<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COSINE COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA
(PRIOR TO REINCORPORATION)
DELAWARE 3576 94-3280301
(AFTER REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
</TABLE>
3200 BRIDGE PARKWAY
REDWOOD CITY, CALIFORNIA 94065
(650) 637-4777
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DEAN E. G. HAMILTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COSINE COMMUNICATIONS, INC.
3200 BRIDGE PARKWAY
REDWOOD CITY, CALIFORNIA 94065
(650) 637-4777
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JOHN A. FORE, ESQ. JOHN L. SAVVA, ESQ.
IAN J. STOCK, ESQ. ALBERT Y. LIU, ESQ.
PAUL H. HARTZEL, ESQ. JAMES J. VIECELI, III, ESQ.
EDWARD F. VERMEER, ESQ. SULLIVAN & CROMWELL
WILSON SONSINI GOODRICH & ROSATI 1888 CENTURY PARK EAST, SUITE 2100
PROFESSIONAL CORPORATION LOS ANGELES, CA 90067
650 PAGE MILL ROAD (310) 712-6600
PALO ALTO, CA 94304
(650) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
Common Stock ($.0001 par value)......................... $120,000,000 $31,680
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER
TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION. DATED APRIL 28, 2000.
Shares
COSINE COMMUNICATIONS LOGO
Common Stock
----------------------
This is an initial public offering of shares of common stock of CoSine
Communications, Inc. All of the shares of common stock are being
sold by CoSine.
Prior to this offering, there has been no public market for our common
stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. Application has been made for quotation
of the common stock on the Nasdaq National Market under the symbol "COSN".
See "Risk Factors" beginning on page 8 to read about factors you should
consider before buying shares of the common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- ---------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to CoSine........................ $ $
</TABLE>
To the extent the underwriters sell more than shares of
common stock, the underwriters have the option to purchase up to an additional
shares from CoSine at the initial public offering price less the
underwriting discount.
----------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
CHASE H&Q
ROBERTSON STEPHENS
J.P. MORGAN & CO.
----------------------
Prospectus dated , 2000.
<PAGE> 3
DESCRIPTION OF GRAPHICS
INSIDE COVER / FOLDOUT DIAGRAM:
This diagram shows 2 levels of 6 evenly distributed icons that extend from and
are connected to a central core icon, for a total of 12 icons that connect to
the core. At the core there is a circuit cloud surrounded by a second larger
circuit cloud which represents a value-added service delivery layer. Along the
borders of the larger circuit cloud there are pictures of 6 IPSX 9000s that are
connected by lines to the core circuit cloud. Extending out from each of the
IPSX 9000s are the other 6 icons. Starting from the upper left side of the
diagram, there is a circuit cloud labeled Regional ISP, and the space between
the Regional ISP and the IPSX 9000 is labeled Wholesale. On the upper right side
of the diagram, there is a circular icon labeled Subscriber Site, and the space
between the Subscriber Site and the IPSX 9000 is labeled Retail. On the right
side of the diagram, there is a circular icon labeled Internet, and to the
bottom right of this icon there is a circular icon labeled Data Center
Application Service Provider. On the bottom left side of the diagram, there is a
cluster of 3 smaller circular icons collectively labeled DSL Cable Modem
Wireless, and the space between this icon and the IPSX 9000 is labeled Broadband
Access. On the left side of the diagram, there is one last icon labeled
Telecommuters.
INSIDE LEFT FOLDOUT DIAGRAM:
This diagram shows a picture of an IPSX 9000 positioned at the center of the
diagram, with the words IPSX 9000 on top of the icon and [bullets to come]. To
the left of the IPSX 9000, there is a picture of a computer monitor with
keyboard, with the words InVision on top, and [bullets to come]. To the right of
the IPSX 9000, there is another picture of a computer monitor with keyboard,
with the words InGage on top, and [bullets to come]. Below the IPSX 9000 there
are 3 square icons evenly distributed connected by dots to the IPSX 9000. The
first icon, on the bottom left side of the diagram, is labeled Carrier-Class
Routing. The second icon, on the bottom center, is labeled Massively Parallel
Computing. The third icon, on the bottom right side of the diagram, is labeled
High Speed Switching.
RIGHT FOLDOUT:
This diagram shows a large circular icon positioned at the center of the
diagram, with 9 smaller evenly distributed circular icons extending from and
connected by lines to the central icon. On the bottom right side of the diagram
there is a phrase that says "Market Leading Third Party Service Applications."
The central icon is labeled Operating System for Computing Networking. Starting
at the top, and moving clockwise, the icons are labeled Public Key
Infrastructure, Anti Virus, Network Address Translation, Service Selection
Switching, Firewall, Encryption, Virtual Routing, Tunnel Termination and
Intrusion Detection.
INSIDE BACK COVER:
This diagram shows a picture of the outside of the corporate office building for
CoSine. On the bottom right side of the diagram, there is a CoSine logo box and
some text. The first two lines read "CoSine Communications," under which it says
in a smaller font size "The Next Wave in Carrier Services." The next section of
text gives the address and contact information for CoSine. It reads "CoSine
Communications, Inc., 3200 Bridge Parkway, Redwood City, CA 94065 USA, Tel:
650.637.4777 or 877.4COSINE, Fax: 650.637.2470, E-mail: [email protected],
www.cosinecom.com."
<PAGE> 4
[INSIDE COVER ART]
CoSine Communications, the CoSine Communications logo, InVision, InGage,
IPSX 9000 and IPNOS are trademarks of CoSine Communications, Inc. Each
trademark, trade name or service mark of any other company appearing in this
prospectus belongs to its holder.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary highlights information we present more fully
elsewhere in this prospectus. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of factors described under the heading "Risk Factors" and elsewhere in this
prospectus.
COSINE COMMUNICATIONS, INC.
We develop, market and sell the first open architecture communications
platform designed to rapidly enable the delivery of market-leading applications
and value-added services from within a service provider's network. Our Internet
Protocol, or IP service delivery platform combines advanced hardware and
software infrastructure products in an open architecture platform. Our platform
is designed to allow the delivery of a wide variety of services simultaneously
to thousands of subscribers from within the service provider's network. Our
platform is designed to address the cost, management, complexity and scalability
issues of value-added service delivery by moving the implementation of these
services from the customer's premises to the service provider's point of
presence. Our platform enables network service providers to provide a variety of
value-added services such as virtual private networks, firewall services and
secure broadband access. Our platform consists of three key elements: our IPSX
9000 service processing switch and InVision service management system, both of
which we are currently shipping, and our InGage customer network management
software, which is scheduled to be released for customer trials in the second
quarter of 2000.
Our customers are network service providers that offer connectivity and
value-added services directly to enterprise subscribers or on a wholesale basis
to other service providers. Our IP service delivery platform is designed for a
wide range of service providers. They include next-generation IP carriers,
competitive local exchange carriers, inter-exchange carriers, regional bell
operating companies, international phone companies and internet service
providers. To date, we have entered into contracts with Qwest Communications,
Nissho Electronics, Internet Initiative Japan, BroadBand Office, American
Metrocomm and AduroNet.
Network service providers generally have focused on providing high
bandwidth connectivity. As new entrants emerge in the service provider market,
competition is making it difficult for service providers to differentiate their
service offerings, except through pricing. As a result, service providers are
seeking solutions that allow them to deliver value-added services in addition to
high speed connectivity and realize incremental revenues. However, the current
approaches to delivering value-added IP services are characterized by high
operating expenses, management and configuration complexity and sealing
difficulty for widespread service provisioning. Additionally, the operating
systems found in most of today's network infrastructure products are proprietary
and are highly inflexible and have not been designed to support the migration of
third-party applications into the network.
In order to quickly offer new applications that customers demand without
having to replace installed infrastructure, service providers need an open
architecture platform that allows rapid changes in services and the rapid
deployment of applications. Since a platform vendor generally cannot maintain
core competencies in all service areas, an open platform that enables the use of
market-leading services from third-party vendors is required.
Our products are designed to offer the following benefits for service
providers and their end customers:
- - the ability for service providers to increase revenue by delivering profitable
value-added services, such as extranet, intranet
3
<PAGE> 6
and remote access virtual private network services, to their customers;
- - faster time to market for the delivery of new services by service providers;
- - reduced operating expenses for service providers through automated
provisioning, customer self-provisioning, centralized billing capability and
fewer on-site service calls;
- - the ability of service providers to attract new subscribers and reduce churn;
- - the ability of subscribers to monitor and control value-added services;
- - carrier-class reliability and scalability;
- - sophisticated software-based network management capabilities for service
providers and their customers;
- - a flexible open architecture that can support market-leading third-party
applications; and
- - support for and interoperability with existing network standards and
applications.
Our objective is to become the leading supplier of platforms designed
specifically for the delivery of market-leading applications and value-added
services from within service provider networks. The key elements of our strategy
include:
- - leverage our open architecture to offer additional market-leading third-party
service applications;
- - establish our platform as the leading solution in key markets;
- - extend our first mover advantage;
- - work closely with customers to facilitate the development of new services;
- - expand sales, distribution, support and service capabilities;
- - extend technology leadership; and
- - pursue strategic alliances and acquisitions.
Our principal executive offices are located at 3200 Bridge Parkway,
Redwood City, California 94065 and our telephone number is (650) 637-4777. We do
not intend for information contained on our website, www.cosinecom.com, to
constitute part of the prospectus. We were incorporated in the State of
California in April 1997. We intend to reincorporate in the State of Delaware
prior to the completion of this offering.
4
<PAGE> 7
THE OFFERING
Shares offered.................. shares
Shares to be outstanding after
this offering................... shares
Proposed Nasdaq National Market
symbol........................ "COSN"
Use of proceeds................. For general corporate purposes, including
working capital and capital expenditures, and
potential acquisitions of complementary
products, technologies or businesses.
Except as otherwise indicated, the total number of shares to be outstanding
after this offering is based on shares outstanding as of March 31,
2000 and 4,666,668 shares of Series E preferred stock that we expect to issue
upon satisfaction of customary closing conditions:
- 8,319,705 shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2000, with a weighted average exercise price
of $2.06 per share;
- 8,231,226 shares of common stock reserved for future issuance under our
stock option, director option and employee stock purchase plans,
including amounts authorized for issuance subsequent to March 31, 2000;
and
- 1,058,726 shares of common stock issuable upon exercise of warrants
outstanding as of March 31, 2000 at a weighted average exercise price of
$0.55 per share.
Except as otherwise indicated, information in this prospectus:
- reflects a 4-for-1 stock split of our common stock that was effected as a
stock dividend in May 1998;
- reflects the automatic exercise of certain warrants and the conversion of
all of our outstanding shares of preferred stock into 67,297,803 shares
of common stock upon the closing of this offering;
- assumes our reincorporation in Delaware; and
- assumes no exercise of the underwriters' option to purchase additional
shares in the offering.
The consolidated financial statements, summary consolidated financial
information and selected consolidated financial data included elsewhere in this
prospectus do not assume our reincorporation in Delaware and the issuance and
conversion of shares of our Series E preferred stock into common stock, since
neither has occurred as of March 31, 2000.
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables present our summary consolidated financial data. The
data presented in these tables are from "Selected Consolidated Financial Data"
and our historical consolidated financial statements and notes to those
financial statements included elsewhere in this prospectus. You should read
those sections for a further explanation of the financial data summarized here.
Pro forma basic and diluted net loss per share have been calculated
assuming the automatic and assumed exercise of certain warrants and the
conversion of all outstanding preferred stock, other than our Series E preferred
stock expected to be issued upon satisfaction of customary closing conditions,
into common stock.
<TABLE>
<CAPTION>
PERIOD FROM YEARS ENDED THREE MONTHS ENDED
INCEPTION DECEMBER 31, MARCH 31,
(APRIL 14, 1997) TO ------------ ------------------
DECEMBER 31, 1997 1998 1999 1999 2000
------------------- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue............................ $ -- $ -- $ -- $ -- $ 3,540
Gross profit....................... $ -- $ -- $ -- $ -- $ 940
Loss from operations............... (134) (9,078) (38,393) (6,777) (39,609)
Net loss........................... (131) (9,293) (37,721) (6,789) (39,231)
Deemed dividend to Series D
preferred stockholders........... -- -- -- -- (2,500)
Net loss allocable to common
stockholders..................... (131) (9,293) (37,721) (6,789) (41,731)
Basic and diluted net loss per
common share..................... $(0.25) $ (4.53) $ (7.80) (1.78) (6.67)
Shares used in computing basic
and diluted net loss per common
share............................ 522 2,051 4,837 3,817 6,255
Pro forma basic and diluted net
loss per common share
(unaudited)...................... $ (0.75) $ (0.61)
Shares used in computing pro forma
basic and diluted net loss per
common share (unaudited)......... 50,378 68,295
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, and short-term
investments.................................... $ 44,515 $117,646 $ --
Working capital.................................. 37,699 110,830
Total assets..................................... 68,363 141,434
Long-term obligations, less current portion...... 9,580 9,580
Redeemable convertible preferred stock........... 104,662 --
Total stockholders' equity (net capital
deficiency).................................... (62,175) 115,618
</TABLE>
- ---------------
(1) The pro forma consolidated balance sheet data gives effect to the automatic
and assumed exercise of certain warrants and the conversion into common
stock upon completion of this offering of our outstanding preferred stock
and the Series E preferred stock expected to be issued upon the satisfaction
of customary closing conditions. The pro forma consolidated balance sheet
data also assumes Series E issuance costs of $150,000.
(2) The pro forma as adjusted balance sheet data gives effect to
- the automatic and assumed exercise of certain warrants;
- the conversion into common stock upon completion of this offering of our
outstanding preferred stock, including our Series E preferred stock
expected to be issued upon satisfaction of customary conditions, assuming
Series E issuance costs of $150,000; and
- the sale of our common stock in this offering at an assumed initial
public offering price of $ , after deducting an assumed
underwriting discount and estimated offering expenses payable by us.
7
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition and results of operations could be seriously
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
WE HAVE A HISTORY OF LOSSES, EXPECT TO CONTINUE TO INCUR LOSSES AND MAY NEVER
ACHIEVE PROFITABILITY.
As of March 31, 2000, we had an accumulated deficit of $86.4 million. We
incurred net losses of $37.7 million in our fiscal year ended December 31, 1999,
$9.3 million in our fiscal year ended December 31, 1998, and $131,000 in the
period from our inception, April 14, 1997, to December 31, 1997. We have only
recently begun to recognize revenues, and we cannot be certain that our revenues
will continue to grow or that we will generate sufficient revenues to become
profitable. We have incurred significant research and development, sales and
marketing and general and administrative expenses in the past and expect to
continue to incur significant and increasing levels of expenses for the
foreseeable future. As a result, we expect to continue to incur losses and will
need to generate increased revenues to achieve profitability. Even if we achieve
profitability we may be unable to sustain or increase profitability on a
quarterly or annual basis given the novel nature of our products for delivering
services to users of Internet Protocol, or IP, networks and the evolving nature
of the market for our IP service delivery platform and competing products.
OUR LIMITED OPERATING HISTORY AND THE LIMITED SALES HISTORY OF OUR IP SERVICE
DELIVERY PLATFORM MAKES FORECASTING OUR REVENUES AND OPERATING RESULTS
DIFFICULT, WHICH MAY IMPAIR OUR ABILITY TO MANAGE OUR BUSINESS AND YOUR ABILITY
TO ASSESS OUR PROSPECTS.
We were founded in April 1997, shipped our first test IP service delivery
platform product in March 1999, and sold our first IP service delivery platform
product in March 2000. As a result, we have limited meaningful historical
financial data upon which to forecast our revenues and operating expenses and
upon which you may evaluate us and our prospects. If we do not achieve our
expected revenues, our operating results will be below our expectations and the
expectations of investors and market analysts, which could cause the price of
our stock to fall.
OUR FUTURE REVENUES DEPEND ON OUR CUSTOMERS' ABILITY TO GENERATE SALES OF
SERVICES DELIVERED USING OUR PRODUCTS AND TO MANAGE DELIVERY OF THESE SERVICES
TO THEIR CUSTOMERS.
Although we have generated revenue from sales to network service
providers, they have yet to generate revenue from the sale of services delivered
using our products. Purchases of our products may decline or be delayed if our
customers do not successfully introduce commercial services derived from our IP
service delivery platform or if our customers do not generate revenues from
these services sufficient to realize an attractive return on their investment in
our IP service delivery platform.
Among the factors that may influence the extent to which network service
providers successfully sell those services to their customers and manage their
delivery are the following:
- - network service providers' success in making their customers recognize the
advantages and cost-effectiveness of the services offered using our products;
- - the ability of network service providers to recruit and train sales personnel
who are familiar with the services that our products offer and support
personnel who master the technical complexity of our products;
- - how well network service providers reorganize their administrative functions
and staff to market, sell, invoice, order, support and otherwise provide for
the services offered by our products in addition
8
<PAGE> 11
to the data transmission service that they currently offer to their customers;
and
- - the accuracy of network service providers' forecasts of market trends and the
services and features that our products should offer their customers.
MARKET ACCEPTANCE OF OUR IP SERVICE DELIVERY PLATFORM IS NOT ASSURED AND MAY NOT
BE ACHIEVED.
We cannot assure you that the market will accept our IP service delivery
platform for the delivery of value-added services to network service providers.
If our IP service delivery platform does not achieve market acceptance, or if
market acceptance occurs more slowly than we expect, our ability to increase our
revenues and achieve profitability could be harmed.
Our products offer a new approach for delivering value-added services to
network service providers, which may perceive our products as being more
expensive than the technologies and products they currently purchase.
Accordingly, the success of our products depends, in part, on our ability to
make potential customers recognize the advantages and cost-effectiveness of our
products.
In addition, many of our customers and potential customers have
long-standing relationships with suppliers of competing technologies and network
architectures that have already achieved a degree of market acceptance. If our
IP service delivery platform does not achieve sufficient customer acceptance
quickly, we may be unable to attract additional users to generate the volume of
business necessary for widespread acceptance of our platform.
OUR IP SERVICE DELIVERY PLATFORM CURRENTLY IS OUR ONLY PRODUCT LINE, AND OUR
FUTURE REVENUES SUBSTANTIALLY DEPEND ON ITS COMMERCIAL SUCCESS.
To date, our IPSX 9000 and InVision products are the only products that
have been shipped to our customers. Our future revenues substantially depend on
the commercial success of our IP service delivery platform product line. If our
customers and potential customers do not adopt, purchase and successfully deploy
our IP service delivery platform in large numbers, our revenue may not grow and
our operating results will be seriously harmed.
BECAUSE OUR PRODUCTS ARE TECHNICALLY COMPLEX AND MAY CONTAIN ERRORS OR DEFECTS
THAT ARE NOT FOUND UNTIL OUR PRODUCTS ARE FULLY DEPLOYED BY OUR CUSTOMERS, ANY
UNDISCOVERED TECHNICAL ERRORS OR DEFECTS IN OUR PRODUCTS COULD SERIOUSLY HARM
OUR BUSINESS.
Customers who have purchased our products have not yet fully deployed the
IP networks that use our products and may not choose to do so. Our products are
more complicated than most networking products, combining our proprietary
hardware and software operating system and incorporating third-party application
software. Moreover, they are deployed in complex environments at the interfaces
among different types of private and public networks. Accordingly, they can be
adequately tested only when completely deployed in very large and diverse
networks with high amounts of traffic. Our customers or their end users may
discover errors or defects in our hardware or software, or the product may not
operate as expected, after it has been fully deployed. Errors or other problems
that may be identified in full deployment could result in:
- - loss of current customers and loss of or delay in revenues and loss of market
share;
- - failure to attract new customers or achieve market acceptance;
- - diversion of development resources;
- - increased service and warranty costs; and
- - increased insurance costs.
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<PAGE> 12
THE LONG SALES AND IMPLEMENTATION CYCLES FOR OUR PLATFORM, AS WELL AS THE
EXPECTATION THAT CUSTOMERS WILL SPORADICALLY PLACE LARGE ORDERS WITH SHORT LEAD
TIMES, MAY CAUSE OUR REVENUES AND OPERATING RESULTS TO VARY SIGNIFICANTLY FROM
QUARTER TO QUARTER.
Our sales cycle is long and depends on factors outside of our control. In
addition, we expect that customers will tend to sporadically place large orders.
As a result, our revenues and operating results may vary significantly and
unexpectedly from quarter to quarter.
A customer's decision to purchase our IP service delivery platform
involves a significant commitment of its resources and a lengthy evaluation,
testing and product qualification process involving the customer itself and, if
our customer is a network service provider, its end user customers. Throughout
the sales cycle, we spend considerable time and expense educating and providing
information to prospective network service provider customers and their end
users about the uses and features of our platform.
Even after a customer decides to purchase our platform, significant
additional time is needed to configure and build the products ordered. We
believe that our network service provider customers and their end users will
deploy our products slowly and deliberately. Timing of deployment can vary
widely and depends on a number of factors outside of our control, including the
technical skills of the customer and its end users, the size of the network
deployment, the complexity of the network environment and the degree of hardware
and software configuration necessary. As a result, our sales cycle is likely to
be lengthy.
Network service providers and other customers with significant or complex
networks usually expand their networks in large increments on a periodic basis.
Accordingly, we may receive purchase orders for significant dollar amounts on an
irregular and unpredictable basis.
THE UNPREDICTABILITY AND POTENTIAL FLUCTUATIONS OF OUR QUARTERLY AND ANNUAL
REVENUES AND OPERATING RESULTS MAY RESULT IN VOLATILITY IN THE TRADING PRICE OF
OUR STOCK PRICE.
Our revenues and operating results are likely to vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control. If our operating results in future quarters are below public market
analysts' or investors' expectations, the trading price of our stock likely will
fall. Factors that may cause fluctuations in our revenues and operating results
include:
- - demand for and timing of sales of our products;
- - the ability of our suppliers to timely produce and deliver components and
parts, including sole or limited source components, in the quantity and with
the quality desired and at the prices we have budgeted;
- - introduction of new products and product enhancements by our competitors,
entry of new competitors into our market, pricing pressures and other
competitive factors;
- - our ability to develop, introduce, manufacture and ship new and enhanced
products in a timely manner without defects;
- - the mix of hardware, software and services sold and the configuration of
products sold;
- - the mix of domestic and international sales;
- - seasonality in the sales of our products due, in part, to customers' budgetary
cycles and potentially lower sales in European markets during the summer
months;
- - decisions by network service providers and their end users to adopt
alternative technologies or reallocate their resources to other architectures;
- - our ability to attain and maintain production volumes and quality levels for
our products; and
- - growth in the use of the Internet and the demand for Internet-based products.
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Our operating expenses are based largely on anticipated revenue trends,
and a significant percentage of our expenses are, and will continue to be, fixed
in the short term. As a result, a delay in generating or recognizing revenue for
the reasons described above, or for any other reason, could cause significant
variations in our operating results from quarter to quarter and could result in
substantial operating losses.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results will not be meaningful. You should not rely
on our results for any quarter as an indication of our future performance.
SALES OF OUR PRODUCTS DEPEND ON CONTINUED DEVELOPMENT AND MARKET ACCEPTANCE OF
OUR OPEN ARCHITECTURE.
Our IP service delivery platform uses our open architecture that is
designed to facilitate the development of new applications and the adaptation of
existing applications by third parties for use in the platform. For our
customers to fully realize the benefits of this open architecture, we must
continue to develop new technologies, processes and standards and make
third-party software providers recognize the advantages of our open
architecture, and we must support their software development efforts. If we fail
to develop these technologies, processes and standards or third-party software
providers do not develop or adapt software applications for our platform, our
open architecture may not become widely accepted and sales of our products may
decline.
IF NETWORKS PROTECTED BY NETWORK SECURITY SERVICES DELIVERED USING OUR PRODUCTS
SUFFER A LOSS OF SECURITY, THE MARKET PERCEPTION OF OUR PRODUCTS COULD BE HARMED
AND WE MAY BE SUBJECT TO LAWSUITS RELATED TO LOSSES SUFFERED BY CUSTOMERS OR
THEIR END USERS.
Our success will depend in part on the ability of our products to enable
effective network security. Even networks protected by network security services
delivered using our IP service delivery platform may be vulnerable to electronic
break-ins. If an actual or perceived breach of network security occurs in a
customer's or end-user's network that uses our products, the market perception
of our products could be harmed, and we could lose current and potential
customers. In addition, we may be subject to lawsuits relating to losses
suffered by customers or their end-users as a result of a breach of network
security. Because the techniques used by computer hackers to access or sabotage
networks change frequently and often are not recognized until launched against a
target, we and the vendors of software used to implement network security
services delivered using our IP service delivery platform may be unable to
anticipate and effectively prevent the use of these techniques.
IF WE FAIL TO ENHANCE EXISTING PRODUCTS OR TO DEVELOP AND ACHIEVE MARKET
ACCEPTANCE FOR NEW PRODUCTS THAT MEET CUSTOMER REQUIREMENTS, OUR REVENUES MAY
SUFFER.
We expect that our customers and potential customers will require product
features that our current IP service delivery platform does not have.
Accordingly, to succeed we must enhance existing products and develop new
products that meet these needs. We may be unable to develop new or enhanced
products that meet customer requirements in a timely manner or at all. Our
products are technically complex and the development of new and enhanced
products is an uncertain, time-consuming and labor intensive process that
requires the accurate anticipation of technological and market trends and joint
efforts with software suppliers. We may experience design, manufacturing,
marketing and other difficulties that could delay or prevent the development,
introduction or marketing of new products and enhancements.
In addition, determining which features to offer is an inherently
uncertain process and requires us to successfully develop and maintain key
customer relationships and to work closely with customers and potential
customers to determine which features they need. Moreover, to enhance the
features of our products, we rely on software suppliers to develop and license
software to operate with
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our products. If software suppliers are unable or unwilling to develop and
license software for use with our products, our ability to offer the features
necessary to achieve and maintain market acceptance of our IP service delivery
platform will be seriously harmed.
WE RELY UPON A LIMITED NUMBER OF CUSTOMERS, AND ANY DECREASE IN REVENUE FROM
THESE CUSTOMERS COULD HARM OUR OPERATING RESULTS.
To date, we have received all of our revenues from two customers and have
received additional purchase orders from four other customers. All of these
customers, directly or indirectly, hold equity securities in our company. We
expect that in the immediate future all of our revenues will continue to depend
on sales of our IP service delivery platform products to a limited number of
existing and new customers. We do not have long-term contracts with any of our
customers, and our customers may reduce or discontinue purchases of our products
at any time. The loss of one or more of our customers or a reduction or delay in
purchases of our products by our customers may limit our revenue growth and harm
our operating results.
Purchases of our products may decline or be delayed if the business of our
customers or potential customers suffers a downturn.
WE MUST CONTINUE TO INCREASE OUR CUSTOMER BASE IN ORDER TO BE SUCCESSFUL.
Our future success will depend on attracting additional customers. Failure
to increase our customer base would harm our operating results and financial
condition. Factors that may affect our ability to increase our customer base
include:
- - the willingness of customers to use our IP service delivery platform;
- - possible new product introductions by our competitors;
- - our ability to develop and introduce new products and product enhancements;
- - performance of our products compared to expectations; and
- - our ability to meet customers' delivery requirements.
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, OUR MANAGEMENT AND OPERATIONAL
RESOURCES WILL BE STRAINED, WHICH COULD HINDER OUR GROWTH.
Our ability to successfully introduce our IP service delivery platform to
the market, offer our products and services and implement our business plan in a
rapidly evolving market requires an effective planning and management process.
We continue to increase the scope of our operations domestically and
internationally and have recently hired a substantial number of employees. At
December 31, 1999, we had 185 employees, and at March 31, 2000, we had 275
employees. We plan to continue to hire a significant number of employees this
year. This growth has placed, and our anticipated future operations will
continue to place, a significant strain on our management systems and resources.
We expect that we will need to continue to improve our financial and managerial
controls and reporting systems and procedures and will need to continue to
expand, train and manage our work force worldwide. Furthermore, we expect that
we will be required to manage business relationships with an increasing number
of customers and other third parties.
In May 1998, we entered into a lease for approximately 48,400 square feet
of new office space in Redwood City, California. This lease expires in December
2011. In September 1999, we entered into a lease for an additional approximately
48,400 square feet of new office space in Redwood City, California. This lease
expires in December 2011. These leased facilities contain substantially all of
our operations. We believe, however, that by the end of 2000, we will need
additional space to accommodate our growth. The commercial real estate market in
the San Francisco Bay area is volatile and unpredictable in terms of available
space, rental fees, occupancy rates and preferred locations. We cannot be
certain that additional space will be available when we require it, or that it
will be affordable or in a preferred location. If we fail to lease a substantial
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amount of new space on reasonable terms, our ability to expand our business may
be diminished and our operating results could be harmed.
OUR MARKET IS HIGHLY COMPETITIVE, AND OUR FAILURE TO COMPETE SUCCESSFULLY WOULD
LIMIT OUR ABILITY TO INCREASE OUR MARKET SHARE AND HARM OUR BUSINESS.
Competition in the network infrastructure market is intense, and we expect
that competition in the market for value-added services in IP networking will
also be intense. If we are unable to compete effectively, our ability to
increase our revenues and market share will be harmed and our operating results
will suffer.
The network infrastructure market has historically been dominated by large
companies such as Cisco Systems, Lucent Technologies, Nortel Networks, Alcatel,
Ericsson and Siemens. In addition, a number of companies, including Cisco,
market products for installation on the premises of network service providers'
customers that offer some services that compete with the services delivered
using our IP service delivery platform. Also, a number of smaller companies have
announced plans for furnishing products for installation on network service
providers' networks that enable delivery of some value-added services to network
service providers' customers.
Due to the rapidly evolving markets in which we compete, we believe that
there is likely to be consolidation in this industry, with one or more of these
smaller private companies being acquired by larger companies with greater
resources. As a result, we expect to face increased competition in the future
from larger companies with significantly more selling and marketing, technical,
manufacturing and financial resources than we have.
Some of these larger competitors have pre-existing relationships involving
a range of product lines with the network service providers who are the
principal potential customers for our IP service delivery platform. In addition,
these competitors may be able to offer vendor financing, which we do not
currently offer, undercut our prices or otherwise induce network service
providers not to use our IP service delivery platform. Moreover, our competitors
may foresee market developments more accurately than we do and may develop new
technologies that compete with our products or that render our products
obsolete.
THE FAILURE OF OUR CONTRACT MANUFACTURERS TO MEET OUR MANUFACTURING NEEDS WOULD
SERIOUSLY HARM OUR ABILITY TO TIMELY FILL CUSTOMER ORDERS.
