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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
incorporation or organization) (I.R.S. Employer Identification No.)
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
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
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N/A N/A
Securities to be registered pursuant to Section 12(g) of the Act:
CLASS A 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 there will be, over the next several years, a significant
increase in the number of audio, video and telephony transmissions over the
Internet, and that there will be a market for products which can enable wired
data transmission networks to handle equally adeptly each of these kinds of
transmissions. It is our goal to position ourselves at the forefront of this
movement through the introduction of products based on our proprietary
TrueCircuit-TM- technology. Our TrueCircuit technology is capable of enabling
the efficient transmission of all communications over a single network and
bringing high-level quality of service (QoS) and real-time audio, video and
telephony capabilities to the Internet and to standard Internet Protocol (IP)
networks. Our intended real-time data delivery product line for business and,
ultimately, the home would have the potential to quickly change the way video
content is produced and delivered, and to ensure that a phone call placed
over the Internet will be delivered as reliably as calls made over today's
telephone network. Among other benefits, our intended products would also
enable improved interaction of computers, telephone equipment, video
equipment and network appliances.
As it operates today, IP (which is simply a common set of
procedures, conventions and rules to link together computers and information
across the world) fragments information into packets of data and
automatically routes these packets to their correct destination via
intermediate switching nodes called IP routers. This process, known as
"packet-switching", does not ensure that packets will arrive in the same
order in which they were sent, or that they will arrive at their destinations
in a timely manner.
Packet-switching works best for transmission of data, which is
tolerant of packet re-ordering and large variations in transmission time
(known as "jitter"). Jitter causes the recipient of an audio or video
transmission to experience a jerky or otherwise imperfect signal, or lengthy
download times as packets respectively arrive. In contrast, the transmission
of real-time signals, including audio and video, requires timely, predictable
and consistent delivery. Traditional telephone networks use
"circuit-switching" to meet the needs of real-time audio signals. Circuit-
switching ensures that a communications signal always has a consistent, fixed
point-to-point path, or "channel", from source to destination. Because
circuit-switching maintains a constant route, it minimizes end-to-end delays
and jitter. However, traditional circuit-switching is not practical for many
of today's Internet uses due to its relatively rigid and inflexible
structure.
Our technology addresses the inherent deficiencies of packet-switching
as applied to transmission of real-time signals by superimposing a
circuit-switched infrastructure on standard IP networking, while maintaining
full compatibility with existing IP networks.
Although we do not have products ready for sale in the marketplace,
we have developed our core software and hardware technology, TrueCircuit,
and completed production of a first generation of prototype equipment
containing this proprietary TrueCircuit technology. The TrueCircuit
Multimedia Gateway, our initial product, is currently in limited production
and undergoing beta-test field evaluation with several companies. As further
discussed in this section, we have several other proposed products at various
stages in the developmental process. We intend to continue to pursue
development and introduction of our proposed products into wide area networks
(WANs), local area networks (LANs), metropolitan area networks (MANs), and
the Home Networking Market, which includes television, telephone, personal
computers and home security systems.
INDUSTRY BACKGROUND
CONVERGENCE - AN INTERNET MARKET OPPORTUNITY
The ability to utilize intranets and the Internet to make clear,
high-quality telephone calls and transmit live, high-quality 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.
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There are strong incentives for companies to merge all of their
communication activities over a network of wires, including for data, voice,
video and control. Currently, companies employ several separate networks
throughout an enterprise -- telephone, computer, security and fire protection.
By combining these, an organization would incur the cost of installing and
maintaining only one network, rather than several separate networks, each of
which would require capital outlay and staffing.
Known as "convergence," a shift to a single network would allow these
companies to take full advantage of the significant cost savings and
increased throughput that computer networks provide. Network convergence
technology enables the merging of disparate digital information such as
full-motion video, still video images, audio, telephony and business data
over the same network infrastructure (as compared to the use of separate
networks for separate applications, e.g. using a telephone network to place a
telephone call). The emergence of this network convergence technology has
largely been made possible by the move from analog to digital technology in
all forms of media. Our TrueCircuit technology facilitates efficient
convergence, enabling disparate services to be carried without disruption,
and meets the specific technical requirements of each service in their
combined carriage over LANs, MANs, and WANs.
In addition to cost savings, we intend that "convergence" products
developed using our TrueCircuit technology could provide enhanced quality to
IP networks in businesses and at home by enabling real-time audio, video and
telephony to be delivered over a single IP network with the equivalent of
"circuit-switched" quality of service (QoS). QoS, a recognized industry term,
is simply a statement of a technology's capabilities in transporting
information across a network. The term "QoS" can pertain to one or more
factors (e.g. latency, jitter or throughput) relating to quality of data
transport across a network. Our "circuit-switched" QoS specifications cover
the following key factors: (i) jitter, (ii) latency (which is the delay in
transmission of an information packet from source to destination across a
network), (iii) reliability (which is defined as the percentage of packets
that are delivered across the network), (iv) sequence (which is defined as
delivery of packets of information in the correct order), and (v) throughput
(which is defined as the consistent transport and delivery of a certain
specified level of information packets per second). Thus, when we state that
TrueCircuit can provide "circuit-switched" QoS, it means that our intended
products will minimize jitter and latency and assure sufficient sequence,
reliability and throughput capabilities so as to enable DVD-quality video,
CD-quality radio, telephony and other time-critical information to all be
transported simultaneously, alongside non-real-time data, over one IP
network.
THE NEED FOR A SOLUTION
Computer data is tolerant of packet-switching jitter and other QoS
problems because computer data does not require real-time delivery; it does not
matter when or in what order the packets arrive. In contrast, real-time
services (e.g. voice, audio and live, interactive video) require timely,
predictable and consistent delivery. As a result of current network systems'
packet-switching jitter and other QoS problems, multimedia and other time
critical transmissions experience long delays and degradation. Therefore, IP
network systems cannot currently provide the convergence of real-time voice,
high-fidelity audio, and live, interactive video services with computer data
over a single network.
Current delays and delivery problems associated with real-time
transmission result from the collision of packets carrying data when network
traffic volume is high. With existing IP computer networks, there is a lack of
an effective traffic management infrastructure to eliminate such collisions.
Despite this deficiency, IP has become the de facto standard for computer
networks. Within LANs, the vast majority of computers communicate via IP
networks, such as Ethernet, the most prevalent of local IP networks. Within
WANs, most computers communicate using IP switching over ATM/SONET links, which
are circuit-switched networks. Furthermore, major telecomm vendors have publicly
indicated that they plan to move to IP-only equipment -- entirely eliminating
ATM from their networks -- because IP systems are less costly.
Our TrueCircuit technology responds to the need to enable
packet-switched IP networks to provide high-quality, real-time transmissions by
coordinating the transport of packets across the network to eliminate or
minimize delays and unreliable delivery. In this regard, we believe our
TrueCircuit technology can make available the best of both worlds - the
reliability and speed of circuit-switched networks along with the data carrying
capability and low cost of IP networks.
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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 (bottlenecks in a
network), results in QoS failures, as these information packets are forced to
"queue" at those points of contention rather than proceeding without delay to
their destinations. The greater the bandwidth demanded by a particular
traffic stream, the higher the potential for service degradation, with packet
collisions rising as the network utilization increases. This is evidenced by
delays and degradation of the images, sound and other real-time data that are
transmitted. In a simple analogy, the packets can be likened to cars
competing for space on a crowded freeway leading to their destination.
Collisions and delays are difficult to avoid in such circumstances; however,
timing and control systems such as express lanes, ramp meters which time the
car's access to the freeway and changeable message signs that coordinate more
expeditious routing can substantially reduce delays and collisions.
Similarly, our TrueCircuit technology provides the timing, channels and
coordination that eliminate or minimize the delays and collisions of packets
across the network from source to destination.
Thus, TrueCircuit's mechanism for a coordinated flow of real-time
packets to avoid points of network contention has the ability to help improve
QoS and permit multiple, simultaneous uses of the network (i.e., computer
traffic, voice and video).
The elimination or avoidance of bottlenecks in the network would also
reduce the need for queuing at network nodes because the time critical-data
would be transported over dedicated channels, leaving the remaining bandwidth
for non-time-critical data. This should enable businesses to reduce network
equipment costs, as a result of increased utilization of networks at any given
capacity level.
Bandwidth demands continue to grow due to technological innovations and
new applications. Unless bandwidth supply significantly exceeds bandwidth demand
(a scenario that no one foresees), there will always be bottlenecks if packet
traffic flow is not coordinated. Therefore, increases in bandwidth supply
notwithstanding, there will continue to be a need for solutions such as those
offered by TrueCircuit technology. 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 LANs shared by many users across
different organizations, competing demands for the network's available bandwidth
supply causes packet collisions that degrade the quality of service provided
over the network. We believe our proposed products, based on our proprietary
TrueCircuit technology, will be able to effectively address the problem of
increased demand at a given level of bandwidth supply by coordinating the flow
of packets end-to-end.
Services that are dependent on time-critical data stand to benefit the
most from TrueCircuit-TM- technology's QoS solution. These include:
- IP telephony
- Video distribution
- Transaction processing
- Security systems
- Data acquisition and control
- Factory floor automation
We demonstrated a prototype of the TrueCircuit Multimedia Gateway
(TMG), a proof-of-concept product, at the Networld+Interop trade show held at
Las Vegas in May 1999. This show exposed us to potential customers, including
telecommunications services providers, systems integrators and other equipment
manufacturers that might incorporate TrueCircuit in future network products. No
direct business was generated from our appearance at this trade show. However,
the demonstration of our technology at this show provided us with positive
feedback from
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industry representatives regarding TrueCircuit's ability to solve QoS problems
which currently inhibit the convergence of real-time audio, video and telephony
and non-real-time data over IP networks.
SERVICES
THE PATH 1 SOLUTION: TRUECIRCUIT-TM-
As networks integrate and become faster, we expect there will be an
increased demand for real-time services (e.g., telephone and video conferencing)
driven by new applications and ever-increasing expectations on the part of
business and consumers. Real-time services require predictability and minimal
delays from end-to-end. Our technology satisfies these requirements and because
it has been designed to industry standards and protocols, is compatible with
today's IP networks.
TrueCircuit, our core technology, is a software and hardware-based
solution for managing network traffic that is, at its essence, a method (or
algorithm) for the transmission of data on a real-time basis over IP
networks. TrueCircuit addresses the fundamental issue of network traffic
management by creating a separate dedicated channel for each real-time stream
- - -- isolating each stream from other real-time streams and the non-real-time
data traffic. These dedicated, end-to end channels, technically termed
"isochronous" channels, provide a means of carrying real-time data and
ensuring the fast, regular and timely delivery of packets end-to-end across
the network. In addition, TrueCircuit has a dynamic allocation system which
sets up channels for the bandwidth required for a specific stream of data and
then "vaporizes" the channel when it is no longer needed. This allocation
scheme maximizes the productivity of a network, providing bandwidth only as
required, as compared with systems that allocate fixed bandwidth, which
cannot adapt to continuously changing requirements.
