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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
PATH 1 NETWORK TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3989885
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3636 NOBEL DRIVE, SUITE 275, SAN DIEGO, CA 92122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 450-4220
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
N/A N/A
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
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(Title of Class)
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
BUSINESS.
OVERVIEW
We believe that over the next few years there will be a
revolutionary movement to converge audio, video and telephony over the
Internet and that we are positioned to be at the forefront of this
revolution. Our mission is to merge all communications over a single network
and to bring quality of service (QoS) and real-time capabilities to the
Internet and standard Internet Protocol (IP) networks, thereby lowering the
cost of communications and providing hybrid services through the interaction
of computers, telephone, video equipment and network appliances. We intend to
develop a real-time data delivery product line that has the potential to
quickly change the way video content is produced and delivered and can ensure
that a phone call placed over the Internet will be delivered as reliably as
calls made over today's phone network. Our patent-pending technology can
provide instantaneous and loss-less transmissions of all forms of data
compatible with existing Internet equipment.
The market for Internet and Intranet infrastructure equipment is
enormous. With our core technology developed and production of a first
generation of prototype equipment complete, we now intend to aggressively
pursue rapid introduction of our TrueCircuit-TM- technology into wide area
networks (WANs), local area networks (LANs), metropolitan area networks
(MANs), and the Home Networking Market.
INDUSTRY BACKGROUND
CONVERGENCE - AN INTERNET MARKET OPPORTUNITY
The dream of being able to utilize Intranets and the Internet to make
crystal clear telephone calls and transmit live video is almost a reality. Many
companies around the world currently produce equipment that interface standard
telephone and video equipment with computer data networks, including the
Internet.
Market forces provide a strong incentive for companies to merge all of
their communication services over a single set of wires, whether for data,
voice, video or control. Currently, companies employ several separate networks
throughout an enterprise - telephone, computer, security and fire protection.
Known as "convergence," a shift to a single network allows these companies to
take advantage of the significant cost savings and increased throughput that
computer networks provide. For example, current analog telephone lines only
allow one phone call at a time. However, modern xDSL technology converts this
same wire to send digital computer signals. It increases the data capacity of a
standard telephone wire over 100 fold. Many applications, such as video, voice,
and computer sessions, would now be able to share the same wire. Crystal clear
voice and video over Intranets and the Internet come one step closer to reality.
Beyond the immediate economic incentives, this convergence of services
will allow new hybrid services to emerge. Telephones will access computer
e-mail. Computers will access video archives, or telephone reminders about
appointments. Tele-medicine, interactive virtual reality and a host of other
applications will be based upon the ability to send any form of data over the
same network - locally or across the globe.
THE NEED FOR A SOLUTION
Computer networks generally use a protocol known as Internet Protocol,
which was designed to carry computer data. Computer data is tolerant of long
latency, high jitter, and unreliable delivery. In contrast, real-time services
require short latency, low jitter, and reliable delivery. Therefore, the real
promise of the convergence of crystal-clear, real-time voice, high-fidelity
audio, and live, interactive video services with computer data over a single
network has not been fulfilled.
These core problems of real-time transmission are the direct result of
the lack of an effective traffic management infrastructure in the existing
Internet Protocol (IP) computer networks. Despite this, IP has become the de
facto standard for computer networks. Within LANs, the vast majority of
computers communicate via IP over
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Ethernet. Within WANs, most computers communicate using IP switching over
ATM/SONET links. Furthermore, within the WAN there is a strong push by major
telecom vendors, among them AT&T, Qwest Communications, and Level 3
Communications, to move to IP-only equipment - entirely eliminating ATM from
their networks. However, the lack of end-to-end traffic management in IP
renders high-quality, real-time service impossible.
As the demand for real-time network services grows, the traffic control
of the transmitted information becomes increasingly important. Congestion of
information packets at points of contention in a network results in dramatic
quality of service (QoS) failures. The greater the bandwidth required for a
particular traffic stream, the higher the potential for service degradation.
Thus, a reliable mechanism for real-time packets to avoid points of
network contention would ensure excellent quality of service and permit
multiple, simultaneous uses of the network (i.e., computer traffic, voice and
video). The elimination of points of contention would also reduce the need for
queuing at network nodes, resulting in a dramatic reduction in the manufacturing
cost for network equipment.
Bandwidth demands continue to grow due to technological innovations.
Therefore, there will always be points of contention. As more and more
high-speed corporate LANs connect to slower external WANs, and as newer
high-speed networks link to existing, slower ones, bottlenecks will continue to
rise at points of ingress from the faster networks to the slower ones. These
networks will saturate, again resulting in increased congestion. And within
shared access networks, such as Ethernet LANs, contention turns into paralyzing
collisions. Common techniques to address these problems include buffering and
data compression. However, neither of these techniques address the problems of
latency and jitter caused by packet contention.
The services which will eventually dominate traffic flow on networks
and which will benefit the most from guaranteed quality of service are:
- IP Telephony
- Video distribution
- Transaction processing
- Security systems
- Data acquisition and control
- Factory floor automation
SERVICES
THE PATH 1 SOLUTION: TRUECIRCUIT-TM-
As networks integrate and become faster, they will pervade all aspects
of life. Real-time services (e.g., telephone, video conferencing, and live video
multicasting) will dominate network traffic. Real-time services require
predictability and low latency from end-to-end. Our technology satisfies these
requirements and is compatible with today's networks.
At the core of our technology is TrueCircuit. TrueCircuit addresses
the fundamental issue of network traffic management. It guarantees QoS by
creating separate ATM-like virtual isochronous channels for each real-time
stream - isolating each stream from other real-time streams and the
non-real-time traffic. Virtual isochronous channels provide a means of carrying
real-time data across a network by insuring the fast, regular and timely
delivery of traffic.
TrueCircuit works with any physical layer under standard Internet
Protocol (IP) to provide QoS guarantees
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for negligible latency and jitter, reserved throughput, packet order, and
reliability. It provides an end-to-end solution that currently is unique in its
ability to eliminate points of contention within a network. As a result, for the
first time network providers will have the ability to guarantee negligible
jitter and latency for real-time signals within an IP network, while precisely
guaranteeing and provisioning throughput for clients.
TrueCircuit has additional advantages in its seamless backward
compatibility with legacy equipment, its low cost of implementation, and in
providing an inherent mechanism for secure communications. The advantages of
TrueCircuit are most dramatic within shared physical networks, such as
Ethernet, where it can completely eliminate collisions for specified classes of
traffic and unlock the full potential of existing IP/Ethernet computer network
infrastructures. Furthermore, our management is currently unaware of any other
technology that can deliver negligible latency and jitter directly over IP
networks. As a result, we are well positioned to capitalize on powerful,
emerging technology trends that are redefining the telecommunications and
network industries.
TrueCircuit technology also offers significant advantages for new
billing approaches. With TrueCircuit, service providers have a choice of
call-based and/or class-based billing, rather than just packet-based or
flat-rate. The fast, automatic set-up and tear-down of virtual channels allows
service providers to adopt a telephone company ("telco") billing model, if
desired. Furthermore, TrueCircuit provides an immediate measurement of the true
cost of an end-to-end channel as the sum of the per-link utilization of a route.
These features of TrueCircuit not only provide a mechanism for service
providers to offer new toll services, but also provide the practical basis for
economic rationing of toll services.
PRODUCTS
In developing our products, we have focused our resources on the
most formidable QoS challenge: delivery of low-latency, high-quality video
over Ethernet/IP networks using Internet-compatible QoS protocols. Those
products intended to meet this challenge include Gigabit Ethernet switches
and broadcast-quality video transport and interfaces. In addition, with an
eye toward packaging TrueCircuit for licensing and incorporation into third
party products, we have designed our TrueCircuit technology to consist of
easy-to-incorporate packages consisting of a reference design, a chip-set
encapsulating TrueCircuit quality of service, and firmware
application-programmer-interfaces (APIs).
To help in the initial marketing of TrueCircuit, we have also
developed the TrueCircuit Multimedia Gateway to showcase the ease of
implementation and technological advantages of our technology.
TRUECIRCUIT MULTIMEDIA GATEWAY
Our initial technology evaluation product is the TrueCircuit
Multimedia Gateway (TMG). The TMG is a QoS Multi-Layer Switch that provides
the foundation for a line of products and applications and demonstrates the
quality of TrueCircuit QoS.
For Internet Service Providers (ISPs), the base TMG model would be
used to provide bandwidth and real-time service guarantees from clients'
LANs into their Internet backbones. The base TMG model provides two Ethernet
interfaces, along with an optional telephone and high-quality 6-channel audio
interfaces, to interconnect and integrate a client's real-time services and
computer data to the ISP backbone. It provides the gateway to set up private
Integrated Service Metropolitan-Area Networks and to Voice over IP (VoIP)
services.
With the audio interface option, the TMG provisions CD-quality
telephony, and interactive audio distribution networks for radio stations and
audio post-production applications. With the telephone services option, the
TMG adds PBX and Voice-Mail functionality accessible from any computer or
telephone on the network.
We successfully demonstrated products based on these interfaces at
Networld Interop 1999 and received very positive responses from industry
representatives in attendance.
The TMG is currently in limited production and undergoing field
evaluations
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with several companies.
PS1/PS100 PATH 1 TRUECIRCUIT GIGABIT & FASTETHERNET SWITCHES
These two products would share the same network switching core as
the PG1 Path 1 TrueCircuit Gigabit Ethernet Broadcast Video Interface and
therefore serve as extensions to that product, minus the video interface.
The PS1 would be a rack mountable real-time Gigabit Ethernet switch
supporting either 8 or 16 ports with quality of service (QoS) guarantees.
These switches would support our TrueCircuit virtual circuit
capabilities. They would interface to multi-mode fiber optic capable, or
optionally CAT5 capable, Ethernet devices. They would fully support all
legacy 1000Base-SX/LX Gigabit Ethernet equipment.
The PS1 would be capable of transporting isochronous real-time data,
such as video and audio streams, and asynchronous data, such as file transfer
and control commands, over the same infrastructure. This product would be
designed for applications where real-time data support is required within the
network. Applications would include broadcasting, production editing, news
gathering, studio, teleconferencing and surveillance.
The PS100 would be a rack mountable real-time 10/100BaseT Ethernet
switch supporting either 8 or 16 ports with quality of service (QoS)
guarantees. These switches would also support TrueCircuit virtual circuit
capabilities. They would interface to 10BaseT and 100BaseT capable Ethernet
devices. They would fully support all legacy 10/100BaseT Ethernet equipment.
The PS100 also would be capable of transporting isochronous real-time data
and asynchronous data over the same infrastructure. This product would be
designed for applications where real-time data support is required within the
network. Applications include network telephony, network video conferencing,
teleconferencing, home networking and surveillance.
The core component of these products is a Gigabit Ethernet packet
processor interface that is currently in layout stage. We expect to have a
prototype of this Gigabit Ethernet packet processor interface within the first
quarter of 2000. The PS100 FastEthernet TrueCircuit switch involves a simple
revision to that core component and could be in prototype within two months
after a decision to pursue development of that product. However, the pursuit of
both the PS100 and the PS1 Gigabit TrueCircuit switches will be secondary to
the PG1 Gigabit Ethernet Broadcast Video Interface and the dotCAM products, and
will depend upon resource and funding availability in light of those priorities.
PG1 PATH 1 TRUECIRCUIT GIGABIT ETHERNET BROADCAST VIDEO INTERFACE
The PG1 would be a rack mountable professional digital video
interface to the Gigabit Ethernet that would bridge common industry standard
interfaces for video, audio, and user data with the Gigabit Ethernet network.
It would support our TrueCircuit technology, which offers guaranteed quality
of service (QoS) when working with a TrueCircuit supported network. PG1 would
interface to multi-mode fiber optic, or optionally CAT5 capable, Ethernet
devices. It would fully support all legacy 1000Base-SX/LX Gigabit Ethernet
equipment.
The PG1 would deliver high bandwidth synchronous and asynchronous
data onto a TrueCircuit gigabit network. It would have the capacity to
support a single uncompressed D1 video channel, three uncompressed audio
channels, one 10/100 Base-T port, an RS232 port and a composite Genlock
interface. The D1 video port would be configurable to support the ASI or SDTI
interface for compressed data transport. All audio and video channels would
be independently configurable as inputs or outputs. The PG1 would be designed
for applications requiring uncompressed video and audio distribution on an IP
network infrastructure. Applications include broadcasting, production
editing, news gathering and studio processing.
The PG1 Path 1 TrueCircuit Gigabit Ethernet Broadcast Video
Interface would consist of the core Gigabit Ethernet packet processor
interface and a digital video interface plug-in PCI card. We are now
beginning the design for the digital video interface plug-in PCI card and
expect to have a prototype in the second quarter of 2000.
dotCAM-TM- DIGITAL LAN TRUECIRCUIT VIDEO CAMERA
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The dotCAM Internet-compatible digital video camera would capture
and deliver digital-quality video and audio through standard Ethernet
networks. It would combine a state-of-the-art 1/4" CCD sensor, VLSI (Very
Large Scale Integration) digital video processing and a digital network
interface to produce a high performance camera capable of delivering
professional quality video with digital-quality sound. Features would include
remote control and setup, 4:1 digital zoom, automatic backlight compensation
for images in strong incidental light and automatic audio gain control (21 dB
dynamic range). The dotCAM would be designed for applications in imaging
systems, machine vision, security and wide area detection.
The dotCAM would be capable of simultaneous video delivery, audio
delivery, power input, and camera control over a single network connection.
The interface would be compatible with all standard 10/100 base-TX Ethernet
hubs, switches, and network adapter cards (e.g., network interface cards
within PCs). The camera would include a built-in http (web) server with JAVA
to offer a user-friendly control and monitor graphic user interface (GUI).
The GUI would support video/audio capture, frame capture, and real time
camera adjustments such as zoom, gain, etc. The server would be fully
compatible with standard Windows-TM- application packages.
The dotCAM would be fully TrueCircuit-compatible. TrueCircuit
optimizes network bandwidth utilization and guarantees video and audio
quality in real-time applications over a Ethernet network. TrueCircuit
increases the total number of supportable cameras in a single network to well
over a hundred and it offers accurate synchronization between any two cameras
on the network. The programmable architecture within the dotCAM would allow
it to support advanced and custom functions, including auto-focus, motion
sensing, variable frame rates, adaptive compression and a user-customizable
GUI interface.
The dotCAM is a proposed joint collaboration with a leading camera
manufacturer. We are currently negotiating an agreement with this company. If
this agreement is finalized, we would expect to have a prototype produced by
the second quarter of 2000.
In addition to the dotCAM, we intend to simultaneously take the same
circuitry for the dotCAM and repackage this circuitry, without the camera,
into a Path 1 product, the dotCAM Digital LAN TrueCircuit Video Interface.
The dotCAM Digital LAN TrueCircuit Video Interface would accept video from
any standard NTSC feed and produce a real-time Ethernet video stream with
full TrueCircuit QoS.
PATH 1 NETMANAGER
NetManager would be Java-based Web-compatible network management
application software for the Path 1 TrueCircuit network. It would support a
user friendly GUI to configure and monitor all Path 1 switches and gateways
within the network.
The NetManager system would rely on an advanced inter-communication
infrastructure that exists on all Path 1 components. It would work with switches
and gateways to establish or alter virtual circuits between any two gateway
ports. It would give users access to all relevant configuration parameters to
the individual ports within the switches and the gateways.
NetManager would offer a full set of performance assurance functions.
It would monitor in real-time status parameters, including pipe traffic activity
between switches, virtual circuit activity and port activity. It would list all
network configuration data including virtual circuits and port settings. It
would be able to manage and display all Path 1 product fault status and fault
logs.
NetManager would support a multi-user dynamic working environment. It
would allow multiple TrueCircuit components to coexist on the same network. It
would support an automatic network configuration detection process that would
capture new devices coming on-line and remove existing devices that went
off-line.
A prototype of the NetManager is now functional. However, the full
NetManager will require a significant number of new features to support the
video and switch products. The development of these features will commence only
in conjunction with the development of the prototypes of products that
NetManager will control.
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MARKET
International Data Corporation (IDC) defines the Internet Economy as
"spending on technology deployment, marketing and sales, content creation,
professional services and education and training to support technology-based
applications." IDC estimates that in 1999 the Internet Economy in the U.S. alone
will be $124 billion and Western Europe's Internet Economy will be $44 billion.
IDC forecasts that the U.S. Internet Economy could grow to between $500 billion
and $600 billion and the Western Europe Internet Economy could grow to $170
billion by 2002.
Within this booming Internet Economy, we have identified three
discrete, yet inter-related market segments: LAN applications and gateways,
MAN/WAN network applications (including Internet Telephony and Video
Conferencing over portions of the Internet and private networks), and Home
Networking. These markets are believed to be substantial and are poised for
considerable expansion. For example, Frost & Sullivan projects that the world
market for telephone gateways will exceed $3 billion per annum by 2002. In the
LAN environment, analysts predict that IP routers will replace one-third of the
$100 billion PBX market (in LANs) by 2005.
In the United States, the main players in network infrastructure
equipment are Cisco Systems, Lucent Technologies, and Nortel Networks and, to a
lesser extent, 3Com Corporation. These companies have announced their intention
to offer technology for network convergence; they will either attempt to develop
technology themselves or procure it from others.
In addition to these major players, a host of smaller hardware and
software companies offer limited forms of QoS and/or network convergence
technology. This list includes Packeteer, Allot, NetReality, Merlot and NBX,
among others. We are unaware of products (hardware or software) or approaches
being taken by any of these or other companies that comprehensively solve the
QoS problem. In contrast, TrueCircuit offers end-to-end QoS management across
all the links of a network and the ability to control jitter and latency.
LOCAL AREA NETWORK (LAN) APPLICATIONS AND GATEWAYS
The largest initial market for our technology appears to be within
local area networks to manage the flow of integrated real-time and data
services: video, audio, telephony and Internet access. Internet Service
Providers also see an urgent need for provisioning and regulating the bandwidth
of their clients who access their Internet backbone.
Hotels, multi-tenant apartment buildings, businesses in the
publishing, broadcasting, entertainment, marketing, and public relations
areas, and even aircraft have immediate demand for carrying real-time
services over their computer networks. Integrated service, multimedia
gateway devices, built around TrueCircuit, would for the first time tie
together all major communications services - video, telephone, and Internet
access, through the existing building phone or cable wiring.
TrueCircuit has the unique ability to manage all such services
within a standard LAN with no degradation in signal quality. Standard QoS
approaches rely upon queues that induce latency and jitter into a signal.
TrueCircuit eliminates network queues, and the latency and jitter they
would otherwise introduce.
Video network encoders currently sell within the $20,000 to $40,000
range. A high-fidelity audio/IP encoder/decoder costs several thousand
dollars. Packet shapers and lower-end multimedia gateways generally sell for
two thousand to five thousand dollars per box. Our gateway products
incorporate these functions in various combinations but have TrueCircuit as
their proprietary enhancement.
METROPOLITAN AREA NETWORK (MAN) APPLICATIONS
Beyond the corporate LAN, there is a demand for video conferencing
among corporate plants and within a metropolitan area.
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The key to effectively exploiting this market is to have very low
latency to enable real-time personal interaction. Video conferencing in the
past achieved less than stellar success. Researchers have found that audio
troubles can seriously affect the quality of interaction in ways not
experienced in face-to-face meetings. The half-second delay in transmitting
audio between sites can cause speech collisions, trouble in working through
conflict and disagreement, and even a marked lack of humor, all of which rely
on careful timing. Using TrueCircuit technology this problem is
eliminated due to TrueCircuit's very low latency.
It is not enough to have real-time interaction; video conferencing
also requires high-resolution video. The availability of a shared drawing
space is also highly desirable. TrueCircuit technology provides very
high-resolution real-time interactive drawing spaces. Video conferencing
participants can use their own white-board or simply a sheet of paper to
communicate detailed drawings.
We plan to enter into strategic alliances with Internet Service
Providers through which we would deploy TrueCircuit technology within
metropolitan areas to multicast private video and/or audio programming, and
implement video conferencing and private telephone networks. As of the time
of this filing, we have not yet entered into any specific strategic alliances
nor do we have concrete plans to do so in the near future.
Professional markets requiring these products would include the
12,000 radio and 9,500 television stations across the United States that
would like to set up private feeds to independent studios within their areas.
We believe video broadcasters and production and post-production/editing
facilities that wish to send compressed video streams over xDSL lines would
be willing to pay $25,000 per video box. In addition to these video
broadcasters are other video content providers who require the ability to
multicast video programming within a city or who wish to set up video
conferences around town.
WIDE AREA NETWORK (WAN) APPLICATIONS
All networks crossing interface boundaries require bridge devices.
Bridge devices are necessary to connect a LAN, including a
TrueCircuit-enabled LAN, to a WAN. These bridges would convert TrueCircuit IP
to and from such interfaces as ATM/SONET, T1/E1, xDSL, cable modem, etc.
We plan to license TrueCircuit technology to others to create
the appropriate bridge devices for network interfaces.
VIDEO/AUDIO NETWORK (VAN) APPLICATIONS
Video signals are most sensitive to jitter. Even 200 nanoseconds of
jitter on a signal can severely degrade a live video feed. The market for
broadcasters, audio and video production and post-production studios is
substantial and fast-growing. These fields are quickly moving from analog
film and tape to digital media, and we expect they will require TrueCircuit
technology to transport their video and audio feeds and distribute them to
their computer editing workstations.
Based upon feedback from a professional video equipment
manufacturer, video switches and equipment can be priced from $25,000 to
$60,000. There is a combined total of 50,000 studios in video production,
post-production, and broadcasting that could use products in this area for
their internal networks (in addition to possible use for MANs interconnecting
their audience).
HOME AND WIRELESS NETWORKING
International Data Corporation expects the number of home office
households with multiple PCs to soar from 7.8 million in 1998 to 12.1 million
by 2002. Therefore a market for Home Networking should exist.
Home Phone Network Alliance (HomePNA), the current standard for
computer networking over standard home phone wiring, does not adequately
address the QoS issue. The existing HomePNA standard uses a shared
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network approach wherein collisions are common. Furthermore, the effects of
collisions within HomePNA are much more severe than within Ethernet.
TrueCircuit can eliminate these collisions within HomePNA and guarantee
compatibility with home real-time services, such as multiple phone lines and
audio/video entertainment feeds shared with computer web browsing. We are
exploring potential commercial arrangements with semiconductor manufacturers
that sell chips for HomePNA. Expansion of their products into the home
networking market would be considered a natural extension of these companies'
existing product offerings.
In addition to HomePNA, a new standard for micro-cell wireless
networking, BlueTooth, has emerged. Like HomePNA, BlueTooth also uses an
Ethernet-like collision-based protocol for accessing the network. TrueCircuit
can also enhance BlueTooth networks to combine real-time services with data.
STRATEGY
Convergence elevates the network's importance to at least that of the
PC today. All forms of local and global communications depend upon these
networks. In other words reliance on the PC is falling and dependence on small,
networked single function "black boxes" or "network appliances" is rising. We
are pursuing a strategy based on five tactical maneuvers:
1. INITIALLY TARGET HIGH-MARGIN MARKETS OF "EARLY ADOPTERS"--
Some market niches exist in arenas of high-margin economics
that have a history of early adoption because of extreme
competition. Our initial product directions must, of course,
be targeted to markets that have an immediate need for
guaranteed QoS. Our management has conducted discussions
with end users, equipment vendors and system integrators to
assist in selecting our optimal initial market niche and
defining our initial product offerings. The highest
visibility early adopters are the digital television
broadcasters and their related production companies. These
companies must satisfy an FCC mandate to convert to digital
television. They require the highest quality of signal
transport. We officially introduced and demonstrated our
video transport technology at a trade show, NetWorld+Interop
'99, in Las Vegas on May 10, 1999. The feedback on our
technology and range of product options from industry
attendees has helped to guide us in finalizing our marketing
decisions to target this market as well as other lower-end
video network interface markets.
2. SEEK RESEARCH AND DEVELOPMENT (R&D) FUNDING FROM KEY
CUSTOMERS-- We have the technology and intellectual resources
to seek R&D funds from key customers to develop products.
The R&D area is of central importance to our long term plans.
We will strive to ensure that any arrangement for R&D funds is
open-ended (e.g. we will retain the right to use our
technology in other markets and products). To date, we
have yet to receive R&D funds via this route, but we will
continue to seek such arrangements as the opportunities arise.
3. ESTABLISH STRATEGIC MARKETING RELATIONSHIPS-- We are
actively seeking to build strategic relationships with
hardware vendors, service providers and system integrators.
We have garnered the interest of several leading technology
companies in the fields of video camera equipment, consumer
electronics, semiconductors and networking. We have yet to
enter into definitive arrangements with any of these entities;
however, should we be successful in doing so, we anticipate
that these relationships will provide us with market
acceptance, distribution outlets, manufacturing capacity,
and most importantly, product definition and continuing market
insights into the targeted market areas.
4. CONTINUE ADHERENCE TO INDUSTRY STANDARDS FOR QOS--We
will ensure that TrueCircuit will continue to adhere to
industry standards for specifying QoS. Operating on Internet
Protocol (IP), TrueCircuit offers substantial advantages over
competing approaches for effective traffic control management.
It works with such industry QoS over IP standards as RSVP,
MPLS, and IETF DiffServ. However, unlike existing
implementations, TrueCircuit provides negligible latency and
jitter.
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5. LEVERAGE IN-HOUSE EXPERTISE IN SIGNAL PROCESSING AND
NETWORKING--Our personnel have significant expertise in
digital signal processing, mixed-signal analog/digital circuit
design, and networking, with many dozens of publications and
dozens of patents. We are leveraging our in-house experience
to allow us to quickly enter the high-end video and audio
markets with TrueCircuit networking technology.
COMPETITION
We have developed a corporate strategy of entering markets where our
intellectual property gives us a strong competitive advantage. In general, we
see only indirect competition in these markets. In the professional video
market, TrueCircuit is the only means of which we are currently aware for
meeting the low jitter requirements within IP/Ethernet networks. Competition
for using new networked technology in this market comes from FibreChannel and
SerialBus, both of which use alternative network approaches. However, neither
of our competitors' approaches has yet become dominant in this area. We
believe that backward compatibility, a fully developed routing capability and
a large existing infrastructure of IP/Ethernet gives our approach a strong
competitive advantage technologically.
We must still co-exist with a number of major, entrenched network
equipment providers such as Cisco, Nortel Networks, 3Com and Lucent. Each of
these vendors has announced a strategy for convergence. All of these
companies can be seen either as potential partners in licensing or
distributing our technology, or as strong competition. Although we are
initially focusing on high-end applications and markets that require
proprietary technology not yet demonstrated by these companies, the risk
clearly exists that these companies, or new startups we are not yet aware of,
may develop their own competitive technology and enter our markets.
All the major network equipment manufacturers stress their adherence
to recognized international standards. We therefore designed TrueCircuit as
an implementation of QoS over IP that is compatible with all appropriate IP
standards - RSVP/MPLS, IETF DiffServ, and IEEE 802.1pq. A major advantage of
TrueCircuit is in its ability to provide ATM compatibility and quality of QoS
over a standard Ethernet or IP network. However, a potential risk is that one
of the major equipment manufacturers may choose to develop its own
proprietary standard that is incompatible with the implementation of our
technology.
Cisco has announced a strong push towards IP telephony. It has
announced IP telephones in the $300 range, along with the switching equipment to
go with it. However, Cisco has adopted a queue-based implementation of QoS that
gives priority-based preference to packets of data. The problem with queue-based
QoS is that queues introduce unpredictable delay. For telephone signals, this
translates to latency and jitter. For smaller numbers of simultaneous phone
calls, the latency may not be noticeable. The adverse effects of queues become
apparent when telephone or other real-time traffic becomes a large fraction of
the overall network capacity and in high-end applications such as interactive
CD-quality audio or high-quality video. Such applications require either
TrueCircuit or some other equally effective means for transporting converged
application traffic. In particular, interactive and high-end video requires very
low jitter, under 200 nanoseconds. TrueCircuit can provide such latency
guarantees whereas queue-based Weighted Fair Queuing QoS cannot. However, there
remains the risk that Cisco or others may reduce the price of bandwidth to the
extent that a customer could obtain competitive QoS by partitioning and
upgrading their networks to operate at much higher data rates and thereby reduce
network contention.
The Grass Valley Group and Sony are both established manufacturers of
professional video equipment. Their current video products use older analog
cabling as well as specialized, single-feed serial links to form point-to-point
connections between expensive video switch boxes and video sources. Our video
networking products would create a lower-cost and more robust solution by
eliminating the large bundles of coaxial cables and multiple switch boxes. Our
solution would not only replace this costly and inflexible infrastructure with a
few strands of fiber optic links connected to a centralized Path 1 video switch,
it would also upgrade a facility for digital television. In addition, the U.S.
Government has mandated a phase-in period for digital television, further
enhancing the market for TrueCircuit video equipment over legacy approaches. We
anticipate that the manufacturers of legacy video equipment would wish to
purchase TrueCircuit video network interface modules to make their equipment
digital television-compatible.
<PAGE>
Integrated service access in hotels, multi-tenant apartments, and
the home is a new and expanding market. We are not aware of products that now
directly address this market to combine phone, video-on-demand, and Internet
access all via a HomePNA phone wire interface with QoS guarantees.
Scientific-Atlanta, General Instrument, and others make set-top boxes, but
these devices do not have all the integrated capabilities offered by our
TrueCircuit technology, nor can multiple set-top boxes interconnect as a
network with QoS guarantees. Again, we believe that TrueCircuit gives us a
strong proprietary advantage in these potentially large, yet currently
undeveloped markets.
The market with the closest apparent competition arises in
metropolitan-area multi-media services, such as video conferencing. Here, Lucent
and the telecom industry represent indirect competition through their
development of ATM/SONET and T1/T3/xDSL multiplexors that can create isolated
virtual channels for different services over the same SONET, T1, T3, or xDSL
line. In general, such equipment is pre-configured to create and set aside
separate channels for each service, regardless of whether that service may or
may not come into use. This approach is appropriate only for point-to-point
links. Our equipment would have the advantage of creating a private multi-point
network that dynamically allocates channels only while they are needed. The Path
1 system would allow multicasting and more efficient utilization of the limited
outgoing link bandwidth.
Finally, we may find ourselves in competition with an alternative
technology for QoS over IP. We are aware of one such technology by Peak Audio,
Inc. of Colorado. Peak Audio is a relatively small company that currently has no
products of its own. Instead, it licenses its CobraNet audio distribution over
Ethernet. However, our analysis of their patents lead us to the conclusion that
TrueCircuit is more robust, precise, and scalable to larger networks than their
technology. Furthermore, our in-house expertise in embedded systems allow us to
tailor the integration of QoS for specific applications, leading to more
cost-effective and higher-performance equipment and QoS technology.
Competition, of course, is not based solely on technological
superiority. Customers may choose a technologically inferior product if its
provider can give better pricing, availability, manufacturing, quality, service
or reliability of continued supply.
SALES
DISTRIBUTION CHANNELS
We intend to ship a variety of products. Each product is targeted for a
different type of customer, so each product requires a different distribution
channel and sales strategy to reach the intended customer. Our initial
distribution plans involve relationships with systems integrators and Internet
Service Providers. To date, we have focused on local, San Diego-based companies
that we can easily work with and who can provide essential early feedback on our
products and strategies. We have formed relationships with Console Inc. as our
first system integrator and American Digital Network as our first Internet
Service Provider partner.
PROFESSIONAL VIDEO MARKET
A majority of sales of the PS1/PS100 Real-Time Ethernet Switches,
PG1 Broadcast Video Ethernet Interface and dotCAM LAN Digital Video Camera
and Interface are expected to be to professional video studios. We have
identified experienced distributors and manufacturers of professional video
products and have begun discussions to determine market size and set up
distribution channels. These vendors need Path 1 QoS technology to expand
into the new digital television and high definition television (HDTV) markets
and have expressed interest in partnering with us to resell TrueCircuit
professional IP/Video products to complement their own product lines.
LICENSING AND SOFTWARE SALES
We plan to derive revenue from licensing TrueCircuit for the dotCAM
and other potential TrueCircuit-enabled consumer appliances, from the licensing
of TrueCircuit network interface driver software, and from sales of the
TrueCircuit NetManager software. In all of these cases, we intend to enter into
sales and licensing agreements
<PAGE>
with large high-volume companies. We intend to bundle the QoS Driver Software
with a TrueCircuit-capable network interface to enable video and audio over the
Internet Protocol using standard PCs. The distribution channels for this
software will be the network interface card manufacturers, provided we are able
to successfully enter into arrangements with these manufacturers to write a
QoS-enabled driver for their products.
However as a contingency to the requirement of obtaining such major
distribution partners, we may alternatively sell our TrueCircuit QoS Driver
Software separately to enterprise clients as part of a full network system
integration package for introducing QoS real-time networking services.
APARTMENT/HOTEL/MOTEL USE OF TRUECIRCUIT-ENABLED PRODUCTS
We expect a variation on the TrueCircuit MultiMedia Gateway to be used
in hotels and multi-tenant apartment buildings. This technology will enable
services beyond those currently available in today's multi-occupant buildings.
In a number of large cities within the United States, apartment buildings now
charge a premium of several hundred dollars per month if they are already hooked
up to high-bandwidth Internet connections.
PRODUCT DEVELOPMENT MANAGEMENT
Central to each current and prospective product is the TrueCircuit
core technology. A single development team develops and enhances the
TrueCircuit core technology used across all Path 1 products. This team
consists of two software engineers and two hardware engineers.
In addition to the core technology team, it is our intent that each
Path 1 product will have a program manager, a lead engineer and an assigned
sales/marketing manager. These teams define, design and implement their assigned
products. The size of each team will depend on scope of the specific product and
may be partially outsourced.
MANUFACTURING / PRODUCTION
A wide variety of products require QoS. We intend to capitalize on this
heterogeneous market as quickly as possible, and deal with the challenge of
supporting a large and varied product line. To meet this challenge, we plan to
utilize the services of ISO 9000 certified component distributors and an ISO
9000 certified contract manufacturer.
We will monitor the operations of the contract manufacturing via our
own quality control team. This team's responsibilities will include evaluating
contract manufacturers as well as monitoring production through statistical
quality control metrics.
RESEARCH AND DEVELOPMENT
We focus significant development efforts on expanding our suite of
products, designing enhancements to core technologies and addressing additional
technical challenges inherent in developing new product applications. We expect
that we will continue to commit substantial resources to product research and
development in the future.
We also have entered into a co-development agreement with
San Diego-based Integrated Systems Design Center, Inc. (doing business as Dr.
Design, Inc.) to co-develop on our behalf a range of professional video
products that utilize Path 1's TrueCircuit technology. This co-development
arrangement allows us to leverage Dr. Design's specific expertise in
commercialization of video technologies for use by production studios and
television broadcast facilities.
CUSTOMERS
We have yet to generate revenue from sales to customers. This lack of
sales revenues is due to the fact that we are still developing much of our core
technology and have only recently commenced production of prototypes of some of
our core products.
<PAGE>
We have entered into several beta test agreements with potential
customers for the use and evaluation of the TrueCircuit Multimedia Gateway. We
expect to enter into additional beta test agreements with other potential
customers for both this initial technology evaluation product as well as our
video products as they become available. We hope to have such beta test
agreements in the second or third quarters of 2000 for our initial video
products, the dotCAM and the PG1 Path 1 TrueCircuit Gigabit Ethernet Broadcast
Video Interface.
PROTECTING INTELLECTUAL PROPERTY
Our success will depend, in part, on our ability to obtain and protect
our patents, trademarks and trade secrets and operate without infringing upon
the proprietary rights of others in the United States and other countries. If we
were to become involved in a dispute regarding our intellectual property, it
could become necessary for us to participate in interference proceedings before
the United States Patent and Trademark Office to determine whether we have a
valid claim to the rights involved. We could also be forced to seek a judicial
determination concerning the rights in question. Such proceedings could be
costly and time consuming, even if we were to eventually prevail. Should we not
prevail, we could be forced to pay significant damages, obtain a license to the
technology in question, or stop marketing one or more of our products.
PATENTS
We filed three patent applications in late 1998 covering the core
aspects of our TrueCircuit technology. Two additional patent disclosures have
also been filed and applications covering these new inventions are in
preparation.
Among the areas covered by our patent applications and disclosures
are: end-to-end quality of service mechanisms; virtual channel creation and
management in an IP or CSMA/CD network and across multiple TrueCircuit domains;
TrueCircuit-enabled network switches; TrueCircuit-enabled repeaters/hubs;
network security, maintenance of QoS within a legacy environment; and
compatibility of TrueCircuit with legacy equipment.
TRADE SECRETS
In addition to the protection afforded by patent law,
implementations of TrueCircuit technology contain trade secrets kept in the
strictest of confidence by our engineering team. These trade secrets cover
areas of fast context switching in embedded operating systems, real-time
embedded architectures, signal processing techniques for artifact-free
signals, and low-latency software drivers. We initially require each external
party that obtains access to our technology (including, but not limited to,
manufacturers, distributors, consultants and potential strategic partners)
to sign confidentiality/non-disclosure agreements. However, our plan to embed
our technology into a small set of integrated circuits by third quarter 2000
will eliminate this requirement. There are risks that these other parties may
not comply with the terms of their agreements with us, and that we may not be
able to adequately enforce our rights against such parties.
TRADEMARKS
We have trademarked TrueCircuit to describe its fundamental
technology. TrueCircuit technology establishes the equivalent of "true"
hardwired "circuits" over the traditionally packet switched Internet Protocol.
CONFIDENTIALITY AGREEMENTS
We require our employees, potential strategic partners, potential
customers and other parties who become privy to our proprietary technology to
execute confidentiality agreements with us. These agreements generally
provide that all confidential information developed or made known to the
employees and outside parties during the course of their relationship with us
is to be kept confidential and not to be disclosed to third parties, except
under certain specific circumstances. In the case of employees, the
agreements also provide that all inventions and works of authorship conceived
by the employees in the course of their employment will be our exclusive
property.
<PAGE>
EMPLOYEES
As of January 1, 2000, we employ eight people full-time and two
persons part-time. It is anticipated that additional employees will be hired
as needed to strengthen management and help in the commercial launch of our
products. We plan to hire (contingent upon obtaining additional financing)
fourteen new employees within the next 8 months.
Our relationship with our employees is good. None of our employees is a
member of a labor union.
CORPORATE HISTORY AND ADDRESS
We were incorporated in January 1998 in the State of Delaware under the
name Millennium Network Technologies, Inc. In March 1998, we changed our name to
Path 1 Network Technologies Inc. and we commenced operations in San Diego,
California in May 1998. Our headquarters are presently located at 3636 Nobel
Drive, Suite 275, San Diego, California 92122. Interested persons may visit our
website at www.path1.net.
REPORTS TO SECURITY HOLDERS
Following the effective date of this registration statement, we will be
required to comply with the reporting requirements of the Securities Exchange
Act of 1934 (the "Exchange Act") and will file annual, quarterly and other
reports with the Securities and Exchange Commission (the "SEC"). We will also be
subject to the proxy solicitation requirements of the Exchange Act and,
accordingly, will furnish an annual report with audited financial statements to
our stockholders.
AVAILABLE INFORMATION
Copies of this registration statement may be inspected, without
charge, at the SEC's Public Reference Room by calling the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Pacific Regional Offices of
the SEC located at 5670 Wilshire Boulevard, 11th Floor, Los Angeles,
California 90036. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0300. Copies of this
material also should be available through the Internet by using the SEC's
EDGAR Archive, the address of which is http://www.sec.gov.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW. YOU SHOULD
ALSO REFER TO THE OTHER INFORMATION IN THIS REGISTRATION STATEMENT, INCLUDING
OUR FINANCIAL STATEMENTS AND THE RELATED NOTES. THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW ARE NOT THE ONLY RISKS AND UNCERTAINTIES WE FACE. ADDITIONAL
RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM
IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION WOULD SUFFER. IN THAT EVENT, THE TRADING PRICE OF OUR STOCK COULD
DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT IN OUR COMMON STOCK.
THE RISKS DISCUSSED BELOW ALSO INCLUDE FORWARD-LOOKING STATEMENTS AND OUR ACTUAL
RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING
STATEMENTS.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS BECAUSE WE HAVE A LIMITED OPERATING
HISTORY AS A PROVIDER OF QUALITY OF SERVICE (QOS) HARDWARE AND SOFTWARE FOR ALL
NETWORKS, INCLUDING THE INTERNET.
Path 1 has a relatively brief operating history. We were incorporated
in January 1998 and commenced operations in May 1998. We do not yet have any
products in commercial production. Accordingly, we are subject to all of the
risks associated with new business ventures including, without limitation,
raising capital, acquiring or developing products which function as intended,
arranging for suitable manufacturing facilities, entering into strategic
relationships with other companies, identifying and retaining necessary
personnel, establishing and penetrating markets for our products and services
and achieving profitable operations.
WE NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS, AND OUR PROSPECTS FOR
OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN.
<PAGE>
We currently anticipate that our available cash resources will be
sufficient to meet our anticipated capital expenditures and working capital
requirements through February 2000. We are currently conducting another
offering of our common stock to accredited European and American investors.
