuance be construed as a
constructive eviction of Tenant or cause an abatement of Rent.
(c) Payment by Tenant. Tenant shall pay, prior to delinquency and
directly to the applicable supplier, for all services and utilities supplied to
the Premises and separately metered, together with any taxes thereon. If any
services are not separately metered to Tenant, Tenant shall pay Tenant's Pro
Rata Share of all charges jointly metered with other space in the Project.
Tenant shall arrange and pay for its own telephone service, fire monitoring
systems and other services provided directly to premises.
8. Personal Property Taxes.
Tenant shall pay, as Additional Rent, before delinquency, any taxes upon
Tenant's leasehold improvements, equipment, furniture, fixtures, and any other
personal property located in the Premises. In the event any such personal
property shall be assessed and taxed with the real property, Tenant shall pay to
Landlord its share of such taxes within ten (10) days after delivery to Tenant
of a statement in writing setting forth the amount of such taxes applicable to
Tenant's personal property.
9. Compliance with Laws.
Tenant will comply at all times, and be responsible for the compliance
by its employees, assigns, agents, subcontractors and any others acting for it,
with all applicable federal, state and local laws, regulations, permits,
license, certificates and any approvals of any type relative to any and all
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of the operations or activities Tenant or others under Tenant's control will
conduct at or upon the Premises.
Tenant shall immediately notify Landlord of any reports made to any
environmental agency arising in connection with the operations to be performed
at the Premises, as well as any complaints, notices, warnings or asserted
violations which relate to the Premises communicated to Tenant, its employees,
assigns, agents, subcontractors, or any others acting for it, by any
governmental agency. Tenant shall promptly supply Landlord with copies of all
such reports, complaints, notices, warnings or asserted violations. Tenant
further warrants and agrees that no substance regarded as hazardous under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
42 USC Section 9601 et seq., will be stored or treated, nor will any hazardous
substance be released or disposed of, on, under or about the Premises or the
Property, except for such hazardous materials that are used or produced in the
ordinary course of Tenant's business, provided that such hazardous materials
shall be used, stored, handled, and disposed of in strict conformity to the
regulations and requirements governing such activities. At all times during the
Term and upon the earlier of the expiration or termination of the Term, Tenant
agrees to keep and maintain the Premises and the Property free of contamination
from any substances regarded as hazardous under CERCLA.
After prior notice to the Landlord, Tenant shall have the right to
contest by appropriate legal proceedings (in the name of Tenant) at Tenant's
sole cost and expense and with counsel of Tenant's own choosing, the validity of
any law, ordinance, order, rule, regulations, or requirement with which, by the
terms of this Lease, Tenant is obligated to comply. If by the terms of any such
law, ordinance, order, rules, regulation, or requirement, compliance therewith
may be legally held in abeyance without incurring any lien or charge or record
against the Premises, and without subjecting Landlord to any fines, penalties,
or any other liability for failure to comply therewith. Tenant may postpone
compliance until the final determination of any such proceedings, provided that
all proceedings shall be prosecuted with due diligence. If upon final
determination Tenant is required to so comply then Tenant will promptly comply
and pay the cost of such compliance even if such determination is made after the
end of the term of this Lease.
10. Tenant's Repairs and Alterations.
(a) Repairs. Subject to the provisions of Paragraph 5(b) (relating to
Landlord's repairs during Landlord's Warranty Period), Paragraph 6(e) (relating
to compliance with ADA), Paragraph 11 (relating to Landlord's repair
obligations), Paragraph 18 (relating to the partial or total destruction of the
Premises) and Paragraph 19 (relating to the condemnation of all or a portion of
the Premises), Tenant shall, at Tenant's sole cost and expense, keep and
maintain the Premises and every part thereof, as well as all equipment serving
only the Premises, in good order, condition, and repair, (whether or not the
need for any such repairs occurs as a result of Tenant's use, any prior use, the
elements or the age of the Premises), and shall keep and maintain the Premises
in full compliance with all applicable laws, rules, regulations, ordinances, and
directives of all local, regional, state, and federal governmental authorities.
Tenant's repair obligations as set forth herein shall include, without limiting
the generality of the foregoing, all equipment within or serving only the
Premises such as plumbing, heating, air conditioning, and ventilating equipment,
electrical lighting facilities,
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fire sprinklers, alarm systems, interior walls, interior ceilings, floors,
windows, doors, plate glass, roof membranes, and skylights. Tenant's obligations
hereunder shall include restorations, replacements, or renewals, if necessary,
in order to keep and maintain the Premises in good order, condition, and state
of repair; provided, however, that Tenant's obligations to repair and to
maintain plumbing, heating, air conditioning, and ventilating equipment,
electrical lighting facilities, roofing membrane, fire sprinklers, and alarm
systems shall extend only to the routine repair and maintenance thereof. In
addition to Tenant's obligation to maintain the Premises, all damage or injury
to any other portion of the Project, including both the Common Area and other
lease spaces, caused by omission, neglect, or improper conduct of Tenant, its
employees, agents, subtenants, assignees or invitees shall be repaired promptly
by Tenant at its sole cost and expense, to the reasonable satisfaction of
Landlord. In connection with Tenant's performance of its obligations under this
Paragraph, Landlord shall make available to Tenant, and, if necessary, shall
assign to Tenant, any warranties held by Landlord on any equipment on the
Premises.
(b) In order to discharge its obligations under Paragraph 10(a), above,
Tenant, at its election, may utilize its own personnel to perform routine
maintenance upon the following equipment and improvements located on the
Premises, if any: (i) heating, air conditioning, and ventilation equipment; (ii)
boiler, fired or unfired pressure vessels; (iii) fire sprinkler and/or standpipe
and hose or other automatic fire extinguishing systems, including fire alarm
and/or smoke detection; and (iv) roof membrane and drain maintenance. Tenant
shall at all times keep and maintain accurate and complete records of Tenant's
maintenance schedules, procedures, and repairs undertaken by Tenant under this
Paragraph, and shall deliver copies of same to Landlord on an annual basis or
upon Landlord's request.
(c) Alterations. Tenant shall pay all costs of construction done by it
or caused to be done by it on the Premises as permitted by this Lease. Tenant
shall not make any alterations, in, on, under, or about the Premises without
Landlord's prior written consent, which consent shall not be unreasonably
withheld or delayed. Any alterations that Tenant shall desire to make shall be
presented to Landlord in written form with proposed detailed plans, not less
than twenty (20) days prior to the date that work on the alterations is to
commence.
All consents given by Landlord shall be conditioned upon all of the
following:
(i) Prior to commencement of any alteration, Tenant, at
Tenant's sole expense, shall obtain all applicable building and other permits
that may from time to time be required by any government authority having
jurisdiction;
(ii) Tenant shall furnish a copy of all such permits, together
with one (1) copy of the plans, specifications, and contract for such
alteration, and the name of Tenant's general contractor, to Landlord at least
twenty (20) days prior to the commencement of work.
(iii) Tenant shall comply with all conditions of such permits in
a prompt and expeditious manner.
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(iv) Prior to the commencement of work Tenant shall deliver to
Landlord insurance certificates evidencing that all contractors and
subcontractors performing the alterations or any part thereof each have adequate
worker's compensation, builder's risk, and comprehensive general liability
insurance, the latter with a combined single limit of not less than One Million
Dollars ($1,000,000). Landlord and Landlord's agent shall be named as an
additional insured on all such policies of comprehensive general liability
insurance.
(v) All alterations shall be completed with due diligence in
compliance with the plans and specifications and working drawings. All
alterations shall comply with all applicable laws, rules, regulations,
ordinances, and directives of all local, regional, state, and federal
governmental authorities.
(vi) The alterations shall be performed in a manner that will
not interfere with the quiet enjoyment of the other tenants in the Project.