TrueCircuit works with the existing wiring of a standard Internet
Protocol (IP) network. This compatability would benefit potential customers
such as, for example, Internet Service Providers (ISPs), who by using
TrueCircuit-based products will have the ability to provide their customers
with "circuit-switched" QoS for the transmission of real-time signals within
an IP network. Without such traffic management, there would be visible delays
and degradation of sound and images transmitted over a network.
TrueCircuit can be implemented cost effectively because it is
compatible with already-installed legacy equipment. As such, the end user
does not have to incur the cost of installing an entirely new network. The
advantages of TrueCircuit are most dramatic within IP networks that are
shared across a corporation, such as Ethernet LANs, where it can almost
entirely eliminate collisions for real-time traffic, thereby unlocking the
full potential of the existing IP/Ethernet computer network infrastructures.
Ethernet (the name commonly used for IEEE 802.3 CSMA/CD) is the
dominant cabling and low-level data delivery technology used in LANs and is
also used for MANs and WANs. First developed in the 1970s, it was published
as an open standard by DEC, Intel, and Xerox (or DIX) and later described as
a formal standard by the IEEE. TrueCircuit`s ability to provide
"circuit-switched" QoS for real-time multimedia over this most prevalent
cabling in the industry provides considerable market growth opportunity for
Path 1.
Furthermore, our management is currently unaware of any other
technology that can deliver the "circuit-switched" QoS directly over IP
networks that is made possible by our patent pending technology. As a result,
we are well positioned to capitalize on emerging telecommunications
technology that are rapidly moving toward convergence of real-time multimedia
over IP, as the network of choice.
Some of our intended products based on our TrueCircuit technology
could also offer significant advantages for ISPs by making new billing
approaches possible, such as call-based and/or class-based billing, rather
than just packet-based or flat-rate billing systems that are currently in
use. The fast, automatic set-up and tear-down of dedicated end-to-end
communication channels allows ISPs to adopt a telephone company
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billing model based on actual usage, if desired. Furthermore, some of our
intended products based on our TrueCircuit technology could be able to
provide an immediate measurement of the true cost of an end-to-end channel as
the sum of the per-link utilization of a route. This metering capability of
TrueCircuit not only provides a mechanism for ISPs to offer new
toll services, but also provides the practical basis for economic rationing
of toll services.
PRODUCTS
In developing our intended products, we have focused our
resources on the most formidable QoS challenge: delivery of low-latency,
high-quality video over Ethernet/IP networks, with a special emphasis on
Gigabit Ethernet/IP networks, using Internet-compatible QoS protocols (these
protocols are in essence a message format for asking equipment on a network
to provide QoS at the level specified in the message). 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,
and firmware application-programmer-interfaces (APIs).
To help in the initial marketing of TrueCircuit-based products, we have
also developed the TrueCircuit Multimedia Gateway to showcase the ease of
implementation and other advantages of our technology.
The following presents a number of Path 1 TrueCircuit-based
products planned for development and introduction to the market during the
second half of 2000 and the first half of 2001.
TMG -TRUECIRCUIT MULTIMEDIA GATEWAY
We propose to further develop our current TrueCircuit Multimedia
Gateway (TMG) prototype and release this proof-of-concept design as TMGII, in
order to address the large target market for telephony, multimedia and data
transmission over the Internet. This product is aimed at the high-end
consumer or small to medium-size business that can benefit from the
convergence of low cost Internet telephone, videoconferencing and high-speed
data services. This product also will be redesigned to be affordable to the
target market. It is expected that this product can be sold in volume through
Computer Superstores and retailers.
PS1/PS100 - TRUECIRCUIT NETWORK SWITCHES
These network switches would be components of a LAN and would
provide the capability to operate computers, telephones, video and audio
equipment on high-speed and very-high-speed LANs, enabling multiple users to
operate in a shared network with access to common data bases and services.
The target market for the PS100 (100 megabit) switch would be small to
medium-size business and high-end consumers with a limited amount of users on
the network. The PS1(Gigabit) switch would be intended for the professional
environment such as large offices, television stations, post-production
companies and advertising agencies. It is expected that this product will be
sold through system integrators or direct to large end-users.
PG1 - TRUECIRCUIT GIGABIT ETHERNET PROFESSIONAL VIDEO INTERFACE
PG1 is being designed for business networks and would provide an
efficient method of connecting different services such as video, audio,
telephony and data onto a single high speed Gigabit LAN. The product would be
aimed at professional, multi-user LANs that require fast access to common
real-time databases required by television networks for newsgathering,
commercial / feature editing, program contribution and distribution, distance
education and other professional network applications. PG1 would also allow
simultaneous access to related computer data and telephony or videoconferencing
between users on the network. PG1 would be a high-value, high-margin product
designed to be affordable in a less price sensitive market segment. PG1 would be
a complementary product to PS1. Both products would be used in professional
multimedia networks.
DOTCAM -TM- DIGITAL TV CAMERA WITH TRUECIRCUIT
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Development of this product is the result of cooperation with a
leading industrial television camera manufacturer, who recognized the need to
provide efficient direct access from its cameras to Ethernet LANs.
The addition of TrueCircuit technology to an industrial TV camera
would enable video, audio and control data to be accommodated on a single
circuit, which would lower the cost, improve performance and simplify the
operation of industrial applications such as surveillance at airports,
prisons and processing plants. There is also an identified need for dotCAM in
distance education.
We anticipate that we would derive revenue from the TrueCircuit
card or module fitted inside of each dotCAM camera. We also plan to develop a
"spin-off" interface product that can be sold into a wider market, providing
the capability to connect any type of video camera to an Ethernet network.
dotCAM is expected to be marketed via original equipment manufacturers
(OEMs) and system integrators.
PMM1 PATH1 NETWORK MANAGER
The Path1 Network Manager would be an Internet web-compatible software
package that would enable users of TrueCircuit products such as the PG1
Multimedia Gateway and PS1 Gigabit Ethernet Switch to configure, operate and
monitor the equipment performance.
PMM1 would provide a graphical user interface (GUI) with computer
generated screens that provide clear instructions on how to configure, control
and monitor each TrueCircuit component in the network.
The PMM1 Network Manager would be licensed to customers on a
site-by-site basis, with software support and upgrade options providing added
revenue. The Network Manager would be supplied direct to large professional
users, or through system integrators and OEMs.
MARKET
Although the market for the intended TrueCircuit-based products and
technology is global, we will initially center our marketing efforts on the
rapid move toward IP networking in the US. Should we be successful in
marketing and selling our product in the US, we anticipate that we will
expand such marketing and sales efforts to include Europe, where there is the
same need for technology that facilitates convergence of disparate digital
information (e.g. full-motion video, audio and telephony).
In the United States, the market for network infrastructure equipment
is dominated by a few large competitors, including companies such as Cisco
Systems, Lucent Technologies, Nortel Networks, and 3Com Corporation, which are
the main players in the US market. 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. Therefore, they are
potentially powerful competitors to Path 1 as well as potential significant
customers.
Our TrueCircuit technology can be provided as licensed intellectual
property, as a chip-set and reference design for integration, or as a
component of an overall system, or can be embedded in our own intended
TrueCircuit hardware products.
LOCAL AREA NETWORK (LAN) APPLICATIONS AND GATEWAYS
LANs, which share data across an organization, are the largest initial
market we expect to target with our technology. TrueCircuit can benefit LANs by
managing the flow of integrated real-time and data services (e.g., video, audio,
telephony and Internet access). We then plan to migrate our technology to
MANs and WANs.
ISPs can particularly benefit from our technology as applied to
the LAN market. In addition to the "circuit-switched" QoS provided for
real-time data, TrueCircuit provides ISPs with a metering capability, as
described in the Services section.
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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, if built around TrueCircuit, would for the first time have the
ability to tie together all major communications services - video, telephone,
and Internet access - through the existing building phone or cable wiring.
TrueCircuit technology has the ability to manage all such
services within a standard LAN with no degradation in signal quality because
of its ability to transport each real-time transmission over its own
dedicated channel from end-to-end, thereby almost entirely eliminating the
collisions inherent in a standard network, where real-time and non-real-time
data compete for transmission over the same network.
METROPOLITAN AREA NETWORK (MAN) APPLICATIONS
Beyond the corporate LAN, there is a demand for video conferencing
among corporate plants and within a metropolitan area.
The key to effectively exploiting this market is to have very low
latency and jitter to enable real-time personal interaction. Video conferencing
in the past has not been particularly successful because delay and degradation
of speech and video images are not conducive to effective interpersonal
communication.
We would intend to seek to enter into strategic alliances with ISPs
through which we would deploy TrueCircuit technology within metropolitan areas
to distribute private video and/or audio programming, and implement video
conferencing and private telephone networks. Under such alliances, the ISPs
would condition their networks with TrueCircuit technology to enhance the
quality of real-time data that they provide to their customers. As of the time
of this filing, we have not yet entered into negotiation for any specific
strategic alliances.
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. Such bridges would convert TrueCircuit IP to and from such
interfaces as ATM/SONET, T1/E1, xDSL, cable modem, etc.
According to the Federal Communications Commission, the opportunity
exists in the US alone for some 12,000 radio stations, 1,600 television
stations and 10,000 cable Master System Operators (MSOs) to stream their
programming to national and international consumers via the Internet.
According to the FCC, this movement towards utilization of the Internet in
this manner has already started with some radio stations providing their
studio output directly to the Internet. Quality at the present time is
relatively poor compared with over-the-air FM and AM broadcasts. Path 1
technology has the potential to eliminate this QoS problem by installing
TrueCircuit technology at the program source and also at the ISP location
where the program is spooled out to subscribers. The final link could be
established by making TrueCircuit available to consumers as a computer card,
or set-top box module. Internet broadcasting QoS can then equate to direct
over-the-air radio broadcasts. This can also apply to streaming of TV
programs from networks, cable MSOs and program content providers using the
same TrueCircuit technology.
We would intend to seek to license TrueCircuit technology to others
to create the appropriate bridge devices for network interfaces. We have not
yet initiated negotiations with specific companies to license TrueCircuit. If
we do not, or are unable to, work with others to create the appropriate
bridge devices, we may still use a combination of intended Path 1 products
(e.g. the PS100) in combination with off-the-shelf third party hardware to
provide the same functionality.