We use three third-party contract manufacturers: Solectron, SMTC
Manufacturing and Sonic Manufacturing, all of which provide manufacturing
services for numerous other companies. If any of these contract manufacturers
terminates its relationship with us or is unable to produce sufficient
quantities of our products in a timely manner and at satisfactory quality
levels, our ability to fill customer orders on time, our reputation and our
operating results will suffer. We do not have long-term supply contracts with
our contract manufacturers, and consequently, they are not obligated to supply
products to us for any given period, in any specific quantity or at any
predetermined price, except as may be provided in a particular purchase order.
Qualifying new contract manufacturers and commencing volume production is
expensive and time consuming, and changing contract manufacturers would disrupt
our business, potentially causing us to lose revenue and damaging our customer
relationships.
WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS, AND OUR BUSINESS MAY BE
SERIOUSLY HARMED IF OUR SUPPLY FROM ANY SOURCE IS DISRUPTED.
We currently purchase several key components, including field programmable
gate arrays, some integrated circuits and memory devices, and power supplies
from a single source or limited sources. We purchase each of these components on
a purchase order basis and do not have long-term supply contracts for these
components. In the event of a disruption in supply, we may be unable to locate
an alternate source in a timely
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manner or at favorable prices. Any interruption or delay in the supply of these
components could prevent us from delivering products to our customers in a
timely manner and cause us to lose sales to existing and potential customers. In
addition, our reliance on third-party suppliers exposes us to potential supplier
production difficulties or quality variations.
IF WE FAIL TO PREDICT OUR MANUFACTURING REQUIREMENTS ACCURATELY, WE COULD INCUR
ADDITIONAL COSTS OR MANUFACTURING DELAYS.
We use rolling forecasts based on anticipated product orders to determine
our manufacturing requirements. In particular, we provide forecasts of our
demand to our contract manufacturers up to twelve months prior to scheduled
delivery of products to our customers. If we overestimate our manufacturing
requirements, our contract manufacturers may have excess or obsolete inventory,
which could harm our operating results. If we underestimate our requirements,
our contract manufacturers may have an inadequate inventory, which could
interrupt manufacturing of our products and result in delays in shipments and
revenues. In addition, lead times for some of the materials and components we
order are long. Lead times vary significantly and depend on factors such as the
specific supplier, contract terms and demand for a component at a given time. We
may experience shortages of components from time to time, which could delay the
manufacturing of our products.
WE DEPEND ON THIRD-PARTY SOFTWARE AND HARDWARE PROVIDERS WITH WHOM WE HAVE
STRATEGIC RELATIONSHIPS, AND OUR BUSINESS WOULD SUFFER IF THESE THIRD PARTIES
WERE TO TERMINATE THEIR RELATIONSHIPS WITH US OR COMPETE WITH US IN THE FUTURE.
We have developed strategic relationships with leading software and
hardware providers and are engaged in joint research and product development and
marketing arrangements with these companies. Our ability to enhance our IP
service delivery platform and develop new products significantly depends on
maintaining and strengthening our relationships with these companies and on
developing new relationships with other leading vendors. If we fail to
effectively manage these relationships or develop new ones, shipments of new or
enhanced products to our customers could be delayed.
Many of our software and hardware suppliers also have significant
development and marketing relationships with our competitors and have
significantly greater financial and marketing resources than we do. If they
develop and market products in the future in competition with us, or form or
strengthen arrangements with our competitors, our ability to deliver our
products may be harmed.
WE DEPEND ON OUR KEY PERSONNEL, WITH WHOM WE DO NOT HAVE EMPLOYMENT AGREEMENTS,
AND MUST HIRE ADDITIONAL PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A
RAPIDLY CHANGING MARKET.
The loss of the services of any of our key employees, the inability to
attract or retain qualified personnel in the future, or delays in hiring
necessary personnel, particularly engineers and sales and support personnel,
could delay the development and introduction of, and harm our ability to sell,
our products. We recently hired many of our key personnel, including our Chief
Operating Officer, our Executive Vice President of Global Services and our
Senior Vice President of Engineering, as well as a number of other key
managerial, marketing, planning, financial, technical and operations personnel.
Our ability to manage our business depends upon how quickly we integrate these
new personnel into our management and culture and the continued service of our
executive officers and other key engineering, sales and marketing and support
personnel. None of our officers or key employees is bound by an employment
agreement for any specific term. We also do not have key person life insurance
policies covering any of our employees.
We also intend to hire a significant number of engineering, sales,
marketing and support personnel in the future, and we believe that our success
depends primarily
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upon our ability to attract and retain these key employees. Competition for
these people is intense, especially in the San Francisco Bay area, and we may be
unable to hire sufficient qualified personnel.
WE WILL NEED TO SUBSTANTIALLY EXPAND OUR SALES AND CUSTOMER SERVICE OPERATIONS
IN ORDER TO INCREASE SALES AND MARKET AWARENESS OF OUR PRODUCTS.
If we are unable to expand our sales force and customer service and
support organization, we may be unable to increase market awareness and
acceptance of our products. Selling our products and services requires a
sophisticated sales effort targeting several key individuals within a
prospective customer's organization, and if the prospective customer is a
network service provider, within its customers' organizations. This sales effort
requires the efforts of specialized sales and sales support engineers. We are in
the process of building our sales force and plan to hire additional qualified
sales and sales support engineers. Competition for these individuals is intense,
and we may be unable to hire the kind and number of sales and sales support
engineers that we need. In addition, we believe that our future success,
particularly in international markets, depends, in part, upon our ability to
establish successful relationships with a number of third parties to distribute
our products.
Given the complexity of our products, installation and maintenance of our
products requires highly trained customer service and support personnel. We
currently have a small customer service and support organization, and will need
to increase our staff to support new customers and the expanding needs of
existing customers. Competition for network support engineers and network
consultants in our industry is intense due to the limited number of people
available with the necessary technical skills and experience.
IF WE BECOME SUBJECT TO UNFAIR HIRING CLAIMS, WE COULD BE PREVENTED FROM HIRING
NEEDED PERSONNEL, INCUR LIABILITY FOR DAMAGES AND INCUR SUBSTANTIAL COSTS IN
DEFENDING OURSELVES.
Companies in our industry whose employees accept positions with
competitors frequently claim that these competitors have engaged in unfair
hiring practices or that the employment of these persons would involve the
disclosure or use of trade secrets. We have been threatened with such claims in
the past and may receive claims of this kind in the future as we seek to hire
qualified personnel. These claims could prevent us from hiring personnel or
cause us to incur liability for damages. We could also incur substantial costs
in defending ourselves or our employees against these claims, regardless of
their merits. In addition, defending ourselves from these claims could divert
the attention of our management away from our operations.
IF OUR PRODUCTS DO NOT INTEROPERATE WITH OUR CUSTOMERS' OR THEIR END USERS'
NETWORKS, INSTALLATIONS OF OUR PRODUCTS MAY BE DELAYED OR CANCELLED, AND WE
COULD EXPERIENCE SUBSTANTIAL PRODUCT RETURNS, WHICH COULD SERIOUSLY HARM OUR
BUSINESS.
We expect that our network service provider customers and their end users
generally will require that our products be designed to interface with their
existing networks, each of which may have different specifications and use
multiple protocol standards. If our products do not interoperate with our
customers' or their end users' networks, installations of our products could be
delayed, orders for our products could be cancelled or our products could be
returned and our reputation could suffer.
Our customers' and their end users' networks contain multiple generations
of products that have been added over time as those networks have grown and
evolved. Our products must interoperate with all of the products within those
networks as well as future products in order to meet our customers' and their
end users' requirements. Our customers may require product
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enhancements to suit their particular needs, and we may have to modify our
products to overcome any software incompatibilities with existing software used
in our customers' and their end users' networks. If we have to redesign our
products to make them compatible with a customer's network, our sales cycle and
research and development expense may increase, and profit margins on our
products may be reduced.
IF WE DO NOT RESPOND RAPIDLY TO TECHNOLOGICAL CHANGES, OR IF STANDARDS THAT ARE
ADOPTED DIFFER FROM THOSE THAT WE USE, OUR PRODUCTS COULD BECOME OBSOLETE.
The market for our IP service delivery platform and other service delivery
products is likely to be characterized by rapid technological change, frequent
new product introductions and changes in customer and end user requirements. We
may be unable to respond quickly or effectively to these developments. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent our development, introduction or marketing of new products and
enhancements. The introduction of new products by competitors, market acceptance
of products based on new or alternative technologies or the emergence of new
industry standards, could render our existing or future products obsolete.
In developing our products, we have made, and will continue to make,
assumptions about the standards that may be adopted by our customers, end users
and our competitors. If our assumptions are wrong or if standards adopted by our
customers or competitors, most of which are considerably larger and have a
greater market presence than we do, are different from those which we have
chosen, our new products may fail to achieve market acceptance. In order to
introduce products incorporating new technologies and new industry standards, we
must be able to access the latest technologies of our customers, their end
users, our suppliers and other network vendors. Any failure to anticipate
changing technological standards and access new technologies could impair the
competitiveness of our products.
WE RELY ON OUR INTELLECTUAL PROPERTY RIGHTS TO MAINTAIN OUR COMPETITIVE
ADVANTAGE AND, EVEN IF WE DEVOTE SIGNIFICANT RESOURCES TO PROTECTING OR
CONFIRMING THESE RIGHTS AGAINST THIRD PARTIES, WE MAY BE UNABLE TO DO SO.
We rely on a combination of copyright, trademark and trade secret laws and
restrictions on disclosure to protect our intellectual property rights. We also
enter into confidentiality or license agreements with our employees, consultants
and third parties with whom we have strategic relationships, and control access
to and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Monitoring unauthorized use of our products is difficult, and we
cannot be certain that the steps we have taken will prevent unauthorized use of
our technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States. For more information
concerning our intellectual property rights, see "Business -- Intellectual
Property".
IF WE BECOME INVOLVED IN AN INTELLECTUAL PROPERTY DISPUTE, WE COULD BE SUBJECT
TO SIGNIFICANT LIABILITY, THE TIME AND ATTENTION OF OUR MANAGEMENT COULD BE
DIVERTED AND WE COULD BE PREVENTED FROM SELLING OUR PRODUCTS.
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. Although we
have never been involved in any intellectual property litigation, we may become
a party to litigation in the future to protect our intellectual property or as a
result of our alleged infringement of others' intellectual property. These
claims and any resulting lawsuit could subject us to significant liability for
damages and invalidate our proprietary rights. These lawsuits, regardless of
their merits, likely would be time-consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual property
litigation alleging our infringement of a third-party's
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intellectual property also could force us to do one or more of the following:
- - stop selling, incorporating or using our products or services that use the
challenged intellectual property;
- - obtain from the owner of the infringed intellectual property right a license
to sell or use the relevant technology, which license may not be available on
reasonable terms, or at all; or
- - redesign those products or services that use such technology.
If we are forced to take any of these actions, we may be unable to
manufacture and sell our products, which would reduce our revenues.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights to protect these rights or to
determine the scope and validity of our proprietary rights or the proprietary
rights of competitors. These claims could result in costly litigation and divert
the attention of our technical and management personnel.
NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY BE TERMINATED, UNAVAILABLE OR
EXPENSIVE.
We license from third-party suppliers several key software applications
incorporated in our IP service delivery platform, such as firewall detection
software from Network Associates and database software from Oracle. From time to
time we may be required to license technology from other third-party suppliers
to enable us to develop new products or product enhancements. Our existing
third-party licenses may not remain available to us on commercially reasonable
terms, or at all, and we may not be able to obtain new third-party licenses on
commercially reasonable terms, or at all. The inability to renew or obtain any
third-party license required to continue to sell existing products or develop
new products and product enhancements could require us to obtain substitute
technology of lower quality or performance standards or at greater cost, either
of which could seriously impair our ability to achieve and maintain market
acceptance of our products and harm our operating results.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS THAT COULD HARM OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We intend to substantially expand our international operations and enter
new international markets. This expansion will require significant management
attention and financial resources to successfully translate our product manuals
into other languages and to develop appropriate international sales and support
channels. Additionally, we intend to rely on a limited number of international
distributors to increase sales and to manage customer service. We have limited
experience in marketing and distributing our products internationally and may be
unable to develop international market demand for our products directly or
through distribution arrangements.
In addition, our international operations may be affected by other
factors, including:
- - the impact of recessions in economies outside the United States;
- - increased difficulty in collecting accounts receivable and longer collection
periods;
- - certification requirements and unexpected changes in them or in other
regulatory requirements;
- - difficulties inherent in developing versions of our products that comply with
local standards;
- - difficulties and costs of staffing and managing foreign operations;
- - reduced protection for intellectual property rights in some countries;
- - potential consequences of foreign currency fluctuations;
- - potentially adverse tax consequences; and
- - political and economic instability.
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SOME OF OUR PRODUCTS MAY BE SUBJECT TO U.S. GOVERNMENT EXPORT RESTRICTIONS AND
REGULATIONS, WHICH COULD REDUCE OUR ABILITY TO SELL THOSE PRODUCTS IN SOME
FOREIGN MARKETS.
Some of our products are subject to the U.S. Export Administration
Regulations, governed by the U.S. Department of Commerce. Network security
products, technology and associated technical assistance, particularly products
and technology incorporating encryption, may be subject to U.S. export
restrictions or import or equivalent restrictions under the laws of various
foreign countries. Recent changes to U.S. laws enable us to export more of these
products without restrictions. However, some products still may not be exported
without prior approval from the U.S. government. The list of products and end
users for which export approval is required, and related regulatory policies,
are subject to revision by the U.S. government at any time. The cost of
compliance with U.S. and international export laws, as well as changes in
existing laws, could reduce our ability to sell some of our products in some
foreign markets, and could harm our international revenues.
OUR SUCCESS DEPENDS ON THE CONTINUED USE AND EXPANSION OF PACKET DATA NETWORKS
SUCH AS THE INTERNET.
Our future success depends on the continued growth of privately held and
publicly accessed packet data networks, such as the Internet, as widely-used
media for commerce and communication. If use of those networks for
communications and commerce does not continue to increase, the growth in the
market for network service providers and for the value-added services that our
IP service delivery platform offers, may not continue, which could seriously
harm our business, results of operations and financial condition.
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE, AND OUR ABILITY TO
GROW MAY BE LIMITED AS A RESULT.
We believe that the net proceeds of this offering, together with our
existing cash balances, will be sufficient to meet our capital requirements at
least through the next twelve months. However, we may be required or may choose
to seek additional funding prior to that time.
The development and marketing of new products and the expansion of our
manufacturing facilities and associated support personnel and our sales and
marketing organizations will require a significant commitment of resources. In
addition, if the market for our products develops at a slower pace than
anticipated, or if we fail to establish significant market share and achieve a
meaningful level of revenue, we may require additional financing earlier or in
greater amounts than anticipated. In addition, cash used for acquisitions or
other unanticipated uses may increase our capital requirements. In the event
that we are required to raise additional funds, we may not be able to do so on
favorable terms, or at all. Future debt financing may limit our financial or
operating flexibility. Further, if we issue new equity securities, stockholders
may experience additional dilution or the new equity securities may have rights,
preferences or privileges senior to those of existing holders of common stock.
If we cannot raise funds on acceptable terms, we may not be unable to develop or
enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements.
ANY ACQUISITIONS WE MAKE COULD ADVERSELY AFFECT US.
We may make investments in, or acquisitions of complementary companies,
products or technologies. In the event of any future investments or
acquisitions, we could:
- - issue stock that would dilute our current stockholders' percentage ownership,
incur debt or assume liabilities; or
- - incur large and immediate write-offs or amortization expenses related to
goodwill and other intangible assets.
These purchases also involve numerous risks, including:
- - problems integrating the purchased operations, technologies or products with
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our own, including diversion of management's attention from our core business;
- - adverse effects on existing business relationships with suppliers and
customers and other unanticipated costs;
- - difficulties associated with entering markets in which we have no or limited
prior experience; and
- - potential loss of key employees, particularly those of the purchased
organizations.
PRIOR TO THIS OFFERING, THERE HAS BEEN NO MARKET FOR OUR COMMON STOCK, AND A
PUBLIC MARKET FOR OUR SECURITIES MAY NOT DEVELOP OR BE SUSTAINED.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering, and the market price might fall below the initial
public offering price. The initial public offering price may bear no
relationship to the price at which the common stock will trade upon completion
of this offering. The initial public offering price will be determined based on
negotiations between us and the representatives of the underwriters, based on
factors that may not be indicative of future market performance.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER US AFTER THIS OFFERING
AND COULD DELAY OR PREVENT A CHANGE IN OUR CORPORATE CONTROL.
Upon completion of this offering, our executive officers, directors and
principal stockholders who hold 5% or more of the outstanding common stock and
their affiliates will beneficially own, in the aggregate, approximately %
of our outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent an outside party from acquiring or
merging with us. For a fuller discussion of the equity ownership of these
stockholders, see "Principal Stockholders".
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR SHARE PRICE, WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR
ABOVE THE INITIAL PUBLIC OFFERING PRICE.
The market price of our common stock after this offering may vary from the
initial public offering price. If you purchase shares of common stock, you may
be unable to resell those shares at or above the initial public offering price.
The market price of our common stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control, including:
- - quarterly variations in operating results;
- - changes in financial estimates or recommendations by securities analysts;
- - changes in market valuations of other data communications equipment companies;
- - announcements by us or our competitors of new products or of significant
technological innovations, contracts, acquisitions, strategic partnerships or
joint ventures;
- - any loss of a major customer;
- - departures of key personnel;
- - any deviations in net revenues or in losses from levels expected by securities
analysts; and
- - future sales of common stock.
In addition, the stock markets in general, and the Nasdaq National Market
and technology companies in particular, have experienced extreme volatility that
has often been unrelated or disproportionate to the operating performance of
particular companies. These market fluctuations may cause our stock price to
fall regardless of our performance.
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER THIS
OFFERING THAT COULD CAUSE OUR STOCK PRICE TO FALL.
Our current stockholders hold a substantial number of shares, which they
will
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be able to sell in the public market in the near future. Sales of a substantial
number of shares of our common stock after this offering could cause our stock
price to fall. In addition, the sale of these shares could impair our ability to
raise capital through the sale of additional stock. You should read "Shares
Eligible for Future Sale" for a fuller discussion of the shares that may be sold
in the public market in the future.
INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price of our common stock is expected to be
substantially higher than the net tangible book value per share of our
outstanding common stock immediately after the offering. Accordingly, if you
purchase our common stock in this offering, you will incur immediate dilution of
approximately $ in the net tangible book value per share of our common
stock from the price you pay for our common stock. This calculation assumes that
you purchased our common stock for $ per share. For additional information
on this calculation, see "Dilution".
PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL.
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
- - authorizing our board of directors to issue preferred stock without
stockholder approval;
- - providing for a classified board of directors with staggered, three-year
terms;
- - prohibiting cumulative voting in the election of directors;
- - requiring super-majority voting to effect significant amendments to our
certificate of incorporation and bylaws or to remove directors without cause;
- - restricting the ability of stockholders to call special meetings;
- - prohibiting stockholder actions by written consent; and
- - establishing advance notice requirements for nominations for election to the
board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Provisions of Delaware law also may discourage, delay or prevent someone
from acquiring or merging with us, which could cause the market price of our
common stock to decline. For a fuller discussion of these provisions, see
"Description of Capital Stock -- Delaware Anti-Takeover Law and Certain
Provisions of Our Certificate of Incorporation and Bylaws".
NOTE REGARDING FORWARD LOOKING STATEMENTS
You should not rely on forward looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipate," "believe," "plan," "expect,"
"future," "intend" and similar expressions to identify forward-looking
statements. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to a number of factors,
including those discussed in "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
prospectus. You should not rely on these forward-looking statements, which apply
only as of the date of this prospectus.
20
<PAGE> 23
USE OF PROCEEDS
The net proceeds from the sale of the shares of common
stock offered by us are estimated to be $ , or $ if the
underwriters exercise in full their option to purchase additional shares in the
offering. These estimates are calculated based on an assumed initial public
offering price of $ per share and after deducting an assumed underwriting
discount and estimated offering expenses payable by us.
The principal purposes of this offering are to:
- - increase our working capital;
- - create a public market for our common stock;
- - facilitate our future access to public equity markets; and
- - provide us with increased visibility and credibility.
We presently have no specific plans for the use of the net proceeds of
this offering. We intend to use the net proceeds primarily for general corporate
purposes, including working capital, expansion of our sales and marketing
organization and capital expenditures. In addition, we may, when and if the
opportunity arises, use a portion of the net proceeds to acquire complementary
products, technologies or businesses. However, we currently have no commitments
or agreements and are not involved in any negotiations with respect to any such
transactions. Pending use of the net proceeds of this offering, we intend to
invest the net proceeds in interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our lease lines and bank lines of credit prohibit the
payment of dividends without prior approval.
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<PAGE> 24
CAPITALIZATION
The following table sets forth:
- - our actual capitalization as of March 31, 2000;
- - our pro forma capitalization as of March 31, 2000 reflecting the automatic and
assumed exercise of certain warrants and the automatic conversion into common
stock upon the closing of this offering of our outstanding preferred stock and
the Series E preferred stock expected to be issued upon satisfaction of
customary closing conditions; and
- - our pro forma as adjusted capitalization as of March 31, 2000 to give effect
to the sale of shares of common stock at an assumed initial public
offering price of per share after deducting an assumed underwriting
discount and estimated offering expenses payable by us.
You should read the information set forth below together with our
consolidated financial statements and the notes to those statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt, net of current portion................... $ 9,580 $ 9,580 $
Redeemable convertible preferred stock, 61,582,326 shares
authorized, 55,131,135 shares issued and outstanding
(actual); no shares issued or outstanding (pro forma
and pro forma as adjusted)............................. 104,662 --
Stockholders' equity:
Preferred stock, $0.0001 par value, 2,150,000 shares
authorized, 1,875,000 shares issued and outstanding
(actual); no shares issued and outstanding (pro
forma and pro forma as adjusted).................... 3,756 -- --
Common stock, $0.0001 par value, 200,000,000 shares
authorized (subject to stockholder approval),
17,824,826 shares issued and outstanding (actual);
87,704,801 shares issued and outstanding (pro
forma); issued and outstanding (pro forma as
adjusted)........................................... 88,408 269,957
Notes receivable from stockholders..................... (8,373) (8,373)
Accumulated other comprehensive income................. (28) (28)
Deferred compensation.................................. (59,562) (59,562)
Deficit accumulated during the development stage....... (86,376) (86,376)
-------- -------- -------
Total stockholders' equity (net capital
deficiency)....................................... (62,175) 115,618
-------- -------- -------
Total capitalization.............................. $ 52,067 $125,198 $
======== ======== =======
</TABLE>
The total number of outstanding shares of our common stock is as of March
31, 2000 and excludes:
- - 8,319,705 shares issuable upon exercise of outstanding stock options as of
March 31, 2000, with a weighted average exercise price of $2.06 per share;
- - 8,231,226 shares reserved for issuance under our stock option, director option
and employee stock purchase plans, including amounts authorized for issuance
subsequent to March 31, 2000; and
- - 1,058,726 shares of common stock issuable upon exercise of warrants
outstanding as of March 31, 2000 at a weighted average exercise price of $0.55
per share, excluding shares associated with warrants that are subject to
automatic exercise.
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<PAGE> 25
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma net tangible book value per share of our
common stock after this offering. We calculate net tangible book value per share
by dividing the net tangible book value, or total assets less intangible assets
and total liabilities, by the number of outstanding shares of common stock.
Our pro forma net tangible book value based on shares outstanding at March
31, 2000, after giving effect to the automatic and assumed exercise of certain
warrants for and automatic conversion of our outstanding preferred stock and the
shares of Series E preferred stock expected to be issued upon the satisfaction
of customary closing conditions, 69,879,975 shares of common stock upon the
closing of this offering, was $ , or $ per share of common stock.
After giving effect to the sale of the shares of common
stock at an assumed initial public offering price of $
per share less an assumed underwriting discount and estimated offering expenses
payable by us, our pro forma net tangible book value at March 31, 2000 would be
$ , or $ per share. This represents an immediate increase in pro
forma net tangible book value of $ per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $ per share to
new investors, or approximately % of the assumed initial public offering
price of $
per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at March 31,
2000................................................... $
Increase per share attributable to new investors..........
------
Pro forma net tangible book value per share after this
offering..................................................
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table shows on a pro forma basis at March 31, 2000, after
giving effect to the automatic and assumed exercise of certain warrants and
automatic conversion of all shares of our outstanding preferred stock and the
shares of Series E preferred stock expected to be issued upon satisfaction of
customary closing conditions, into 69,879,975 shares of common stock upon the
closing of this offering, the number of shares of common stock purchased from
us, the total consideration paid to us and the average price per share paid by
existing stockholders and by new investors purchasing common stock in this
offering, before deducting an assumed underwriting discount and estimated
offering expenses payable by us, at an assumed initial public offering price of
$
per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- --------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ % $ % $
New investors................
------- --- --------- ---
Total...................... 100% $ 100%
======= === ========= ===
</TABLE>
The foregoing discussion and table are based on the number of outstanding
shares
23
<PAGE> 26
of our common stock after this offering and excludes:
- 8,319,705 shares issuable upon exercise of outstanding stock options as
of March 31, 2000, with a weighted average exercise price of $2.06 per
share;
- 8,231,226 shares, reserved for future issuance under our stock option,
director option and employee stock purchase plans, including amounts
authorized for issuance subsequent to March 31, 2000; and
- 1,058,726 shares of common stock issuable upon exercise of warrants
outstanding as of March 31, 2000, other than warrants that are
automatically exercised upon completion of this offering, at a weighted
average exercise price of $0.55 per share.
To the extent any of these options or warrants are exercised, there will
be further dilution to investors. See "Capitalization," "Management -- Stock
Plans," "Description of Capital Stock" and note 8 of notes to consolidated
financial statements.
24
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes to those statements included elsewhere in this prospectus. The
consolidated statement of operations data set forth below for the period from
inception to December 31, 1997, and for the fiscal years ended December 31, 1998
and 1999, and the consolidated balance sheet data as of December 31, 1998 and
1999 have been derived from our audited consolidated financial statements
included elsewhere in this prospectus, which have been audited by Ernst & Young
LLP, Independent Auditors. The consolidated balance sheet data at December 31,
1997 is derived from the audited consolidated financial statements that are not
included in this prospectus. The consolidated statement of operations data for
the three-month periods ended March 31, 1999 and 2000, and the consolidated
balance sheet data as of March 31, 1999 and 2000, are unaudited and have been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this prospectus. In the opinion of management, all
necessary adjustments consisting only of normal recurring adjustments have been
included to present fairly the unaudited consolidated quarterly results when
read in conjunction with the audited consolidated financial statements and the
notes thereto appearing elsewhere in this prospectus. The historical results are
not necessarily indicative of results to be expected for any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
25
<PAGE> 28
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEARS ENDED THREE MONTHS ENDED
(APRIL 14, 1997) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------ --------------------
1997 1998 1999 1999 2000
---------------- ------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................... $ -- $ -- $ -- $ -- $ 3,540
Cost of goods sold..................... -- -- -- -- 2,600
------ ------- -------- ------- --------
Gross profit........................... -- -- -- -- 940
Operating expenses:
Research and development............. 87 7,366 27,336 5,494 15,700
Sales and marketing.................. -- 606 6,077 500 21,679
General and administrative........... 47 1,106 4,980 783 3,170
------ ------- -------- ------- --------
Total operating expenses........... 134 9,078 38,393 6,777 40,549
------ ------- -------- ------- --------
Loss from operations................... (134) (9,078) (38,393) (6,777) (39,609)
Interest income (expense), net......... 3 (212) 651 (12) 378
Other income (expense)................. -- (3) 21 -- --
------ ------- -------- ------- --------
Net loss............................... $ (131) $(9,293) (37,721) (6,789) (39,231)
Deemed dividend to Series D preferred
stockholders......................... -- -- -- -- (2,500)
------ ------- -------- ------- --------
Net loss allocable to common
stockholders......................... $ (131) $(9,293) $(37,721) $(6,789) $(41,731)
====== ======= ======== ======= ========
Basic and diluted net loss per common
share................................ $(0.25) $ (4.53) $ (7.80) $ (1.78) $ (6.67)
====== ======= ======== ======= ========
Shares used in computing basic
and diluted net loss per common
share(1)............................. 522 2,051 4,837 3,817 6,255
====== ======= ======== ======= ========
Pro forma basic and diluted net loss
per common share (unaudited)......... $ (0.75) $ (0.61)
======== ========
Shares used in computing pro forma
basic and diluted net loss per common
share (unaudited)(1)................. 50,378 68,295
======== ========
</TABLE>
- ---------------
(1) See note 1 of notes to consolidated financial statements for an explanation
of the determination of the shares used to compute basic and diluted net
loss per share and basic and diluted pro forma net loss per share.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------- ----------------------
1997 1998 1999 1999 2000
------ ------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, and short-term
investments.............................. $1,301 $ 6,580 $ 54,586 $ 22,552 $ 44,515
Working capital............................ 1,238 2,900 49,584 18,522 37,699
Total assets............................... 1,443 11,099 66,070 28,106 68,363
Long-term obligations, less current
portion.................................. -- 2,710 7,907 3,728 9,580
Redeemable convertible preferred stock..... -- 9,823 89,388 31,773 104,662
Total stockholders' equity
(net capital deficiency)................. 1,370 (6,038) (38,374) (12,588) (62,175)
</TABLE>
26
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and notes thereto included elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of a number of factors,
including, but are not limited to, those discussed under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
From our inception on April 14, 1997 through March 31, 2000, our operating
activities were primarily devoted to increasing our research and development
capabilities, designing our hardware, developing our software and testing our
products. In March 2000, after extensive field testing of our IP service
delivery platform, we began shipping to our first customers. We currently market
our products through our direct sales force to service providers in Asia, North
America and Europe. We provide customer service and support for our products.
To date, substantially all of our revenues have been derived from sales of
the IPSX 9000 and related software applications. Substantially all of our
revenues have been generated from two customers. We expect that the majority of
our future revenues in the near term will continue to come from sales of the
IPSX 9000 and related software applications to a small number of customers. We
expect to receive a substantial portion of our revenues from these initial
customers until we can sufficiently penetrate additional accounts.
Because the market for our IP service delivery platform is new and
evolving, the volume and timing of orders are difficult to predict. A customer's
decision to purchase our platform typically involves a lengthy evaluation and
product qualification process that takes several months and may include:
- - technical evaluation;
- - network planning;
- - integration into the customer's and its end-users' networks; and
- - customer trials.