(vii) Tenant shall notify Landlord of the names and addresses of
the persons supplying labor and materials in connection with the alterations so
that Landlord may give notice that it shall not be subject for any lien for
Tenant's work, in accordance with California's mechanics' lien statutes.
Landlord shall have the right to keep posted on the Premises notice to such
persons in accordance with such statute.
(viii) Within forty-five (45) days after completion of the
alterations, Tenant shall furnish Landlord with the as-built plans and
specifications therefor.
(d) Ownership of Alterations and Improvements. Subject to Landlord's
right to require their removal or to become the owner thereof as hereinafter
provided in this Paragraph 10(d), all alterations and improvements made to the
Premises by Tenant shall be the property of and owned by Tenant, but considered
a part of the Premises. Landlord shall, at the time Tenant requests the right to
make an alteration or improvement, elect in writing to Tenant to be the owner of
all or any specified portion of the Tenant-owned alterations and improvements.
Unless otherwise elected by Landlord as hereinafter set forth, all alterations
and improvements shall, at the expiration or earlier termination of this Lease,
become the property of Landlord and remain upon and be surrendered by Tenant
with the Premises.
(e) Mechanics' Liens. Tenant shall pay or cause to be paid when due all
costs for work done by or on behalf of Tenant or caused to be done by or on
behalf of Tenant on the Premises of a character which will or may result in
liens against Landlord's interest in the Premises or the Project. Tenant will
keep the same free and clear of all mechanics' liens and other liens on account
of work done for or on behalf of Tenant or persons claiming under Tenant. Tenant
hereby agrees to indemnify, defend and save Landlord harmless of and from all
liability, loss, damages, costs or expenses, including attorneys' fees, incurred
in connection with any claims of any nature whatsoever for work performed for,
or materials or supplies furnished to Tenant, including lien claims of laborers,
materialmen or others. Should any such liens be filed or recorded against the
Premises or the Project with respect to work done for or materials supplied to
or on behalf of Tenant or should
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any action affecting the title thereto be commenced, Tenant shall cause such
liens to be released of record within twenty (20) days after notice thereof. If
Tenant desires to contest any such claim of line, Tenant shall nonetheless cause
such lien to be released of record by the posting of adequate security with a
court of competent jurisdiction as may be provided by California's mechanics'
lien statutes. If Tenant shall be delinquent in paying any charge for which such
a mechanics' lien or suit to foreclose such a lien has been recorded or filed
and shall not have caused the lien to be released as aforesaid, Landlord may at
its discretion pay such lien or claim and any costs associated therewith, and
the amount so paid, together with interest thereon at the Interest Rate and
reasonable attorneys' fees incurred in connection therewith, shall be
immediately due from Tenant to Landlord as Additional Rent.
11. Landlord Repairs.
(a) Subject to the provisions of Paragraph 18 and 19, below, Landlord
shall repair and maintain the structural portions of the Premises and the Common
Areas in good order, condition and state of repair. As used herein, the term
"Structural portion of the Premises" shall mean only the roof joists (excluding
skylights and roofing membrane), bearing and exterior walls (excluding doors and
windows), foundations, and subflooring. In addition, subject to the provisions
of Paragraph 12, below, Landlord shall repair the Premises when such repairs are
required due to damage caused by (i) the omission, neglect, or improper conduct
of Landlord, its employees, or its agents; or (ii) due to Landlord's failure to
perform its obligations under this Paragraph 11.
(b) In connection with its obligation to repair and maintain the Common
Areas, Landlord shall repair, restripe, and resurface the parking area when
necessary, except that Landlord shall not be obligated to restripe the parking
area more than once each three (3) years, or resurface the parking area more
than once each seven (7) years.
(c) There shall be no abatement of rent and no liability of Landlord to
Tenant or to third parties by reason of any injury to, or interference with,
Tenant's business arising from the making of any repairs, alterations or
improvements required to be made by Landlord under this Paragraph. Landlord's
obligation to make repairs under this Paragraph 11 is a covenant independent of
any other covenant set forth in this Lease.
12. Tenant's Indemnity; Waiver of Subrogation.
(a) The parties intend to assign the risk of loss whether resulting from
negligence of the parties or otherwise, to the party who is obligated hereunder
to cover the risk of such loss with insurance. Thus, the indemnity and waiver of
subrogation provisions of this Lease have as their objective, so long as such
objective is not in violation of public policy, the assignment of risk for a
particular casualty to the party carrying the insurance for such risk, without
respect to the causation thereof.
(b) Neither party shall be liable to the other party for any damage to
the physical property of the other party caused by fire or other perils insured
against by such other party's fire and/or "all-
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risk" property insurance carried and maintained pursuant to the terms of this
Lease, only to the extent that such insurance is valid and collectible. Each
party shall cause each fire and/or "all-risk" property insurance policy obtained
by it to provide that the insurer waives all rights of recovery by way of
subrogation against either party in connection with any damage covered by such
policy. If any such insurance policy cannot be obtained with a waiver of
subrogation without payment of an additional premium charge above that charged
by the insurance companies issuing such policies without waiver of subrogation,
the party receiving the benefit shall elect to either forfeit the benefit or
shall pay such additional premium to the insurance carrier requiring such
additional premium.
(c) Tenant, as a material part of the consideration to be rendered to
Landlord, shall indemnify, defend, and save harmless Landlord from and against
any and all liabilities, claims, penalties, forfeitures, and suits, and the
costs and expenses incident thereto, including costs of defense, settlements,
and reasonable attorney's fees, due to injury to any person or property arising
out of or in any way connected with the condition or use of the Premises or
Property, or the improvements or personal property therein or thereon, including
without limitation any liability or injury to the person or property of Tenant,
its agents, officers, employees, guests or invitees. By way of illustration and
not of limitation, Tenant shall indemnify, save harmless, and defend Landlord
from and against any and all liabilities, claims, penalties, forfeitures, and
suits, and the costs and expenses incident thereto, including costs of defense,
settlements, and reasonable attorney's fees, which Landlord may hereafter incur,
become responsible for, or pay out as a result of death or bodily injury to any
person, destruction or damage to any property, contamination of or adverse
effects on the environment, or any violation of governmental laws, regulations,
or orders, caused by 9a) Tenant's failure to comply with any federal, state, or
local law, (b) any negligent or willful act or claim under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) attributable to
Tenant's conduct, or (c) Tenant's breach of any provisions of this Lease. For
purposes of this indemnity, any acts or omission (whether or not they are
negligent, intentional, willful or unlawful) shall be strictly attributable to
Tenant whether performed by it or by employees, agents, assignees,
subcontractors, or others acting for Tenant. Nothing contained herein shall
absolve Landlord from any liability in connection with the willful or gross
negligent acts or omissions of Landlord, its employees, agents, assignees,
subcontractors, or others acting for Landlord. Tenant shall have no obligation
to indemnify Landlord for the willful or gross negligent acts or omissions of
Landlord, its employees, agents, assignees, subcontractors, or others acting for
Landlord. The obligations of Tenant under this subparagraph arising by reason of
any occurrence taking place during the Term of this Lease shall survive the
expiration or earlier termination of this Lease.
(d) Tenant shall assume all normal risk and liability incident to the
use of the Premises upon the signing of this Lease. Tenant, as a material part
of the consideration to be rendered to Landlord, hereby waives all claims
against Landlord for damages to goods, wares, merchandise and loss of business
in, upon or about the Premises and for injury to Tenant, its agents, employees,
invitees or third persons in or about the Premises from any cause arising at any
time, excluding the negligence or willful misconduct of the Landlord.
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13. Landlord's Indemnity.