VIDEO/AUDIO NETWORK (VAN) APPLICATIONS
Video signals are most sensitive to jitter and latency. Even 200
nanoseconds of packet delivery deviation can severely degrade a live video
feed. The market consisting of broadcasters, audio and video production and
post-production studios is substantial. These fields are quickly moving from
analog film and tape to digital media, and we expect they will generate a
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demand for solutions such as those offered by TrueCircuit technology to
transport their video and audio feeds and distribute them to their computer
editing workstations.
HOME NETWORKING
Home Phone Network Alliance (HomePNA), the current standard for
computer networking of multiple PCs, multiple TVs, telephones, security
system, etc., over standard home phone wiring does not adequately address the
QoS issue. The existing HomePNA standard uses a shared network approach
wherein collisions are common. Furthermore, the effects of collisions within
HomePNA are much more severe than within Ethernet because the quality of
wiring and less stringent installation standards in the home make it more
difficult to attain higher bandwidths. 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 now in the early stages of exploring potential commercial
arrangements with semiconductor manufacturers that sell chips for HomePNA.
Such an arrangement would provide for embedding the TrueCircuit technology
during the manufacturing of these chips. The sale by these semiconductor
maufacturers of products that incorporate our TrueCircuit technology would
be considered a natural extension of these companies' existing product
offerings in the Home PNA market.
STRATEGY
There are five components to our strategic framework:
1. INITIALLY TARGET HIGH-MARGIN MARKETS OF "EARLY ADOPTERS." Some
market niches have a history of early adoption because of
extreme competition. Our initial product directions are being
targeted to markets that have an immediate need for
"circuit-switched" 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
that make it plausible 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.
Not receiving this R&D funding increases our reliance on our
operational funds to support the R&D necessary to remain at
the forefront of communications technology.
3. ESTABLISH STRATEGIC MARKETING RELATIONSHIPS-- The development
of strategic marketing relationships will largely be centered
upon Original Equipment Manufacturers (OEMs), system
integrators and network operators who are, like us, focused on
the convergence of digital media. Strategic marketing
relationships provide immediate access to early adopters and
increase the number and type of channels to market. Direct
sales of the company's products will be created through
recruitment of qualified sales staff, operating from
strategically important locations,
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augmented by headquarters support staff with the Internet as a
sales and technical support resource.
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. If we did
not design to industry standards, we would not have the
compatibility with existing systems and equipment to have
acceptance in the marketplace. For this reason, all of our
development strictly conforms to current industry standards
and protocols.
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 to their names. We believe this expertise
gives us the capability to design products to quickly enter
the high-end video and audio markets with TrueCircuit
networking technology.
COMPETITION
We have developed a corporate strategy of seeking to enter markets
where our intellectual property gives us a competitive advantage. 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 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
"circuit-switched" 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 protocol that gives
priority-based preference to packets of data. The problem with queues is that
they introduce unpredictable delay. For telephone signals, this translates to
latency and jitter. For smaller numbers of simultaneous phone calls, such
latency and jitter may not be noticeable. However, 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 do this today 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.
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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 intended video networking products would create a more
cost-efficient and practical solution by eliminating the large bundles of
coaxial cables and multiple switch boxes. Our solution would be less
expensive because it would replace a costly and inflexible infrastructure
with a few strands of fiber optic links connected to a centralized Path 1
video switch. It would also concurrently upgrade a facility for digital
television, thereby eliminating the need to purchase a separate costly
upgrade. In addition, the U.S. Government has mandated a phase-in period for
digital television. 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.
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 "circuit-switched" QoS.
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 "circuit-switched" QoS.
The market with the closest apparent competition arises in
metropolitan-area multimedia 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 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, unlike Peak Audio, our technology is not
confined to audio transmission. Rather, TrueCircuit is designed to handle all
forms of time sensitive data, such as video and sensor data.
Competition, of course, is not based solely on technological
superiority. Customers may choose a technologically inferior product if the
product's provider can give better pricing, availability, manufacturing,
quality, service or reliability of continued supply. Our philosophy will be
to build positive customer relationships in which we are a truly valued-added
partner and problem solver for our customers. Our operations will be oriented
toward meeting the needs of our customers cost-effectively and in a timely
manner. We realize that customers have other choices and we will work with
customers to assist them in becoming more competitive in order to minimize
the risk that they will chose another technology supplier.
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
ISPs in which our technology will be incorporated into their systems. Depending
on the specific requirements of our customers, these distribution plans could
call for us to provide hardware embedding our technology or a chip-set with
reference design, or licensing of our technology as intellectual property. 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 ISP partner.
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PROFESSIONAL VIDEO MARKET
A majority of sales of our intended PS1/PS100 Real-Time Ethernet
Switches, PG1 Broadcast Video Ethernet Interface and dotCAM LAN Digital Video
Camera and Interface products are expected to be to professional video
studios. We have identified experienced distributors and manufacturers of
professional video products and have commenced discussions to determine
market size and set up distribution channels.
LICENSING AND SOFTWARE SALES
We plan to seek 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. 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.
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 product would
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. We would not
expect to receive any portion of such premiums, but the existence of such
premiums suggests the existence of a market for our intended products. With
TrueCircuit, apartment dwellers and hotel guests could access potentially
thousands of video channels as well as high-fidelity audio channels. They
could also have effective security systems and automated control systems. To
reach this market, we currently plan to use systems integrators that
specialize in this market segment. We have initiated talks with one such
systems integrator, CAIS Internet. Negotiations with CAIS Internet are at a
very early stage.
PRODUCT DEVELOPMENT MANAGEMENT
Central to each intended Path 1 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 are to 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
Instead of developing our own manufacturing capabilities, we plan to
utilize the services of ISO 9000 certified component distributors and an ISO
9000 certified contract manufacturer. Path 1 has commenced preliminary
discussions with AVNET for manufacturing of prospective TrueCircuit hardware
products.
We would proposed to 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 expend significant effort in developing our intended products,
designing enhancements to core technologies and addressing additional technical
challenges inherent in developing new product applications. We
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expect that we will continue to commit substantial resources to product research
and development in the future. Over the next six months, we anticipate that we
will spend approximately $500,000 for research and $1,000,000 for development of
our intended products.
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. Under this agreement,
Dr. Design will perform architecture studies of our existing technology and
will recommend additional enhancements, requirements and features to these
intended products. 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 revenue is due to the fact that we are still developing some of our
enabling technology and have only recently commenced production of prototypes
and evaluation units of some of our intended products.
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 product and 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 Path1
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, or to
litigate the issues in court. 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, stop marketing one or more of our products or lose
the ability to prevent others from using our technology in their own
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.
We cannot guarantee that any patents will be granted to us or that any
patents that are granted to us will be sufficiently broad to protect our
interests.
TRADE SECRETS
In addition to the protection afforded by patent law, implementations
of TrueCircuit technology contain trade secrets which we keep confidential.
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
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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 and other persons.
TRADEMARKS
We have trademarked the name TrueCircuit for our core technology to
describe its fundamental functionality. TrueCircuit technology establishes
the equivalent of "true" hardwired "circuits" over the traditionally
packet-switched Internet Protocol. We expect also to trademark the names we
give to products which we develop and market.
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 and
consultants, the agreements also provide that all inventions and works of
authorship conceived by the employees in the course of their employment or
consultancy will be our exclusive property.
EMPLOYEES
As of January 24, 2000, we employed eight people full-time and one
person part-time. It is anticipated that additional employees will be hired
as needed to, among other things, strengthen management and help in the
commercial launch of our products.
We believe 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. Information on our web site is not a part
of this registration statement, and you should bear that in mind if you read
the information on this site.
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
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information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0300. Copies of this material also are 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. IF ANY OF THE FOLLOWING RISKS
ACTUALLY MATERIALIZE, 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.
MANY PARTS OF THIS REGISTRATION STATEMENT ALSO INCLUDE FORWARD-LOOKING
STATEMENTS AND OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE DISCUSSED
IN THESE FORWARD-LOOKING STATEMENTS. THIS DIFFERENCE COULD RESULT FROM THE RISK
FACTORS DESCRIBED HEREIN OR FROM OTHER UNANTICIPATED FACTORS.
IT IS DIFFICULT TO EVALUATE OUR BUSINESS BECAUSE WE HAVE NOT YET LAUNCHED ANY
PRODUCTS COMMERCIALLY.
We have 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,
those associated with 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
proposed products and achieving profitable operations.
WE NEED MORE WORKING CAPITAL TO EXPAND OUR BUSINESS, AND OUR PROSPECTS FOR
OBTAINING ADDITIONAL FINANCING ARE UNCERTAIN.
As we are a new business with no sales or revenues to date, we
anticipate that we will require 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 current stockholders. We cannot
guarantee that additional financing will be available in the future 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, fund our
expansion, take advantage of potential opportunities, develop or enhance
products, or otherwise respond to competitive pressures would be significantly
limited. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Liquidity and Capital Resources" for a discussion of
working capital.
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.
On September 20, 1999, we filed a complaint in the San Diego County
(Calif.) Superior Court 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 Class A Common Stock. We are seeking damages and/or
cancellation of outstanding shares.
Some of the defendants have, in response, sued us for
indemnification and advancement of defense expenses in regard to this
complaint. In addition, Franklin Felber has sued us and three of our
directors for alleged wrongdoing in connection with an option to purchase
255,640 shares of our Class A Common Stock which he
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granted to Jyra Research, Inc. in January 1999. Felber's action, filed November
29, 1999, seeks unspecified compensatory and punitive damages.
Our complaint, the defendants' action requesting indemnification and
advancement of expenses and Felber's cross-complaint are all at early stages in
the litigation process. Effective February 3, 2000, we entered into a 45-day
standstill agreement, or truce, with Michael Berns, Rona Berns, James Berns and
Berns & Berns.
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. The four named defendants
beneficially own 31.4% of our issued and outstanding Class A Common Stock,
while the individuals and the Company named as cross-defendants in Felber's
cross-complaint beneficially own 27.1% of our issued and outstanding Class A
Common Stock plus options to purchase an additional 552,000 shares of Class A
Common Stock. This concentration of ownership of our Class A Common Stock on
both sides of the litigation could adversely affect our ability to achieve
stockholder approval of significant corporate transactions, appointment of
directors and other such matters, and 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.
There has been a trend toward litigation regarding patent and other
intellectual property rights in the telecommunications 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 our strategy is to seek to enter 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
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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 force us to reduce prices, could lower our projected margins and could
hinder our ability to gain or hold 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 or no 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 hire 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 KEY EMPLOYEES.
Our future success will depend, in part, on our ability to attract and
retain highly skilled employees, particularly management (including senior
management), technical and sales personnel. We believe our current roster of
senior management is incomplete and that if we are to succeed we must identify
and hire several additional professional senior managers. Competition for
employees in our industry and in our geographic region is intense due to the
scarcity of available people with the necessary professional technical skills.