As we are a new business with no sales or revenues to date, we anticipate
that we will be dependent over the foreseeable future upon procurement of
additional financing to fund expansion, to develop new or enhance existing
services or products, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. If additional funds are
raised through the issuance of equity or equity-linked securities, the
percentage ownership of our stockholders would be reduced. In addition, these
securities may have rights, preferences or privileges senior to the rights of
the securities held by our stockholders. We cannot assure that additional
financing will be available on terms favorable to us, or at all. If adequate
funds are not available or are not available on acceptable terms, our ability
to continue our operations or fund our expansion, take advantage of potential
opportunities, develop or enhance services or products, or otherwise respond
to competitive pressures would be significantly limited. Our business,
results of operations and financial condition could be harmed by this
limitation. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation - Liquidity and Capital Resources" for a discussion
of working capital and capital expenditures.
WE ARE SUING CERTAIN PRESENT AND FORMER COMPANY INSIDERS. THIS LITIGATION MAY BE
PROTRACTED AND MAY DIVERT SIGNIFICANT COMPANY RESOURCES AWAY FROM THE CONDUCT OF
OUR BUSINESS.
We are suing Michael Berns, his wife Rona Berns, James Berns, Franklin
Felber and the law firm of Berns & Berns for breach of oral contract,
professional negligence, breach of fiduciary duty, constructive trust, breach of
the covenant of good faith and fair dealing, and unfair business practices.
Collectively, the four individuals named above own 1,910,640 shares of our
common stock. We are seeking damages and/or cancellation of outstanding shares.
Some of the defendants have, in response, sued us for indemnification
and sued us and three of our directors for alleged wrongdoing in connection with
a stock option which Franklin Felber granted to Jyra Research, Inc.
The litigation is causing and will continue to cause a substantial
expense for attorneys fees and a diversion of management attention, regardless
of the outcome of the litigation. In addition, internal disputes such as this
one can be harmful to companies, especially a company such as ours which is in
the early stage of development. This dispute could result in a lack of
cooperation among our directors and between the directors and the senior
management. Please see "Legal Proceedings" for further discussion of this
dispute.
OUR PROPOSED PRODUCTS ARE ONLY AT A DEVELOPMENTAL STAGE.
At the present time, our proposed products have yet to receive the
requisite commercial and FCC certifications. Our proposed products are either
at the conceptual stage, i.e., ideas for products, or have been reduced to
beta units or prototypes that must be tested and modified. We must continue
our efforts to design these proposed products and arrange for prototypes of
each product to be manufactured, tested and de-bugged before we can implement
our marketing plan. There is no assurance that each of these milestones can
be achieved or that, if they are achieved, we will be able to effectively
market our products and achieve profitable operations.
WE MAY BE UNABLE TO OBTAIN PATENT PROTECTION FOR OUR CORE TECHNOLOGY AND
PRODUCTS, AND THERE IS A RISK OF INFRINGEMENT.
We intend to patent our core technology and our products. However,
there can be no assurance that patents will be issued to us, or, if patents
are issued, that they will be broad enough to prevent significant competition
or that third parties will not infringe upon or design around such patents to
develop a competing product. Furthermore, others may design and manufacture
superior products.
In addition to seeking patent protection for our products, we intend to
rely upon a combination of trade secret, copyright and trademark laws, and
contractual provisions to protect our proprietary rights in our products. There
can be no assurance that these protections will be adequate or that competitors
will not independently develop technologies that are substantially equivalent or
superior to our products.
<PAGE>
There has been a trend toward litigation regarding patent and other
intellectual property rights in the software and hardware industry. Although
there are currently no lawsuits pending against us regarding possible
infringement claims, there can be no assurance such claims will not be asserted
in the future or that such assertions will not materially adversely affect our
business, financial conditions and results of operation. Any such suit, whether
or not it has merit, would be costly to us in terms of employee time and defense
costs and could materially adversely affect us. If an infringement or
misappropriation claim is successfully asserted against us, we may need to
obtain a license from the claimant to use the intellectual property rights.
There can be no assurance that such a license will be available on reasonable
terms or at all.
WE FACE COMPETITION IN OUR INDUSTRY FROM MUCH LARGER COMPANIES WITH
SIGNIFICANTLY GREATER RESOURCES THAN OUR OWN, AND SUCH COMPETITION IS LIKELY TO
INCREASE IN THE FUTURE.
Although we have pursued a strategy of entering markets where our
intellectual property gives us a strong competitive advantage, we still
presently face indirect and direct competition in these markets. We anticipate
that the competitive pressures we currently face will increase significantly in
the future. A number of major network equipment providers such as Cisco Systems,
3Com and Lucent have announced network convergence strategies. Other competitors
are developing alternative network approaches which, if successful, could
materially and adversely affect us. Many of our current and potential
competitors have longer operating histories, significantly greater financial,
technical and marketing resources, greater name recognition and substantially
larger customer bases then we have. In addition, many of our competitors may be
able to respond more quickly than we can to new or emerging technologies, as
well as devote greater resources than we can to the development, promotion and
sale of their products. Increased competition could result in price reductions,
lower projected margins and inability to gain market share. In addition, if we
expand internationally, we may face additional competition. There can be no
assurance that we will be able to compete successfully against current and
future competitors.
WE MAY NOT BE ABLE TO PROFIT FROM GROWTH IN OUR BUSINESS IF WE ARE UNABLE TO
EFFECTIVELY MANAGE THE GROWTH.
Our senior managers have limited experience in management positions
and in managing rapid growth. We anticipate (but by no means do we guarantee)
that we will grow rapidly in the near future and that this growth will place
significant strain on our managerial, financial and personnel resources. The
pace of our anticipated expansion, together with the complexity of the
technology involved in our proposed products, demands an unusual amount of
focus on the operational needs of our future customers for quality and
reliability, as well as timely delivery and post-installation field support.
In addition, relationships with new customers generally require significant
engineering support. Therefore, adoption of our products by customers would
increase the strain on our resources, especially our engineers. To reach our
goals, we will need to continue hiring on a rapid basis, while, at the same
time, invest in our infrastructure. We expect that we will also have to
expand our facilities. In addition, we will need to:
- successfully train, motivate and manage new employees;
- expand our sales and support organization;
- integrate new management and employees into our overall
operations; and
- establish improved financial and accounting systems.
We may not succeed in anticipating all of the changing demands that
growth would impose on our systems, procedures and structure. If we fail to
effectively manage our expansion, our business may suffer.
COMPETITION FOR EMPLOYEES IN OUR INDUSTRY IS INTENSE, AND WE MAY NOT BE ABLE TO
HIRE OR RETAIN KEY EMPLOYEES.
Our future success will depend, in part, on our ability to attract and
retain highly skilled employees, particularly management, technical and sales
personnel. Competition for employees in our industry and in our geographic
region is intense due to the scarcity of available people with the necessary
technical skills. We may be
<PAGE>
unable to retain our key employees or to attract other highly qualified
employees in the future.
WE ARE DEPENDENT ON OUR KEY MANAGEMENT FOR OUR FUTURE SUCCESS, AND NONE OF OUR
MANAGERS ARE OBLIGATED TO STAY WITH US.
Our success depends on the efforts and abilities of our senior
management and certain other key personnel. We currently do not have key man
life insurance on any of these employees. If any of these key employees
leaves or is seriously injured and unable to work and we are unable to find a
qualified replacement, then our business could be harmed. In addition, we
plan to continue to hire key management personnel. We may not be able to
successfully assimilate these employees or hire qualified key management
personnel to replace them.
OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% STOCKHOLDERS CURRENTLY MAINTAIN
SUBSTANTIAL VOTING CONTROL OVER US, WHICH WILL ALLOW THEM TO CONTROL MOST
MATTERS SUBMITTED TO STOCKHOLDERS FOR APPROVAL.
Our executive officers, directors and 5% stockholders beneficially
own, in the aggregate, 54% of our outstanding common stock. As a result,
these stockholders (or subgroups of them) retain substantial control over
matters requiring approval by our stockholders, such as the election of
directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing
a change in control. Although persons holding a significant amount of
outstanding shares are currently on the respective opposite sides of
litigation, it is possible that in the future they will resolve their
differences and tend to vote their shares together. Until then, the existence
of large holdings by subgroups could have the same kind of effect as
described in this paragraph.
UNANTICIPATED DELAYS OR PROBLEMS IN INTRODUCING PRODUCTS OR PRODUCT IMPROVEMENTS
MAY CAUSE CUSTOMER DISSATISFACTION.
Management has limited experience in manufacturing products. In
addition, delays in the development of prototype products are not uncommon in
high-tech industries such as ours. If we experience problems related to
introducing products or product improvements or the reliability and quality of
our products, we could experience reduced product sales and adverse publicity.
Our products are complex and are likely to contain a number of undetected errors
and defects, especially when these products are first released. These errors or
defects, if significant, could harm the performance of these products, result in
ongoing redevelopment and maintenance costs and/or cause dissatisfaction on the
part of customers. These costs, delays or dissatisfaction could harm our
business.
MANAGEMENT MAY APPLY THE PROCEEDS OF OUR COMMON STOCK OFFERINGS TO USES THAT
DECREASE OUR PROFITS OR MARKET VALUE.
We have used the net proceeds from our offerings of Path 1 common
stock for general corporate purposes, including working capital, and for
research and development, but also for matters such as legal fees for
litigation. We determine, based on our existing needs, how the proceeds will
be allocated among the anticipated uses. Accordingly, our management has
significant flexibility in applying the net proceeds of our common stock
offerings and operating income (if any). The money may be used for corporate
purposes that decrease stockholder value.
TO DATE THERE HAS BEEN ONLY A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK AND
THERE IS NO ASSURANCE THAT AN ACTIVE TRADING MARKET FOR OUR COMMON STOCK WILL
EVER EXIST.
As of January 1, 2000, there are 6,086,651 shares of our common
stock outstanding. Prior to this registration of our common stock under the
Securities Exchange Act of 1934, there has been only a limited public market
for Path 1 securities. There can be no assurance that a broad public market
for our securities will arise once our common stock is registered. We may be
unable to attract and maintain good-quality market makers. In the event a
liquid market for our common stock does develop, there can be no assurance
that the market will be strong enough to absorb all of the common stock
currently owned by our stockholders. In addition, subsequent issuances of
equity or equity-linked securities may further saturate the market for our
common stock. The resale of substantial amounts of our common stock will have
a depressive effect on the market.
<PAGE>
Principal stockholders with an aggregate of 3,339,360 shares of common
stock are subject to a lock-up agreement which expires on February 1, 2000.
Public resales could begin then which might result in an imbalance of supply and
demand in the market for our common stock, thus driving our stock price
downward.
THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, IN WHICH CASE
STOCKHOLDERS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
Our common stock is presently quoted for trading on the OTC Bulletin
Board as well as on the Third Segment of the Frankfurt Stock Exchange. The
market price for our common stock is susceptible to a number of internal and
external factors including:
- quarterly variations in operating results;
- announcements of technological innovations;
- the introduction of new products or changes in product pricing
policies by us or our competitors;
- proprietary rights disputes or litigation; and
- changes in earnings estimates by analysts or other factors.
In addition, stock prices for many technology companies fluctuate
widely for reasons which may be unrelated to operating results. These
fluctuations, as well as general economic, market and political conditions such
as recessions or military conflicts, may materially and adversely affect the
market price of our common stock.
WE INTEND TO OFFER STOCK INCENTIVE PLANS TO OUR EMPLOYEES WHICH COULD RESULT IN
SUBSTANTIAL DILUTION TO ALL STOCKHOLDERS.
In order to provide incentives to current employees and induce
prospective employees and consultants to work for us, we have offered and issued
options to purchase our stock. The exercise of such options could result in
substantial dilution to all stockholders.
IF WE EXPAND OUR BUSINESS INTERNATIONALLY WE MAY BE SUBJECT TO FOREIGN
GOVERNMENT REGULATIONS AND TAXATION, CURRENCY ISSUES, DIFFICULTIES IN MANAGING
FOREIGN OPERATIONS AND FOREIGN POLITICAL AND ECONOMIC INSTABILITY.
An element of our growth strategy is to introduce our products into
international markets. Our participation in international markets will be
subject to a number of risks, including foreign government regulations, export
license requirements, tariffs and taxes, fluctuations in currency exchange
rates, introduction of the European Union common currency, difficulties in
managing foreign operations and political and economic instability. To the
extent our potential international customers are impacted by currency
devaluations, general economic crises or other macroeconomic events, the ability
of our customers to purchase our products could be diminished.
In order to help us address some of the risks associated with
introducing our products internationally, we believe it will be necessary to
establish strategic relationships with international partners. To date, we have
not entered into any strategic relationship with any international partners. We
cannot assure you that we will be able to establish international relationships,
or that if established, they will be successful. In addition, we cannot assure
you that an international market for our products will ever successfully
develop.
PROBLEMS RESULTING FROM THE YEAR 2000 PROBLEM COULD REQUIRE US TO INCUR
UNANTICIPATED EXPENSE AND COULD DIVERT MANAGEMENT'S TIME AND ATTENTION.
The Year 2000 problem could harm our business and financial results.
Many currently installed business systems and software products are coded to
accept or recognize only two-digit entries in the date code field. These systems
may interpret the date code "00" as the year 1900 rather than the year 2000. As
a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded or replaced to comply
<PAGE>
with Year 2000 requirements or risk system failure or miscalculations causing
disruptions of normal business activities.
We have evaluated our products and consider them to be fully Year 2000
compliant. However, if we have somehow failed to correct a material Year 2000
problem, our business activities and results of operations could be adversely
affected. In addition, significant Year 2000 problems involving our potential
customers or involving services or equipment provided to us by third-party
vendors could significantly affect the conduct of our business. Any significant
Year 2000 problem could require us to incur significant unanticipated expenses
to remedy this problem and could divert management's time and attention.
FORWARD-LOOKING STATEMENTS
This registration statement contains forward-looking statements. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as
"anticipates," "believes," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "potential," "predicts," "should," or "will," or the
negative of such terms or other comparable terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under "Risk Factors," that may cause our
or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels or
activity, performance or achievements expressed or implied by such
forward-looking statements. In addition, this registration statement contains
forward-looking statements attributed to third party industry sources relating
to their estimates regarding the growth of Internet use. You should not place
undue reliance on these forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results,
unless so required by law.
FINANCIAL INFORMATION
SELECTED HISTORICAL FINANCIAL DATA
In the table below, we provide you with selected historical financial
data. We have prepared this information using financial statements for the
period from January 30, 1998 (inception) to December 31, 1998 and the
nine-month period ended September 30, 1999. The financial statements for the
period from January 30, 1998 (inception) to December 31, 1998 have been
audited by Ernst & Young LLP, independent auditors. The financial statements
for the nine-month period ended September 30, 1999 have not been audited. We
have prepared this unaudited information on substantially the same basis as
the audited financial statements and included all adjustments, consisting
only of normal recurring adjustments, that we consider necessary for a fair
presentation of the financial position and results of operations for the
period. When you read this selected historical financial data, it is
important that you read along with it the historical financial statements and
related notes as well as the section titled "Management's Discussion and
Analysis of Financial Condition and Operating Results" included elsewhere in
this registration statement. Historical results are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 30, 1998 NINE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Research and development.......................... $ 600,035 $ 695,839
Sales and marketing............................... 291,698 234,915
General and administrative........................ 298,529 528,130
----------- -----------
Total operating expenses............................ $(1,190,262) $(1,458,884)
----------- -----------
Interest income, net................................ 7,123 14,209
----------- -----------
Net loss............................................ $(1,183,139) $(1,444,675)
=========== ===========
Net loss per share (1):
Basic and diluted................................. $ (0.25) $ (0.26)
=========== ===========
Weighted average shares--basic and diluted........ 4,712,194 5,648,051
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 119,394 $ 1,005,362
Working capital...................................... 74,177 942,084
Total assets......................................... 311,594 1,184,189
Total stockholders' equity........................... 256,252 1,105,590
</TABLE>
- - -----------------------
(1) See Note 1 of Notes to Financial Statements for a description of the
computation of the net loss per share and the number of shares used in
the per share calculation.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including those discussed under "Risk Factors". While this outlook represents
our current judgement on the future direction of the business, such risks and
uncertainties could cause actual results to differ materially from any future
performance suggested below. We undertake no obligation to release publicly
the results of any revisions to these forward-looking statements to reflect
events or circumstances arising after the date of this registration
statement. You should read the following discussion in conjunction with our
financial statements and the accompanying notes.
GENERAL
Our only material financial transactions have been capital raising,
paying costs of forming our company and commencing limited operations,
including research and development. We are a corporation with a limited
operating history; we were incorporated on January 30, 1998. We are a
development-stage company with no revenues to date. We have insufficient
operating history on which to base an evaluation of our business and
prospects. Any such evaluation must be made in light of the risks frequently
encountered by companies in their early stages of development, particularly
for companies in the rapidly evolving sector related to the Internet. Among
the risks we face are the absence of an established customer base, lack of a
significant presence in the marketplace, untested operating capacity and the
need for additional capital. There is no assurance that we will be successful
in addressing these risks and if we fail to do so, our financial condition
and results of operations would be materially harmed.
We believe that our success depends in a large part, on our ability
to create market awareness and acceptance for our products, raise additional
operating capital to grow operations, build technology and non-technology
infrastructures and continue product research and development.
RESULTS OF OPERATIONS (FROM INCEPTION THROUGH DECEMBER 31, 1998 COMPARED WITH
THE NINE MONTHS ENDED SEPTEMBER 30, 1999)
SALES. We had no revenue from product sales in either 1998 or 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development
expenses were $600,035 for the period from inception through December 31,
1998, compared to $695,839 for the nine months ended September 30, 1999, as
the receipt of additional invested funds enabled us to ramp up our research
and development effort.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses were
$291,698 for the period from inception through December 31, 1998 (a significant
portion of this amount is compensation expense related to shares given to a
certain employee) and $234,915 for the nine months ended September 30, 1999,
as we continued our ongoing efforts to increase market awareness and
acceptance of our technology.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative
expenses were $298,529 for the period from inception through December 31,
1998, compared to $528,130 for the nine months ended September 30, 1999, due
to higher personnel and legal costs. After this registration statement
becomes effective, we will have ongoing additional legal and accounting
expenses as a result of being a reporting "public company".
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded our cash requirements through
issuances of our common stock to accredited investors in Europe and the
United States. As of January 1, 2000 we had $456,954 in cash available to
fund operations. We operate in a very competitive industry in which large
amounts of capital are required in order to develop and promote products. We
will need to continue to raise significant amounts of additional capital, in
both the very near term and the mid-term, in order to successfully compete.
<PAGE>
We currently estimate that we will require approximately $2,500,000 to
fully develop our initial line of products. Actual development costs will
depend on a number of factors, including:
- our ability to identify and sell to customers and our ability to
negotiate favorable licensing agreements with customers;
- the number of our customers;
- the nature and success of our products;
- regulatory changes; and
- changes in technology and product requirements.
In addition, our actual expenses and revenues could vary materially from
the amounts we anticipate or budget, and such variations may affect the
additional financing needed for our operations. Accordingly, there can be no
assurance that we will be able to obtain the capital that we will require.
To the extent that we acquire the amounts necessary to fund our operations
through the issuance of equity securities, our then-current stockholders may
experience dilution in the value per share of their equity securities.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. Computer systems and/or software
products used by many companies may need to be upgraded to be Year 2000
compliant.
We have completed a review of our internal computer systems, operations and
products to determine the extent to which our business could be vulnerable to
potential errors and failures as a result of the Year 2000 problem. The cost of
this review to Path 1 was not material.
We believe, based on our review, that our internal computer systems,
operations and products are Year 2000 compliant and, as a result, the Year 2000
problem will not have a material adverse affect on our business, result of
operations or financial condition. If, under a worse scenario, the Year 2000
problem causes a substantial or complete shutdown of the Internet, then this
eventuality would have an adverse affect on our business and results of
operations. We have no contingency plan for dealing with this scenario and are
not planning to develop one.
Despite testing and validation of our products, these products may contain
undetected errors or defects associated with Year 2000 date functions. Known or
unknown errors or defects in our products could result in the following adverse
affects to our operations:
- delay or loss of revenue;
- diversion of development resources;
- damage to our reputation; or
- increased service or warranty costs.
Although we believe our products to be fully Year 2000 compliant, we face
additional risks that suppliers of products, services and systems that we
purchase and others with whom we transact business are not Year 2000 compliant.
If third parties cannot provide us with products, services or systems that are
Year 2000 compliant on a timely basis, our business, results of operations and
financial condition could be affected. That said, a very high proportion of the
technology incorporated into our products was developed internally, thus greatly
decreasing our
<PAGE>
reliance on the products and services of outside vendors.
Finally, as is the case with other similarly situated software
companies, if our current or future customers fail to achieve Year 2000
compliance, our business, results of operations, or financial condition could
be materially and adversely affected.
We have not been a party to any litigation or any proceedings to
date involving our products related to Year 2000 compliance issues; however,
we cannot assure you that we will not in the future be required to defend our
products in proceedings, or to negotiate the resolution of claims based on
Year 2000 issues. Some commentators have predicted significant litigation
regarding Year 2000 compliance issues. Because of the unprecedented nature of
such litigation, it is uncertain whether or to what extent we may be affected
by it. The costs of defending and resolving Year 2000-related disputes, and
any liability of the company for Year 2000-related damages, including
consequential damages, could have a material adverse effect on our business,
results of operations and financial condition.
IMPACT OF EUROPEAN MONETARY CONVERSION
We are aware of the issues associated with the changes in Europe
resulting from the formation of a European economic and monetary union. One
change resulting from this union required EMU member states to irrevocably
fix their respective currencies to a new currency, the Euro, as of January 1,
1999, at which date the Euro became the functional legal currency of these
countries. We do not expect this change to have any material effect on us.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that changes in interest rates or foreign currency
rates would materially affect us, due to our early stage of development. We
own no hedging instruments or derivatives which are exposed to such changes.
PROPERTIES.
We do not own any real property. We currently lease 4,142 square
feet of office space at 3636 Nobel Drive, San Diego, California under a
three-year lease that expires on May 31, 2002. Base rent for the period June
1, 1999 through May 31, 2000 is $8,491 per month. Thereafter the rent shall
be adjusted annually to reflect a fixed four percent (4%) increase over the
prior year's rent, resulting in monthly base rent payments of $8,831.00 per
month for the period June 1, 2000 through May 31, 2001, and $9,184 per month
for the period June 1, 2001 through May 31, 2002. We believe that our present
facilities are adequate to meet our current business requirements and that
suitable facilities for expansion will be available when required.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information known to us with respect
to beneficial ownership of our common stock as of January 1,2000 by:
- each person, or group of affiliated persons, known by us to own
beneficially more than 5% of our outstanding common stock;
- each director;
- our Chief Executive Officer;
- each person who served as our Chief Executive Officer in 1998;
and
- our directors and our executive officers as a group.
The following table gives effect to the shares of common stock
issuable within 60 days of January 1, 2000
<PAGE>
upon the exercise of all options and other rights beneficially owned by the
indicated stockholders on that date. Except as indicated in the footnotes to
the following table, the persons named in the table have sole voting and
investment power with respect to all shares of our common stock shown as
beneficially owned by them, subject to community property laws, where
applicable. Percentage of ownership in the following table is calculated
under the Securities and Exchange Commission's Rule 13d-3(d)(1).
<TABLE>
<CAPTION>
Common Stock Beneficially Owned
Name / Address of
Beneficial Owners # of Shares of Common Stock % of Class
<S> <C> <C>
Rona Berns 1,148,720(1)(2)(5) 18.87%
231 Barnard Road
Larchmont, NY 10538
Michael Berns 1,148,720(1)(2)(5)
231 Barnard Road
Larchmont, New York 10538
Ronald Fellman 1,148,720(5) 18.87%
12989 Chaparral Ridge Road
San Diego, CA 92130
Douglas Palmer 502,000(3)(5) 7.89%
1229 Trieste Drive
San Diego, CA 92107
James Berns 506,280(2)(5) 8.32%
3 Orchard Hill Road
Westport, CT 06880-2950
Paul Robinson 372,018(4) 6.02%
22 Pond Place
London SW3 6QJ
England
Roderick Adams 372,018(4) 6.02%
211a Stephendale Road
London SW6 2PR
England
All directors and executive officers
as a group (6 persons) 2,649,018 (6) 40.27%
---------
</TABLE>
(1) These shares are held in the name of Rona Berns. Michael Berns is Rona
Berns' husband.
(2) We believe Rona Berns, Michael Berns and James Berns may be deemed to
constitute a "group".
(3) Includes options to purchase 278,000 shares of Common Stock.
(4) Includes options to purchase 95,000 shares of Common Stock; also includes
277,018 shares of Common Stock beneficially owned by Jyra Research, Inc., of
which the indicated person is an officer. The indicated person disclaims
beneficial ownership in these shares except to the extent of his pecuniary
ownership in such shares. We believe Mr. Robinson, Mr. Adams, and Jyra Research,
Inc. may be deemed to constitute a "group."
(5) These shares are subject to a Lock-Up Agreement due to expire on February 1,
2000.
(6) Includes options to purchase 468,000 shares of Common Stock, and options
to purchase 25,000 shares of Class B
<PAGE>
Common Stock; also includes 277,018 shares of Common Stock owned by Jyra
Research, Inc., as to which beneficial ownership is disclaimed except to the
extent of Mr. Robinson's and Mr. Adams' pecuniary ownership in such shares.
DIRECTORS AND EXECUTIVE OFFICERS.
Our directors, executive officers and key employees, and their ages and
positions, are:
<TABLE>
<CAPTION>
Name Age Position
EXECUTIVE OFFICERS AND DIRECTORS:
<S> <C> <C>
Ronald D. Fellman 44 President, Chief Executive Officer and
Chairman of the Board
Douglas A. Palmer 49 Director, Executive Vice President,
Treasurer and Chief Technology Officer
Yendo Hu 36 Vice President of Video Products
Paul Robinson 36 Director
Roderick Adams 36 Director
James Berns 47 Director
KEY EMPLOYEES:
John Hooker 44 Director of Customer Support
John Beer 35 Director of Software Development
Grady Taylor 41 Director of Embedded Systems
</TABLE>
Dr. Ronald D. Fellman has been our President since March 1998. He also
presently serves as Chief Executive Officer, a position he assumed in January
1999, and Acting Chairman of the Board of Directors, a position he assumed upon
Michael Berns' departure in May 1999. From July 1996 to December 1997, Dr.
Fellman worked as an independent consultant and also co-founded and served as
Chief Technology Officer for Newsletter Technologies, Inc., a pioneer in
commerce over the Internet. From 1988 to 1996, Dr. Fellman served as a professor
of Electrical and Computer Engineering at the University of California at San
Diego. He has extensive expertise in high-speed, real-time computer networks,
multiprocessing, mixed analog/digital integrated circuits and systems, and
signal processing, and has published over 35 papers in these areas. His
industrial experience includes senior engineering positions at Hewlett-Packard
Corporate Labs and Tektronics Labs. Dr. Fellman received his B.S. (Summa Cum
Laude), M.S., and Ph.D. degrees from the University of California at Berkeley.
Dr. Douglas Palmer has served as Executive Vice President and a
director of Path 1 since March 1998. In addition, Dr. Palmer assumed the
position of Treasurer in November 1998 and became Chief Technology Officer in
May 1999. Prior to co-founding Path 1, Dr. Palmer served as the Director of
Networking for TrexCommunications Corp. from December 1996 to January 1998,
and as a Senior Scientist for ThermoElectron Corp. from 1988 to December
1996. Dr. Palmer brings extensive expertise in digital signal processing,
image processing, digital communications, and real-time computer software. He
has held senior research positions at M/A-Com Linkabit, Western Research
Corporation and ThermoTrex Corp. In the business area, he has assisted in the
startup and funding of HNC Software and Trex Communications Corp. and worked
in the area of corporate acquisitions for ThermoElectron Corp. identifying
takeover candidates and performing technical due diligence. He has published
numerous research publications and has received over 12 patents in signal
processing and telecommunications. He is a former professor at the University
of California at San Diego. Dr. Palmer received his B.A. in Physics from the
University of California at San Diego (Magna Cum Laude), and his M.Phil. and
Ph.D. degrees from Yale University.
Dr. Yendo Hu, Vice President of Video Products, joined Path 1 in
September 1999. Prior to joining us, Dr. Hu served as Director of Systems
Engineering for Tiernan Communications Inc. from June 1996 to September 1999,
<PAGE>
and served as a member of the technical staff at AT&T Bell Laboratories,
where he carried out communications implementation research. Dr. Hu brings
extensive experience in video technology and the professional broadcast
market. At Tiernan Communications, he developed MPEG2 video and multiplexing
compression technology, which lead to the first commercially available MPEG2
4:2:2 level solution. He was also instrumental in establishing Tiernan
Communications as the sole HDTV corporate distribution compression provider
for both the ABC and NBC television networks. Dr. Hu received his B.S. and
M.S. in Electrical Engineering from Cornell University and his Ph.D. in
Electrical Engineering from the University of California at San Diego. Dr. Hu
holds three patents in the area of MPEG2 implementation and is the author of
numerous papers on implementation.
Paul Robinson has served as a director of Path 1 since his appointment
to the board in March 1998. Mr. Robinson has also served as Chairman of the
Board of Directors, President, and Chief Executive Officer of Jyra Research
Inc., since June 3, 1996. Jyra Research Inc. is in the business of developing
network monitoring software. From August 1995 to October 1, 1996, Mr. Robinson
was an Account Manager for Cisco Systems, handling customers in the United
Kingdom financial sector. From 1992 to August 1995, Mr. Robinson was employed by
Biss Ltd. as a new business sales executive.
Roderick Adams has served as a director of Path 1 since his
appointment to the board in March 1998. Mr. Adams has served as a director and
Vice President of Corporate Affairs of Jyra Research Inc. since its inception in
May 1996. Since 1991 Mr. Adams has acted as a consultant to companies seeking
financing. Mr. Adams provides services and advice on corporate finance and
investor and media relations.
James Berns has served as a director of Path 1 since his appointment
in March 1998. Mr. Berns was also Secretary of the Company from March 1998
until May 1999. Mr. Berns has been a partner in the New York City law firm of
Berns & Berns since 1981. James Berns' appointment as a director and officer
was related to the fact that he is the brother of Michael Berns, who served
as our Chief Executive Officer until January 1999 and Chairman of the Board
of Directors until May 1999. James Berns graduated from the Wharton School of
Finance and Commerce at the University of Pennsylvania (B.S. Economics), the
Columbia University Graduate School of Business (M.B.A.), and Hofstra
University School of Law (J.D.).
John Hooker has served as the Director of Customer Support since
July 1998. Prior to joining Path 1, Mr. Hooker served as the Marketing
Support Engineer, Senior Consultant and Project Manager for the Professional
Services Group of TriTeal Corporation from May 1995 to June 1998. From
January 1995 to May 1995, Mr. Hooker was employed as an outside consultant
for TriTeal. Mr. Hooker brings nearly 20 years of technical and sales
experience in the field of computer integration and software. He has received
numerous top sales support awards and honors such as the "Top Performer" and
"Circle of Excellence" (twice) from Digital Equipment Corporation. He has
extensive experience in software engineering, hardware/software integration,
and solution design. He received his B.A. in Physics at the University of
California at San Diego.
John Beer has served as the Director of Software Development since
July 1998. Prior to joining Path 1, Mr. Beer served as the Principal Research
Engineer for TriTeal Corporation from December 1995 to May 1998. While at
TriTeal, he researched, designed, and prototyped thin-client, a
network-centric desktop user interface using Java, XML, and HTML languages,
and httpd servers. From 1991 to December 1995, Mr. Beer performed consulting
work for IBM as a contract consultant through his official employer, Ralph
Kirkley Associates. He worked on many projects for IBM Corporation including
AIX Windows Visual System Management. Mr. Beer brings extensive software
expertise in network and graphical user interface products using many
languages and operating systems. Mr. Beer has received four patents for his
developments. He received his B.S. in Computer Science from The University of
Texas at Austin.
Grady Taylor has served as the Director of Embedded Systems since
September 1998. Prior to joining us, Mr. Taylor served as Program Manager and
Senior Software Engineer at ThermoTrex Corporation from April 1986 to
September 1998. While at ThermoTrex, he worked on adaptive optics systems,
microwave imaging systems and laser interferometry. He is highly conversant
in embedded microprocessors and operating systems utilized in the most
demanding environments. Mr. Taylor received his B.S. in Mathematics with
emphasis in Computer Science from San Diego State University.
<PAGE>
EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The salaries of all of our officers are subject to the approval of
the Executive Committee of the Board of Directors. Due to our stage of
development, the Executive Committee attempted to pay our executive officers
at the market rate for persons with their credentials and expertise and did
not attempt to tie or relate their compensation to corporate performance.
Michael Berns served as our de facto Chief Executive Officer from
commencement of Path 1's operations until his official appointment to the
position in November 1998. Michael Berns began receiving compensation from us
for his services (not including any earlier compensation for legal services
rendered to Path 1) in June 1998. Thereafter, he was compensated at the
rate of $180,000 per year until his resignation in May 1999. His total cash
compensation from us in 1998 was $105,000 (not including any compensation for
legal services). The Executive Committee's decision to give this compensation
to Michael Berns was based on promises of individual performance which, we
believe, he did not fulfill.
No other officer earned more than $100,000 during 1998. Although
several employees, including Ron Fellman, Doug Palmer and John Hooker were
provided annual salaries at or in excess of $100,000 per year, payment of
these salaries commenced no earlier than April 1998. As a result, the actual
salaries of each of our other officers for 1998 was less than $100,000.
EXECUTIVE COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Two of the three members of the Executive Committee, Ron Fellman and
Doug Palmer, are presently officers of the Company and were officers of Path
1 during the year ended December 31, 1998.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Dr. Yendo Hu dated
August 31, 1999. The agreement provides for a base salary of $112,000 per
annum and calls for Dr. Hu to receive options to purchase 225,000 shares of
Class B Common Stock, once the Class B Common Stock is authorized, at an
exercise price not to exceed $2 per share, 25,000 shares of which vested upon
commencement of his employment with us and 200,000 shares of which will vest
over a four-year period in equal annual installments (if the Class B Common
Stock is not authorized by April 10, 2000, Dr. Hu will retain the option to
purchase our existing common stock on the same terms as those provided in
this employment agreement). In the event that Dr. Hu's position with us is
terminated as a direct result of a merger, consolidation, buy-out, takeover,
or other change in control of Path 1, he will receive severance pay equal to
three months' base salary.
We entered into an employment agreement with John Hooker dated June
10, 1998 and effective as of July 1, 1998. The agreement provides for a base
salary of $100,000 per annum and calls for Mr. Hooker to receive a grant of
our common stock totaling 56,000 shares, par value $0.001 per share, plus
options to purchase an additional 112,000 shares of common stock at an
exercise price of $0.60 per share. These options to purchase the 112,000
shares of common stock are scheduled to vest over a four-year period in equal
annual installments.
We entered into an employment agreement with Grady Taylor dated
September 8, 1998. The agreement provides for a base salary of $77,500 per
annum and calls for Mr. Taylor to receive options to purchase 25,000 shares
of our common stock at an exercise price of $2.50 per share. These options
are scheduled to vest over a four-year period in equal annual installments.
Mr. Taylor's employment with us is governed in accordance with the rules and
regulations concerning at-will, exempt employees in the State of California.
We do not presently maintain employment agreements with Ron Fellman,
Doug Palmer or John Beer.
DIRECTOR COMPENSATION
The amount of compensation, if any, which each director is entitled to
receive for services rendered to us is decided by resolution of the Board of
Directors. We do not presently maintain any standard compensation arrangements
with our directors, and they receive no compensation for their service as
directors.
<PAGE>
STOCK OPTION PLAN
Our 1999 Stock Option/Stock Issuance Plan (the "Plan") is a typical
stock option plan allowing the grant of options to buy Common Stock and
options to buy any authorized Class B Common Stock; the Plan gives
substantial discretion to the Plan administrator. Option grants under the
Plan are made by the Board or the Executive Committee.
As of January 1, 2000, each of the 495,000 options granted under the
Plan is exercisable for our existing common stock; however, upon
authorization of the Class B Common Stock by our stockholders (provided such
authorization takes place by April 10, 2000), these options shall
automatically be exercisable for the same number of shares of Class B Common
Stock, and all other provisions of such options shall remain the same.
PERFORMANCE GRAPH
We have not included a stock price performance graph because, in
view of the thin trading in our stock and the fact that we have only been
quasi-public, we believe it would not provide meaningful information and
might be misleading.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
On March 15, 1998, our Board of Directors authorized the creation of
the Series A Convertible Preferred Stock ("Series A Preferred") which was
issued to Jyra Research, Inc. ("Jyra"), a publicly-held, United Kingdom-based
company, which is in the business of developing network monitoring software.
The agreement provided for Jyra to make a strategic investment in Path 1 and
for Path 1 to make a strategic investment in Jyra. Under this agreement, Path
1 exchanged ten shares of its Series A Preferred convertible into 277,018
shares of common stock, for 16,000 restricted common shares of Jyra. Paul
Robinson, a director of Path 1, also serves as a director and Chief Executive
Officer of Jyra, while Roderick Adams, a director of Path 1, serves as a
director and Vice President of Corporate Affairs of Jyra. Mr. Robinson and
Mr. Adams each have been given fully vested options to purchase 95,000 shares
of Path 1's common stock at an exercise price of $0.60 per share.
In March 1998, in connection with services provided by Michael Berns
as promoter, legal counsel and as the de facto chief executive officer of
Path 1, we made available to him 1,245,600 shares of common stock for an
aggregate consideration of $346. Mr. Berns arranged for these shares to be
purchased by his wife, Rona Berns. Some of these shares were transferred (on
a pro rata basis with the other founders) to Doug Palmer and John Hooker upon
commencement of their employment with us, leaving Rona Berns with 1,148,720
shares of Path 1 common stock. Also, in March 1998, Michael Berns' brother,
James Berns, was issued 554,400 shares of the Company's common stock for an
aggregate purchase price of $154. Some of these shares were transferred (on a
pro rata basis with the other founders) to Doug Palmer and John Hooker, and
5,000 additional shares were transferred to a member of the immediate family
of James Berns. James Berns presently owns 506,280 shares of our common stock.
James Berns is a partner in the law firm of Berns & Berns. Berns &
Berns acted as general counsel to us from early 1998 through April 1999. We
believe that during this time Michael Berns was also a partner in Berns & Berns.
James Berns and Michael Berns deny that he was, and the matter is currently a
subject of the litigation brought by us. Berns & Berns charged us $42,339 in
legal fees for 1998.
LEGAL PROCEEDINGS.
On September 20, 1999, we filed a complaint in the San Diego County
(Calif.) Superior Court against (i) Michael Berns, who at various times has held
the positions of Chairman of the Board, Executive Chairman and Chief Executive
Officer of Path 1, (ii) Franklin Felber, former Treasurer and a former director,
(iii) James Berns, a current director and former Secretary, (iv) Rona Berns,
wife of Michael Berns and holder of record of 1,148,720 shares of common stock,
and (v) the law firm of Berns & Berns, former general counsel to Path 1.
Our complaint is for breach of oral contract, professional negligence,
breach of fiduciary duty, constructive trust, breach of the covenant of good
faith and fair dealing, and unfair business practices, primarily in connection
with the allocation of founder's stock of Path 1. We are seeking damages and/or
the return of stock.
<PAGE>
On November 29, 1999, Felber filed a cross-complaint against us, Ron
Fellman, Doug Palmer, Roderick Adams and Jyra for fraud, breach of fiduciary
duty, breach of the covenant of good faith and fair dealing, and
misrepresentation in connection with the exercise in July 1999 by Jyra of its
private option to purchase from Felber, for $4.00 per share, 255,640 shares of
Path 1 common stock.
The present and former officers and directors of Path 1 under this
complaint and cross-complaint are seeking or are expected to seek
indemnification and advancement of defense expenses from us. Michael Berns,
James Berns and Felber sued us in Delaware Chancery Court on November 9, 1999 to
seek to enforce their asserted rights to indemnification and advancement.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our Common Stock is quoted on the OTC Bulletin Board under the symbol
"PNWK". We do not know whether this meets the definition of an "established
public trading market" for our common stock. We are also listed on the Third
Segment of the Frankfurt Stock Exchange.
The following table sets forth the high and low bid prices for our
common stock on the OTC Bulletin Board for the periods indicated. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
1999 1998
high low high low
-------------------------------------
<S> <C> <C> <C> <C>
Quarter ended March 31 8.1250 3.5625 ---- ----
Quarter ended June 30 16.625 6.8750 ---- ----
Quarter ended September 30 12.500 8.1250 2.8750 2.2500
Quarter ended December 31 ---- ---- 6.0000 2.6250
</TABLE>
As of January 1, 2000, there were approximately 107 shareholders of
record of our 6,086,651 issued and outstanding shares of common stock. There
were also options outstanding as of January 1, 2000 to purchase 954,975
shares of common stock and (subject to creation of such series) 495,000
shares of Class B Common Stock. On January 6, 2000, the last reported bid
price of Path 1's common stock was $9.250 per share on the OTC Bulletin Board.