Landlord shall indemnify, defend, and save harmless Tenant from and
against any and all liabilities, claims, penalties, forfeitures, and suits, and
the costs and expenses incident thereto, including costs of defense, arising out
of Landlord's gross negligence or willful misconduct. In addition, Landlord
shall indemnify, protect, and save Tenant harmless from any and all damages,
losses, liabilities, obligations, penalties, claims, litigation, or demands
which may at any time be imposed upon, incurred by, or asserted against Tenant
and which arise out of the failure of the Premises to comply with applicable
environmental laws and regulations as of the date of this Lease.
14. Insurance.
(a) Subject to Paragraph 14(e), at all times during the term of this
Lease and any extensions thereof, Landlord shall obtain and maintain insurance
insuring the Premises and the Property against damage or destruction of the
Premises, the Property, and Project, including without limitation fire,
"all-risk", earthquake, flood, rent loss, boiler and machinery, plate glass
insurance, and change of condition coverage, in an amount not less than the full
replacement value thereof.
(b) Landlord shall obtain and maintain during the term of this Lease a
policy of comprehensive general liability insurance protecting Landlord and
Landlord's agent against claims for bodily injury, personal injury, and property
damage based upon, involving, or arising out of the ownership, use, occupancy,
or maintenance of the Premises, the Property, and the Project. Such insurance
shall have a combined single limit of not less than One Million Dollars
($1,000,000) per occurrence.
(c) Tenant shall procure and maintain at its own cost at all times
during the term of this Lease and any extensions hereof, fire, hazard and
extended coverage insurance on Tenant's property and the contents of the
Premises in an amount not less than full replacement value thereof, worker's
compensation insurance for all of Tenant's employees at the Premises, and
comprehensive general liability insurance, including coverage for bodily injury,
property damage, personal injury (employee and contractual liability exclusions
deleted), products and completed operations, contractual liability, owner's
protective liability, and broad form property damage with a combined single
limit per occurrence of not less than One Million Dollars ($1,000,000).
(d) All insurance policies required to be carried by Tenant hereunder
shall conform to the following requirements:
(i) The insurer in each case shall carry a designation in
"Best's Insurance Reports" acceptable to Landlord in its reasonable discretion;
(ii) The insurer shall be qualified to do business in the State
of California;
(iii) Tenant's policy shall name Landlord and its agents as an
additional insured on its comprehensive general liability policy and, at
Landlord's request, Tenant's property insurance policy shall carry a lender's
loss payee endorsement in favor of Landlord's lender;
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(iv) Certificates thereof evidencing the coverages required
herein shall be delivered to Landlord at the commencement of the Term and shall
remain in effect throughout the Term. At least thirty (30) days prior to the
expiration of such policies, a replacement certificate thereof shall be
deposited with Landlord;
(v) These policies shall require that Landlord be notified in
writing by the insurer at least thirty (30) days prior to any cancellation or
expiration of such policy, or any reduction in the amounts of insurance carried;
(vi) Each policy shall be primary, not contributing with, and
not in excess of coverage which Landlord may carry;
(vii) All liability insurance required to be carried by Tenant
hereunder shall carry a standard cross-liability endorsement.
(viii) If Tenant obtains any comprehensive general liability
insurance policy on a claims-made basis, Tenant shall provide continuous
liability coverage for claims arising during the entire term of this Lease,
regardless of when such claims are made, either by obtaining an endorsement
providing for an unlimited extended reporting period in the event such policy is
canceled or not renewed for any reason whatsoever or by obtaining new coverage
with a retroactive date the same as or earlier than the expiration with a
retroactive date the same as or earlier than the expiration date of the canceled
or expired policy.
(e) All insurance policies required to be carried by Landlord hereunder
shall conform to the following requirements:
(i) The insurer in each case shall carry a designation in
"Best's Insurance Reports" acceptable to Tenant in its reasonable discretion;
(ii) The insurer shall be qualified to do business in the State
of California;
(iii) Landlord's policy shall name Tenant as an additional
insured on its comprehensive general liability policy;
(iv) Certificates thereof evidencing the coverages required
herein shall be delivered to Tenant at the commencement of the Term and shall
remain in effect throughout the Term. At least thirty (30) days prior to the
expiration of such policies, a replacement certificate thereof shall be
deposited with Tenant;
(v) These policies shall require that Tenant be notified in
writing by the insurer at least thirty (30) days prior to any cancellation or
expiration of such policy, or any reduction in the amounts of insurance carried;
(vi) Each policy shall be primary, not contributing with, and
not in excess of coverage which Tenant may carry;
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(vii) All liability insurance required to be carried by Landlord
hereunder shall carry a standard cross-liability endorsement.
(viii) If Landlord obtains any comprehensive general liability
insurance policy on a claims-made basis, Landlord shall provide continuous
liability coverage for claims arising during the entire term of this Lease,
regardless of when such claims are made, either by obtaining an endorsement
providing for an unlimited extended reporting period in the event such policy is
canceled or not renewed for any reason whatsoever or by obtaining new coverage
with a retroactive date the same as or earlier than the expiration date of the
canceled or expired policy.
15. Common Areas and Parking.
The Common Areas of the Project shall be at all times under Landlord's
exclusive control. Landlord reserves the right to change the entrances, exits,
traffic lanes and the boundaries and locations of parking areas, as long as
Tenant's business is not materially disrupted. Landlord shall keep Common Areas
in clean and orderly condition. All vehicles of Tenant, its agents, employees
and invitees shall be parked only in designated parking areas in the Common
Areas of the Project.
16. Entry by Landlord.
Landlord reserves the right to enter the Premises to inspect the same,
to submit the Premises to prospective purchasers, insurance representatives,
Landlord's agents (and associated parties), or lenders and, within the last nine
(9) months of the Lease Term, to prospective tenants, to post notices of
nonresponsibility, to hereby waive any claim for damages to Tenant's business,
any loss of occupancy or quiet enjoyment of the Premises, and any other loss
occasioned thereby. Landlord shall have the right to use any and all means which
Landlord may deem proper to gain entry to the Premises in the event of an
emergency, without any liability to Tenant. Any entry to the Premises by
Landlord in accordance with the provisions of this Paragraph shall not be
construed to be a forcible or unlawful entry into the Premises, or an eviction
of Tenant from the Premises.
17. Assignment and Subletting.
(a) Tenant (but not Tenant's assignee) may assign or sublet this Lease
with the consent of Landlord, but only if the following terms and conditions are
met and fulfilled:
(i) Tenant shall give Landlord not less than twenty (20) days
prior written notice of Tenant's intention to assign or to sublet this Lease.
Such notice shall set forth: the name of the assignee or sublessee (along with a
description and recent financial statements of assignee or sublessee); the date
that the assignment or sublease is to be effective; and the use to which the
assignee or sublessee intends to put the Premises, and shall contain a copy of
the proposed instrument of assignment or sublease.
(ii) The instrument of assignment or the sublease shall be in
writing.
(iii) Tenant's assignee shall assume the obligations of Tenant
under this Lease.
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(iv) The assignment or sublease, and Landlord's acceptance
thereof, shall not relieve Tenant of its primary obligation for the faithful
performance of all of the covenants, terms, and conditions hereof on Tenant's
part to be performed, including the obligation for payment of rent when due
hereunder.
Tenant's right to assignment or to sublease shall apply solely to
Tenant, and Tenant's assignee or sublessee shall have no right to further assign
or to sublet this lease or any portion thereof without Landlord's prior written
consent, which consent Landlord may grant or withhold at its sole and absolute
discretion.