Even after customers decide to purchase our platform, they tend to deploy
it slowly and deliberately. Long sales and implementation cycles for our
platform, as well as the expectation that customers will tend to sporadically
place large orders with short lead times, may cause our revenues and operating
results to vary significantly and unexpectedly from quarter to quarter.
We recognize revenue for hardware sales and software license fees at the
time of shipment, unless we have future obligations for installation or have to
obtain customer acceptance, in which case we defer recognizing revenue until the
product is installed or accepted. Revenue from service obligations is deferred
and recognized on a straight-line basis over the contractual period. Amounts
billed in excess of revenue recognized are included as deferred revenue in the
accompanying balance sheets. At March 31, 2000, a total of $1.0 million of
revenue was deferred. It is currently expected that this deferred revenue will
be recognized in 2000 and 2001. We provide a reserve for warranty returns based
on our experience with the customer evaluation process. Historically, selling
prices in the Internet infrastructure equipment market have been relatively
stable. However, as competitors launch new products, our prices may decline.
Cost of goods sold includes all costs associated with the production of
our products, including the cost of outsourced manufacturing, software
royalties, warranties, related manufacturing overhead costs, as well as costs
associated with our service offerings, including personnel engaged in providing
maintenance, product installation and consulting to our customers. We have
outsourced the majority of our manufacturing, repair and supply chain management
27
<PAGE> 30
operations. Accordingly, a significant portion of our cost of goods sold
consists of payments to Solectron, Surface Mount Technology Centre, or SMTC, and
Sonic Manufacturing, our contract manufacturers. We conduct manufacturing
engineering, final assembly, configuration testing and documentation control at
our facility in Redwood City, California.
Research and development expenses consist primarily of salaries and
related personnel costs, fees paid to contractors and outside service providers,
laboratory equipment and prototype costs related to the design, development and
testing of our products. We have also incurred stock-based research and
development expenses arising from the issuance of stock options to purchase
common stock to members of our technical advisory boards. We expense our
research and development costs as they are incurred. Several components of our
research and development effort require significant expenditures, the timing of
which can cause significant quarterly variability in our expenses. The number of
prototypes required to build and test a complex product such as the IP service
delivery platform is large and this building and testing process occurs over a
short period of time. We are devoting substantial resources to the continued
development of new products and the enhancement of existing products. We believe
that our research and development is critical to our strategic product
development objectives and that to take advantage of our leading technology and
meet the changing requirements of our customers, we will need to fund several
development projects simultaneously. As a result, we expect that research and
development expenses, excluding stock-based compensation, will increase in
absolute dollars in the future.
Sales and marketing expenses consist primarily of salaries and related
expenses for personnel engaged in marketing, sales and customer evaluations, as
well as the amortization cost of customer evaluation units and other costs
associated with promotional and other marketing expenses, including stock-based
sales and marketing expenses arising from the issuance to our customers of
warrants to purchase preferred and common stock. The complexity of our IP
service delivery platform and the networks in which it is installed and
integrated require highly trained systems engineers and service and support
personnel. We expect to hire additional systems engineers and to expand our
customer support organization in order to organize and administer the increasing
number of customer evaluations and trials. We expect that sales and marketing
expenses, excluding stock-based compensation, will increase substantially in
absolute dollars as we hire additional sales and marketing personnel, initiate
additional marketing programs to support the IP service delivery platform,
establish additional and expand existing direct sales offices in the United
States and abroad, and engage in more customer evaluations and trials.
General and administrative expenses consist primarily of salaries and
related expenses for executive, business development, finance and accounting and
human resources personnel as well as other corporate expenses, including
stock-based compensation. We expect general and administrative expenses,
excluding stock-based compensation, to increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and
our operation as a public company.
In connection with the grant of certain stock options to employees, we
accrued deferred compensation of $34.0 million during 1999 and $36.8 million
during the three months ended March 31, 2000, representing the difference
between the deemed value of the common stock for accounting purposes and the
exercise price of these options at the date of grant. Deferred compensation is
presented as a reduction of stockholders' equity and is amortized over the
vesting period of the applicable options. We amortized $3.6 million of deferred
compensation during the year ended December 31, 1999 and $7.6 million of
deferred compensation during the three months ended March 31, 2000. This
compensation expense relates to stock options awarded to individuals in all
operating
28
<PAGE> 31
expense categories. Based on options granted as of March 31, 2000, we expect to
amortize additional deferred compensation of $29.7 million during the remainder
of 2000 using the accelerated method. See note 8 of our notes to consolidated
financial statements.
As of December 31, 1999, we had $25.6 million of federal net operating
loss carryforwards and $28.9 million of state net operating loss carryforwards
for tax reporting purposes available to offset future taxable income. These net
operating loss carryforwards expire at various dates beginning 2005 to the
extent that they are not utilized. We have not recognized any benefit from the
future use of net operating loss carryforwards for these periods, or for any
other periods, since inception. We are not currently recognizing the potential
tax benefits of our net operating loss carryforwards because we do not have
sufficient evidence that we will generate adequate profits to use them.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
The quarter ended March 31, 2000 was our first quarter of revenue. Revenue
for the quarter was $3.5 million, with sales to Qwest Communications and
AduroNet accounting for substantially all of that amount.
COST OF GOODS SOLD
Cost of goods sold for the quarter ended March 31, 2000 was $2.6 million.
Cost of goods sold was high in relation to sales because it included start-up
expenses, as well as high overhead costs relative to low manufacturing volumes.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $15.7 million in the three months
ended March 31, 2000, an increase of $10.2 million over the comparable quarter
in 1999. Approximately $4.1 million of the increase was due to amortization of
stock-based compensation related to stock options issued to employees and
consultants. Other drivers of the increase include the hiring of additional
research and development personnel, expenses related to prototype development,
information technology infrastructure costs and equipment depreciation.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $21.7 million in the three months ended
March 31, 2000, an increase of $21.2 million over the comparable quarter in
1999. The increase was primarily due to $16.2 million of non-cash expenses
associated with warrants granted to customers in connection with valuable
technical and market services. Approximately $1.8 million of the increase was
due to amortization of stock-based compensation related to stock options issued
to employees and consultants. The increase also reflects hiring of additional
sales and marketing personnel and related expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $3.2 million in the three months
ended March 31, 2000, an increase of $2.4 million over the comparable quarter in
1999. The increase was primarily due to $1.8 million of amortization related to
stock-based compensation in connection with stock options issued to employees
and consultants. The increase was also due to the hiring of additional general
and administrative personnel and related expenses.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of income from our cash
investments. Interest and other income totaled $694,000 in the three months
ended March 31, 2000, an increase of $604,000 over the comparable quarter in
1999. The increase was due to larger cash balances available for investing
resulting from the proceeds from the sales of preferred stock.
INTEREST EXPENSE
Interest expense is incurred as a result of our financing obligations.
Interest expense
29
<PAGE> 32
totaled $316,000 in the three months ended March 31, 2000, an increase of
$214,000 over the comparable quarter in 1999. The increase was due to an
increase in equipment loans.
DEEMED DIVIDEND
In March 2000, we sold 625,000 shares of Series D redeemable convertible
preferred stock at $8.00 per share for which we received proceeds of
approximately $5.0 million. At the date of issuance, we believed that the per
share price of $8.00 represented the fair value of the preferred stock.
Subsequent to the commencement of our initial public offering process, we
reevaluated the fair value of our common stock as of March 2000. Accordingly,
the increase in fair value has resulted in a beneficial conversion feature of
$2.5 million, that has been recorded as a deemed dividend to preferred
stockholders in 2000. We recorded the deemed dividend at the date of issuance by
offsetting charges and credits to stockholders' equity. The preferred stock
dividend increases the net loss allocable to common stockholders in the
calculation of basic and diluted net loss per common share for the three months
ended March 31, 2000.
YEARS ENDED DECEMBER 31, 1999 AND 1998
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $27.3 million in 1999, an increase
of $20.0 million compared to 1998. The increase was primarily due to the hiring
of additional research and development personnel, and secondarily to expenses
related to prototype development. The increase was also due to $2.2 million of
amortization related to stock-based compensation in connection with stock
options issued to employees and consultants, as well as increases in information
technology infrastructure costs and equipment depreciation.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $6.1 million in 1999, an increase of
$5.5 million compared to 1998. The increase was primarily due to the hiring of
additional sales and marketing personnel and related expenses. The increase was
also due to $1.4 million of amortization of deferred compensation related to
stock options issued to employees and consultants. The increase also reflected
higher expenses related to travel, marketing programs and public relations
events.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $5.0 million in 1999, an increase
of $3.9 million compared to 1998. The increase was primarily due to the hiring
of additional general and administrative personnel and related expenses, and
secondarily to outside service costs. The increase was also due to $0.7 million
of amortization related to stock-based compensation in connection with stock
options issued to employees and consultants.
INTEREST AND OTHER INCOME
Interest and other income primarily represents income on our cash
investments. Interest and other income totaled $1.3 million in 1999, an increase
of $1.2 million compared to 1998. The increase was due primarily to the larger
cash balances from the proceeds of the issuance of preferred stock.
INTEREST EXPENSE
Interest expense includes expenses related to our financing obligations.
Interest expense totaled $599,000 in 1999, an increase of $332,000 compared to
1998. The increase was due to an increase in equipment loans.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of $94.1 million of convertible preferred stock as well as through
equipment and working capital loans.
At March 31, 2000, cash, cash equivalents and short-term investments
totaled $44.5 million. The decrease from December 31, 1999 was due to cash used
in operations and the purchase of equipment. Cash, cash equivalents and
short-term investments totaled $54.6 million at December 31, 1999, compared to
$6.6 million
30
<PAGE> 33
at December 31, 1998. Most of the increase was due to the receipt of $79.2
million from the sales of preferred stock in March, September and October 1999.
We used $11.4 million in cash for operations in the three months ended
March 31, 2000 compared to $5.5 million in the three months ended March 31,
1999. The increase in the quarter ended March 31, 2000 over the comparable
quarter in 1999 was due primarily to the increase in our net loss from $6.8
million in the three months ended 1999 to $39.2 million in the three months
ended 2000, offset in part by $24.2 million in non-cash expense associated with
the issuance of warrants and options and amortization of deferred stock
compensation. We used $30.8 million in cash for operations in 1999, an increase
of $25.5 million from the $5.3 million used in 1998. The increase was primarily
due to an increase in our net loss from $9.3 million in 1998 to $37.7 million in
1999.
In the three months ended March 31, 2000, we generated $3.5 million in
cash from investing activities, an increase of $4.5 million from the $1.0
million used in the three months ended March 31, 1999. The increase in the
quarter ended March 31, 2000 over the comparable quarter in 1999 was due to
proceeds of $13.5 million from the sale and maturity of short term investments,
offset, in part, by $5.6 million of capital equipment purchases and $4.4 million
used to purchase short-term investments. We used $41.3 million in cash for
investing activities in 1999, an increase of $38.3 million from the $3.0 million
used in 1998. The increase was due to the investment of $34.5 million in
short-term securities and the purchase of $6.8 million of capital equipment,
most of which was financed through equipment loans.
We generated $85.6 million in cash from financing activities in 1999, an
increase of $72.0 million from the $13.6 million generated in 1998. The increase
in cash generated from financing activities in 1999 over 1998 was due primarily
to proceeds from the issuance of convertible preferred stock. In addition, we
have used equipment loans to partially finance capital equipment purchases. We
generated $6.9 million in cash from financing activities in the three months
ended March 31, 2000, a decrease of $15.6 million compared to $22.5 million
generated for the three months ended March 31, 1999 as we generated less in
proceeds from preferred stock. We had $10.7 million of loans outstanding at
March 31, 2000.
We expect to devote substantial capital resources to continue our research
and development efforts, to hire and expand sales, customer service and support
and marketing organizations, to increase our marketing programs and to expand
our general corporate support activities. We believe that the net proceeds from
this offering, together with our existing cash balances, equipment loans and the
net proceeds from the sale of Series E preferred stock, will be sufficient to
meet our operating and capital requirements for at least the next 12 months.
However, there can be no assurance that we will not require additional financing
within this time frame or that such additional funding, if needed, will be
available on terms acceptable to us or at all. Our capital requirements during
this period and for the long term will depend on numerous factors, including
market acceptance of our products, the resources we devote to developing,
marketing, selling and supporting our products, and the timing and extent of
establishing international operations. Our capital commitments totaled
approximately $1.0 million at December 31, 1999 and approximately $3.3 million
at March 31, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants or
AICPA issued Statement of Position No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. We expect that the adoption of SOP No. 98-1 will
not have a material impact on our financial position or results of operations.
We adopted SOP No. 98-1 effective January 1, 1999.
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In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. FAS No. 133
establishes accounting methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
Because we do not currently hold any derivative instruments and do not engage in
hedging activities, we expect that the adoption of FAS No. 133 will not have a
material impact on our financial position or results of operations. We adopted
FAS No. 133 effective January 1, 1999.
In December 1999, the Securities and Exchange Commission ("SEC") issued
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We believe our revenue recognition policy is in compliance
with SAB 101 as of March 31, 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
Our exposure to market risks from changes in interest rates relates
primarily to corporate debt securities. We place our investments with high
credit quality issuers and, by policy, limit the amount of the credit exposure
to any one issuer.
Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with a maturity of less than three months at the date of purchase
are considered to be cash equivalents, and all investments with maturities of
three months or greater are classified as available-for-sale and considered to
be short-term investments.
The following table presents the amounts of our cash equivalents and
short-term investments that are subject to market risk by range of expected
maturity and weighted average interest rates as of December 31, 1999. This table
does not include money market funds because those funds are not subject to
market risk.
<TABLE>
<CAPTION>
MATURING
MATURING BETWEEN
IN 3 3 MONTHS AND
MONTHS 1 YEAR TOTAL
-------- ------------ -------
<S> <C> <C> <C>
Included in cash and cash equivalents and short-term
investments............................................ $34,497 -- $34,497
Weighted average interest rate........................... 6.0% --% 6.0%
</TABLE>
EXCHANGE RATE SENSITIVITY
We operate primarily in the United States. All of our sales to date have
been made in U.S. dollars; however, a small portion of our operational expenses
have not been denominated in U.S. dollars. To date, the effect of changes in
foreign currency exchange rates on operating expenses have not been material. In
the future, we intend to transact business in various foreign currencies and,
accordingly, will be subject to exposure from adverse movements in foreign
currency exchange rates. We intend to assess the need to use financial
instruments to hedge currency exposures on an ongoing basis.
We do not use derivative financial instruments for speculative trading
purposes.
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BUSINESS
OVERVIEW
We develop, market and sell the first open architecture communications
platform designed to rapidly enable the delivery of market-leading applications
and value-added services from within a service provider's network. Our IP
service delivery platform is designed to allow service providers to offer highly
differentiated, scalable managed value-added services, such as virtual private
networks, without the level of financial and human resources associated with
traditional deployment of these services. Our IP service delivery platform
consists of three key elements: our IPSX 9000 service processing switch and our
InVision service management system, both of which we are currently shipping, and
our InGage customer network management software, which is scheduled to be
released for customer trials in the second quarter of 2000. Our initial
customers are Qwest Communications, Nissho Electronics, Internet Initiative
Japan, BroadBand Office, American Metrocomm and AduroNet.
INDUSTRY BACKGROUND
Wide area data networks, including the Internet, have rapidly evolved to
become critical for the communication needs of many businesses and consumers.
The explosive growth in the number of users and applications has created an
enormous need for communications bandwidth. As a result, numerous service
providers have emerged to offer high speed connectivity services to businesses
and consumers. These service providers are building high-capacity networks using
the latest broadband access, switching and routing products from both
traditional and next-generation communications equipment vendors.
As new entrants in the service provider market emerge, the delivery of
high speed connectivity is becoming intensely competitive. This competition is
making it difficult for service providers to differentiate their service
offerings, except through pricing. The result has been a rapid commoditization
of bandwidth, which has created an environment that makes it increasingly
difficult for service providers to achieve and maintain profitability.
As businesses have become more dependent on the Internet and other wide
area data networks, they are increasingly seeking other communication services
in addition to high speed connectivity. To enable these services, a secure and
reliable networking environment is required. The Internet, however, suffers from
an inherent lack of security and dependability, which businesses have struggled
to overcome by deploying technologies such as firewalls, virus scanning,
intrusion detection and encryption using dedicated customer premises equipment,
or CPE. Businesses are also deploying additional dedicated CPE as more services
are needed. This equipment is costly to deploy and maintain and requires large
numbers of sophisticated and expensive networking personnel to manage. Most
businesses do not have the capability to effectively implement these new
technologies and have increasingly sought to outsource these activities.
Network service providers have started to provide management of customer
premises equipment to address this demand and achieve three important business
objectives:
- - attract subscribers through differentiated value-added services that can be
layered on top of high-speed connectivity services;
- - increase revenue and profits from business subscribers who are demanding
additional services; and
- - reduce subscriber churn, since customers are forced to consider the total cost
of replacing multiple services and to evaluate the risk of transitioning
business critical services to a new service provider.
While network service providers have started to offer value-added services
through the CPE-based approach to achieve these three objectives, the CPE-based
approach is subject to a number of limitations.
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<PAGE> 36
THE PROBLEMS OF A CPE-BASED APPROACH
The following diagram illustrates a typical CPE-based model for a single
corporate customer in which equipment is installed at various customer premises
and interlinked by dedicated encrypted connections:
MULTIVENDOR CPE DIAGRAM
The CPE-based model creates the following challenges that constrain the
delivery of value-added services for both service providers and their customers.
HIGH COST TO INSTALL AND MANAGE. Installing and managing equipment located
at dispersed customer sites results in high costs for both service providers and
their customers. Each new customer site or service requires new CPE, or the
modification of existing CPE, as well as on-site service calls. As a result, a
CPE-based approach is costly and time consuming and often leads to delays in
establishing service. This approach also requires that both service providers
and their subscribers incur significant maintenance and monitoring expenses for
all of the dedicated CPE and for the sophisticated technology personnel needed
to manage these highly complex networks.
DIFFICULT TO SCALE. A CPE-based service delivery model is difficult to
scale because on-site installation is required to deploy each new site or
service. In addition, implementation challenges increase geometrically as new
services and devices are added, since each new network site must be connected to
all existing network sites.
LIMITED NETWORK SERVICES. In a CPE-based model, a subscriber's data is
typically encrypted before entering the service provider's network. This
environment limits the service provider to simple packet forwarding because
value-added services must be implemented prior to encryption.
DIFFICULT TO INTEGRATE. CPE-based service provisioning often involves the
integration of multiple network devices from a variety of vendors. Integrating
and ensuring compatibility among these network devices is a significant
challenge to using them in an efficient, combined manner.
LACK OF CARRIER-CLASS RELIABILITY. Customer premises equipment is not
typically designed to deliver carrier-class reliability. Consequently, service
providers may have difficulty offering consistent quality of service across all
of these disparate network devices and implementing and supporting agreed levels
of service.
THE NEED FOR A NEW NETWORK-BASED
SERVICE DELIVERY MODEL
The problems with CPE-based service delivery models have created a
significant need for service providers to offer network-based services that
operate on infrastructure located within the service providers' networks.
Delivering value-added services in this manner requires the creation of a new
and more intelligent network, through which value-added services can be
delivered quickly and cost-effectively to thousands of customer sites from
within a service provider's network, without the need for equipment to be
deployed or managed on customers' premises. Furthermore, we believe that this
network must also be based on an open
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<PAGE> 37
architecture to enable the use of market-leading applications from third-party
vendors.
Existing infrastructure has been used in network-based approaches in
attempts to build intelligent networks. However, we believe that traditional
approaches and existing infrastructure cannot effectively be used to implement
this network because they face a number of challenges, which have constrained
their commercial viability:
LIMITATIONS OF EXISTING NETWORK-BASED APPROACHES
FARMS OF CUSTOMER PREMISES EQUIPMENT. While reducing the installation and
management costs resulting from broad geographic dispersion of customer premises
equipment, aggregating this equipment in the service providers' facilities does
not address the remaining problems associated with CPE-based approaches. In
addition, this approach introduces costs associated with requiring large numbers
of devices to be located in the already constrained space of the service
providers' facilities.
CARRIER SWITCHES AND ROUTERS. Switches and routers currently used by
service providers are specifically designed to forward packets through data
networks. However, they lack the flexibility and general purpose computing
capacity necessary to directly provide a wide range of value-added services,
making them poorly suited for deployment of these services.
LARGE GENERAL-PURPOSE SERVERS. Large general-purpose servers, commonly
deployed in computer data centers, do not have carrier-routing capabilities or
network access interfaces and are not optimized for data forwarding performance.
Further, these servers do not have the network management and operational
systems required to meet stringent service provider standards. Even when these
servers are loosely coupled with large routers to address the lack of carrier-
routing capabilities and network access interfaces, the combined system is
costly and inefficient and does not provide a secure environment.
NEED FOR AN OPEN ARCHITECTURE
Most of today's network devices are designed around proprietary
architectures and use operating systems that are highly inflexible and have not
been designed to support the migration of third-party applications into the
network. Since network equipment vendors generally cannot maintain core
competencies in all application technologies, we believe service providers need
a device that employs an open architecture, facilitating the development of new
applications and the adaptation of existing applications by third parties for
use on that device. Such a device is needed to allow service providers to
rapidly change services and deploy new applications without having to replace
installed infrastructure.
We believe there is substantial demand for next-generation systems that
enable the cost-effective delivery of network-based value-added services from an
open platform in a scalable and reliable manner.
THE COSINE COMMUNICATIONS SOLUTION
We develop, market and sell the first open architecture communications
platform designed to rapidly enable the delivery of market-leading applications
and value-added services from within a service provider's network. Our IP
service delivery platform combines advanced hardware and software in an open
architecture platform that is designed to allow service providers to build
intelligent data networks.
Intelligent data networks enabled by our products are designed to deliver
applications from within a network much like voice networks are designed to
deliver services, such as voice messaging and conferencing, without the need for
specialized customer premises equipment. Each IPSX 9000 can deliver applications
to thousands of subscribers simultaneously. The following diagram illustrates an
intelligent data network
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<PAGE> 38
enabled by our products for a single organization with multiple sites.
[GRAPHIC]
Our IP service delivery platform consists of three key elements: our IPSX
9000 service processing switch and InVision service management system, both of
which we are currently shipping, and our InGage customer network management
software, which is scheduled to be released for customer trials in the second
quarter of 2000.
We believe our products will offer the following benefits for service
providers and their customers:
- - the ability for service providers to increase revenue by delivering profitable
value-added services, such as extranet, intranet and remote access virtual
private network services, to their customers;
- - faster time to market for the delivery of new services by service providers;
- - reduced operating expenses for service providers through automated
provisioning, customer self-provisioning, centralized billing capability and
fewer on-site service calls;
- - the ability of service providers to attract new customers and reduce customer
churn;
- - the ability for subscribers to monitor and control value-added services;
- - carrier-class reliability and scalability;
- - sophisticated software-based network management capabilities for service
providers and their customers;
- - a flexible open architecture that can support market-leading third-party
applications; and
- - support for and interoperability with existing network standards and
applications.
Our IP service delivery platform is designed to achieve carrier-class
reliability and manageability and to scale efficiently as a service provider's
network and service offerings grow. Our platform is designed to enable network
service providers to offer their subscribers value-added services, such as
virtual private networks, firewall services and secure broadband access without
the need for CPE.
Our IP service delivery platform is designed for a wide range of service
providers. They include next-generation IP carriers, competitive local exchange
carriers, inter-exchange carriers, regional bell operating companies,
international phone companies and Internet service providers.
STRATEGY
Our objective is to be the leading supplier of a platform designed
specifically for the delivery of market-leading applications and value-added
services from within service provider networks. The following are the key
elements of our strategy:
- - LEVERAGE OUR OPEN ARCHITECTURE TO OFFER ADDITIONAL MARKET-LEADING THIRD-PARTY
SERVICE APPLICATIONS. The open architecture approach of the IPSX 9000 enables
us to offer service providers value-added services using market-leading,
third-party software technologies. We currently offer several such
technologies from a number of market-leading software providers. Our goal is
to continue developing relationships with additional third-party software
providers to expand our portfolio of services.
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<PAGE> 39
- - ESTABLISH OUR PLATFORM AS THE LEADING SOLUTION IN KEY MARKETS. Our initial
focus has been to achieve commercial deployments with key classes of service
providers to demonstrate and validate distinct applications of our platform.
We believe that early success with these customers will better enable us to
market our products to other service providers within these different classes
as these service providers continue to build their networks and replace
outdated equipment.
- - EXTEND OUR FIRST MOVER ADVANTAGE. We have built the first open architecture IP
service delivery platform designed specifically for the delivery of market-
leading applications and value-added services from within a service provider
network. Our goals are to secure rapid deployment of our products into service
providers' networks and to establish our products as the primary service
delivery platform, thereby creating a significant barrier to entry for
potential competitors.
- - WORK CLOSELY WITH CUSTOMERS TO FACILITATE NEW SERVICES. In developing our IP
service delivery platform, we have worked closely with our current customers
to develop features to meet their complex and distinct needs. We believe that
our close relationships and open communications with these customers have been
essential to our platform being designed and deployed into their networks. We
plan to continue to work closely with our current and potential customers to
develop product enhancements, future products and value-added services that
specifically meet their evolving needs.
- - EXPAND SALES, DISTRIBUTION, SUPPORT AND SERVICE CAPABILITIES. We plan to
aggressively expand our sales and distribution capabilities in the United
States and internationally. Additionally, we have built a team of support and
service professionals to assist our customers with the rapid design and
deployment and efficient operation of our platform within their networks.
- - EXTEND TECHNOLOGY LEADERSHIP. We have established technology leadership with
our modular and scalable hardware and software architecture. We believe that
we can use this modular architecture to rapidly develop future products and
enhancements. We intend to extend our technology leadership through continued
significant investment in research and development.
- - PURSUE STRATEGIC ALLIANCES AND ACQUISITIONS. We intend to expand our products
and services through selected acquisitions and alliances. These may include
acquisitions of complementary products, technologies and businesses that
enhance our technology leadership and product breadth. We also believe that
allying with companies providing complementary products or services for
intelligent data networks will assist us in bringing greater value to our
customers and extending our lead over potential competitors.
PRODUCTS AND TECHNOLOGY
IP SERVICE DELIVERY PLATFORM
Our IP service delivery platform consists of three key products: our IPSX
9000 service processing switch, our InVision service management system and our
InGage customer network management software. In January 2000, we released our
IPSX 9000 service processing switch and InVision service management system for
general availability. We anticipate releasing our InGage customer network
management software for customer trials in the second quarter of 2000 and for
general availability in the third quarter of 2000.
Our products are priced separately and can be sold in various
configurations and combinations depending on the size of the service provider
and the specific service offerings the service provider would like to offer its
customers. The list price for our IP service delivery platform ranges from
$73,000 to several million dollars, depending on the hardware and software
configuration.
IPSX 9000 SERVICE PROCESSING SWITCH.
Our IPSX 9000 service processing switch combines the functionality of
high-
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performance networking hardware, massively parallel distributed computing
hardware and sophisticated operating system software. It is designed to be
deployed in a service provider's point of presence and is the vehicle from which
value-added services are delivered.
Our platform is based on a massively parallel computing architecture,
which allows distributed computing to occur simultaneously within a
multi-processor system. This approach aggregates the computing power of multiple
processors to deliver the performance of a more powerful computing system.
Individual processors, located on processing engines, or PEs, are connected to
other processing engines through a communications fabric, as illustrated below.
[GRAPHIC]
Our massively parallel approach, which is designed to be scaleable, allows
additional processing resources to be added as they are needed. Our architecture
enables applications to be distributed among available processing resources.
These processing resources are located within processing engines on printed
circuit board assemblies, which we refer to as blades. Our architecture allows
applications to be distributed among processing engines on individual blades and
between blades within our IPSX 9000 system.
IPSX HARDWARE ARCHITECTURE. The IPSX hardware architecture involves two
key design elements, our chassis design and blade design, that create a modular
and flexible platform. Our IPSX 9000 is shown below.
GRAPHIC
IPSX Chassis design. Our chassis design provides a total of 26 slots for
system blades, 13 in the front and 13 in the rear. All of the blades are
connected to a printed circuit board assembly located in the middle of the
chassis, which we refer to as the mid-plane, using our fault tolerant dual ring
fabric. Any blade can be placed into any available slot within the chassis at
any time. The IPSX chassis currently supports the following four types of system
blades:
- - access blades -- interfaces to subscriber networks;
- - trunk blades -- interfaces to the carrier backbone;
- - processing blades -- multiple processing engines for value-added service
applications; and
- - control blades -- processing for shelf management and administrative
functions.
In addition to the capabilities described above, access, trunk and control
blades can support multiple processing engines for the delivery of value-added
services.
This ring fabric eliminates the need for dedicated switch fabric slots and
allows each blade to have access to all of the bandwidth of the ring. Our ring
fabric architecture is illustrated below.
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<PAGE> 41
[GRAPHIC]
Our proprietary fault tolerant ring technology implements a self-healing
capability, which can protect the system against failure of a single blade or
ring, and allows a blade to be inserted and removed while the system is
operating. This ring architecture is highlighted in the following diagram:
GRAPHIC
Blade design. Each IPSX 9000 blade is built around a similar architecture
as shown in the following diagram:
GRAPHIC
Each blade is individually configurable and supports up to four processing
engines. Each processing engine consists of a general purpose processor, memory
or specialized hardware designed for encryption or other specific applications,
and our proprietary queuing packet inter-processor controller, or QPIC, designed
to facilitate inter-processor collaboration. We currently use three types of
processing engines, one designed for high performance general purpose computing,
another for encryption and public key related authentication and another for
external interfaces. The processing engines and
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<PAGE> 42
applications on each blade can interact with the processing engines and
applications on every other blade. In addition, each blade contains a
proprietary crossbar switch fabric that allows the processing engines on a given
blade to communicate with each other without using the inter-blade ring fabric
capacity. Our hardware is also designed to take advantage of improvements in
processing and computing technology.
We currently offer the following blades for the IPSX 9000:
ACCESS BLADES
2 Port DS-3 Channelized
2 Port DS-3 UnChannelized
3 Port E3 Channelized
2 Port E3 UnChannelized
1 Port OC-3c/STM-1 ATM
1 Port Fast Ethernet
TRUNK BLADES
2 Port DS-3 UnChannelized
2 Port E3 UnChannelized
1 Port OC-3c/STM-1 ATM
1 Port OC-3c/STM-1 POS
1 Port Fast Ethernet
PROCESSOR BLADES
4 Processor Service Blade
CONTROL BLADES
Control Blade with Fast Ethernet
IPNOS SOFTWARE. Our platform is designed to provide a real-time, object-
oriented, fault-tolerant, distributed computing IP network operating system, or
IPNOS. IPNOS combines the capabilities of real-time operating system software
typically found in networking infrastructure products with the capabilities of
large scale general-purpose computing operating system software typically found
in large scale general-purpose computers and traditional servers. IPNOS is a
distributed operating system designed to allow applications to easily take
advantage of our massively parallel processing capabilities. The following
diagram illustrates our secure IPNOS application service environment.