We currently have 5,541,351 shares of common stock that were sold
pursuant to Securities Act Rule 504 at a time when securities sold under Rule
504 did not thereby become "restricted securities". The remaining common
stock held by existing stockholders are "restricted securities" as that term
is defined by Rule 144. Restricted securities may be sold in the public
market only if they are registered or if they qualify for exemption from
registration under Rule 144 under the Securities Act or otherwise. None of
such restricted securities has yet been held for a full year, so none is yet
eligible for public resale under Rule 144.
We have not paid any cash dividends on our common stock and do not
presently intend to do so. Future dividend policy will be determined by our
Board of Directors on the basis of earnings, capital requirements, financial
condition and other factors deemed relevant.
RECENT SALES OF UNREGISTERED SECURITIES.
The following discussion describes all securities sold by us within
the past three years without registration.
From inception through March 1998, we issued 3,600,000 shares of Common
Stock to founders for nominal consideration pursuant to Rule 504 under the
Securities Act.
In March 1998, the Board of Directors authorized a Private Placement
under which we sold 1,614,833
<PAGE>
shares of common stock at $0.60 per share to accredited investors in the United
States and Europe. The offering was closed in May 1998. In connection with the
offering, we issued 49,500 common shares to brokers as payment for finders fees
and incurred other offering-related expenses of $18,726. The common shares were
sold pursuant to Rule 504, promulgated under the Securities Act.
In February 1999, the Board of Directors authorized a Private
Placement under which we sold 419,500 shares of common stock at $4 per share
to accredited investors in Europe. This offering was closed in April 1999. In
connection with this offering, we paid commissions consisting of (i) cash
payments equal to 5% of the subscription funds received and (ii) options to
purchase 20,975 shares of our common stock. The common shares were sold
pursuant to Rule 505, promulgated under the Securities Act.
In May 1999, the Board of Directors authorized a Private Placement
of up to 1,250,000 shares its common stock at a price of $8 per share to
accredited European investors. This offering was expanded on July 23, 1999 to
include accredited investors located in the United States. The offering is
authorized to continue for up to twenty-four months from its inception. As of
January 1, 2000, we have sold 125,800 shares. In connection with this
offering, we agreed to pay a broker a cash commission equal to five (5%) of
the subscription funds received from the sale of the common shares to
investors located by that firm, plus options to purchase 625 common shares
(with an exercise price of $8 per share) for each $100,000 of such
subscription funds sold. The common shares are being sold pursuant to Rules
505 and 506, promulgated under the Securities Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
COMMON STOCK
The Common Stock being registered here is a typical common stock, with
all customary rights.
POSSIBLE ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS AND STATUTES
BYLAWS
Our Bylaws state that special meetings of the stockholders may be
called by the President, the Board of Directors, or one-fourth of the shares of
stock issued and outstanding and entitled to vote at such meeting.
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law
which, subject to various exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder--defined as
any person or entity that is the beneficial owner of at least 15% of a
corporation's voting stock--for a period of three years following the time that
such stockholder became an interested stockholder, unless:
- - - prior to such time, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- - - upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- - - at or subsequent to such time, the business combination is approved by the
board and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least two-thirds of
the outstanding voting stock that is not owned by the interested
stockholder.
<PAGE>
Section 203 defines business combination to include:
- - - any merger or consolidation involving the corporation and the interested
stockholder;
- - - any sale, lease, exchange, mortgage, transfer, pledge or other disposition
involving the interested stockholder and 10% or more of the assets of the
corporation;
- - - subject to exceptions, any transaction which results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
- - - any transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or
- - - the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
TRANSFER AGENT AND REGISTRAR
Our transfer agent and registrar for the common stock is Registrar
and Transfer Company.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Certificate of Incorporation and Bylaws contain provisions
authorizing indemnification of and advancement of expenses to officers and
directors. The indemnities provided by our charter documents (i) shall continue
as to a person who has ceased to be a director or officer, (ii) shall inure to
the benefit of his heirs, executors and administrators, and (iii) shall not be
deemed to limit or exclude any rights, indemnities or limitations of liability
to which any person may be entitled, whether as a matter of law, under the
Bylaws, by agreement, vote of the stockholders or disinterested directors or
otherwise.
Section 145 of the Delaware General Corporation Law permits
indemnification of our officers and directors under certain conditions and
subject to certain limitations. Section 145 of the Delaware General
Corporation Law also provides that a corporation has the power to purchase
and maintain insurance on behalf of its officers and directors against any
liability asserted against such person and incurred by him or her in such
capacity, or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her against such
liability under the provisions of Section 145 of the Delaware General
Corporation Law. We purchased and presently maintain insurance on behalf of
our officers and directors.
We are currently engaged in litigation in which certain former and
present directors and officers seek indemnification under the Delaware General
Corporation Law and our charter documents for claims brought against them by us.
ITEM 13. FINANCIAL DATA AND SUPPLEMENTARY DATA.
See attached financial statements beginning on page F-1.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS FILED AS PART OF THE REGISTRATION STATEMENT.
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Index to Financial Statements
Period from January 30, 1998 (inception) to December 31, 1998
and the nine months ended September 30, 1999 (unaudited)
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..............................F-2
Financial Statements
Balance Sheets as of December 31, 1998 and September 30, 1999 (unaudited) .....F-3
Statements of Operations for the period from January 30, 1998 (inception) to
December 31, 1998 and the nine months ended September 30, 1999 (unaudited)...F-4
Statements of Stockholders' Equity for the period from January 30, 1998
(inception) to December 31, 1998 and the nine months ended
September 30, 1999 (unaudited)...............................................F-5
Statements of Cash Flows for the period from January 30, 1998 (inception) to
December 31, 1998 and the nine months ended September 30, 1999 (unaudited)...F-6
Notes to Financial Statements..................................................F-7
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Path 1 Network Technologies Inc.
We have audited the accompanying balance sheet of Path 1 Network Technologies
Inc. (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 30, 1998 (inception) through 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.
As discussed in Note 1 to the financial statements, the Company has not yet
generated positive cash flow from operations. The Company's ability to
transition from the development stage and ultimately, to attain profitable
operations, is dependent upon obtaining sufficient working capital to
complete the successful development of its technology, achieving market
acceptance of such technology and achievement of sufficient levels of revenue
to support the Company's cost structure.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Path 1 Network Technologies
Inc. (a development stage company) at December 31, 1998, and the results of
its operations and its cash flows for the period from January 30, 1998
(inception) through December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
San Diego, California
December 27, 1999
F-2
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 119,394 $ 1,005,362
Deposits and prepaid expenses 10,125 15,321
------------- -------------
Total current assets 129,519 1,020,683
Property and equipment, net
Computer equipment 65,238 71,476
Furniture and office equipment 7,449 7,449
Accumulated depreciation (19,012) (30,419)
------------- -------------
53,675 48,506
Investment in Jyra Research, Inc. 128,400 115,000
------------- -------------
$ 311,594 $ 1,184,189
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 55,342 $ 78,599
------------- -------------
Total current liabilities 55,342 78,599
Commitments
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value; shares authorized - 10;
shares issued and outstanding - 10 at December 31, 1998 and September 30, 1999
(unaudited) - -
Common stock, $0.001 par value; shares authorized -
20,000,000; shares issued and outstanding - 5,264,333 at December 31, 1998;
shares issued and outstanding - 5,771,133 at September 30, 1999 (unaudited) 5,264 5,771
Additional paid-in capital 1,452,447 3,759,353
Accumulated other comprehensive loss (18,320) (31,720)
Deficit accumulated during the development stage (1,183,139) (2,627,814)
------------- -------------
Total stockholders' equity 256,252 1,105,590
------------- -------------
$ 311,594 $ 1,184,189
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
Period from
January 30, 1998 (inception) Nine months ended
to December 31, 1998 September 30, 1999
---------------------------- ------------------
(unaudited)
<S> <C> <C>
Operating expenses:
Research and development $ 600,035 $ 695,839
Sales and marketing 291,698 234,915
General and administrative 298,529 528,130
-------------- ------------
Total operating expenses (1,190,262) (1,458,884)
Interest income, net 7,123 14,209
-------------- ------------
Net loss $ (1,183,139) $ (1,444,675)
============== ============
Net loss per share (Basic and Diluted) $ (0.25) $ (0.26)
============== ============
Weighted average shares used in computing net loss per share
(Basic and Diluted) 4,712,194 5,648,051
============== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------- ------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at inception on January 30, 1998 - $ - - $ - $ -
Issuance of common stock at par to founders
for cash in February 1998 - - 3,600,000 3,600 (2,500)
Issuance of Series A convertible preferred
stock in exchange for stock in Jyra
Research, Inc. in April 1998 10 - - - 146,720
Issuance of common stock at $0.60 per share
for cash from March through May 1998, net
of issuance costs of $48,426 - - 1,664,333 1,664 966,176
Transfer of common stock to employees by
principal stockholders - - - - 330,400
Issuance of stock options to consultants for
services - - - - 11,651
Unrealized loss on investment
in Jyra Research, Inc. - - - - -
Net loss from inception through December 31,
1998 - - - - -
----------------------- --------------------------------------
Balance at December 31, 1998 10 $ - 5,264,333 $5,264 $1,452,447
Issuance of common stock at $4.00 per share for
cash from March to April 1999, net of issuance
costs of $82,492 (unaudited) - - 419,500 420 1,595,088
Issuance of common stock at $8.00 per share for
cash from July to Sept 1999, net
of issuance costs of $821 (unaudited) - - 87,300 87 697,492
Issuance of stock options to consultants for
services (unaudited) - - - - 14,326
Unrealized loss on investment
in Jyra Research, Inc. (unaudited) - - - - -
Net loss for nine months ended
September 30, 1999 (unaudited) - - - - -
----------------------- --------------------------------------
Balance at September 30, 1999 (unaudited) 10 $ - 5,771,133 $5,771 $3,759,353
======================= ======================================
<CAPTION>
DEFICIT
OTHER ACCUMULATED
COMPREHENSIVE DURING THE TOTAL
INCOME DEVELOPMENT STOCKHOLDERS'
(LOSS) STAGE EQUITY
------------------------------------------------
<S> <C> <C> <C>
Balance at inception on January 30, 1998 $ - $ - $ -
Issuance of common stock at par to founders
for cash in February 1998 - - 1,100
Issuance of Series A convertible preferred
stock in exchange for stock in Jyra
Research, Inc. in April 1998 - - 146,720
Issuance of common stock at $0.60 per share
for cash from March through May 1998, net
of issuance costs of $48,426 - - 967,840
Transfer of common stock to employees by
principal stockholders - - 330,400
Issuance of stock options to consultants for
services - - 11,651
Unrealized loss on investment
in Jyra Research, Inc. (18,320) - (18,320)
Net loss from inception through December 31,
1998 - (1,183,139) (1,183,139)
------------------------------------------------
Balance at December 31, 1998 $(18,320) $(1,183,139) $ 256,252
Issuance of common stock at $4.00 per share for
cash from March to April 1999, net of
issuance costs of $82,492 (unaudited) - - 1,595,508
Issuance of common stock at $8.00 per share for cash
from July to Sept 1999, net of issuance costs of $821
(unaudited) - - 697,579
Issuance of stock options to consultants for
services (unaudited) - - 14,326
Unrealized loss on investment
in Jyra Research, Inc. (unaudited) (13,400) - (13,400)
Net loss for nine months ended September 30,
1999 (unaudited) - (1,444,675) (1,444,675)
------------------------------------------------
Balance at September 30, 1999 (unaudited) $(31,720) $(2,627,814) $ 1,105,590
================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
January 30, 1998 (inception) Nine months ended
to December 31, 1998 September 30, 1999
---------------------------- ------------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,183,139) $ (1,444,675)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 19,012 11,407
Common stock issued to employees by principal stockholders 330,400 -
Common stock options issued for services 11,651 14,326
Changes in operating assets and liabilities:
Deposits and prepaid expenses (10,125) (5,196)
Accounts payable and accrued liabilities 55,342 23,257
-------------- --------------
Net cash flows used for operating activities (776,859) (1,400,881)
INVESTING ACTIVITIES
Purchases of property and equipment (72,687) (6,238)
-------------- --------------
Net cash flows used for investing activities (72,687) (6,238)
FINANCING ACTIVITIES
Issuance of common stock for cash, net 968,940 2,293,087
-------------- --------------
Net cash flows provided by financing activities 968,940 2,293,087
-------------- --------------
Net increase in cash and cash equivalents 119,394 885,968
Cash and cash equivalents at inception - 119,394
-------------- --------------
Cash and cash equivalents at end of period $ 119,394 1,005,362
============== ==============
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING ACTIVITIES:
Issuance of Series A convertible preferred stock in exchange for investment in Jyra
Research, Inc. $ 146,720 $ -
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements
(Information subsequent to December 31, 1998 and pertaining to September 30,
1999 and for the nine months ended September 30, 1999 is unaudited.)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Path 1 Network Technologies Inc. (the "Company") was incorporated in Delaware on
January 30, 1998 under the name Millennium Network Technologies, Inc. On March
16, 1998, the Company changed its name to Path 1 Network Technologies Inc.
The Company is engaged in the development of proprietary, internet protocol
based, network technology which when developed, will manage and alleviate
network traffic, enabling simultaneous computer, telephone and video
transmissions over one line with improved quality of service. From inception to
date, management of the Company has devoted substantially all of its efforts in
organizing the Company and raising capital necessary to fund planned operations
and product development. Accordingly, at December 31, 1998 the Company is
considered to be in the development stage.
BASIS OF PRESENTATION
In the period from January 30, 1998 (inception) through December 31, 1998, the
Company incurred losses totalling $1,183,139. The Company's ability to
transition from the development stage and ultimately, to attain profitable
operations, is dependent upon obtaining sufficient working capital to complete
the successful development of its technology, achieving market acceptance of
such technology and achievement of sufficient levels of revenue to support the
Company's cost structure. Management of the Company is actively seeking to raise
the required working capital through the sale of common and preferred equity to
qualified investors and ultimately from profitable operations. There can be no
assurances that required equity financing will be available on terms acceptable
to the Company, if at all, to fund the Company's working capital requirements
until such time as it can achieve profitable operations. The accompanying
financial statements have been prepared assuming the Company will continue as a
going concern.
INTERIM FINANCIAL DATA
The financial statements as of September 30, 1999 and for the nine months
ended September 30, 1999 are unaudited. The unaudited financial statements
have been prepared on the same basis as the audited financial statements and,
in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial
information included, in accordance with generally accepted accounting
principles. The results of operations for the interim period ended September
30, 1999 are not necessarily indicative of the results which may be reported
for any other interim period or for the year ending December 31, 1999.
Financial statements for the period from January 30, 1998 (inception) to
September 30, 1998 have not been presented as the operating activities of the
Company were not significant and disclosure would not be meaningful.
F-7
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents. As of December 31, 1998,
cash and cash equivalents consist primarily of cash deposits in a money market
account.
PROPERTY AND EQUIPMENT
Property and equipment consists primarily of computer equipment and is stated at
cost. Depreciation is calculated using the straight-line method over an
estimated useful life of two years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
about the future that effect the amounts reported in the financial statements.
Actual results could differ from those estimates.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and related Interpretations
in accounting for its employee stock options because, as discussed in Note 4,
the alternative fair value accounting provided under Financial Accounting
Standards Board Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK BASED COMPENSATION, requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Options or stock awards issued to
non-employees are valued using the fair value method and expensed over the
period services are provided.
NET LOSS PER SHARE
The Company computes net loss per share following SFAS No. 128, EARNINGS PER
SHARE and SEC Staff Accounting Bulletin No. 98. SFAS 128 requires the
presentation of basic
F-8
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (continued)
and diluted income (loss) per share amounts. Under the provisions of SFAS No.
128, basic net income (loss) per share is computed by dividing the net income
(loss) available to common shareholders for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share is computed by dividing the net income (loss) for the
period by the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares, composed of
incremental common shares issuable upon the exercise of stock options and
common shares issuable on assumed conversion of Series A preferred stock, are
included in diluted net income (loss) per share to the extent these shares
are dilutive. Common equivalent shares are not included in the computation of
dilutive net loss per share for the period January 30, 1998 (inception) to
December 31, 1998 because the effect would be anti-dilutive.
Under the provisions of SAB 98, common shares issued for nominal consideration,
if any, would be included in the per share calculations as if they were
outstanding for all periods presented. No common shares have been issued for
nominal consideration.
F-9
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (continued)
2. INVESTMENT IN JYRA RESEARCH, INC.
On March 16, 1998, the Company signed an agreement with Jyra Research, Inc.
("Jyra"), a publicly-held, United Kingdom based company, which is in the
business of developing network monitoring software. The agreement provided for
Jyra to make a strategic investment in the Company and for the Company to make a
strategic investment in Jyra.
Under this agreement the Company exchanged ten shares of its Series A Preferred
stock for 16,000 restricted common shares of Jyra. The agreement became
effective on April 21, 1998.
The common stock received from Jyra is restricted from sale by the Company for
one year from the date of issuance. The Company's management determined that the
fair value of the Jyra shares was more readily determinable than the fair value
of the Company's Series A Preferred stock on the date of the agreement.
Accordingly, the Company recorded the value of the Series A Preferred stock
issued in this non-monetary exchange based on the fair value of the Jyra common
shares on the date of the agreement. The fair value of the Jyra shares was
determined based on the closing market price as reported on the NASD's OTC
Bulletin Board on the date of the transaction.
As the restriction on the sale of Jyra shares ends less than one year from the
balance sheet date, the Company will account for its investment in Jyra common
shares using the fair value method. The agreement contains provisions which
restrict the ability of the Company to issue debt or warrants without Jyra's
prior consent for a period of two years.
3. COMMITMENTS
LEASES
The Company leases its office facility under an operating lease agreement which
expires on April 22, 1999. The lease is payable in monthly installments of
$3,315. Rent expense totaled $27,904 for the period from January 30, 1998
(inception) through December 31, 1998.
F-10
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY
FOUNDERS STOCK
On January 31, 1998, the Company issued 3,600,000 shares of common stock to the
Company's founders for $1,100 in cash.
STOCK SPLIT
On March 15, 1998, the Board of Directors authorized a 3,600 to 1 stock split of
all outstanding common stock. All share and per share amounts and stock option
data within the financial statements have been restated to reflect the stock
split.
AUTHORIZED SHARES
On March 16, 1998, the Company amended its Certificate of Incorporation to
increase the Company's authorized shares of common stock to 20,000,000 and to
authorize ten shares of preferred stock. The common and preferred shares were
authorized with a par value of $0.001 per share.
CONVERTIBLE PREFERRED STOCK
On March 15, 1998, the Company's Board of Directors authorized the creation of
the Series A Convertible Preferred Stock ("Series A Preferred") which was issued
to Jyra (Note 2). The Series A Preferred Stock is non-voting, does not bear
interest, and is non-assignable for two years. In the event of a liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, the
holders of the preferred shares and common shares are to receive distributions
ratably on an "as-converted" basis. The Series A Preferred stock is convertible
nine months after issuance at the option of the holder or the Company, into
277,018 shares of the Company's common stock. Holders of the outstanding Series
A Preferred stock are entitled to appoint two representatives to the Company's
Board of Directors.
PRIVATE PLACEMENT OFFERING
In May 1998, the Company completed a Private Placement offering under which it
sold 1,614,833 shares of common stock at $0.60 per share to accredited
investors, resulting in net cash proceeds totaling $967,840. In connection with
the offering, the Company issued 49,500 common shares to brokers as payment for
finders fees and incurred other offering related expenses of $18,726.
F-11
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
In the period from January 30, 1998 (inception) through December 31, 1998 the
Company granted 826,500 options for common stock, 25,000 options were cancelled,
no options were exercised, and 801,500 stock options remain outstanding.
A summary of stock options outstanding at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED EXERCISE PRICE
RANGE OF EXERCISE OPTIONS REMAINING LIFE AVERAGE OPTIONS OF OPTIONS
PRICES OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISABLE
- - ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.60 776,500 9.57 $0.60 492,412 $0.60
$2.50 25,000 9.67 $2.50 2,083 $2.50
</TABLE>
STOCK-BASED EMPLOYEE COMPENSATION
The Company has adopted the disclosure-only provision of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation expense
has been recognized for the stock options issued to employees or directors. Had
compensation expense been determined consistent with SFAS No. 123, the Company's
net loss would have been changed to the following pro forma amounts:
<TABLE>
<S> <C>
Net loss, as reported $(1,183,139)
Net loss, pro forma $(2,103,483)
Net loss per share, as reported $(0.25)
Net loss per share, pro forma $(0.45)
</TABLE>
The pro forma effect on net loss for the period presented may not be
representative of the pro forma effect on net loss in future years because they
reflect less than four years of vesting.
The fair value of options granted in 1998 is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions: expected life of three years; expected dividend yield of zero
percent; expected volatility of 100 percent; and risk-free interest rate of six
percent. The weighted-average fair value of options granted was $1.61 in 1998.
For the period ended December 31, 1998, the Company amortized $11,651 to
research and development expense related to options granted under five
consulting agreements.
F-12
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
On June 18, 1998, the principal stockholders of the Company transferred on a
pro-rata basis 224,000 shares of their holdings of the Company's common stock to
an employee. The fair value of the Company's stock on the date of transfer was
$0.60 per share, resulting in compensation expense of $134,400 during the period
ended December 31, 1998.
On September 16, 1998, the principal stockholders of the Company transferred on
a pro-rata basis 56,000 shares of their holdings of the Company's common stock
to an employee. The fair market value of the Company's stock on the date of
transfer was $3.50 per share, resulting in compensation expense of $196,000
during the period ended December 31, 1998.
5. INCOME TAXES
Significant components of the Company's deferred tax assets are shown below. A
valuation allowance of $464,000 has been recognized to offset the deferred tax
assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31
1998
----------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 413,000
Research and development credits 37,000
Other, net 14,000
----------------
Total deferred tax assets 464,000
Valuation allowance for deferred tax assets (464,000)
----------------
Net deferred tax assets $ -
================
</TABLE>
At December 31, 1998, the Company has federal and California net operating loss
carryforwards of approximately $1,120,841 and $548,000, respectively. The
federal and California tax loss carryforwards will begin expiring in 2018 and
2006, respectively unless previously utilized. The Company also had federal and
California research tax credit carryforwards of approximately $27,000 and
$15,000, respectively, which will began to expire in 2013 unless previously
utilized.
F-13
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
Pursuant to Internal Revenue Code Sections 382 and 383, the annual use of the
Company's net operating loss carryforwards may be limited in the event of a
cumulative change in ownership of more than 50%. However, the Company does not
believe such limitation will have a material impact upon the utilization of
these carryforwards.
6. YEAR 2000 COMPLIANCE (UNAUDITED)
The Company's accounting software and other computer application software used
in its operations were purchased from outside vendors. It is management's
understanding that these applications are year 2000 compliant. As a result,
management of the Company does not believe that the Year 2000 Issue will have an
impact on its financial statements or on the Company's results of operations.
7. SUBSEQUENT EVENTS
In April 1999, the Company completed a Private Placement Offering under which
it sold 419,500 shares of common stock at $4.00 per share to accredited
investors, resulting in net cash proceeds totaling $1,595,508. In connection
with the offering, the Company granted 20,975 options for common stock to
brokers as payment for finders fees and incurred other offering related
expenses of $82,492.
In January and May 1999 a total of 128,475 common stock options were granted at
exercise prices from $0.60 to $4.00 per share.
In May 1999, the Company's Board of Directors authorized a Private Placement
Offering of up to 1,250,000 shares of its common stock, under which to
December 27, 1999 it has sold 125,800 shares of common stock at $8.00 per
share to accredited investors, resulting in net cash proceeds totaling
$954,914. In connection with the offering through December 27, 1999, the
Company will grant 6,290 options for common stock to brokers as payment for
finders fees and incurred other offering related expenses of $51,486.
Subsequent to the balance sheet date the fair market value of the shares held in
Jyra Research Inc. have declined. At December 27, 1999, the fair market value
was $5.875 per share resulting in a fair market value of $94,000.
In June 1999, the Company commenced a three-year operating lease for office
space at $8,491 per month for base rent, subject to annual rate increases.
F-14
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (continued)
7. SUBSEQUENT EVENTS (CONTINUED)
On August 3, 1999, the Board of Directors authorized the issuance of
non-qualified and incentive stock options for up to 1,500,000 common shares.
Options granted will generally expire seven years from the date of grant and the
terms of vesting are determined by the Board of Directors when such options are
granted (range of vesting from immediate to four years). Generally, any unvested
shares underlying exercised options will be canceled in the event of termination
of employment or engagement. In November 1999, 495,000 unqualified stock options
were granted under this plan at exercise prices from $2.00 to $4.35 per share.
In December 1999, Jyra Research, Inc. converted its Series A Preferred stock, as
discussed in Note 4, into 277,018 shares of the Company's common stock.
8. LEGAL PROCEEDINGS
On September 20, 1999, a complaint by the Company was filed against certain
stockholders for breach of oral contract, professional negligence, breach of
fiduciary duty, constructive trust, breach of the covenant of good faith and
fair dealing and unfair business practice, primarily in connection with the
allocation of founders stock of the Company. On November 29, 1999, a
stockholder, who was a defendant in the September 20 complaint, filed a
cross-compliant against the Company, certain directors of the Company and Jyra
Research, Inc. for fraud, breach of fiduciary duty, breach of the covenant of
good faith and fair dealing, and misrepresentation in connection with the
exercise in July 1999 by Jyra of its arrangement to purchase from this
stockholder for $4.00 per share, 255,640 shares of the Company's common stock.
This litigation is in the very early stages and the Company has not yet
determined the potential financial impact on the Company. However, there can be
no assurance that it may not have a material adverse impact on the Company's
financial position and results of operations.
F-15
<PAGE>
Exhibits
- - --------
3.1 Certificate of Incorporation, as amended
3.2 Bylaws
10.1 Option Agreement Between Franklin S. Felber and Jyra Research,
Inc. dated January 25, 1999.
10.2 Lock-Up Agreement dated January 25, 1999
10.3 Lease Agreement between us and Spieker Properties, L.P. dated
April 10, 1999
10.4 Employment Agreement between us and Yendo Hu dated August 31,
1999
10.5 1999 Stock Option/Stock Issuance Plan
10.6 Form of Notice of Grant/Stock Option Agreement under the
1999 Stock Option/Stock Issuance Plan
10.7 Form of Notice of Grant/Stock Option Agreement other than
under the 1999 Stock Option/Stock Issuance Plan
10.8 Agreement with Doctor Design, Inc. dated June 4, 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
PATH 1 NETWORK TECHNOLOGIES INC.
Date: January 10, 2000 By /s/ Ronald D. Fellman
-----------------------------------------
Ronald D. Fellman
President, Chief Executive Officer and
Chairman of the Board
<PAGE>
STATE OF DELAWARE
PAGE 1
OFFICE OF THE SECRETARY OF STATE
--------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "MILLENNIUM NETWORK TECHNOLOGIES, INC.", FILED IN THIS OFFICE
ON THE THIRTIETH DAY OF JANUARY, A.D. 1998, AT 9 O'CLOCK A.M.
285301 8100 [LOGO]
Edward J. Freel, Secretary of State
981039457 AUTHENTICATION: 8897839
DATE: 02-02-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 01/30/1998
981039457 - 2853501
CERTIFICATE OF INCORPORATION
OF
MILLENNIUM NETWORK TECHNOLOGIES, INC.
The undersigned, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of the General
Corporation Law of the State of Delaware, does hereby certify as follows:
1. The name of the corporation (hereinafter referred to as the
"Corporation") is Millennium Network Technologies, Inc.
2. The address of the registered office of the Corporation in the State
of Delaware is 15 East North Street, City of Dover, County of Kent 19901. The
name of its registered agent at such address is United Corporate Services, Inc.
3. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
4. The Corporation shall have authority to issue one thousand (1,000)
shares of Common Stock, par value $.001 per share.
5. The term of existence of the Corporation shall be perpetual.
6. The stockholders may hold their meetings, annual or special, within
or without the State of Delaware as may be provided in the By-Laws, and the
Board of Directors or any Committee thereof may hold all or any of their
meetings within or without the State of Delaware at such places as the By-Laws
or the Board of Directors may designate. The Corporation may have one or more
offices and keep any of the books of the Corporation subject to the provisions
of the laws of the State of Delaware within or without the State of Delaware at
such places as may from time to time be designated by the Board of Directors.
Elections of directors need not be written ballot unless the By-Laws of the
Corporation shall so provide.
7. The Corporation shall possess and may exercise all the powers and
privileges granted by the General Corporation Law or by any other law of the
State of Delaware at the time in force or by this Certificate of Incorporation,
together with any powers incidental thereto, so far as such powers and such
privileges are necessary or convenient to the conduct, promotion or attainment
of the purpose set forth in Article 3 of this Certificate of Incorporation.
8. The personal liability of the directors of the Corporation is hereby
eliminated to the fullest extent permitted by paragraph 7 of section 102 of the
General Corporation Law of the State of Delaware, as the same may be amended and
supplemented from time to time. Except as and to the extent otherwise required
by Delaware law, the directors of the Corporation shall not
<PAGE>
be liable to the Corporation or the stockholders of the Corporation for any
damage arising out of or in connection with or resulting from any breach of a
director's fiduciary duty. The Corporation shall, to the full extent
permitted by the General Corporation Law of the State of Delaware, indemnify
all persons whom this Corporation may indemnify pursuant thereto and, in
connection therewith, to the full extent permitted by Delaware law, advance
expenses to all such persons in connection with the investigation and defense
of indemnifiable actions brought against them. Directors and officers of the
Corporation shall not be obligated to repay funds so advanced unless it shall
be specifically determined that such director or officer shall not be
entitled to such indemnification. The indemnification provided by this
Section shall not limit or exclude any rights, indemnities or limitations of
liability to which any person may be entitled, whether as a matter of law,
under the By-laws of the Corporation, by agreement, vote of the stockholders
or disinterested directors of the Corporation, or otherwise.
9. All transactions between the Corporation and one or more of its
directors or officers, or between the Corporation and any other corporation,
partnership, association or other organization in which one or more of its
directors or officers are officers or directors or have a financial interest,
shall be valid to the full extent permitted by the General Corporation Law of
the State of Delaware.
10. The name of the incorporator is James Berns, and the mailing
address of the incorporator is One Rockefeller Plaza, New York, New York 10020.
Signed at New York, New York on January 29, 1998.
/s/
---
James Berns, Esq.
One Rockefeller Plaza
New York, New York 10020
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
-----------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "MILLENNIUM NETWORK TECHNOLOGIES, INC.", CHANGING ITS NAME FROM
"MILLENNIUM NETWORK TECHNOLOGIES, INC." TO "PATH 1 NETWORK TECHNOLOGIES INC.",
FILED IN THIS OFFICE ON THE SIXTEENTH DAY OF MARCH, A.D. 1998, AT 9 O'CLOCK A.M.
[SEAL]
/s/
---
EDWARD J. FREEL, SECRETARY OF STATE
2853501 8100 AUTHENTICATION: 8974042
981100087 DATE: 03-16-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 01/30/1998
981039457 - 2853501
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
MILLENNIUM NETWORK TECHNOLOGIES, INC.
The Undersigned, in order to amend its Certificate of Incorporation,
hereby certify as follows:
FIRST: The name of the corporation is Millennium Network
Technologies, Inc.
SECOND. The Corporation hereby amends its Certificate of
Incorporation as follows:
Paragraph FIRST of the Certificate of Incorporation, relating to the
name of the Corporation, is hereby amended to read in its entirely, as follows:
"FIRST: The name of the corporation is Path 1 Network Technologies
Inc."
Paragraph FOURTH of the Certificate of Incorporation, relating to the
authorized capital, is hereby amended to read in its entirely, as follows:
"FOURTH: (a) The Corporation shall be authorized to issue the
following shares:
<TABLE>
<CAPTION>
------------------- ----------------- ----------------
Class # of Par Value
----- ---- ---------
Shares
------
------------------- ----------------- ----------------
<S> <C> <C>
Common 20,000,000 .001
------------------- ----------------- ----------------
Preferred 10 .001
------------------- ----------------- ----------------
</TABLE>
(b) PREFERRED STOCK. The shares of the Corporation's preferred stock
shall be designated as Series A Preferred Stock (the "Series A Preferred
Stock").
(c) VOTING. (1) Except as provided in paragraph (c) (2), the Series A
Preferred Stock
<PAGE>
shall have no voting rights.
(2) The Corporation shall not, without the affirmative consent of the
holders of a majority of the Series A Preferred Stock, (i) in any manner
authorize or create any class of capital stock ranking, as to distribution of
assets, prior to the Series A Preferred Stock or (ii) in any manner alter or
change the designations or the powers, preferences or rights, or the
qualifications, limitations or restrictions, or increase the number of
authorized shares of the Series A Preferred Stock in any material respect
prejudicial to the holders thereof.
(d) DIVIDENDS. The holders of the Series A Preferred Stock shall be
entitled to receive, when and as declared by the Board of Directors of the
Corporation, out of funds legally available for that purpose, a dividend,
payable, on the same terms as dividends payable to holders of the Corporation's
common shares, in an amount equal to the percentage interest in the
Corporation's common shares the Series A Preferred Stock would be convertible
into.
(e) CONVERSION
Nine months after the date the Series A Preferred Shares are issued,
ten (10) Series A Preferred Shares shall be convertible into 277,018 Shares of
the Corporation's common stock.
(f) NON-VOTING, NON-ASSIGNABLE AND NON-TRANSFERABLE
The Series A Preferred Shares shall be (i) non-voting, (ii)
non-assignable, and (iii) non-transferable for the first two years after
issuance.
(g) REDEMPTION
At any time nine months after issuance, ten Series A Preferred Shares
may be redeemed by the Corporation into 277,018 Shares of the Common Stock of
the Corporation.
(h) REPRESENTATION ON BOARD OF DIRECTORS
<PAGE>
Holders of all the outstanding Series A Preferred Shares shall be
entitled to appoint two representatives to the Corporation's Board of Directors.
(i) DEBT FINANCING: WARRANTS
For a period of two years after the issuance of the Series A Preferred
Shares, the Corporation shall not be entitled to (i) issue any debt securities,
or (ii) any warrants in connection with an equity financing, without the consent
of the holders of the Series A Preferred Shares, which consent shall not be
unreasonably withheld.
(j) LIQUIDATION, DISSOLUTION OR WINDING UP.
Upon any liquidation, dissolution or winding up of the Corporation, no
distribution shall be made to the holders of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up) with the Series
A Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up.
THIRD: The amendment effected herein was authorized by the consent in
writing, setting forth the action so taken, unanimously signed by the holders of
all the outstanding shares entitled to vote thereon pursuant to Section 228 and
242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, I hereunto sign my name and affirm that the
statements made herein are true under the penalties of perjury, this 16th day of
March 1998.
/s/
---
James Berns, Secretary
<PAGE>
MILLENIUM NETWORK TECHNOLOGIES, INC.
(A Delaware Company)
BY-LAWS
<PAGE>
MILLENNIUM NETWORK TECHNOLOGIES, INC.
(A Delaware Company)
BY-LAWS
TABLE OF CONTENTS
ARTICLE 1
<TABLE>
<S> <C>
STOCKHOLDERS 1
Section 1.1 ANNUAL MEETINGS 1
Section 1.2 SPECIAL MEETINGS 1
Section 1.3 NOTICE OF MEETINGS 1
Section 1.4 BUSINESS TRANSACTED AT SPECIAL MEETINGS OF STOCKHOLDERS 1
Section 1.5 QUORUM 1
Section 1.6 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING 2
Section 1.7 APPROVAL OR RATIFICATION BY STOCKHOLDERS 2
ARTICLE 2
BOARD OF DIRECTORS 2
Section 2.1 GENERAL POWERS 2
Section 2.2 NUMBER AND TERM OF OFFICE 2
Section 2.3 ELECTION OF DIRECTORS 2
Section 2.4 ANNUAL AND REGULAR MEETINGS 3
Section 2.5 SPECIAL MEETINGS; NOTICE 3
Section 2.6 QUORUM 3
Section 2.7 TELEPHONE MEETINGS; ACTION WITHOUT A MEETING 3
<PAGE>
<S> <C>
Section 2.8 RESIGNATIONS 4
Section 2.9 REMOVAL OF DIRECTORS 4
Section 2. 10 VACANCIES AND NEWLY CREATED DIRECTORSHIPS 4
Section 2.11 COMPENSATION 4
ARTICLE 3
COMMITTEES 4
Section 3.1 HOW CONSTITUTED 4
Section 3.2 POWERS 5
Section 3.3 PROCEEDINGS 5
Section 3.4 QUORUM AND MANNER OF ACTING; TELEPHONE MEETINGS 5
Section 3.5 RESIGNATION 5
Section 3.6 REMOVAL 5
Section 3.7 VACANCIES 5
ARTICLE 4
OFFICERS 6
Section 4.1 NUMBER 6
Section 4.2 ELECTION 6
Section 4.3 ADDITIONAL OFFICERS 6
Section 4.4 SALARIES 6
Section 4.5 RESIGNATIONS 6
Section 4.6 REMOVAL AND VACANCIES 6
<PAGE>
<S> <C>
Section 4.7 DUTIES OF THE PRESIDENT 6
Section 4.8 DUTIES OF THE VICE-PRESIDENT 7
Section 4.9 DUTIES OF THE SECRETARY 7
Section 4.10 DUTIES OF THE CONTROLLER 7
Section 4.11 EMPLOYEE BONDS 7
ARTICLE 5
CAPITAL STOCK 8
Section 5.1 CERTIFICATES OF STOCK 8
Section 5.2 SIGNATURES 8
Section 5.3 LOST, STOLEN OR DESTROYED CERTIFICATES 8
Section 5.4 TRANSFER OF STOCK 8
Section 5.5 RECORD DATE 8
Section 5.6 REGISTERED STOCKHOLDERS 9
ARTICLE 6
INDEMNIFICATION 9
Section 6.1 ACTIONS AGAINST OFFICERS AND DIRECTORS 9
Section 6.2 INSURANCE 9
ARTICLE 7
GENERAL PROVISIONS 9
Section 7.1 DIVIDENDS 9
<PAGE>
<S> <C>
Section 7.2 RESERVES 9
Section 7.3 CHECKS 10
Section 7.4 FISCAL YEAR 10
Section 7.5 SEAL 10
Section 7.6 OFFICES 10
ARTICLE 8
AMENDMENTS 10
Section 8.1 AMENDMENTS 10
</TABLE>
<PAGE>
BY-LAWS
ARTICLE 1
STOCKHOLDERS
Section 1.1 ANNUAL MEETINGS. The annual meeting of the
Stockholders of the Company for the election of directors and for the
transaction of such other business as properly may come before such meeting
shall be held at such place either within or without the State of Delaware and
at 10:00 A.M. local time on the fourth Tuesday in March (or, if such is a legal
holiday, then on the next succeeding business day), or at such other time and
date as shall be fixed from time to time by resolution of the Board of Directors
and as set forth in the notice of the meeting. The Chairman of the Board or, in
his absence, the President, shall determine the purpose or purposes and the
agenda of and order of business at all regular and special meetings called by
the Board and of any committee on which he serves.
Section 1.2 SPECIAL MEETINGS. Special meetings of the
stockholders may be called at any time by the President (or, in the absence or
disability of the President, by any Vice President), or by the Board of
Directors, and may be called by one-fourth of the shares of stock of the Company
issued and outstanding and entitled to vote at such meeting. Any such request by
stockholders shall state the purpose or purposes of the proposed meeting. Such
special meetings of the stockholders shall be held at such places, within or
without the State of Delaware, as shall be specified in the respective notices
or waivers of notice.
Section 1.3 NOTICE OF MEETINGS. The Secretary or any Assistant
Secretary shall cause notice of the time, place and purpose or purposes of each
meeting of the stockholders (such notice to contain the name of the person or
persons calling the meeting, unless such meeting is the annual meeting of the
stockholders) to be mailed, not less than ten but not more than sixty days prior
to the meeting, to each stockholder of record entitled to vote at his
post-office address as the same appears on the books of the Company at the time
of such mailing. Such further notice shall be given as may be required by law.
Notice of any meeting of stockholders need not be given to any stockholder who
shall sign a waiver of such notice in writing, whether before or after the time
of such meeting. Attendance of any stockholder at any meeting in person or by
proxy, without protesting prior to the conclusion of the meeting the lack of
notice of such meeting, shall constitute a waiver of notice by him. Notice of
any adjourned meeting of the stockholders of the Company need not be given.
Section 1.4 BUSINESS TRANSACTED AT SPECIAL MEETINGS OF
STOCKHOLDERS. Business transacted at any special meeting of stockholders shall
be limited to the purposes stated in the notice thereof.
Section 1.5 QUORUM. Except as at the time otherwise required
by statute or by the
<PAGE>
Certificate of Incorporation, the presence at any stockholders meeting, in
person or by proxy, of a majority of the shares of stock then issued and
outstanding and entitled to vote at the meeting, shall be necessary and
sufficient to constitute a quorum for the transaction of business.