(b) No interest of Tenant in this Lease shall be assignable by operation
of law. Each of the following acts shall be considered an involuntary
assignment:
(i) The corporate dissolution of Tenant;
(ii) If Tenant becomes bankrupt or insolvent, makes an
assignment for the benefit of creditors, or institutes a proceeding under the
Bankruptcy Act in which Tenant is the bankrupt;
(iii) If a writ of attachment or execution is levied on this
Lease;
(iv) If, in any action or proceeding to which Tenant is a
party, a receive is appointed with authority to take possession of the Premises;
or
(v) The foreclosure by any person holding a security interest
in this Lease.
An involuntary assignment shall be voidable and, at Landlord's election, shall
constitute an Event of Default by Tenant, thereupon giving rise to the remedies
contained in this Paragraph.
(c) In the event of any subassignment, sub-sublease, or involuntary
assignment without the prior written consent of Landlord, Landlord may either;
(i) immediately terminate this Lease; or
(ii) on ten (10) days written notice to Tenant, elect to
continue this Lease in full force and effect, and accept performance from such
subtenant, involuntary assignee, or subassignee; in such event, such subtenant,
involuntary assignee, or subassignee shall execute documents setting forth the
provisions of Paragraph 17(b) above; and the subtenant, involuntary assignee, or
subassignee shall have no right to exercise any option in this Lease.
(d) Landlord may accept any rent or performance of Tenant's obligations
from any person other than Tenant. Neither a delay in such approval or
disapproval, nor an acceptance of rent or other performance, shall constitute a
waiver or estoppel of Landlord's right to exercise the remedies herein set
forth.
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(e) The Landlord, as consideration in connection with such transfer,
assignment, or subletting, shall be entitled to receive sixty percent (60%) of
all consideration (the excess and/or differential of the rent payable to
Landlord and rent, additional rent, and any other consideration paid by
Sublessee or Assignee to Tenant) payable in connection therewith, including
without limitation, any additional rent or other charges or any lump sum
settlement. In connection with such transfer, Landlord reserves the right to
make modifications to the other provisions of the Lease, including the
cancellation of any options to extend the term of this Lease, as Landlord deems
advisable.
18. Damage by Casualty.
(a) Definitions:
(i) "Partial Damage to the Premises" shall mean damage or
destruction to the Premises, other than alterations and improvements owned by
Tenant, which can be repaired within one hundred twenty (120) days of the date
of the casualty, and the repair cost of which damage or destruction is less than
sixty percent (60%) of the then Replacement Cost of the Premises immediately
prior to such damage or destruction, excluding from such calculation the value
of the land upon which the Premises are situated.
(ii) "Total Destruction of the Premises" shall mean damage or
destruction to the Premises, other than alterations and improvements owned by
Tenant, the repair cost of which damage or destruction is greater than sixty
percent (60%) of the then Replacement Cost of the Premises immediately prior to
such damage or destruction, excluding from such calculation the value of the
land upon which the Premises are situated.
(iii) "Insured Loss" shall mean damage or destruction to the
Premises, other than alterations and improvements owned by Tenant, which was
caused by an event for which either party maintained insurance, and for which
insurance proceeds are available to Landlord and not retained and otherwise
applied by Landlord's Lender.
(iv) "Landlord's Lender" shall mean any lender who holds a
mortgage or deed of trust against the Premises as security for a loan made to
Landlord.
(v) "Replacement Cost" shall mean the cost to repair or to
rebuild the Premises at the time of the occurrence to their condition
immediately prior thereto, including demolition, debris removal, and upgrading
required by the operation of applicable building codes, ordinances, or laws, and
without deduction for depreciation.
(b) Partial Damage. If there is a Partial Damage to the Premises which
is an Insured Loss, then Landlord shall utilize the insurance proceeds therefrom
to rebuild the Premises (other than Tenant's alterations and improvements) as
soon as reasonably possible and this Lease shall continue in full force and
effect; provided, however, that is Landlord's repairs are not completed within
one hundred twenty (120) days from the date of the damage or destruction, which
period shall be extended by the number of days lost in the event of labor
strikes, acts of God, or any other similar
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causes beyond the control of Landlord, then Tenant may, by written notice to
Landlord, terminate this Lease.
If there is a Partial Damage to the Premises which is not an Insured
Loss, then Landlord shall either:
(i) rebuild the Premises (other than Tenant's alterations and
improvements) as soon as reasonably possible at Landlord's sole expense (except
if the damage or destruction is caused by the negligence or willful misconduct
of Tenant, in which case, if the loss is not an Insured Loss, Tenant shall pay
to rebuild the Premises in accordance with Paragraph 18(f) below) and this Lease
shall continue in full force and effect; provided, however, that if Landlord's
repairs are not completed within one hundred twenty (120) days from the date of
the damage or destruction, which period shall be extended by the number of days
lost in the event of labor strikes, acts of God, or any other similar causes
beyond the control of Landlord, then Tenant may, by written notice to Landlord,
terminate this Lease; or
(ii) give Tenant written notice not more than thirty (30) days
from the date of the damage or destruction, electing to terminate this Lease not
more than sixty (60) days from the date of such notice.
(c) Total Damage. If there is a Total Destruction of the Premises,
whether or not such Total Destruction is an Insured Loss, then Landlord, by
written notice to Tenant within thirty (30) days of the casualty, may terminate
this Lease, which termination shall be effective not more than sixty (60) days
from the date of such notice.
If this Lease is not terminated, then Landlord shall rebuild the
Premises (other than Tenant's alterations and improvements), using any available
insurance proceeds, as soon as reasonably possible at Landlord's sole expense
(except if the damage or destruction is caused by the negligence or willful
misconduct of Tenant, in which case, if the loss is not an Insured Loss, Tenant
shall pay to rebuild the Premises in accordance with Paragraph 18(f) below) and
this Lease shall continue in full force and effect.
(d) Damage Near End of Term. Notwithstanding the foregoing provisions,
in the event of a Partial Destruction of the Premises or a Total Destruction of
the Premises during the last four (4) months of the term of this Lease, then
either party may elect to terminate this Lease by written notice to the other
party given within seven (7) days of the date of the casualty. If no such
written notice is given, then the foregoing provisions shall apply.
(e) Abatement of Rent. In the event of a Partial Destruction of the
Premises, from the date of the casualty until repairs are effected or this Lease
is terminated pursuant to the terms hereof, Base Rent and Additional Rent shall
be abated in proportion to the degree to which Tenant's use of the Premises is
impaired; but all of the other terms, covenants, and conditions of the Lease
shall remain in full force and effect. In the event of a Total Destruction of
the Premises, from the date of
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the casualty until repairs are effected or this Lease is terminated pursuant
to the terms hereof, Base Rent and Additional Rent shall be totally abated.
(f) Damage Due to Tenant's Negligence or Willful Misconduct. If the
damage to or destruction of the Premises is due to Tenant's gross negligence or
willful misconduct, there shall be no abatement of Base Rent or Additional Rent,
and (i) if the loss is an Insured Loss, Tenant shall, upon demand, pay to
Landlord an amount equal to the applicable deductible under Landlord's policy of
insurance; or (ii) if the loss is not an Insured Loss, then Tenant, at its sole
cost and expense, shall promptly repair and rebuild the Premises.
(g) Waive Statutes. Landlord and Tenant agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of the Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
19. Eminent Domain and Condemnation.
(a) Total or Substantial Condemnation. If at any time during the term of
this Lease the whole of the Premises shall be taken for any public or
quasi-public use, under any statute, or by right of eminent domain, except as
provided in subparagraph (c) hereof, this Lease shall terminate on the date of
such taking and the Base Rent and Additional Rent shall be apportioned as of the
date of the taking. If less than all but more than twenty-five percent (25%) of
the Premises shall be so taken, either party may, by written notice to the other
party within sixty (60) consecutive days after such taking, terminate this
Lease. If either party so exercises its option to terminate, then this Lease and
the term hereof shall end on the date specified in the notice and both Base Rent
and Additional Rent shall be apportioned and paid to the date of such taking.