IPNOS Foundation graph
IPNOS is designed to support high-performance routing and packet
forwarding. It also provides an application programming interface, or API, which
is designed to allow applications to be ported from traditional general-purpose
operating systems, such as UNIX or Windows. Finally, IPNOS provides a framework
for secure system communications.
INVISION SERVICE MANAGEMENT SYSTEM. Our InVision service management system
is a scalable network management software product that is designed to allow
service providers to manage our IPSX 9000 platforms and the services being
offered to their customers. It is designed to be deployed in the service
provider's network operations center and provides a broad range of sophisticated
management services for each value-added application. It also enables service
providers to develop service provisioning templates and includes a provisioning
tool to facilitate the process of delivering new services. InVision also
provides a powerful scripting language to allow service providers to easily
customize and automate various functions without re-programming the underlying
software. InVision is
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designed for scalability to meet the needs of the largest service provider
networks, and conforms to telecom industry network management standards.
The InVision system runs on the Sun Solaris and Microsoft Windows NT
operating systems and uses both a distributed Oracle database and CORBA
distributed object technology to ensure scalability for both its servers and GUI
client stations. All distributed components can communicate using a secure IP
network and CORBA APIs. These APIs can be made available to our customers,
providing them with a mechanism to control InVision from other systems in their
networks. InVision uses SNMP to communicate with the IPSX 9000. InVision also is
designed to interoperate with network management systems from Hewlett Packard,
Concord Systems, Veritas, and Micromuse.
INGAGE CUSTOMER NETWORK MANAGEMENT. InGage, which is scheduled for
customer trial at the end of the second quarter of 2000 and general availability
in the third quarter 2000, will be a scalable network management software
product designed to allow subscribers to securely manage their value-added
services through a Web-enabled interface. We expect InGage to enable a
subscriber to remotely manage services without affecting the services of any
other subscriber and monitor the usage of value-added services. We are designing
InGage to permit the addition of tools from our third-party software vendors,
allowing us to incorporate existing sophisticated trending and analysis tools
already on the market. We also expect InGage to provide subscribers with the
ability to provision certain service capabilities directly without contacting
the service provider.
InGage will be comprised of CORBA server components that act as clients of
the larger InVision system. All traffic between the Web client and the InGage
servers will be secured using SSL-based strong encryption and authentication
technology. InGage will be designed to run on standards-based Web browser
environments.
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IPSX SERVICE APPLICATIONS
A service provider can deliver a variety of value-added service
applications running on our platform based on individual subscriber needs. Our
IP service delivery platform is designed to enable each service to be available
independently and privately for each enterprise subscriber.
Although we license many of our service applications from leading
application software vendors, we have also developed several of our own
enterprise subscriber service applications. We plan to continue to add new
services developed internally as well as add new services developed by third
parties. The table below sets forth value-added service applications currently
available for use on our IP service delivery platform.
<TABLE>
<CAPTION>
THIRD-PARTY-DEVELOPED
APPLICATION CATEGORY COSINE-DEVELOPED (LICENSOR)
-------------------- ---------------- ---------------------
<S> <C> <C>
Access Protocol Cisco HDLC Frame Relay (Harris and
Ethernet VLAN -- 802.1Q Jeffries)
Packet-Over-SONET ATM (Trillium)
PPP (RouterWare)
Virtual Routing Static Routes RIP V1/V2 (Epilog)
OSPF (Epilog)
BGP-4 (Epilog)
Security Network Address Translation Proxy Firewall (Network
Packet Filter Associates)
Encryption IPSec (SSH)
Broadband and Dial Aggregation PPTP
PPPoATM
Emulation FRoIPSec
Virtual FR Switch
</TABLE>
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SERVICE OFFERING EXAMPLES
Our IP Services Delivery Platform is designed to enable a wide variety of
advanced services for our customers and their subscribers. A few examples of
potential applications are summarized below:
ENTERPRISE VIRTUAL PRIVATE NETWORK SERVICE
[DIAGRAM]
Our platform is designed to enable service providers with IP backbone
networks to offer their enterprise subscribers virtual private network, or VPN,
services without the need for costly customer premises equipment. Using
traditional point-to-point connections, including leased lines, Frame Relay or
asynchronous transfer mode, or ATM, enterprise subscribers can access our IP
service delivery platform located at their service provider's closest point of
presence, or PoP. Each connection terminates on a single private routing service
application within our IPSX 9000 called a virtual router. Each virtual router
acts as a private aggregation point for these connections and can provide secure
routing services between all of a customer's sites within a virtual network.
Service providers can deploy our platform at the edge of their networks to
reduce the distance that must be traversed using costly leased line, Frame Relay
or ATM connections from each enterprise subscriber to the nearest PoP. Once the
traffic reaches the virtual router service, our platform can provide
sophisticated encryption and authentication services using the IP security
protocol, or IPSec, service. The traffic can then be securely transmitted less
expensively over public IP networks or the Internet.
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WHOLESALE VPN SERVICE
[COSINE GRAPHIC]
A wholesale ISP, which provides wholesale services to regional ISPs, can
use our IP service delivery platform to offer these regional ISPs value-added
services for resale to their subscribers. Currently, ISPs using CPE-based
encryption cannot easily offer network-based, value-added services because
traffic is encrypted on the customer's premises before being sent to the
network. Once encrypted by the customer, the service provider cannot interpret
the contents of the packet and, as a result, cannot layer on any services.
By directing CPE-based encrypted traffic from a customer site to a virtual
router within the wholesale ISP, the regional ISP can offer a wide range of
value-added services from the wholesale ISP's network in a cost-effective
scalable manner.
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SECURE BROADBAND SERVICES
[COSINE GRAPHIC]
Broadband local access carriers deploying digital subscriber line, cable
modem or broadband wireless data services control consumer and business access
to the Internet and other wide area data networks. These carriers are very often
in the position of providing wholesale broadband access to their service
provider customers. Wholesale broadband connectivity, however, is becoming a
commodity, and these data carriers are seeking ways to lower costs associated
with providing this connectivity and to increase revenues through value-added
services. Our platform is designed to enable broadband data carriers to provide
traffic aggregation and ISP service selection switching more efficiently than
existing solutions. Additionally, our platform lowers the cost of operation for
carriers by allowing them to transport the aggregated traffic over less
expensive IP networks instead of using point-to-point, Frame Relay or ATM
connections to reach their wholesale customers.
In addition to cost savings, our platform gives data carriers and their
service provider customers several new revenue-generating opportunities. Using
our platform, a data carrier can provide its service provider customers with
broadband ports already enabled with value-added services. Service providers can
buy these services wholesale, along with the broadband subscriber access port,
from the data carrier and resell them to their end-subscribers as premium value-
added services.
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<PAGE> 48
LEGACY AND IP INTERWORKING SERVICE
[DIAGRAM]
Many traditional domestic and international carriers have invested heavily
in existing Frame Relay and ATM network infrastructures. We believe that these
networks and the enterprises using them will continue to grow. Large enterprise
customers using these networks generally cannot afford to quickly migrate their
entire organization to a new IP-based network. Our platform is designed to
enable traditional service providers to use their existing Frame Relay or ATM
networks to emulate IP networks and offer network-based services. We believe
that this will enable service providers to pursue revenue opportunities using
their significant existing investments in equipment. In addition, we believe
that this will benefit these service providers' subscribers by facilitating the
introduction of new services at lower costs than would otherwise be available.
FRAME RELAY EMULATION SERVICES OVER IP
[DIAGRAM]
We believe that next generation IP service providers will sometimes need
to offer services, such as Frame Relay over IP, in addition to their
next-generation services. These service providers are likely to continue to have
customers that need to use traditional services in order to transport many
legacy protocols, such as Novell's IPX. Although we believe that these services
will not grow as quickly as next generation services, Frame Relay connections
are likely to continue to grow with the volume of traffic from large
enterprises. Our IPSX 9000 is designed to emulate the capabilities of a Frame
Relay
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<PAGE> 49
service without requiring an IP-based carrier to invest in any additional
equipment. We believe that our platform will allow next generation service
providers to create virtual Frame Relay networks, significantly improving the
flexibility of their IP-based networks.
CUSTOMERS
As of April 28, 2000, we have received orders for our products and
services from Qwest Communications, Nissho Electronics, Internet Initiative
Japan, BroadBand Office, American Metrocomm and AduroNet.
SALES AND MARKETING
We sell our products primarily through our global direct sales
organization, which we intend to complement with resellers that target specific
countries and international partners. As of March 31, 2000 we had 37 people in
our sales and marketing organization.
DIRECT SALES
Our North American direct sales organization is divided into western,
central, and eastern regions and concentrates on network service providers
offering IP-based services. Territory sales managers cover specified
geographies, and account managers focus on large individual customers. Both
types of sales managers work with our global sales and support organization
systems engineers to provide customers with network design and buildout
proposals. Sales and account managers are directed by regional vice presidents
in the western, central and eastern regions who report directly to the vice
president of worldwide sales.
As part of our direct selling model, we use our field sales, engineering,
and executive personnel to establish multiple contacts within a potential
customer's business organization. We believe that maintaining ongoing customer
relationships with key individuals in a customer's engineering, operations,
marketing and executive departments will be important to our success.
INTERNATIONAL SALES AND RESELLERS
We believe that to effectively market our products in other countries, we
need to use local sales organizations that understand the business and network
environment in their countries. We expect that the international sales
organizations and resellers that we are selecting will enhance our ability to
sell our products in complex international environments and provide high quality
support for our foreign customers.
GLOBAL SERVICES AND SUPPORT
Global services and support play a key role in ensuring our customers'
success in using the IP services delivery platform. The goal of our service
organization is to enable service providers to generate sustainable new revenues
in a short period of time. We seek to achieve this goal by providing a
comprehensive set of service offerings ranging from professional services
targeted at network architecture, design, and deployment to product support. Our
support offerings include hardware and software warranty services, access to our
global technical assistance center, on-site network engineers, and Web-based
technical information and assistance.
Our professional services include consulting offerings designed to support
service providers from initial planning through implementation and ongoing
operation. Our network engineers and consultants are skilled in network design
and architecture, virtual private network technologies, IP security, IP routing
protocols and network performance and availability.
As of March 31, 2000, we had 24 employees in customer service and support,
with the majority located at our Redwood City, California corporate
headquarters.
RESEARCH AND DEVELOPMENT
We have assembled a team of skilled engineers with extensive experience in
high-end computing, network system design communications protocols, Internet
security protocols, Internet firewalls, managed network services, operating
system design and
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<PAGE> 50
network management software. These
individuals have come from leading data networking, computer systems, computer
security and telecommunications companies. In addition to building complex
hardware and software systems, our engineering team has experience in designing
highly scalable Internet software, high performance computing platforms, and
highly integrated application specific integrated circuits with advanced
packaging technologies. We currently license software from leading network
software application companies for integration into our IP service delivery
platform and plan to continue to do so in the future.
Our research and development group is organized into teams that work on
multiple generations of products. We seek to offer our customers new products as
they are needed, as well as enhancements to existing products.
We plan to enhance our core technology and develop additional applications
for our IP service delivery platform. For example, we are using our first
generation system design and managed network services to develop additional
network interfaces and services. We continue to expand the functionality of our
IPNOS software, our InVision service management software and our InGage customer
network management software to improve performance, scalability and ease of use.
Our research and development efforts are driven by the availability of new
technology, market demand and customer feedback. We have invested significant
time and resources in creating a structured process for undertaking all product
development projects. This process involves all functional groups and all levels
within our company. Following an assessment of market demand, our research and
development team develops a set of functional product specifications based on
inputs from the product management, sales, and service organizations. This
process is designed to provide a framework for defining and addressing the
steps, tasks, and activities required to bring product concepts and development
projects to market.
In connection with our research and development efforts, we work closely
with technical, marketing and other departments of our customers to determine
the features and functionality they want from our products. This feedback is a
factor we consider in defining and prioritizing our research and development
projects. To further the development of additional applications for our IP
service delivery platform, we intend to continue working with research and
development teams of market leading application vendors.
As of March 31, 2000, we had 144 employees in our research and development
group.
Our research and development expenses totaled $27.3 million in 1999, $7.4
million in 1998, and $87,000 for the period from inception to December 31, 1997.
MANUFACTURING
We outsource manufacturing to three ISO-certified contract manufacturers:
Solectron, SMTC Manufacturing and Sonic Manufacturing. These suppliers procure
material and assemble and test all printed circuit boards and chassis assemblies
used in our products. These printed circuit boards and chassis assemblies are
delivered to our Redwood City, California facilities, where we perform the final
testing, packaging and shipping. Each of our manufacturers produce our products
within 30 miles of our Redwood City facilities. All manufacturing is done on a
purchase order basis. We are working with Solectron to have it provide
additional manufacturing services through system integration, test and direct
shipment to our customers by the end of 2000. Our use of outsourced
manufacturing minimizes the space and inventory investment needed for
manufacturing operations and enables us to:
- - adjust manufacturing volumes quickly to meet changes in customer demand;
- - focus on production planning and key commodity management; and
- - take advantage of the purchasing power of our contract manufacturers.
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<PAGE> 51
As of March 31, 2000 we had 25 employees in our manufacturing operations
group.
COMPETITION
The networking equipment business is extremely competitive, with numerous
vendors offering products that enhance the functionality of a service provider's
network. With our IP service delivery platform, we have created a technology
that enables a broad suite of services to be deployed from a service provider's
network with the capacity to add new services in the future. These services
include both site-to-site and secure dial virtual private networks, extranets,
managed firewalls and other services. Consequently, our capabilities place us in
direct competition with a variety of vendors who can offer specific products
addressing each of these customer needs.
In specific service areas, our competitors include Alcatel, Cisco, Lucent,
Nortel, Siemens and Spring Tide who market and sell certain products offering
virtual private network capabilities and/or firewall solutions. These vendors
and other new entrants are aggressively developing new infrastructure solutions
for use within a service provider's network, as it evolves to become the point
in the network where service differentiation occurs. We also compete with
traditional enterprise equipment because our IP service delivery platform
eliminates the need for these products. These vendors include, among others,
Check Point and Axent for firewalls and VPNet and Red Creek for virtual private
network encryption devices.
To compete effectively, we must continue to do the following:
- - expand the service offerings that can be delivered from our IP service
delivery platform;
- - enhance the functionality of our service management system;
- - deliver scalable processing capabilities;
- - provide carrier-class network reliability;
- - market our products effectively to potential customers; and
- - offer responsive global service and support.
INTELLECTUAL PROPERTY
We have developed significant trade secret knowledge with respect to the
architecture and operation of our IP service delivery platform. Our IPNOS
software, InVision service management system and InGage customer network
management system were developed internally and are protected by United States
and foreign copyright laws. Our IP service delivery platform system architecture
and hardware were developed internally, and we own all rights to the core
interfaces and protocols between subsystems.
Although we rely on copyright, trade secret and trademark law to protect
our intellectual property, we believe that the technological and creative skills
of our personnel, new product developments and frequent product enhancements are
essential to maintain our technology leadership.
We currently license software from leading network software application
companies for integration into our IP service delivery platform. These licenses
are terminable after a specified period or upon certain events. If one or more
of these licenses is terminated, we may need to locate and incorporate
alternative software providing comparable services to the customer.
Our success will depend upon our ability to obtain necessary intellectual
property rights and protect our intellectual rights. We cannot be certain that
we will be able to obtain the necessary intellectual property rights or that
other parties will not contest our intellectual property rights.
LEGAL PROCEEDINGS
We are not subject to any material legal proceedings.
EMPLOYEES
As of March 31, 2000, we had 275 full-time employees, 144 of whom were
engaged
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<PAGE> 52
in research and development, 37 in sales and marketing, 24 in customer support,
45 in general corporate, finance and administration, and 25 in manufacturing.
None of our employees is represented by a labor union. We have not experienced
any work stoppages, and we consider our relations with our employees to be good.
Our future performance depends substantially upon the continued service of
our key technical, sales and senior management personnel, none of whom is bound
by an employment agreement requiring service for any specified period of time.
The loss of the services of one or more of our key employees could have a
material adverse effect on our business, financial condition and results of
operations. Our future success also depends on our continuing ability to
attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that we can retain our key personnel in the future.
FACILITIES
We lease approximately 96,800 square feet at our corporate headquarters
located in Redwood City, California under leases which expire in December 2011.
Although we believe that our existing facilities are adequate to meet our
current requirements, we expect that by the end of 2000 we will need additional
space to accommodate our growth. The commercial real estate market in the San
Francisco Bay Area is volatile and unpredictable in terms of available space,
rental fees, occupancy rates and preferred locations. We cannot be certain that
additional space will be available when we require it, or that it will be
affordable or in a preferred location. See "Risk Factors -- If we fail to manage
expansion effectively, our business, our management and operational resources
will be strained, which could hinder our growth."
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<PAGE> 53
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive officers
and directors as of April 24, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dean E. G. Hamilton.... 37 President, Chief Executive Officer and Director
Steve Goggiano......... 47 Executive Vice President and Chief Operating Officer
Bill Ferone............ 55 Executive Vice President, Global Services and Support
Lianghwa Jou........... 39 Executive Vice President and Chief Technology Officer
Michael Nielsen........ 38 Senior Vice President of Engineering
Curtis Dudnick......... 50 Vice President of Finance, Secretary, and Chief Financial
Officer (acting)
Larry Jackson.......... 37 Vice President of Worldwide Sales
Vinton G. Cerf......... 56 Director
Donald Green(1)........ 68 Director
Glenn Hartman(2)....... 42 Director
R. David 38 Director
Spreng(1)(2).........
</TABLE>
- -------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Dean E. G. Hamilton has served as President, Chief Executive Officer and
has been a director of CoSine since founding CoSine in April 1997. From August
1996 to November 1997, Mr. Hamilton was the general manager of the Carrier
Signaling Infrastructure Business Unit at Ascend Communications, Inc., a
telecommunications company. From April 1995 to August 1996, Mr. Hamilton was
co-founder, Chief Executive Officer, and President of Subspace Communications, a
telecommunications company, which was acquired by Ascend.
Steve Goggiano has served as Chief Operating Officer since joining CoSine
in December 1999. Prior to joining CoSine, Mr. Goggiano held various positions
at SGI, formerly known as Silicon Graphics, Inc., a provider of computing
systems and software, from 1989 to 1999. These positions included Senior Vice
President/General Manager of SGI's Server and Supercomputer division, and Senior
Vice President of WorldWide Manufacturing and Customer Service. Mr. Goggiano
holds a B.S. in Business from San Jose State University.
Bill Ferone has served as the Executive Vice President of Global Services
and Support since joining CoSine in July 1999. Prior to joining CoSine, Mr.
Ferone was Senior Vice President of Service at Nortel Networks from April 1998
to July 1999. He served as Vice President and later as Senior Vice President of
Customer Service at Amdahl Corporation, a wholly-owned subsidiary of Fujitsu
Limited that is a provider of integrated computing services, from January 1991
to April 1998. Mr. Ferone holds a B.S. in Business from the University of
Cincinnati.
Lianghwa Jou is a co-founder of CoSine and has served as Chief Technology
Officer since November 1999 and served as the Vice President of Engineering from
November 1997 through October 1999. Mr. Jou worked as a Director of Engineering
at Ascend Communications from July 1996 to September 1997. From March 1995
through June 1996, Mr. Jou was the Vice President of Engineering and a
co-founder of Subspace Communications. He holds a B.S.E.E. from National Chiao
Tung University and an M.S. in Computer Science from Indiana University.
Michael Nielsen has served as Senior Vice President of Engineering since
joining CoSine in October 1999. From July 1992 to September 1999, Mr. Nielsen
held various
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<PAGE> 54
positions at SGI, formerly known as Silicon Graphics, Inc., most recently as
Vice President of Engineering for the Workstation Division. Mr. Nielsen holds a
B.S., an M.S. and a Ph.D. in Electrical Engineering from Stanford University.
Curtis Dudnick has served as acting Chief Financial Officer and Secretary
of CoSine since June 1998 and as Vice President of Finance since August 1999.
From May 1995 to August 1999, Mr. Dudnick was a partner in David Powell, Inc., a
national consulting firm, through which he acted as chief financial officer for
a number of privately held technology companies. Mr. Dudnick holds a B.S. in
Accounting and an MBA from the University of Utah.
Larry Jackson has served as Vice President of Sales since joining CoSine
in June 1998. From January 1997 to March 1998, Mr. Jackson served as Vice
President of Sales for Europe, the Middle East and Africa, and prior to that as
Vice President of Sales for Japan and the Pacific Rim, at Ascend Communications.
Mr. Jackson holds a B.S. in Computer Science from the University of California,
Santa Barbara.
Vinton G. Cerf has served as a director of CoSine since April 2000. Dr.
Cerf has served as the Senior Vice President for Internet Architecture and
Technology for MCI WorldCom Corporation, a telecommunications company, since
September 1998. From January 1996 to September 1998, Dr. Cerf was the Senior
Vice President for Internet Architecture and Engineering at MCI Communications
Corporation, a telecommunications company. Dr. Cerf was Senior Vice President
for Data Architecture at MCI Telecommunications Corporation, a
telecommunications company, from February 1994 to December 1995. Dr. Cerf is
also a director of Avanex Corporation, a supplier of fiber optic-based products,
and Nuance Communications, Inc., a speech recognition software company. Dr. Cerf
holds a B.S. in Mathematics from Stanford University and M.S. and Ph.D. degrees
in Computer Science from the University of California, Los Angeles.
Donald Green has served as a director of CoSine since June 1999. Mr. Green
was a co-founder of Advanced Fibre Communications, Inc., a provider of
multi-service access solutions for the telecommunications industry, and has
served as its Chairman of the Board since May 1999, and served as Chief
Executive Officer from May 1992 to May 1999. Mr. Green is also a director of
TCSI Corporation, a software company. Mr. Green holds a higher national
certificate in electrical engineering from Willingsdon Technical College.
Glenn Hartman has served as a director of CoSine since its inception in
April 1997. Mr. Hartman has served as the Managing General Partner of Falcon
Capital, LLC, a private equity investment company, since September 1995. Mr.
Hartman was the co-founder of Apex Data Inc., a manufacturer of
telecommunication computer peripheral products, and served as its chief
executive officer from June 1992 until September 1995. Mr. Hartman is also a
director of Digital Courier Technologies, Inc., a provider of payment processing
services to merchants and financial institutions, and two private organizations.
Mr. Hartman holds a B.A. in Economics from the University of California at Los
Angeles.
R. David Spreng has served as a director of CoSine since December 1998.
Mr. Spreng has served as the Managing General Partner of Crescendo Venture
Management, LLC since September 1998. Mr. Spreng served as President of IAI
Ventures, Inc. from March 1996 to September 1998 and served in various
capacities at Investment Advisers, Inc. since 1989. Mr. Spreng is also a
director of Allied Riser Communications Corporation, a broadband communications
services provider, and Tut Systems, Inc., a developer of multi-service broadband
access systems. Mr. Spreng holds a B.S. in Finance and Accounting from the
University of Minnesota.
We intend to appoint Craig B. Collins as Chief Financial Officer upon his
joining our company.
BOARD OF DIRECTORS
Our Board of Directors currently consists of five 5 authorized members.
Upon completion of this offering, our certificate of
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<PAGE> 55
incorporation will provide for a classified board of directors consisting of
three classes of directors, each serving staggered 3-year terms. As a result, a
portion of our board of directors will be elected each year. To implement the
classified structure, prior to the consummation of the offering, one of the
nominees to the board will be elected to a one-year term, two will be elected to
2-year terms and two will be elected to three-year terms. Thereafter, directors
will be elected for 3-year terms. Class I directors will have terms of office
expiring at the 2001 annual meeting of stockholders; Class II directors will
have terms of office expiring at the 2002 annual meeting of stockholders; and
Class III directors will have terms of office expiring at the 2003 annual
meeting of stockholders. This classification of the board of directors may delay
or prevent a change in control of our company or in our management. See
"Description of Capital Stock -- Delaware Anti-Takeover Law and Certain
Provisions of Our Certificate of Incorporation and Bylaws."
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been elected and qualified. There
are no family relationships among any of our directors, officers, or key
employees.
BOARD COMMITTEES
We established an audit committee and a compensation committee in January
1999. The audit committee consists of Messrs. Green and Spreng. The audit
committee reviews our internal accounting procedures, consults with and reviews
the services provided by our independent accountants and makes recommendations
to the board of directors regarding the selection of independent accountants.
The compensation committee consists of Messrs. Hartman, Green and Spreng.
The compensation committee reviews and recommends to the board of directors the
salaries, incentive compensation and benefits of our officers and employees,
including stock compensation and loans, and administers our stock plans and
employee benefit plans.
Mr. Green purchased Series D preferred stock from us on September 17,
1999. Please see "Certain Transactions" for a discussion of our Series D
preferred stock financing.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently, or has
ever been at any time since our formation, one of our officers or employees or
an officer or employee of any of our subsidiaries. No member of the compensation
committee serves as a member of the board of directors or compensation committee
of any entity that has one or more of our executive officers serving as a member
of our board of directors or compensation committee.
DIRECTOR COMPENSATION
We do not currently compensate our directors in cash for their service as
members of the board of directors, although they are reimbursed for certain
expenses in connection with attendance at board and committee meetings. Under
our 1997 Stock Plan, non-employee directors are eligible to receive stock option
grants at the discretion of the board of directors or another administrator of
the plan. See "-- Stock Plans."
TECHNICAL ADVISORY BOARDS
We have technical advisory boards for both our U.S. operations and our
international operations. These boards advise us on the performance of our
current and future services and products in relation to client needs. In
addition, these boards advise us on engineering issues related to our products.
Our U.S. board is comprised of seven members, and our international board is
comprised of two members.
LIMITATIONS ON DIRECTORS' AND OFFICER'S LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary
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<PAGE> 56
damages for breach of their fiduciary duties as directors, except liability for:
- - any breach of their duty of loyalty to the corporation or its stockholders;
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
- - unlawful payments of dividends or unlawful stock repurchases or redemptions;
or
- - any transaction from which the director derived an improper personal benefit.
Such limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors, officers, employees and other agents to the fullest extent
permitted by law. We believe that indemnification under our bylaws covers at
least negligence and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the bylaws would permit indemnification.
We intend to enter into agreements to indemnify our directors and
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
officers for certain expenses including attorneys' fees, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by us or on our behalf, arising out of such person's
services as one of our directors or officers, any of our subsidiaries or any
other company or enterprise to which the person provides services at our
request. These agreements also provide for the payment by us of taxes imposed on
such person resulting from payments under the agreement. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
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<PAGE> 57
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the
compensation earned for services rendered for us in all capacities for the
fiscal year ended December 31, 1999 by our Chief Executive Officer and our three
next most highly compensated executive officers, who we refer to as the named
executive officers, who earned more than $100,000 in salary and bonus during the
fiscal year ended December 31, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
----------------- UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY BONUS OPTIONS
---------------------------- ------ ----- ----------
<S> <C> <C> <C>
Dean E. G. Hamilton..................................... $169,231 $-- 400,000
President, Chief Executive Officer and Director
Curtis Dudnick.......................................... $216,931(1) -- 210,000
Chief Financial Officer (acting), Vice President of
Finance and Secretary
Larry Jackson........................................... $149,999 -- 66,678
Vice President of Sales
Lianghwa Jou............................................ $138,078 -- 250,000
Chief Technology Officer
</TABLE>
- ---------------
(1) Includes $165,505 paid to Mr. Dudnick by David Powell, Inc. during the
period he was our acting chief financial officer. See "Certain
Transactions -- Other Compensation Transactions".
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OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
information with respect to stock options granted to each of the named executive
officers during the fiscal year ended December 31, 1999. All of these options
were granted under our 1997 Stock Plan and have a term of ten years, subject to
earlier termination in the event the optionees' services to us cease. See
"-- 1997 Stock Plan" for a description of the material terms of these options.
In accordance with the rules of the SEC, also shown below is the potential
realizable value over the term of the option the period from the grant date to
the expiration date based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. These amounts are based on assumed rates of appreciation in
accordance with the rules of the SEC and do not represent our estimate of our
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of the common stock.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO FAIR OF STOCK APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE VALUE ON OPTION TERM(3)
OPTIONS DURING PRICE THE DATE OF EXPIRATION ------------------------------
NAME GRANTED PERIOD(1) $/SHARE(2) GRANT(2) DATE 0% 5% 10%
---- ------------- ----------- ----------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dean E. G. Hamilton... 400,000 3.17% $0.2250 $0.36 3/16/09 $ 54,000 $144,562 $283,493
Curtis Dudnick........ 200,000 1.59 0.545 2.03 8/23/09 297,000 552,333 944,042
10,000 0.08 1.00 4.03 10/19/09 30,300 55,645 94,526
Larry Jackson......... 64,678 0.51 0.15 0.36 3/10/09 13,582 28,226 50,690
2,000 0.02 1.00 4.03 10/19/09 6,060 11,129 18,905
Lianghwa Jou.......... 250,000 1.98 0.15 0.31 2/13/09 40,000 88,740 163,512
</TABLE>
- ---------------
(1) Based on an aggregate of 12,604,225 options we granted during the fiscal
year ended December 31, 1999 to our employees and consultants, including the
Named Executive Officers.
(2) Options were granted at an exercise price which we believed represented the
fair value of our common stock, as determined in good faith by our board of
directors.
Subsequent to the commencement of our initial public offering process, we
reevaluated the fair value of our common stock options as of March 2000.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (ten years). It is calculated assuming that the fair
value of the common stock on the date of grant appreciates at the indicated
annual rate compounded annually for the entire term of the option and that
the option is exercised and sold on the last day of its term for the
appreciated stock price.
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AGGREGATE OPTION EXERCISES AND OPTION VALUES. The following table sets
forth information with respect to the named executive officers concerning option
exercises for the fiscal year ended December 31, 1999, and exercisable and
unexercisable options held as of December 31, 1999:
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1999(#) DECEMBER 31, 1999 $(2)
ACQUIRED ON VALUE --------------------------- ----------------------------
NAME EXERCISE # REALIZED $(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dean E. G. Hamilton..... -- $ -- 400,000(3) -- --
Curtis Dudnick.......... 52,500 40,013 197,500(4) -- --
Larry Jackson........... 645,400 2,712,188 -- -- -- --
Lianghwa Jou............ -- -- 250,000(5) -- --
</TABLE>
- ---------------
(1) Based on the fair market value of our stock on the date of the exercise, as
determined by the Board of Directors, minus the exercise price, multiplied
by the number of shares issued upon exercise of the option.