Section 1.6 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. To the
extent permitted by any statute at the time in force, whenever the vote of
stockholders at a meeting thereof is required or permitted to be taken for or in
connection with any corporate action, by any statute, by the Certificate of
Incorporation or by these By-Laws, the meeting and vote of stockholders may be
dispensed with if the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
shall consent in writing to such corporate action being taken. 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.
Section 1.7 APPROVAL OR RATIFICATION BY STOCKHOLDERS. The
board of directors in its discretion may submit any act, transaction or contract
for approval or ratification at any annual meeting of the stockholders, or at
any special meeting of the stockholders called for the purpose of considering
any such act, transaction or contract. Any act, transaction or contract that
shall be approved or be ratified by the vote of the stockholders holding a
majority in voting power of the issued and outstanding shares of the capital
stock of the Company present in person or by proxy at such meeting and entitled
to vote thereat on such matter (provided that a quorum shall be present) shall
be as valid and as binding upon the Company and upon all the stockholders as if
it had been approved or ratified by every stockholder of the Company.
ARTICLE 2
BOARD OF DIRECTORS
Section 2.1 GENERAL POWERS. The property, affairs and business
of the Company shall be managed by the Board of Directors. Each Director shall
be at least eighteen years of age, and each Director shall be a stockholder;
PROVIDED, HOWEVER, that existing Directors shall have the power to waive this
requirement in circumstances which they deem, in their discretion, to be
appropriate. The Board of Directors may exercise all the powers of the Company,
whether derived from law or the Certificate of Incorporation, except such powers
as are, by statute, by the Certificate of Incorporation or by these By-Laws,
vested solely in the stockholders of the Company.
Section 2.2 NUMBER AND TERM OF OFFICE. The Board of Directors
shall consist of at least one and not more than seven Directors, such number to
be fixed from time to time by resolution of the Board of Directors. The initial
Board of Directors shall consist of one (1) Director. Each Director (whenever
elected) shall hold office until his successor shall have been elected and shall
qualify or until he shall have resigned in the manner provided in Section 2.8,
or
<PAGE>
shall have been removed in the manner provided in Section 2.9.
Section 2.3 ELECTION OF DIRECTORS. The Directors elected by
the Incorporator shall hold office until the first annual meeting of
stockholders, and until their successors shall have been elected and qualified.
Commencing with the first annual meeting of stockholders, except as otherwise
provided in Sections 2.9 and 2. 10, the Directors shall be elected annually at
the annual meeting of the stockholders. In the event of the failure to elect
Directors at an annual meeting of the stockholders, then Directors may be
elected at any regular or special meeting of stockholders entitled to vote for
the election of Directors provided that notice of such meeting shall contain
mention of such purpose. At each meeting of the stockholders for the election of
Directors, provided a quorum is present, the Directors shall be chosen and
elected by a plurality of the votes validly cast at such election.
Section 2.4 ANNUAL AND REGULAR MEETINGS. The annual meeting of
the Board of Directors for the choosing of officers and for the transaction of
such other business as may come before the meeting shall be held in each year as
soon as possible after the annual meeting of the stockholders at the place of
such annual meeting of the stockholders, and notice of such annual meeting of
the Board of Directors shall not be required to be given. The Board of Directors
from time to time may provide by resolution for the holding of regular meetings
and fix the time and place (which may be within or outside the State of
Delaware) thereof. Notice of such regular meetings need not be given; PROVIDED,
HOWEVER, that in case the Board of Directors shall fix or change the time or
place of regular meetings, notice of such action shall be mailed promptly to
each Director who shall not have been present at the meeting at which such
action was taken.
Section 2.5 SPECIAL MEETINGS; NOTICE. Special meetings of the
Board of Directors shall be held whenever called by a majority of the Board of
Directors, by the President (or, in the absence or disability of the President,
by any Vice President), or by any two Directors, at such time and place (which
may be within or outside of the State of Delaware) as may be specified in the
respective notices or waivers of notice thereof. Neither the business to be
transacted at nor the purpose of any special meeting need be specified in the
waiver of notice of such meeting. Special meetings of the Board of Directors may
be called on one day's notice to each Director, personally or by telephone,
telegram or telecopier, or on two days' notice by mail. Notice of any special
meeting need not be given to any Director who shall be present at such meeting,
and any business may be transacted thereat. No notice need be given of any
adjourned meeting.
Section 2.6 QUORUM. At all meetings of the Board of Directors,
the presence of a majority of the total number of Directors shall be necessary
and sufficient to constitute a quorum for the transaction of business. Except
when otherwise required by statute, the act of a majority of the Directors
present at any meeting at which a quorum is present shall be the act of the
Board of Directors. In the absence of a quorum, a majority of the Directors
present may adjourn the meeting for time to time, until a quorum shall be
present.
Section 2.7 TELEPHONE MEETINGS; ACTION WITHOUT A MEETING. Any
one or more members of the Board or any Committee thereof may participate in a
meeting of the Board or Committee by means of a conference telephone or any
means of communication by which all
<PAGE>
persons participating in the meeting can hear each other at the same time,
and participation at such a meeting shall constitute presence in person at
such meeting for all purposes. Any action required or permitted to be taken
at any meeting of the Board of Directors or Committee may be taken without a
meeting, if written consents thereto are signed by all members of the Board
or Committee, as the case may be, and such written consents are filed with
the minutes of proceedings of the Board or Committee.
Section 2.8 RESIGNATION. Any Director may resign at any time
by delivering a written resignation to the Company. Unless otherwise specified
therein, such resignation shall take effect upon receipt thereof.
Section 2.9 REMOVAL OF DIRECTORS. Except as the stockholders
may otherwise agree, any Director may be removed at any time for cause upon the
affirmative vote of the holders of majority of the outstanding shares of stock
of the Company entitled to vote for the election of such Director, held at a
special meeting of such stockholders called for the purpose. Except as the
stockholders may otherwise agree, any vacancy in the Board of Directors caused
by any such removal may be filled at such meeting by the stockholders entitled
to vote for the election of the Director so removed. Except as the stockholders
may otherwise agree, if such stockholders do not fill such vacancy at such
meeting, such vacancy may be filled in the manner provided in Section 2.10.
Section 2. 10 VACANCIES AND NEWLY CREATED DIRECTORSHIPS. If
any vacancies shall occur in the Board of Directors, by reason of death,
resignation, removal (for or without cause) or otherwise, or if the authorized
number of Directors shall be increased, the Directors then in office shall
continue to act, and, except as the stockholders may otherwise agree, such
vacancies may be filled by a majority of the Directors then in office, though
less than a quorum, and the Directors so chosen shall hold office until the next
annual election and until their successors are duly elected and qualified,
unless sooner displaced. Any such vacancies or newly created Directorships may
also be filled by the stockholders in accordance with the provisions of Section
2.9.
Section 2.11 COMPENSATION. The amount, if any, which each
Director shall be entitled to receive as compensation for his services as such
shall be fixed from time to time by resolution of the Board of Directors.
ARTICLE 3
COMMITTEES
Section 3.1 HOW CONSTITUTED. The Board of Directors, by
resolution or resolutions adopted by a majority of the whole Board of Directors,
may designate an Executive Committee and/or one or more other Committees, each
such Committee to consist of such number of Directors as from time to time shall
be fixed by resolution or resolutions similarly passed. The Board of Directors
shall designate the Chairman of each such committee.
<PAGE>
Thereafter, members (and alternate members, if any) of each such Committee
shall be designated annually, in like manner, at any regular or special
meeting of the Board of Directors; PROVIDED, HOWEVER, that any such
Committee, from time to time, may be abolished by resolution or resolutions
similarly passed, and may be re-designated in like manner. Each member (and
each such alternate member) of any such Committee shall hold office until his
successor shall have been designated or until he shall cease to be a
Director, or until his death, or until he shall have resigned in the manner
provided in Section 2.8, or shall have been removed in the manner provided in
Section 2.9.
Section 3.2 POWERS. Each Committee shall have and may exercise
such powers of the Board as provided by resolution or resolutions passed to the
extent permitted by law. Any such Committee may be granted power to authorize
the seal of the Company to be affixed to any or all papers which may require it.
Section 3.3 PROCEEDINGS. Subject to the provisions of Section
2.7, each such Committee may fix its own rules of procedure and may meet at any
such place or places (within or outside the State of Delaware) at such time or
times and upon such notice (or without notice) as it shall determine from time
to time. It shall keep a record of its proceedings and shall report such
proceedings to the Board of Directors at a meeting of the Board of Directors
when required.
Section 3.4 QUORUM AND MANNER OF ACTING; TELEPHONE MEETINGS.
Except as may be otherwise provided in the resolution designating any such
Committee, at all meetings of any such Committee the presence of members (or
alternate members, if any) consisting of a majority of the total authorized
membership of such Committee shall be necessary and sufficient to constitute a
quorum for the transaction of business, and the act of the majority of the
members (or such alternates) present at any meeting at which a quorum is present
shall be the act of such Committee. In the absence or disqualification of any
member or alternate member of such 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. The members (or such alternates) of any such Committee shall act only as
a Committee, and individual members (or such alternates) thereof shall have no
power as such. Telephonic meetings may be held as provided in Section 2.7.
Section 3.5 RESIGNATION. Any member (and any alternate member)
of any such Committee may resign at any time by delivering a written resignation
to either the President, a Vice President, the Secretary or an Assistant
Secretary. Unless otherwise specified therein, such resignation shall take
effect upon receipt thereof.
Section 3.6 REMOVAL. Except as the stockholders may otherwise
agree, any member (and any alternate member) of any such Committee, may be
removed at any time, either for or without cause, by resolution adopted by the
Board of Directors.
Section 3.7 VACANCIES. If any vacancy shall occur in any such
Committee, by reason of disqualification, death, resignation, removal or
otherwise, the remaining members (and
<PAGE>
such alternate members) shall continue to act and any such vacancy may,
except as the stockholders may otherwise agree, be filled at any meeting of
the Board of Directors by resolution adopted by the Board of Directors.
ARTICLE 4
OFFICERS
Section 4.1 NUMBER. The officers of the Company shall be
chosen by the Board of Directors and may be a President, a Vice President, a
Secretary and a Controller, who shall hold office until their successors are
chosen and qualify. The Board of Directors may also choose one or more Assistant
Vice Presidents, Assistant Secretaries and Assistant Controllers. Any number of
offices may be held by the same person, but no officer may execute, acknowledge
or verify any instrument in more than one capacity if such instrument is
required by law, by the Certificate of Incorporation, or by these By-laws to be
executed, acknowledged, or verified by two or more officers, and the President
(unless he shall be absent or unavailable, in which case the Controller) must be
one of such executing, acknowledging or verifying officers.
Section 4.2 ELECTION. The Directors elected by the
Incorporator may elect a President, one or more Vice Presidents, one or more
Assistant Vice Presidents, a Secretary, an Assistant Secretary, and a
Controller. Thereafter, the Board of Directors at its first meeting of
stockholders shall elect a President, one or more Vice Presidents, one or more
Assistant Vice Presidents, a Secretary, an Assistant Secretary, and a
Controller. Any officer so elected shall hold office for the term for which he
is elected and until a successor is elected, subject to earlier termination due
to removal or resignation.
Section 4.3 ADDITIONAL OFFICERS. The Board of Directors may
appoint such other officers and agents as it shall deem necessary who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors.
Section 4.4 SALARIES. The salaries of all officers and
agents of the Company shall be fixed by the Board of Directors.
Section 4.5 RESIGNATIONS. Any officer may resign at any time
by delivering a written resignation to the Company. Unless otherwise specified
therein, such resignation shall take effect upon receipt thereof.
Section 4.6 REMOVAL AND VACANCIES. Except as the stockholders
may otherwise agree, any officer elected or appointed by the Board of Directors
may be removed at any time either with or without cause by the affirmative vote
of a majority of the Board of Directors. Except as the stockholders may
otherwise agree, any vacancy occurring in any office of the Company shall be
filled by the Board of Directors.
<PAGE>
Section 4.7 DUTIES OF THE PRESIDENT. The President shall be
the chief executive officer of the Company. He shall, when present, preside at
all meetings of the stockholders, Directors, and all committees on which he
serves, shall have the general and executive management and control of the
business of the Company, and shall see that all orders and votes of the Board
are carried into effect, except where and to the extent that the execution of
such orders and votes of the Board and management of the business of the Company
are expressly delegated by the Board of Directors to some other officer or
agent, or a Committee, of the Company. He shall execute bonds, mortgages, notes,
contracts, agreements, and other contracts, obligations or instruments in the
name of the Company, may countersign and deliver all certificates for shares of
the capital stock of the Company and other documents requiring a seal under the
seal of the Company, 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 another officer or agent of the
Company.
Section 4.8 DUTIES OF THE VICE PRESIDENT. In the event of the
absence or disability of the President, the first Vice President shall perform
all the duties of the President, and when so acting shall have all the powers
of, and be subject to all the restrictions upon, the President. Except where by
law the signature of the President is required, the Vice President shall possess
the same power as the President to sign all certificates, contracts, obligations
and other instruments of the Company; PROVIDED the signature of the Controller
of the Company shall also be obtained. The Vice President shall perform such
other duties and may exercise such other powers as from time to time may be
assigned to him by these By-Laws or by the Board of Directors or by the
President.
Section 4.9 DUTIES OF THE SECRETARY. The Secretary shall, if
present, act as Secretary of, and keep the minutes of, all the proceedings of
the meetings of the stockholders and of the Board of Directors, and of any
committee of the Board of Directors in one or more books to be kept for that
purpose; shall perform such other duties as shall be assigned to him by the
President or the Board of Directors; and, in general, shall perform all duties
incident to the office of Secretary.
Section 4.10 DUTIES OF THE CONTROLLER. The Controller shall
keep or cause to be kept full and accurate records of all receipts and
disbursements in the books of the Company and shall have the care and custody of
all funds and securities of the Company. He shall disburse the funds of the
Company 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
transactions as Controller, and shall perform such other duties as may be
assigned to him by the President or the Board of Directors. He shall prepare or
cause to be prepared appropriate financial statements for the Company. The
Controller shall also perform such other duties as may be assigned to him by the
President or the Board of Directors; and, in general, shall perform all duties
incident to the office of Controller. Except where by law the signature of the
President is required, the Controller shall possess the same power as the
President to sign all certificates, contracts, obligations and other instruments
of the Company; PROVIDED the signature of any Vice President of the Company
shall also be obtained.
<PAGE>
Section 4.11 EMPLOYEE BONDS. The Board of Directors may
require the Controller, the Assistant Controllers and any other officers, agents
or employees of the Company to give bond for the faithful discharge of their
duties, in such sum and of such character as the Board may from time to time
prescribe.
ARTICLE 5
CAPITAL STOCK
Section 5.1 CERTIFICATES OF STOCK. Every holder of stock in
the Company shall be entitled to have a certificate signed by, or in the name of
the Company by, the President or Vice President, and by the Controller or an
Assistant Controller, or the Secretary or an Assistant Secretary of the Company,
certifying the number of shares owned by him in the Company. Each such
certificate shall state upon the face thereof. (i) that the Company is formed
under the laws of Delaware, (ii) the name of the person or persons to whom the
stock is issued, and (iii) the number and class of shares, and the designation
of the series, if any, which such certificate represents.
Section 5.2 SIGNATURES. Any or all of the signatures on such
certificate may be a facsimile if the certificate is countersigned by a transfer
agent or registered by a registrar other than the Company itself or its
employee. In case any officer, transfer agent or registrar who has signed, or
whose facsimile signature has been placed upon a certificate, shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Company with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
Section 5.3 LOST, STOLEN OR DESTROYED CERTIFICATES. The Board
of Directors may direct that a new certificate or certificates be issued in
place of any certificate or certificates theretofore issued by the Company
alleged to have been stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming the certificate of stock to be lost or
destroyed. When authorizing such issue of a new certificate or certificates, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the Company a bond in such sum
as it may direct as indemnity against any claim that may be made against the
Company with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 5.4 TRANSFER OF STOCK. Except as the stockholders may
otherwise agree, upon surrender to the Company or the transfer agent of the
Company of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Company to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
Section 5.5 RECORD DATE. In order to determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to
<PAGE>
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 fifty nor less
than ten days before the date of such meeting, or other corporate action or
event to which it relates. If no record date is fixed, the record date shall
be that date prescribed by statute as then in effect.
Section 5.6 REGISTERED STOCKHOLDERS. Prior to due presentment
for registration of transfer of a security in registered form, the Company may
treat the registered owner as the person exclusively entitled to vote, to
receive notifications, and otherwise to exercise all the rights and powers of an
owner.
ARTICLE 6
INDEMNIFICATION
Section 6.1 ACTIONS AGAINST OFFICERS AND DIRECTORS. The
Company shall indemnify to the full extent now or hereafter authorized or
permitted by the Delaware General Corporation Law (or any successor or related
statute or statutes and whether or not specifically required, permitted, or
authorized thereby) any person made, or threatened to be made, a party to an
action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that he is or was a director or officer of
the Company or is or was serving as an officer or director of any other
corporation at the request of the Company. The indemnification provided hereby
shall continue as to a person who has ceased to be a director or officer, inure
to the benefit of his heirs, executors and administrators, and shall not be
deemed exclusive of any other rights provided by any law, agreement, vote of
stockholders or directors or otherwise.
Section 6.2 INSURANCE. The Company may purchase and maintain
insurance on behalf of any such person against any liability (including legal
expenses) asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Company would have the
power to indemnify him against such liability under the Delaware General
Corporation Law or any successor or related statute or statutes.
ARTICLE 7
GENERAL PROVISIONS
Section 7.1 DIVIDENDS. Dividends upon the stock of the
Company, subject to the provisions of the Certificate of Incorporation, if any,
may be declared by the Board of Directors at any regular or special meeting,
pursuant to law. Dividends may be paid in cash, bonds, in property, or in shares
of stock, subject to provisions of the Certificate of Incorporation.
Section 7.2 RESERVES. Before payment of any dividend, there
may be set aside out of any funds of the Company available for dividends such
sum or sums as the Directors from
<PAGE>
time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing
or maintaining any property of the Company, or for such other purposes as the
Directors shall think conducive to the interest of the Company, and the
Directors may modify or abolish any such reserve.
Section 7.3 CHECKS. All checks or demands for money and notes
of the Company shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.
Section 7.4 FISCAL YEAR. The fiscal year of the company shall
be fixed by resolution of the Board of Directors.
Section 7.5 SEAL. The corporate seal shall have inscribed
thereon the name of the Company, the year of its incorporation, and the words
"Corporate Seal, Delaware". The seal may be used in causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 7.6 OFFICES. An office of the Company shall be located
at such place or places as the Board of Directors shall designate from time to
time. The Company may have offices at such places both within or outside the
State of Delaware as the Board of Directors may from time to time determine or
the business of the Company may require.
ARTICLE 8
AMENDMENTS
Section 8.1 AMENDMENTS. Except as the stockholders may
otherwise agree, these By-Laws may be altered, amended or repealed by a majority
of the stockholders of the Company at any regular meeting of the stockholders or
at any special meeting of the stockholders if notice of such alteration or
repeal be contained in the notice of such special meeting. Except as the
stockholders may otherwise agree, these By-laws may likewise be amended by a
majority vote of all Directors at any regular or special meeting of the Board of
Directors if notice of such alteration or repeal be contained in the notice of
such special meeting.
<PAGE>
OPTION AGREEMENT
Agreement made this 25th day of January 1999 among and between Franklin
S. Felber, having an address at 13472 Calle Colina, Poway, CA 92064 ("Felber"),
Jyra Research Inc., having an address at Hamilton House, 111 Marlowes, Hemel
Hempstead HP1 1BB, England ("Jyra"), and, as to paragraphs (2), (3) and (5)
only, Path 1 Network Technologies Inc., having an address at Suite 230, 9339
Genesee Avenue, San Diego, CA 92121 ("Path 1").
WHEREAS, Felber desires to sell a portion of shares of Path 1
beneficially owned by him ("Shares") and
WHEREAS Felber is willing to grant Jyra an option to purchase said
Shares, and
WHEREAS Jyra desires to acquire an option to purchase said Shares from
Felber,
The Parties hereby understand and agree as follows:
(1) Felber hereby grants Jyra an irrevocable option to purchase up to
a total of 255,640 Shares as follows:
(a) 30,000 Shares may be purchased by Jyra during the
period from February 1, 1999 to February 28, 1999 at
a price of $4.00 per Share; and
(b) up to 225,640 Shares may be purchased by Jyra from
time to time up to and including the date which is
the EARLIER of (a) fifteen days after the date upon
which Path 1 receives a minimum of $2,000,000 from
investors in its current equity offering, or (b) July
31, 1999, as follows:
(i) if the Shares are purchased on or before
April 30, 1999, the purchase price per Share
is $3.50; and
(ii) If the Shares are purchased between May 1,
1999 and July 31, 1999, the purchase price
per Share is $4.00.
(2) (a) In the event that Jyra does not exercise the option to
purchase all 30,000 Shares from Felber in accordance with
paragraph 1(a), the option to purchase up to 225,640 Shares
from Felber set forth in paragraph 1(b) shall be void and, in
such event, Felber shall have the right to sell all or a
portion of the 255,640 Shares (which are subject to the option
set forth in paragraphs 1(a) and 1(b)) in accordance with Rule
144.
(b) Path 1 hereby agrees that Felber is not an affiliate of
Path 1, accepts Felber's representations in "Seller's
Representation Letter dated January 25, 1999 (Exhibit 1 A
hereto), and agrees to cooperate in Felber's proposed sales of
Shares as per "Form 144 dated January 25, 1999" (Exhibit 1 B
hereto) in the event that Jyra does not exercise the option to
purchase all 30,000 Shares from Felber in accordance with
paragraph 1(a). Path 1 has made its own independent
<PAGE>
determination that, as of January 25, 1999, Felber has
satisfied all the conditions in Seller's Representation Letter
dated January 25, 1999, and that, as of January 25, 1999, Path
1 would approve Felber's sale of Shares pursuant to Rule 144.
Path 1 hereby agrees that it will take no steps to change the
status of Felber so that future sales of Shares pursuant to
Rule 144 remain available and approved.
(3) In the event Jyra purchases some but not all of the Shares
subject to the option in accordance with paragraph 1(b),
Felber shall have the right to sell the balance of any such
Shares not purchased by Jyra in accordance with Rule 144.
(4) Payment for the Shares shall be made in U.S. funds by bank or
certified check or by wire transfer, in no event later than
(a) February 28, 1999 with respect to sales under paragraph
1(a), (b) April 30, 1999 with respect to sales under paragraph
1(b)(i), and (c) July 31, 1999 with respect to sales under
paragraph 1(b)(ii).
(5) This represents the entire Option Agreement between the
parties, superseding all prior agreements, and may only be
modified in writing signed by the parties.
Jyra Research Inc.
By /s/ Roderick Adams /s/ Franklin S. Felber
--------------------- ------------------------
Roderick Adams Franklin S. Felber
Director
Path 1 Network Technologies Inc.
As to paragraphs (2), (3) and (5) only
By /s/ Michael Berns
--------------------
Michael Berns
Director
By /s/ James Berns
------------------
James Berns
Secretary & General Counsel
<PAGE>
January 25, 1999
LOCK UP AGREEMENT
The undersigned, holders in the aggregate of 3,595,000 shares of common
stock, $.001 par value of Path 1 Network Technologies Inc. ("Path 1")
("Shares"), hereby agree that until February 1, 2000, none of them shall either
offer for sale or sell any Shares, except for Franklin S. Felber ("Felber") who
has the right to sell Shares pursuant to the terms of a separate Option
Agreement dated today (the "Option Agreement") between Felber and Jyra Research
Inc. ("Jyra") pursuant to which Felber has granted to Jyra an irrevocable option
to purchase up to 255,640 Shares. The restrictions agreed to herein shall
automatically lapse and be of no force or effect in the event of any sales made
in the context of a tender offer, merger, or other takeover involving Path 1.
In the event that Jyra does not exercise that certain option to
purchase up to a total of 255,640 Shares in accordance with the terms of the
Option Agreement, Felber shall not be bound by the resale restrictions herein
respecting any and all such 255,640 Shares optioned to, but not purchased by,
Jyra and, in such event, shall be free to sell any such Shares in accordance
with the provisions of Rule 144.
The balance of the Shares held by Felber, viz. 255,640 Shares, shall
continue to be subject to the terms of this agreement.
This agreement shall not be effective unless signed by all parties
listed below.
/s/ Ronald D. Fellman /s/ Franklin S. Felber
- - ----------------------- ------------------------
Ronald D. Fellman Franklin S. Felber
/s/ Rona Berns /s/ James Berns
- - ---------------- -----------------
Rona Berns James Berns
/s/ Douglas Palmer /s/ John Hooker
- - -------------------- -----------------
Douglas Palmer John Hooker
<PAGE>
BASIC LEASE INFORMATION
OFFICE GROSS
LEASE DATE: April 10, 1999
TENANT: Path 1 Network Technologies, Inc. a
Delaware corporation
TENANT'S NOTICE ADDRESS: 3636 Nobel Drive, Suite 275
San Diego, CA 92122
TENANT'S BILLING ADDRESS: 3636 Nobel Drive, Suite 275
San Diego, CA 92122
TENANT CONTACT: Ronald D. Fellman PHONE NUMBER: 619/
FAX NUMBER: 619/
LANDLORD: Spieker Properties, L.P., a California
limited partnership
LANDLORD'S NOTICE ADDRESS: 9255 Towne Centre Drive, Suite 100
San Diego, CA 92122
LANDLORD'S REMITTANCE ADDRESS: Spieker Properties
Dept. 11811
P.O. Box 60077
Los Angeles, CA 90060-0077
PROJECT DESCRIPTION: Nobel Corporate Plaza, a 4 story office
building located at 3636 Nobel Drive,
San Diego, CA 92121 and as detailed in
the attached Exhibit B.
BUILDING DESCRIPTION: That certain four-story Building as
described in the Project Description.
PREMISES: Suite 275 of the Building, consisting of
approximately 4,142 rentable square
feet.
PERMITTED USE: General Office
OCCUPANCY DENSITY: 4 people per 1,000 rentable square feet
PARKING DENSITY: 3.4 spaces per 1,000 usable square feet
PARKING AND PARKING CHARGE: Fourteen (14) parking spaces of which
ten (10) shall be unreserved at no
charge during the initial term and four
(4) shall be underground and reserved at
$50.00 per space, per month during the
initial term.
SCHEDULED TERM COMMENCEMENT DATE: June 1, 1999
SCHEDULED LENGTH OF TERM: Thirty six (36) months
SCHEDULED TERM EXPIRATION DATE: May 31, 2002
RENT:
<PAGE>
BASE RENT: Base rent for the period 6/1/99 -
5/31/00 shall be $8,491.00 per month
(subject to adjustment as provided in
Paragraph 39. hereof)
BASE YEAR FOR OPERATING EXPENSES: 1999
SECURITY DEPOSIT: $36,736.00
TENANT'S PROPORTIONATE SHARE:
OF BUILDING: 4.00%
OF PROJECT: 4.00%
BUILDING HOURS 7:00 AM - 7:00 PM Monday - Friday
9:00 AM - 1:00 PM Saturday
After Hours HVAC provided at $25.00 per
hour
The foregoing Basic Lease Information is incorporated into and made a part
of this Lease. Each reference in this Lease to any of the Basic Lease
Information shall mean the respective information above and shall be
construed to incorporate all of the terms provided under the particular
Lease paragraph pertaining to such information. In the event of any
conflict between the Basic Lease Information and the Lease, the latter
shall control.
LANDLORD TENANT
Spieker Properties, L.P., Path 1 Network Technologies, Inc.,
a California limited partnership a Delaware corporation
By: Spieker Properties, Inc.,
a Maryland corporation, By:
its general partner ---------------------
Ronald D. Fellman
Its: President
By:
---------------------
Richard L. Romney
Its: Senior Vice President
<PAGE>
TABLE OF CONTENTS
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<S> <C> <C>
Basic Lease Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1. Premises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2. Possession And Lease Commencement . . . . . . . . . . . . . . . . . . . . . . .2
3. Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
4. Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
5. Rules And Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
6. Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
7. Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
8. Insurance And Indemnification . . . . . . . . . . . . . . . . . . . . . . . . .2
9. Waiver Of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
10. Landlord's Repairs And Maintenance. . . . . . . . . . . . . . . . . . . . . . .2
11. Tenant's Repairs And Maintenance. . . . . . . . . . . . . . . . . . . . . . . .2
12. Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
13. Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
14. Inspection/Posting Notices. . . . . . . . . . . . . . . . . . . . . . . . . . .2
15. Services And Utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
16. Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
17. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
18. Estoppel Certificate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
19. Security Deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
20. Imitation Of Tenant's Remedies. . . . . . . . . . . . . . . . . . . . . . . . .2
21. Assignment And Subletting . . . . . . . . . . . . . . . . . . . . . . . . . . .2
22. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
24. Casualty Damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
25. Holding Over. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
26. Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
27. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
28. Substitution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
29. Transfers By Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
30. Right Of Landlord To Perform Tenant's Covenants . . . . . . . . . . . . . . . .2
31. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
32. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
33. Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
34. Successors And Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
36. Surrender Of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
37. Parking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
38. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
39. Additional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
40. Jury Trial Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
Exhibits:
Exhibit A. . . . . . . . . . . . . . . . . . . . . . .Rules and Regulations
Exhibit B. . . . . . . . . . . . . . . . . .Site Plan, Property Description
Exhibit C. . . . . . . . . . . . . . Tenant Improvements and Specifications
<PAGE>
LEASE
THIS LEASE is made as of the 10th day of April, 1999, by and between Spieker
Properties, L.P., a California limited partnership (hereinafter called
"LANDLORD"), and Path 1 Network Technologies, Inc., a Delaware corporation
(hereinafter called "TENANT").
1. PREMISES
Landlord leases to Tenant and Tenant leases from Landlord, upon the terms
and conditions hereinafter set forth, those premises (the "PREMISES") outlined
in red on EXHIBIT B and described in the Basic Lease Information. The Premises
shall be all or part of a building (the "BUILDING") and of a project (the
"PROJECT"), which may consist of more than one building and additional
facilities, as described in the Basic Lease Information. The Building and
Project are outlined in blue and green respectively on EXHIBIT B. Landlord and
Tenant acknowledge that physical changes may occur from time to time in the
Premises, Building or Project, and that the number of buildings and additional
facilities which constitute the Project may change from time to time, which may
result in an adjustment in Tenant's Proportionate Share, as defined in the Basic
Lease Information, as provided in Paragraph 7.A.
2. POSSESSION AND LEASE COMMENCEMENT
A. RESERVED.
B. CONSTRUCTION OF IMPROVEMENTS. If this Lease pertains to a Building to be
constructed or improvements to be constructed within a Building, the provisions
of this Paragraph 2.B. shall apply in lieu of the provisions of Paragraph 2.A.
above and the term commencement date ("TERM COMMENCEMENT DATE") shall be the
earlier of the date on which: (1) Tenant takes possession of some or all of the
Premises; or (2) the improvements to be constructed or performed in the Premises
by Landlord (if any) shall have been substantially completed in accordance with
the plans and specifications, if any, described on EXHIBIT C and Tenant's taking
of possession of the Premises or any part thereof shall constitute Tenant's
confirmation of substantial completion for all purposes hereof, whether or not
substantial completion of the Building or Project shall have occurred. If for
any reason Landlord cannot deliver possession of the Premises to Tenant on the
scheduled Term Commencement Date, Landlord shall not be subject to any liability
therefor, nor shall Landlord be in default hereunder nor shall such failure
affect the validity of this Lease, and Tenant agrees to accept possession of the
Premises at such time as such improvements have been substantially completed,
which date shall then be deemed the Term Commencement Date. Tenant shall not be
liable for any Rent for any period prior to the Term Commencement Date (but
without affecting any obligations of Tenant under any improvement agreement
appended to this Lease). In the event of any dispute as to substantial
completion of work performed or required to be performed by Landlord, the
certificate of Landlord's architect or general contractor shall be conclusive.
Substantial completion shall have occurred notwithstanding Tenant's submission
of a punchlist to Landlord, which Tenant shall submit, if at all, within three
(3) business days after the Term Commencement Date or otherwise in accordance
with any improvement agreement appended to this Lease. Upon Landlord's request,
Tenant shall promptly execute and return to Landlord a "Start-Up Letter" in
which Tenant shall agree, among other things, to acceptance of the Premises and
to the determination of the Term Commencement Date, in accordance with the terms
of this Lease, but Tenant's failure or refusal to do so shall not negate
Tenant's acceptance of the Premises or affect determination of the Term
Commencement Date.
3. TERM
The term of this Lease (the "TERM") shall commence on the Term Commencement
Date and continue in full force and effect for the number of months specified as
the Length of Term in the Basic Lease Information or until this Lease is
terminated as otherwise provided herein. If the Term Commencement Date is a
date other than the first day of the calendar month, the Term shall be the
number of months of the Length of Term in addition to the remainder of the
calendar month following the Term Commencement Date.
<PAGE>
4. USE
A. GENERAL. Tenant shall use the Premises for the permitted use specified in
the Basic Lease Information ("PERMITTED USE") and for no other use or purpose.
Tenant shall control Tenant's employees, agents, customers, visitors, invitees,
licensees, contractors, assignees and subtenants (collectively, "TENANT'S
PARTIES") in such a manner that Tenant and Tenant's Parties cumulatively do not
exceed the occupant density (the "OCCUPANCY DENSITY") or the parking density
(the "PARKING DENSITY") specified in the Basic Lease Information at any time.
Tenant shall pay the Parking Charge specified in the Basic Lease Information as
Additional Rent (as hereinafter defined) hereunder. So long as Tenant is
occupying the Premises, Tenant and Tenant's Parties shall have the nonexclusive
right to use, in common with other parties occupying the Building or Project,
the parking areas, driveways and other common areas of the Building and Project,
subject to the terms of this Lease and such rules and regulations as Landlord
may from time to time prescribe. Landlord reserves the right, without notice or
liability to Tenant, and without the same constituting an actual or constructive
eviction, to alter or modify the common areas from time to time, including the
location and configuration thereof, and the amenities and facilities which
Landlord may determine to provide from time to time.
B. LIMITATIONS. Tenant shall not permit any odors, smoke, dust, gas,
substances, noise or vibrations to emanate from the Premises or from any portion
of the common areas as a result of Tenant's or any Tenant's Party's use thereof,
nor take any action which would constitute a nuisance or would disturb, obstruct
or endanger any other tenants or occupants of the Building or Project or
elsewhere, or interfere with their use of their respective premises or common
areas. Storage outside the Premises of materials, vehicles or any other items
is prohibited. Tenant shall not use or allow the Premises to be used for any
immoral, improper or unlawful purpose, nor shall Tenant cause or maintain or
permit any nuisance in, on or about the Premises. Tenant shall not commit or
suffer the commission of any waste in, on or about the Premises. Tenant shall
not allow any sale by auction upon the Premises, or place any loads upon the
floors, walls or ceilings which could endanger the structure, or place any
harmful substances in the drainage system of the Building or Project. No waste,
materials or refuse shall be dumped upon or permitted to remain outside the
Premises. Landlord shall not be responsible to Tenant for the non-compliance by
any other tenant or occupant of the Building or Project with any of the
above-referenced rules or any other terms or provisions of such tenant's or
occupant's lease or other contract.
C. COMPLIANCE WITH REGULATIONS. By entering the Premises, Tenant accepts the
Premises in the condition existing as of the date of such entry. Tenant shall
at its sole cost and expense strictly comply with all existing or future
applicable municipal, state and federal and other governmental statutes, rules,
requirements, regulations, laws and ordinances, including zoning ordinances and
regulations, and covenants, easements and restrictions of record governing and
relating to the use, occupancy or possession of the Premises, to Tenant's use of
the common areas, or to the use, storage, generation or disposal of Hazardous
Materials (hereinafter defined) (collectively "REGULATIONS"). Tenant shall at
its sole cost and expense obtain any and all licenses or permits necessary for
Tenant's use of the Premises. Tenant shall at its sole cost and expense
promptly comply with the requirements of any board of fire underwriters or other
similar body now or hereafter constituted. Tenant shall not do or permit
anything to be done in, on, under or about the Project or bring or keep anything
which will in any way increase the rate of any insurance upon the Premises,
Building or Project or upon any contents therein or cause a cancellation of said
insurance or otherwise affect said insurance in any manner. Tenant shall
indemnify, defend (by counsel reasonably acceptable to Landlord), protect and
hold Landlord harmless from and against any loss, cost, expense, damage,
attorneys' fees or liability arising out of the failure of Tenant to comply with
any Regulation. Tenant's obligations pursuant to the foregoing indemnity shall
survive the expiration or earlier termination of this Lease.
D. HAZARDOUS MATERIALS. As used in this Lease, "HAZARDOUS MATERIALS" shall
include, but not be limited to, hazardous, toxic and radioactive materials and
those substances defined as "hazardous substances," "hazardous materials,"
"hazardous wastes," "toxic substances," or other similar designations in any
Regulation. Tenant shall not cause, or allow any of Tenant's Parties to cause,
any Hazardous Materials to be handled, used, generated, stored, released or
disposed of in, on, under or about the Premises, the Building or the Project or
surrounding land or environment in violation of any Regulations. Tenant must
obtain Landlord's written consent prior to the introduction of any Hazardous
Materials onto the Project. Notwithstanding the foregoing, Tenant may handle,
store, use and dispose of products containing small quantities of Hazardous
Materials for "general office purposes" (such as toner for copiers) to the
extent customary and necessary for the Permitted Use of the Premises; provided
that Tenant shall always handle, store, use, and dispose of any such Hazardous
Materials in a safe and lawful manner and never allow such Hazardous Materials
to contaminate the Premises, Building, or Project or surrounding land or
environment. Tenant shall immediately notify Landlord in writing of any
Hazardous Materials' contamination of any portion of the Project of which Tenant
becomes aware, whether or not caused by Tenant. Landlord shall have the right
at all reasonable times to inspect the Premises and to conduct tests and
investigations to determine whether Tenant is in compliance with the foregoing
provisions, the costs of all such inspections, tests and investigations to be
borne by Tenant. Tenant shall indemnify, defend (by counsel reasonably
acceptable to Landlord), protect and hold Landlord harmless from and against any
and all claims, liabilities, losses, costs, loss of rents, liens, damages,
injuries or expenses (including
<PAGE>
attorneys' and consultants' fees and court costs), demands, causes of action, or
judgments directly or indirectly arising out of or related to the use,
generation, storage, release, or disposal of Hazardous Materials by Tenant or
any of Tenant's Parties in, on, under or about the Premises, the Building or the
Project or surrounding land or environment, which indemnity shall include,
without limitation, damages for personal or bodily injury, property damage,
damage to the environment or natural resources occurring on or off the Premises,
losses attributable to diminution in value or adverse effects on marketability,
the cost of any investigation, monitoring, government oversight, repair,
removal, remediation, restoration, abatement, and disposal, and the preparation
of any closure or other required plans, whether such action is required or
necessary prior to or following the expiration or earlier termination of this
Lease. Neither the consent by Landlord to the use, generation, storage, release
or disposal of Hazardous Materials nor the strict compliance by Tenant with all
laws pertaining to Hazardous Materials shall excuse Tenant from Tenant's
obligation of indemnification pursuant to this Paragraph 4.D. Tenant's
obligations pursuant to the foregoing indemnity shall survive the expiration or
earlier termination of this Lease.
5. RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the building rules and
regulations attached hereto as EXHIBIT A and any other rules and regulations and
any modifications or additions thereto which Landlord may from time to time
prescribe in writing for the purpose of maintaining the proper care,
cleanliness, safety, traffic flow and general order of the Premises or the
Building or Project. Tenant shall cause Tenant's Parties to comply with such
rules and regulations. Landlord shall not be responsible to Tenant for the
non-compliance by any other tenant or occupant of the Building or Project with
any of such rules and regulations, any other tenant's or occupant's lease or any
Regulations.
6. RENT
A. BASE RENT. Tenant shall pay to Landlord and Landlord shall receive,
without notice or demand throughout the Term, Base Rent as specified in the
Basic Lease Information, payable in monthly installments in advance on or before
the first day of each calendar month, in lawful money of the United States,
without deduction or offset whatsoever, at the Remittance Address specified in
the Basic Lease Information or to such other place as Landlord may from time to
time designate in writing. Base Rent for the first full month of the Term shall
be paid by Tenant upon Tenant's execution of this Lease. If the obligation for
payment of Base Rent commences on a day other than the first day of a month,
then Base Rent shall be prorated and the prorated installment shall be paid on
the first day of the calendar month next succeeding the Term Commencement Date.
The Base Rent payable by Tenant hereunder is subject to adjustment as provided
elsewhere in this Lease, as applicable. As used herein, the term "Base Rent"
shall mean the Base Rent specified in the Basic Lease Information as it may be
so adjusted from time to time.