(b) Partial Condemnation. If less than all of the Premises shall be
taken and unless either party has exercised its option to terminate pursuant to
subparagraph (a) hereof, this lease shall be unaffected, except the Tenant shall
be entitled to a pro rata abatement of Base Rent and Additional Rent in the
proportion that the floor area of the Premises so taken bears to the area of the
Premises demised hereunder immediately prior to such taking.
(c) Temporary Taking. If the use or occupancy of the whole or more than
twenty-five percent (25%) of the Premises is temporarily taken for a public or
quasi-public use for a period less than the balance of the term, the Tenant
shall have the option to terminate this Lease on the date of the taking. If this
lease remains in effect the Tenant shall be entitled to an abatement of Rent and
Additional Rent proportionate to the area of the Premises taken, or, at its
option, receive that portion of the award for such taking which represents
compensation for the value of the Tenant's leasehold estate for the original
term or any exercised extension thereof demised hereunder in which case Tenant
shall continue to pay in full the Rent and Additional Rent when due.
(d) Damages. The Landlord shall be entitled to receive the entire award
or awards in any condemnation proceeding without deduction therefrom for any
estate vested in the Tenant and the
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Tenant shall receive no part of such award or awards from the Landlord or in the
proceedings except as otherwise expressly provided in this Paragraph. Subject to
the foregoing, the Tenant hereby assigns to the Landlord any and all of its
right, title, and interest in or to such award or awards or any part thereof.
(e) Tenant's Improvements. In the event of a taking of any of Tenant's
improvements or alterations, the Tenant shall be entitled to receive out of the
award, or, if allowed by law, to appear, claim, prove, and receive in the
condemnation proceedings (i) the unamortized value over the term of this Lease
of the Tenant's improvements and alterations to the Premises, depreciated as
allowed by law or otherwise proven from the date of installation thereof to the
date of the taking, minus the amount of Landlord's allowance, if any, provided
the same shall have been installed by or at the Tenant's expense but regardless
of whether the improvements and alterations might be considered part of the
Premises or real property or shall be or become the property of the Landlord
under the terms of this Lease; (ii) the value of the Tenant's fixtures, minus
the amount of Landlord's allowance, if any; (iii) the cost of moving to new
premises; and (iv) special awards or allowances provided by law to tenants in
the event their premises are taken by eminent domain.
(f) Restoration of Premises. If there is a taking hereunder and this
Lease is continued, the Landlord shall, at its expense, and upon receipt of any
award or awards deemed sufficient by an independent architect selected by
Landlord and approved by Tenant for the purpose, proceed with reasonable
diligence to repair, alter, and restore the Premises as a complete architectural
unit of substantially the same proportionate usefulness, design, and
construction existing immediately prior to the date of taking, except that the
Landlord may elect to reconstruct the interior of the Premises either in
accordance with the original specification or in accordance with single line
control drawings and specifications furnished by Tenant. If Landlord agrees to
so rebuild the Premises in accordance with Tenant's specifications, then no
later than thirty (30) days before commencement of such repair and
reconstruction, the Tenant shall pay to the Landlord a sum equal to the
difference between an independent architect of Landlord's estimate of (i) the
cost to be incurred by the Landlord to complete reconstruction of the Premises
in accordance with Tenant's specifications, and (ii) the cost that the
independent architect estimates would have been incurred had Landlord
reconstructed the Premises in accordance with the original construction drawings
and specifications applicable to the Premises (as such improvements may have
been altered by Landlord during the term prior to the taking) to the extent that
such improvements have been constructed for the Tenant by the Landlord, at the
Landlord's expense, prior to and during the term hereof; provided, however, that
Landlord shall pay the difference between the actual cost incurred by Landlord
to complete reconstruction in accordance with Tenant's specifications and the
sum paid by Tenant pursuant hereto within fifteen (15) days after completion of
such reconstruction and delivery of the Premises to Tenant.
(g) Transfer in Lieu. Taking by condemnation or eminent domain hereunder
shall include the exercise of any similar governmental power and any sale,
transfer, or other disposition of the Premises in lieu of or under threat of
condemnation.
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20. Default by Tenant.
(a) Event of Default Defined. The following events (herein referred to
as an "Event of Default") shall constitute a default by Tenant hereunder:
(i) Tenant's failure to pay (without notice) when due the Base
Rent, Additional Rent, or any other sums payable hereunder within five (5)
business days of when it is due; or
(ii) Tenant's neglect or failure to perform or observe any of
the other covenants herein contained on Tenant's part to be performed or
observed and Tenant's failure to remedy the same within thirty (30) days after
Landlord shall have mailed to Tenant written notice specifying such neglect or
failure, or such further period as Tenant may reasonably require so long as
Tenant commences to cure such default within such thirty (30) day cure period
and diligently proceeds to effectuate such cure thereafter; or
(iii) Tenant shall violate the provisions of Paragraph 17 with
respect to involuntary assignment, or Tenant's assignee or sublessee shall
violate the provisions of said Paragraph regarding further assignment or
subletting.
(b) Remedies. Upon an Event of Default by Tenant, Landlord may at any
time thereafter, in its sole discretion, without limiting Landlord in the
exercise of a right or remedy which Landlord may have by reason of such default
or breach, elect to pursue one or more of the following remedies, which are
cumulative and in addition to any remedies now or later allowed by law:
(i) Landlord may continue this Lease in full force and effect,
and the Lease will continue in effect as long as Landlord does not terminate
Tenant's right to possession, and Landlord shall have the right to collect rent
when due. During the period Tenant is in default, Landlord can enter the
Premises and relet them, or any part of them, to third parties for Tenant's
account. Tenant shall be liable immediately to Landlord for all reasonable costs
and expenses incurred by Landlord in mitigation of damages as required by law.
Reletting can be for a period shorter or longer than the remaining term of this
Lease. Tenant shall pay to Landlord the rent due under this Lease on the dates
the rent is due, less the rent Landlord receives from reletting. No act by
Landlord allowed by this Paragraph shall terminate this Lease unless Landlord
notifies Tenant that Landlord elects to terminate this Lease. After Tenant's
default and for as long as Landlord does not terminate Tenant's right to
possession of the Premises, Tenant shall have the right to assign or, with
Landlord's consent, sublet the Premises, but Tenant shall not be released from
liability therefrom. Landlord's consent to a subletting shall not be
unreasonably withheld.
If Landlord elects to relet the Premises as provided in this Paragraph,
rent that Landlord receives from reletting shall be applied to the Payment of:
(A) First, any indebtedness from Tenant to Landlord other
than rent due from Tenant;
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(B) Second, all reasonable costs, including any costs and
expenses incurred in preparing the Premises for reletting, incurred by Landlord
in mitigation of damages as required by law;
(C) Third, rent due and unpaid under this Lease.
After deducting the payments referred to in this Paragraph, any sums remaining
from the rent that Landlord receives from reletting shall be held by Landlord
and applied in payment of future rent as rent becomes due under this Lease. In
no event shall Landlord be entitled to any excess rent received by Landlord. If,
on the date rent is due under this Lease, the rent received from the reletting
is less than the rent due on that date, Tenant shall pay to Landlord, in
addition to the remaining rent due, all costs, including for maintenance,
Landlord incurred in reletting that remain after applying the rent received from
the reletting as provided in this Paragraph.