(2) Based on an assumed initial offering price of $ per share minus the
actual exercise price of the option, multiplied by the number of shares
underlying the option.
(3) Of such options, 75,000 were vested at December 31, 1999.
(4) Of such options, 69,166 were vested at December 31, 1999.
(5) Of such options, 52,083 were vested at December 31, 1999.
STOCK PLANS
1997 STOCK PLAN
Our 1997 stock plan was adopted by our board of directors and by our
stockholders on October 28, 1997. At March 31, 2000, the maximum number of
shares that may be issued under the 1997 stock plan was 21,620,000 shares of our
common stock. In April 2000, we increased the maximum number of options that can
be issued under the 1997 stock plan by 6,000,000. As of March 31, 2000, options
to purchase 8,319,705 shares of our common stock were outstanding under the 1997
stock plan, with a weighted average exercise price of approximately $2.06 per
share. We expect that upon the adoption of the 2000 stock plan that no further
options will be granted under the 1997 stock plan. However, its provisions will
still govern outstanding options issued under the 1997 stock plan. Our 1997
stock plan provides for the grant of incentive stock options, within the meaning
of Section 422 of the Internal Revenue Code, as amended, referred to as the
Code, to our employees, and for the grant of nonstatutory stock options to our
employees, directors and consultants.
Our 1997 stock plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option or stock purchase right. If
the outstanding options or stock purchase rights are not assumed or substituted,
the administrator will provide notice to the optionee that he or she has the
right to exercise the option or stock purchase right as to all of the shares
subject to the option or stock purchase right, including shares which would not
otherwise be exercisable, for a period of 15 days from the date of the notice.
The option or stock purchase right will terminate upon the expiration of the
15-day period.
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<PAGE> 60
2000 STOCK PLAN
We intend to submit the 2000 stock plan to our board of directors and
stockholders for approval in May 2000. We expect the 2000 option plan to have
the terms described below.
Our 2000 stock plan provides for the grant of incentive stock options,
within the meaning of Section 422 Code, to our employees, and for the grant of
nonstatutory stock options and stock purchase rights to our employees, directors
and consultants.
As of , 2000, a total of shares of our common stock
were reserved for issuance pursuant to the 2000 stock plan, of which no options
were issued and outstanding as of that date. In addition, any shares of common
stock that were reserved but unissued under our 1997 stock plan and any shares
that are subsequently returned to the 1997 stock plan as a result of termination
of options or our repurchase of shares previously issued under that plan are
reserved for issuance under the 2000 stock plan. In addition, our 2000 stock
plan provides for annual increases in the number of shares available for
issuance on the first day of each fiscal year, beginning with our fiscal year
2001, equal to the lesser of shares, % of the
outstanding shares of common stock on the first day of our fiscal year or an
amount determined by our board of directors.
Our board of directors or a committee of our board administers the 2000
stock plan. If the options are intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, a committee of
two or more "outside directors" within the meaning of Section 162(m) of the Code
will administer the 2000 stock plan. The administrator has the power to
determine the terms of the options or stock purchase rights granted, including
the exercise price, the number of shares subject to each option or stock
purchase right, the exercisability of the options and the form of consideration
payable upon exercise.
The administrator determines the exercise price of options granted under
the 2000 Stock Plan, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Code and all incentive stock options, the exercise price must at least be
equal to the fair market value of our common stock on the date of grant. The
term of an incentive stock option may not exceed ten years and the administrator
determines the term of all other options.
No optionee may be granted an option to purchase more than shares
in any fiscal year. In connection with his or her initial service, an optionee
may be granted an additional option to purchase up to shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. In the absence of a period of time in the option agreement, the
option will remain exercisable for 12 months if termination is due to death or
disability. In all other cases, the option will generally remain exercisable for
3 months. However, an option may never be exercised later than the expiration of
its term.
The administrator determines the exercise price of stock purchase rights
granted under our 2000 stock plan. Unless the administrator determines
otherwise, a restricted stock purchase agreement will grant us a repurchase
option that we may exercise upon the voluntary or involuntary termination of the
purchaser's service with us for any reason including death or disability. The
purchase price for shares we repurchase will generally be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to us. The administrator determines the rate at which our repurchase
option will lapse.
Our 2000 stock plan generally doesn't allow for the transfer of options or
stock purchase rights and only the optionee may exercise an option and stock
purchase right during his or her lifetime.
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<PAGE> 61
Our 2000 stock plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option or stock purchase right. If
the outstanding options or stock purchase rights are not assumed or substituted,
the administrator will provide notice to the optionee that he or she has the
right to exercise the option or stock purchase right as to all of the shares
subject to the option or stock purchase right, including shares which would not
otherwise be exercisable, for a period of 15 days from the date of the notice.
The option or stock purchase right will terminate upon the expiration of the
15-day period.
Our 2000 stock plan will automatically terminate in 2010, unless we
terminate it sooner. In addition, our board of directors has the authority to
amend, suspend or terminate the 2000 stock plan provided it does not adversely
affect any option previously granted under it.
2000 EMPLOYEE STOCK PURCHASE PLAN
We expect to submit the 2000 employee stock purchase plan to our board of
directors and stockholders for their approval in May 2000. We expect that the
2000 employee stock purchase plan to have the terms described below.
A total of shares of common stock have been reserved for
issuance under our 2000 employee stock purchase plan, plus annual increases
equal to the lesser of (i) shares, (ii) % of the outstanding
shares on such date, or (iii) an amount determined by our board of directors.
Our 2000 employee stock purchase plan contains consecutive six month
offering and purchase periods. The offering periods generally start on the first
trading day on or after and of each year, except
for the first such offering period which commences on the first trading day on
or after the effective date of this offering and ends on the last trading day on
or before .
Employees are eligible to participate if they are employed by us or any
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, any employee who (i) immediately after
grant owns stock possessing 5% or more of the total combined voting power or
value of all classes of our capital stock, or (ii) whose rights to purchase
stock under all of our employee stock purchase plans accrues at a rate which
exceeds $25,000 worth of stock for each calendar year may not be granted an
option to purchase stock under this plan. The employee stock purchase plan
permits participants to purchase common stock through payroll deductions of up
to % of the participant's "compensation." Compensation is defined as the
participant's base gross earnings and commissions but is exclusive of payments
for overtime, shift premium payments, incentive compensation, incentive
payments, bonuses and other compensation. The maximum number of shares a
participant may purchase during a single purchase period is shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the employee stock purchase plan is 85% of the lower of the fair
market value of the common stock (i) at the beginning of the offering period or
(ii) at the end of the purchase period. Participants may end their participation
at any time during an offering period, and they will be paid their payroll
deductions to date. Participation ends automatically upon termination of
employment with us.
Rights granted under the employee stock purchase plan are not transferable
by a participant other than by will, the laws of descent and distribution or as
otherwise provided under the plan. The employee stock purchase plan provides
that, in the event of our merger with or into another corporation or a sale of
substantially all our assets, each outstanding option may be assumed or
substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding
59
<PAGE> 62
options, the offering period then in progress will be shortened and a new
exercise date will be set. The employee stock purchase plan will terminate
automatically in 2010, unless terminated earlier. The board of directors has the
authority to amend or terminate the purchase plan, except that no such action
may adversely affect any outstanding rights to purchase stock under the purchase
plan. The board of directors has the exclusive authority to interpret and apply
the provisions of the purchase plan.
DIRECTOR OPTION PLAN
We expect to submit the director option plan to our board of directors and
stockholders for approval in May 2000. We expect the director option plan to
have the terms described below.
The total number of shares available for issuance under the director
option plan is shares of our common stock. No awards will be made
under the director option plan until completion of this offering. The purpose of
the director option plan is to attract and retain the best available non-
employee directors, to provide them additional incentives and, therefore, to
promote the success of our business.
The director option plan establishes an automatic grant of
shares of common stock to each non-employee director on the effective date of
the director option plan. Under this program, each non-employee director first
elected to our board of directors following completion of this offering will
automatically be granted an option to acquire shares of our common
stock. The director option plan also provides that upon the date of each annual
stockholders' meeting, each non-employee director who has been a member of our
board of directors for at least six months prior to the date of the
stockholders' meeting will receive automatic annual grants of options to acquire
shares of our common stock.
Each automatic grant will have an exercise price per share equal to the
fair market value of our common stock at the date of grant and will have a term
of ten years. Each initial option shall vest and become exercisable in equal
increments over the year period immediately following the date of
grant. Of the shares subject to an automatic grant, of the shares shall
vest and become exercisable one year following the date of grant.
In the event of our merger with or into another corporation or a sale of
substantially all of our assets, the successor corporation will assume or
substitute each option. If such assumption or substitution occurs, the options
will continue to be exercisable according to the same terms as before the merger
or sale of assets. Following such assumption or substitution, if a non-employee
director is terminated other than by voluntary resignation, the option will
become fully exercisable and generally will remain exercisable for a period of 3
months. If the outstanding options are not assumed or substituted for, our board
of directors will notify each non-employee director that he or she has the right
to exercise the option as to all shares subject to the option for a period of 30
days following the date of the notice. The option will terminate upon the
expiration of the 30-day period.
Options granted under the director option plan must be exercised within 3
months of the end of the non-employee director's tenure as a member of our Board
of Directors, or within 12 months after a non-employee director's termination by
death or disability, provided that the option does not terminate by its terms
earlier.
Unless terminated sooner, our director option plan terminates
automatically in 2010. Our board of directors has the authority to amend,
suspend or terminate the plan, subject to stockholder approval of some
amendments and provided no amendment, suspension or termination may affect
awards to non-employee directors previously granted under the plan, unless
agreed to by the affected non-employee director.
401(k) PLAN
In July 1998, we adopted a 401(k) plan covering our employees who are age
21 as of the effective date of the 401(k) plan, and/or
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<PAGE> 63
have at least 1,000 hours of service credited as of their anniversary hire date
with us and for every plan year thereafter. The 401(k) plan excludes nonresident
alien employees. Our 401(k) plan is intended to qualify under Section 401(k) of
the United States tax code, so that contributions to the 401(k) plan by
employees or by us and the investment earnings thereon are not taxable to the
employees until withdrawn. If our 401(k) plan qualifies under Section 401(k) of
the United States tax code, our contributions will be deductible by us when
made. Our employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit of $10,500 in 2000 and to have those funds
contributed to the 401(k) plan. The 401(k) plan permits us, but does not require
us, to make additional matching contributions on behalf of all participants. To
date, we have not made any contributions to the 401(k) plan.
CHANGE OF CONTROL ARRANGEMENTS
Some options awarded under our 1997 stock plan provide that the options
will become fully exercisable and fully vested if, anytime within 24 months
following a change of control, the optionee's employment is terminated other
than for cause or a constructive termination of the optionee's employment
occurs. Events constituting a constructive termination include, among other
things, a significant reduction in the optionee's duties, position or
responsibilities without the optionee's prior written consent. Options
containing these change of control provisions were granted to, among others,
each of our named executive officers.
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<PAGE> 64
CERTAIN TRANSACTIONS
Since our inception in April 1997, there has not been nor is there
currently proposed any transaction or series of similar transactions to which we
were or are to be a party in which the amount involved exceeds $60,000 and in
which any director, executive officer, holder of more than 5% of our common
stock or any member of the immediate family of any of the foregoing persons had
or will have a direct or indirect material interest other than (1) compensation
agreements and other arrangements, that are described where required in
"Management," and (2) the transactions described below.
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
COMMON STOCK. The following table summarizes the private placement
transactions in which we sold common stock to our directors, executive officers,
5% stockholders and persons and entities affiliated with them.
<TABLE>
<CAPTION>
SHARES OF
PURCHASER DATE OF PURCHASE COMMON STOCK
--------- ----------------- ------------
<S> <C> <C>
Dean E. G. Hamilton (executive officer, director and
5% stockholder).................................... September 1, 1997 4,000,000
February 9, 2000 300,000
Lianghwa Jou (executive officer)..................... January 15, 1998 1,833,332
Chow & Hamilton...................................... July 27, 1999 16,514(1)
September 1, 1999 2,000(1)
</TABLE>
- ---------------
(1) Issued in exchange for legal services rendered. Mr. Hamilton's brother,
Duane Hamilton, is a partner at Chow & Hamilton.
SERIES A PREFERRED STOCK. In November 1997 and April 1998, we sold
1,875,000 shares of our Series A Preferred Stock at a price of $1.60 per share.
Each share of our Series A Preferred Stock is convertible into four shares of
our common stock pursuant to a conversion price adjustment resulting from our
stock dividend declared in May 1998.
SERIES B PREFERRED STOCK. In December 1998, we sold 12,884,205 shares of
our Series B Preferred Stock for $0.738 per share, and in May, October and
November issued warrants to
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<PAGE> 65
acquire 694,444 shares of our Series B Preferred Stock. The purchasers of the
Series B Preferred Stock included, among others:
<TABLE>
<CAPTION>
WARRANTS TO
SHARES OF PURCHASE
SERIES B SERIES B
PREFERRED PREFERRED
PURCHASER DATE OF PURCHASE OR ISSUE STOCK STOCK
--------- ------------------------- ---------- -----------
<S> <C> <C> <C>
Communications Ventures Affiliates
Fund II, L.P...................... December 4, 1998 113,105 --
Communications Ventures III CEO and
Entrepreneurs' Fund, L.P.......... December 4, 1998 106,465 --
Communications Ventures II, L.P..... December 4, 1998 1,379,339 --
Communications Ventures III, L.P.... December 4, 1998 2,129,306 --
Crescendo World Fund, LLC........... December 4, 1998 648,386 --
Crescendo III, L.P.................. December 4, 1998 3,048,780 --
Eagle Ventures WF, LLC.............. December 4, 1998 31,050 --
Worldview Technology International
I, L.P............................ December 4, 1998 357,834 --
Worldview Strategic Partners I,
L.P............................... December 4, 1998 79,081 --
Worldview Technology Partners I,
L.P............................... December 4, 1998 918,099 --
Falcon Capital, LLC................. December 4, 1998 681,367
Crescendo World Fund, LLC........... November 1, 1998 -- 48,491
Eagle Ventures WF, LLC.............. November 1, 1998 -- 2,322
Communications Ventures II, L.P..... November 1, 1998 -- 46,962
Communications Ventures Affiliates
Fund II, L.P...................... November 1, 1998 -- 3,851
Falcon Capital, LLC................. November 1, 1998 -- 101,627
</TABLE>
Communications Ventures Affiliates Fund II, L.P., Communications Ventures
III CEO and Entrepreneurs' Fund, L.P., Communications Ventures II, L.P. and
Communications Ventures III, L.P. are affiliated entities and together are
considered a holder of more than 5% of our common stock.
Crescendo World Fund, LLC, Crescendo III, L.P., Crescendo III Executive
Fund, L.P., Crescendo III, GbR and Eagle Ventures WF, LLC are affiliated
entities and together are considered a holder of more than 5% of our common
stock. R. David Spreng, one of our directors, is a managing member of
Crescendo's related entities. See "Principal Stockholders".
Worldview Technology International I, L.P., Worldview Strategic Partners I,
L.P. and Worldview Technology Partners I, L.P. are affiliated entities and
together are considered a holder of more than 5% of our common stock.
Glenn Hartman, one of our directors, is a manager of Falcon Capital, LLC.
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<PAGE> 66
SERIES C PREFERRED STOCK. In March 1999, we sold 24,503,677 shares of our
Series C Preferred Stock at $0.897 per share. The purchasers of the Series C
Preferred Stock included, among others:
<TABLE>
<CAPTION>
SHARES OF
DATE OF SERIES C
PURCHASER PURCHASE PREFERRED STOCK
--------- ------------- ---------------
<S> <C> <C>
Communications Ventures Affiliates Fund II, L.P............ March 2, 1999 69,078
Communications Ventures III CEO and Entrepreneurs' Fund,
L.P...................................................... March 2, 1999 65,106
Communications Ventures II, L.P............................ March 2, 1999 842,410
Communications Ventures III, L.P........................... March 2, 1999 1,302,127
Crescendo World Fund, LLC.................................. March 2, 1999 638,328
Crescendo III, L.P......................................... March 2, 1999 2,954,292
Eagle Ventures WF, LLC..................................... March 2, 1999 30,569
Kleiner Perkins Caufield & Byers VIII, L.P................. March 2, 1999 5,239,866
KPCB Information Sciences Zaibatsu Fund II, L.P............ March 2, 1999 142,140
KPCB VIII Founders Fund, L.P............................... March 2, 1999 303,612
Norwest Ventures Partners VII, LP.......................... March 2, 1999 5,016,722
Worldview Technology International I, L.P.................. March 8, 1999 1,324,922
Worldview Strategic Partners I, L.P........................ March 8, 1999 292,786
Worldview Technology Partners I, L.P....................... March 8, 1999 3,399,114
</TABLE>
SERIES D PREFERRED STOCK. In September and October 1999, we sold 17,118,253
shares of our Series D Preferred Stock at $3.505 per share. In March, 2000 we
sold 625,000 shares of our Series D Preferred Stock at $8.00 per share. The
purchasers of the Series D Preferred Stock included, among others:
<TABLE>
<CAPTION>
SHARES OF
DATE OF SERIES D
PURCHASER PURCHASE PREFERRED STOCK
--------- ------------------ ---------------
<S> <C> <C>
Donald Green (director)............................. September 17, 1999 142,653
Communications Ventures Affiliates Fund II, L.P..... September 17, 1999 26,994
Communications Ventures III CEO and Entrepreneurs'
Fund, L.P......................................... September 17, 1999 25,442
Communications Ventures II, L.P..................... September 17, 1999 329,197
Communications Ventures III, L.P.................... September 17, 1999 508,845
Crescendo World Fund, LLC........................... September 17, 1999 190,663
Crescendo III, L.P.................................. September 17, 1999 847,359
Crescendo III Executive Fund, L.P................... September 17, 1999 25,187
Crescendo III, GbR.................................. September 17, 1999 17,444
Eagle Ventures WF, LLC.............................. September 17, 1999 9,130
KPCB Holdings, Inc.................................. September 17, 1999 842,845
Norwest Ventures Partners VII, LP................... September 17, 1999 743,686
Worldview Technology International I, L.P........... September 17, 1999 188,360
Worldview Strategic Partners I, L.P................. September 17, 1999 41,628
Worldview Technology Partners I, L.P................ September 17, 1999 483,279
</TABLE>
STOCK OPTION GRANTS TO CERTAIN DIRECTORS
In July 1999, we granted Donald Green an option to purchase 160,476 shares
of our common stock at an exercise price of $0.545 per share.
INDEBTEDNESS OF MANAGEMENT
In connection with the exercise of stock options, Dean E.G. Hamilton
executed a full recourse promissory note payable to us in the original principal
amount of $925,628 and a
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<PAGE> 67
promissory note payable to us in the original principal amount of $274,372.
Interest accrues on the unpaid principal of each note at a rate of 6.77% per
annum. Principal and interest of each note is due and payable on February 3,
2010, or if earlier and at our option, when Mr. Hamilton ceases to be our
employee, director or consultant. The note is secured by a pledge of our common
stock obtained by Mr. Hamilton upon the exercise of these options.
In connection with the exercise of stock options, Michael Nielsen executed
a promissory note payable to us in the original principal amount of $500,000.
Interest accrues on the unpaid principal at a rate of 6.77% per annum. Principal
and interest are due and payable on December 21, 2009, or if earlier and at our
option, when Mr. Nielsen ceases to be our employee, director or consultant. The
note is secured by a pledge of our common stock received by Mr. Nielsen upon the
exercise of those options.
In connection with the exercise of stock options, Steve Goggiano executed
a promissory note payable to us in the original principal amount of $600,000.
Interest accrues on the unpaid principal at a rate of 6.77% per annum. Principal
and interest are due and payable on December 8, 2009, or if earlier and at our
option, when Mr. Goggiano ceases to be our employee, director or consultant. The
note is secured by a pledge of our common stock received by Mr. Goggiano upon
exercise of those options.
EQUITY INVESTMENT BY CUSTOMERS AND THEIR AFFILIATES
On March 2, 1999, the Anschutz Family Investment Co. LLC and A.C.E.
Investment Partnership acquired an aggregate of 1,114,826 shares of our Series C
preferred stock. On September 17, 1999, the Anschutz Family Investment Co. LLC
and A.C.E. Investment Partnership acquired an aggregate of 184,014 shares of our
series D preferred stock. On April 26, 2000, the Anschutz Family Investment Co.
LLC agreed to acquire an aggregate of 80,000 shares of our Series E preferred
stock under a purchase agreement, subject to satisfaction of customary closing
conditions. The Anschutz Family Investment Co. LLC and A.C.E. Investment
Partnership are affiliates of Qwest Communications Corporation.
Our initial customers, each of which represents a different type of
network service provider, have cooperated with us in the marketing, development
and refinement of our product, culminating in the receipt by us of initial
purchase orders. In connection with their marketing, development and refinement
activities, we:
- - issued warrants to purchase up to 1,875,403 shares of our Series C preferred
stock at an average exercise price of $0.91 a share to U.S. Telesource, Inc.,
an affiliate of Qwest;
- - issued a warrant to purchase up to 200,000 shares of our common stock at an
exercise price of $4.00 per share to AduroNet; and
- - agreed to issue warrants to purchase up to 468,849 shares of our common stock
at an exercise price of $3.73 per share to BroadBand Offices.
In addition, in connection with their assistance with specific marketing
activities of ours, we agreed to issue a warrant to purchase up to 75,000 shares
of our common stock at an exercise price of $15.00 per share to American
Metrocomm contingent on it obtaining financing in order to purchase our
products.
In addition, officers of Qwest and a Qwest affiliate participated in our
Series D preferred stock financing. Nissho Electronics, Internet Initiative
Japan and officers of AduroNet and of several potential customers participated
in our Series E preferred stock financing.
INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with each of our
directors and officers. Such indemnification agreements will require us to
indemnify our directors and officers to the fullest extent permitted by Delaware
law. See "-- Limitation of Liability and Indemnification".
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<PAGE> 68
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of April 28, 2000, and as adjusted to reflect
the sale of common stock offered by this prospectus, by:
- - each of the individuals listed on the "Summary Compensation Table" above;
- - each of our directors;
- - each person or group of affiliated persons who is known to us to own
beneficially 5% or more of our common stock; and
- - all current directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of April 28, 2000, are deemed issued
and outstanding. These shares, however, are not deemed outstanding for purposes
of computing percentage ownership of each other stockholder.
Except as indicated in the footnotes to this table and subject to
applicable community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares shown as beneficially
owned by them. This table also includes shares owned by a spouse as community
property.
Percentage of ownership is based on 88,375,442 shares of common stock
outstanding on April 28, 2000 and shares of common stock
outstanding after completion of this offering. The percentage of common stock
outstanding as of April 28, 2000 is calculated in accordance with the rules of
the Securities and Exchange Commission and assumes, for purposes of this
calculation, the automatic exercise of certain warrants and that all outstanding
preferred stock and the 4,666,668 shares of Series E preferred stock expected to
be issued upon the satisfaction of customary closing conditions have been
converted into common stock. This table assumes no exercise of the underwriters'
option to purchase additional shares in this offering. Unless otherwise
indicated, the address of each of the individuals named below is: c/o CoSine
Communications, Inc., 3200 Bridge Parkway, Redwood City, California 94065
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BENEFICIALLY OWNED
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Entities affiliated with Crescendo(1).............. 8,692,001 9.84%
800 LaSalle Avenue
Suite 2250
Minneapolis, MN 55402
Entities affiliated with Worldview(2).............. 7,085,003 8.02%
45 Tasso Street
Suite 120
Palo Alto, CA 94301
Entities affiliated with Communications
Ventures(3)...................................... 6,948,227 7.86%
505 Hamilton Avenue
Suite 305
Palo Alto, CA 94301
Entities affiliated with KPCB Holdings, Inc........ 6,528,463 7.39%
2750 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
PERCENT
NUMBER OF BENEFICIALLY OWNED
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Norwest Ventures Partners VII, LP.................. 5,760,408 6.52%
245 Lytton Street
Suite 250
Palo Alto, CA 94301
Falcon Capital, LLC................................ 4,970,494(4) 5.62%
3905 State Street
Suite 7148
Santa Barbara, CA 93105
Dean E. G. Hamilton................................ 4,700,000(5) 5.32%
Curtis Dudnick..................................... 250,000(6) * *
Larry Jackson...................................... 645,400 * *
Lianghwa Jou....................................... 2,083,332(7) 2.36%
Glenn Hartman...................................... 1,829,869(8) 2.07% *
Donald Green....................................... 303,129(9) * *
R. David Spreng.................................... 8,692,001(1) 9.84%
Vinton G. Cerf..................................... -- * *
All directors and executive officers as a group (11
persons)......................................... 19,271,856(1,7,8,9) 21.43%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 1,477,377 shares held by Crescendo World Fund, LLC, 6,850,431
shares held by Crescendo III, L.P., 25,187 shares held by Crescendo III
Executive Fund, L.P., 17,444 shares held by Crescendo III, GbR, 70,749
shares held by Eagle Ventures WF, LLC, a warrant to purchase 48,491 shares
held by Crescendo World Fund, LLC and a warrant to purchase 2,322 shares
held by Eagle Ventures WF, LLC. Includes 200,000 shares of Series E
preferred stock that Crescendo entities have agreed to purchase under a
stock purchase agreement dated as of April 27, 2000 subject to the
satisfaction of customary closing conditions. The sole general partner of
Crescendo World Fund, LLC is Crescendo Ventures World Fund, LLC. The sole
general partner of Crescendo III, L.P., Crescendo III Executive Fund, L.P.,
and Eagle Ventures WF, LLC is Crescendo Ventures III, LLC. The general
partners of Crescendo III, GbR are Crescendo Ventures III, LLC and Verbier
Ventures, LLC. R. David Spreng, one of our directors, is a managing member
of each of Crescendo Ventures World Fund, LLC, Crescendo Ventures III, LLC
and Verbier Ventures, LLC. Mr. Spreng and each of the other managing members
disclaim beneficial ownership of the shares held by Crescendo World Fund,
LLC, Crescendo III, L.P., Crescendo III Executive Fund, L.P., Crescendo III,
GbR and Eagle Ventures WF, LLC, except to the extent of their pecuniary
interest therein.
(2) Includes 1,871,016 shares held by Worldview Technology International I,
L.P., 413,495 shares held by Worldview Strategic Partners I, L.P. and
4,800,492 shares held by Worldview Technology Partners I, L.P.
(3) Includes 209,177 shares held by Communications Ventures Affiliates Fund II,
L.P., 197,013 shares held by Communications Ventures III CEO and
Entrepreneurs' Fund, L.P., 2,550,946 shares held by Communications Ventures
II, L.P., 3,940,278 shares held by Communications Ventures III, L.P., a
warrant to purchase 46,962 shares held by Communications Ventures II, L.P.
and a warrant to purchase 3,851 shares held by Communications Ventures
Affiliates Fund II, L.P. The sole general partner of Communications Ventures
Affiliates Fund II, L.P. and Communications Ventures II, L.P. is ComVen II,
L.L.C. The sole general partner of
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<PAGE> 70
Communications Ventures III CEO & Entrepreneurs' Fund, L.P. and
Communications Ventures III, L.P. is ComVen III, L.L.C.
(4) Of the 4,970,494 shares, Falcon Capital held of record 4,868,867 shares and
has the right to acquire 101,627 shares upon the exercise of warrants
within 60 days after April 28, 2000.
(5) Of the 4,700,000 shares, Mr. Hamilton held of record 4,300,000 shares and
has the right to acquire 400,000 shares upon the exercise of stock options
within 60 days after April 28, 2000.
(6) Of the 250,000 shares, Mr. Dudnick held of record 182,500 shares and has
the right to acquire 67,500 shares upon the exercise of stock options
within 60 days after April 28, 2000.
(7) Of the 2,083,332 shares, Mr. Jou held of record 1,883,332 shares and has
the right to acquire 250,000 shares upon the exercise of stock options
within 60 days after April 28, 2000.
(8) Includes shares held by Falcon Capital, LLC and 101,627 shares
issuable upon exercise of a warrant held by Falcon Capital, LLC that was
exercisable within 60 days after April 28, 2000. Mr. Hartman, a manager of
Falcon Capital, LLC, disclaims beneficial ownership of such shares, except
to the extent of his pecuniary interest therein.
(9) Of the 303,129 shares, Mr. Green has the right to acquire 160,476 shares
upon the exercise of stock options within 60 days after April 28, 2000. The
remaining 142,653 shares are held by Green Venture Capital Limited
Partnership II as to which Mr. Green disclaims beneficial ownership, except
to the extent of his pecuniary interest therein.
(10) Of the 19,071,858 shares, 8,311,232 shares were held of record by our
executive officers and 1,392,976 shares were issuable upon the exercise of
stock options by our executive officers and directors within 60 days after
April 28, 2000.
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<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the closing of this offering, we will be authorized to issue
300,000,000 shares of common stock, $0.0001 par value, and 1,000,000 shares of
undesignated preferred stock, $0.0001 par value. The following description of
our capital stock does not purport to be complete and is subject to and
qualified in its entirety by our certificate of incorporation and bylaws, which
are included as exhibits to this registration statement of which this prospectus
forms a part, and by the applicable provisions of Delaware law.
COMMON STOCK
As of April 28, 2000, there were 88,375,442 shares of common stock
outstanding which were held of record by approximately 400 stockholders,
assuming the automatic exercise of certain warrants, and the automatic
conversion of all outstanding shares of preferred stock and the 4,666,668 shares
of Series E preferred stock expected to be issued upon the satisfaction of
customary closing conditions into common stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution or
the winding up of our affairs, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of the holders of preferred stock, if any, then outstanding.
The common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon the closing of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of the common stock until the board of directors
determines the specific rights of the holders of such preferred stock. However,
the effects might include, among other things, restricting dividends on the
common stock, diluting the voting power of the common stock, impairing the
liquidation rights of the common stock and delaying or preventing a change of
our control without further action by the stockholders. There are
shares outstanding. No shares of preferred stock will be outstanding upon the
completion of this offering.