B. ADDITIONAL RENT. All monies other than Base Rent required to be paid by
Tenant hereunder, including, but not limited to, Tenant's Proportionate Share of
Operating Expenses, as specified in Paragraph 7 of this Lease, charges to be
paid by Tenant under Paragraph 15, the interest and late charge described in
Paragraphs 26.C. and D., and any monies spent by Landlord pursuant to Paragraph
30, shall be considered additional rent ("ADDITIONAL RENT"). "RENT" shall mean
Base Rent and Additional Rent.
7. OPERATING EXPENSES
A. OPERATING EXPENSES. In addition to the Base Rent required to be paid
hereunder, beginning with the expiration of the Base Year specified in the Basic
Lease Information (the "BASE YEAR"), Tenant shall pay as Additional Rent,
Tenant's Proportionate Share of the Building and/or Project (as applicable), as
defined in the Basic Lease Information, of increases in Operating Expenses
(defined below) over the Operating Expenses incurred by Landlord during the Base
Year (the "BASE YEAR OPERATING EXPENSES"), in the manner set forth below.
Tenant shall pay the applicable Tenant's Proportionate Share of each such
Operating Expenses. Landlord and Tenant acknowledge that if the number of
buildings which constitute the Project increases or decreases, or if physical
changes are made to the Premises, Building or Project or the configuration of
any thereof, Landlord may at its discretion reasonably adjust Tenant's
Proportionate Share of the Building or Project to reflect the change.
Landlord's determination of Tenant's Proportionate Share of the Building and of
the Project shall be conclusive so long as it is reasonably and consistently
applied. "OPERATING EXPENSES" shall mean all expenses and costs of every kind
and nature which Landlord shall pay or become obligated to pay, because of or in
connection with the ownership, management, maintenance, repair, preservation,
replacement and operation of the Building or Project and its supporting
facilities and such additional facilities now and in subsequent years as may be
determined by Landlord to be necessary or desirable to the Building and/or
Project (as determined in a reasonable manner) other than those expenses and
costs which are
<PAGE>
specifically attributable to Tenant or which are expressly made the financial
responsibility of Landlord or specific tenants of the Building or Project
pursuant to this Lease. Operating Expenses shall include, but are not limited
to, the following:
(1) TAXES. All real property taxes and assessments, possessory interest
taxes, sales taxes, personal property taxes, business or license taxes or
fees, gross receipts taxes, service payments in lieu of such taxes or fees,
annual or periodic license or use fees, excises, transit charges, and other
impositions, general and special, ordinary and extraordinary, unforeseen as
well as foreseen, of any kind (including fees "in-lieu" of any such tax or
assessment) which are now or hereafter assessed, levied, charged,
confirmed, or imposed by any public authority upon the Building or Project,
its operations or the Rent (or any portion or component thereof), or any
tax, assessment or fee imposed in substitution, partially or totally, of
any of the above. Operating Expenses shall also include any taxes,
assessments, reassessments, or other fees or impositions with respect to
the development, leasing, management, maintenance, alteration, repair, use
or occupancy of the Premises, Building or Project or any portion thereof,
including, without limitation, by or for Tenant, and all increases therein
or reassessments thereof whether the increases or reassessments result from
increased rate and/or valuation (whether upon a transfer of the Building or
Project or any portion thereof or any interest therein or for any other
reason). Operating Expenses shall not include inheritance or estate taxes
imposed upon or assessed against the interest of any person in the Project,
or taxes computed upon the basis of the net income of any owners of any
interest in the Project. If it shall not be lawful for Tenant to reimburse
Landlord for all or any part of such taxes, the monthly rental payable to
Landlord under this Lease shall be revised to net Landlord the same net
rental after imposition of any such taxes by Landlord as would have been
payable to Landlord prior to the payment of any such taxes.
(2) INSURANCE. All insurance premiums and costs, including, but not
limited to, any deductible amounts, premiums and other costs of insurance
incurred by Landlord, including for the insurance coverage set forth in
Paragraph 8.A. herein.
(3) COMMON AREA MAINTENANCE.
(a) Repairs, replacements, and general maintenance of and for the
Building and Project and public and common areas and facilities of and
comprising the Building and Project, including, but not limited to,
the roof and roof membrane, windows, elevators, restrooms, conference
rooms, health club facilities, lobbies, mezzanines, balconies,
mechanical rooms, building exteriors, alarm systems, pest
extermination, landscaped areas, parking and service areas, driveways,
sidewalks, loading areas, fire sprinkler systems, sanitary and storm
sewer lines, utility services, heating/ventilation/air conditioning
systems, electrical, mechanical or other systems, telephone equipment
and wiring servicing, plumbing, lighting, and any other items or areas
which affect the operation or appearance of the Building or Project,
which determination shall be at Landlord's discretion, except for:
those items expressly made the financial responsibility of Landlord
pursuant to Paragraph 10 hereof; those items to the extent paid for by
the proceeds of insurance; and those items attributable solely or
jointly to specific tenants of the Building or Project.
(b) Repairs, replacements, and general maintenance shall include the
cost of any capital improvements made to or capital assets acquired
for the Project or Building that in Landlord's discretion may reduce
any other Operating Expenses, including present or future repair work,
are reasonably necessary for the health and safety of the occupants of
the Building or Project, or are required to comply with any
Regulation, such costs or allocable portions thereof to be amortized
over such reasonable period as Landlord shall determine, together with
interest on the unamortized balance at the publicly announced "prime
rate" charged by Wells Fargo Bank, N.A. (San Francisco) or its
successor at the time such improvements or capital assets are
constructed or acquired, plus two (2) percentage points, or in the
absence of such prime rate, then at the U.S. Treasury six-month market
note (or bond, if so designated) rate as published by any national
financial publication selected by Landlord, plus four (4) percentage
points, but in no event more than the maximum rate permitted by law,
plus reasonable financing charges.
(c) Payment under or for any easement, license, permit, operating
agreement, declaration, restrictive covenant or instrument relating to
the Building or Project.
(d) All expenses and rental related to services and costs of
supplies, materials and equipment used in operating, managing and
maintaining the Premises, Building and Project, the equipment therein
and the
<PAGE>
adjacent sidewalks, driveways, parking and service areas, including,
without limitation, expenses related to service agreements regarding
security, fire and other alarm systems, janitorial services, window
cleaning, elevator maintenance, Building exterior maintenance,
landscaping and expenses related to the administration, management and
operation of the Project, including without limitation salaries, wages
and benefits and management office rent.
(e) The cost of supplying any services and utilities which benefit
all or a portion of the Premises, Building or Project, including
without limitation services and utilities provided pursuant to
Paragraph 15 hereof.
(f) Legal expenses and the cost of audits by certified public
accountants; provided, however, that legal expenses chargeable as
Operating Expenses shall not include the cost of negotiating leases,
collecting rents, evicting tenants nor shall it include costs incurred
in legal proceedings with or against any tenant or to enforce the
provisions of any lease.
(g) A management and accounting cost recovery fee equal to five
percent (5%) of the sum of the Project's base rents and Operating
Expenses to the extent not included in such base rents (other than
such management and accounting fee).
If the rentable area of the Building and/or Project is not fully occupied during
any fiscal year of the Term as determined by Landlord, an adjustment may be made
in Landlord's discretion in computing the Operating Expenses for such year so
that Tenant pays an equitable portion of all variable items (e.g., utilities,
janitorial services and other component expenses that are affected by variations
in occupancy levels) of Operating Expenses, as reasonably determined by
Landlord; provided, however, that in no event shall Landlord be entitled to
collect in excess of one hundred percent (100%) of the total Operating Expenses
from all of the tenants in the Building or Project, as the case may be.
Operating Expenses shall not include the cost of providing tenant improvements
or other specific costs incurred for the account of, separately billed to and
paid by specific tenants of the Building or Project, the initial construction
cost of the Building, or debt service on any mortgage or deed of trust recorded
with respect to the Project other than pursuant to Paragraph 7.A.(3)(b) above.
Notwithstanding anything herein to the contrary, in any instance wherein
Landlord, in Landlord's sole discretion, deems Tenant to be responsible for any
amounts greater than Tenant's Proportionate Share, Landlord shall have the right
to allocate costs in any manner Landlord deems appropriate.
The above enumeration of services and facilities shall not be deemed to impose
an obligation on Landlord to make available or provide such services or
facilities except to the extent if any that Landlord has specifically agreed
elsewhere in this Lease to make the same available or provide the same. Without
limiting the generality of the foregoing, Tenant acknowledges and agrees that it
shall be responsible for providing adequate security for its use of the
Premises, the Building and the Project and that Landlord shall have no
obligation or liability with respect thereto, except to the extent if any that
Landlord has specifically agreed elsewhere in this Lease to provide the same.
B. PAYMENT OF ESTIMATED OPERATING EXPENSES. "ESTIMATED OPERATING EXPENSES"
for any particular year shall mean Landlord's estimate of the Operating Expenses
for such fiscal year made with respect to such fiscal year as hereinafter
provided. Landlord shall have the right from time to time to revise its fiscal
year and interim accounting periods so long as the periods as so revised are
reconciled with prior periods in a reasonable manner. During the last month of
each fiscal year during the Term, or as soon thereafter as practicable, Landlord
shall give Tenant written notice of the Estimated Operating Expenses for the
ensuing fiscal year. Tenant shall pay Tenant's Proportionate Share of the
difference between Estimated Operating Expenses and Base Year Operating Expenses
with installments of Base Rent for the fiscal year to which the Estimated
Operating Expenses applies in monthly installments on the first day of each
calendar month during such year, in advance. Such payment shall be construed to
be Additional Rent for all purposes hereunder. If at any time during the course
of the fiscal year, Landlord determines that Operating Expenses are projected to
vary from the then Estimated Operating Expenses by more than five percent (5%),
Landlord may, by written notice to Tenant, revise the Estimated Operating
Expenses for the balance of such fiscal year, and Tenant's monthly installments
for the remainder of such year shall be adjusted so that by the end of such
fiscal year Tenant has paid to Landlord Tenant's Proportionate Share of the
revised difference between Estimated Operating Expenses and Base Year Operating
Expenses for such year, such revised installment amounts to be Additional Rent
for all purposes hereunder.
<PAGE>
C. COMPUTATION OF OPERATING EXPENSE ADJUSTMENT. "OPERATING EXPENSE
ADJUSTMENT" shall mean the difference between Estimated Operating Expenses and
actual Operating Expenses for any fiscal year, over Base Year Operating
Expenses, determined as hereinafter provided. Within one hundred twenty (120)
days after the end of each fiscal year, or as soon thereafter as practicable,
Landlord shall deliver to Tenant a statement of actual Operating Expenses for
the fiscal year just ended, accompanied by a computation of Operating Expense
Adjustment. If such statement shows that Tenant's payment based upon Estimated
Operating Expenses is less than Tenant's Proportionate Share of actual increases
in Operating Expenses over the Base Year Operating Expenses, then Tenant shall
pay to Landlord the difference within twenty (20) days after receipt of such
statement, such payment to constitute Additional Rent for all purposes
hereunder. If such statement shows that Tenant's payments of Estimated
Operating Expenses exceed Tenant's Proportionate Share of actual increases in
Operating Expenses over the Base Year Operating Expenses, then (provided that
Tenant is not in default under this Lease) Landlord shall pay to Tenant the
difference within twenty (20) days after delivery of such statement to Tenant.
If this Lease has been terminated or the Term hereof has expired prior to the
date of such statement, then the Operating Expense Adjustment shall be paid by
the appropriate party within twenty (20) days after the date of delivery of the
statement. Tenant's obligation to pay increases in Operating Expenses over the
Base Year Operating Expenses shall commence on January 1 of the year succeeding
the Base Year. Should this Lease terminate at any time other than the last day
of the fiscal year, Tenant's Proportionate Share of the Operating Expense
Adjustment shall be prorated based on a month of 30 days and the number of
calendar months during such fiscal year that this Lease is in effect. Tenant
shall in no event be entitled to any credit if Operating Expenses in any year
are less than Base Year Operating Expenses. Notwithstanding anything to the
contrary contained in Paragraph 7.A or 7.B, Landlord's failure to provide any
notices or statements within the time periods specified in those paragraphs
shall in no way excuse Tenant from its obligation to pay Tenant's Proportionate
Share of increases in Operating Expenses.
D. GROSS LEASE. This shall be a gross Lease; however, it is intended that
Base Rent shall be paid to Landlord absolutely net of all costs and expenses
other than Operating Expenses each year equal to Tenant's Proportionate Share of
Base Year Operating Expenses, except as otherwise specifically provided to the
contrary in this Lease. The provisions for payment of increases in Operating
Expenses and the Operating Expense Adjustment are intended to pass on to Tenant
and reimburse Landlord for all costs and expenses of the nature described in
Paragraph 7.A. incurred in connection with the ownership, management,
maintenance, repair, preservation, replacement and operation of the Building
and/or Project and its supporting facilities and such additional facilities, in
excess of the Base Year Operating Expenses, now and in subsequent years as may
be determined by Landlord to be necessary or desirable to the Building and/or
Project.
E. TENANT AUDIT. If Tenant shall dispute the amount set forth in any
statement provided by Landlord under Paragraph 7.B. or 7.C. above, Tenant shall
have the right, not later than twenty (20) days following receipt of such
statement and upon the condition that Tenant shall first deposit with Landlord
the full amount in dispute, to cause Landlord's books and records with respect
to Operating Expenses for such fiscal year to be audited by certified public
accountants selected by Tenant and subject to Landlord's reasonable right of
approval. The Operating Expense Adjustment shall be appropriately adjusted on
the basis of such audit. If such audit discloses a liability for a refund in
excess of ten percent (10%) of Tenant's Proportionate Share of the Operating
Expenses previously reported, the cost of such audit shall be borne by Landlord;
otherwise the cost of such audit shall be paid by Tenant. If Tenant shall not
request an audit in accordance with the provisions of this Paragraph 7.E. within
twenty (20) days after receipt of Landlord's statement provided pursuant to
Paragraph 7.B. or 7.C., such statement shall be final and binding for all
purposes hereof.
8. INSURANCE AND INDEMNIFICATION
A. LANDLORD'S INSURANCE. All insurance maintained by Landlord shall be for
the sole benefit of Landlord and under Landlord's sole control.
(1) PROPERTY INSURANCE. Landlord agrees to maintain property insurance
insuring the Building against damage or destruction due to risk including
fire, vandalism, and malicious mischief in an amount not less than the
replacement cost thereof, in the form and with deductibles and endorsements
as selected by Landlord. At its election, Landlord may instead (but shall
have no obligation to) obtain "All Risk" coverage, and may also obtain
earthquake, pollution, and/or flood insurance in amounts selected by
Landlord.
(2) OPTIONAL INSURANCE. Landlord, at Landlord's option, may also (but
shall have no obligation to) carry insurance against loss of rent, in an
amount equal to the amount of Base Rent and Additional Rent that Landlord
could be required to abate to all Building tenants in the event of
condemnation or casualty damage for a period of
<PAGE>
twelve (12) months. Landlord may also (but shall have no obligation to)
carry such other insurance as Landlord may deem prudent or advisable,
including, without limitation, liability insurance in such amounts and on
such terms as Landlord shall determine. Landlord shall not be obligated to
insure, and shall have no responsibility whatsoever for any damage to, any
furniture, machinery, goods, inventory or supplies, or other personal
property or fixtures which Tenant may keep or maintain in the Premises, or
any leasehold improvements, additions or alterations within the Premises.
B. TENANT'S INSURANCE.
(1) PROPERTY INSURANCE. Tenant shall procure at Tenant's sole cost and
expense and keep in effect from the date of this Lease and at all times
until the end of the Term, insurance on all personal property and fixtures
of Tenant and all improvements, additions or alterations made by or for
Tenant to the Premises on an "All Risk" basis, insuring such property for
the full replacement value of such property.
(2) LIABILITY INSURANCE. Tenant shall procure at Tenant's sole cost and
expense and keep in effect from the date of this Lease and at all times
until the end of the Term Commercial General Liability insurance covering
bodily injury and property damage liability occurring in or about the
Premises or arising out of the use and occupancy of the Premises and the
Project, and any part of either, and any areas adjacent thereto, and the
business operated by Tenant or by any other occupant of the Premises. Such
insurance shall include contractual liability insurance coverage insuring
all of Tenant's indemnity obligations under this Lease. Such coverage
shall have a minimum combined single limit of liability of at least Two
Million Dollars ($2,000,000.00), and a minimum general aggregate limit of
Three Million Dollars ($3,000,000.00), with an "Additional Insured -
Managers or Lessors of Premises Endorsement." All such policies shall be
written to apply to all bodily injury (including death), property damage or
loss, personal and advertising injury and other covered loss, however
occasioned, occurring during the policy term, shall be endorsed to add
Landlord and any party holding an interest to which this Lease may be
subordinated as an additional insured, and shall provide that such coverage
shall be "PRIMARY" and non-contributing with any insurance maintained by
Landlord, which shall be excess insurance only. Such coverage shall also
contain endorsements including employees as additional insureds if not
covered by Tenant's Commercial General Liability Insurance. All such
insurance shall provide for the severability of interests of insureds; and
shall be written on an "OCCURRENCE" basis, which shall afford coverage for
all claims based on acts, omissions, injury and damage, which occurred or
arose (or the onset of which occurred or arose) in whole or in part during
the policy period.
(3) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE. Tenant
shall carry Workers' Compensation Insurance as required by any Regulation,
throughout the Term at Tenant's sole cost and expense. Tenant shall also
carry Employers' Liability Insurance in amounts not less than One Million
Dollars ($1,000,000) each accident for bodily injury by accident; One
Million Dollars ($1,000,000) policy limit for bodily injury by disease; and
One Million Dollars ($1,000,000) each employee for bodily injury by
disease, throughout the Term at Tenant's sole cost and expense.
(4) GENERAL INSURANCE REQUIREMENTS. All coverages described in this
Paragraph 8.B. shall be endorsed to (i) provide Landlord with thirty (30)
days' notice of cancellation or change in terms; and (ii) waive all rights
of subrogation by the insurance carrier against Landlord. If at any time
during the Term the amount or coverage of insurance which Tenant is
required to carry under this Paragraph 8.B. is, in Landlord's reasonable
judgment, materially less than the amount or type of insurance coverage
typically carried by owners or tenants of properties located in the general
area in which the Premises are located which are similar to and operated
for similar purposes as the Premises or if Tenant's use of the Premises
should change with or without Landlord's consent, Landlord shall have the
right to require Tenant to increase the amount or change the types of
insurance coverage required under this Paragraph 8.B. All insurance
policies required to be carried by Tenant under this Lease shall be written
by companies rated A X or better in "Best's Insurance Guide" and authorized
to do business in the State of California. In any event deductible amounts
under all insurance policies required to be carried by Tenant under this
Lease shall not exceed Five Thousand Dollars ($5,000.00) per occurrence.
Tenant shall deliver to Landlord on or before the Term Commencement Date,
and thereafter at least thirty (30) days before the expiration dates of the
expired policies, certified copies of Tenant's insurance policies, or a
certificate evidencing the same issued by the insurer thereunder; and, if
Tenant shall fail to procure such insurance, or to deliver such policies or
certificates, Landlord may, at Landlord's option and in addition to
Landlord's other remedies in the event of a default by Tenant hereunder,
procure the same for the account of Tenant, and the cost thereof shall be
paid to Landlord as Additional Rent.
<PAGE>
C. INDEMNIFICATION. Tenant shall indemnify, defend by counsel reasonably
acceptable to Landlord, protect and hold Landlord harmless from and against any
and all claims, liabilities, losses, costs, loss of rents, liens, damages,
injuries or expenses, including reasonable attorneys' and consultants' fees and
court costs, demands, causes of action, or judgments, directly or indirectly
arising out of or related to: (1) claims of injury to or death of persons or
damage to property occurring or resulting directly or indirectly from the use or
occupancy of the Premises, Building or Project by Tenant or Tenant's Parties, or
from activities or failures to act of Tenant or Tenant's Parties; (2) claims
arising from work or labor performed, or for materials or supplies furnished to
or at the request or for the account of Tenant in connection with performance of
any work done for the account of Tenant within the Premises or Project; (3)
claims arising from any breach or default on the part of Tenant in the
performance of any covenant contained in this Lease; and (4) claims arising from
the negligence or intentional acts or omissions of Tenant or Tenant's Parties.
The foregoing indemnity by Tenant shall not be applicable to claims to the
extent arising from the gross negligence or willful misconduct of Landlord.
Landlord shall not be liable to Tenant and Tenant hereby waives all claims
against Landlord for any injury or damage to any person or property in or about
the Premises, Building or Project by or from any cause whatsoever (other than
Landlord's gross negligence or willful misconduct) and, without limiting the
generality of the foregoing, whether caused by water leakage of any character
from the roof, walls, basement or other portion of the Premises, Building or
Project, or caused by gas, fire, oil or electricity in, on or about the
Premises, Building or Project. The provisions of this Paragraph shall survive
the expiration or earlier termination of this Lease.
9. WAIVER OF SUBROGATION
To the extent permitted by law and without affecting the coverage provided
by insurance to be maintained hereunder or any other rights or remedies,
Landlord and Tenant each waive any right to recover against the other for: (a)
damages for injury to or death of persons; (b) damages to property, including
personal property; (c) damages to the Premises or any part thereof; and (d)
claims arising by reason of the foregoing due to hazards covered by insurance
maintained or required to be maintained pursuant to this Lease to the extent of
proceeds recovered therefrom, or proceeds which would have been recoverable
therefrom in the case of the failure of any party to maintain any insurance
coverage required to be maintained by such party pursuant to this Lease. This
provision is intended to waive fully, any rights and/or claims arising by reason
of the foregoing, but only to the extent that any of the foregoing damages
and/or claims referred to above are covered or would be covered, and only to the
extent of such coverage, by insurance actually carried or required to be
maintained pursuant to this Lease by either Landlord or Tenant. This provision
is also intended to waive fully, and for the benefit of each party, any rights
and/or claims which might give rise to a right of subrogation on any insurance
carrier. Subject to all qualifications of this Paragraph 9, Landlord waives its
rights as specified in this Paragraph 9 with respect to any subtenant that it
has approved pursuant to Paragraph 21 but only in exchange for the written
waiver of such rights to be given by such subtenant to Landlord upon such
subtenant taking possession of the Premises or a portion thereof. Each party
shall cause each insurance policy obtained by it to provide that the insurance
company waives all right of recovery by way of subrogation against either party
in connection with any damage covered by any policy.
10. LANDLORD'S REPAIRS AND MAINTENANCE
Landlord shall at Landlord's expense maintain in good repair, reasonable
wear and tear excepted, the structural soundness of the roof, foundations, and
exterior walls of the Building. The term "exterior walls" as used herein shall
not include windows, glass or plate glass, doors, special store fronts or office
entries. Any damage caused by or repairs necessitated by any negligence or act
of Tenant or Tenant's Parties may be repaired by Landlord at Landlord's option
and Tenant's expense. Tenant shall immediately give Landlord written notice of
any defect or need of repairs in such components of the Building for which
Landlord is responsible, after which Landlord shall have a reasonable
opportunity and the right to enter the Premises at all reasonable times to
repair same. Landlord's liability with respect to any defects, repairs, or
maintenance for which Landlord is responsible under any of the provisions of
this Lease shall be limited to the cost of such repairs or maintenance, and
there shall be no abatement of rent and no liability of Landlord by reason of
any injury to or interference with Tenant's business arising from the making of
repairs, alterations or improvements in or to any portion of the Premises, the
Building or the Project or to fixtures, appurtenances or equipment in the
Building, except as provided in Paragraph 24. By taking possession of the
Premises, Tenant accepts them "as is," as being in good order, condition and
repair and the condition in which Landlord is obligated to deliver them and
suitable for the Permitted Use and Tenant's intended operations in the Premises,
whether or not any notice of acceptance is given.
<PAGE>
11. TENANT'S REPAIRS AND MAINTENANCE
Tenant shall at all times during the Term at Tenant's expense maintain all
parts of the Premises and such portions of the Building as are within the
exclusive control of Tenant in a first-class, good, clean and secure condition
and promptly make all necessary repairs and replacements, as determined by
Landlord, with materials and workmanship of the same character, kind and quality
as the original. Notwithstanding anything to the contrary contained herein,
Tenant shall, at its expense, promptly repair any damage to the Premises or the
Building or Project resulting from or caused by any negligence or act of Tenant
or Tenant's Parties.
12. ALTERATIONS
A. Tenant shall not make, or allow to be made, any alterations, physical
additions, improvements or partitions, including without limitation the
attachment of any fixtures or equipment, in, about or to the Premises
("ALTERATIONS") without obtaining the prior written consent of Landlord, which
consent shall not be unreasonably withheld with respect to proposed Alterations
which: (a) comply with all applicable Regulations; (b) are, in Landlord's
opinion, compatible with the Building or the Project and its mechanical,
plumbing, electrical, heating/ventilation/air conditioning systems, and will not
cause the Building or Project or such systems to be required to be modified to
comply with any Regulations (including, without limitation, the Americans With
Disabilities Act); and (c) will not interfere with the use and occupancy of any
other portion of the Building or Project by any other tenant or its invitees.
Specifically, but without limiting the generality of the foregoing, Landlord
shall have the right of written consent for all plans and specifications for the
proposed Alterations, construction means and methods, all appropriate permits
and licenses, any contractor or subcontractor to be employed on the work of
Alterations, and the time for performance of such work, and may impose rules and
regulations for contractors and subcontractors performing such work. Tenant
shall also supply to Landlord any documents and information reasonably requested
by Landlord in connection with Landlord's consideration of a request for
approval hereunder. Tenant shall cause all Alterations to be accomplished in a
first-class, good and workmanlike manner, and to comply with all applicable
Regulations and Paragraph 27 hereof. Tenant shall at Tenant's sole expense,
perform any additional work required under applicable Regulations due to the
Alterations hereunder. No review or consent by Landlord of or to any proposed
Alteration or additional work shall constitute a waiver of Tenant's obligations
under this Paragraph 12, nor constitute any warranty or representation that the
same complies with all applicable Regulations, for which Tenant shall at all
times be solely responsible. Tenant shall reimburse Landlord for all costs
which Landlord may incur in connection with granting approval to Tenant for any
such Alterations, including any costs or expenses which Landlord may incur in
electing to have outside architects and engineers review said plans and
specifications, and shall pay Landlord an administration fee of fifteen percent
(15%) of the cost of the Alterations as Additional Rent hereunder. All such
Alterations shall remain the property of Tenant until the expiration or earlier
termination of this Lease, at which time they shall be and become the property
of Landlord; provided, however, that Landlord may, at Landlord's option, require
that Tenant, at Tenant's expense, remove any or all Alterations made by Tenant
and restore the Premises by the expiration or earlier termination of this Lease,
to their condition existing prior to the construction of any such Alterations.
All such removals and restoration shall be accomplished in a first-class and
good and workmanlike manner so as not to cause any damage to the Premises or
Project whatsoever. If Tenant fails to remove such Alterations or Tenant's
trade fixtures or furniture or other personal property, Landlord may keep and
use them or remove any of them and cause them to be stored or sold in accordance
with applicable law, at Tenant's sole expense. In addition to and wholly apart
from Tenant's obligation to pay Tenant's Proportionate Share of Operating
Expenses, Tenant shall be responsible for and shall pay prior to delinquency any
taxes or governmental service fees, possessory interest taxes, fees or charges
in lieu of any such taxes, capital levies, or other charges imposed upon, levied
with respect to or assessed against its fixtures or personal property, on the
value of Alterations within the Premises, and on Tenant's interest pursuant to
this Lease, or any increase in any of the foregoing based on such Alterations.
To the extent that any such taxes are not separately assessed or billed to
Tenant, Tenant shall pay the amount thereof as invoiced to Tenant by Landlord.
Notwithstanding the foregoing, at Landlord's option (but without obligation),
all or any portion of the Alterations shall be performed by Landlord for
Tenant's account and Tenant shall pay Landlord's estimate of the cost thereof
(including a reasonable charge for Landlord's overhead and profit) prior to
commencement of the work. In addition, at Landlord's election and
notwithstanding the foregoing, however, Tenant shall pay to Landlord the cost of
removing any such Alterations and restoring the Premises to their original
condition such cost to include a reasonable charge for Landlord's overhead and
profit as provided above, and such amount may be deducted from the Security
Deposit or any other sums or amounts held by Landlord under this Lease.
B. In compliance with Paragraph 27 hereof, at least ten (10) business days
before beginning construction of any Alteration, Tenant shall give Landlord
written notice of the expected commencement date of that construction to permit
<PAGE>
Landlord to post and record a notice of non-responsibility. Upon substantial
completion of construction, if the law so provides, Tenant shall cause a timely
notice of completion to be recorded in the office of the recorder of the county
in which the Building is located.
13. SIGNS
Tenant shall not place, install, affix, paint or maintain any signs, notices,
graphics or banners whatsoever or any window decor which is visible in or from
public view or corridors, the common areas or the exterior of the Premises or
the Building, in or on any exterior window or window fronting upon any common
areas or service area without Landlord's prior written approval which Landlord
shall have the right to withhold in its absolute and sole discretion; provided
that Tenant's name shall be included in any Building-standard door and directory
signage, if any, in accordance with Landlord's Building signage program,
including without limitation, payment by Tenant of any fee charged by Landlord
for maintaining such signage, which fee shall constitute Additional Rent
hereunder. Any installation of signs, notices, graphics or banners on or about
the Premises or Project approved by Landlord shall be subject to any Regulations
and to any other requirements imposed by Landlord. Tenant shall remove all such
signs or graphics by the expiration or any earlier termination of this Lease.
Such installations and removals shall be made in such manner as to avoid injury
to or defacement of the Premises, Building or Project and any other improvements
contained therein, and Tenant shall repair any injury or defacement including
without limitation discoloration caused by such installation or removal.
14. INSPECTION/POSTING NOTICES
After reasonable notice, except in emergencies where no such notice shall be
required, Landlord and Landlord's agents and representatives, shall have the
right to enter the Premises to inspect the same, to clean, to perform such work
as may be permitted or required hereunder, to make repairs, improvements or
alterations to the Premises, Building or Project or to other tenant spaces
therein, to deal with emergencies, to post such notices as may be permitted or
required by law to prevent the perfection of liens against Landlord's interest
in the Project or to exhibit the Premises to prospective tenants, purchasers,
encumbrancers or to others, or for any other purpose as Landlord may deem
necessary or desirable; provided, however, that Landlord shall use reasonable
efforts not to unreasonably interfere with Tenant's business operations. Tenant
shall not be entitled to any abatement of Rent by reason of the exercise of any
such right of entry. Tenant waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned thereby.
Landlord shall at all times have and retain a key with which to unlock all of
the doors in, upon and about the Premises, excluding Tenant's vaults and safes
or special security areas (designated in advance), and Landlord shall have the
right to use any and all means which Landlord may deem necessary or proper to
open said doors in an emergency, in order to obtain entry to any portion of the
Premises, and any entry to the Premises or portions thereof obtained by Landlord
by any of said means, or otherwise, shall not be construed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or an eviction, actual or
constructive, of Tenant from the Premises or any portions thereof. At any time
within six (6) months prior to the expiration of the Term or following any
earlier termination of this Lease or agreement to terminate this Lease, Landlord
shall have the right to erect on the Premises, Building and/or Project a
suitable sign indicating that the Premises are available for lease.
15. SERVICES AND UTILITIES
A. Provided Tenant shall not be in default hereunder, and subject to the
provisions elsewhere herein contained and to the rules and regulations of the
Building, Landlord shall furnish to the Premises during ordinary business hours
of generally recognized business days, to be determined by Landlord (but
exclusive, in any event, of Saturdays, Sundays and legal holidays), water for
lavatory and drinking purposes and electricity, heat and air conditioning as
usually furnished or supplied for use of the Premises for reasonable and normal
office use as of the date Tenant takes possession of the Premises as determined
by Landlord (but not including above-standard or continuous cooling for
excessive heat-generating machines, excess lighting or equipment), janitorial
services during the times and in the manner that such services are, in
Landlord's judgment, customarily furnished in comparable office buildings in the
immediate market area, and elevator service, which shall mean service either by
nonattended automatic elevators or elevators with attendants, or both, at the
option of Landlord. Tenant acknowledges that Tenant has inspected and accepts
the water, electricity, heat and air conditioning and other utilities and
services being supplied or furnished to the Premises as of the date Tenant takes
possession of the Premises, as being sufficient for use of the Premises for
reasonable and normal office use in their present condition, "as is," and
suitable for the Permitted Use, and for Tenant's intended operations in the
Premises. Landlord shall have no obligation to provide additional or
after-hours electricity, heating or air conditioning, but if Landlord elects to
provide such services at Tenant's request,
<PAGE>
Tenant shall pay to Landlord a reasonable charge for such services as determined
by Landlord. Tenant agrees to keep and cause to be kept closed all window
covering when necessary because of the sun's position, and Tenant also agrees at
all times to cooperate fully with Landlord and to abide by all of the
regulations and requirements which Landlord may prescribe for the proper
functioning and protection of electrical, heating, ventilating and air
conditioning systems. Wherever heat-generating machines, excess lighting or
equipment are used in the Premises which affect the temperature otherwise
maintained by the air conditioning system, Landlord reserves the right to
install supplementary air conditioning units in the Premises and the cost
thereof, including the cost of installation and the cost of operation and
maintenance thereof, shall be paid by Tenant to Landlord upon demand by
Landlord.
B. Tenant shall not without written consent of Landlord use any apparatus,
equipment or device in the Premises, including without limitation, computers,
electronic data processing machines, copying machines, and other machines, using
excess lighting or using electric current, water, or any other resource in
excess of or which will in any way increase the amount of electricity, water, or
any other resource being furnished or supplied for the use of the Premises for
reasonable and normal office use, in each case as of the date Tenant takes
possession of the Premises as determined by Landlord, or which will require
additions or alterations to or interfere with the Building power distribution
systems; nor connect with electric current, except through existing electrical
outlets in the Premises or water pipes, any apparatus, equipment or device for
the purpose of using electrical current, water, or any other resource. If
Tenant shall require water or electric current or any other resource in excess
of that being furnished or supplied for the use of the Premises as of the date
Tenant takes possession of the Premises as determined by Landlord, Tenant shall
first procure the written consent of Landlord which Landlord may refuse, to the
use thereof, and Landlord may cause a special meter to be installed in the
Premises so as to measure the amount of water, electric current or other
resource consumed for any such other use. Tenant shall pay directly to Landlord
as an addition to and separate from payment of Operating Expenses the cost of
all such additional resources, energy, utility service and meters (and of
installation, maintenance and repair thereof and of any additional circuits or
other equipment necessary to furnish such additional resources, energy, utility
or service). Landlord may add to the separate or metered charge a recovery of
additional expense incurred in keeping account of the excess water, electric
current or other resource so consumed. Landlord shall not be liable for any
damages directly or indirectl resulting from nor shall the Rent or any monies
owed Landlord under this Lease herein reserved be abated by reason of: (a) the
installation, use or interruption of use of any equipment used in connection
with the furnishing of any such utilities or services, or any change in the
character or means of supplying or providing any such utilities or services or
any supplier thereof; (b) the failure to furnish or delay in furnishing any such
utilities or services when such failure or delay is caused by acts of God or the
elements, labor disturbances of any character, or any other accidents or other
conditions beyond the reasonable control of Landlord or because of any
interruption of service due to Tenant's use of water, electric current or other
resource in excess of that being supplied or furnished for the use of the
Premises as of the date Tenant takes possession of the Premises; (c) the
inadequacy, limitation, curtailment, rationing or restriction on use of water,
electricity, gas or any other form of energy or any other service or utility
whatsoever serving the Premises or Project, whether by Regulation or otherwise;
or (d) the partial or total unavailability of any such utilities or services to
the Premises or the Building, whether by Regulation or otherwise; nor shall any
such occurrence constitute an actual or constructive eviction of Tenant.
Landlord shall further have no obligation to protect or preserve any apparatus,
equipment or device installed by Tenant in the Premises, including without
limitation by providing additional or after-hours heating or air conditioning.
Landlord shall be entitled to cooperate voluntarily and in a reasonable manner
with the efforts of national, state or local governmental agencies or utility
suppliers in reducing energy or other resource consumption. The obligation to
make services available hereunder shall be subject to the limitations of any
such voluntary, reasonable program. In addition, Landlord reserves the right to
change the supplier or provider of any such utility or service from time to
time. Tenant shall have no right to contract with or otherwise obtain any
electrical or other such service for or with respect to the Premises or Tenant's
operations therein from any supplier or provider of any such service. Tenant
shall cooperate with Landlord and any supplier or provider of such services
designated by Landlord from time to time to facilitate the delivery of such
services to Tenant at the Premises and to the Building and Project, including
without limitation allowing Landlord and Landlord's suppliers or providers, and
their respective agents and contractors, reasonable access to the Premises for
the purpose of installing, maintaining, repairing, replacing or upgrading such
service or any equipment or machinery associated therewith.
C. Tenant shall pay, upon demand, for all utilities furnished to the Premises,
or if not separately billed to or metered to Tenant, Tenant's Proportionate
Share of all charges jointly serving the Project in accordance with Paragraph 7.
All sums payable under this Paragraph 15 shall constitute Additional Rent
hereunder.
<PAGE>
16. SUBORDINATION
Without the necessity of any additional document being executed by Tenant for
the purpose of effecting a subordination, this Lease shall be and is hereby
declared to be subject and subordinate at all times to: (a) all ground leases or
underlying leases which may now exist or hereafter be executed affecting the
Premises and/or the land upon which the Premises and Project are situated, or
both; and (b) any mortgage or deed of trust which may now exist or be placed
upon the Building, the Project and/or the land upon which the Premises or the
Project are situated, or said ground leases or underlying leases, or Landlord's
interest or estate in any of said items which is specified as security.
Notwithstanding the foregoing, Landlord shall have the right to subordinate or
cause to be subordinated any such ground leases or underlying leases or any such
liens to this Lease. If any ground lease or underlying lease terminates for any
reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of
foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination, attorn to and become the Tenant of the successor in interest to
Landlord provided that Tenant shall not be disturbed in its possession under
this Lease by such successor in interest so long as Tenant is not in default
under this Lease. Within ten (10) days after request by Landlord, Tenant shall
execute and deliver any additional documents evidencing Tenant's attornment or
the subordination of this Lease with respect to any such ground leases or
underlying leases or any such mortgage or deed of trust, in the form requested
by Landlord or by any ground landlord, mortgagee, or beneficiary under a deed of
trust, subject to such nondisturbance requirement. If requested in writing by
Tenant, Landlord shall use commercially reasonable efforts to obtain a
subordination, nondisturbance and attornment agreement for the benefit of Tenant
reflecting the foregoing from any ground landlord, mortgagee or beneficiary, at
Tenant's expense, subject to such other terms and conditions as the ground
landlord, mortgagee or beneficiary may require.
17. FINANCIAL STATEMENTS
At the request of Landlord from time to time, Tenant shall provide to Landlord
Tenant's and any guarantor's current financial statements or other information
discussing financial worth of Tenant and any guarantor, which Landlord shall use
solely for purposes of this Lease and in connection with the ownership,
management, financing and disposition of the Project.
18. ESTOPPEL CERTIFICATE
Tenant agrees from time to time, within ten (10) days after request of Landlord,
to deliver to Landlord, or Landlord's designee, an estoppel certificate stating
that this Lease is in full force and effect, that this Lease has not been
modified (or stating all modifications, written or oral, to this Lease), the
date to which Rent has been paid, the unexpired portion of this Lease, that
there are no current defaults by Landlord or Tenant under this Lease (or
specifying any such defaults), that the leasehold estate granted by this Lease
is the sole interest of Tenant in the Premises and/or the land at which the
Premises are situated, and such other matters pertaining to this Lease as may be
reasonably requested by Landlord or any mortgagee, beneficiary, purchaser or
prospective purchaser of the Building or Project or any interest therein.
Failure by Tenant to execute and deliver such certificate shall constitute an
acceptance of the Premises and acknowledgment by Tenant that the statements
included are true and correct without exception. Tenant agrees that if Tenant
fails to execute and deliver such certificate within such ten (10) day period,
Landlord may execute and deliver such certificate on Tenant's behalf and that
such certificate shall be binding on Tenant. Landlord and Tenant intend that
any statement delivered pursuant to this Paragraph may be relied upon by any
mortgagee, beneficiary, purchaser or prospective purchaser of the Building or
Project or any interest therein. The parties agree that Tenant's obligation to
furnish such estoppel certificates in a timely fashion is a material inducement
for Landlord's execution of this Lease, and shall be an event of default
(without any cure period that might be provided under Paragraph 26.A(3) of this
Lease) if Tenant fails to fully comply or makes any material misstatement in any
such certificate.