(ii) Landlord can terminate Tenant's right to possession of the
Premises at any time. No act by Landlord other than giving notice to Tenant
shall terminate this Lease. Acts of maintenance or efforts to relet the Premises
shall not constitute a termination of Tenant's right to possession. On
termination, Landlord shall have the right to recover from Tenant:
(A) The worth, at the time of the award, of the unpaid
rent that had been earned at the time of the termination of the Lease;
(B) The worth, at the time of the award, of the amount by
which the unpaid rent that would have been earned after the date of termination
of this Lease until the time of award exceeds the amount of the loss of rent
that Tenant proves could have been reasonably avoided;
(C) The worth, at the time of the award, of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of the loss of rent that Tenant proves could have been
reasonably avoided; and
(D) Any other amount, and court costs, necessary to
compensate Landlord for all detriment proximately caused by Tenant's default.
As used in subparagraphs (A) and (B) above, the "worth at the time of
the award" is to be computed by allowing interest at the maximum rate an
individual can charge. As used in subparagraph (C) above, the "worth at the time
of the award" is to be computed by discounting the amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time of the award, plus one
percent (1%).
(iii) Landlord, at any time after an Event of Default, can cure
the default at Tenant's cost. If Landlord at any time, by reason of a breach of
this Lease by Tenant, pays any sum or does any act that requires the payment of
any sum, the sum paid by Landlord shall be due immediately from Tenant to
Landlord, together with interest thereon at the maximum rate an
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individual can charge from the date the sum is paid by Landlord until reimbursed
by Tenant. The sum, together with interest thereon, shall be Additional Rent.
(iv) Pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of the State of California.
21. Landlord's Breach; Tenant's Remedies.
Landlord shall be in default of this Lease if Landlord fails or refuses
to perform any provision of this Lease that it is obligated to perform if the
failure to perform is not cured within thirty (30) days after notice of the
default has been given by Tenant to Landlord. If the default cannot reasonably
be cured within thirty (30) days, Landlord shall not be in default of this Lease
if Landlord commences to cure the default within the thirty (30) day period and
diligently and in good faith continues to cure the default.
Tenant, at any time after the Landlord commits a default, and as its
sole remedy therefor, can cure the default at Landlord's cost. If Tenant at any
time, by reason of Landlord's default, pays any sum or does any act that
requires the payment of any sum, the sum paid by Tenant shall be due immediately
from Landlord to Tenant, together with interest thereon at the maximum rate an
individual can charge from the date the sum is paid by Tenant until reimbursed
by Landlord. If Landlord fails to reimburse Tenant as required by this
Paragraph, Tenant shall have the right to withhold from future rent due the sum
Tenant has paid until Tenant is reimbursed in full for the sum and interest on
it.
22. Subordination, Non-disturbance, and Attornment.
This Lease is subordinate to any mortgage or deed of trust now placed on
the Project and to any renewal, modification, consolidation, replacement or
extension of such mortgage or deed of trust. This clause shall be
self-operative, and no further instrument of subordination shall be required.
Within five (5) days after written request by Landlord, Tenant shall execute any
documents which may be desirable to confirm the subordination of this Lease.
Landlord is hereby irrevocably appointed agent and attorney-in-fact of Tenant to
execute all such subordination instruments in the event Tenant fails to execute
said instruments within fifteen (15) days after notice from Landlord demanding
the execution thereof. At the request of Tenant, Landlord shall request a
subordination, attornment, and non-disturbance agreement from the lender,
although Landlord makes no representation that such subordination, attornment,
and non-disturbance agreement can be obtained.
23. Signs and Advertising.
Tenant shall have the right, at its sole cost and expense, to place a
sign on the Project monument/directional signage, as designated by Landlord.
Tenant shall place no signs on the roof of the Premises. Tenant shall place no
sign on the exterior of the Premises without Landlord's prior written consent,
which consent shall not be unreasonably withheld or delayed.
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24. Brokers.
Landlord and Tenant represents that they have dealt only with Pacific
Equity Partners, LLC ("Broker") in the negotiation of this Lease. Tenant and
Landlord acknowledge and agree that the Broker acted as a Transaction Broker,
defined as a broker assisting the Landlord or Tenant and/or both throughout this
real estate transaction with communication, advice, negotiation, contracting and
closing without being an agent or advocate for any of the parties. The parties
to a transaction are not legally responsible for the actions of a Transaction
Broker and a Transaction Broker does not owe those parties the duties of an
agent. However, a Transaction Broker does owe the parties a number of statutory
obligations and responsibilities, including using reasonable skill and care in
the performance of any oral or written agreement. A Transaction Broker must also
make the same disclosures as agents about adverse material facts concerning a
property or a buyer's financial ability to perform the terms of a transaction
and whether the buyer intends to occupy the property. No written agreement is
required.
25. Notices.
All notices required or permitted by this Lease shall be in writing and
may be delivered in person (by hand or by messenger or by overnight courier
service), or may be sent by regular, certified, or registered mail or by United
State Postal Service Express Mail, with postage prepaid, or by facsimile
transmission, and shall be deemed sufficiently given if served or delivered in a
manner specified in this Paragraph 25. The addresses for delivery of notice
herein shall be:
To Landlord at: Drever Partners, Inc.
Four Embarcadero Center
Suite 1810
San Francisco, CA 94111
Attn: Richard Kalish
With Copies to: McIntosh Properties
3000 Sand Hill Road
Building 2, Suite 100
Menlo Park, CA 94025
Attn: Chip McIntosh
With Copies to: Pacific Equity Partners, LLC
Two North Cascade Avenue
Suite 760
Colorado Springs, CO 80903-1614
Attn: Gary L. Christensen
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To Tenant: Finisar Corporation
274 Ferguson Drive
Mountain View, CA 94043
Attn: Jerry Rawls
Either party may by written notice to the other specify a different address for
notice purposes. Hand-delivered notices shall be deemed given when actually
received by Landlord or Tenant. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, and if no delivery date is shown, the postmark thereon. If
sent by regular mail the notice shall be deemed given forty-eight (48) hours
after the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postage Service or representative of
the overnight courier. If any notice is transmitted by facsimile transmission or
similar means, the same shall be deemed served or delivered on telephone
confirmation of receipt of the transmission thereof. If notice is received on a
Sunday or legal holiday, it shall be deemed received on the next business day.
26. Estoppel Statement.
Tenant shall within five (5) days of Landlord's written request therefor
execute, acknowledge and deliver to Landlord or Landlord's designee a statement
in writing including the following information (but not limited to) (a)
certifying that this Lease constitutes the entire agreement between Landlord and
Tenant and is unmodified and in full force and effect (or if there have been
modifications, that the same is in full force and effect as modified and stating
the modification(s); (b) the dates to which the rent and other charges hereunder
have been paid, and the amount of any security deposited with Landlord; (c) that
the Premises have been completed on or before the date of such letter and that
all conditions precedent to this lease taking effect have been carried out (or
specifying in what way they have not); (d) that Tenant has accepted possession,
that the term has commenced, that the Tenant is occupying the Premises, and that
Tenant knows of no default under this Lease by Landlord and that to the best of
Tenant's knowledge there are no defaults or offsets which Tenant has against
enforcement of this Lease by Landlord; (e) the actual Commencement Date and
expiration date of the term of this Lease; and (f) that the Premises are open
for business. Any such Estoppel Certificate may be conclusively relied upon by
Landlord and any prospective purchaser or encumbrance of the Premises or
Project. In the event that such Estoppel Certificate is not so delivered by
Tenant as required herein within ten (10) days of Landlord's request therefor,
Tenant will be conclusively deemed for all purposes to have signed and to be
bound by such Estoppel Certificate in a form which, inter alia, (i) states that
the Lease has not been modified; (ii) states that all conditions precedent to
the Lease taking effect have been carried out; and (iii) states that Tenant
knows of no default under the Lease.
27. Attorney's Fees.
(a) If either party becomes a party to any litigation concerning this
Lease, the Premises, or the Project, by reason of any act or omission of the
other party or its authorized representatives,
-25-
<PAGE> 34
the party that causes the other party to become involved in the litigation shall
be liable to that party for reasonable attorney's fees, court costs,
investigation expenses, discovery costs and costs of appeal incurred by it in
the litigation.