WARRANTS
At March 31, 2000, there were warrants outstanding to purchase a total of
280,567 shares of common stock, 159,105 shares of Series A preferred stock,
694,444 shares of Series B preferred stock, 1,875,403 shares of Series C
preferred stock and 154,064 shares of Series D preferred stock. Unless earlier
exercised, warrants to purchase 243,067 shares of common stock, 1,190 shares of
Series A preferred stock, 1,875,403 shares of Series C preferred stock and
154,064 shares of Series D preferred stock will be exercised automatically in
connection with this offering. Each of the shares of Series A preferred stock
issuable upon exercise of the warrants is convertible into four shares of our
common stock. Warrants exercisable for 304,878 shares of Series B preferred
stock will expire immediately prior to the closing of this offering unless
earlier exercised. The remaining warrants will remain outstanding
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<PAGE> 72
after the completion of this offering and will become exercisable for an
aggregate of 1,058,726 shares of common stock.
REGISTRATION RIGHTS
The holders of 73,339,467 shares of common stock, as converted, and
warrants to purchase 2,896,629 shares of common stock, as converted or their
permitted transferees are entitled to certain rights with respect to
registration of such shares under the Securities Act at any time after 180 days
following the closing of this offering. Under the terms of the agreement between
us and the holders of such registrable securities, by written request of certain
of such holders holding at least 50% of the outstanding registrable securities
then held by them, such holders may require on two occasions that we, at our
expense, file a registration statement under the Securities Act, with respect to
such registrable securities. In addition, holders of at least 20% of the
registrable securities then outstanding may, at our expense, request that we
register their shares for public resale on Form S-3 or similar short-form
registration, provided that we are eligible to use Form S-3 or similar
short-form registration, that at least 180 days has elapsed since the most
recent registration of our common stock and that the value of the securities to
be registered is at least $1,000,000. Furthermore, in the event we elect to
register any of our securities after this offering for purposes of effecting any
public offering for cash, the holders of registrable securities generally are
entitled, at our expense, to include their shares of common stock in the
registration, subject to the right of the underwriter to reduce the number of
shares proposed to be registered in view of market conditions.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of Delaware law and our Certificate of Incorporation
and Bylaws could make it more difficult to acquire us by means of a tender
offer, a proxy contest or otherwise and to remove incumbent officers and
directors. These provisions, summarized below, are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of us to first negotiate with us.
We believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure us outweigh the disadvantages of discouraging such proposals
because, among other things, negotiation of such proposals could result in an
improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless with certain exceptions the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns or within three years prior to the determination of interested
stockholder status, did own 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have an anti- takeover effect
with respect to transactions not approved in advance by the board of directors,
including discouraging takeover attempts that might result in a premium over the
market price for the shares of common stock held by stockholders.
Our certificate of incorporation and bylaws require that, upon the closing
of the offering, any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special meeting of the
stockholders and may not be effected by a consent in writing. In addition, our
certificate of incorporation does not provide for cumulative voting. Our bylaws
permit special meetings of our stockholders to be called only by the board of
directors,
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<PAGE> 73
specified officers or holders of 50% or more of our outstanding shares and
require stockholders to provide advance notice of nominations for election to
the board of directors and proposals they intend to submit for approval at
stockholder meetings. Our certificate of incorporation and bylaws also provide
that, beginning upon the closing of the offering, our board of directors will be
divided into three classes, with each class serving staggered three-year terms
and that certain amendments by the stockholders of the certificate of
incorporation and of the bylaws, as well as removal of directors without cause,
require the approval of holders of at least 66 2/3% of the voting power of all
outstanding stock. In addition, our certificate of incorporation allows our
board of directors to issue preferred stock without stockholder approval. These
provisions may have the effect of deferring hostile takeovers of us or delaying
changes in our control or management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is .
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<PAGE> 74
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock.
Upon completion of this offering, we will have outstanding shares
of common stock, assuming the issuance of shares of common stock offered
hereby, no exercise of the underwriters' option to purchase additional shares
and no exercise of options or warrants after April 28, 2000. Of these shares,
the shares sold in the offering will be freely tradable without
restriction or further registration under the Securities Act; provided, however,
that if shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act, their sales of shares would be subject to certain
limitations and restrictions that are described below.
The remaining shares of common stock held by existing stockholders
that are to be outstanding upon completion of this offering will be "restricted
securities" as that term is defined under Rule 144. Restricted securities may be
sold in the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities Act,
which are summarized below. In addition, certain of these outstanding shares are
subject to our contractual right to repurchase the shares in the event the
holder of such shares ceases to be one of our employees, directors or
consultants.
All of our executive officers, directors and substantially all of our
stockholders, who collectively hold an aggregate of of these restricted
securities, will be subject, on the effective date of the offering, to lock-up
agreements pursuant to which they have agreed not to offer, sell or otherwise
dispose of any of their shares for a period of 180 days after the date of this
prospectus. Goldman, Sachs & Co. may, in its sole discretion, at any time
without notice, release all or any portion of the shares subject to the lock-up
agreements. We also have entered into an agreement with the underwriters that we
will not offer, sell or otherwise dispose of common stock for a period of 180
days from the date of this prospectus.
Taking into account the lock-up agreements and assuming Goldman, Sachs &
Co. does not release stockholders from these agreements, the following shares
will be eligible for sale in the public market at the following times:
<TABLE>
<CAPTION>
APPROXIMATE
SHARES ELIGIBLE
RELEVANT DATES FOR FUTURE SALE COMMENT
-------------- --------------- -------------------------------------
<S> <C> <C>
On effective date.................... Shares sold in the offering; shares
saleable under Rule 144(k) that are
not subject to lock-up.
90 days after effective date......... Shares saleable under Rules 144 and
701 that are not subject to the
lock-up.
2 days after September 30, 2000
quarterly results are
released(1)........................ 15% of shares subject to lock-up
released(2); shares saleable under
Rules 144 and 701.
30 days after September 30, 2000
quarterly results are
released(1)........................ Additional 25% of shares subject to
lock-up released(2); shares saleable
under Rules 144 and 701.
180 days after effective date........ All shares subject to lock-up
released; shares saleable under Rules
144 and 701
</TABLE>
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<PAGE> 75
- ---------------
(1) Assumes quarterly results are released on October 25, 2000.
(2) Automatic partial release of shares subject to lock-up is subject to the
last reported trading price of the shares for at least 20 of the 30 trading
days preceding the relevant date being at least twice the initial public
offering price per share.
In addition, as of April 28, 2000, there were outstanding options to
purchase 18,962,229 shares of common stock and outstanding warrants to purchase
280,567 shares of common stock. As soon as practicable after the completion of
the offering, we intend to file one or more registration statements on Form S-8
under the Securities Act to register all of the shares of common stock issued or
reserved for future issuance under our 1997 stock plan, 2000 stock plan,
employee stock purchase plan, and director option plan. Although such
registration statement will become effective automatically upon filing, and
sales of shares pursuant to such registration statement are subject to the
lock-up restrictions and repurchase rights described above.
In addition, following this offering, the holders of 73,339,467 shares of
outstanding common stock, as converted, and warrants to purchase 2,896,629
shares of common stock, as converted, will, under some circumstances, have the
right to require us to register their shares for future sale.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person, including an affiliate, who has
beneficially owned shares of our common stock for at least one year is entitled
to sell, within any three-month period, a number of shares that does not exceed
the greater of
- - 1% of the number of shares of common stock then outstanding, which will equal
approximately shares immediately after this offering; or
- - the average weekly trading volume of the common stock on the Nasdaq National
Market during the four calendar weeks preceding the filing of a notice on Form
144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation provisions of Rule 144 and without current public
information about us being available. Therefore, unless otherwise restricted,
"144(k) shares" may be sold immediately upon the effective date of this
offering.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchases shares from us in connection with a
compensatory stock purchase or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, which permits non-
affiliates to sell such shares without having to comply with the
public-information, holding-period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell such shares without having to comply
with the holding-period provisions of Rule 144. Therefore, unless otherwise
restricted, "701 shares" may be sold 90 days after the effective date of this
offering.
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<PAGE> 76
UNDERWRITING
CoSine and the underwriters for the offering named below have entered into
an underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table. Goldman, Sachs & Co., Chase
Securities Inc., FleetBoston Robertson Stephens Inc. and J.P. Morgan Securities
Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Goldman, Sachs & Co.........................................
Chase Securities Inc........................................
FleetBoston Robertson Stephens Inc..........................
J.P. Morgan Securities Inc..................................
--------
Total.....................................................
========
</TABLE>
If the underwriters sell more shares than the total number set forth in
the table above, the underwriters have an option to buy up to an additional
shares from CoSine to cover such sales. They may exercise that
option for 30 days. If any shares are purchased under this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by CoSine. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
PAID BY COSINE
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
Prior to the offering, there has been no public market for our common
stock. The initial public offering price will be negotiated among CoSine and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be CoSine's historical performance, estimates of the business
potential and earnings prospects of CoSine, an assessment of CoSine's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
CoSine and its executive officers, directors and substantially all of its
stockholders have agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co. and except as described in "Shares
Eligible for Future Sale." This agreement does not apply to any
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<PAGE> 77
existing employee benefit plans. See "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
At the request of CoSine, the underwriters have reserved at the initial
public offering price up to percent of the shares of common stock
offered in this offering for sale to directors, officers, employees, business
associates and related persons of CoSine. The number of shares of common stock
available for sale to the general public will be reduced to the extent these
individuals purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered by this prospectus.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
The common stock will be quoted on the Nasdaq National Market under the
symbol "COSN".
As of the date of this prospectus, entities affiliated with Goldman, Sachs
& Co. beneficially own an aggregate of 798,859 shares of CoSine's Series D
preferred stock, which were purchased for $3.505 per share, and 66,667 shares of
CoSine's Series E preferred stock, which were purchased for $15.00 per share. As
of the date of this prospectus, entities affiliated with Chase Securities Inc.
beneficially own an aggregate of 159,772 shares of Cosine's Series D preferred
stock, which were purchased for $3.505 per share, and 9,333 shares of CoSine's
Series E preferred stock, which were purchased for $15.00 per share.
Additionally, Access Technology Partners, L.P., a fund of outside investors that
is managed by an affiliate of Chase Securities Inc., owns 639,087 shares of
Series D preferred stock, which were purchased for $3.505 per share, and 37,333
shares of Series E preferred stock, which were purchased for $15.00 per share.
As of the date of this prospectus, entities affiliated with Chase Securities
Inc. also hold a warrant that is immediately exercisable to purchase 148,929
shares of CoSine's Series D preferred stock for $3.505 per share.
CoSine estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$ .
CoSine has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
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<PAGE> 78
VALIDITY OF COMMON STOCK
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California, and for the underwriters by Sullivan & Cromwell, Los Angeles,
California. As of the date of this prospectus, WS Investment Company 99A, an
investment partnership composed of certain current and former members of and
persons associated with Wilson Sonsini Goodrich & Rosati, Professional
Corporation, in addition to a number of current individual members of and
persons associated with Wilson Sonsini Goodrich & Rosati, Professional
Corporation, beneficially own an aggregate of 111,485 shares of our common
stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1998 and 1999, for the years ended
December 31, 1998 and 1999, and for the periods from inception (April 14, 1997)
to December 31, 1997 and 1999. The information under the caption "Selected
Consolidated Financial Data" at December 31, 1997, 1998 and 1999, for the period
from inception (April 14, 1997) to December 31, 1997 and for the years ended
December 31, 1998 and 1999, included in this prospectus and elsewhere in the
registration statement, have been derived from consolidated financial statements
audited by Ernst & Young LLP. We have included our consolidated financial
statements in this prospectus and elsewhere in the registration statement, in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
WHERE YOU MAY FIND ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the shares of common stock in
this offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to our company and
our common stock, we refer you to the registration statement and the exhibits
and schedule that were filed with the registration statement. Statements
contained in this prospectus about the contents of any contract or any other
document that is filed as an exhibit to the registration statement are not
necessarily complete, and we refer you to the full text of the contract or other
document filed as an exhibit to the registration statement.
A copy of the registration statement and the exhibits and schedule that we
filed with the registration statement may be inspected without charge at the
public reference room maintained by the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of
the registration statement may be obtained from the SEC upon payment of the
prescribed fee. You may call the Securities Exchange Commission at
1-800-SEC-0330 for further information on the operation of the public reference
room. The Securities and Exchange Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange
Commission. The address of the site is http://www.sec.gov.
Upon completion of this offering, we will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, and, in accordance with the requirements of the Securities Exchange Act
of 1934, will file periodic reports, proxy statements and other information with
the Securities and Exchange Commission. These periodic reports, proxy statements
and other information will be available for inspection and copying at the
regional offices, public reference facilities and web site of the Securities and
Exchange Commission referred to above.
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<PAGE> 79
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency)... F-5
Consolidated Statements of Cash Flows....................... F-8
Notes to Consolidated Financial Statements.................. F-10
</TABLE>
F-1
<PAGE> 80
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CoSine Communications, Inc.
We have audited the accompanying consolidated balance sheets of CoSine
Communications, Inc. (a development stage company) as of December 31, 1998 and
1999, and the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders' equity (net capital deficiency),
and cash flows for the years ended December 31, 1998 and 1999 and for the
periods from inception (April 14, 1997) to December 31, 1997 and 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CoSine
Communications, Inc. (a development stage company) at December 31, 1998 and
1999, and the consolidated results of its operations and its cash flows for the
years ended December 31, 1998 and 1999, and for the periods from inception
(April 14, 1997) to December 31, 1997 and 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
March 2, 2000
F-2
<PAGE> 81
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
PRO FORMA
ASSETS AND
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ MARCH 31, MARCH 31,
1998 1999 2000 2000
------- -------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,580 $ 20,089 $ 19,079 22,360
Short-term investments.................................... -- 34,497 25,436 25,436
Accounts receivable:
Trade................................................... -- -- 5,016 5,016
Other................................................... -- -- 1,536 1,536
Inventory................................................. 670 327 1,279 1,279
Prepaid expenses and other current assets................. 254 1,820 1,649 1,649
------- -------- -------- --------
Total current assets.................................. 7,504 56,733 53,995 57,276
Property and equipment, net................................. 2,767 7,631 12,191 12,191
Other assets................................................ 828 1,706 2,177 2,177
------- -------- -------- --------
$11,099 $ 66,070 $ 68,363 $ 71,644
======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable.......................................... $ 2,840 $ 2,505 $ 5,740
Accrued liabilities....................................... 730 1,468 4,379
Accrued compensation...................................... 121 812 1,902
Note payable.............................................. 201 -- 223
Deferred revenue.......................................... -- 30 1,018
Current portion of equipment and working capital loans.... 712 2,274 2,626
Current portion of obligations under capital lease........ -- -- 408
Other current liabilities................................. -- 60 --
------- -------- --------
Total current liabilities............................. 4,604 7,149 16,296
Long-term portion of equipment and working capital loans.... 1,948 6,037 6,525
Long-term portion of obligations under capital lease........ -- -- 1,128
Accrued rent................................................ 762 1,648 1,740
Other long-term liabilities................................. -- 222 187
Commitments
Redeemable preferred stock:
Series B convertible preferred stock: 13,578,649 shares
authorized, 12,884,205 shares issued and outstanding at
December 31, 1998 and 1999, and March 31, 2000;
12,884,205 on an as-if converted basis; no shares issued
and outstanding -- pro forma; aggregate liquidation
preference of $9,509 at December 31, 1999 and March 31,
2000.................................................... 9,823 9,823 9,823 --
Series C convertible preferred stock: 27,503,677 shares
authorized, 24,503,677 shares issued and outstanding at
December 31, 1999, and March 31, 2000; none at December
31, 1998; 24,503,677 on an as-if converted basis; no
shares issued and outstanding -- pro forma; aggregate
liquidation preference of $21,980 at December 31, 1999
and March 31, 2000...................................... -- 22,342 32,642 --
Series D convertible preferred stock: 20,500,000 shares
authorized, 17,118,253 and 17,743,253 shares issued and
outstanding shares at December 31, 1999, and March 31,
2000 respectively; none at December 31, 1998; 17,118,253
on an as-if converted basis; no shares issued and
outstanding -- pro forma; aggregate liquidation
preference of $59,999 and $62,190 at December 31, 1999
and March 31, 2000, respectively........................ -- 57,223 62,197 --
Stockholders' equity (net capital deficiency):
Series A convertible preferred stock: 2,150,000 shares
authorized, 1,875,000 shares issued and outstanding at
December 31, 1998 and 1999 and March 31, 2000; 7,500,000
on an as-if-converted basis; no shares issued and
outstanding -- pro forma; aggregate liquidation
preference of $3,000 at December 31, 1998 and 1999 and
March 31, 2000.......................................... 3,360 3,756 3,756 --
Common stock, no par value, 200,000,000 shares authorized
(subject to stockholders' approval), 6,666,664,
10,764,151 and 17,824,826 shares issued and outstanding
at December 31, 1998 and 1999, and March 31, 2000
respectively; 83,035,133 outstanding -- pro forma....... 106 36,293 88,408 200,107
Notes receivable from stockholders........................ (80) (903) (8,373) (8,373)
Accumulated other comprehensive income.................... -- 11 (28) (28)
Deferred compensation..................................... -- (30,386) (59,562) (59,562)
Deficit accumulated during the development stage.......... (9,424) (47,145) (86,376) (86,376)
------- -------- -------- --------
Total stockholders' equity (net capital deficiency)... (6,038) (38,374) (62,175) 45,768
------- -------- -------- --------
$11,099 $ 66,070 $ 68,363 $ 71,644
======= ======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 82
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION THREE MONTHS
(APRIL 14, 1997) YEARS ENDED (APRIL 14, 1997) ENDED
TO DECEMBER 31, TO MARCH 31,
DECEMBER 31, ------------------- DECEMBER 31, -------------------
1997 1998 1999 1999 1999 2000
---------------- ------- -------- ---------------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. $ -- $ -- $ -- $ -- $ -- $ 3,540
Cost of goods sold(1)............... -- -- -- -- -- 2,600
------ ------- -------- -------- ------- --------
Gross profit........................ -- -- -- -- -- 940
Operating expenses:
Research and development(1)....... 87 7,366 27,336 34,789 5,494 15,700
Sales and marketing(1)............ -- 606 6,077 6,683 500 21,679
General and administrative(1)..... 47 1,106 4,980 6,133 783 3,170
------ ------- -------- -------- ------- --------
Total operating
expenses.......................... 134 9,078 38,393 47,605 6,777 40,549
------ ------- -------- -------- ------- --------
Loss from operations................ (134) (9,078) (38,393) (47,605) (6,777) (39,609)
Other income (expenses):
Interest income................... 3 55 1,250 1,308 90 694
Interest expense.................. -- (267) (599) (866) (102) (316)
Other............................. -- (3) 21 18 -- --
------ ------- -------- -------- ------- --------
Net loss............................ (131) (9,293) (37,721) (47,145) (6,789) (39,231)
Deemed dividend to Series D
preferred stockholders............ -- -- -- -- -- 2,500
------ ------- -------- -------- ------- --------
Net loss allocable to common
stockholders...................... $ (131) $(9,293) $(37,721) $(47,145) $(6,789) $(41,731)
====== ======= ======== ======== ======= ========
Basic and diluted net loss per
common share...................... $(0.25) $ (4.53) $ (7.80) $ (1.78) $ (6.67)
====== ======= ======== ======= ========
Shares used in computing basic and
diluted net loss per common
share............................. 522 2,051 4,837 3,817 6,255
====== ======= ======== ======= ========
Pro forma basic and diluted net loss
per common share (unaudited)...... $ (0.75) $ (0.61)
======== ========
Shares used in computing pro forma
basic and diluted net loss per
common share (unaudited).......... 50,378 68,295
======== ========
</TABLE>
- -------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(1) Non cash charges related to
equity issuances included above:
Cost of goods sold........... $ -- $ -- $ -- $ -- $ -- $ 216
Research and development..... -- -- 2,186 2,186 -- 4,104
Sales and marketing.......... -- -- 1,462 1,462 -- 18,049
General and administrative... -- -- 733 733 -- 1,811
------ ------- -------- -------- ------- --------
Total..................... $ -- $ -- $ 4,381 $ 4,381 $ -- $ 24,180
====== ======= ======== ======== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 83
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE NOTES ACCUMULATED
CONVERTIBLE CONVERTIBLE RECEIVABLE OTHER
PREFERRED PREFERRED COMMON FROM COMPREHENSIVE DEFERRED
STOCK STOCK STOCK STOCKHOLDERS INCOME COMPENSATION
----------- ----------- ------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 4,000,000 shares of
common stock to founder in
September 1997 at $0.00025 per
share for cash................. $ -- $ -- $ 1 $ -- $-- $ --
Issuance of 1,562,500 shares of
Series A preferred stock in
November 1997 to investors at
$1.60 per share for cash and
promissory notes............... -- 2,500 -- (1,000) -- --
Net loss......................... -- -- -- -- -- --
------- ------ ------- ------- --- --------
Balance at December 31, 1997....... -- 2,500 1 (1,000) -- --
Issuance of 2,666,664 shares of
common stock to founders in
January 1998 and February 1998
at $0.0375 per share for cash
and notes...................... -- -- 100 (80) -- --
Issuance of 312,500 shares of
Series A preferred stock to
investors in April 1998 at
$1.60 per share, net of
issuance costs of $11.......... -- 489 -- -- -- --
Issuance of 12,884,205 shares of
Series B preferred stock to
investors in December 1998 at
$0.738 per share, net of
issuance costs of $37.......... 9,471 -- -- -- -- --
Issuance of warrants to purchase
43,067 shares of common stock
in connection with services.... -- -- 5 -- -- --
Issuance of warrants to purchase
159,105 shares of Series A
preferred stock in connection
with lease of building......... -- 371 -- -- -- --
Issuance of warrants to purchase
694,444 shares of Series B
preferred stock in connection
with loan financing............ 352 -- -- -- -- --
Repayment of notes receivable
from stockholders.............. -- -- -- 1,000 -- --
Net loss and comprehensive
loss........................... -- -- -- -- -- --
------- ------ ------- ------- --- --------
Balance at December 31, 1998
(carried forward)................ $ 9,823 $3,360 $ 106 $ (80) $-- $ --
<CAPTION>
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
DURING THE EQUITY
DEVELOPMENT (NET CAPITAL
STAGE DEFICIENCY)
----------- --------------
<S> <C> <C>
Issuance of 4,000,000 shares of
common stock to founder in
September 1997 at $0.00025 per
share for cash................. $ -- $ 1
Issuance of 1,562,500 shares of
Series A preferred stock in
November 1997 to investors at
$1.60 per share for cash and
promissory notes............... -- 1,500
Net loss......................... (131) (131)
-------- --------
Balance at December 31, 1997....... (131) 1,370
Issuance of 2,666,664 shares of
common stock to founders in
January 1998 and February 1998
at $0.0375 per share for cash
and notes...................... -- 20
Issuance of 312,500 shares of
Series A preferred stock to
investors in April 1998 at
$1.60 per share, net of
issuance costs of $11.......... -- 489
Issuance of 12,884,205 shares of
Series B preferred stock to
investors in December 1998 at
$0.738 per share, net of
issuance costs of $37.......... -- --
Issuance of warrants to purchase
43,067 shares of common stock
in connection with services.... -- 5
Issuance of warrants to purchase
159,105 shares of Series A
preferred stock in connection
with lease of building......... -- 371
Issuance of warrants to purchase
694,444 shares of Series B
preferred stock in connection
with loan financing............ -- --
Repayment of notes receivable
from stockholders.............. -- 1,000
Net loss and comprehensive
loss........................... (9,293) (9,293)
-------- --------
Balance at December 31, 1998
(carried forward)................ $ (9,424) $ (6,038)
</TABLE>
See accompanying notes.
F-5
<PAGE> 84
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (CONTINUED)
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE NOTES ACCUMULATED
CONVERTIBLE CONVERTIBLE RECEIVABLE OTHER
PREFERRED PREFERRED COMMON FROM COMPREHENSIVE DEFERRED
STOCK STOCK STOCK STOCKHOLDERS INCOME COMPENSATION
----------- ----------- ------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998
(brought forward)................ $ 9,823 $3,360 $ 106 $ (80) $-- $ --
Issuance of 73,667 shares of
common stock for services at
various dates at prices ranging
from $0.545 to $2.60 per
share.......................... -- -- 163 -- -- --
Issuance of 24,503,677 shares of
Series C preferred stock to
investors in March 1999 at
$0.897 per share, net of
issuance costs of $29.......... 21,950 -- -- -- -- --
Issuance of 17,118,253 shares of
Series D preferred stock to
investors in September and
October 1999 at $3.505 per
share, net of issuance costs of
$3,079......................... 56,921 -- -- -- -- --
Issuance of warrants to purchase
641,904 shares of Series C
preferred stock in connection
with technical and marketing
services....................... 392 -- -- -- -- --
Issuance of warrants to purchase
154,064 shares of Series D
preferred stock in connection
with services.................. 302 -- -- -- -- --
Issuance of 4,023,820 shares of
common stock in connection with
stock options for cash and
promissory notes............... -- -- 1,603 (873) -- --
Increase in value of variable
award warrants of Series A
preferred stock issued in
connection with lease of
building....................... -- 396 -- -- -- --
Increase in value of variable
award warrants of common stock
issued in connection with
services....................... -- -- 255 -- -- --
Repayment of notes receivable
from stockholders.............. -- -- -- 50 -- --
Deferred stock-based
compensation................... -- -- 33,955 -- -- (33,955)
Amortization of deferred
stock-based compensation....... -- -- -- -- -- 3,569
Issuance of options to
nonemployees to purchase common
stock.......................... -- -- 211 -- -- --
Components of comprehensive
loss:..........................
Net loss....................... -- -- -- -- -- --
Unrealized gains on
investments.................. -- -- -- -- 11 --
------- ------ ------- ------- --- --------
Total comprehensive loss... -- -- -- -- 11 --
------- ------ ------- ------- --- --------
Balance at December 31, 1999
(carried forward)................ $89,388 $3,756 $36,293 $ (903) $11 $(30,386)
<CAPTION>
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
DURING THE EQUITY
DEVELOPMENT (NET CAPITAL
STAGE DEFICIENCY)
----------- --------------
<S> <C> <C>
Balance at December 31, 1998
(brought forward)................ $ (9,424) $ (6,038)
Issuance of 73,667 shares of
common stock for services at
various dates at prices ranging
from $0.545 to $2.60 per
share.......................... -- 163
Issuance of 24,503,677 shares of
Series C preferred stock to
investors in March 1999 at
$0.897 per share, net of
issuance costs of $29.......... -- --
Issuance of 17,118,253 shares of
Series D preferred stock to
investors in September and
October 1999 at $3.505 per
share, net of issuance costs of
$3,079......................... -- --
Issuance of warrants to purchase
641,904 shares of Series C
preferred stock in connection
with technical and marketing
services....................... -- --
Issuance of warrants to purchase
154,064 shares of Series D
preferred stock in connection
with services.................. -- --
Issuance of 4,023,820 shares of
common stock in connection with
stock options for cash and
promissory notes............... -- 730
Increase in value of variable
award warrants of Series A
preferred stock issued in
connection with lease of
building....................... -- 396
Increase in value of variable
award warrants of common stock
issued in connection with
services....................... -- 255
Repayment of notes receivable
from stockholders.............. -- 50
Deferred stock-based
compensation................... -- --
Amortization of deferred
stock-based compensation....... -- 3,569
Issuance of options to
nonemployees to purchase common
stock.......................... -- 211
Components of comprehensive
loss:..........................
Net loss....................... (37,721) (37,721)
Unrealized gains on
investments.................. -- 11
-------- --------
Total comprehensive loss... (37,721) (37,710)
-------- --------
Balance at December 31, 1999
(carried forward)................ $(47,145) $(38,374)
</TABLE>
See accompanying notes.