We may be unable to identify and attract highly qualified employees in the
future. In addition, we may not be able to successfully assimilate these
employees or hire qualified key management personnel to replace them.
WE ARE DEPENDENT ON OUR KEY EMPLOYEES FOR OUR FUTURE SUCCESS, AND NONE OF THESE
KEY EMPLOYEES IS OBLIGATED TO STAY WITH US.
Our success depends on the efforts and abilities of our senior
management, specifically Ronald Fellman, Douglas Palmer, Yendo Hu, Keith
Dunford and other senior managers yet to be identified and hired, and certain
other key personnel including John Hooker, Grady Taylor and John Beer. We
currently do not have key man life
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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.
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 Class A 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 (see the above risk factor related to 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. It is also
possible that, especially during the time of litigation, disagreements
between subgroups could result in stalemate and an inability to move forward
on favorable opportunities.
UNANTICIPATED DELAYS OR PROBLEMS IN INTRODUCING OUR PROPOSED PRODUCTS OR
IMPROVEMENTS TO OUR PROPOSED PRODUCTS MAY CAUSE CUSTOMER DISSATISFACTION OR
DEPRIVE US OF THE "FIRST-TO-MARKET" ADVANTAGE.
Management has limited or no experience in manufacturing and
shipping 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 the introduction or modification of our
proposed products or the reliability and quality of such products, which
problems delay the introduction of our proposed products or product
improvements by more than a few months, we could experience reduced product
sales and adverse publicity. We believe that whichever company is
first-to-market with viable products in the markets we intend to address will
gain a significant advantage with customers; delays could prevent us from
being the company which gains this advantage.
Our proposed products are complex and are likely to contain a number of
undetected errors and defects, especially when these proposed products are first
released. These errors or defects, if significant, could harm the performance of
these proposed 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 RECEIVED FROM ANY ONGOING OR FUTURE SALE OF
OUR SECURITIES TO USES THAT DECREASE OUR PROFITS OR MARKET VALUE.
We have used, and will continue to use, the net proceeds from sale of
our securities 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 from any sale of our
securities and operating income (if any). The money may be used for corporate
purposes that have the unintended effect of decreasing 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 24, 2000, there were 6,087,651 shares of our Class A
Common Stock outstanding. Prior to this registration of our Class A 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 Class A Common
Stock is registered. We may be unable to attract and maintain good-quality
market makers. In the event a liquid market for our Class A Common Stock does
develop, there can be no assurance that the market will be strong enough to
absorb all of the Class A Common Stock currently owned by our
18
<PAGE>
stockholders. In addition, subsequent issuances of equity or equity-linked
securities may further saturate the market for our Class A Common Stock. The
resale of substantial amounts of our Class A Common Stock will have a depressive
effect on the market.
Principal stockholders with an aggregate of 3,339,360 shares of
common stock were subject to a lock-up agreement which expired on February 1,
2000. Public resales of these shares, beginning three months after the
effective date of this registration statement, could result in an imbalance
of supply and demand in the market for our Class A Common Stock. Franklin
Felber has expressed his intention immediately to commence orderly
incremental sales of his 255,640 shares of Class A Common Stock; he is able
to do so without waiting for the three month period to expire.
THE MARKET PRICE OF OUR CLASS A COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, IN
WHICH CASE STOCKHOLDERS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
Our Class A 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 Class A 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 interest rate increases, recessions or military conflicts, may
materially and adversely affect the market price of our Class A Common Stock.
WE OFFER STOCK OPTIONS 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 Class A Common Stock and Class B Common Stock.
As of December 31, 1999, there were options outstanding to purchase 891,086
shares of our Class A Common Stock, and there were options outstanding under
our 1999 Stock Option/Stock Issuance Plan to purchase 325,556 shares of Class
B Common Stock. We will continue to issue options to purchase sizable numbers
of shares of stock to new and existing employees, directors, advisors,
consultants or other individuals as we deem appropriate and in our best
interests. The grant and subsequent exercise of such options could result in
substantial dilution to all stockholders. As of February 24, 2000, 797,944
shares of Class B Common Stock under our 1999 Stock Option/Stock Issuance
Plan remain authorized but not yet subject to options.
19
<PAGE>
FORWARD-LOOKING STATEMENTS
This registration statement contains forward-looking statements.
These statements relate to future events or our future business 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 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.
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. You should not
place undue reliance on these forward-looking statements. To the extent
permitted by federal law, we disclaim any duty to update any of the
forward-looking statements after the date of this registration statement to
conform such statements to actual results.
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
twelve-month period ended December 31, 1999. The financial statements for the
period from January 30, 1998 (inception) to December 31, 1998, and for the
twelve-month period ended December 31, 1999, have been audited by Ernst &
Young LLP, independent auditors. 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 Twelve Months
(Inception) To Ended
December 31, 1998 December 31, 1999
----------------- -----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Research and development.......................................... $ 661,735 $ 1,347,631
Sales and marketing............................................... 291,698 359,039
General and administrative........................................ 1,717,936 2,293,082
Total operating expenses............................................. $(2,671,369) $ (3,999,752)
Interest income, net................................................. 7,123 19,392
Recognized loss of investment in
Jyra Research, Inc................................................ - (33,720)
Net loss............................................................. $(2,664,246) $ (4,014,080)
Net loss per share (1):
Basic and diluted................................................. $ (0.57) $ (0.71)
Weighted average shares--basic and diluted........................ 4,712,194 5,678,757
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 119,394 $ 453,951
Working capital...................................................... 74,177 257,387
Total assets......................................................... 311,594 712,473
Total stockholders' equity........................................... 256,252 429,977
</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.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
financial statements and the accompanying notes.
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.
We believe that our success depends, in 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 TWELVE MONTHS ENDED DECEMBER 31, 1999)
SALES. We had no revenue from product sales in either 1998 or 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development
expenses were $661,735 for the period from inception through December 31,
1998, compared to $1,347,631 for the twelve months ended December 31, 1999,
as the receipt of additional invested funds over this twelve month period (as
opposed to the nine month period in 1998) enabled us to ramp up our research
and development effort. We incurred $73,351 in compensation expense in 1998
and $311,247 in compensation expense in 1999 related to options given to
consultants for research and development services rendered to us.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses were
$291,698 for the period from inception through December 31, 1998; of this
amount, $196,000 is compensation expense related to shares given to a
certain employee. Our sales and marketing expenses were $359,039 for the
twelve months ended December 31, 1999, as we continued our ongoing efforts to
increase market awareness and acceptance of our technology and our intended
products. The increase in sales and marketing expenses from 1998 to 1999 is
due primarily to the increased costs of conducting sales and marketing
efforts for a full twelve months (as opposed to approximately nine months
during 1998).
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and
administrative expenses were $1,717,936 for the period from inception through
December 31, 1998, of which $1,419,407 was amortization of compensation
expense related to options granted to employees at less than fair market
value, compared to $2,293,082 for the twelve months ended December 31, 1999,
of which $1,299,938 was amortization of compensation expense related to options
granted to employees at less than fair market value. The increase in general
and administrative expenses from 1998 to 1999 is primarily due to (i) higher
personnel costs, as we filled two executive officer positions with new hires,
and increased salaries for our existing executive officers and employees,
(ii) legal costs ($251,667 as of December 31, 1999) associated with the
ongoing litigation, (iii) increased rent payment for our premises, (iv) the
increase in compensation expenses related to employee option grants at below
fair market value and (v) the costs of doing business for a full twelve
months (as opposed to approximately nine months during 1998). 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 Class A Common Stock to accredited investors in Europe and
the United States. In the period from March to May 1998, we conducted a
private offering to accredited individual and institutional investors in the
United States and Europe in which we sold 1,614,833 shares of Class A Common
Stock at a price of $0.60 per share, resulting in net cash proceeds of
$967,840. In the period from February to April 1999, we conducted a private
offering to accredited individual and institutional investors in Europe in
which we sold 419,500 shares of our Class A Common Stock at a price of $4.00
per share, resulting in net cash proceeds
21
<PAGE>
of $1,595,508. In May 1999, we authorized a private offering to accredited
individual and institutional investors of up to 1,250,000 shares of our Class
A Common Stock at a price of $8.00 per share. As of February 21, 2000, we had
sold 601,800 shares of our Class A Common Stock in this $8 offering,
resulting in aggregate cash proceeds (not including offering-related expenses
incurred to date) of $4,814,400. Proceeds totalling $3,800,000 have been
received after December 31, 1999 and of these proceeds received after December
31, 1999, $800,000 is restricted and subject to possible refund.
The ongoing litigation against Michael Berns, James Berns, Rona
Berns, Franklin Felber and Berns & Berns has cost us $251,667 through December
31, 1999. It is possible we will incur substantially more expenses in the
future related to our claims against these individuals and to our defense
against Felber's cross-complaint. Due to the inherently unpredictable nature
of the litigation process, it is difficult to estimate with any confidence
the amount of such future expenses. On February 3, 2000, we began a 45-day
litigation standstill, or truce, with Michael Berns, James Berns, Rona Berns
and Berns & Berns.
As of December 31, 1999 we had $453,951 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 believe
our cash resources at December 31, 1999 plus the net proceeds of over $3.0
million from our sales of Class A Common Stock from January 1, 2000 through
February 21, 2000 will be sufficient to fund capital expenditures, working
capital and cash requirements for the next twelve months. We anticipate that
we will require additional funds to continue our research and development
activities, expand our marketing and sales capabilities, fund our capital
expenditures necessary to accomodate our anticipated customer base and expand
certain financial and administrative functions. If we are unable to obtain
additional financing, we may be required to delay, reduce the scope of or
eliminate research and development of one or more of our intended products
and significantly reduce expenditures on infrastructure.
Our actual revenues and expenses 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.
We have no material commitments for capital expenditures.
YEAR 2000 COMPLIANCE
In 1998 and 1999, the Company established plans to become Year 2000 ready. In
late 1999, the Company completed its remediation and testing of systems. As a
result of those planning and implementation efforts, the Company experienced
no significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company incurred minimal expenses
during 1999 in connection with remediating its systems. The Company is not
aware of any material problems resulting from Year 2000 issues, either with
its products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year 2000
to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
22
<PAGE>
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 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 Class A Common Stock as of January 24, 2000 by:
- each person, or group of affiliated persons, known by us to
own beneficially more than 5% of our outstanding Class A
Common Stock;
- each director;
- our Chief Executive Officer;
- each person who served as our Chief Executive Officer in 1999;
- each executive officer whose 1999 compensation from us was
over $100,000; and
- our directors and our executive officers as a group.