(b) If either party commences an action against the other party arising
out of or in connection with this Lease, the prevailing party shall be entitled
to have and recover from the losing party, reasonable attorney's fees, costs of
suit, investigation costs and discovery costs, including costs of appeal.
(c) Should it be necessary for either party to employ legal counsel to
enforce any of the provisions herein contained, the non-prevailing party shall
pay all attorney's fees and court costs reasonably incurred thereby.
(d) Each party's obligations under this Paragraph shall survive the
expiration of the term or any earlier termination of this Lease. This Paragraph
is intended to supplement (and not to limit) other provisions of this Lease
pertaining to indemnities and/or attorney's fees.
28. Surrender of Premises; Holding Over.
(a) Upon expiration or earlier termination of this Lease, Tenant shall
surrender to Landlord the Premises and all of Tenant's improvements and
alterations thereon in good operating order, condition, and state of repair,
clean and free of debris (except for ordinary wear and tear occurring after
Tenant's last necessary maintenance, and subject to the provisions of Paragraph
18, relating to the destruction or partial destruction of the Premises), except
for alterations and improvements that Tenant is required to remove by written
election of the Landlord pursuant to Paragraph 10(e), above. Tenant shall remove
all of its personal property and trade fixtures from the Premises prior to the
expiration or earlier termination of this Lease. Tenant shall perform at its
sole cost and expense all restoration made necessary by its removal of
alterations and improvements, personal property, and trade fixtures.
Landlord may elect to retain or to dispose of in any manner any
alterations or improvements that Tenant is required to remove pursuant to
Paragraph 10(e) above, or Tenant's trade fixtures or personal property that
Tenant does not remove from the Premises on expiration or earlier termination of
this Lease by giving at least ten (10) days written notice to Tenant. Title to
any such alterations, improvements, trade fixtures, or personal property that
Landlord elects to retain or to dispose of on expiration of the aforesaid ten
(10) day period shall vest in Landlord. Tenant waives all claims against
Landlord and Landlord's agents for any damage to Tenant resulting from
Landlord's retention or disposition of any such alterations, improvements, trade
fixtures, and/or personal property, and Tenant shall be liable to Landlord for
Landlord's costs and expenses for storing, removing, and disposing of same, and
for the cost of restoring the Premises thereafter to the condition required by
subparagraph (a), above.
(b) Tenant has no right to retain possession of the Premises or any part
thereof beyond the expiration or earlier termination of this Lease. If Tenant,
with Landlord's written consent,
-26-
<PAGE> 35
remains in possession of the Premises after the expiration or earlier
termination of this Lease, such consensual possession shall be deemed to be a
month-to-month tenancy terminable on thirty (30) days written notice given at
any time by either party. During such month-to-month tenancy, all of the terms
and conditions of this Lease shall remain in full force and effect, except (i)
the Base Rent during the holdover period shall be one hundred fifty percent
(150%) of the Base Rent in force during the month immediately preceding the
expiration or earlier termination of the Lease, and (ii) any option or options
set forth in the Lease to extend the term thereof shall not be exercisable
during any such holdover period, but shall lapse upon the expiration date or
date of the earlier termination of the Lease.
29. No Waste.
Tenant shall commit no waste upon the Premises or the Project.
30. No Waiver.
The waiver by Landlord of any breach of any Lease provision shall not be
deemed to be a permanent waiver of such Lease provision or a waiver of any
subsequent breach of the same or any other term, covenant or condition therein
contained. The subsequent acceptance of rent hereunder by Landlord shall not be
deemed to be a waiver of any preceding breach by Tenant of any provision of this
Lease, other than the failure of Tenant to pay the particular rent so accepted,
regardless of Landlord's knowledge of such preceding breach at the time of
acceptance of such rent. The consent or approval by either party to or of any
act by the other party of a nature requiring consent or approval shall not be
deemed to waive or render unnecessary consent to approval of any subsequent
similar act.
31. Effect of Landlord's Conveyance.
If, during the Term of this Lease, Landlord shall assign or sell, in
whole or in part, its interest in the Project of which the Premises forms a
part, or the Premises, all of which is hereby permitted and which Landlord shall
be allowed to advertise for at any time, then from and after the effective date
of the sale or conveyance, Landlord shall be released and discharged from any
and all obligations and responsibilities under this Lease or arising out of any
act, occurrence or omission relating to the Project or Premises which occurs
after the consummation of such sale, exchange, or assignment, except those
already accrued; provided, however, that if the purchaser or assignee expressly
assumes in writing all of Landlord's liabilities under this Lease, whensoever
accrued, then Landlord shall be released and discharged from any and all
obligations and responsibilities under this Lease, whensoever accrued. If any
security be given by Tenant to secure the faithful transfer and/or deliver the
security, as such, to the purchaser or assignee and thereupon Landlord shall be
discharged from any further liability in reference thereto. Landlord shall give
immediate notice of such sale and/or assignment of Lease to Tenant upon its
occurrence.
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<PAGE> 36
32. Authority to Execute Lease.
Tenant is a duly formed corporation in the state of California, and each
individual executing this Lease on behalf of Tenant represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of Tenant in
accordance with a duly adopted Corporate Resolution of Tenant, in accordance
with the bylaws of the Tenant, and certifying that Tenant is duly organized
under the laws of its State of formation, and that this Lease is binding upon
the Tenant in accordance with its terms. Tenant shall furnish with the executed
lease a copy of the Corporate Resolution.
33. Mortgage Protection.
Tenant shall give Landlord's lender, by registered mail, a copy of any
notice of default service upon Landlord, provided that prior to such notice
Tenant has been notified, in writing (by way of notice of assignment of rents
and leases, or otherwise), of the identity and address of Landlord's Lender.
34. Time of the Essence.
Time is of the essence of this Lease with respect to each and every
Paragraph thereof.
35. Covenant of Quiet Possession.
Upon Tenant paying the rent reserved hereunder and observing and
performing all of the covenants, conditions and provisions on Tenant's part to
be observed and performed hereunder, Tenant shall have quiet possession of the
Premises for the entire term hereof, subject to all the provisions of this
Lease.
36. General Provisions.
(a) The captions in the margins and the headings of the several
Paragraphs of this Lease are for convenience only and are not a part of this
Lease and do not in any way limit or amplify the terms and provisions of this
Lease.
(b) Whenever the singular number is used in this Lease and when required
by the context, the same shall include the plural, the plural shall include the
singular, and the masculine gender shall include the feminine and neuter
genders, and the word "person" shall include corporation, limited liability
company, partnership, firm or association. References in this Lease to terms
such as "herein", "hereof", and "hereunder" shall be construed to reference any
applicable provisions contained within the entire Lease.
(c) This Lease contains all of the agreements of the parties hereto with
respect to any matter covered or mentioned in this Lease, and no prior to
contemporaneous agreements or understandings, whether written or oral,
pertaining to any such matters shall be effective for any purpose. No provisions
of this Lease may be amended or added to except by an agreement in writing
signed by the parties hereto or their permitted successors in interest.
-28-
<PAGE> 37
(d) Except as otherwise expressly stated, each payment required to be
made by Tenant shall be in addition to and not in substitution for other
payments to be made by Tenant.