F-6
<PAGE> 85
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (CONTINUED)
(NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE NOTES ACCUMULATED
CONVERTIBLE CONVERTIBLE RECEIVABLE OTHER
PREFERRED PREFERRED COMMON FROM COMPREHENSIVE DEFERRED
STOCK STOCK STOCK STOCKHOLDERS INCOME COMPENSATION
----------- ----------- ------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999
(brought forward)................ $ 89,388 $3,756 $36,293 $ (903) $ 11 $(30,386)
Issuance of 15,426 shares of common
stock for services in February
and March at $4.00 per share
(unaudited)...................... -- -- 62 -- -- --
Issuance of warrants to purchase
1,233,499 shares of Series C
preferred stock in connection
with technical and marketing
services (unaudited)............. 10,300 -- -- -- -- --
Issuance of warrants to purchase
200,000 shares of common stock in
connection with technical and
marketing services (unaudited)... -- -- 1,840 -- -- --
Issuance of warrants to purchase
468,849 shares of common stock in
connection with technical and
marketing services (unaudited)... -- -- 4,112 -- -- --
Issuance of warrants to purchase
37,500 shares of common stock in
connection with lease agreement
(unaudited)...................... -- -- 357 -- -- --
Issuance of 625,000 shares of
Series D preferred stock to
investors in March 2000 at $8.00
per share, net of issuance costs
of $26 (unaudited)............... 4,974 -- -- -- -- --
Issuance of 7,045,249 shares of
common stock in connection with
exercise of stock options for
cash and notes (unaudited)....... -- -- 8,529 (7,470) -- --
Increase in value of variable award
warrants of common stock issued
in connection with services
(unaudited)...................... -- -- 139 -- -- --
Deferred stock-based compensation
(unaudited)...................... -- -- 36,816 -- -- (36,816)
Amortization of deferred
stock-based compensation
(unaudited)...................... -- -- -- -- -- 7,640
Issuance of options to
non-employees to purchase common
stock (unaudited)................ -- -- 260 -- -- --
Components of comprehensive loss:
Net loss (unaudited)............. -- -- -- -- -- --
Unrealized losses on investments
(unaudited).................... -- -- -- -- (39) --
-------- ------ ------- ------- ---- --------
Total comprehensive loss
(unaudited)................ -- -- -- -- (39) --
-------- ------ ------- ------- ---- --------
Balance at March 31, 2000
(unaudited)...................... $104,662 $3,756 $88,408 $(8,373) $(28) $(59,562)
======== ====== ======= ======= ==== ========
<CAPTION>
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
DURING THE EQUITY
DEVELOPMENT (NET CAPITAL
STAGE DEFICIENCY)
----------- --------------
<S> <C> <C>
Balance at December 31, 1999
(brought forward)................ $(47,155) $(38,384)
Issuance of 15,426 shares of common
stock for services in February
and March at $4.00 per share
(unaudited)...................... -- 62
Issuance of warrants to purchase
1,233,499 shares of Series C
preferred stock in connection
with technical and marketing
services (unaudited)............. -- --
Issuance of warrants to purchase
200,000 shares of common stock in
connection with technical and
marketing services (unaudited)... -- 1,840
Issuance of warrants to purchase
468,849 shares of common stock in
connection with technical and
marketing services (unaudited)... -- 4,112
Issuance of warrants to purchase
37,500 shares of common stock in
connection with lease agreement
(unaudited)...................... -- 357
Issuance of 625,000 shares of
Series D preferred stock to
investors in March 2000 at $8.00
per share, net of issuance costs
of $26 (unaudited)............... -- --
Issuance of 7,045,249 shares of
common stock in connection with
exercise of stock options for
cash and notes (unaudited)....... -- 1,059
Increase in value of variable award
warrants of common stock issued
in connection with services
(unaudited)...................... -- 139
Deferred stock-based compensation
(unaudited)...................... -- --
Amortization of deferred
stock-based compensation
(unaudited)...................... -- 7,640
Issuance of options to
non-employees to purchase common
stock (unaudited)................ -- 260
Components of comprehensive loss:
Net loss (unaudited)............. (39,231) (39,231)
Unrealized losses on investments
(unaudited).................... -- (39)
-------- --------
Total comprehensive loss
(unaudited)................ (39,231) (39,270)
-------- --------
Balance at March 31, 2000
(unaudited)...................... $(86,376) $(62,175)
======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 86
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM THREE MONTHS
INCEPTION YEARS ENDED INCEPTION ENDED
(APRIL 14, 1997) TO DECEMBER 31, (APRIL 14, 1997) TO MARCH 31,
DECEMBER 31, ------------------- DECEMBER 31, -------------------
1997 1998 1999 1999 1999 2000
------------------- ------- -------- ------------------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................. $ (131) $(9,293) $(37,721) $(47,145) $(6,789) $(39,231)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation....................... 2 284 1,921 2,207 265 1,031
Noncash warrant expense --
preferred stock.................. -- 227 511 738 25 10,355
Noncash warrant expense -- common
stock............................ -- -- 29 29 -- 5,952
Common stock issued for services... -- -- 163 163 -- 62
Amortization of deferred stock
compensation..................... -- -- 3,569 3,569 32 7,640
Issuance of options to purchase
common stock..................... -- -- 211 211 -- 260
Accrued expense on bridge note
converted into preferred stock... -- 9 -- 9 -- --
Changes in unrealized gains or
losses........................... -- -- 11 11 -- (39)
Changes in operating assets and
liabilities:
Accounts receivable (trade)...... -- -- -- -- -- (5,016)
Other receivables................ -- -- -- -- -- (1,536)
Inventory........................ -- (670) 343 (327) (57) (952)
Prepaid expenses and other
current assets................. (10) (169) (1,437) (1,616) (79) 189
Other assets..................... (100) (302) (504) (906) (16) (48)
Accounts payable................. 73 2,767 (335) 2,505 (58) 3,235
Accrued liabilities.............. -- 730 738 1,468 809 2,911
Accrued compensation............. -- 121 691 812 (121) 1,090
Note payable..................... -- 201 (201) -- -- 223
Obligations under capital
lease.......................... -- -- -- -- -- 1,536
Deferred rent.................... -- 762 886 1,648 427 92
Other liabilities................ -- -- 312 312 74 893
------ ------- -------- -------- ------- --------
Net cash used in operating
activities......................... (166) (5,333) (30,813) (36,312) (5,488) (11,353)
------ ------- -------- -------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures................. (34) (3,019) (6,785) (9,838) (1,025) (5,591)
Purchase of short-term investments... -- -- (34,497) (34,497) -- (4,404)
Proceeds from maturities of
short-term investments............. -- -- -- -- -- 9,430
Proceeds from sales of short-term
investments........................ -- -- -- -- -- 4,035
------ ------- -------- -------- ------- --------
Net cash provided by (used in)
investing activities............... (34) (3,019) (41,282) (44,335) (1,025) 3,470
------ ------- -------- -------- ------- --------
</TABLE>
See accompanying notes.
F-8
<PAGE> 87
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM THREE MONTHS
INCEPTION YEARS ENDED INCEPTION ENDED
(APRIL 14, 1997) TO DECEMBER 31, (APRIL 14, 1997) TO MARCH 31,
DECEMBER 31, ------------------ DECEMBER 31, -----------------
1997 1998 1999 1999 1999 2000
------------------- ------- -------- ------------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from equipment and working
capital loans........................ -- 2,853 7,001 9,854 670 1,486
Principal payments of equipment and
working capital loans................ -- (193) (1,350) (1,543) (194) (646)
Proceeds from issuance of bridge
loans................................ -- 1,500 -- 1,500 -- --
Proceeds from issuance of preferred
stock, net........................... 1,500 8,451 79,173 89,124 21,950 4,974
Proceeds from issuance of common
stock................................ 1 20 730 751 10 1,059
Proceeds from notes receivable from
stockholders......................... -- 1,000 50 1,050 49 --
------ ------- -------- -------- ------- -------
Net cash provided by financing
activities........................... 1,501 13,631 85,604 100,736 22,485 6,873
------ ------- -------- -------- ------- -------
Net increase in cash and cash
equivalents.......................... 1,301 5,279 13,509 20,089 15,972 (1,010)
Cash and cash equivalents at beginning
of period............................ -- 1,301 6,580 -- 6,580 20,089
------ ------- -------- -------- ------- -------
Cash and cash equivalents at end of
period............................... $1,301 $ 6,580 $ 20,089 $ 20,089 $22,552 $19,079
====== ======= ======== ======== ======= =======
SUPPLEMENTAL INFORMATION:
Cash paid for interest................. $ -- $ 59 $ 552 $ 611 $ 90 $ 304
====== ======= ======== ======== ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of preferred stock in exchange
for bridge loans..................... $ -- $ 1,500 $ -- $ 1,500 $ -- $ --
====== ======= ======== ======== ======= =======
Issuance and remeasurement of
warrants............................. $ -- $ 728 $ 1,345 $ 2,073 $ 149 $16,391
====== ======= ======== ======== ======= =======
Notes receivable received from
stockholders (in exchange for
issuance of common stock)............ $1,000 $ 80 $ 873 $ 1,953 $ -- $ 7,470
====== ======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-9
<PAGE> 88
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
CoSine Communications, Inc. (the "Company") was incorporated in California
on April 14, 1997 and is engaged in the development of network-based, high-
performance Internet service delivery platforms for the global, carrier-class
business IP Service Provider market. Since inception, the Company's principal
activities have been recruiting personnel, raising capital, and performing
product development. Accordingly, the Company is classified as a development
stage enterprise at December 31, 1999.
During the first quarter of 2000, the Company commenced shipping product
and recognizing revenue, and therefore ceased to be classified as a development
stage enterprise.
BASIS OF PRESENTATION
The consolidated financial statements include all of the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
MANAGEMENT'S PLANS
As of December 31, 1999, the Company had an accumulated deficit of
approximately $47.1 million. Even though the Company commenced shipping product
and recognizing revenue in the first quarter of 2000, management expects to
continue to incur substantial operating losses for the foreseeable future
primarily as a result of expected increases in expenses for:
- - Sales and marketing activities
- - Research and product development activities
- - General and administrative activities
The Company currently does not have a credit facility or committed sources
of capital. To the extent operating and capital resources are insufficient to
meet future requirements, the Company will have to raise additional funds to
continue the development and commercialization of future technologies. These
funds may not be available on favorable terms, or at all. If adequate funds are
not available on attractive terms, the Company may be required to curtail
operations significantly or to obtain funds by entering into financing, supply
or operating agreements on unattractive terms. In addition, the Company may
choose to raise additional capital due to market conditions or strategic
considerations even if it has sufficient funds for current or future operating
plans.
The Company believes that its available cash, cash equivalents, and
short-term investments of $54.6 million as of December 31, 1999 together with
the cash proceeds to be raised from the issuance of Series E preferred stock
(see note 11) will be adequate to fund its operations through December 31, 2000.
UNAUDITED PRO FORMA INFORMATION
In February 2000, the Board of Directors authorized the management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock to the
public. If the initial public offering is consummated under the terms presently
anticipated, all of the convertible preferred stock outstanding, and certain of
the warrants to purchase common and preferred stock which are automatically
exercised upon the closing of an initial public offering of the Company's common
stock, will automatically convert into common stock. Unaudited pro forma
stockholders' equity, as adjusted for the assumed conversion of the
F-10
<PAGE> 89
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
preferred stock, and the automatic and assumed exercise of certain of the
warrants to purchase common and preferred stock as set forth on the balance
sheet.
INTERIM CONSOLIDATED FINANCIAL DATA
The consolidated financial information at March 31, 2000 and for the three
months ended March 31, 1999 and 2000 is unaudited but has been prepared on the
same basis as the annual consolidated financial statements and, in the opinion
of management, includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
consolidated financial position at such dates and the consolidated operating
results and cash flows for such periods. Results for the interim periods are not
necessarily indicative of the results to be expected for any subsequent period.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and the accompanying notes. Actual results
could differ from these estimates.
REVENUE RECOGNITION
The Company generally recognizes product revenue at the time of shipment,
assuming that collectibility is probable, unless the Company has future
obligations for installation or has to obtain customer acceptance, in which case
revenue is deferred until these obligations are met. Revenue from service
obligations for specified future periods is deferred and recognized on a
straight-line basis over the contractual period. Amounts billed in excess of
revenue recognized are included as deferred revenue in the accompanying balance
sheets. Revenue from engineering and consulting services is recognized as the
services are provided or based upon the achievement of contractual milestones.
The Company's initial two customers were provided limited price protection
rights which expire in September and December 2000. The Company believes that
the likelihood that there will be any price adjustments in connection with these
rights is remote.
COST OF GOOD SOLD
Cost of goods sold is comprised primarily of material, labor, overhead and
estimated warranty reserves.
WARRANTY RESERVES
The warranty period for the Company's product is generally outlined in the
specific sales agreements. Estimated expenses for warranty obligations are
accrued as revenue is recognized and included in cost of goods sold.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with
original maturities of three months or less from the date of purchase to be cash
equivalents. Investments with maturities in excess of three months and less than
one year are considered to be short-term investments. Management determines the
appropriate classification of its cash equivalents and investment securities at
the time of purchase and reevaluates such determination as of each balance sheet
date. Management has classified the Company's marketable securities as
available-for-sale securities in the accompanying consolidated financial
statements. Available-for-sale securities are carried at fair value, with
F-11
<PAGE> 90
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
unrealized gains and losses reported in a separate component of stockholders'
equity. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. Interest on securities classified as available-for-sale is also included
in interest income. The cost of securities sold is based on the specific
identification method.
The Company invests its excess cash in U.S. government and agency
securities, debt instruments of financial institutions and corporations, and
money market funds with strong credit ratings. The Company has established
guidelines regarding diversification of its investments and their maturities
which should maintain safety and liquidity.
INVENTORIES
Inventories, stated at the lower of cost (first-in, first-out) or market,
consist principally of raw materials at December 31, 1998 and 1999, and
work-in-process at March 31, 2000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation. Property and equipment are depreciated using the straight-line
method over estimated useful lives of the assets (ranging from three to five
years) or the related lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews
long-lived assets, including property and equipment, for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable. Under SFAS 121, an impairment loss
would be recognized when estimated undiscounted future cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount. Impairment, if any, is assessed using discounted cash flows.
Through December 31, 1999, there have been no such losses.
RESEARCH AND DEVELOPMENT
The Company expenses research and development costs as incurred. Research
and development expenses consist primarily of materials, labor, and overhead
costs for the development and testing of prototypes and salaries and related
personnel costs associated with independent research.
STOCK-BASED COMPENSATION
The Company accounts for employee and director stock option grants using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") which does
not require the recognition of compensation expense for options granted to
employees with exercise prices equal to the fair value of the common stock at
the date of grant. The fair value disclosures required by Statement of Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") are included in Note 8. SFAS 123 requires the
disclosure of pro forma information regarding net loss and net loss per share as
if the Company had accounted for its stock options under the fair value method.
Stock options granted to non-employees are accounted for in accordance
with SFAS 123 and the Emerging Issues Task Force Consensus No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in
F-12
<PAGE> 91
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
Conjunction with Selling, Goods or Services" which requires the value of such
options to be periodically re-measured as they vest over a performance period.
The fair value of such options is determined using the Black-Scholes model.
COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 requires unrealized gains or losses
on the Company's available-for-sale securities to be included in other
comprehensive income. For the year ended December 31, 1999, comprehensive loss
was reduced by $11,000 in unrealized gains on available-for-sale securities.
During the three months ended March 31, 2000, comprehensive loss was increased
by $39,000 in unrealized losses on available-for-sale securities. For the years
ended December 31, 1998, comprehensive loss equaled net loss.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers. The Company has determined that it operates in only one
segment. Accordingly, the adoption of SFAS 131 had no impact on the Company's
financial statements.
For the quarter ended March 31, 2000, the Company generated $1,715,000 of
revenue from a customer based in Europe. Substantially all of the Company's
assets are located in the United States at December 31, 1998 and 1999 and at
March 31, 2000.
SIGNIFICANT CONCENTRATIONS
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash equivalents and
short-term investments (see Note 2).
The Company relies on a few companies as the sole source of various
materials in its production process. The Company also utilizes a few third-party
subcontractors to manufacture all of the product that it sells. If these
suppliers were unable to satisfy the Company's material and production
requirements, the Company may be unable to meet customer demand.
For the quarter ended March 31, 2000, two customers accounted for
substantially all of the Company's revenue.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company's advertising
costs through December 31, 1999 have been immaterial.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000. The Company will assess the impact of SFAS 133 if
such activities are undertaken.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1").
F-13
<PAGE> 92
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
SOP 98-1 requires that entities capitalize certain costs related to internal use
software once certain criteria have been met. The Company adopted the provisions
of SOP 98-1 on January 1, 1999.
In December 1999, the Securities and Exchange Commission ("SEC") issued
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Company believes its revenue recognition policy is in
compliance with SAB 101 as of March 31, 2000.
NET LOSS PER COMMON SHARE
Basic net loss per common share is calculated based on the
weighted-average number of common shares outstanding during the periods
presented, less the weighted-average shares outstanding which are subject to the
Company's right of repurchase. Diluted net loss per common share would give
effect to the dilutive effect of common stock equivalents consisting of
convertible preferred stock, stock options and warrants (calculated using the
treasury stock method). Potentially dilutive securities have been excluded from
the diluted net loss per common share computations as their inclusion would be
antidilutive.
The computation of pro forma basic and diluted net loss per common share
includes shares issuable upon the conversion of outstanding shares of
convertible preferred stock (using the as-if converted method) from the original
date of issuance. Shares issuable upon exercise of certain warrants for common
and preferred stock, which are automatically exercised upon closing of an
initial public offering, do not affect the computation, as such shares are
issued on the date of the assumed conversion.
F-14
<PAGE> 93
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
The following table presents the calculation of historical basic and
diluted net loss per share and pro forma basic and diluted net loss per share
(in thousands, except per share data):
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
INCEPTION YEARS ENDED ENDED
(APRIL 14, 1997) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ------------------ ------------------
1997 1998 1999 1999 2000
---------------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Historical:
Net loss allocable to common
shareholders................... $ (131) $(9,293) $(37,721) $(6,789) $(41,731)
======= ======= ======== ======= ========
Basic and diluted:
Weighted-average shares of common
stock outstanding.............. 1,868 6,484 7,659 6,702 15,323
Less: weighted-average shares
subject to repurchase.......... (1,346) (4,433) (2,822) (2,885) (9,068)
------- ------- -------- ------- --------
Weighted-average shares used in
basic and diluted net loss per
common share................... 522 2,051 4,837 3,817 6,255
======= ======= ======== ======= ========
Basic and diluted net loss per
common share...................... $ (0.25) $ (4.53) $ (7.80) $ (1.78) $ (6.67)
======= ======= ======== ======= ========
Pro forma:
Net loss allocable to common
shareholders................... $(37,721) $(41,731)
======== ========
Pro forma basic and diluted:
Shares used above................. 4,837 6,255
Pro forma adjustment to reflect
weighted-average effect of
assumed conversion of
convertible preferred stock
(unaudited).................... 45,541 62,040
-------- --------
Weighted-average shares used in
pro forma basic and diluted net
loss per common share
(unaudited).................... 50,378 68,295
======== ========
Pro forma basic and diluted net
loss per common share
(unaudited).................... $ (0.75) $ (0.61)
======== ========
</TABLE>
During all periods presented, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded from the computation
F-15
<PAGE> 94
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
of diluted net loss per share as their effect would have been antidilutive.
These outstanding securities consist of the following:
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
INCEPTION YEARS ENDED ENDED
(APRIL 14, 1997) DECEMBER 31, MARCH 31,
TO DECEMBER 31, --------------- -------------------
1997 1998 1999 1999 2000
---------------- ------ ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Convertible preferred stock (as-if
converted basis)................... 6,250 20,384 62,006 44,888 62,631
Stock options........................ -- 2,618 10,761 5,098 8,320
Warrants to purchase common stock.... -- 43 43 43 749
Warrants to purchase preferred stock
(as-if converted basis)............ -- 1,331 2,127 1,331 3,360
</TABLE>
2. SHORT-TERM INVESTMENTS
Short-term investments as of December 31, 1999, including cash equivalents
and short-term investments, were as follows (in thousands):
<TABLE>
<S> <C>
Money market funds.......................................... $ 11,448
Commercial paper............................................ 17,751
Corporate bonds............................................. 24,670
--------
53,869
Amounts classified as cash equivalents...................... (19,372)
--------
Short-term investments...................................... $ 34,497
========
</TABLE>
As of December 31, 1999, the fair value approximated the amortized cost of
available-for-sale securities. As of December 31, 1999, the average portfolio
duration was 122 days. There were no short-term investments as of December 31,
1998.
F-16
<PAGE> 95
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1998 1999 2000
------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer equipment......................................... $1,716 $ 2,175 $ 3,956
Furniture and fixtures..................................... 526 1,069 1,768
Leasehold improvements..................................... 155 364 885
Computer software.......................................... 656 2,002 2,715
Manufacturing and laboratory equipment..................... -- 4,228 6,105
------ ------- -------
3,053 9,838 15,429
Less accumulated depreciation.............................. (286) (2,207) (3,238)
------ ------- -------
Property and equipment, net................................ $2,767 $ 7,631 $12,191
====== ======= =======
</TABLE>
4. LEASES
The Company leases its facilities under an operating lease which commenced
August 1, 1998 and has been extended to expire December 31, 2011.
Minimum future lease payments due under this lease agreement are as follows
at December 31, 1999:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
2000.................................................... $ 1,924
2001.................................................... 1,983
2002.................................................... 2,038
2003.................................................... 2,088
2004.................................................... 2,148
Thereafter.............................................. 16,710
-------
Total minimum lease payments.......................... $26,891
=======
</TABLE>
Rent expense was $19,000, $1,045,000, and $2,093,000 for the period from
inception (April 14, 1997) to December 31, 1997, and the years ended December
31, 1998 and 1999, respectively, and is calculated on a straight-line basis.
The Company subleases a portion of the space at its facility. Rental
income relating to the sublease was $0, $13,000 and $323,000 for the period from
inception (April 14, 1997) to December 31, 1997 and the years ended December 31,
1998 and 1999, respectively. The sublease arrangements, which expire on June 30,
2001, provide for income of $531,000 in 2000 and $261,000 in 2001.
In connection with its facility lease, the Company has issued a
noninterest-bearing promissory note due January 2001 for approximately $222,000
relating to a security deposit, which is included in other long-term liabilities
at December 31, 1999.
On February 12, 2000, the Company leased additional facilities in Redwood
City,
F-17
<PAGE> 96
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
California, primarily for office space. The term of the lease is twelve years
commencing on February 12, 2000. Minimum annual rental commitments under the
operating lease are $1,835,000, $2,127,000, $2,186,000, $2,246,000 and
$2,305,000 for the years ending December 31, 2000, 2001, 2002, 2003 and 2004,
respectively, and $18,018,000 for the period subsequent to December 31, 2004.
On January 1, 2000, the Company leased additional facilities in Reston,
Virginia, primarily for office space. The term of the lease is fifty-three
months commencing on January 1, 2000. Minimum annual rental Commitments under
the operating lease are $185,000, $194,000, $204,000, $214,000 and $94,000 for
the years ending December 31, 2000, 2001, 2002, 2003 and 2004, respectively.
5. EQUIPMENT AND WORKING CAPITAL LOANS
As of December 31, 1999, the Company has entered into equipment and
working capital loan agreements totaling $9,854,000 that are secured by the
assets purchased using the loans. Principal and interest are due in monthly
installments through 2003. Interest accrues at rates between 12.9% and 14.1% per
annum. As of December 31, 1999, total principal payments due under these
agreements are $8,311,000. The fair value of the loans is estimated based on
current interest rates available to the Company for debt instruments with
similar terms, degrees of risk, and remaining maturities. The carrying value of
the loans approximates their fair value.
Future minimum principal payments under these equipment and working capital
loans at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
2000.................................................... $ 3,221
2001.................................................... 3,005
2002.................................................... 2,528
2003.................................................... 1,570
-------
Total minimum payments.................................. 10,324
Less: amount representing interest...................... (2,013)
-------
8,311
Less: current portion................................... (2,274)
-------
$ 6,037
=======
</TABLE>
During the three months ended March 31, 2000, the Company obtained
additional equipment loans totaling $1,486,000 that are secured by the assets
purchased using the loans. Principal and interest are due in monthly
installments through 2004. Interest accrues at 14.3% per annum. As of March 31,
2000, total principal payments due under these agreements are $1,382,000. Future
minimum principal payments under these loans are as follows: 2000 -- $204,000,
2001 -- $308,000, 2002 -- $355,000, 2003 -- $385,000, and 2004 -- $130,000.
At March 31, 2000, the Company was in violation of certain financial
reporting loan
F-18
<PAGE> 97
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
covenants in connection with these loans. The financial institutions have agreed
to waive these covenants.
6. COMMITMENTS
As of December 31, 1999, the Company had commitments of approximately
$6,067,000 relating to purchases of raw material components and $3,813,000
relating to royalties payable on software licenses on future product sales.
7. 401(k) PLAN
The Company has a defined contribution benefit plan established under the
provisions of Section 401(k) of the Internal Revenue Code. All employees may
elect to contribute up to 20% of their compensation to the plan through salary
deferrals, subject to IRS limits. The Company may contribute a discretionary
matching contribution. Since inception (April 14, 1997) through December 31,
1999, the Company made no matching contributions to the plan.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
The Company has convertible preferred stock that consists of (i) Series A
convertible preferred stock and (ii) Series B, C, and D redeemable convertible
preferred stock, collectively referred to as "preferred stock."
CONVERTIBLE PREFERRED STOCK
SERIES A
Series A convertible preferred stock ranks senior to the Company's common
stock and junior to the Series B, C and D preferred stock with respect to
liquidation preference. Series A convertible preferred stock has a liquidation
preference of $1.60 per share, plus any accrued dividends.
Each share of Series A convertible preferred stock is, at the option of
the holder, convertible into common stock as determined by dividing the original
issue price by the following conversion price: $0.40 (subject to adjustment).
The outstanding shares of Series A convertible preferred stock automatically
convert into common stock either immediately preceding the closing of an
underwritten public offering of common stock in which the Company receives at
least $15,000,000 in gross proceeds, and the price per share is at least $5.00
per share, or at the election of the holders of a majority of the then
outstanding shares of Series A convertible preferred stock.
Series A convertible preferred stock is not redeemable by the Company.
The Series A convertible preferred stockholders have voting rights equal
to the common shares issuable upon conversion. In addition, the holders of
Series A convertible preferred stock, voting together as a class, are entitled
to elect one member of the Company's board of directors (as long as 500,000
shares of the class are outstanding).
Series A convertible preferred stock ranks senior to the common stock with
respect to dividends. Each fiscal year, Series A convertible stockholders are
entitled to cumulative dividends of $0.16 per share. Dividends will be paid only
when declared by the board of directors, out of legally available funds. To
date, no dividends have been declared.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
SERIES B
Series B convertible preferred stock ranks senior to the Series A stock
and pari passu with the Series C and D preferred stock with respect to
liquidation preference. Series B convertible preferred stock has a liquidation
preference of $0.738 per share,
F-19
<PAGE> 98
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
plus any accrued dividends. In no event shall the aggregate per share
liquidation amount for the holders of Series B convertible preferred stock
exceed $2.50.
Each share of Series B convertible preferred stock is, at the option of
the holder, convertible into common stock as determined by dividing the original
issue price by the following conversion price: $0.738 (subject to adjustment).
The outstanding shares of Series B convertible preferred stock automatically
convert into common stock either immediately preceding the closing of an
underwritten public offering of common stock in which the Company receives at
least $15,000,000 in gross proceeds, and the price per share is at least $7.00
per share, or at the election of the holders of a majority of the then
outstanding shares of Series B convertible preferred stock.
If at any time within the 90 day period following November 23, 2003, the
Company receives a written request from the holders of not less than 67% of the
then outstanding Series B, C and D convertible preferred stock, requesting
redemption of all or a portion of the Series B, C and D convertible preferred
stock, the Company shall redeem pro rata to their respective requests for
redemption one-third of each of the Series B, C and D convertible preferred
stock requested to be redeemed, and shall redeem the Series B, C and D
convertible preferred stock remaining outstanding after such redemption pro rata
to the respective number of shares of each then outstanding, in two equal
installments on November 23, 2004 and November 23, 2005. The Company shall pay
in cash for Series B preferred the higher of $0.738 per share or the fair market
value of such shares as determined by a qualified independent appraiser.
The Series B convertible preferred stockholders have voting rights equal
to the common shares issuable upon conversion. In addition, the holders of
Series B convertible preferred stock, voting together as a class, are entitled
to elect two members of the Company's board of directors (as long as 500,000
shares of the class are outstanding).
Series B convertible preferred stock ranks senior to the common stock with
respect to dividends. Each fiscal year, Series B convertible stockholders are
entitled to noncumulative dividends of $0.0738 per share. Dividends will be paid
only when declared by the board of directors, out of legally available funds. To
date, no dividends have been declared.
SERIES C
Series C convertible preferred stock ranks senior to the Series A stock
and pari passu with the Series B and D preferred stock with respect to
liquidation preference. Series C convertible preferred stock has a liquidation
preference of $0.897 per share, plus any accrued dividends. In no event shall
the aggregate per share liquidation amount for the holders of Series C preferred
stock exceed $3.588.
Each share of Series C convertible preferred stock is, at the option of
the holder, convertible into common stock as determined by dividing the original
issue price by the following conversion price: $0.897 (subject to adjustment).
The outstanding shares of Series C convertible preferred stock automatically
convert into common stock either upon the close of business on the day
immediately preceding the closing of an underwritten public offering of common
stock in which the Company receives at least $15,000,000 in gross proceeds, and
the price per share is at least $7.00 per share, or at the election of the
holders of a majority of the then outstanding shares of Series C convertible
preferred stock.
F-20
<PAGE> 99
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
If at any time within the 90 day period following November 23, 2003, the
Company receives a written request from the holders of not less than 67% of the
then outstanding Series B, C and D convertible preferred stock, requesting
redemption of all or a portion of the Series B, C and D convertible preferred
stock, the Company shall redeem pro rata to their respective requests for
redemption one-third of each of the Series B, C and D convertible preferred
stock requested to be redeemed, and shall redeem the Series B, C and D
convertible preferred stock remaining outstanding after such redemption pro rata
to the respective number of shares of each then outstanding, in two equal
installments on November 23, 2004 and November 23, 2005. The Company shall pay
in cash for Series C preferred the higher of $0.897 per share or the fair market
value of such shares as determined by a qualified independent appraiser.
The Series C convertible preferred stockholders have voting rights equal
to the common shares issuable upon conversion.
Series C convertible preferred stock ranks senior to the common stock with
respect to dividends. Each fiscal year, Series C convertible stockholders are
entitled to noncumulative dividends of $0.0897 per share. Dividends will be paid
only when declared by the board of directors, out of legally available funds. To
date, no dividends have been declared.
SERIES D
Series D convertible preferred stock ranks senior to the Series A stock
and pari passu with the Series B and C preferred stock with respect to
liquidation preference. Series D convertible preferred stock has a liquidation
preference of $3.505 per share, plus any accrued dividends. In no event shall
the aggregate per share liquidation amount for the holders of Series D preferred
stock exceed $14.02.
Each share of Series D convertible preferred stock is, at the option of
the holder, convertible into common stock as determined by dividing the original
issue price by the following conversion price: $3.505 (subject to adjustment).
The outstanding shares of Series D convertible preferred stock automatically
convert into common stock either immediately preceding the closing of an
underwritten public offering of common stock in which the Company receives at
least $15,000,000 in gross proceeds, and the price per share is at least $7.00
per share, or at the election of the holders of a majority of the then
outstanding shares of Series D convertible preferred stock.
If at any time within the 90 day period following November 23, 2003, the
Company receives a written request from the holders of not less than 67% of the
then outstanding Series B, C and D convertible preferred stock, requesting
redemption of all or a portion of the Series B, C and D convertible preferred
stock, the Company shall redeem pro rata to their respective requests for
redemption one-third of each of the Series B, C and D convertible preferred
stock requested to be redeemed, and shall redeem the Series B, C and D
convertible preferred stock remaining outstanding after such redemption pro rata
to the respective number of shares of each then outstanding, in two equal
installments on November 23, 2004 and November 23, 2005. The Company shall pay
in cash for Series D preferred the higher of $3.505 per share or the fair market
value of such shares as determined by a qualified independent appraiser.
The Series D convertible preferred stockholders have voting rights equal
to the common shares issuable upon conversion.
F-21
<PAGE> 100
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
Series D convertible preferred stock ranks senior to the common stock with
respect to dividends. Each fiscal year, Series D convertible stockholders are
entitled to noncumulative dividends of $0.3505 per share. Dividends will be paid
only when declared by the board of directors, out of legally available funds. To
date, no dividends have been declared.
DEEMED DIVIDEND
In March 2000, the Company consummated the sale of an additional 625,000
shares of Series D redeemable convertible preferred stock from which the Company
received proceeds of approximately $5 million or $8.00 per share. At the date of
issuance, the Company believed the per share price of $8.00 represented the fair
value of the preferred stock. Subsequent to the commencement of the Company's
initial public offering process, the Company reevaluated the fair value of its
common stock as of March 2000. Accordingly, the increase in fair value has
resulted in a beneficial conversion feature of $2.5 million, that has been
recorded as a deemed dividend to preferred stockholders in 2000. The Company
recorded the deemed dividend at the date of issuance by offsetting charges and
credits to stockholders' equity. The preferred stock dividend increases the net
loss allocable to common stockholders in the calculation of basic and diluted
net loss per common share for the three months ended March 31, 2000.