The following table gives effect to the shares of Class A Common Stock
issuable within 60 days of January 24, 2000 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 Class A 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 SEC's Rule
13d-3(d)(1).
<TABLE>
<CAPTION>
Class A Common Stock Beneficially Owned
Name / Address of ----------------------------------------------------------
Beneficial Owners # of Shares of Class A Common Stock % of Class
- - ----------------- ----------------------------------- -----------------
<S> <C> <C>
Rona Berns
231 Barnard Road
Larchmont, NY 10538 1,148,720(1)(2) 18.9%
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
Michael Berns
231 Barnard Road
Larchmont, New York 10538 1,148,720(1)(2) 18.9%
Ronald Fellman
12989 Chaparral Ridge Road
San Diego, CA 92130 1,148,720 18.9%
James Berns
3 Orchard Hill Road
Westport, CT 06880 506,280(2) 8.3%
Douglas Palmer
1229 Trieste Drive
San Diego, CA 92107 502,000(3) 7.9%
Paul Robinson
22 Pond Place
London SW3 6QJ
England 372,018(4) 6.0%
Roderick Adams
211a Stephendale Road
London SW6 2PR
England 372,018(4) 6.0%
Jyra Research, Inc.
111 Marlowes
Hemel Hempstead HP1 1BB
England 467,018(5) 7.4%
All directors and executive officers
as a group (8 persons) 2,624,018 (6) 40.0%
</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". The total number of shares beneficially owned by
the "group" would be 1,655,000.
(3) Includes options to purchase 278,000 shares of Class A Common Stock.
(4) Includes options to purchase 95,000 shares of Class A Common Stock;
also includes 277,018 shares of Class A 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) Includes options to purchase 190,000 shares of Class A Common Stock
beneficially owned by Mr. Robinson and Mr. Adams. We believe Mr.
Robinson, Mr. Adams and Jyra Research, Inc. may be deemed to constitute
a "group".
(6) Includes options to purchase 468,000 shares of Class A Common Stock;
also includes 277,018 shares of Class A 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.
24
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS.
Our directors, executive officers and key employees, and their ages
and positions, are:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
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
Keith Dunford 61 Vice President, Marketing
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>
Messrs. Hooker, Beer and Taylor are not members of our Board of
Directors.
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 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 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. Dr. Hu also served as a member of the technical staff at AT&T Bell
Laboratories from 1987 until 1990. Dr. Hu left AT&T Bell Laboratories in 1990
to attend the University of California at San Diego, where he completed his
Ph.D. in Electrical Engineering in June 1996. 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
25
<PAGE>
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. Dr. Hu holds three patents in the area
of MPEG2 implementation.
Keith Dunford, Vice President of Marketing, joined Path 1 in January
2000. Prior to joining us, Mr. Dunford served as Managing Partner of Exam
Associates, a business development consultant group, from 1987 to 1995, and
then again from July 1999 to January 2000. In the interim period from 1995
to July 1999, Mr. Dunford served as Vice President of Sales and Marketing at
Tiernan Communications, Inc. Mr. Dunford has held senior management and
technical positions in the telecommunications, broadcasting and computer
industries for over four decades. Mr. Dunford received his B.S. in Electrical
Engineering from Manchester University (UK) and a master's degree in Business
Economics from the London School of Economics.
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 to these
companies 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 from November 1998 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 sales support awards and
honors such as the "Top Performer" and "Circle of Excellence" (twice) from
Digital Equipment Corporation. He has 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 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 Path 1, 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
26
<PAGE>
and laser interferometry. He has expertise in embedded microprocessors and
operating systems utilized in the demanding environments. Mr. Taylor received
his B.S. in Mathematics with an emphasis in Computer Science from San Diego
State University.
BOARD OF DIRECTORS
The Board of Directors may consist of at least one and not more than
seven directors. Our Board of Directors is currently comprised of five (5)
members. Directors are elected to serve until the next annual meeting of
stockholders.
BOARD COMMITTEES
In November, 1998, the Board of Directors authorized the formation
of an Executive Committee which currently consists of Ronald Fellman, Douglas
Palmer and James Berns. The Executive Committee oversees the routine matters
of Path 1, including the hiring and firing of employees and the retention of
consultants (to the extent these matters are not delegated to our senior
executive officers). The Executive Committee is also responsible for the
creation and administration of all stock option plans and grants thereunder
for the Company. The Executive Committee does not have the power to bind us
on other matters not in the ordinary course of business.
EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation earned by, or
which we paid to, the following persons (the "Named Executive Officers") with
respect to 1998 and 1999 for all services rendered to us in all capacities:
- each person who served as our Chief Executive Officer in 1999;
and
- each of our other executive officers whose total salary and
bonus in 1999 exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- -------------------------------
SALARY BONUS SECURITIES UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#)
- - ----------------------------- ------ -------- ------- -------------------------------
<S> <C> <C> <C> <C>
Ronald D. Fellman, 1999 175,833 -- --
Chief Executive Officer 1998 105,416 -- --
Michael Berns, 1999 60,000 -- --
Chief Executive Officer 1998 105,000 -- --
Douglas A. Palmer, 1999 137,083 -- --
Chief Technology Officer 1998 72,019 -- 362,000
</TABLE>
Based on Michael Berns' assertion to us that he was not a partner in
the Berns & Berns law firm, to which we paid $42,339 with respect to 1998 and
approximately $29,000 with respect to 1999 for legal services, we have not
included any of such amounts for him in this table.
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. The
Executive Committee's decision on Michael Berns' compensation level was based
on his promises of individual performance which, we believe, he did not
fulfill.
OPTION GRANTS IN LAST YEAR
No options to acquire shares of our Class A and Class B Common Stock
were granted during the year ended December 31, 1999 to the Named Executive
Officers.
27
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the number and
value of unexercised options held by each of the Named Executive Officers at
December 31, 1999.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
ACQUIRED ON VALUE ---------------------------- -----------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - --------------------- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald Fellman -- -- -- -- -- --
Michael Berns -- -- -- -- -- --
Douglas Palmer -- -- 278,000 84,000 $2,682,700 $810,600
</TABLE>
(1) The last reported bid price of our Class A Common Stock as of December 31,
1999 was $10.25 per share.
EXECUTIVE COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Two of the three members of the Executive Committee, Ronald Fellman
and Douglas Palmer, are presently executive officers of Path 1 and were
officers of Path 1 during the year ended December 31, 1999.
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 at $2.00 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. 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 Class A
Common Stock totaling 56,000 shares, par value $0.001 per share, plus options to
purchase an additional 112,000 shares of Class A Common Stock at an exercise
price of $0.60 per share. These options to purchase the 112,000 shares of Class
A Common Stock are scheduled to vest over a four-year period starting June 29,
1998 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.
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. In March 1998, in connection with their appointments as directors on
our Board, Paul Robinson and Roderick Adams each received fully vested options
to purchase 95,000 shares of our Class A Common Stock.
28
<PAGE>
1999 STOCK OPTION/STOCK ISSUANCE PLAN
Our 1999 Stock Option/Stock Issuance Plan (the "Plan"), our equity
incentive plan, was adopted by the Board of Directors as of August 3, 1999. The
Plan is subject to approval by our stockholders, and until such stockholder
approval is obtained, no option granted under the Plan may be exercised nor
shall any shares be issued under the Plan. The Plan shall be administered by the
Board; however, the Board has delegated Plan administrative functions to the
Executive Committee. The Plan Administrator (either the Board or the Executive
Committee) shall have broad authority to administer the Plan as it deems
appropriate; decisions of the Plan Administrator shall be final and binding.
1,500,000 shares of Class B Common Stock have been reserved for
issuance under the Plan. This share reserve includes 325,556 shares of
Class B Common Stock that were subject to outstanding options as of
December 31, 1999.
The Plan is divided into two separate equity programs:
(i) the discretionary option grant program, under which the
Plan Administrator may grant eligible persons options to purchase shares of
Class B Common Stock; and
(ii) the stock issuance program, under which the Plan
Administrator may issue shares of Class B Common Stock directly to eligible
persons, either through immediate purchase of such shares or as a bonus for
services rendered to us.
Persons eligible to participate in the Plan are as follows:
(i) Employees;
(ii) non-employee members of the Board of Directors; and
(iii) consultants and other independent advisors who provide
services to the us.
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 individual, the vesting schedule (if any)
applicable to the issued shares and the consideration to be paid by the
individual for such shares.
The exercise price for the options shall be payable in cash or check to
Path1. Should the Class B 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 (i) in some circumstances in shares of Class B Common Stock valued at
fair market value on the date of exercise, or (ii) a same-day sale program
without any cash outlay by the option holder.
The Plan does not provide for automatic acceleration of unvested shares
in the event of (i) a merger or consolidation in which we are not the surviving
entity, or (ii) a sale, transfer or other disposition of all or substantially
all of our assets (each of which shall constitute 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.
29
<PAGE>
The Plan shall terminate upon the EARLIEST of (i) the expiration of the
ten (10)-year 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.
CERTAIN RELATIONSHIPS AND RELATED 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 Path1 and for
Path1 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 Class A Common Stock) for 16,000 restricted common shares of Jyra. There were
no other material terms to this agreement, although our Certificate of
Incorporation provided for the Series A Preferred to elect two directors to our
Board of Directors. These seats were occupied by Paul Robinson and Roderick
Adams. Mr. Robinson, also serves as a director and Chief Executive Officer of
Jyra, while Mr. Adams 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 Class A Common Stock at an
exercise price of $0.60 per share as consideration for their service as
directors on our Board.
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 Class A 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 Douglas Palmer and John Hooker upon
commencement of their employment with us, leaving Rona Berns with 1,148,720
shares of Path 1 Class A Common Stock. Also, in March 1998, Michael Berns'
brother, James Berns, was issued 554,400 shares of the Company's Class A 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 Douglas 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 Class A 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. See "Legal Proceedings" below. Berns &
Berns charged us $42,339 in legal fees for 1998 and approximately $29,000 in
legal fees for 1999.
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 Class A 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 founders' stock of Path 1. We are seeking damages and/or
the return of stock.
On November 29, 1999, Felber filed a cross-complaint against us, Ronald
Fellman, Douglas 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 grant in January 1999 by Felber and the
exercise in July 1999 by assignees of Jyra of a private option to purchase from
Felber, for $4.00 per share, 255,640 shares of Path 1 Class A Common Stock. This
private, irrevocable option was granted by Felber to Jyra pursuant to an option
agreement
30
<PAGE>
executed in January 1999 in connection with a lock-up agreement signed by our
major stockholders. This option granted Jyra the right to purchase 30,000 shares
of Class A Common Stock from Felber at any point during February 1999, and upon
purchase of these 30,000 shares of Class A Common Stock, Jyra was automatically
granted the right to purchase the additional 225,640 shares of Class A Common
Stock subject to the option. The cross-complaint seeks an unspecified amount of
compensatory and punitive damages.