(e) The invalidity of any provision of this Lease, as determined by a
court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
(f) The preparation and submission of a draft of this Lease by either
party to the other shall not constitute an offer nor shall either party be bound
to any terms of this Lease or the entirety of the Lease itself until both
parties have fully executed a final document and an original signature document
has been received by both parties. Until such time as described in the previous
sentence, either party is free to terminate negotiations with no obligations to
the other. This Lease may be fully executed in any number of counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(g) Under the terms of this Lease, numerous charges are and may be due
from Tenant to Landlord including, without limitation, Common Area Costs, Real
Estate Taxes, insurance reimbursement and other items of a similar nature
including advances made by Landlord in respect of Tenant's default at Landlord's
option. If, at any time during the Term, there is a bona fide dispute between
the parties as to the amount due for any of such charges claimed by Landlord to
be due, the undisputed amount demanded by Landlord shall be paid by Tenant until
the resolution of the dispute between the parties by litigation, agreement or
otherwise.
(h) It is understood and agreed that the remedies herein given to either
party shall be cumulative, and the exercise of any one remedy by either party
shall not be to the exclusion of any right to exercise any other remedy.
(i) This Lease shall be construed and enforced in accordance with the
laws of the State of California. Venue and jurisdiction shall be proper in State
Court in Santa Clara County, and/or in Federal Court in the Northern District of
California.
(j) Neither this Lease nor any memorandum or recitation of its terms
shall be recorded without the prior written consent of Landlord.
(k) Nothing contained herein shall be deemed or construed by anyone as
creating the relationship of principal and agent, partnership, or joint venture
between the parties hereto.
(l) Subject to the limitations of Paragraph 17, above, the covenants,
agreements and obligations herein contained shall extend to, bind and inure to
the benefit not only of the parties hereto but their respective personal
representatives, heirs, successors and assigns.
(m) Whenever a period of time is herein provided for either party to do
or perform any act or thing, that party shall not be liable or responsible for
any delays, and applicable periods for performance shall be extended
accordingly, due to strikes, lockouts, riots, acts of God, shortages of labor or
materials, restrictions, laws or regulations, or any other cause or causes,
whether similar or dissimilar to those enumerated, beyond its reasonable
control. The provisions of this Subparagraph
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<PAGE> 38
shall not operate to excuse Tenant from prompt payment of Base Rent, Additional
Rent or other monetary payments required by the terms of this Lease.
(n) Landlord shall have the right to grant any easements on, over, under
and above the Premises for such purposes as Landlord determines, provided that
such easements will not materially interfere with Tenant's then-current or
projected use of the Premises.
(o) No provision of this Lease shall be construed against or interpreted
to the disadvantage of any party by any court or other governmental or judicial
authority by reason of such party having or being deemed to have drafted,
devised or imposed such provision.
(p) Unless specifically set forth therein to the contrary, when
reference is made to "Landlord's consent" or "Landlord's prior written consent,"
said consent shall be granted or denied in Landlord's sole discretion.
(q) At any time during this Lease, Landlord may require financial
statements of Tenant (and any sub-tenant and/or assignee) for a designated
period of time. Tenant shall furnish Landlord the requested information within
fifteen (15) days of request.
-30-
<PAGE> 39
IN WITNESS WHEREOF, the parties have executed this Lease, to be
effective as of the 30th day of May, 1997.
LANDLORD: DM GROUP VIII, a California
limited partnership, by
/s/ Maxwell Bruce Drever
-------------------------------------
Maxwell Bruce Drever
General Partner
/s/ Arthur T. McIntosh
-------------------------------------
Arthur T. McIntosh
General Partner
Drever, McIntosh & Company, Inc., a
California corporation,
general partner, by
/s/ Maxwell Bruce Drever
-------------------------------------
Maxwell Bruce Drever
President
DM GROUP VIII-E, a California
limited partner, by
/s/ Maxwell Bruce Drever
-------------------------------------
Maxwell Bruce Drever
General Partner
/s/ Arthur T. McIntosh, III
-------------------------------------
Arthur T. McIntosh, III
General Partner
Drever, McIntosh & Company, Inc., a
California corporation,
general partner, by
/s/ Maxwell Bruce Drever
-------------------------------------
Maxwell Bruce Drever
President
-31-
<PAGE> 40
TENANT: FINISAR CORPORATION, a
California corporation, by
/s/ Jerry Rawls
--------------------------------------
Its:President
----------------------------------
--------------------------------------
Its:
----------------------------------
-32-
<PAGE> 41
EXHIBIT "A"
LEGAL DESCRIPTION OF PREMISES
All of that certain real property situate in the City of Mountain View,
County of Santa Clara, State of California, described as follows:
Unit 17 as shown and defined on the Condominium Plan for Lot 1, Tract
No. 7110, attached to and made a part of as Exhibit "A" on "The Combined
Condominium Declaration and Covenants, Conditions, and Restrictions" recorded
August 19, 1982, in Book G972, Page 697, Official Records of Santa Clara County,
and being contained within Lot 1 of Tract 7110, filed for record on June 25,
1981, in Book 486 of Maps, Pages 42 and 43, Official Records of Santa Clara
County.
<PAGE> 42
EXHIBIT "B"
LEGAL DESCRIPTION OF PROJECT
All of that certain real property situate in the City of Mountain View,
County of Santa Clara, State of California, described as follows:
Parcel One
Units 18A and 18B as shown and defined on the Condominium Plan for Lot
1, Tract No. 7110, attached to and made a part of as Exhibit "A" on "The
Combined Condominium Declaration and Covenants, Conditions, and Restrictions"
recorded August 19, 1982, in Book G972, Page 697, Official Records of Santa
Clara County, and being contained within Lot 1 of Tract 7110, filed for record
on June 25, 1981, in Book 486 of Maps, Pages 42 and 43, Official Records of
Santa Clara County.
Parcel Two
Units 1 through 17 and 18A and 18B, and all of the Common Area and
restricted Common Area as shown and defined on the Condominium Plan for Lot 1,
Tract No. 7110, attached to and made a part of as exhibit "A" on "The Combined
Condominium Declaration and Covenants, Conditions, and Restrictions" recorded
August 19, 1982, in Book G972, Page 697, Official Records of Santa Clara county,
and being contained within lot 1 of tract 7110, filed for record on June 25,
1981, in Book 486 of Maps, Pages 42 and 43, Official Records of Santa Clara
County.
<PAGE> 43
EXHIBIT C
[Floor Plan Graphic]
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors
Turnstone Systems, Inc.
We consent to the use of our report dated November 5, 1999 on the balance
sheet of Turnstone Systems, Inc., as of December 31, 1998, and the related
statements of operations, stockholders' equity, and cash flows for the period
from January 2, 1998 (inception) to December 31, 1998, included herein and to
the reference to our firm under the heading "Experts" in the prospectus.
Mountain View, California
November 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEETS AT DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 AND STATEMENTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-02-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 1,338 6,952
<SECURITIES> 0 0
<RECEIVABLES> 0 5,002
<ALLOWANCES> 0 226
<INVENTORY> 0 3,281
<CURRENT-ASSETS> 1,434 15,170
<PP&E> 616 1,214
<DEPRECIATION> 108 320
<TOTAL-ASSETS> 1,970 16,197
<CURRENT-LIABILITIES> 474 6,632
<BONDS> 0 0
0 0
12 15
<COMMON> 10 11
<OTHER-SE> 1,204 9,205
<TOTAL-LIABILITY-AND-EQUITY> 1,970 16,197
<SALES> 0 14,704
<TOTAL-REVENUES> 0 14,704
<CGS> 0 6,920
<TOTAL-COSTS> 4,941 15,460
<OTHER-EXPENSES> 12 37
<LOSS-PROVISION> 0 226
<INTEREST-EXPENSE> 12 37
<INCOME-PRETAX> (4,748) (644)
<INCOME-TAX> 1 63
<INCOME-CONTINUING> (4,749) (707)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,749) (707)
<EPS-BASIC> (3.51) (0.18)
<EPS-DILUTED> (3.51) (0.18)
</TABLE>