19. SECURITY DEPOSIT
Tenant agrees to deposit with Landlord upon execution of this Lease, a security
deposit as stated in the Basic Lease Information (the "SECURITY DEPOSIT"), which
sum shall be held and owned by Landlord, without obligation to pay interest, as
security for the performance of Tenant's covenants and obligations under this
Lease. The Security Deposit is not an advance rental deposit or a measure of
damages incurred by Landlord in case of Tenant's default. Upon the occurrence
of any event of default by Tenant, Landlord may from time to time, without
prejudice to any other remedy provided herein or by law, use such fund as a
credit to the extent necessary to credit against any arrears of Rent or other
payments due to Landlord hereunder, and any other damage, injury, expense or
liability caused by such event of default, and Tenant shall pay to Landlord, on
demand, the amount so applied in order to restore the Security Deposit to its
original amount. Although the Security Deposit shall be deemed the property of
Landlord, any remaining balance of such deposit shall be returned by Landlord to
Tenant at such time after termination of this Lease that all of Tenant's
obligations under this Lease have been
<PAGE>
fulfilled, reduced by such amounts as may be required by Landlord to remedy
defaults on the part of Tenant in the payment of Rent or other obligations of
Tenant under this Lease, to repair damage to the Premises, Building or Project
caused by Tenant or any Tenant's Parties and to clean the Premises. Landlord
may use and commingle the Security Deposit with other funds of Landlord. Upon
proof of receipt, acceptable to Landlord, of $5,000,000 in funding, and within
thirty (30) days written notice from Tenant, and provided that Tenant is not and
has not been in default of any Terms of the Lease, Landlord shall refund
$9,184.00 of the Security Deposit. At month thirteen (13) of the Lease Term,
within thirty (30) days written notice from Tenant to Landlord, and provided
that Tenant is not and has not been in default of any Terms of the Lease,
Landlord shall refund $9,184.00 of the Security Deposit. At month twenty-five
(25) of the Lease Term, within thirty (30) days written notice from Tenant to
Landlord, and provided that Tenant is not and has not been in default of any
Terms of the Lease, Landlord shall review Tenant's current financial statements
and business plan to determine Tenant's financial condition. If Landlord
determines Tenant's financials are capable of fulfilling it's remaining lease
obligation, Landlord shall refund $9,184.00 of the Security Deposit within
fifteen (15) days of review of said financials. $9,184.00 of the Security
Deposit shall be retained by the Landlord for the remainder of the Term.
20. IMITATION OF TENANT'S REMEDIES
A. The obligations and liability of the parties for any default by the parties
under the terms of this Lease are not personal obligations of the parties
or of the individual or other partners of the parties or its or their
partners, directors, officers, or shareholders, and Tenant agrees to look
solely to Landlord's interest in the Project for the recovery of any
amount, and shall not look to other assets of Landlord. The parties agree
not to seek recourse against the assets of the individual or other partners
of Landlord or Tenant or its or their partners, directors, officers or
shareholders.
B. Any lien obtained to enforce any such judgment and any levy of execution
thereon shall be subject and subordinate to any lien, mortgage or deed of
trust on the Project. Under no circumstances shall Tenant have the right
to offset against or recoup Rent or other payments due and to become due to
Landlord hereunder except as expressly provided in Paragraph 23.B. below,
which Rent and other payments shall be absolutely due and payable hereunder
in accordance with the terms hereof.
21. ASSIGNMENT AND SUBLETTING
A. (1) GENERAL. This Lease has been negotiated to be and is granted as an
accommodation to Tenant. Accordingly, this Lease is personal to Tenant,
and Tenant's rights granted hereunder do not include the right to assign
this Lease or sublease the Premises, or to receive any excess, either in
installments or lump sum, over the Rent which is expressly reserved by
Landlord as hereinafter provided, except as otherwise expressly hereinafter
provided. Without Landord's prior written consent which shall not be
unreasonably witheld, Tenant shall not assign or pledge this Lease or
sublet the Premises or any part thereof, whether voluntarily or by
operation of law, or permit the use or occupancy of the Premises or any
part thereof by anyone other than Tenant, or suffer or permit any such
assignment, pledge, subleasing or occupancy, without Landlord's prior
written consent except as provided herein. If Tenant desires to assign
this Lease or sublet any or all of the Premises, Tenant shall give Landlord
written notice (the "TRANSFER NOTICE") at least thirty (30) days prior to
the anticipated effective date of the proposed assignment or sublease,
which shall contain all of the information reasonably requested by Landlord
to address Landlord's decision criteria specified hereinafter. Landlord
shall then have a period of fifteen business (15) days following receipt of
the Transfer Notice to notify Tenant in writing that Landlord elects
either: (i) to terminate this Lease as to the space so affected as of the
date so requested by Tenant; or (ii) to consent to the proposed assignment
or sublease, subject, however, to Landlord's prior written consent of the
proposed assignee or subtenant and of any related documents or agreements
associated with the assignment or sublease. If Landlord should fail to
notify Tenant in writing of such election within said period, Landlord
shall be deemed to have waived option (i) above, but written consent by
Landlord of the proposed assignee or subtenant shall still be required. If
Landlord does not exercise option (i) above, Landlord's consent to a
proposed assignment or sublease shall not be unreasonably withheld.
Consent to any assignment or subletting shall not constitute consent to any
subsequent transaction to which this Paragraph 21 applies.
(2) CONDITIONS OF LANDLORD'S CONSENT. Without limiting the other
instances in which it may be reasonable for Landlord to withhold Landlord's
consent to an assignment or subletting, Landlord and Tenant acknowledge
that it shall be reasonable for Landlord to withhold Landlord's consent in
the following instances: if the proposed assignee
<PAGE>
does not agree to be bound by and assume the obligations of Tenant under
this Lease in form and substance satisfactory to Landlord; the use of the
Premises by such proposed assignee or subtenant would not be a Permitted
Use or would violate any exclusivity or other arrangement which Landlord
has with any other tenant or occupant or any Regulation or would increase
the Occupancy Density or Parking Density of the Building or Project, or
would otherwise result in an undesirable tenant mix for the Project as
determined by Landlord; the proposed assignee or subtenant is not of sound
financial condition as determined by Landlord in Landlord's sole
discretion; the proposed assignee or subtenant is a governmental agency;
the proposed assignee or subtenant does not have a good reputation as a
tenant of property or a good business reputation; based on commercially
reasonable standards, the proposed assignee or subtenant is a person with
whom Landlord is negotiating to lease space in the Project or is a present
tenant of the Project; the assignment or subletting would entail any
Alterations which would lessen the value of the leasehold improvements in
the Premises or use of any Hazardous Materials or other noxious use or use
which may disturb other tenants of the Project; or Tenant is in default of
any obligation of Tenant under this Lease, or Tenant has defaulted under
this Lease on three (3) or more occasions during any twelve (12) months
preceding the date that Tenant shall request consent. Failure by or
refusal of Landlord to consent to a proposed assignee or subtenant shall
not cause a termination of this Lease. Upon a termination under Paragraph
21.A.(1)(i), Landlord may lease the Premises to any party, including
parties with whom Tenant has negotiated an assignment or sublease, without
incurring any liability to Tenant. At the option of Landlord, a surrender
and termination of this Lease shall operate as an assignment to Landlord of
some or all subleases or subtenancies. Landlord shall exercise this option
by giving notice of that assignment to such subtenants on or before the
effective date of the surrender and termination. In connection with each
request for assignment or subletting, Tenant shall pay to Landlord
Landlord's standard fee which shall not exceed $500, for approving such
requests, as well as all costs incurred by Landlord or any mortgagee or
ground lessor in approving each such request and effecting any such
transfer, including, without limitation, reasonable attorneys' fees.
B. BONUS RENT. Any Rent or other consideration realized by Tenant under any
such sublease or assignment in excess of the Rent payable hereunder, after
amortization of a reasonable brokerage commission and reasonable out of pocket
expenses incurred by Tenant, shall be divided and paid, ten percent (10%) to
Tenant, ninety percent (90%) to Landlord. In any subletting or assignment
undertaken by Tenant, Tenant shall diligently seek to obtain the maximum rental
amount available in the marketplace for comparable space available for primary
leasing.
C. CORPORATION. If Tenant is a corporation, a transfer of corporate shares by
sale, assignment, bequest, inheritance, operation of law or other disposition
(including such a transfer to or by a receiver or trustee in federal or state
bankruptcy, insolvency or other proceedings) resulting in a change in the
present control of such corporation or any of its parent corporations by the
person or persons owning a majority of said corporate shares, shall constitute
an assignment for purposes of this Lease.
D. UNINCORPORATED ENTITY. If Tenant is a partnership, joint venture,
unincorporated limited liability company or other unincorporated business form,
a transfer of the interest of persons, firms or entities responsible for
managerial control of Tenant by sale, assignment, bequest, inheritance,
operation of law or other disposition, so as to result in a change in the
present control of said entity and/or of the underlying beneficial interests of
said entity and/or a change in the identity of the persons responsible for the
general credit obligations of said entity shall constitute an assignment for all
purposes of this Lease.
E. LIABILITY. No assignment or subletting by Tenant, permitted or otherwise,
shall relieve Tenant of any obligation under this Lease or alter the primary
liability of the Tenant named herein for the payment of Rent or for the
performance of any other obligations to be performed by Tenant, including
obligations contained in Paragraph 25 with respect to any assignee or subtenant.
Landlord may collect rent or other amounts or any portion thereof from any
assignee, subtenant, or other occupant of the Premises, permitted or otherwise,
and apply the net rent collected to the Rent payable hereunder, but no such
collection shall be deemed to be a waiver of this Paragraph 21, or the
acceptance of the assignee, subtenant or occupant as tenant, or a release of
Tenant from the further performance by Tenant of the obligations of Tenant under
this Lease. Any assignment or subletting which conflicts with the provisions
hereof shall be void.
22. AUTHORITY
Landlord represents and warrants that it has full right and authority to enter
into this Lease and to perform all of Landlord's obligations hereunder and that
all persons signing this Lease on its behalf are authorized to do. Tenant and
the person or
<PAGE>
persons, if any, signing on behalf of Tenant, jointly and severally represent
and warrant that Tenant has full right and authority to enter into this Lease,
and to perform all of Tenant's obligations hereunder, and that all persons
signing this Lease on its behalf are authorized to do so.
23. CONDEMNATION
A. CONDEMNATION RESULTING IN TERMINATION. If the whole or any substantial
part of the Premises should be taken or condemned for any public use under any
Regulation, or by right of eminent domain, or by private purchase in lieu
thereof, and the taking would prevent or materially interfere with the Permitted
Use of the Premises, either party shall have the right to terminate this Lease
at its option. If any material portion of the Building or Project is taken or
condemned for any public use under any Regulation, or by right of eminent
domain, or by private purchase in lieu thereof, Landlord may terminate this
Lease at its option. In either of such events, the Rent shall be abated during
the unexpired portion of this Lease, effective when the physical taking of said
Premises shall have occurred.
B. CONDEMNATION NOT RESULTING IN TERMINATION. If a portion of the Project of
which the Premises are a part should be taken or condemned for any public use
under any Regulation, or by right of eminent domain, or by private purchase in
lieu thereof, and the taking prevents or materially interferes with the
Permitted Use of the Premises, and this Lease is not terminated as provided in
Paragraph 23.A. above, the Rent payable hereunder during the unexpired portion
of this Lease shall be reduced, beginning on the date when the physical taking
shall have occurred, to such amount as may be fair and reasonable under all of
the circumstances, but only after giving Landlord credit for all sums received
or to be received by Tenant by the condemning authority. Notwithstanding
anything to the contrary contained in this Paragraph, if the temporary use or
occupancy of any part of the Premises shall be taken or appropriated under power
of eminent domain during the Term, this Lease shall be and remain unaffected by
such taking or appropriation and Tenant shall continue to pay in full all Rent
payable hereunder by Tenant during the Term; in the event of any such temporary
appropriation or taking, Tenant shall be entitled to receive that portion of any
award which represents compensation for the use of or occupancy of the Premises
during the Term, and Landlord shall be entitled to receive that portion of any
award which represents the cost of restoration of the Premises and the use and
occupancy of the Premises.
C. AWARD. Landlord shall be entitled to (and Tenant shall assign to Landlord)
any and all payment, income, rent, award or any interest therein whatsoever
which may be paid or made in connection with such taking or conveyance and
Tenant shall have no claim against Landlord or otherwise for any sums paid by
virtue of such proceedings, whether or not attributable to the value of any
unexpired portion of this Lease, except as expressly provided in this Lease.
Notwithstanding the foregoing, any compensation specifically and separately
awarded Tenant for Tenant's personal property and moving costs, shall be and
remain the property of Tenant.
D. WAIVER OF CCP Section 1265.130. Each party waives the provisions of
California Civil Code Procedure Section 1265.130 allowing either party to
petition the superior court to terminate this Lease as a result of a partial
taking.
24. CASUALTY DAMAGE
A. GENERAL. If the Premises or Building should be damaged or destroyed by
fire, tornado, or other casualty (collectively, "CASUALTY"), Tenant shall give
immediate written notice thereof to Landlord. Within thirty (30) days after
Landlord's receipt of such notice, Landlord shall notify Tenant whether in
Landlord's estimation material restoration of the Premises can reasonably be
made within one hundred eighty (180) days from the date of such notice and
receipt of required permits for such restoration. Landlord's determination
shall be binding on Tenant.
B. WITHIN 180 DAYS. If the Premises or Building should be damaged by Casualty
to such extent that material restoration can in Landlord's estimation be
reasonably completed within one hundred eighty (180) days after the date of such
notice and receipt of required permits for such restoration, this Lease shall
not terminate. Provided that insurance proceeds are received by Landlord to
fully repair the damage, Landlord shall proceed to rebuild and repair the
Premises in the manner determined by Landlord, except that Landlord shall not be
required to rebuild, repair or replace any part of the Alterations which may
have been placed on or about the Premises by Tenant. If the Premises are
untenantable in whole or in part following such damage, the Rent payable
hereunder during the period in which they are untenantable shall be abated
proportionately, but only to the extent of rental abatement insurance proceeds
received by Landlord during the time and to the extent the Premises are unfit
for occupancy.
<PAGE>
C. GREATER THAN 180 DAYS. If the Premises or Building should be damaged by
Casualty to such extent that rebuilding or repairs cannot in Landlord's
estimation be reasonably completed within one hundred eighty (180) days after
the date of such notice and receipt of required permits for such rebuilding or
repair, then Landlord shall have the option of either: (1) terminating this
Lease effective upon the date of the occurrence of such damage, in which event
the Rent shall be abated during the unexpired portion of this Lease; or (2)
electing to rebuild or repair the Premises diligently and in the manner
determined by Landlord. Landlord shall notify Tenant of its election within
thirty (30) days after Landlord's receipt of notice of the damage or
destruction. Notwithstanding the above, Landlord shall not be required to
rebuild, repair or replace any part of any Alterations which may have been
placed, on or about the Premises by Tenant. If the Premises are untenantable in
whole or in part following such damage, the Rent payable hereunder during the
period in which they are untenantable shall be abated proportionately, but only
to the extent of rental abatement insurance proceeds received by Landlord during
the time and to the extent the Premises are unfit for occupancy.
D. TENANT'S FAULT. Notwithstanding anything herein to the contrary, if the
Premises or any other portion of the Building are damaged by Casualty resulting
from the fault, negligence, or breach of this Lease by Tenant or any of Tenant's
Parties, Base Rent and Additional Rent shall not be diminished during the repair
of such damage and Tenant shall be liable to Landlord for the cost and expense
of the repair and restoration of the Building caused thereby to the extent such
cost and expense is not covered by insurance proceeds.
E. INSURANCE PROCEEDS. Notwithstanding anything herein to the contrary, if
the Premises or Building are damaged or destroyed and are not fully covered by
the insurance proceeds received by Landlord or if the holder of any indebtedness
secured by a mortgage or deed of trust covering the Premises requires that the
insurance proceeds be applied to such indebtedness, then in either case Landlord
shall have the right to terminate this Lease by delivering written notice of
termination to Tenant within thirty (30) days after the date of notice to
Landlord that said damage or destruction is not fully covered by insurance or
such requirement is made by any such holder, as the case may be, whereupon this
Lease shall terminate.
F. WAIVER. This Paragraph 24 shall be Tenant's sole and exclusive remedy in
the event of damage or destruction to the Premises or the Building. As a
material inducement to Landlord entering into this Lease, Tenant hereby waives
any rights it may have under Sections 1932, 1933(4), 1941 or 1942 of the Civil
Code of California with respect to any destruction of the Premises, Landlord's
obligation for tenantability of the Premises and Tenant's right to make repairs
and deduct the expenses of such repairs, or under any similar law, statute or
ordinance now or hereafter in effect.
G. TENANT'S PERSONAL PROPERTY. In the event of any damage or destruction of
the Premises or the Building, under no circumstances shall Landlord be required
to repair any injury or damage to, or make any repairs to or replacements of,
Tenant's personal property.
25. HOLDING OVER
Unless Landlord expressly consents in writing to Tenant's holding over, Tenant
shall be unlawfully and illegally in possession of the Premises, whether or not
Landlord accepts any rent from Tenant or any other person while Tenant remains
in possession of the Premises without Landlord's written consent. If Tenant
shall retain possession of the Premises or any portion thereof without
Landlord's consent following the expiration of this Lease or sooner termination
for any reason, then Tenant shall pay to Landlord for each day of such retention
triple the amount of daily rental as of the last month prior to the date of
expiration or earlier termination. Tenant shall also indemnify, defend, protect
and hold Landlord harmless from any loss, liability or cost, including
consequential and incidental damages and reasonable attorneys' fees, incurred by
Landlord resulting from delay by Tenant in surrendering the Premises, including,
without limitation, any claims made by the succeeding tenant founded on such
delay. Acceptance of Rent by Landlord following expiration or earlier
termination of this Lease, or following demand by Landlord for possession of the
Premises, shall not constitute a renewal of this Lease, and nothing contained in
this Paragraph 25 shall waive Landlord's right of reentry or any other right.
Additionally, if upon expiration or earlier termination of this Lease, or
following demand by Landlord for possession of the Premises, Tenant has not
fulfilled its obligation with respect to repairs and cleanup of the Premises or
any other Tenant obligations as set forth in this Lease, then Landlord shall
have the right to perform any such obligations as it deems necessary at Tenant's
sole cost and expense, and any time required by Landlord to complete such
obligations shall be considered a period of holding over and the terms of this
Paragraph 25 shall apply. The provisions of this Paragraph 25 shall survive any
expiration or earlier termination of this Lease.
<PAGE>
26. DEFAULT
A. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute
an event of default on the part of Tenant:
(1) ABANDONMENT. Abandonment or vacation of the Premises for a continuous
period in excess of five (5) days. Tenant waives any right to notice
Tenant may have under Section 1951.3 of the Civil Code of the State of
California, the terms of this Paragraph 26.A. being deemed such notice to
Tenant as required by said Section 1951.3.
(2) NONPAYMENT OF RENT. Failure to pay any installment of Rent or any
other amount due and payable hereunder upon the date when said payment is
due, as to which time is of the essence.
(3) OTHER OBLIGATIONS. Failure to perform any obligation, agreement or
covenant under this Lease other than those matters specified in
subparagraphs (1) and (2) of this Paragraph 26.A., such failure continuing
for fifteen (15) days after written notice of such failure, as to which
time is of the essence.
(4) GENERAL ASSIGNMENT. A general assignment by Tenant for the benefit of
creditors.
(5) BANKRUPTCY. The filing of any voluntary petition in bankruptcy by
Tenant, or the filing of an involuntary petition by Tenant's creditors,
which involuntary petition remains undischarged for a period of thirty (30)
days. If under applicable law, the trustee in bankruptcy or Tenant has the
right to affirm this Lease and continue to perform the obligations of
Tenant hereunder, such trustee or Tenant shall, in such time period as may
be permitted by the bankruptcy court having jurisdiction, cure all defaults
of Tenant hereunder outstanding as of the date of the affirmance of this
Lease and provide to Landlord such adequate assurances as may be necessary
to ensure Landlord of the continued performance of Tenant's obligations
under this Lease.
(6) RECEIVERSHIP. The employment of a receiver to take possession of
substantially all of Tenant's assets or Tenant's leasehold of the Premises,
if such appointment remains undismissed or undischarged for a period of
fifteen (15) days after the order therefor.
(7) ATTACHMENT. The attachment, execution or other judicial seizure of
all or substantially all of Tenant's assets or Tenant's leasehold of the
Premises, if such attachment or other seizure remains undismissed or
undischarged for a period of fifteen (15) days after the levy thereof.
(8) INSOLVENCY. The admission by Tenant in writing of its inability to
pay its debts as they become due.
B. REMEDIES UPON DEFAULT.
(1) TERMINATION. In the event of the occurrence of any event of default,
Landlord shall have the right to give a written termination notice to
Tenant, and on the date specified in such notice, Tenant's right to
possession shall terminate, and this Lease shall terminate unless on or
before such date all Rent in arrears and all costs and expenses incurred by
or on behalf of Landlord hereunder shall have been paid by Tenant and all
other events of default of this Lease by Tenant at the time existing shall
have been fully remedied to the satisfaction of Landlord. At any time
after such termination, Landlord may recover possession of the Premises or
any part thereof and expel and remove therefrom Tenant and any other person
occupying the same, including any subtenant or subtenants notwithstanding
Landlord's consent to any sublease, by any lawful means, and again
repossess and enjoy the Premises without prejudice to any of the remedies
that Landlord may have under this Lease, or at law or equity by any reason
of Tenant's default or of such termination. Landlord hereby reserves the
right, but shall not have the obligation, to recognize the continued
possession of any subtenant. The delivery or surrender to Landlord by or
on behalf of Tenant of keys, entry codes, or other means to bypass security
at the Premises shall not terminate this Lease.
(2) CONTINUATION AFTER DEFAULT. Even though an event of default may have
occurred, this Lease shall continue in effect for so long as Landlord does
not terminate Tenant's right to possession under Paragraph 26.B.(1) hereof,
and Landlord may enforce all of Landlord's rights and remedies under this
Lease and at law or in equity, including without limitation, the right to
recover Rent as it becomes due, and Landlord, without terminating this
Lease, may exercise all of the rights and remedies of a landlord under
Section 1951.4 of the Civil Code of the State of California or any
successor code section. Acts of maintenance, preservation or efforts to
lease the Premises or the appointment
<PAGE>
of a receiver under application of Landlord to protect Landlord's interest
under this Lease or other entry by Landlord upon the Premises shall not
constitute an election to terminate Tenant's right to possession.
(3) INCREASED SECURITY DEPOSIT. If Tenant is in default under Paragraph
26.A.(2) hereof and such default remains uncured for ten (10) days after
such occurrence or such default occurs more than three times in any twelve
(12) month period, Landlord may require that Tenant increase the Security
Deposit to the amount of three times the current month's Rent at the time
of the most recent default.
C. DAMAGES AFTER DEFAULT. Should Landlord terminate this Lease pursuant to
the provisions of Paragraph 26.B.(1) hereof, Landlord shall have the rights and
remedies of a Landlord provided by Section 1951.2 of the Civil Code of the State
of California, or any successor code sections. Upon such termination, in
addition to any other rights and remedies to which Landlord may be entitled
under applicable law or at equity, Landlord shall be entitled to recover from
Tenant: (1) the worth at the time of award of the unpaid Rent and other amounts
which had been earned at the time of termination, (2) the worth at the time of
award of the amount by which the unpaid Rent and other amounts that would have
been earned after the date of termination until the time of award exceeds the
amount of such Rent loss that Tenant proves could have been reasonably avoided;
(3) the worth at the time of award of the amount by which the unpaid Rent and
other amounts for the balance of the Term after the time of award exceeds the
amount of such Rent loss that the Tenant proves could be reasonably avoided; and
(4) any other amount and court costs necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease or which, in the ordinary course of things, would be likely to
result therefrom. The "worth at the time of award" as used in (1) and (2) above
shall be computed at the Applicable Interest Rate (defined below). The "worth
at the time of award" as used in (3) above shall be computed by discounting such
amount at the Federal Discount Rate of the Federal Reserve Bank of San Francisco
at the time of award plus one percent (1%). If this Lease provides for any
periods during the Term during which Tenant is not required to pay Base Rent or
if Tenant otherwise receives a Rent concession, then upon the occurrence of an
event of default, Tenant shall owe to Landlord the full amount of such Base Rent
or value of such Rent concession, plus interest at the Applicable Interest Rate,
calculated from the date that such Base Rent or Rent concession would have been
payable.
D. LATE CHARGE. In addition to its other remedies, Landlord shall have the
right without notice or demand to add to the amount of any payment required to
be made by Tenant hereunder, and which is not paid and received by Landlord
within five (5) business days of the first day of each calendar month, an amount
equal to ten percent (10%) of the delinquency for each month or portion thereof
that the delinquency remains outstanding to compensate Landlord for the loss of
the use of the amount not paid and the administrative costs caused by the
delinquency, the parties agreeing that Landlord's damage by virtue of such
delinquencies would be extremely difficult and impracticable to compute and the
amount stated herein represents a reasonable estimate thereof. Any waiver by
Landlord of any late charges or failure to claim the same shall not constitute a
waiver of other late charges or any other remedies available to Landlord.
E. RESERVED.
F. REMEDIES CUMULATIVE. All rights, privileges and elections or remedies of
the parties are cumulative and not alternative, to the extent permitted by law
and except as otherwise provided herein.
27. LIENS
Tenant shall at all times keep the Premises and the Project free from liens
arising out of or related to work or services performed, materials or supplies
furnished or obligations incurred by or on behalf of Tenant or in connection
with work made, suffered or done by or on behalf of Tenant in or on the Premises
or Project. If Tenant shall not, within ten (10) days following the imposition
of any such lien, cause the same to be released of record by payment or posting
of a proper bond, Landlord shall have, in addition to all other remedies
provided herein and by law, the right, but not the obligation, to cause the same
to be released by such means as Landlord shall deem proper, including payment of
the claim giving rise to such lien. All sums paid by Landlord on behalf of
Tenant and all expenses incurred by Landlord in connection therefor shall be
payable to Landlord by Tenant on demand with interest at the Applicable Interest
Rate as Additional Rent. Landlord shall have the right at all times to post and
keep posted on the Premises any notices permitted or required by law, or which
Landlord shall deem proper, for the protection of Landlord, the Premises, the
Project and any other party having an interest therein, from mechanics' and
materialmen's liens, and Tenant shall give Landlord not less than ten (10)
business days prior written notice of the commencement of any work in the
Premises or Project which could lawfully give rise to a claim for mechanics' or
materialmen's liens to permit Landlord to post and record a timely notice of
non-responsibility, as Landlord may elect to
<PAGE>
proceed or as the law may from time to time provide, for which purpose, if
Landlord shall so determine, Landlord may enter the Premises. Tenant shall not
remove any such notice posted by Landlord without Landlord's consent, and in any
event not before completion of the work which could lawfully give rise to a
claim for mechanics' or materialmen's liens.
28. SUBSTITUTION
A. RESERVED.
29. TRANSFERS BY LANDLORD
In the event of a sale or conveyance by Landlord of the Building or a
foreclosure by any creditor of Landlord, the same shall operate to release
Landlord from any liability upon any of the covenants or conditions, express or
implied, herein contained in favor of Tenant, to the extent required to be
performed after the passing of title to Landlord's successor-in-interest. In
such event, Tenant agrees to look solely to the responsibility of the
successor-in-interest of Landlord under this Lease with respect to the
performance of the covenants and duties of "Landlord" to be performed after the
passing of title to Landlord's successor-in-interest. This Lease shall not be
affected by any such sale and Tenant agrees to attorn to the purchaser or
assignee. Landlord's successor(s)-in-interest shall not have liability to
Tenant with respect to the failure to perform any of the obligations of
"Landlord," to the extent required to be performed prior to the date such
successor(s)-in-interest became the owner of the Building.
30. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS
All covenants and agreements to be performed by Tenant under any of the terms of
this Lease shall be performed by Tenant at Tenant's sole cost and expense and
without any abatement of Rent. If Tenant shall fail to pay any sum of money,
other than Base Rent, required to be paid by Tenant hereunder or shall fail to
perform any other act on Tenant's part to be performed hereunder, including
Tenant's obligations under Paragraph 11 hereof, and such failure shall continue
for fifteen (15) days after notice thereof by Landlord, in addition to the other
rights and remedies of Landlord, Landlord may make any such payment and perform
any such act on Tenant's part. In the case of an emergency, no prior
notification by Landlord shall be required. Landlord may take such actions
without any obligation and without releasing Tenant from any of Tenant's
obligations. All sums so paid by Landlord and all incidental costs incurred by
Landlord and interest thereon at the Applicable Interest Rate, from the date of
payment by Landlord, shall be paid to Landlord on demand as Additional Rent.
31. WAIVER
If either Landlord or Tenant waives the performance of any term, covenant or
condition contained in this Lease, such waiver shall not be deemed to be a
waiver of any subsequent breach of the same or any other term, covenant or
condition contained herein, or constitute a course of dealing contrary to the
expressed terms of this Lease. The acceptance of Rent by Landlord shall not
constitute a waiver of any preceding breach by Tenant of any term, covenant or
condition of this Lease, regardless of Landlord's knowledge of such preceding
breach at the time Landlord accepted such Rent. Failure by Landlord to enforce
any of the terms, covenants or conditions of this Lease for any length of time
shall not be deemed to waive or decrease the right of Landlord to insist
thereafter upon strict performance by Tenant. Waiver by Landlord of any term,
covenant or condition contained in this Lease may only be made by a written
document signed by Landlord, based upon full knowledge of the circumstances.
32. NOTICES
Each provision of this Lease or of any applicable governmental laws, ordinances,
regulations and other requirements with reference to sending, mailing, or
delivery of any notice or the making of any payment by Landlord or Tenant to the
other shall be deemed to be complied with when and if the following steps are
taken:
A. RENT. All Rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at Landlord's Remittance Address
set forth in the Basic Lease Information, or at such other address as Landlord
may specify from time to time by written notice delivered in accordance
herewith. Tenant's obligation to pay Rent and any other amounts to Landlord
under the terms of this Lease shall not be deemed satisfied until such Rent and
other amounts have been actually received by Landlord.
<PAGE>
B. OTHER. All notices, demands, consents and approvals which may or are
required to be given by either party to the other hereunder shall be in writing
and either personally delivered, sent by commercial overnight courier, mailed,
certified or registered, postage prepaid or sent by facsimile with confirmed
receipt (and with an original sent by commercial overnight courier), and in each
case addressed to the party to be notified at the Notice Address for such party
as specified in the Basic Lease Information or to such other place as the party
to be notified may from time to time designate by at least fifteen (15) days
notice to the notifying party. Notices shall be deemed served upon receipt or
refusal to accept delivery. Tenant appoints as its agent to receive the service
of all default notices and notice of commencement of unlawful detainer
proceedings the person in charge of or apparently in charge of occupying the
Premises at the time, and, if there is no such person, then such service may be
made by attaching the same on the main entrance of the Premises.
C. REQUIRED NOTICES. Tenant shall immediately notify Landlord in writing of
any notice of a violation or a potential or alleged violation of any Regulation
that relates to the Premises or the Project, or of any inquiry, investigation,
enforcement or other action that is instituted or threatened by any governmental
or regulatory agency against Tenant or any other occupant of the Premises, or
any claim that is instituted or threatened by any third party that relates to
the Premises or the Project.
33. ATTORNEYS' FEES
If Landlord places the enforcement of this Lease, or any part thereof, or the
collection of any Rent due, or to become due hereunder, or recovery of
possession of the Premises in the hands of an attorney, Tenant shall pay to
Landlord, upon demand, Landlord's reasonable attorneys' fees and court costs,
whether incurred without trial, at trial, appeal or review. In any action which
Landlord or Tenant brings to enforce its respective rights hereunder, the
unsuccessful party shall pay all costs incurred by the prevailing party
including reasonable attorneys' fees, to be fixed by the court, and said costs
and attorneys' fees shall be a part of the judgment in said action.
34. SUCCESSORS AND ASSIGNS
This Lease shall be binding upon and inure to the benefit of Landlord, its
successors and assigns, and shall be binding upon and inure to the benefit of
Tenant, its successors, and to the extent assignment is approved by Landlord as
provided hereunder, Tenant's assigns.
35. FORCE MAJEURE
If performance by a party of any portion of this Lease is made impossible by any
prevention, delay, or stoppage caused by strikes, lockouts, labor disputes, acts
of God, inability to obtain services, labor, or materials or reasonable
substitutes for those items, government actions, civil commotions, fire or other
casualty, or other causes beyond the reasonable control of the party obligated
to perform, performance by that party for a period equal to the period of that
prevention, delay, or stoppage is excused. Tenant's obligation to pay Rent,
however, is not excused by this Paragraph 35.
36. SURRENDER OF PREMISES
Tenant shall, upon expiration or sooner termination of this Lease, surrender the
Premises to Landlord in the same condition as existed on the date Tenant
originally took possession thereof, including, but not limited to, all interior
walls cleaned, all interior painted surfaces repainted in the original color,
all holes in walls repaired, all carpets shampooed and cleaned, and all floors
cleaned, waxed, and free of any Tenant-introduced marking or painting, all to
the reasonable satisfaction of Landlord. Tenant shall remove all of its debris
from the Project. At or before the time of surrender, Tenant shall comply with
the terms of Paragraph 12.A. hereof with respect to Alterations to the Premises
and all other matters addressed in such Paragraph. If the Premises are not so
surrendered at the expiration or sooner termination of this Lease, the
provisions of Paragraph 25 hereof shall apply. All keys to the Premises or any
part thereof shall be surrendered to Landlord upon expiration or sooner
termination of the Term. Tenant shall give written notice to Landlord at least
thirty (30) days prior to vacating the Premises and shall meet with Landlord for
a joint inspection of the Premises at the time of vacating, but nothing
contained herein shall be construed as an extension of the Term or as a consent
by Landlord to any holding over by Tenant. In the event of Tenant's failure to
give such notice or participate in such joint inspection, Landlord's inspection
at or after Tenant's vacating the Premises shall conclusively be deemed correct
for purposes of determining Tenant's responsibility for repairs and restoration.
Any delay caused by Tenant's failure to carry out its obligations under this
Paragraph 36 beyond the term hereof, shall constitute unlawful and illegal
possession of Premises under Paragraph 25 hereof.
<PAGE>
37. PARKING
So long as Tenant is occupying the Premises, Tenant and Tenant's Parties
shall have the right to use up to the number of parking spaces, if any,
specified in the Basic Lease Information on an unreserved, nonexclusive, first
come, first served basis, for passenger-size automobiles, in the parking areas
in the Project designated from time to time by Landlord for use in common by
tenants of the Building. Further Landlord and Tenant acknowledge that Tenant's
Occupancy Density exceeds Tenant's Parking Density, however, Landlord shall not
be obligated to Tenant to provide additional parking in the event the Occupancy
Density causes the Parking Density to be exceeded. In the event Tenant's
Parking Density is exceeded, it shall immediately cure this condition or if not
cured, Tenant shall be in default of this Lease and the provisions of Paragraph
26 shall apply.
Tenant may request additional parking spaces from time to time and if
Landlord in its sole discretion agrees to make such additional spaces available
for use by Tenant, such spaces shall be provided on a month-to-month unreserved
and nonexclusive basis (unless otherwise agreed in writing by Landlord), and
subject to such parking charges as Landlord shall determine, and shall otherwise
be subject to such terms and conditions as Landlord may require.
Tenant shall at all times comply and shall cause all Tenant's Parties and
visitors to comply with all Regulations and any rules and regulations
established from time to time by Landlord relating to parking at the Project,
including any keycard, sticker or other identification or entrance system, and
hours of operation, as applicable.
Landlord shall have no liability for any damage to property or other items
located in the parking areas of the Project, nor for any personal injuries or
death arising out of the use of parking areas in the Project by Tenant or any
Tenant's Parties. Without limiting the foregoing, if Landlord arranges for the
parking areas to be operated by an independent contractor not affiliated with
Landlord, Tenant acknowledges that Landlord shall have no liability for claims
arising through acts or omissions of such independent contractor. In all
events, Tenant agrees to look first to its insurance carrier and to require that
Tenant's Parties look first to their respective insurance carriers for payment
of any losses sustained in connection with any use of the parking areas.
Landlord reserves the right to assign specific spaces, and to reserve
spaces for visitors, small cars, disabled persons or for other tenants or
guests, and Tenant shall not park and shall not allow Tenant's Parties to park
in any such assigned or reserved spaces. Tenant may validate visitor parking by
such method as Landlord may approve, at the validation rate from time to time
generally applicable to visitor parking. Landlord also reserves the right to
alter, modify, relocate or close all or any portion of the parking areas in
order to make repairs or perform maintenance service, or to restripe or renovate
the parking areas, or if required by casualty, condemnation, act of God,
Regulations or for any other reason deemed reasonable by Landlord.
Tenant shall pay to Landlord (or Landlord's parking contractor, if so
directed in writing by Landlord), as Additional Rent hereunder, the monthly
charges established from time to time by Landlord for parking in such parking
areas (which shall initially be the charge specified in the Basic Lease
Information, as applicable). Such parking charges shall be payable in advance
with Tenant's payment of Basic Rent. No deductions from the monthly parking
charge shall be made for days on which the Tenant does not use any of the
parking spaces entitled to be used by Tenant.
38. MISCELLANEOUS
A. GENERAL. The term "Tenant" or any pronoun used in place thereof shall
indicate and include the masculine or feminine, the singular or plural number,
individuals, firms or corporations, and their respective successors, executors,
administrators and permitted assigns, according to the context hereof.
B. TIME. Time is of the essence regarding this Lease and all of its
provisions.
C. CHOICE OF LAW. This Lease shall in all respects be governed by the laws of
the State of California.
D. ENTIRE AGREEMENT. This Lease, together with its Exhibits, addenda and
attachments and the Basic Lease Information, contains all the agreements of the
parties hereto and supersedes any previous negotiations. There have been no
representations made by the Landlord or understandings made between the parties
other than those set forth in this Lease and its Exhibits, addenda and
attachments and the Basic Lease Information.
<PAGE>
E. MODIFICATION. This Lease may not be modified except by a written
instrument signed by the parties hereto. Tenant accepts the area of the
Premises as specified in the Basic Lease Information as the approximate area of
the Premises for all purposes under this Lease, and acknowledges and agrees that
no other definition of the area (rentable, usable or otherwise) of the Premises
shall apply. Tenant shall in no event be entitled to a recalculation of the
square footage of the Premises, rentable, usable or otherwise, and no
recalculation, if made, irrespective of its purpose, shall reduce Tenant's
obligations under this Lease in any manner, including without limitation the
amount of Base Rent payable by Tenant or Tenant's Proportionate Share of the
Building and of the Project.
F. SEVERABILITY. If, for any reason whatsoever, any of the provisions hereof
shall be unenforceable or ineffective, all of the other provisions shall be and
remain in full force and effect.
G. RECORDATION. Tenant shall not record this Lease or a short form memorandum
hereof.
H. EXAMINATION OF LEASE. Submission of this Lease to Tenant does not
constitute an option or offer to lease and this Lease is not effective otherwise
until execution and delivery by both Landlord and Tenant.
I. ACCORD AND SATISFACTION. No payment by Tenant of a lesser amount than the
total Rent due nor any endorsement on any check or letter accompanying any check
or payment of Rent shall be deemed an accord and satisfaction of full payment of
Rent, and Landlord may accept such payment without prejudice to Landlord's right
to recover the balance of such Rent or to pursue other remedies. All offers by
or on behalf of Tenant of accord and satisfaction are hereby rejected in
advance.
J. EASEMENTS. Landlord may grant easements on the Project and dedicate for
public use portions of the Project without Tenant's consent; provided that no
such grant or dedication shall materially interfere with Tenant's Permitted Use
of the Premises. Upon Landlord's request, Tenant shall execute, acknowledge and
deliver to Landlord documents, instruments, maps and plats necessary to
effectuate Tenant's covenants hereunder.
K. DRAFTING AND DETERMINATION PRESUMPTION. The parties acknowledge that this
Lease has been agreed to by both the parties, that both Landlord and Tenant have
consulted with attorneys with respect to the terms of this Lease and that no
presumption shall be created against Landlord because Landlord drafted this
Lease. Except as otherwise specifically set forth in this Lease, with respect
to any consent, determination or estimation of Landlord required or allowed in
this Lease or requested of Landlord, Landlord's consent, determination or
estimation shall be given or made solely by Landlord in Landlord's good faith
opinion, whether or not objectively reasonable. If Landlord fails to respond to
any request for its consent within the time period, if any, specified in this
Lease, Landlord shall be deemed to have disapproved such request.
L. EXHIBITS. The Basic Lease Information, and the Exhibits, addenda and
attachments attached hereto are hereby incorporated herein by this reference and
made a part of this Lease as though fully set forth herein.
M. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of light,
air or view by any structure which may be erected on lands adjacent to or in the
vicinity of the Building shall in no way affect this Lease or impose any
liability on Landlord.
N. NO THIRD PARTY BENEFIT. This Lease is a contract between Landlord and
Tenant and nothing herein is intended to create any third party benefit.
O. QUIET ENJOYMENT. Upon payment by Tenant of the Rent, and upon the
observance and performance of all of the other covenants, terms and conditions
on Tenant's part to be observed and performed, Tenant shall peaceably and
quietly hold and enjoy the Premises for the term hereby demised without
hindrance or interruption by Landlord or any other person or persons lawfully or
equitably claiming by, through or under Landlord, subject, nevertheless, to all
of the other terms and conditions of this Lease. Landlord shall not be liable
for any hindrance, interruption, interference or disturbance by other tenants or
third persons, nor shall Tenant be released from any obligations under this
Lease because of such hindrance, interruption, interference or disturbance.