The present and former officers and directors of Path 1 under this
complaint and cross-complaint are seeking 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.
On February 3, 2000, we entered into a 45-day litigation standstill
agreement, or truce, with all of the defendants except Franklin Felber.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our Class A 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 Class A 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
Class A 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 14.500 9.0000 6.0000 2.6250
</TABLE>
As of January 24, 2000, there were approximately 107 shareholders of
record of our 6,087,651 issued and outstanding shares of Class A Common
Stock, and there were no outstanding shares of Class B Common Stock. There
were also options outstanding as of December 31, 1999 to purchase 891,086
shares of Class A Common Stock and 325,556 shares of Class B Common Stock. On
February 17, 2000, the last reported bid price of Path1's Class A Common
Stock on the OTC Bulletin Board was $14.1875 per share.
We currently have outstanding 5,541,351 shares of Class A Common Stock
that were sold pursuant to Securities Act Rule 504 and, under the terms of Rule
504 as then in effect, did not thereby become "restricted securities". They can
be resold in the public market without registration; however, 3,304,738 of such
shares are held by persons who currently are affiliates of Path 1, so such
shares cannot be resold now without compliance with Rule 144's volume limitation
and current public information requirements. The remaining shares of Class A
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; and because no exemption from registration
would be available for them other than Rule 144, they currently cannot be sold
unless they are registered. Of these shares, 419,500 will become available for
public resale under Rule 144 three months after the effective date of this Form
10, and the remainder will become eligible at various points beginning June 2000
one year after they were purchased.
We have not paid any cash dividends on our Class A 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.
31
<PAGE>
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 Class
A 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 shares of Class A Common Stock at $0.60 per share
to accredited institutional and individual investors in the United States and
Europe. The offering was closed in May 1998. In connection with the offering, we
issued 49,500 shares of Class A Common Stock to LTR Consultancy as payment for
finders fees and incurred other offering-related expenses of $18,726. These
shares of Class A Common Stock were sold pursuant to Rule 504, promulgated under
the Securities Act. We relied on the fact that under $1,000,000 was raised in
the offering to make this exemption available.
In February 1999, the Board of Directors authorized a private placement
under which we sold 419,500 shares of Class A Common Stock at $4 per share to
accredited institutional and individual investors in Europe. This offering was
closed in April 1999. In connection with this offering, we paid commissions to
LTR Consultancy consisting of (i) cash payments equal to 5% of the subscription
funds received and (ii) options to purchase 20,975 shares of our Class A Common
Stock. The Class A Common Stock was sold pursuant to Rule 505, promulgated under
the Securities Act. We relied on the fact that under $5,000,000 was raised in
the offering and the number and nature of the purchasers, together with
compliance with the other requirements of the Rule, to make the exemption
available.
In May 1999, the Board of Directors authorized a private placement
of up to 1,250,000 shares of our Class A 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 December 31, 1999, we have sold 126,800 shares of Class A
Common Stock to accredited institutional and individual investors, primarily
in Europe. Since December 31, 1999, we have sold an additional 475,000 shares
of Class A Common Stock under this offering, and sales continue. In connection
with this offering, we agreed to pay LTR Consultancy a cash commission equal
to five (5%) of the subscription funds received from the sale of the Class A
Common Stock to investors located by that firm, plus options to purchase 625
shares of Class A Common Stock (at an exercise price of $8 per share) for
each $100,000 of such subscription funds received. The Class A Common Stock
is being sold pursuant to Rule 506, promulgated under the Securities Act. We
relied upon the number and nature of the purchasers, together with compliance
with the other requirements of the Rule, to make the exemption available.
DESCRIPTION OF SECURITIES.
GENERAL
We are authorized to issue 30,000,000 shares of common stock, $0.001
par value per share, divided into two series designated "Class A Common Stock"
(20,000,000 shares) and "Class B Common Stock" (10,000,000 shares), and ten (10)
shares of preferred stock, designated "Series A Preferred Stock", $0.001 par
value per share. The following describes the Company's capital stock but does
not purport to be complete and is subject to and qualified in its entirety by
our certificate of incorporation and our bylaws, and by the provisions of
applicable Delaware law.
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
Our initial Certificate of Incorporation, filed January 30, 1998,
authorized 1,000 shares of an undivided class of common stock, par value $0.001,
all of which were issued to our founders. In March 1998, we amended the
Certificate of Incorporation to authorize 20,000,000 shares of an undivided
class of common stock, par value $0.001 per share. Simultaneously, we authorized
a 3,600-to-1 forward split of all of the outstanding shares of common stock as
of that date, thus increasing the number of shares of our outstanding common
stock from 1,000 shares to 3,600,000 shares of common stock.
32
<PAGE>
In April 1999, we amended the certificate of incorporation further to
authorize thirty million (30,000,000) shares of common stock, divided into two
series: Class A Common Stock and Class B Common Stock. The Class A Common Stock
maintained the same rights, preferences and privileges as the original common
stock; the amended Certificate of Incorporation simply renamed that original
security. The Class B Common Stock, a junior common stock, was designed to be
used principally in connection with recruitment of new employees and as a method
of providing incentives to existing employees.
SERIES A PREFERRED STOCK
All ten (10) authorized shares of Series A Preferred Stock were issued
to Jyra Research, Inc. and were, in accordance with their terms, voluntarily
converted into a total of 277,018 shares of Class A Common Stock in December
1999. The shares of Series A Preferred Stock cannot be reissued. We intend to
seek stockholder approval for an amendment to the Certificate of Incorporation
to eliminate the Series A Preferred Stock authorization.
CLASS A COMMON STOCK
The holders of Class A Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, any dividend payable out of funds
legally available for that purpose. Upon liquidation, dissolution or winding up
of the Company, the holders of Class A Common Stock shall share ratably in the
proceeds in proportion to the total amounts to which the holders of all Class A
Common Stock are entitled upon such liquidation, dissolution or winding up.
The holders of Class A Common Stock will be entitled to one vote for
each share held of record on all matters to be voted on by the stockholders, and
shall be entitled to notice of any stockholders' meeting in accordance with the
Bylaws of the Company. Except when applicable law requires a greater vote,
matters brought before the stockholders at annual or special meetings must be
approved by a majority of the issued and outstanding shares of Class A Common
Stock present in person or by proxy and entitled to vote at such meeting
(provided a quorum is present). The consent of the stockholders of the Company
may be obtained in lieu of a meeting, provided that the holders of a majority of
all of the issued and outstanding shares of Class A Common Stock entitled to
vote on such matters consent in writing to such corporate action being taken.
Special meetings may be called by one-fourth of the shares of Class A Common
Stock of the Company issued and outstanding and entitled to vote at such
meeting. The Class A Common Stock is not redeemable. All outstanding shares of
Class A Common Stock are fully paid and nonassessable.
CLASS B COMMON STOCK
The Class B Common Stock has no voting rights (except as expressly
required by law) and is non-assignable and non-transferable. The Class B Common
Stock is not redeemable and is not entitled to receive dividends. Upon
liquidation, dissolution or winding up of Path 1, the rights of the holders of
the Class B Common Stock to receive any distributions shall be subordinate to
holders of the Class A Common Stock.
In addition, the Class B Common Stock will be automatically converted
into Class A Common Stock on a 1-for-1 basis upon the occurrence of any of the
following events:
1. We are sold (including merger, consolidation or other change of
control) or we sell, lease or license all or substantially all of our assets;
2. We generate revenues from operations equal to $10 million and report
earnings of at least $2 million in any year before interest, taxes,
depreciation, amortization and extraordinary items; or
3. There is a $25 million underwritten offering of our Class A Common
Stock.
33
<PAGE>
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
Class A Common Stock issued and outstanding and entitled to vote at such
meeting. These limitations may defer the calling of a meeting at which a change
of control might be effected.
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.
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 registrar and transfer agent for the Class A Common Stock is
Registrar and Transfer Company.
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
34
<PAGE>
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.
FINANCIAL DATA AND SUPPLEMENTARY DATA.
See attached financial statements beginning on page F-1.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
35
<PAGE>
FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS FILED AS PART OF THE REGISTRATION STATEMENT.
Path 1 Network Technologies Inc.
(a development stage company)
Index to Financial Statements
Period from January 30, 1998 (inception) to December 31, 1998 and
December 31, 1999 and the twelve months ended December 31, 1999
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 December 31, 1999 ........................................F-3
Statements of Operations for the period from January 30, 1998 (inception) to
December 31, 1998 and December 31, 1999 and the twelve months ended December 31, 1999 ...............F-4
Statements of Stockholders' Equity for the period from January 30, 1998
(inception) to December 31, 1998 and the twelve months ended
December 31, 1999 ...................................................................................F-5
Statements of Cash Flows for the period from January 30, 1998 (inception) to
December 31, 1998 and December 31, 1999 and the twelve months ended December 31, 1999................F-7
Notes to Financial Statements........................................................................F-8
</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 sheets of Path 1 Network
Technologies Inc. (a development stage company) as of December 31, 1999 and
1998, and the related statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1999 and for the period from
January 30, 1998 (inception) through December 31, 1998 and December 31, 1999.
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 audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 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, 1999 and 1998, and the
results of its operations and its cash flows for the year ended December 31,
1999 and for the period from January 30, 1998 (inception) through December
31, 1998 and December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
February 10, 2000
except for Note 6, as to
which the date is February 28, 2000
F-2
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $453,951 $119,394
Deposits and prepaid expenses 85,932 10,125
---------- ----------
Total current assets 539,883 129,519
Property and equipment, net
Computer equipment 82,560 65,238
Furniture and office equipment 7,449 7,449
Accumulated depreciation (30,419) (19,012)
---------- ----------
59,590 53,675
Investment in Jyra Research, Inc. 113,000 128,400
---------- ----------
$712,473 $311,594
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $282,496 $55,342
---------- ----------
Total current liabilities 282,496 55,342
Commitments
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value;
shares authorized - 10; none and 10 shares issued and
outstanding at December 31, 1999 and 1998, respectively - -
Common stock, $0.001 par value; issuable in series:
Class A - 20,000,000 shares authorized; 6,087,651
and 5,264,333 shares issued and outstanding at
December 31, 1999 and 1998, respectively 6,088 5,264
Class B - 10,000,000 shares authorized; no shares
issued or outstanding at December 31, 1999 and
1998, respectively - -
Additional paid-in capital 10,263,806 3,799,593
Deferred Compensation (3,161,591) (866,039)
Accumulated other comprehensive loss - (18,320)
Deficit accumulated during the development stage (6,678,326) (2,664,246)
---------- ----------
Total stockholders' equity 429,977 256,252
---------- ----------
$712,473 $311,594
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JANUARY 30,
YEAR ENDED 1998 (INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Operating expenses:
Research and development $1,347,631 $ 661,735 $2,009,366
Sales and marketing 359,039 291,698 650,737
General and administrative 2,293,082 1,717,936 4,011,018
----------- ----------- -----------
Total operating expenses (3,999,752) (2,671,369) (6,671,121)
Interest income, net 19,392 7,123 26,515
Recognized loss on investment in
Jyra Research, Inc. (33,720) - (33,720)
----------- ----------- -----------
Net loss $(4,014,080) $(2,664,246) $(6,678,326)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share (basic and diluted)
$ (0.71) $ (0.57)
----------- -----------
----------- -----------
Weighted average shares used in
computing net loss per share (basic and
diluted) 5,678,757 4,712,194
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Stockholders' Equity
For the period from January 30, 1998 (inception) through December 31, 1999
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK CLASS A 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 - - - - 73,351
Deferred compensation related
to employee stock options - - - - 2,285,446
Amortization of deferred compensation - - - - -
Unrealized loss on investment
in Jyra Research, Inc. - - - - -
Net loss from inception through
December 31, 1998 - - - - -
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL
DEFERRED COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
COMPENSATION LOSS STAGE EQUITY
------------ ------------ ----------- -----------
<S> <C> <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 - - - 73,351
Deferred compensation related
to employee stock options (2,285,446) - - -
Amortization of deferred compensation 1,419,407 - - 1,419,407
Unrealized loss on investment
in Jyra Research, Inc. - (18,320) - (18,320)
Net loss from inception through
December 31, 1998 - - (2,664,246) (2,664,246)
</TABLE>
F-5
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Stockholders' Equity (continued)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE COMMON STOCK
PREFERRED STOCK CLASS A ADDITIONAL
----------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 10 - 5,264,333 5,264 3,799,593
Issuance of common stock at $4.00
per share for cash from February
to April 1999, net of issuance
costs of $82,492 - - 419,500 420 1,595,088
Issuance of common stock at
$8.00 per share for cash from
June to December 1999, net of
issuance costs of $51,609 - - 126,800 127 962,665
Conversion of Series A preferred
stock into common stock in
December 1999 (10) - 277,018 277 (277)
Issuance of stock options to
consultants for services - - - - 311,247
Deferred compensation related
to employee stock options - - - - 3,595,490
Amortization of deferred compensation - - - - -
Reversal of unrealized loss
on investment in Jyra
Research, Inc. - - - - -
Net loss for the year ended
December 31, 1999 - - - - -
------- ------ --------- ------ -----------
Balance at December 31, 1999 - $ - 6,087,651 $6,088 $10,263,806
------- ------ --------- ------ -----------
------- ------ --------- ------ -----------
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING THE TOTAL
DEFERRED COMPREHENSIVE DEVELOPMENT STOCKHOLDERS'
COMPENSATION LOSS STAGE EQUITY
------------ ------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1998 (866,039) (18,320) (2,664,246) 256,252
Issuance of common stock at $4.00
per share for cash from February
to April 1999, net of issuance
costs of $82,492 - - - 1,595,508
Issuance of common stock at
$8.00 per share for cash from
June to December 1999, net of
issuance costs of $51,609 - - - 962,792
Conversion of Series A preferred
stock into common stock in
December 1999 - - - -
Issuance of stock options to
consultants for services - - - 311,247
Deferred compensation related
to employee stock options (3,595,490) - - -
Amortization of deferred compensation 1,299,938 - - 1,299,938
Reversal of unrealized loss
on investment in Jyra
Research, Inc. - 18,320 - 18,320
Net loss for the year ended
December 31, 1999 - - (4,014,080) (4,014,080)
------------ ---------- ----------- -----------
Balance at December 31, 1999 $(3,161,591) - $(6,678,326) $ 429,977
------------ ---------- ----------- -----------
------------ ---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE PERIOD FROM JANUARY 30,
YEAR ENDED 1998 (INCEPTION) THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,014,080) $(2,664,246) $(6,678,326)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 11,407 19,012 30,419
Amortization of deferred compensation 1,299,938 1,419,407 2,719,345
Common stock issued to employees by principal
stockholders - 330,400 330,400
Common stock options issued for services 311,247 73,351 384,598
Recognized loss on investment in Jyra Research,
Inc. 33,720 - 33,720
Changes in operating assets and liabilities:
Deposits and prepaid expenses (75,807) (10,125) (85,932)
Accounts payable and accrued liabilities 227,154 55,342 282,496
------------- ------------ -------------
Net cash flows used for operating activities (2,206,421) (776,859) (2,983,280)
INVESTING ACTIVITIES
Purchases of property and equipment (17,322) (72,687) (90,009)
------------- ------------ -------------
Net cash flows used for investing activities (17,322) (72,687) (90,009)
FINANCING ACTIVITIES
Issuance of common stock for cash, net 2,558,300 968,940 3,527,240
------------- ------------ -------------
Net cash flows provided by financing activities 2,558,300 968,940 3,527,240
------------- ------------ -------------
Net increase in cash and cash equivalents 334,557 119,394 453,951
Cash and cash equivalents at beginning of period 119,394 - -
------------- ------------ -------------
Cash and cash equivalents at end of period $ 453,951 $119,394 $453,951
------------- ------------ -------------
------------- ------------ -------------
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING
ACTIVITIES:
Issuance of Series A convertible preferred stock
in exchange for investment in Jyra Research, Inc. $ - $146,720 $146,720
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements
December 31, 1999
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 conducting product development. Accordingly, at
December 31, 1999 the Company is considered to be in the development stage.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company's assets and the satisfaction of its
liabilities in the normal course of conducting business. In the period from
January 30, 1998 (inception) through December 31, 1999, the Company incurred
losses totaling $6,678,326. The Company's ability to transition from the
development stage and ultimately, to attain profitable operations, is
dependant 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 believes that the funds necessary to
meet its planned capital and operating requirements for the next twelve
months will be raised either from equity or debt financing. However, there
can be no assurances that required equity or debt financing will be available
on terms acceptable to the Company, if at all. Without additional financing,
the Company will be required to delay, reduce the scope of and eliminate one
or more of its research and development projects and significantly reduce
its expenditures on infrastructure.
F-8
<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,
1999, 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.
Deferred compensation is recognized for options granted to employees to the
extent the exercise price is less than the fair value at date of grant.
Deferred compensation is amortized as the underlying options vest.
Compensation charges for options granted to non-employees has been determined
in accordance with SFAS No. 123 and EITF 96-18 as the fair value of the
consideration received or the fair value of equity instruments issued,
whichever is more reliably measured. Charges for options granted to
non-employees are periodically remeasured as the underlying options vest.
The Company has disclosed the pro forma effect of using the fair value based
method to account for its employee stock-based compensation.
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("SAB 98"). SFAS 128
requires the presentation of basic 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 year ended December 31, 1999 and the period January 30,
1998 (inception) to December 31, 1998 totaling 1,216,642 and 1,078,518,
respectively, 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 entered into 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. On December 7, 1999, Jyra Research, Inc.
converted its Series A Preferred stock into 277,018 shares of the Company's
Class A common stock.
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.
At December 31, 1999, the Company determined that the decline in the fair
market value of its investment in Jyra was other than temporary. As a result,
the Company has recognized a loss on this investment of $33,720 during 1999.
3. COMMITMENTS
LEASES
The Company leases its office facility under an operating lease agreement
which expires in May 2002. The lease is payable in monthly installments of
$8,431, subject to annual rate increases. Rent expense totaled $125,751 for
the year ended December 31, 1999, $27,904 for the period from January 30,
1998 (inception) through December 31, 1998 and $153,655 for the period from
inception to December 31, 1999.
F-10
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
3. COMMITMENTS (CONTINUED)
Annual future minimum lease obligations for operating leases as of December
31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Year ending December 31,
2000 $106,024
2001 106,024
2002 44,177
---------
Total $256,225
---------
---------
</TABLE>
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.
On April 13, 1999, the Company amended its Certificate of Incorporation to
authorize 10,000,000 shares of Class B Common Stock with a par value of
$0.001 per share, and classify the Company's existing common stock as Class A
Common Stock.
F-11
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK
On December 7, 1999, Jyra Research, Inc. converted ten shares of the
Company's Series A Preferred stock, that was authorized on March 15, 1998 by
the Company's Board of Directors, into 277,018 shares of the Company's Class
A common stock. The Series A Preferred stock was convertible nine months
after issuance at the option of the holder or the Company.
CLASS B COMMON STOCK
The Class B Common Stock has no voting rights and the holders are not
entitled to receive any dividends. Class B Common Stock will convert into
shares of Class A Common Stock, on a one-for-one basis, upon the occurrence
of certain events.
PRIVATE PLACEMENT OFFERINGS
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 Class A common shares to brokers
as payment for finders fees and incurred other offering related expenses of
$18,726.
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 options for the purchase of 20,975
shares of Class A common stock with an exercise price of $4.00 per share
through May 2009, to brokers as payment for finders fees and incurred other
offering related expenses of $82,492.
In December 1999, the Company completed a Private Placement Offering under
which it sold 126,800 shares of common stock at $8.00 per share to accredited
investors, resulting in net cash proceeds totaling $962,792. In connection
with the offering, the Company will grant options for the purchase of 6,250
shares of Class A common stock with an exercise price of $8.00 per share
through December 2006, to brokers as payment for finders fees and incurred
other offering related expenses of $51,609.
F-12
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
On August 3, 1999, the Company adopted the 1999 Stock Option/Stock Issuance
Plan (the "Plan") which provides for the grant of incentive and nonstatutory
stock options of Class B common stock, to employees, directors or consultants
of the Company. The Plan authorizes the Company to issue up to 1,500,000
shares of Class B common stock. The Plan provides that incentive stock
options will be granted at no less than the fair value of the Company's
common stock as determined by the Board of Directors at the date of the
grant. The options generally vest and become exercisable either immediately
or over one to four years. Generally, any unvested shares underlying
exercised options will be canceled in the event of termination of employment
or engagement.
Options expire no more than ten years after the date of grant, or earlier if
the employment terminates. The following table summarizes stock option
activity; of which only the Class B option activity was under the Plan.