P. COUNTERPARTS. This Lease may be executed in any number of counterparts,
each of which shall be deemed an original.
<PAGE>
Q. MULTIPLE PARTIES. If more than one person or entity is named herein as
Tenant, such multiple parties shall have joint and several responsibility to
comply with the terms of this Lease.
R. PRORATIONS. Any Rent or other amounts payable to Landlord by Tenant
hereunder for any fractional month shall be prorated based on a month of 30
days. As used herein, the term "fiscal year" shall mean the calendar year or
such other fiscal year as Landlord may deem appropriate.
39. ADDITIONAL PROVISIONS
A. RENT ADJUSTMENTS: Base Rent shall be adjusted annually on June 1 by a
fixed four percent (4%) increase as follows:
6/01/00 - 5/31/01 = $ 8,831.00 per month
6/01/01 - 5/31/02 = $ 9,184.00 per month
B. ROOFTOP TELECOMMUNICATIONS EQUIPMENT. During the Term of this Lease,
Tenant shall have the right to install and operate one (1) receiver
("Telecommunications Equipment") on the roof top of the Building. Prior to
installation, Tenant must submit and specifications to Landlord for Landlord's
written approval. All costs for the installation of the Telecommunications
Equipment including, but not limited to, electrical equipment and connections,
mounting fixtures, engineering studies, inspections, permits, license or fees,
etc. will be at the Tenant's sole cost, expense and responsibility. Prior to
the expiration or earlier termination of the Term of this Lease, or any extended
Term, Tenant shall remove the Telecommunications Equipment and shall restore and
repair all damage to the Building or Project occasioned by the installation,
maintenance or removal of the Telecommunications Equipment. If Tenant fails to
timely complete such removal, restoration and repair, all sums incurred by
Landlord to complete such work shall be paid by Tenant to Landlord upon demand.
40. JURY TRIAL WAIVER
EACH PARTY HERETO (WHICH INCLUDES ANY ASSIGNEE, SUCCESSOR HEIR OR PERSONAL
REPRESENTATIVE OF A PARTY) SHALL NOT SEEK A JURY TRIAL, HEREBY WAIVES TRIAL BY
JURY, AND HEREBY FURTHER WAIVES ANY OBJECTION TO VENUE IN THE COUNTY IN WHICH
THE BUILDING IS LOCATED, AND AGREES AND CONSENTS TO PERSONAL JURISDICTION OF THE
COURTS OF THE STATE IN WHICH THE PROPERTY IS LOCATED, IN ANY ACTION OR
PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST THE OTHER ON ANY
MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE
RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES,
OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY
STATUTE, EMERGENCY OR OTHERWISE, WHETHER ANY OF THE FOREGOING IS BASED ON THIS
LEASE OR ON TORT LAW. EACH PARTY REPRESENTS THAT IT HAS HAD THE OPPORTUNITY TO
CONSULT WITH LEGAL COUNSEL CONCERNING THE EFFECT OF THIS PARAGRAPH 40. THE
PROVISIONS OF THIS PARAGRAPH 40 SHALL SURVIVE THE EXPIRATION OR EARLIER
TERMINATION OF THIS LEASE.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day
and the year first above written.
LANDLORD TENANT
Spieker Properties, L.P., Path 1 Network Technologies, Inc.,
a California limited partnership a Delaware corporation
By: Spieker Properties, Inc.,
a Maryland corporation, By: /s/ Ronald D. Fellman
its general partner ---------------------
Ronald D. Fellman
Its: President
By: /s/ Richard L. Romney Date:
---------------------
Richard L. Romney
Its: Senior Vice President
Date:
<PAGE>
EXHIBIT A
RULES AND REGULATIONS
1. Driveways, sidewalks, halls, passages, exits, entrances, elevators,
escalators and stairways shall not be obstructed by tenants or used by
tenants for any purpose other than for ingress to and egress from their
respective premises. The driveways, sidewalks, halls, passages, exits,
entrances, elevators and stairways are not for the use of the general
public and Landlord shall in all cases retain the right to control and
prevent access thereto by all persons whose presence, in the judgment of
Landlord, shall be prejudicial to the safety, character, reputation and
interests of the Building, the Project and its tenants, provided that
nothing herein contained shall be construed to prevent such access to
persons with whom any tenant normally deals in the ordinary course of such
tenant's business unless such persons are engaged in illegal activities.
No tenant, and no employees or invitees of any tenant, shall go upon the
roof of any Building, except as authorized by Landlord. No tenant, and no
employees or invitees of any tenant shall move any common area furniture
without Landlord's consent.
2. No sign, placard, banner, picture, name, advertisement or notice,
visible from the exterior of the Premises or the Building or the common
areas of the Building shall be inscribed, painted, affixed, installed or
otherwise displayed by Tenant either on its Premises or any part of the
Building or Project without the prior written consent of Landlord in
Landlord's sole and absolute discretion. Landlord shall have the right to
remove any such sign, placard, banner, picture, name, advertisement, or
notice without notice to and at the expense of Tenant, which were installed
or displayed in violation of this rule. If Landlord shall have given such
consent to Tenant at any time, whether before or after the execution of
Tenant's Lease, such consent shall in no way operate as a waiver or release
of any of the provisions hereof or of the Lease, and shall be deemed to
relate only to the particular sign, placard, banner, picture, name,
advertisement or notice so consented to by Landlord and shall not be
construed as dispensing with the necessity of obtaining the specific
written consent of Landlord with respect to any other such sign, placard,
banner, picture, name, advertisement or notice.
All approved signs or lettering on doors and walls shall be printed,
painted, affixed or inscribed at the expense of Tenant by a person or
vendor approved by Landlord and shall be removed by Tenant at the time of
vacancy at Tenant's expense.
3. The directory of the Building or Project will be provided exclusively
for the display of the name and location of tenants only and Landlord
reserves the right to charge for the use thereof and to exclude any other
names therefrom.
4. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, awnings, hangings or decorations shall be attached to, hung or
placed in, or used in connection with, any window or door on the Premises
without the prior written consent of Landlord. In any event with the prior
written consent of Landlord, all such items shall be installed inboard of
Landlord's standard window covering and shall in no way be visible from the
exterior of the Building. All electrical ceiling fixtures hung in offices
or spaces along the perimeter of the Building must be fluorescent or of a
quality, type, design, and bulb color approved by Landlord. No articles
shall be placed or kept on the window sills so as to be visible from the
exterior of the Building. No articles shall be placed against glass
partitions or doors which Landlord considers unsightly from outside
Tenant's Premises.
5. Landlord reserves the right to exclude from the Building and the
Project, between the hours of 6 p.m. and 8 a.m. and at all hours on
Saturdays, Sundays and legal holidays, all persons who are not tenants or
their accompanied guests in the Building. Each tenant shall be responsible
for all persons for whom it allows to enter the Building or the Project and
shall be liable to Landlord for all acts of such persons.
Landlord and its agents shall not be liable for damages for any error
concerning the admission to, or exclusion from, the Building or the Project
of any person.
During the continuance of any invasion, mob, riot, public excitement
or other circumstance rendering such action advisable in Landlord's
opinion, Landlord reserves the right (but shall not be obligated) to
prevent access to the Building and the Project during the continuance of
that event by any means it considers appropriate for the safety of tenants
and protection of the Building, property in the Building and the Project.
6. All cleaning and janitorial services for the Building and the Premises
shall be bonded and insured and provided
<PAGE>
exclusively through Landlord . Except with the written consent of
Landlord, no person or persons other than those approved by Landlord shall
be permitted to enter the Building for the purpose of cleaning the same.
Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness or indifference in the preservation of good order and
cleanliness of its Premises. Landlord shall in no way be responsible to
Tenant for any loss of property on the Premises, however occurring, or for
any damage done to Tenant's property by the janitor or any other employee
or any other person.
7. Tenant shall see that all doors of its Premises are closed and
securely locked and must observe strict care and caution that all water
faucets or water apparatus, coffee pots or other heat-generating devices
are entirely shut off before Tenant or its employees leave the Premises,
and that all utilities shall likewise be carefully shut off, so as to
prevent waste or damage. Tenant shall be responsible for any damage or
injuries sustained by other tenants or occupants of the Building or Project
or by Landlord for noncompliance with this rule. On multiple-tenancy
floors, all tenants shall keep the door or doors to the Building corridors
closed at all times except for ingress and egress.
8. Tenant shall not use any method of heating or air-conditioning other
than that supplied by Landlord. As more specifically provided in Tenant's
lease of the Premises, Tenant shall not waste electricity, water or
air-conditioning and agrees to cooperate fully with Landlord to assure the
most effective operation of the Building's heating and air-conditioning,
and shall refrain from attempting to adjust any controls other than room
thermostats installed for Tenant's use.
9. Landlord will furnish Tenant free of charge with two keys to each door
in the Premises. Landlord may make a reasonable charge for any additional
keys, and Tenant shall not make or have made additional keys. Tenant shall
not alter any lock or access device or install a new or additional lock or
access device or bolt on any door of its Premises, without the prior
written consent of Landlord. If Landlord shall give its consent, Tenant
shall in each case furnish Landlord with a key for any such lock. Tenant,
upon the termination of its tenancy, shall deliver to Landlord the keys for
all doors which have been furnished to Tenant, and in the event of loss of
any keys so furnished, shall pay Landlord therefor.
10. The restrooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were constructed
and no foreign substance of any kind whatsoever shall be thrown into them.
The expense of any breakage, stoppage, or damage resulting from violation
of this rule shall be borne by the tenant who, or whose employees or
invitees, shall have caused the breakage, stoppage, or damage.
11. Tenant shall not use or keep in or on the Premises, the Building or
the Project any kerosene, gasoline, or inflammable or combustible fluid or
material.
12. Tenant shall not use, keep or permit to be used or kept in its
Premises any foul or noxious gas or substance. Tenant shall not allow the
Premises to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Building by reason of noise, odors
and/or vibrations or interfere in any way with other tenants or those
having business therein, nor shall any animals or birds be brought or kept
in or about the Premises, the Building, or the Project.
13. No cooking shall be done or permitted by any tenant on the Premises,
except that use by the tenant of Underwriters' Laboratory (UL) approved
equipment, refrigerators and microwave ovens may be used in the Premises
for the preparation of coffee, tea, hot chocolate and similar beverages,
storing and heating food for tenants and their employees shall be
permitted. All uses must be in accordance with all applicable federal,
state and city laws, codes, ordinances, rules and regulations and the
Lease.
14. Except with the prior written consent of Landlord, Tenant shall not
sell, or permit the sale, at retail, of newspapers, magazines, periodicals,
theater tickets or any other goods or merchandise in or on the Premises,
nor shall Tenant carry on, or permit or allow any employee or other person
to carry on, the business of stenography, typewriting or any similar
business in or from the Premises for the service or accommodation of
occupants of any other portion of the Building, nor shall the Premises be
used for the storage of merchandise or for manufacturing of any kind, or
the business of a public barber shop, beauty parlor, nor shall the Premises
be used for any illegal, improper, immoral or objectionable purpose, or any
business or activity other than that specifically provided for in such
Tenant's Lease. Tenant shall not accept hairstyling, barbering, shoeshine,
nail, massage or similar services in the Premises or common areas except as
<PAGE>
authorized by Landlord.
15. If Tenant requires telegraphic, telephonic, telecommunications, data
processing, burglar alarm or similar services, it shall first obtain, and
comply with, Landlord's instructions in their installation. The cost of
purchasing, installation and maintenance of such services shall be borne
solely by Tenant.
16. Landlord will direct electricians as to where and how telephone,
telegraph and electrical wires are to be introduced or installed. No
boring or cutting for wires will be allowed without the prior written
consent of Landlord. The location of burglar alarms, telephones, call
boxes and other office equipment affixed to the Premises shall be subject
to the prior written approval of Landlord.
17. Tenant shall not install any radio or television antenna, satellite
dish, loudspeaker or any other device on the exterior walls or the roof of
the Building, without Landlord's consent. Tenant shall not interfere with
radio or television broadcasting or reception from or in the Building, the
Project or elsewhere.
18. Tenant shall not mark, or drive nails, screws or drill into the
partitions, woodwork or drywall or in any way deface the Premises or any
part thereof without Landlord's consent. Tenant may install nails and
screws in areas of the Premises that have been identified for those
purposes to Landlord by Tenant at the time those walls or partitions were
installed in the Premises. Tenant shall not lay linoleum, tile, carpet or
any other floor covering so that the same shall be affixed to the floor of
its Premises in any manner except as approved in writing by Landlord. The
expense of repairing any damage resulting from a violation of this rule or
the removal of any floor covering shall be borne by the tenant by whom, or
by whose contractors, employees or invitees, the damage shall have been
caused.
19. No furniture, freight, equipment, materials, supplies, packages,
merchandise or other property will be received in the Building or carried
up or down the elevators except between such hours and in such elevators as
shall be designated by Landlord.
Tenant shall not place a load upon any floor of its Premises which
exceeds the load per square foot which such floor was designed to carry or
which is allowed by law. Landlord shall have the right to prescribe the
weight, size and position of all safes, furniture or other heavy equipment
brought into the Building. Safes or other heavy objects shall, if
considered necessary by Landlord, stand on wood strips of such thickness as
determined by Landlord to be necessary to properly distribute the weight
thereof. Landlord will not be responsible for loss of or damage to any
such safe, equipment or property from any cause, and all damage done to the
Building by moving or maintaining any such safe, equipment or other
property shall be repaired at the expense of Tenant.
Business machines and mechanical equipment belonging to Tenant which
cause noise or vibration that may be transmitted to the structure of the
Building or to any space therein to such a degree as to be objectionable to
Landlord or to any tenants in the Building shall be placed and maintained
by Tenant, at Tenant's expense, on vibration eliminators or other devices
sufficient to eliminate noise or vibration. The persons employed to move
such equipment in or out of the Building must be acceptable to Landlord.
20. Tenant shall not install, maintain or operate upon its Premises any
vending machine without the written consent of Landlord.
21. There shall not be used in any space, or in the public areas of the
Project either by Tenant or others, any hand trucks except those equipped
with rubber tires and side guards or such other material handling equipment
as Landlord may approve. Tenants using hand trucks shall be required to
use the freight elevator, or such elevator as Landlord shall designate. No
other vehicles of any kind shall be brought by Tenant into or kept in or
about its Premises.
22. Each tenant shall store all its trash and garbage within the interior
of the Premises. Tenant shall not place in the trash boxes or receptacles
any personal trash or any material that may not or cannot be disposed of in
the ordinary and customary manner of removing and disposing of trash and
garbage in the city, without violation of any law or ordinance governing
such disposal. All trash, garbage and refuse disposal shall be made only
through entry-ways and elevators provided for such purposes and at such
times as Landlord shall designate. If the Building has implemented a
building-wide recycling program for tenants, Tenant shall use good faith
efforts to participate in said program.
<PAGE>
23. Canvassing, soliciting, distribution of handbills or any other written
material and peddling in the Building and the Project are prohibited and
each tenant shall cooperate to prevent the same. No tenant shall make
room-to-room solicitation of business from other tenants in the Building or
the Project, without the written consent of Landlord.
24. Landlord shall have the right, exercisable without notice and without
liability to any tenant, to change the name and address of the Building and
the Project.
25. Landlord reserves the right to exclude or expel from the Project any
person who, in Landlord's judgment, is under the influence of alcohol or
drugs or who commits any act in violation of any of these Rules and
Regulations.
26. Without the prior written consent of Landlord, Tenant shall not use
the name of the Building or the Project or any photograph or other likeness
of the Building or the Project in connection with, or in promoting or
advertising, Tenant's business except that Tenant may include the
Building's or Project's name in Tenant's address.
27. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental
agency.
28. Tenant assumes any and all responsibility for protecting its Premises
from theft, robbery and pilferage, which includes keeping doors locked and
other means of entry to the Premises closed.
29. The requirements of Tenant will be attended to only upon appropriate
application at the office of the Building by an authorized individual.
Employees of Landlord shall not perform any work or do anything outside of
their regular duties unless under special instructions from Landlord, and
no employees of Landlord will admit any person (tenant or otherwise) to any
office without specific instructions from Landlord.
30. Landlord reserves the right to designate the use of the parking spaces
on the Project. Tenant or Tenant's guests shall park between designated
parking lines only, and shall not occupy two parking spaces with one car.
Parking spaces shall be for passenger vehicles only; no boats, trucks,
trailers, recreational vehicles or other types of vehicles may be parked in
the parking areas (except that trucks may be loaded and unloaded in
designated loading areas). Vehicles in violation of the above shall be
subject to tow-away, at vehicle owner's expense. Vehicles parked on the
Project overnight without prior written consent of the Landlord shall be
deemed abandoned and shall be subject to tow-away at vehicle owner's
expense. No tenant of the Building shall park in visitor or reserved
parking areas. Any tenant found parking in such designated visitor or
reserved parking areas or unauthorized areas shall be subject to tow-away
at vehicle owner's expense. The parking areas shall not be used to provide
car wash, oil changes, detailing, automotive repair or other services
unless otherwise approved or furnished by Landlord. Tenant will from time
to time, upon the request of Landlord, supply Landlord with a list of
license plate numbers of vehicles owned or operated by its employees or
agents.
31. No smoking of any kind shall be permitted anywhere within the
Building, including, without limitation, the Premises and those areas
immediately adjacent to the entrances and exits to the Building, or any
other area as Landlord elects. Smoking in the Project is only permitted in
smoking areas identified by Landlord, which may be relocated from time to
time.
32, If the Building furnishes common area conferences rooms for tenant
usage, Landlord shall have the right to control each tenant's usage of the
conference rooms, including limiting tenant usage so that the rooms are
equally available to all tenants in the Building. Any common area
amenities or facilities shall be provided from time to time at Landlord's
discretion.
33. Tenant shall not swap or exchange building keys or cardkeys with other
employees or tenants in the Building or the Project.
34. Tenant shall be responsible for the observance of all of the foregoing
Rules and Regulations by Tenant's employees, agents, clients, customers,
invitees and guests.
35. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify, alter or amend, in whole or in part, the
terms, covenants, agreements and conditions of any lease of any premises in
the Project.
<PAGE>
36. Landlord may waive any one or more of these Rules and Regulations for
the benefit of any particular tenant or tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in
favor of any other tenant or tenants, nor prevent Landlord from thereafter
enforcing any such Rules and Regulations against any or all tenants of the
Building.
37. Landlord reserves the right to make such other and reasonable rules
and regulations as in its judgment may from time to time be needed for
safety and security, for care and cleanliness of the Building and the
Project and for the preservation of good order therein. Tenant agrees to
abide by all such Rules and Regulations herein stated and any additional
rules and regulations which are adopted.
<PAGE>
EXHIBIT B1
PREMISES
SUITE 275
41,142 SF
<PAGE>
EXHIBIT C
LEASE IMPROVEMENT AGREEMENT
This Lease Improvement Agreement ("IMPROVEMENT AGREEMENT") sets forth
the terms and conditions relating to construction of the initial tenant
improvements described in the Plans referred to below (the "TENANT
IMPROVEMENTS") in the Premises. Capitalized terms used but not otherwise
defined herein shall have the meanings set forth in the Lease (the "LEASE") to
which this Improvement Agreement is attached and forms a part.
1. PLANS AND SPECIFICATIONS.
1.1. Landlord shall construct the Tenant Improvements in the Premises
pursuant to Exhibit B (collectively, the "PLANS") which shall include new
carpet and paint, four (4) 6' x 4' windows in offices 5, 6, 7 & 8, a 10' x
8'6" glass wall in office 8, six power poles and a double french door entry
into office 9. Tenant shall make no changes or modifications to the Plans
or submit any change orders without the prior written approval of Landlord.
1.2. Notwithstanding Landlord's review and approval of the Plans,
Landlord shall have no responsibility or liability whatsoever for any
errors or omissions contained in the Plans, or to verify dimensions or
conditions, or for the quality, design or compliance with applicable
Regulations of any improvements described therein or constructed in the
Premises. Landlord shall assign to Tenant all warranties and guarantees by
the contractor who constructs the Tenant Improvements relating to the
Tenant Improvements, and Tenant hereby waives all claims against Landlord
relating to, or arising out of the construction of, the Tenant
Improvements.
2. SPECIFICATIONS FOR STANDARD TENANT IMPROVEMENTS.
2.1. Specifications and quantities of standard building components
which will comprise and be used in the construction of the Tenant
Improvements ("STANDARDS") are set forth in SCHEDULE 1 to this EXHIBIT C.
As used herein, "STANDARDS" or "BUILDING STANDARDS" shall mean the
standards for a particular item selected from time to time by Landlord for
the Building, including those set forth on SCHEDULE 1 of this EXHIBIT C, or
such other standards of equal or better quality as may be mutually agreed
between Landlord and Tenant in writing.
2.2. No deviations from the Standards are permitted.
3. CONSTRUCTION OF TENANT IMPROVEMENTS.
3.1. Promptly upon the execution of this Improvement Agreement,
Landlord shall, if required, secure a building permit and commence
construction of the Tenant Improvements provided that Tenant shall
cooperate with Landlord in executing permit applications and performing
other actions reasonably necessary to enable Landlord to obtain any
required permits or certificates of occupancy. Without limiting the
provisions of Paragraph 35 of the Lease, Landlord shall not be liable for
any direct or indirect damages suffered by Tenant as a result of delays in
construction beyond Landlord's reasonable control, including, but not
limited to, delays due to strikes or unavailability of materials or labor,
or delays caused by Tenant (including delays by the contractor or anyone
else performing services on behalf of Landlord or Tenant).
3.2. If any work is to be performed on the Premises by Tenant or
Tenant's contractor or agents:
(a) Such work shall proceed upon Landlord's written approval of
Tenant's contractor, public liability and property damage insurance carried
by Tenant's contractor, and detailed plans and specifications for such work
shall be at Tenant's sole cost and expense, and shall further be subject to
the provisions of Paragraphs 12 and 27 of the Lease.
(b) All work shall be done in conformity with a valid building
permit when required, a copy of which shall be furnished to Landlord before
such work is commenced, and in any case, all such work shall be performed
in accordance with all applicable Regulations. Notwithstanding any failure
by Landlord to object to any such work, Landlord shall have no
responsibility for Tenant's failure to comply with all applicable
Regulations.
(c) If required by Landlord or any lender of Landlord, all work
by Tenant or Tenant's contractor or
<PAGE>
agents shall be done with union labor in accordance with all union labor
agreements applicable to the trades being employed.
(d) All work by
(e) Tenant or Tenant's contractor or agents shall be scheduled
through Landlord.
(f) Tenant or Tenant's contractor or agents shall arrange for
necessary utility, hoisting and elevator service with Landlord's contractor
and shall pay such reasonable charges for such services as may be charged
by Tenant's or Landlord's contractor.
(g) Tenant's entry to the Premises for any purpose, including,
without limitation, inspection or performance of Tenant construction by
Tenant's agents, prior to the date Tenant's obligation to pay rent
commences shall be subject to all the terms and conditions of the Lease
except the payment of Rent. Tenant's entry shall mean entry by Tenant, its
officers, contractors, licensees, agents, servants, employees, guests,
invitees, or visitors.
(h) Tenant shall promptly reimburse Landlord upon demand for any
reasonable expense actually incurred by the Landlord by reason of faulty
work done by Tenant or its contractors or by reason of any delays caused by
such work, or by reason of inadequate clean-up.
4. COMPLETION AND RENTAL COMMENCEMENT DATE.
4.1. Tenant's obligation to pay Rent under the Lease shall commence on
the applicable date described in Paragraph 2 of the Lease. However:
(a) If Tenant delays in approving any matter requiring Tenant's
approval within the time limits specified herein; or
(b) If the construction period is extended because Tenant
requests any changes in construction or modifies the Plans or if the same
do not comply with applicable Regulations; or
(c) If Landlord is otherwise delayed in the construction of the
Tenant Improvements for any act or omission of or breach by Tenant or
anyone performing services on behalf of Tenant or on account of any work
performed on the Premises by Tenant or Tenant's contractors or agents, then
the date described in Paragraph 2 of the Lease shall be deemed to be
accelerated by the total number of days of Tenant delays described in (a)
through (c) above (each, a "TENANT DELAY"), calculated in accordance with
the provisions of Paragraph 4.2 below.
4.2. If the Term of the Lease has not already commenced pursuant to
the provisions of Paragraph 2 of the Lease and substantial completion of
the Tenant Improvements has been delayed on account of any Tenant Delays,
then upon actual substantial completion of the Tenant Improvements (as
defined in Paragraph 2 of the Lease), Landlord shall notify Tenant in
writing of the date substantial completion of the Tenant Improvements would
have occurred but for such Tenant Delays, and such date shall thereafter be
deemed to be the Term Commencement Date for all purposes under the Lease.
Tenant shall pay to Landlord, within three (3) business days after receipt
of such written notice (which notice shall include a summary of Tenant
Delays), the per diem Base Rent times the number of days between the date
the Term Commencement Date would have otherwise occurred but for the Tenant
Delays (as determined by Landlord's contractor), and the date of actual
substantial completion of the Tenant Improvements.
4.3. Promptly after substantial completion of the Tenant Improvements,
Landlord shall give notice to Tenant and Tenant shall conduct an inspection
of the Premises with a representative of Landlord and develop with such
representative of Landlord a punchlist of items, if any, of the Tenant
Improvements that are not complete or that require correction. Upon
receipt of such punchlist, Landlord shall proceed diligently to remedy such
items at Landlord's cost and expense provided such items are part of the
Tenant Improvements to be constructed by Landlord hereunder and are
otherwise consistent with Landlord's obligations under this Improvement
Agreement (with any dispute between Landlord and Tenant pertaining thereto
to be resolved by Landlord's architect or general contractor). Substantial
completion shall occur notwithstanding delivery of any such punchlist.
<PAGE>
4.4 A default under this Improvement Agreement shall constitute a
default under the Lease, and the parties shall be entitled to all rights
and remedies under the Lease in the event of a default hereunder by the
other party (notwithstanding that the Term thereof has not commenced).
4.5. Without limiting the "as-is" provisions of the Lease, except for
the Tenant Improvements to be constructed by Landlord pursuant to this
Improvement Agreement, Tenant accepts the Premises in its "as-is" condition
and acknowledges that it has had an opportunity to inspect the Premises
prior to signing the Lease.
5. AMORTIZATION OF NON-BUILDING STANDARD TENANT IMPROVEMENTS:
5.1 Landlord shall provide Tenant with glass upgrades in two (2)
offices not to exceed $3,300.00. Said costs shall be fully amortized, plus
interest thereon at twelve percent (12%) per annum, over the initial Lease
Term An additional $109.61 per month shall be due to Landlord in
additional to the Base Rent show in the Basic Lease Information.
<PAGE>
SCHEDULE 1
TO EXHIBIT C
BUILDING STANDARDS
The following constitutes the Building Standard tenant improvements
("STANDARDS") in the quantities specified:
(to be provided)
<PAGE>
Exhibit 10.4
Dear Dr. Hu,
On behalf of Path 1 Network Technologies Inc., I am pleased to extend an
offer to you to become Path 1's Vice President of Video Products. Your
starting salary will be $112,000 per year. You will receive all Company
benefits, which are now limited to health insurance for you and your
immediate family. For the first year of employment, you will have 2 to 3
weeks of paid vacation time, depending upon the requirements of the Company.
After that, your vacation time will start at 3 weeks of paid vacation per
year.
You will be granted options to purchase a total of 225,000 shares of Class B
common stock of Path 1 Network Technologies Inc., as follows:
- - ---25,000 Class B shares, vesting immediately upon your first day of work and
which can be purchased at a price to be determined by independent corporate
valuation experts, but not to exceed $2.00 per Share.
- - ---200,000 Class B shares, vesting over a period of 4 years in quarterly
increments and which can also be purchased at a price to be determined by
independent corporate valuation experts, but not to exceed $2.00 per Share.
These options expire seven (7) years from the date of grant.
The creation of the Class B shares are in the process of being finalized. The
Class B common stock will be automatically exchangeable into the existing
Class A shares of common stock upon the occurrence of any one of the
following events:
(1) The Company does a $25,000,000 public offering of securities in the
United States,
<PAGE>
(2) There is a merger, consolidation, buy-out, takeover or other change in
control of the Company, or
(3) The Company generates $10,000,000 in revenues and reports earnings of
$2,000,000 in net income (before taxes) in any fiscal year.
If, for any reason, you cease to be an employee, all unvested options are
automatically canceled.
However in the event that, for any reason, Path 1 decides to lay off or
terminate your job position, and this is not a direct result of a merger,
consolidation, buy-out, takeover, or other change in control in the company,
you will be provided with three months of severance pay.
This offer expires on August 31, 1999. Please acknowledge your acceptance of
this offer by that date.
I take great pleasure in welcoming you as part of our core staff. I look
forward to working together with you for our continued success.
Best regards,
- - -ron
/s/ Ronald D. Fellman
- - --------------------------
Dr. Ronald D. Fellman, President & CEO
Path 1 Network Technologies, Inc.
Phone: 619-450-4220, E-mail: [email protected]
Accept: /s/ Yendo Hu
------------------------
Date: August 31, 1999
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
1999 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE 1
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1999 Stock Option/Stock Issuance Plan is intended to
promote the interests of Path 1 Network Technologies Inc., a Delaware
corporation, by providing eligible persons in the Corporation's employ or
service with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to continue in such employ or service.
Capitalized terms herein shall have the meanings assigned to
such terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate equity
programs:
(i) the Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock, and
(ii) the Stock Issuance Program under which
eligible persons may, at the discretion of the Plan Administrator, be issued
shares of Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent or
Subsidiary).
B. The provisions of Articles One and Four shall apply to both
equity programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Board. However, any
or all administrative functions otherwise exercisable by the Board may be
delegated to the Committee. Members of the Committee shall serve for such period
of time as the Board may determine and shall be subject to removal by the Board
at any time. The Board may also at any time terminate the functions of the
Committee and reassume all powers and authority previously delegated to the
Committee.
B. The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for
<PAGE>
proper administration of the Plan and to make such determinations under, and
issue such interpretations of, the Plan and any outstanding options or stock
issuances thereunder as it may deem necessary or advisable. Decisions of the
Plan Administrator shall be final and binding on all parties who have an
interest in the Plan or any option or stock issuance thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Plan are as
follows:
(i) Employees,
(ii) non-employee members of the Board or
the non-employee members of the board of directors of any Parent or Subsidiary,
and
(iii) consultants and other independent
advisors who provide services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall have full authority to
determine, (i) with respect to the grants made under the Option Grant Program,
which eligible persons are to receive the option grants, the time or times when
those grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding, and (ii) with
respect to stock issuances made under the Stock Issuance Program, which eligible
persons are to receive such stock issuances, the time or times when those
issuances are to be made, the number of shares to be issued to each Participant,
the vesting schedule (if any) applicable to the issued shares and the
consideration to be paid by the Participant for such shares.
C. The Plan Administrator shall have the absolute discretion
either to grant options in accordance with the Option Grant Program or to effect
stock issuances in accordance with the Stock Issuance Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock. The maximum number of shares
of Common Stock which may be issued over the term of the Plan shall not exceed
1,500,000 shares.
B. Shares of Common Stock subject to outstanding options shall
be available for subsequent issuance under the Plan to the extent (i) the
options expire or terminate for any reason prior to exercise in full or (ii) the
options are cancelled in accordance with the cancellation-regrant provisions of
Article Two. Unvested shares issued under the Plan and subsequently repurchased
by the Corporation, at the option exercise or direct issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be
<PAGE>
available for reissuance through one or more subsequent option grants or direct
stock issuances under the Plan.
C. Should any change be made to the Common Stock by reason of
any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan and (ii) the number and/or class of securities and the
exercise price per share in effect under each outstanding option in order to
prevent the dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive.
ARTICLE 2
OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; PROVIDED, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to Incentive Options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by
the Plan Administrator at the time of grant.
2. The exercise price shall become immediately due
upon exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then the
exercise price may also be paid as follows:
(i) in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the Exercise
Date, or
(ii) to the extent the option is exercised
for vested shares, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable instructions (A) to a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be withheld by the
Corporation by reason of such
<PAGE>
exercise and (B) to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
B. EXERCISE AND TERM OF OPTIONS.
Each option shall be exercisable at such time or times,
during such period and for such number of shares as shall be determined by
the Plan Administrator and set forth in the documents evidencing the option
grant. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise
of any options held by the Optionee at the time of cessation of Service or
death:
(i) Should the Optionee cease to remain in
Service for any reason other than death, Disability or Misconduct, then the
Optionee shall have a period of three months following the date of such
cessation of Service during which to exercise each outstanding option held by
such Optionee.
(ii) Should Optionee's Service terminate by
reason of Disability, then the Optionee shall have a period of twelve (12)
months following the date of such cessation of Service during which to exercise
each outstanding option held by such Optionee.
(iii) If the Optionee dies while holding an
outstanding option, then the personal representative of his or her estate or the
person or persons to whom the option is transferred pursuant to the Optionee's
will or the laws of inheritance shall have a twelve (12)-month period following
the date of the Optionee's death to exercise such option.
(iv) Under no circumstances, however, shall
any such option be exercisable after the specified expiration of the option
term.
(v) During the applicable post-Service
exercise period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable on the date of
the Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall, immediately
upon the Optionee's cessation of Service, terminate and cease to be outstanding
with respect to any and all option shares for which the option is not otherwise
at the time exercisable or in which the Optionee is not otherwise at that time
vested.
(vi) Should Optionee's Service be terminated
for Misconduct, then all
<PAGE>
outstanding options held by the Optionee shall terminate immediately and cease
to remain outstanding.
2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the
option is to remain exercisable following Optionee's cessation of Service or
death from the limited period otherwise in effect for that option to such
greater period of time as the Plan Administrator shall deem appropriate, but in
no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised,
during the applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is exercisable at
the time of the Optionee's cessation of Service but also with respect to one or
more additional installments in which the Optionee would have vested under the
option had the Optionee continued in Service.
D. STOCKHOLDER RIGHTS.
The holder of an option shall have no stockholder rights with
respect to the shares subject to the option until such person shall have
exercised the option, paid the exercise price and become the recordholder of the
purchased shares.
E. UNVESTED SHARES.
The Plan Administrator shall have the discretion to grant
options which are exercisable for unvested shares of Common Stock. Should the
Optionee cease Service while holding such unvested shares, the Corporation shall
have the right to repurchase, at the exercise price paid per share, any or all
of those unvested shares. The terms upon which such repurchase right shall be
exercisable (including the period and procedure for exercise and the appropriate
vesting schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right.
The Plan Administrator may not impose a vesting schedule upon any option grant
or the shares of Common Stock subject to that option which is more restrictive
than twenty percent (20%) per year vesting, with the initial vesting to occur
not later than one year after the option grant date. However, such limitation
shall not be applicable to any option grants made to individuals who are
officers of the Corporation, non-employee Board members or independent
consultants.
F. LIMITED TRANSFERABILITY OF OPTIONS.
During the lifetime of the Optionee, Incentive Options shall
be exercisable only by the Optionee and shall not be assignable or transferable
other than by will or by the laws of descent and distribution following the
Optionee's death. Non-Statutory Options may, to the extent permitted by the Plan
Administrator, be assigned in whole or in part during the Optionee's lifetime to
one or more members of the Optionee's immediate family or to a trust established
exclusively for one or more such family members. The terms applicable to the
assigned portion
<PAGE>
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Four shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
shall NOT be subject to the terms of this Section II.
A. ELIGIBILITY.
Incentive Options may only be granted to Employees.
B. EXERCISE PRICE.
The exercise price per share shall not be less than one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.
C. DOLLAR LIMITATION.
The aggregate Fair Market Value of the shares of Common Stock
(determined as of the respective date or dates of grant) for which one or more
options granted to any Employee under the Plan (or any other option plan of the
Corporation or any Parent or Subsidiary) may for the first time become
exercisable as Incentive Options during any one calendar year shall not exceed
the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee
holds two or more such options which become exercisable for the first time in
the same calendar year, the foregoing limitation on the exercisability of such
options as Incentive Options shall be applied on the basis of the order in which
such options are granted.
D. 10% STOCKHOLDER.
If any Employee to whom an Incentive Option is granted is a
10% Stockholder, then the option term shall not exceed five years measured from
the option grant date and the exercise price per share shall not be less than
one hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date.
III. CORPORATE TRANSACTION
A. The Plan does not provide for automatic acceleration of
unvested shares in the event of a Corporate Transaction, although the Plan
Administrator has discretion to grant individual options which so provide. In
the event of a Corporate Transaction, all options shall be assumed or equivalent
options shall be substituted by the successor corporation (or other entity) or a
parent or subsidiary of such successor corporation (or other entity). If such
successor does not agree to assume the options or to substitute equivalent
options therefor, unless the Plan Administration shall determine otherwise, such
options will expire upon such event.
<PAGE>
B. In the event of the proposed dissolution or liquidation of
the Company, the Plan Administrator shall notify each Optionee at least thirty
(30) days prior to such proposed action. To the extent not previously exercised,
all options will terminate immediately prior to consummation of such proposed
action.
C. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction, had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, PROVIDED the aggregate exercise price payable for such
securities shall remain the same.
D. The grant of options under the Plan shall in no way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected option holders,
the cancellation of any or all outstanding options under the Plan and to grant
in substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.
ARTICLE 3
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share shall be
fixed by the Plan Administrator but shall not be less than the par value per
share of Common Stock.
2. Subject to the provisions of Section I of Article
Four, shares of Common Stock may be issued under the Stock Issuance Program for
any of the following items of consideration which the Plan Administrator may
deem appropriate in each individual instance:
<PAGE>
(i) cash or check made payable to the
Corporation, or
(ii) past services rendered to the
Corporation (or any Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock
Issuance Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, with initial vesting to
occur not later than one year after the issuance date. Such limitation shall not
apply to any Common Stock issuances made to the officers of the Corporation,
non-employee Board members or independent consultants.
2. Any new, substituted or additional securities or
other property (including money paid other than as a regular cash dividend)
which the Participant may have the right to receive with respect to the
Participant's unvested shares of Common Stock by reason of any stock dividend,
stock split, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a series or class without
the Corporation's receipt of consideration shall be issued subject to (i) the
same vesting requirements applicable to the Participant's unvested shares of
Common Stock and (ii) such escrow arrangements as the Plan Administrator shall
deem appropriate.
3. The Participant shall have full stockholder rights
with respect to any shares of Common Stock issued to the Participant under the
Stock Issuance Program, whether or not the Participant's interest in those
shares is vested. Accordingly, the Participant shall have the right to vote such
shares and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service
while holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive
the surrender and cancellation of one or more unvested shares of Common Stock
(or other assets attributable thereto) which would otherwise occur upon the
non-completion of the vesting schedule applicable to those shares. Such waiver
shall result in the immediate vesting of the Participant's
<PAGE>
interest in the shares of Common Stock as to which the waiver applies. Such
waiver may be effected at any time (including prospective effectuation, in the
Stock Issuance Agreement or in any other written agreement), whether before or
after the Participant's cessation of Service or the attainment or non-attainment
of the applicable performance objectives.
II. CORPORATE TRANSACTION
The Plan does not provide for automatic acceleration of
unvested shares in the event of a Corporate Transaction, although the Plan
Administrator has discretion to award individual stock issuances which so
provide.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
ARTICLE 4
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price under the Option Grant Program or the purchase
price for shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments and secured by the purchased shares. The terms of any such
promissory note (including the interest rate and the terms of repayment) shall
be established by the Plan Administrator in its sole discretion. In no event may
the maximum credit available to the Optionee or Participant exceed the sum of
(i) the aggregate option exercise price or purchase price payable for the
purchased shares (less the par value of those shares) plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the Board,
but no option granted under the Plan may be exercised, and no shares shall be
issued under the Plan, until the Plan is approved by the Corporation's
stockholders. If such stockholder approval is not obtained within twelve (12)
months after the date of the Board's adoption of the Plan, then all options
previously granted under the Plan shall terminate and cease to be outstanding,
and no further options shall be granted and no shares shall be issued under the
Plan. Subject to such limitation, the Plan Administrator may grant options and
issue shares under the Plan at any time after the effective date of the Plan and
before the date fixed herein for termination of the Plan.
B. The Plan shall terminate upon the EARLIEST of (i) the
expiration of the ten (10)-year
<PAGE>
period measured from the date the Plan is adopted by the Board, (ii) the date on
which all shares available for issuance under the Plan shall have been issued as
vested shares or (iii) the termination of all outstanding options in connection
with a Corporate Transaction. All options and unvested stock issuances
outstanding at the time of a clause (i) termination event shall continue to have
full force and effect in accordance with the provisions of the documents
evidencing those options or issuances.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect the rights and obligations with
respect to options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws and regulations.