<TABLE>
<CAPTION>
CLASS A CLASS B
STOCK STOCK
OPTION OPTION
SHARES SHARES
-------- ---------
<S> <C> <C>
Balance at January 1, 1998 (inception) - -
Granted 826,500 -
Exercised - -
Cancelled (25,000) -
-------- ---------
Balance at December 31, 1998 801,500 -
Granted 128,475 495,000
Exercised - -
Cancelled (38,889) (169,444)
-------- ---------
Balance at December 31, 1999 891,086 325,556
-------- ---------
-------- ---------
Exercisable at December 31, 1999 631,859 88,040
-------- ---------
-------- ---------
</TABLE>
As of December 31, 1999, 1,174,444 shares are available for future grant
under the Plan.
F-13
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Exercise prices and weighted average remaining contractual life for the
options outstanding as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Remaining Weighted Exercise Price of
Number Contractual Life Average Options Options
Exercise Price Outstanding (in years) Exercise Exercisable Exercisable
Price
- - -------------- ----------- ---------------- --------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
CLASS A
$0.60 834,000 6.07 $0.60 591,457 $0.60
$2.00 11,111 9.28 $2.00 11,111 $2.00
$2.50 25,000 5.69 $2.50 8,316 $2.50
$4.00 20,975 9.33 $4.00 20,975 $4.00
CLASS B
$2.00 255,556 7.58 $2.00 69,445 $2.00
$4.35 70,000 6.76 $4.35 18,595 $4.35
--------- -------- ------- ------- ---------
1,216,642 6.59 $1.33 719,899 $0.97
--------- -------- ------- ------- ---------
--------- -------- ------- ------- ---------
</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 in
accordance with SFAS No. 123. Had compensation expense been determined
consistent with SFAS No. 123, as compared to the intrinsic method in accordance
with APB 25, the Company's net loss would have been changed to the following
pro forma amounts:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net loss, as reported $(4,014,080) $(2,664,246)
Net loss, pro forma (4,147,422) (2,773,926)
Net loss per share, as reported $ (0.71) $ (0.57)
Net loss per share, pro forma $ (0.73) $ (0.59)
</TABLE>
The effects are not likely to be representative of the effects on pro forma
net income or loss in future years.
F-14
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of options granted in 1998 and 1999 is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: expected life of three to four 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
the options granted to employees during 1999 and the period from January 30,
1998 to December 31, 1998 to employees were $10.82 and $3.19, respectively.
For the year ended December 31, 1999 and for the period January 30, 1998 to
December 31, 1998, the Company amortized $311,247 and $73,351, respectively,
to research and development expense related to options granted under
consulting agreements.
For the year ended December 31, 1999 and for the period January 30, 1998 to
December 31, 1998, the Company amortized $1,299,938 and $1,419,407,
respectively, to general and adminstrative expense related to options granted
to employees below fair market value.
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 $1,570,000 has been recognized at December 31, 1999
to offset the deferred tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,369,000 $ 413,000
Research and development credits 133,000 37,000
Other, net 68,000 14,000
---------- ---------
Total deferred tax assets 1,570,000 464,000
Valuation allowance for deferred tax assets (1,570,000) (464,000)
---------- ---------
Net deferred tax assets $ - $ -
---------- ---------
---------- ---------
</TABLE>
F-15
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
5. INCOME TAXES (CONTINUED)
At December 31, 1999, the Company has federal and California net operating
loss carryforwards of approximately $3,435,000 and $2,894,000, 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
$98,000 and $54,000, respectively, which will begin to expire in 2013 unless
previously utilized.
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% which occurs within a three
year period. However, the Company does not believe such limitation will have
a material impact upon the utilization of these carryforwards.
6. SUBSEQUENT EVENTS
In connection with a Private Placement Offering of up to 1,250,000 shares of
Class A common stock, subsequent to December 31, 1999 through February 21,
2000 the Company sold 475,000 shares of Class A common stock at $8.00 per
share to investors, resulting in net cash proceeds totaling approximately
$3,600,000. Of the net proceeds, approximately $800,000 is restricted and
subject to refund. The Company is in the process of obtaining waivers from
three investors that will allow the Company to keep these currently restricted
funds. In connection with the offering through February 21, 2000, the Company
will grant options for the purchase of 23,750 shares of Class A common stock
to brokers with an exercise price of $8.00 per share through February 2007,
as payment for finders fees and incurred other offering related expenses of
approximately $190,000.
In February 2000, a total of 376,500 Class B and 6,250 Class A common stock
options were granted to employees and consultants which will vest over terms
of up to four years. These options were granted at an exercise price of $4.35
and $8.00 per share, respectively. The Company will recognize deferred
compensation expense for grants to employees to the extent the exercise price
is less than the fair value of date of grant. The Company will recognize
compensation charges in accordance with EITF 96-18 related to options granted
to consultants as the underlying options vest.
7. LEGAL PROCEEDINGS
On September 20, 1999, a complaint by the Company was filed against certain
stockholders and their affiliates 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-complaint 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's assignees of Jyra's
arrangement to purchase from this stockholder for $4.00 per share, 255,640
shares of the Company's Class A common stock.
F-16
<PAGE>
Path 1 Network Technologies Inc.
(a development stage company)
Notes to Financial Statements (Continued)
7. LEGAL PROCEEDINGS (CONTINUED)
This litigation is in the early stages and the Company has not yet determined
the potential financial impact. 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-17
<PAGE>
<TABLE>
<CAPTION>
Exhibits
- - --------
<S> <C>
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
</TABLE>
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: March 23, 2000 By /s/ Ronald D. Fellman
---------------------
Ronald D. Fellman
President, Chief Executive Officer and
Chairman of the Board
F-18
<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 03/16/1998
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>
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 AMENDMENT OF "PATH 1 NETWORK TECHNOLOGIES INC.", FILED IN THIS
OFFICE ON THE THIRTEENTH DAY OF APRIL, A.D. 1999, AT 9 O'CLOCK A.M.
[SEAL]
[SEAL]
/s/ EDWARD FREEL
-----------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
2853501 8100 AUTHENTICATION: 0265247
001082093 DATE: 02-17-00
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PATH 1 NETWORK TECHNOLOGIES INC.
The Undersigned, in order to amend its Certificate of Incorporation,
hereby certifies as follows:
FIRST: The name of the corporation is Path 1 Network
Technologies Inc.
SECOND: The Corporation hereby amends its Certificate of
Incorporation as follows:
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>
Class A Common 20,000,000 .001
--------------------------------------------------------
Class B Common 10,000,000 .001
--------------------------------------------------------
Preferred 10 .001
--------------------------------------------------------
</TABLE>
(A) CLASS A COMMON STOCK.
The Corporation's existing Common Stock, par value, $.001 per share, is
hereby redesignated Class A Common Stock, par value $.001 per share.
(B) CLASS B COMMON STOCK.
(1) VOTING. The Class B Common stock shall have no voting rights.
(2) DIVIDENDS. The holders of the Class B Common Stock shall not be
entitled to receive any dividends.
(3) CONVERSION. The Class B Common Stock will convert into shares of
Class A Common Stock, on a one-for-one basis, upon the occurrence of any one of
the following events:
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 04/13/1999
991144006-2853501
- - --------------------------------------------------------------------------------
<PAGE>
(a) Either the Corporation is sold (including merger,
consolidation or other change of control) or it sells, leases,
or licenses all of substantially all of its assets;
(b) The Corporation generates revenues from operations equal to
$10,000,000 and reports earnings of $2,000,000 in any fiscal
year before interest, taxes, depreciation, amortization and
extraordinary items; and
(c) There is a underwritten public offering of the Corporation's
Class A Common Stock of at least $25,000,000.
(4) NON-VOTING, NON-ASSIGNABLE AND NON-TRANSFERABLE
The Class B Common Stock shall be (i) non-voting, (ii) non-assignable,
and (iii) non-transferable.
(5) LIQUIDATION, DISSOLUTION OR WINDING UP.
Upon any liquidation, dissolution or winding up of the Corporation, the
right of the holders of the Class B Common Stock to receive any distributions
shall be subordinate to holders of the Class A Common Stock and the Series A
Preferred Stock.
(C) PREFERRED STOCK. The shares of the Corporation's preferred stock shall
be designated as Series A Preferred Stock (the "Series A Preferred Stock").
(1) VOTING. (a) Except as provided in paragraph (b), the Series A
Preferred Stock shall no voting rights.
(b) 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.
(2) 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
- 2 -
- - --------------------------------------------------------------------------------
<PAGE>
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.
(3) 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.
(4) 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.
(5) 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.
(6) REPRESENTATION ON BOARD OF DIRECTORS
Holders of all the outstanding Series A Preferred Shares shall be
entitled to appoint two representatives to the Corporation's Board of Directors.
(7) 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.
(8) 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, signed by the holders of
a majority of outstanding
- 3 -
- - --------------------------------------------------------------------------------
<PAGE>
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 22nd
day of March 1999.
/s/ James Berns
---------------------------
James Berns, Secretary
- 4 -
- - --------------------------------------------------------------------------------
<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 2.8 and 2.9, 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
<TABLE>
<CAPTION>
PAGE
<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: 99PAT1B
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:[99PAT1B]
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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 5 weeks 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 [***] $65,280
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TOTAL HOURLY ESTIMATE: $65,280
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</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 $160.
<TABLE>
<CAPTION>
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TYPE OF ENGINEERING EFFORT COST PER HOUR
-----------------------------------------------------------------
<S> <C>
Systems Architect [***]
-----------------------------------------------------------------
Specialized Expertise or On-Site Consulting Market Rate*
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</TABLE>
* In cases where specialty skills such as User Interface
Engineering, FDA Compliance Consultant, ESD Specialists, Database
Design Engineer, etc., are required, the hourly rate will be based
on the actual Market Rate for the skill. Special hourly
rates will also apply where a substantial proportion of Project
activity is based at a location away from DDI. If Path 1 will be
subject to this rate, DDI will provide written notification in advance
if this rate applies.
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<PAGE>
PROPOSAL AGREEMENT [DOCTOR DESIGN LOGO]
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PROPOSAL AGREEMENT
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 99PAT1B 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 Ten Thousand Dollars
($10,000), 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 ten
percent (10%) 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
seven (7) days from such request.
The Project hourly charges will be invoiced weekly, and are due within ten
(10) days of the billing date. All billings that are not paid within that
period will accrue interest at the rate of one and one-half percent (1 1/2%)
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 maximum of eight (8) hours per day.
In cases of multi-day on-site work, Path 1 will be billed, at the Standard
Hourly Rates set forth herein, a minimum of eight (8) hours per day or actual
time worked 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 Net Zero (0) Days. If
actual prototype costs exceed the prototype estimate, the excess will be
billed monthly at terms Net Thirty (30) Days. 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 four (4) weeks prior to the scheduled
delivery of the first deliverable or has failed to complete the ATP testing
within fifteen (15) working days 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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