B. Options may be granted under the Option Grant Program and
shares may be issued under the Stock Issuance Program which are in each instance
in excess of the number of shares of Common Stock then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess grants or issuances are
made, then (i) any unexercised options granted on the basis of such excess
shares shall terminate and cease to be outstanding and (ii) the Corporation
shall promptly refund to the Optionees and the Participants the exercise or
purchase price paid for any excess shares issued under the Plan and held in
escrow, together with interest (at the applicable Short Term Federal Rate) for
the period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan may be used for any appropriate corporate
purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Common Stock
upon the exercise of any options or upon the issuance or vesting of any shares
issued under the Plan shall be subject to the satisfaction of all applicable
Federal, state and local income and employment tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any option or (ii) under the
<PAGE>
Stock Issuance Program shall be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it and the shares of Common Stock
issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause, but subject to any applicable bilateral written employment agreement.
VIII. FINANCIAL REPORTS
The Corporation shall deliver a balance sheet and an income
statement at least annually to each individual holding an outstanding option
under the Plan, unless such individual is a key Employee whose duties in
connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. BOARD shall mean the Corporation's Board of Directors.
B. CODE shall mean the Internal Revenue Code of 1986, as amended.
C. COMMITTEE shall mean a committee of two or more Board members
appointed by the Board to exercise one or more administrative functions under
the Plan.
D. COMMON STOCK shall mean the Corporation's Common Stock; provided,
that when and if (before April 10, 2000) the Corporation has Class B Common
Stock authorized, the meaning of "Common Stock" shall be changed to mean the
Corporation's Class B Common Stock in all contexts referring to shares issuable
under the Stock Issuance Program or upon the exercise of options under the
Option Grant Program.
E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which
securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or
(ii) the sale, transfer or other disposition
of all or substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.
F. CORPORATION shall mean Path 1 Network Technologies Inc., a Delaware
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Path 1 Network Technologies Inc. which shall by
appropriate action adopt the Plan.
G. DISABILITY shall mean the inability of the Optionee or the
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances.
H. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.
J. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
A-1
<PAGE>
(i) If the Common Stock is at the time
traded on the Nasdaq National Market, then the Fair Market Value shall
be the closing selling price per share of Common Stock on the date in
question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time
listed on any Stock Exchange, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in question
on the Stock Exchange determined by the Plan Administrator to be the
primary market for the Common Stock, as such price is officially quoted
in the composite tape of transactions on such exchange. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.
(iii) If the Common Stock is at the time
neither listed on any Stock Exchange nor traded on the Nasdaq National
Market (including all cases in which the security for which a fair
market value is required is Class B Common Stock), then the Fair Market
Value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
K. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
L. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
M. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
N. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
O. OPTION GRANT PROGRAM shall mean the option grant program in effect
under the Plan.
P. OPTIONEE shall mean any person to whom an option is granted under
the Plan.
Q. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent
A-2
<PAGE>
(50%) or more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.
R. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.
S. PLAN shall mean the Corporation's 1999 Stock Option/Stock Issuance
Plan, as set forth in this document.
T. PLAN ADMINISTRATOR shall mean either the Board or the Committee
acting in its capacity as administrator of the Plan.
U. SERVICE shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.
V. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
W. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
X. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under the Plan.
Y. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
A@. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Corporation (or
any Parent or Subsidiary).
A-3
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the
"Option") to purchase shares of the Common Stock of Path 1 Network Technologies
Inc. (the "Corporation"); provided, that if and when (by no later than April 20,
2000) the Corporation has Class B Common Stock authorized, the Option instead
shall be an option to purchase shares of the Class B Common Stock of the
Corporation:
OPTIONEE:
GRANT DATE:
VESTING COMMENCEMENT DATE:
GRANT NUMBER: EXERCISE PRICE: $ per share
NUMBER OF OPTION SHARES: ________________ shares
MAXIMUM EXPIRATION DATE:
TYPE OF GRANT: Incentive Stock Option
Non-Statutory Stock Option
Restricted Stock
VESTING SCHEDULE:
This Option may be exercised, at any time before it terminates
or expires, for all or any portion of the vested Option Shares.
The Option Shares shall vest as follows (based on Service):
OTHER PROVISIONS:
Optionee understands and agrees that the Option is granted
subject to and in accordance with the terms of the Path 1 Network Technologies
Inc. 1999 Stock Option/Stock Issuance Plan (the "Plan"). Optionee further agrees
to be bound by the terms of the Plan and the terms of the Option as set forth in
the Stock Option Agreement attached hereto as Exhibit A.
Optionee hereby acknowledges receipt of a copy of the Plan in
the form attached hereto as Exhibit B.
NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Notice or
in the attached
<PAGE>
Stock Option Agreement or Plan shall confer upon Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining Optionee) or of Optionee, which rights are
hereby expressly reserved by each, to terminate Optionee's Service at any
time for any reason, with or without cause.
DEFINITIONS. All capitalized terms in this Notice shall have
the meaning assigned to them in this Notice or in the attached Stock Option
Agreement.
DATED: ____________, 1999
PATH 1 NETWORK TECHNOLOGIES INC.
By:
-----------------------------
Title:
-----------------------------
-----------------------------
OPTIONEE
Address:
-----------------------------
-----------------------------
ATTACHMENTS:
EXHIBIT A - STOCK OPTION AGREEMENT
EXHIBIT B - 1999 STOCK OPTION/STOCK ISSUANCE PLAN
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMENT
PATH 1 NETWORK TECHNOLOGIES INC.
STOCK OPTION AGREEMENT
RECITALS
A. The Board has adopted the Plan for the purpose of retaining
the services of selected Employees, non-employee members of the Board or the
board of directors of any Parent or Subsidiary and consultants and other
independent advisors in the service of the Corporation (or any Parent or
Subsidiary).
B. Optionee is to render valuable services to the Corporation (or
a Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
Corporation's grant of an option to Optionee.
C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as
of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
2. OPTION TERM. This option shall (unless otherwise specified in
the Grant Notice) have a term of ten (10) years measured from the earlier of the
vesting commencement date specified in the Grant Notice or from the Grant Date
and shall accordingly expire at the close of business on the Expiration Date,
unless sooner terminated in accordance with Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY. During Optionee's lifetime, this
option shall be exercisable only by Optionee and shall not be assignable or
transferable other than by will or by the laws of descent and distribution
following Optionee's death.
4. DATES OF EXERCISE. This option shall become exercisable for
the Option Shares in one or more installments as specified in the Grant Notice.
As the option becomes exercisable for such installments, those installments
shall accumulate, and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
5. CESSATION OF SERVICE. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable (unless
the Grant Notice expressly provides that this Section 5 is inapplicable):
<PAGE>
(a) Should Optionee cease to remain in Service for any reason
(other than death, Disability or Misconduct) while this option is outstanding,
then Optionee shall have a period of three (3) months (commencing with the date
of such cessation of Service) during which to exercise this option, but in no
event shall this option be exercisable at any time after the Expiration Date.
(b) Should Optionee die while this option is outstanding, then
the personal representative of Optionee's estate or the person or persons to
whom the option is transferred pursuant to Optionee's will or in accordance with
the laws of inheritance shall have the right to exercise this option. Such right
shall lapse, and this option shall cease to be outstanding, upon the EARLIER of
(i) the expiration of the twelve (12)-month period measured from the date of
Optionee's death or (ii) the Expiration Date.
(c) Should Optionee cease Service by reason of Disability
while this option is outstanding, then Optionee shall have a period of twelve
(12) months (commencing with the date of such cessation of Service) during which
to exercise this option. In no event shall this option be exercisable at any
time after the Expiration Date.
NOTE: Exercise of this option on a date later than three (3)
months following cessation of Service due to Disability will
result in loss of favorable Incentive Option treatment, UNLESS
such Disability constitutes Permanent Disability. In the event
that Incentive Option treatment is not available, this option
will be taxed as a Non-Statutory Option upon exercise.
(d) During the limited period of post-Service exercisability,
this option may not be exercised in the aggregate for more than the number of
Option Shares in which Optionee is, at the time of Optionee's cessation of
Service, vested pursuant to the Vesting Schedule specified in the Grant Notice
or the special vesting acceleration provisions of Paragraph 6. Upon the
expiration of such limited exercise period or (if earlier) upon the Expiration
Date, this option shall terminate and cease to be outstanding for any vested
Option Shares for which the option has not been exercised. To the extent
Optionee is not vested in one or more Option Shares at the time of Optionee's
cessation of Service, this option shall immediately terminate and cease to be
outstanding with respect to those shares.
(e) Should Optionee's Service be terminated for Misconduct,
then this option shall terminate immediately and cease to remain outstanding.
6. ACCELERATED VESTING.
(a) In the event of any Corporate Transaction, the Option
Shares at the time subject to this option but not otherwise vested shall
automatically vest in full so that this option shall, immediately prior to the
effective date of the Corporate Transaction, become exercisable for all of the
Option Shares as fully-vested shares and may be exercised for any or all of
those Option Shares as vested shares. However, the Option Shares shall NOT vest
on such an accelerated basis if and to the extent: (i) this option is assumed by
the successor corporation (or
2.
<PAGE>
parent thereof) in the Corporate Transaction and the Corporation's repurchase
rights with respect to the unvested Option Shares are assigned to such
successor corporation (or parent thereof) or (ii) this option is to be
replaced with a cash incentive program of the successor corporation which
preserves the spread existing on the unvested Option Shares at the time of
the Corporate Transaction (the excess of the Fair Market Value of those
Option Shares over the Exercise Price payable for such shares) and provides
for subsequent payout in accordance with the same Vesting Schedule applicable
to those unvested Option Shares as set forth in the Grant Notice.
(b) Immediately following the Corporate Transaction, this
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with the
Corporate Transaction.
(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, PROVIDED the aggregate Exercise Price shall remain the same.
(d) The Option Shares may also vest upon an accelerated basis
in accordance with the terms and conditions of any special addendum attached to
this Agreement.
(e) This Agreement shall not in any way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to the
Common Stock or Class B Common Stock, as the case may be, by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock or Class B Common
Stock, as the case may be, as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
8. STOCKHOLDER RIGHTS. The holder of this option shall not have
any stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become the record holder
of the purchased shares.
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise this option with respect to all or
any part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:
3.
<PAGE>
(i) Execute and deliver to the Corporation a written
notice of exercise, in the form attached hereto, for the Option Shares for which
the option is exercised.
(ii) Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:
(A) cash or check made payable to the
Corporation; or
(B) a promissory note payable to the
Corporation, but only to the extent authorized by the Plan
Administrator in accordance with Paragraph 13.
Should the Common Stock be registered under Section 12 of the
1934 Act at the time the option is exercised, then the Exercise Price
may also be paid as follows:
(C) in shares of Common Stock held by
Optionee (or any other person or persons exercising the option) for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date; or
(D) to the extent the option is exercised
for vested Option Shares, through a special sale and remittance
procedure pursuant to which Optionee (or any other person or persons
exercising the option) shall concurrently provide irrevocable
instructions (a) to a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate Exercise Price payable for the
purchased shares plus all applicable Federal, state and local income
and employment taxes required to be withheld by the Corporation by
reason of such exercise and (b) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale.
Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the
Exercise Price must accompany the written notice of exercise delivered
to the Corporation in connection with the option exercise.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if other than
Optionee) have the right to exercise this option.
4.
<PAGE>
(iv) Execute and deliver to the Corporation such
written representations as may be requested by the Corporation in order for it
to comply with the applicable requirements of Federal and state securities laws.
(v) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining Optionee) for the
satisfaction of all Federal, state and local income and employment tax
withholding requirements applicable to the option exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.
(c) In no event may this option be exercised for any
fractional shares.
10. COMPLIANCE WITH LAWS AND REGULATIONS.
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.
(b) The inability of the Corporation to obtain approval from
any regulatory body having authority deemed by the Corporation to be necessary
to the lawful issuance and sale of any Common Stock or Class B Common Stock, as
the case may be, pursuant to this option shall relieve the Corporation of any
liability with respect to the non-issuance or sale of the Common Stock or Class
B Common Stock, as the case may be, as to which such approval shall not have
been obtained. The Corporation, however, shall use its best efforts to obtain
all such approvals.
11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns and the legal representatives, heirs
and legatees of Optionee's estate.
12. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.
13. FINANCING. The Plan Administrator may, in its absolute
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchased Option Shares by delivering a full-recourse,
interest-bearing promissory note secured by those
5.
<PAGE>
Option Shares. The payment schedule in effect for any such promissory note shall
be established by the Plan Administrator in its sole discretion.
14. CONSTRUCTION. This Agreement and the option evidenced hereby
are made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator with
respect to any question or issue arising under the Plan or this Agreement shall
be conclusive and binding on all persons having an interest in this option.
15. GOVERNING LAW. The interpretation, performance and enforcement
of this Agreement shall be governed by the laws of the State of California
without regard to that State's conflict-of-laws rules.
16. STOCKHOLDER APPROVAL. If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock or
Class B Common Stock, as the case may be, which may be issued under the Plan as
last approved by the stockholders, then this option shall be void with respect
to such excess shares, unless stockholder approval of an amendment sufficiently
increasing the number of shares of Common Stock or Class B Common Stock, as the
case may be, issuable under the Plan is obtained in accordance with the
provisions of the Plan.
17. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the
event this option is designated an Incentive Option in the Grant Notice, the
following terms and conditions shall also apply to the grant:
(a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (i) more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or Permanent
Disability or (ii) more than twelve (12) months after the date Optionee ceases
to be an Employee by reason of Permanent Disability.
(b) This option shall not become exercisable in the calendar
year in which granted if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock or Class B Common Stock, as
the case may be, for which this option would otherwise first become exercisable
in such calendar year would, when added to the aggregate value (determined as of
the respective date or dates of grant) of the Common Stock or Class B Common
Stock, as the case may be, and any other securities for which one or more other
Incentive Options granted to Optionee prior to the Grant Date (whether under the
Plan or any other option plan of the Corporation or any Parent or Subsidiary)
first become exercisable during the same calendar year, exceed One Hundred
Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability
of this option is deferred by reason of the foregoing limitation, the deferred
portion shall become exercisable in the first calendar year or years thereafter
in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph
17(b) would not be contravened, but such deferral shall in all events end
immediately prior to the effective date of a Corporate Transaction in which this
option is not to be assumed, whereupon the option shall
6.
<PAGE>
become immediately exercisable as a Non-Statutory Option for the deferred
portion of the Option Shares.
(c) Should Optionee hold, in addition to this option, one or
more other options to purchase Common Stock or Class B Common Stock, as the case
may be, which become exercisable for the first time in the same calendar year as
this option, then the foregoing limitations on the exercisability of such
options as Incentive Options shall be applied on the basis of the order in which
such options are granted.
7.
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
NOTICE OF EXERCISE
To be Executed by the Optionee
In Order to Exercise Options
The undersigned Optionee hereby delivers $_____ and irrevocably elects to
exercise options for _________ Option Shares, and requests that certificates for
such Option Shares shall be issued (bearing appropriate legends) in the name of
such Optionee as follows:
(Please Insert Name and Social Security or Other Identifying Number)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
and be delivered to such Optionee at
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - ----------------------------- ----------------------------------
Date Name (Printed)
----------------------------------
Signature
----------------------------------
----------------------------------
Address
----------------------------------
Social Security No.
----------------------------------
Signature Guaranteed
<PAGE>
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CLASS B COMMON STOCK shall mean the Corporation's Class B Common Stock,
if and when (before April 20, 2000) the Corporation has Class B Common Stock
authorized.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's Common Stock.
F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation.
G. CORPORATION shall mean Path 1 Network Technologies Inc., a Delaware
corporation.
H. DISABILITY shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment and shall be determined by the Plan Administrator on the basis
of such medical evidence as the Plan Administrator deems warranted under the
circumstances. Disability shall be deemed to constitute PERMANENT DISABILITY in
the event that such Disability is expected to result in death or has lasted or
can be expected to last for a continuous period of twelve (12) months or more.
I. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
J. EXERCISE DATE shall mean the date on which the option shall have been
exercised in accordance with Paragraph 9 of the Agreement.
A-1.
<PAGE>
K. EXERCISE PRICE shall mean the exercise price payable per Option Share as
specified in the Grant Notice.
L. EXPIRATION DATE shall mean the date on which the option expires as
specified in the Grant Notice.
M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question, as the price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market. If there is no closing selling price for the Common Stock on the
date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock Exchange,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by
the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on
such exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on any Stock
Exchange nor traded on the Nasdaq National Market, then the Fair Market
Value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
N. GRANT DATE shall mean the date of grant of the option as specified in
the Grant Notice.
O. GRANT NOTICE shall mean the Notice of Grant of Stock Option accompanying
the Agreement, pursuant to which Optionee has been informed of the basic terms
of the option evidenced hereby.
P. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.
Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee adversely affecting
the business or affairs of the Corporation (or any Parent or Subsidiary) in a
material manner. The foregoing definition shall not be deemed
A-2.
<PAGE>
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Optionee or any other individual in the Service of the Corporation (or any
Parent or Subsidiary).
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
T. OPTION SHARES shall mean the number of shares of Common Stock subject to
the option; provided, that if and when (before April 10, 2000) the Corporation
has Class B Common Stock authorized, "Option Shares" instead shall mean the
number of shares of Class B Common Stock subject to the option.
U. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.
V. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
W. PLAN shall mean the Corporation's 1999 Stock Option/Stock Issuance Plan.
X. PLAN ADMINISTRATOR shall mean either the Board or a committee of the
Board acting in its capacity as administrator of the Plan.
Y. SERVICE shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or an independent consultant.
Z. STOCK EXCHANGE shall mean the American Stock Exchange or the New York
Stock Exchange.
AA. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
BB. VESTING SCHEDULE shall mean the vesting schedule specified in the Grant
Notice pursuant to which the Optionee is to vest in the Option Shares in a
series of installments over his or her period of Service.
A-3.
<PAGE>
EXHIBIT B
1999 STOCK OPTION/STOCK ISSUANCE PLAN
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
NOTICE OF GRANT OF STOCK OPTION
Notice is hereby given of the following option grant (the "Option") to
purchase shares of the Common Stock of Path 1 Network Technologies Inc. (the
"Corporation"):
OPTIONEE:
GRANT DATE:
VESTING COMMENCEMENT DATE:
GRANT NUMBER: EXERCISE PRICE: $ per share
NUMBER OF OPTION SHARES: ________________ shares
MAXIMUM EXPIRATION DATE:
TYPE OF GRANT: Incentive Stock Option
Non-Statutory Stock Option
VESTING SCHEDULE:
This Option may be exercised, at any time before it terminates or
expires, for all or any portion of the vested Option Shares.
The Option Shares shall vest as follows (based on Service):
OTHER PROVISIONS:
Optionee agrees to be bound by the terms of the Option as set forth in
the Stock Option Agreement attached hereto as Exhibit A.
NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Notice or in the
attached Stock Option Agreement shall confer upon Optionee any right to continue
in Service for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Corporation or of Optionee, which rights
are hereby expressly reserved by each, to terminate Optionee's Service at any
time for any reason, with or without cause.
DEFINITIONS. All capitalized terms in this Notice shall have the
meaning assigned to them in this Notice or in the attached Stock Option
Agreement.
<PAGE>
DATED: ____________, 199__
PATH 1 NETWORK TECHNOLOGIES INC.
By:
------------------------------
Title:
------------------------------
------------------------------
OPTIONEE
Address:
------------------------------
------------------------------
ATTACHMENTS:
EXHIBIT A - STOCK OPTION AGREEMENT
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMENT
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
STOCK OPTION AGREEMENT
1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as
of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.
2. OPTION TERM. This option shall (unless otherwise specified in
the Grant Notice) have a term of ten (10) years measured from the earlier of the
vesting commencement date specified in the Grant Notice or from the Grant Date
and shall accordingly expire at the close of business on the Expiration Date,
unless sooner terminated in accordance with Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY. During Optionee's lifetime, this option
shall be exercisable only by Optionee and shall not be assignable or
transferable other than by will or by the laws of descent and distribution
following Optionee's death.
4. DATES OF EXERCISE. This option shall become exercisable for the
Option Shares in one or more installments as specified in the Grant Notice. As
the option becomes exercisable for such installments, those installments shall
accumulate, and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.
5. CESSATION OF SERVICE. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable (unless
the Grant Notice expressly provides that this Section 5 is inapplicable):
(a) Should Optionee cease to remain in Service for any reason
(other than death, Disability or Misconduct) while this option is outstanding,
then Optionee shall have a period of three (3) months (commencing with the date
of such cessation of Service) during which to exercise this option, but in no
event shall this option be exercisable at any time after the Expiration Date.
(b) Should Optionee die while this option is outstanding, then
the personal representative of Optionee's estate or the person or persons to
whom the option is transferred pursuant to Optionee's will or in accordance with
the laws of inheritance shall have the right to exercise this option. Such
right shall lapse, and this option shall cease to be outstanding, upon the
EARLIER of (i) the expiration of the twelve (12)-month period measured from the
date of Optionee's death or (ii) the Expiration Date.
(c) Should Optionee cease Service by reason of Disability while
this option is outstanding, then Optionee shall have a period of twelve (12)
months (commencing with the date
<PAGE>
of such cessation of Service) during which to exercise this option. In no event
shall this option be exercisable at any time after the Expiration Date.
NOTE: Exercise of this option on a date later than three
(3) months following cessation of Service due to Disability
will result in loss of favorable Incentive Option treatment,
UNLESS such Disability constitutes Permanent Disability. In
the event that Incentive Option treatment is not available,
this option will be taxed as a Non-Statutory Option upon
exercise.
(d) During the limited period of post-Service exercisability,
this option may not be exercised in the aggregate for more than the number of
Option Shares in which Optionee is, at the time of Optionee's cessation of
Service, vested pursuant to the Vesting Schedule specified in the Grant Notice
or the special vesting acceleration provisions of Paragraph 6. Upon the
expiration of such limited exercise period or (if earlier) upon the Expiration
Date, this option shall terminate and cease to be outstanding for any vested
Option Shares for which the option has not been exercised. To the extent
Optionee is not vested in one or more Option Shares at the time of Optionee's
cessation of Service, this option shall immediately terminate and cease to be
outstanding with respect to those shares.
(e) Should Optionee's Service be terminated for Misconduct, then
this option shall terminate immediately and cease to remain outstanding.
6. ACCELERATED VESTING.
(a) In the event of any Corporate Transaction, the Option Shares
at the time subject to this option but not otherwise vested shall automatically
vest in full so that this option shall, immediately prior to the effective date
of the Corporate Transaction, become exercisable for all of the Option Shares as
fully-vested shares and may be exercised for any or all of those Option Shares
as vested shares. However, the Option Shares shall NOT vest on such an
accelerated basis if and to the extent: (i) this option is assumed by the
successor corporation (or parent thereof) in the Corporate Transaction and the
Corporation's repurchase rights with respect to the unvested Option Shares are
assigned to such successor corporation (or parent thereof) or (ii) this option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested Option Shares at the time of
the Corporate Transaction (the excess of the Fair Market Value of those Option
Shares over the Exercise Price payable for such shares) and provides for
subsequent payout in accordance with the same Vesting Schedule applicable to
those unvested Option Shares as set forth in the Grant Notice.
(b) Immediately following the Corporate Transaction, this option
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) in connection with the Corporate
Transaction.
(c) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to
<PAGE>
apply to the number and class of securities which would have been issuable to
Optionee in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction, and appropriate
adjustments shall also be made to the Exercise Price, PROVIDED the aggregate
Exercise Price shall remain the same.
(d) The Option Shares may also vest upon an accelerated basis in
accordance with the terms and conditions of any special addendum attached to
this Agreement.
(e) This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
7. ADJUSTMENT IN OPTION SHARES. Should any change be made to the
Common Stock, by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.
8. STOCKHOLDER RIGHTS. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become the record holder
of the purchased shares.
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:
(i) Execute and deliver to the Corporation a
written notice of exercise, in the form attached hereto, for the
Option Shares for which the option is exercised.
(ii) Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:
(A) cash or check made payable to the
Corporation; or
(B) a promissory note payable to the
Corporation, but only to the extent authorized by the Board in
accordance with Paragraph 13.
Should the Common Stock be registered under Section 12 of
the 1934 Act at the time the option is exercised, then the
Exercise Price may also be paid as follows:
<PAGE>
(C) in shares of Common Stock held by Optionee
(or any other person or persons exercising the option) for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair
Market Value on the Exercise Date; or
(D) to the extent the option is exercised for
vested Option Shares, through a special sale and remittance
procedure pursuant to which Optionee (or any other person or
persons exercising the option) shall concurrently provide
irrevocable instructions (a) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased
shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for the purchased shares plus
all applicable Federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of
such exercise and (b) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage
firm in order to complete the sale.
Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the
Exercise Price must accompany the written notice of exercise
delivered to the Corporation in connection with the option
exercise.
(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if
other than Optionee) have the right to exercise this option.
(iv) Execute and deliver to the Corporation
such written representations as may be requested by the Corporation in
order for it to comply with the applicable requirements of Federal and
state securities laws.
(v) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining Optionee)
for the satisfaction of all Federal, state and local income and
employment tax withholding requirements applicable to the option
exercise.
(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.
(c) In no event may this option be exercised for any fractional
shares.
10. COMPLIANCE WITH LAWS AND REGULATIONS.
<PAGE>
(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.
(b) The inability of the Corporation to obtain approval from any
regulatory body having authority deemed by the Corporation to be necessary to
the lawful issuance and sale of any Common Stock pursuant to this option shall
relieve the Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such
approvals.
11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided
in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's assigns and the legal representatives, heirs and
legatees of Optionee's estate.
12. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to
be given or delivered to Optionee shall be in writing and addressed to Optionee
at the address indicated below Optionee's signature line on the Grant Notice.
All notices shall be deemed effective upon personal delivery or upon deposit in
the U.S. mail, postage prepaid and properly addressed to the party to be
notified.
13. FINANCING. The Board may, in its absolute discretion and without
any obligation to do so, permit Optionee to pay the Exercise Price for the
purchased Option Shares by delivering a full-recourse, interest-bearing
promissory note secured by those Option Shares. The payment schedule in effect
for any such promissory note shall be established by the Board in its sole
discretion.
14. CONSTRUCTION. All decisions of the Board with respect to any
question or issue arising under this Agreement shall be conclusive and binding
on all persons having an interest in this option.
15. GOVERNING LAW. The interpretation, performance and enforcement
of this Agreement shall be governed by the laws of the State of California
without regard to that State's conflict-of-laws rules.
16. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the event
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:
(a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (i)
<PAGE>
more than three (3) months after the date Optionee ceases to be an Employee for
any reason other than death or Permanent Disability or (ii) more than twelve
(12) months after the date Optionee ceases to be an Employee by reason of
Permanent Disability.
(b) This option shall not become exercisable in the calendar
year in which granted if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which this option would
otherwise first become exercisable in such calendar year would, when added to
the aggregate value (determined as of the respective date or dates of grant) of
the Common Stock and any other securities for which one or more other Incentive
Options granted to Optionee prior to the Grant Date first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in
the aggregate. To the extent the exercisability of this option is deferred by
reason of the foregoing limitation, the deferred portion shall become
exercisable in the first calendar year or years thereafter in which the One
Hundred Thousand Dollar ($100,000) limitation of this Paragraph 16(b) would not
be contravened, but such deferral shall in all events end immediately prior to
the effective date of a Corporate Transaction in which this option is not to be
assumed, whereupon the option shall become immediately exercisable as a
Non-Statutory Option for the deferred portion of the Option Shares.
(c) Should Optionee hold, in addition to this option, one or
more other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.
<PAGE>
PATH 1 NETWORK TECHNOLOGIES INC.
NOTICE OF EXERCISE
To be Executed by the Optionee
In Order to Exercise Options
The undersigned Optionee hereby delivers $_____ and irrevocably elects to
exercise options for _________ Option Shares, and requests that certificates for
such Option Shares shall be issued (bearing appropriate legends) in the name of
such Optionee as follows:
(Please Insert Name and Social Security or Other Identifying Number)
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and be delivered to such Optionee at
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- - --------------------------------------------------------------------------------
- - -------------------------
Date Name (Printed)
Signature
Address
Social Security No.
Signature Guaranteed
<PAGE>
APPENDIX
The following definitions shall be in effect under the Agreement:
A. AGREEMENT shall mean this Stock Option Agreement.
B. BOARD shall mean the Corporation's Board of Directors.
C. CODE shall mean the Internal Revenue Code of 1986, as amended.
D. COMMON STOCK shall mean the Corporation's Common Stock.
E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
F. CORPORATION shall mean Path 1 Network Technologies Inc., a Delaware
corporation.
G. DISABILITY shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment and shall be determined by the Board on the basis of such
medical evidence as the Board deems warranted under the circumstances.
Disability shall be deemed to constitute PERMANENT DISABILITY in the event that
such Disability is expected to result in death or has lasted or can be expected
to last for a continuous period of twelve (12) months or more.
H. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
I. EXERCISE DATE shall mean the date on which the option shall have been
exercised in accordance with Paragraph 9 of the Agreement.
J. EXERCISE PRICE shall mean the exercise price payable per Option Share
as specified in the Grant Notice.
K. EXPIRATION DATE shall mean the date on which the option expires as
specified in the Grant Notice.
A-1
<PAGE>
L. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
the price is reported by the National Association of Securities
Dealers on the Nasdaq National Market. If there is no closing selling
price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding
date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Board to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no closing selling
price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding
date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on
any Stock Exchange nor traded on the Nasdaq National Market, then the
Fair Market Value shall be determined by the Board after taking into
account such factors as the Board shall deem appropriate.
M. GRANT DATE shall mean the date of grant of the option as specified in
the Grant Notice.
N. GRANT NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.
O. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.
P. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by Optionee adversely affecting
the business or affairs of the Corporation (or any Parent or Subsidiary) in a
material manner. The foregoing definition shall not be deemed to be inclusive
of all the acts or omissions which the Corporation (or any Parent or Subsidiary)
may consider as grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
A-2
<PAGE>
R. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
S. OPTION SHARES shall mean the number of shares of Common Stock subject
to the option.
T. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.
U. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. SERVICE shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or an independent consultant.
W. STOCK EXCHANGE shall mean the American Stock Exchange or the New York
Stock Exchange.
X. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
Y. VESTING SCHEDULE shall mean the vesting schedule specified in the
Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a
series of installments over his or her period of Service.
A-3
<PAGE>
ARCHITECTURE STUDY PROPOSAL
Prepared for
[DOCTOR DESIGN LOGO]
Path 1 Network Technologies, Inc.
Proposal Number: [***]
Proposal Date: JUNE 4, 1999
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PROJECT DESCRIPTION
Doctor Design (DDI) proposes to perform an Architecture Study to review the
requirements, features, and specification of an enhanced gigabit Ethernet switch
and develop a suggested architecture as input to the development phase of the
project.
An initial project meeting between Path 1 Network Technologies, Inc. (Path 1)
and DDI will be held at DDI as soon as it can be arranged to determine the
features and specifications of the development project and the scope of the
Architecture study. At this meeting, Path 1 will provide to DDI, any
information in its possession that is related to the Architecture Study,
including Path 1 Deliverables below.
A comprehensive study of the issues relating to the development project will be
conducted by DDI. DDI will review existing requirements, propose additional
requirements, suggest an architecture, perform necessary trade-off analyses, and
evaluate software and hardware tools required.
STATEMENT OF WORK
DDI shall perform the following tasks during the Architecture Study:
- - - Review requirements and planned features.
- - - Recommend additional requirements and features, which would enhance
the resulting product.
- - - Evaluate components and perform trade-off analyses to aid in defining
architecture.
- - - Recommend system architecture to satisfy requirements and features.
- - - Evaluate development tools and recommend development environment.
- - - Prepare an Architecture Study Document summarizing the results.
- - - Identify design tasks and prepare a development project schedule.
DELIVERABLES
PATH 1 DELIVERABLES
Any existing information or documentation relating to the Architecture Study.
This may include requirements documents, industrial design sketches, user
interface drawings, specifications, schematics, block diagrams, data sheets,
etc.
DDI DELIVERABLES
DDI will prepare and deliver an Architecture Study Document to Path 1. This
document will summarize the results of the requirements review, trade-off
analyses and will make recommendations with respect to features, architecture,
and tools.
DDI will identify design tasks, create a statement of work for the development
project, prepare a development project schedule, estimate design services fees
associated with the development project,
[***CONFIDENTIAL TREATMENT REQUESTED]
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Path 1 Network Technologies, Inc. Proposal Number: [***]
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ESTIMATED SCHEDULE AND ESTIMATED FEES
ESTIMATED SCHEDULE
perform an analysis of the final cost of the development project (when
appropriate), and prepare an engineering services proposal for the
development project.
DDI will deliver the Architecture Study Document approximately [***] after
beginning the Architecture Study.
ESTIMATED FEES
All fees contained in this Architecture Study Proposal are based on time and
materials ESTIMATES and are subject to change by DDI.
ESTIMATED HOURLY CHARGES
Based on the Statement of Work and estimated schedule above, the following are
estimated fees for engineering services:
<TABLE>
<CAPTION>
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TYPE OF ENGINEERING EFFORT MAN-WEEKS ESTIMATED COST
-----------------------------------------------------------------
<S> <C> <C>
Systems Architect [***] [***]
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TOTAL HOURLY ESTIMATE: [***]
-----------------------------------------------------------------
</TABLE>
TRAVEL COSTS
Any travel outside the San Diego area required of DDI employees and its
subcontractors is not included in the above estimates and will be separately
approved by Path 1. Path 1 will reimburse DDI for actual, reasonable travel and
living expenses. DDI will provide Path 1 with detailed expense reports for such
travel.
HOURLY RATES
The following hourly rates have been used in determining the estimated fees
above for this Architecture Study. Resulting from previous discussions
between Path 1 and DDI, these rates include a [***]. The standard hourly
rate for a Systems Architect is [***].
<TABLE>
<CAPTION>
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TYPE OF ENGINEERING EFFORT COST PER HOUR
-----------------------------------------------------------------
<S> <C>
Systems Architect [***]
-----------------------------------------------------------------
Specialized Expertise or On-Site Consulting [***]
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</TABLE>
* In cases where specialty skills such as [***] are required, the
hourly rate will be based on the [***] for the skill. Special hourly
rates will also apply where a [***] is based [***]. If Path 1 will be
subject to this rate, DDI will provide written notification in advance
if this rate applies.
[*** Confidential treatment requested]
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<PAGE>
PROPOSAL AGREEMENT [LOGO DOCTOR DESING]
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This Proposal Agreement (hereinafter "AGREEMENT"), is entered into by and
between Integrated Systems Design Center, Inc., doing business as Doctor Design,
Inc. (hereinafter "DDI"), a California corporation, having its principal place
of business at 10505 Sorrento Valley Road, San Diego, California 92121-1608 and
PATH 1 NETWORK TECHNOLOGIES, INC., (hereinafter "PATH 1"), a California
corporation, having its principal place of business at 3636 Nobel Drive, Suite
275, San Diego, California 92122. DDI and Path 1, desire to enter into a
mutually beneficial relationship, whereby DDI agrees to perform engineering
services, based upon and pursuant to the provisions of the Technical Proposal
Revision Number [***] dated JUNE 4, 1999, containing the Statement of Work,
Deliverables, Estimated Schedule and Estimated Fees described therein
(hereinafter "Project"). The Technical Proposal described above is herein
incorporated by reference.
PAYMENT TERMS
INVOICES
DDI will be pleased to start the Project upon Path 1's acceptance of this
Agreement including the terms and conditions herein and receipt of an advance
payment (hereinafter "Start Payment"), in the amount of [***], which shall be
applied against invoices as set forth below. All prototyping fees are also due
upon execution of this Agreement.
This is a time and materials estimate. All fees contained in this Agreement are
estimates and are subject to change. Path 1 agrees to promptly pay DDI's
invoices for services performed during the term of this Agreement. DDI will
credit the Start Payment amount to Path 1 on each invoice at the rate of [***]
of the invoice amount until the total amount of the Start Payment is reimbursed.
DDI will refund the balance of any non-reimbursed Start Payment at the end of
the Project. In the event the Start Payment is exhausted prior to the end of
the Project, Path 1 agrees that it shall provide another payment in an amount
reasonably requested by DDI, within [***] from such request.
The Project hourly charges will be invoiced [***], and are due within [***] of
the billing rate. All billings that are not paid within that period will accrue
interest at the rate of [***] per month. The payment terms set forth herein are
contingent upon DDI obtaining satisfactory credit information and the approval
of Path 1 for the payment terms based upon that information. DDI has the right
to immediately terminate this Agreement upon written notice to Path 1 if any
payment is not made in a timely manner, and DDI shall have no responsibility for
any loss that may be sustained by Path 1 in the event of such termination.
TRAVEL COSTS
Any travel outside the San Diego area required of DDI employees and its
subcontractors is not included in the fees and costs outlined for the Project,
and will be approved by Path 1. Path 1 will
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DDI: MPC
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Doctor Design, Inc. Proposal Agreement
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reimburse DDI for actual, reasonable travel and living expenses. DDI will
provide Path 1 with detailed expense reports for such travel.
While traveling pursuant to this Agreement, Path 1 will be billed at the
Standard Hourly Rates set forth herein for the actual time DDI employees and its
subcontractors are in transit, to a [***].
In cases of multi-day on-site work, Path 1 will be billed, at the Standard
Hourly Rates set forth herein, a minimum of [***] by DDI employees and its
subcontractors, whichever is higher, including weekends and holidays.
Business or better class of service will be used for flight segments in excess
of six (6) hours. Round trip business or better class of service will be used
for all flights to destinations outside North America.
PROTOTYPING FEES
Any prototype fees, if applicable, shall be detailed in the Technical Proposal
and are based on average costs of similar projects performed by DDI. Third
party prototyping services will be billed with a [***]. Internal prototyping
services will be billed at Standard Hourly Rates. The prototype fees shall be
due upon the start of the Project, terms [***]. If actual prototype costs
exceed the prototype estimate, the excess will be billed monthly at terms [***].
If the prototype estimate exceeds actual cost, the excess will be refunded at
the end of the Project.
OTHER COSTS
Any other costs or fees for which Path 1 is responsible shall be separately
listed in the Technical Proposal. Path 1 will also be responsible for all
requirements for international shipments including, but not limited to,
import/export documentation, documentation preparation, expenses, duties, fees
and taxes. All amounts in this Agreement are in U.S. Dollars and all invoices
are payable in U.S. Dollars. Path 1 will also be responsible for any banking
fees, if any, associated with payment of all invoices, including but not limited
to, wire transfer fees, exchange rates, or processing fees.
FINAL ACCEPTANCE
Path 1 shall prepare an Acceptance Test Plan (hereinafter "ATP") acceptable to
DDI which defines criteria for final acceptance of DDI deliverables outlined in
the Technical Proposal that are subject to acceptance testing. If Path 1 has
not delivered an ATP [***] prior to the scheduled delivery of the first
deliverable or has failed to complete the ATP testing within [***] following
receipt of any deliverable, such deliverable shall be deemed accepted.
[*** Confidential treatment requested]
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Path 1: RDF
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DDI: MPC
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Doctor Design, Inc. Proposal Agreement
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TERMINATION
This Agreement may be terminated thirty (30) days following DDI's receipt of
written notice from Path 1. Path 1 shall compensate DDI for all work performed
and costs incurred, including, but not limited to, engineering services at
Standard Hourly Rates, prototype expenses, or DDI's inability to reassign
personnel, prior to the effective date of termination.
CONFLICT
Path 1 may use its standard purchase order form for the purpose of effecting or
releasing payment hereunder. Except as specifically agreed to in writing
between DDI and Path 1, any terms and conditions of such purchase order or other
document delivered pursuant hereto shall not apply to this Agreement and are
expressly rejected.
NOTICES
Any and all notices to be given under this Agreement shall be in writing and
shall be delivered or mailed via certified mail, return receipt requested to the
other party at the addresses of each party set forth below or at such other
address as either party shall designate in writing according to this paragraph.
DDI PATH 1
- - --- ------
Doctor Design, Inc. Path 1 Network Technologies, Inc.
10505 Sorrento Valley Road 3636 Nobel Drive, Suite 275
San Diego, California 92121-1608 San Diego, California 92122
Attn: Legal Department Attn: Legal Department
ATTORNEY FEES
In the event of any dispute, California law shall apply and arbitration shall be
promptly commenced in San Diego County, California. The prevailing party shall
be entitled to recover all of its attorneys' fees and costs incurred as a result
of the dispute and those incurred in protecting any rights in any Bankruptcy
proceeding or any action pursuant to any statutory right.
[*** Confidential treatment requested]
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Path 1: RDF
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DDI: MPC
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Doctor Design, Inc. Proposal Agreement
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The parties executing this Agreement on behalf of DDI and Path 1 warrant that
they have the authority to enter into this Agreement and to bind their
respective companies to all of the terms and conditions of this Agreement.
DOCTOR DESIGN, INC. PATH 1 NETWORK TECHNOLOGIES, INC.
By: /s/ Michael P. Cusick By: /s/ Ronald D. Fellman
Name: Michael P. Cusick Name: Ronald D. Fellman
Title: V.P. Sales & Marketing Title: Chief Executive Officer
Date: June 4, 1999 Date: June 4, 1999
[*** Confidential treatment requested]
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