RESERVED SHARES
The Company has reserved a total of 159,105, 694,444, 641,904, and 154,064
shares of Series A, B, C, and D convertible preferred stock, respectively, for
issuance under warrant agreements. As of December 31, 1999, warrants were
outstanding and exercisable for similar amounts of shares of Series A, B, C, and
D preferred stock.
COMMON STOCK
As of December 31, 1999, 1,666,666 shares of common stock issued to two of
the Company's founders are subject to repurchase.
In 1999, and during the three months ended March 31, 2000, 4,023,820 and
7,045,249 shares of common stock, respectively, were issued upon stock option
exercises for cash and notes.
At December 31, 1999, the Company has reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Stock options:
Options outstanding....................................... 10,761,834
Reserved for future grants................................ 6,834,346
Convertible preferred stock................................. 64,288,738
Warrants outstanding........................................ 2,169,899
----------
84,054,817
==========
</TABLE>
Holders of common stock, voting together as a class, are entitled to elect
one member of the Company's board of directors.
STOCK DIVIDEND
In May 1998, a stock dividend was authorized for the issuance of three
common
F-22
<PAGE> 101
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
shares for every common share held at such date. As a result, the conversion
price for Series A preferred stock was reduced from $1.60 to $0.40. Furthermore,
holders of options for shares of common stock at such date (effectively a
4-for-1 stock split) are entitled to receive four times the number of shares of
common stock for the same aggregate price upon exercise. The stock dividend was
accounted for as a stock split and common share numbers have been adjusted
accordingly.
1997 STOCK OPTION PLAN
In October 1997, the Board of Directors adopted the 1997 Stock Option Plan
(the "1997 Plan") for issuance of common stock and grants of options for common
stock to employees, consultants and directors. Incentive stock options granted
under the 1997 Plan are at prices not less than the fair value of stock at the
date of grant, except in the case of a sale to a person who owns stock
representing more than 10% of all the voting power of all classes of stock of
the Company, in which case the purchase price will be 110% of the fair market
value of the common stock on the date of grant. Nonstatutory stock options
granted under the 1997 Plan are at prices not less than 85% of the fair value of
stock at the date of grant, except in the case of a sale to a person who owns
stock representing more than 10% of all the voting power of all classes of stock
of the Company, in which case the purchase price will be 110% of the fair market
value of the common stock on the date of grant. Options granted under the Plan
generally vest over four years at a rate of 25% one year from the grant date and
ratably monthly thereafter and expire ten years after the grant, or earlier upon
termination. Options may be granted from time to time with different vesting
terms.
The 1997 Plan also allows for the exercise of options prior to vesting and
the related issuance of restricted stock that is subject to right of repurchase
by the Company. The right of repurchase generally lapses at the rate noted
above. An aggregate 2,782,227 and 9,118,247 shares of common stock acquired
through the exercise of options are subject to repurchase at an aggregate
repurchase price of $1,485,000 and $9,902,000 as of December 31, 1999 and March
31, 2000, respectively.
As discussed in Note 1, the Company has elected to follow APB 25 and
related interpretations in accounting for its employee stock options. Under APB
25, when the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-23
<PAGE> 102
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
Stock activity under the 1997 Stock Option Plan was as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED-
AVAILABLE OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
----------- ----------- --------------
<S> <C> <C> <C>
Authorized................................... 833,332 -- --
----------- ---------- -----
Balance as of December 31, 1997.............. 833,332 -- --
Authorized................................... 1,786,668 -- --
Granted...................................... (2,618,127) 2,618,127 $0.08
----------- ---------- -----
Balance as of December 31, 1998.............. 1,873 2,618,127 $0.08
Authorized................................... 19,000,000 -- --
Granted...................................... (12,604,225) 12,604,225 $0.70
Exercised.................................... -- (4,023,820) $0.40
Canceled..................................... 436,698 (436,698) $0.17
----------- ---------- -----
Balance as of December 31, 1999.............. 6,834,346 10,761,834 $0.69
Authorized (subject to stockholders'
approval) (unaudited)...................... 6,000,000
Granted (unaudited).......................... (5,066,483) 5,066,483 $3.72
Exercised (unaudited)........................ -- (7,045,249) $1.21
Canceled (unaudited)......................... 463,363 (463,363) $1.25
----------- ---------- -----
Balance as of March 31, 2000 (unaudited)..... 8,231,226 8,319,705 $2.06
=========== ========== =====
</TABLE>
The following table summarizes information concerning outstanding options
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
- ------------------------------------
WEIGHTED-
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL
PRICE OUTSTANDING LIFE
- -------- ----------- -----------
(IN YEARS)
<S> <C> <C>
$0.038 570,163 8.1
$0.150 1,697,976 9.1
$0.225 853,544 9.2
$0.545 1,537,763 9.5
$1.000 6,102,388 9.9
---------- ---
10,761,834 9.5
========== ===
</TABLE>
STOCK-BASED COMPENSATION
During the year ended December 31, 1999 and the three months ended March
31, 2000, the Company issued stock options to employees with exercise prices
which it believed represented the fair value of the options. Subsequent to the
commencement of the Company's initial public offering process, the Company
reevaluated the fair value of its common stock options as of March 2000.
F-24
<PAGE> 103
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
Accordingly, in connection with such stock option grants deferred stock
compensation was recorded totaling $33,955,000 and $36,816,000, respectively,
representing the difference between the deemed fair value of the common stock
for financial reporting purposes and the exercise price of the underlying
options. This amount is recorded as a reduction of stockholders' equity and is
being amortized over the vesting period of the individual options, generally
four years. The Company recorded amortization of deferred stock compensation of
$3,569,000 and $7,640,000 for the year ended December 31, 1999 and the three
months ended March 31, 2000, respectively.
During the years ended December 31, 1998 and 1999 and the three months
ended March 31, 2000, the Company granted common stock options to nonemployees
at exercise prices that range from $0.15 to $1.00 per share for services
rendered. Such options are included in the option tables disclosed above. The
options generally vest over four years at a rate of 25% one year from the grant
date and ratably monthly thereafter and expire ten years after the grant date.
Expense of $211,000 and $260,000 was recognized in 1999 and during the three
months ended March 31, 2000, respectively, related to these transactions. The
related expense in 1998 was not material. The fair value of these options is
periodically re-measured as they vest over the performance period and was
estimated using the Black-Scholes model with the following assumptions:
risk-free interest rate of 5%, expected life of 10 years, a dividend yield of
zero, and an expected volatility of the Company's common stock of 0.6.
PRO FORMA INFORMATION
Pro forma information regarding net loss and net loss per share is
required by FAS 123, which also requires the information to be determined as if
the Company has accounted for its employee stock options granted under the fair
value method of that statement. The fair value of the Company's options was
estimated at the grant date using the Black-Scholes option pricing model with
the following assumptions: volatility of 0.6, risk-free interest rate of 5%, an
expected life of four years, and a dividend yield of zero. The weighted-average
fair value of options granted during 1998 and 1999 was $0.02 and $2.92,
respectively.
Pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------ ------- --------
<S> <C> <C> <C>
As reported:
Net loss (in thousands)................................... $ (131) $(9,293) $(37,721)
Net loss per share........................................ $(0.25) $ (4.53) $ (7.80)
Pro forma:
Net loss (in thousands)................................... $ (131) $(9,299) $(37,721)
Net loss per share........................................ $(0.25) $ (4.53) $ (7.80)
</TABLE>
Proforma net loss and net loss per share equals actual net loss and net
loss per share in 1999 due to the fact that the amortization of deferred
stock-based compensation exceeds proforma compensation expense calculated under
FAS 123.
F-25
<PAGE> 104
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
WARRANTS
In November 1998, in connection with consulting services, the Company
issued warrants to purchase 43,067 shares of common stock. The warrants are
exercisable at any time at $0.15 per share and expire on the earlier of ten
years following the issue date or a corporate reorganization. The warrants are
automatically exercised upon the closing of an initial public offering or other
defined events. The warrants have a variable measurement date and accordingly
they are periodically revalued in accordance with Emerging Issues Task Force
Consensus No. 96-18 "Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." The warrants vest over a period of four years and their fair value
was calculated to be $260,000 at December 31, 1999 and $399,000 at March 31,
2000 using the Black-Scholes valuation method, utilizing a volatility factor of
0.6%, risk-free interest rate of 5%, and an initial expected life of 10 years.
The fair value of the warrants is being amortized over the term of the lease.
In August 1998, in connection with a facilities lease arrangement, the
Company issued warrants to purchase 157,915 shares of Series A preferred stock.
The warrants are exercisable at any time at no cost to the holder and expire on
the earlier of five years following the issue date or a corporate
reorganization. The warrants have a variable measurement date and accordingly
they are periodically revalued in accordance with Emerging Issues Task Force
Consensus No. 96-18 "Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." The warrants vest over a period of one year and their fair value was
calculated to be $767,000 at December 31, 1999 using the Black-Scholes valuation
method, utilizing a volatility factor of 0.6, risk-free interest rate of 5%, and
an initial expected life of 5 years. The fair value of the warrants is being
amortized over the term of the lease.
In May 1998, in connection with a loan and security agreement, the Company
issued warrants to purchase 84,688 shares of Series B preferred stock. The
warrants are fully vested immediately upon issuance and exercisable at any time
at $0.738 per share and expire five years following the issue date. There are no
forfeiture rights. As there are no future performance obligations, the
measurement date of the warrants was fixed at the issuance date. The fair value
of the warrants was calculated to be $35,000 using the Black-Scholes valuation
method, utilizing a volatility factor of 0.6, risk-free interest rate of 5%, and
an expected life of 5 years, and was expensed in full during 1998.
In October 1998, in connection with an equipment and working capital loan
arrangement, the Company issued warrants to purchase 304,878 shares of Series B
preferred stock. The warrants are fully vested immediately upon issuance and
exercisable at any time and expire eight years following the issue date. The
fair value of the warrants was calculated to be $152,000 using the Black-
Scholes valuation method, utilizing a volatility factor of 0.6, risk-free
interest rate of 5%, and an expected life of 8 years. The fair value of the
warrants is being amortized over the term of the loan.
In November 1998, in connection with a bridge note agreement, the Company
issued warrants to purchase 304,878 shares of Series B preferred stock. The
warrants are fully vested immediately upon issuance and exercisable at any time
and expire on the earlier of ten years following the issue date and a corporate
reorganization. There are no forfeiture rights. As there are no future
performance obligations, the measurement date of the warrants was fixed at the
F-26
<PAGE> 105
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
issuance date. The fair value of the warrants was calculated to be $165,000
using the Black-Scholes valuation method, utilizing a volatility factor of 0.6,
risk-free interest rate of 5%, and an expected life of 10 years, and was
expensed in full during 1998.
In May 1999, in connection with technical and marketing services related
to its products, the Company issued warrants to a customer to purchase 641,904
shares of Series C preferred stock. The warrants are fully vested immediately
upon issuance and exercisable at any time and expire five years following the
issue date. The warrants are automatically exercised upon the closing of an
initial public offering or other defined events. There are no forfeiture rights.
As there are no future performance obligations, the measurement date of the
warrants was fixed at the issuance date. The fair value of the warrants was
calculated to be $392,000 using the Black-Scholes valuation method, utilizing a
volatility factor of 0.6, risk-free interest rate of 5%, and an expected life of
5 years, and was expensed in full during 1999.
In September 1999, in connection with placement services for the first
round of Series D issuance, the Company issued warrants to purchase 148,929
shares of Series D preferred stock. The warrants are fully vested immediately
upon issuance and exercisable at any time and expire five years following the
issue date. The warrants are automatically exercised upon the closing of an
initial public offering or other defined events. There are no forfeiture rights.
As there are no future performance obligations, the measurement date of the
warrants was fixed at the issuance date. The fair value of the warrants was
calculated to be $292,000 using the Black-Scholes valuation method, utilizing a
volatility factor of 0.6, risk-free interest rate of 5%, and an expected life of
5 years, and was recorded as Series D first round issuance costs.
In October 1999, in connection with placement services for the second
round of Series D issuance, the Company issued warrants to purchase 5,135 shares
of Series D preferred stock. The warrants are fully vested immediately upon
issuance and exercisable at any time and expire five years following the issue
date. The warrants are automatically exercised upon the closing of an initial
public offering or other defined events. There are no forfeiture rights. As
there are no future performance obligations, the measurement date of the
warrants was fixed at the issuance date. The fair value of the warrants was
calculated to be $10,000 using the Black-Scholes valuation method, utilizing a
volatility factor of 0.6, risk-free interest rate of 5%, and an expected life of
5 years, and was recorded as Series D second round issuance costs.
9. RELATED PARTIES
As of December 31, 1998 and 1999, the Company has full-recourse promissory
notes, with values of $80,000 and $30,000, respectively, from officers of the
Company. In addition, the notes are secured by a pledge of the Company's common
stock and bear interest at 6.13% per annum. The notes and interest accrued but
unpaid are due and payable during 2008.
As of December 31, 1999, the Company had full recourse promissory notes
totaling $873,000 from employees of the Company for the payment of stock option
exercises (none at December 31, 1998). Interest on the notes ranges from 6.39%
to 6.77% per annum. The notes are due and payable at the earliest of the
following events: 10 years from the date of loan, termination of the employee or
sale of the shares.
F-27
<PAGE> 106
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
In 1999, the Company granted 18,604 shares of common stock to a firm of
immigration attorneys in lieu of compensation. A partner of that firm is a
relative of an officer of the Company.
10. INCOME TAXES
Due to operating losses and the Company's inability to recognize an income
tax benefit from these losses, there is no provision for income taxes for the
period from inception (April 14, 1997) to December 31, 1997, and for the years
ended December 31, 1998 and 1999.
The difference between the provision (benefit) for income taxes and the
amount computed by applying the Federal statutory income tax rate to income
(loss) before taxes is explained below:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEARS ENDED
(APRIL 14, 1997) TO DECEMBER 31,
DECEMBER 31, ------------------
1997 1998 1999
------------------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax (benefit) at federal statutory rate............. $(45) $(3,253) $(13,206)
Loss for which no tax benefit is currently
recognizable...................................... 45 3,253 13,206
---- ------- --------
Total provision (benefit)................. $ -- $ -- $ --
==== ======= ========
</TABLE>
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 3,100 $ 10,300
Tax credit carryforwards.................................... 270 900
Accruals and reserves not currently deductible.............. 600 3,300
------- --------
Total deferred tax assets................................... 3,970 14,500
Valuation allowance......................................... (3,970) (14,500)
------- --------
Net deferred tax assets..................................... $ -- $ --
======= ========
</TABLE>
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon the weight of available evidence, which includes the
Company's historical operating performance and the reported cumulative net
losses in all prior years, the Company has provided a full valuation allowance
against its net deferred tax assets.
The valuation allowance increased by $10,530,000 and $3,925,000 during the
year ended December 31, 1998 and 1999, respectively.
As of December 31, 1999, the Company had federal and state net operating
loss
F-28
<PAGE> 107
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
carryforwards of approximately $25,600,000 and $28,900,000, respectively. As of
December 31, 1999, the Company also had federal and state research and
development tax credit carryforwards of approximately $600,000 and $500,000,
respectively. The net operating loss and tax credit carryforwards will expire at
various dates beginning in 2005, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net operating
loss and tax credit carryforwards before utilization.
11. SUBSEQUENT EVENTS
WARRANTS
In February 2000, in connection with technical and marketing services
related to its products, the Company issued warrants to a customer to purchase
200,000 shares of common stock at $4.00 per share, subject to adjustment. The
warrants have a life of 4 years. They are fully vested and exercisable
immediately and are automatically exercised upon the closing of an initial
public offering of the Company's common stock or other defined events. There are
no forfeiture rights. As there are no future performance obligations, the
measurement date of the warrants was fixed at the issuance date. The fair value
of the warrants was calculated to be $1,840,000 using the Black-Scholes
valuation method, utilizing a volatility factor of 0.6, risk-free interest rate
of 5% and expected lives of 4 years, and such amount was charged to sales and
marketing expense in the period ended March 31, 2000.
In March 2000, in connection with technical and marketing services related
to its products, the Company agreed to issue warrants to a customer to purchase
468,849 shares of common stock at $3.73 per share, subject to adjustment. The
Company has accounted for the warrants as if they had been issued as of March
31, 2000. The warrants have a life of 2 years. They are fully vested and
exercisable immediately. There are no forfeiture rights. As there are no future
performance obligations, the measurement date of the warrants was fixed at the
issuance date. The fair value of the warrants was calculated to be $4,112,000
using the Black-Scholes valuation method, utilizing a volatility factor of 0.6
risk-free interest rate of 5% and expected lives of 2 years and such amount was
charged to sales and marketing expense in the period ended March 31, 2000.
In January 2000, in connection with technical and marketing services
related to its products, the Company issued warrants to a customer to purchase
1,233,499 shares of Series C Redeemable Preferred Stock at $0.81 per share,
subject to adjustment. The warrants have a life of 4 years. They are fully
vested and exercisable immediately and are automatically exercised upon the
closing of an initial public offering of the Company's common stock or other
defined events. There are no forfeiture rights. As there are no future
performance obligations, the measurement date of the warrants was fixed at the
issuance date. The fair value of the warrants was calculated to be $10,300,000
using the Black-Scholes valuation method, utilizing a volatility factor of 0.6,
risk-free interest rate of 5% and expected lives of 4 years and such amount was
charged to sales and marketing expense in the period ended March 31, 2000.
In March 2000, in connection with an equipment lease, the Company issued
warrants for the purchase of 37,500 shares of its common stock at $8.00 per
share to a leasing company. The warrants may be exercised at any time prior to
the earlier of 10
F-29
<PAGE> 108
COSINE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 2000 IS UNAUDITED)
years from the date of the warrant or the fifth anniversary of the first public
offering of the Company's common stock. There are no forfeiture rights. As there
are no future performance obligations, the measurement date of the warrants was
fixed at the issuance date. The fair value of the warrant was calculated to be
$357,000 using the Black-Scholes valuation method utilizing a volatility factor
of 0.6, risk-free interest rate of 5% and expected lives of 10 years. At March
31, 2000, this amount has been deferred as prepaid interest and will be
amortized over the lease term of 3 years.
In April 2000, in connection with assistance with specific marketing
activities the Company agreed to issue a warrant to a customer for the purchase
of 75,000 shares of common stock at $15.00 per share, subject to adjustment. The
issuance of the warrant is contingent upon the customer obtaining financing for
its purchase order.
CAPITAL LEASE
On March 29, 2000, the Company entered into a thirty-six month capital
lease under a sale and leaseback agreement to finance the purchase of computer
equipment. Capitalized costs of $1,536,000 and accumulated amortization of
$62,000 are included in property and equipment at March 31, 2000. The proceeds
from this agreement have not been received by the Company as of March 31, 2000
and are therefore included in other accounts receivable in the accompanying
balance sheet.
Future minimum payments under this capital lease as of March 31, 2000 are
as follows (in thousands):
<TABLE>
<S> <C>
2000................................ $ 450
2001................................ $ 594
2002................................ $ 594
2003................................ $ 302
------
Total minimum lease payments........ $1,940
Less amount representing interest... (404)
------
Present value of net minimum lease
payments.......................... $1,536
Less current portion................ (408)
------
Long-term portion................... $1,128
======
</TABLE>
SERIES E REDEEMABLE CONVERTIBLE PREFERRED STOCK
On April 26, 2000, the Company entered into a stock purchase agreement to
sell 4,666,668 shares of Series E redeemable convertible preferred stock at
$15.00 per share. The shares will be issued upon satisfaction of customary
closing conditions. The shares automatically convert into common stock upon the
closing of a firmly underwritten public offering of common stock in which the
company receives gross proceeds of at least $15,000,000, and the price per share
is at least $7.00. The conversion price upon such an offering is $15.00 per
share. If the offering price is less than $15.00 per share, the conversion price
will be reduced to the actual offering price. However, it will not be reduced to
less than $7.00 per share. The shares are redeemable on substantially the same
terms as those described above for Series D (Note 8) except that the redemption
price will be the higher of $15.00 per share or the fair market value of the
shares as determined by a qualified independent appraiser.
F-30
<PAGE> 109
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE> 110
COSINE COMMUNICATIONS, INC.
[ART WORK]
<PAGE> 111
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell
only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 8
Note Regarding Forward Looking
Statements......................... 20
Use of Proceeds...................... 21
Dividend Policy...................... 21
Capitalization....................... 22
Dilution............................. 23
Selected Consolidated Financial
Data............................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 27
Business............................. 33
Management........................... 51
Certain Transactions................. 62
Principal Stockholders............... 66
Description of Capital Stock......... 69
Shares Eligible For Future Sale...... 72
Underwriting......................... 74
Validity of Common Stock............. 76
Experts.............................. 76
Where You May Find Additional
Information........................ 76
Index To Consolidated Financial
Statements......................... F-1
</TABLE>
----------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
Shares
COSINE COMMUNICATIONS, INC.
Common Stock
----------------------
COSINE LOGO
----------------------
GOLDMAN, SACHS & CO.
CHASE H&Q
ROBERTSON STEPHENS
J.P. MORGAN & CO.
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 112
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $31,680
NASD filing fee............................................. 12,500
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving costs................................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue Sky fees and expenses.................................. $15,000
Transfer Agent and Registrar fees...........................
Miscellaneous expenses......................................
-------
Total.....................................................
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 145(a) and (b) of the Delaware General Corporation Law permit us
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that such person is or was one of our directors, officers, employees or agents,
or is or was serving at our request as a director, officer, employee or agent of
another enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by the
person if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to our best interests, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful; provided, that with respect to actions or suits brought on
our behalf, such person may only be indemnified with respect to expenses
(including attorneys' fees) and may not be indemnified with respect to any
claim, issue or matter as to which the person is adjudged to be liable unless a
court determines otherwise. Moreover, under Section 145(c), to the extent that
one of our present or former directors or officers is successful on the merits
or otherwise in defense of any such action, suit or proceeding, or in defense of
any claim, issue or matter therein, such director or officer shall be
indemnified against expenses (including attorneys' fees) that such director or
officer actually and reasonably incurs in connection therewith. Section 145 of
the Delaware General Corporation Law permits a corporation to include in its
charter documents, and in agreements between the corporation and its directors
and officers, provisions expanding the scope of indemnification beyond that
specifically provided by the current law.
Article XI of our restated Certificate of incorporation requires us to
indemnify our directors, officers, employees and agents to the fullest extent
permitted by law. Article XI also requires us or our stockholders, to the
fullest extent permitted by Delaware law, to indemnify our directors for
monetary damages for breach of fiduciary duty as a director.
Article VI of our bylaws requires us to indemnify our directors, officers,
employees, and agents to the extent permitted by Sections 145(a) and (b) of the
Delaware General Corporation Law. Article VI also provides that, to the extent
that a director, officer, employee or agent has been successful on the merits or
otherwise in defense of any such action, suit or proceeding, or in defense of
any claim, issue or matter therein, we shall indemnify such person for his
reasonable expenses incurred in connection with such defense.
II-1
<PAGE> 113
In addition to the indemnification provided for in our restated certificate
of incorporation and bylaws, we intend to enter into indemnification agreements
with our existing and future directors and officers. We also intend to obtain,
as permitted by Article VI of our bylaws, liability insurance for the benefit of
our directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, we have issued unregistered securities to a limited number
of persons as described below:
1. On September 1, 1997, we sold 4,000,000 shares of our common stock
to Dean E.G. Hamilton for an aggregate purchase price of $1,000.00.
2. On January 15, 1998, we sold 1,833,332 shares of our common stock to
Lianghwa Jou for an aggregate purchase price of $68,749.95 of which
approximately $20,625 was paid in cash and approximately $48,125 was paid
by issuance of a promissory note payable to us.
3. On February 19, 1998 we sold 833,332 shares of our common stock to a
former member of our board of directors for an aggregate purchase price of
approximately $31,250, which consideration was paid for by issuance of a
promissory note payable to us.
4. On November 7, 1997 and April 2, 1998, we sold 1,562,500 shares and
312,500 shares, respectively, of our Series A preferred stock for $1.60 per
share to a group of private investors for an aggregate purchase price of
$3,000,000.
5. On May 29, 1998 and June 22, 1998, in connection with an equipment
lease and loan facility, we issued to the equipment financier a warrant to
purchase an aggregate of 84,688 shares of our Series B preferred stock at
an exercise price of $0.738 per share.
6. On August 26, 1998, in connection with the lease of office space in
Redwood City, California, we issued to the lessor a warrant to purchase an
aggregate of 157,915 shares of our Series A preferred stock at no cost to
the grantee.
7. On October 21, 1998 and January 20, 1999, in connection with an
equipment lease and loan facility, we issued to the equipment financier
warrants to purchase an aggregate of 304,878 shares of our Series B
preferred stock at an exercise price of $0.738 per share.
8. On November 2 and November 9, 1998, in connection with a bridge loan
financing, we issued to a group of private investors warrants to purchase
an aggregate of 304,878 shares of our Series B preferred stock at an
exercise price of $0.738 per share.
9. On November 17, 1998, we issued a warrant to purchase 43,067 shares
of our common stock to a public relations firm at an exercise price of
$0.15 per share.
10. On November 17, 1998, in connection with the lease of office space
in Redwood City, California, we issued to an affiliate of the lessor a
warrant to purchase an aggregate of 1,190 shares of our Series A preferred
stock at an exercise price of $8.41 per share.
11. On December 4, 1998, we sold 12,884,205 shares of our Series B
preferred stock for $0.738 per share to a group of private investors for an
aggregate purchase price of approximately $8,000,000. Each share of our
Series B preferred stock is convertible into one share of our common stock.
12. On March 2 and 8, 1999, we sold an aggregate of 24,503,677 shares
of our Series C preferred stock for $0.897 per share to a group of private
investors for an aggregate purchase price of approximately $21,979,799.
Each share of our Series C preferred stock is convertible into one share of
our common stock.
II-2
<PAGE> 114
13. On May 28, 1999, in connection with technical and marketing
services, we issued a warrant to purchase an aggregate of 641,904 shares of
our Series C preferred stock at an exercise price of $1.0905 per share.
14. On June 28, 1999, in connection with the provision of recruitment
services to us, we sold 7,374 shares of our common stock to a recruiting
services firm in exchange for services rendered which were valued at
approximately $8,111.
15. On June 28, 1999, we issued 5,000 shares of our common stock in
settlement of a dispute to the complaining party.
16. On July 27, 1999, in connection with the provision of immigration
recruitment services to us, we sold 16,514 shares of our common stock to a
recruiting services firm in exchange for services rendered which were
valued at $9,000.
17. On September 13, 1999, we issued 15,000 shares of our common stock
in settlement of a dispute to the complaining party.
18. On September 1, 1999, in connection with the provision of
immigration recruitment services to us, we sold 2,000 shares of our common
stock to a recruiting services firm in exchange for services valued at
$2,000.
19. On September 17 and October 14, 1999, we sold 17,118,253 shares of
our Series D preferred stock at $3.505 per share to a group of private
investors for an aggregate purchase price of approximately $59,999,477.
Each share of our Series D preferred stock is convertible into one share of
our common stock.
20. On September 17 and October 14, 1999, in connection with the
private placement of our Series D preferred stock, we issued to the private
placement agent warrants to purchase an aggregate of 154,064 shares of our
Series D preferred stock at an exercise price of $3.505 per share
21. On September 1, 1999, in connection with the provision of
recruitment services to us, we sold 22,297 shares of our common stock to a
recruiting services firm in exchange for services rendered which were
valued at $22,297.
22. On December 8, 1999, in connection with the provision of
recruitment services to us, we sold 5,482 shares of our common stock to two
recruiting services firms in exchange for services rendered which were
valued at $41,115.
23. On January 26, 2000, in connection with technical and marketing
services related to our products, we issued a warrant to purchase an
aggregate of 1,233,499 shares of our Series C preferred stock at an
exercise price of $0.8107 per share.
24. On February 3, 2000, in connection with the provision of
recruitment services to us, we sold 9,101 shares of our common stock at a
price of $4.00 per share for an aggregate purchase price of $36,404.
25. On March 9, 2000, in connection with the provision of recruitment
services for us, we sold 6,325 shares of our common stock at a price of
$4.00 per share for an aggregate purchase price of $25,300.
26. On February 11, 2000, in connection with technical and marketing
services related to our products, we issued a warrant to purchase an
aggregate of 200,000 shares of our common stock at an exercise price of
$4.00 per share.
27. On March 27, 2000, we sold an aggregate of 625,000 shares of our
Series D preferred stock at $8.00 per share to a group of private investors
for an aggregate purchase price of $5,000,000.
II-3
<PAGE> 115
28. On March 31, 2000, in connection with an equipment lease and loan
facility, we issued to the equipment financier and an entity affiliated
with the equipment financier warrants to purchase an aggregate of 37,500
shares of our common stock at an exercise price of $8.00 per share.
29. On March 29, 2000, in connection with technical and marketing
services related to our products, we agreed to issue a warrant to purchase
an aggregate of 468,849 shares of our common stock at an exercise price of
$3.7325 per share.
30. On April 26, 2000, we entered into an agreement to sell 4,666,668
shares of our Series E preferred stock, upon satisfaction of customary
closing conditions, to a group of private investors for an aggregate
purchase price of $70,000,020.
31. From inception through April 28, 2000 (the most recent practicable
date), we granted stock options to purchase an aggregate of 21,192,135
shares of our common stock at prices ranging from $0.15 to $9.50 per share
to employees, consultants and directors pursuant to our 1997 Stock Plan.
32. From inception through April 28, 2000 (the most recent practicable
date), we issued and sold an aggregate of 12,205,499 shares of our common
stock to employees, consultants and directors for aggregate consideration
of approximately $15,484,742, consisting of a mix of cash and promissory
notes, pursuant to the exercise of options granted under our 1997 Stock
Plan.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein.
None of the foregoing transactions involved a public offering, and we
believe that each transaction was exempt from the registration requirements of
the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. Except as indicated
above, none of the foregoing transactions involved any underwriters,
underwriting discounts or commissions. The recipients in such transactions
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about us. All share amounts indicated
above reflect a 4-for-1 stock split of our common stock that was effected as a
stock dividend in May 1998. Each share of our Series A preferred stock is
convertible into four shares of our common stock pursuant to a conversion price
adjustment resulting from the May 1998 stock dividend and the Series A share
amounts above reflect the conversion price adjustment.
ITEM 16. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(a) INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Fifth Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Form of Restated Certificate of Incorporation to be filed
upon the closing of the offering made pursuant to this
Registration Statement.
3.3 Bylaws of the Registrant.
3.4 Certificate of Amendment of the Bylaws of the Registrant.
</TABLE>
II-4
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
3.5* Amended and Restated Bylaws of the Registrant to be
effective upon the closing of the offering made pursuant to
this Registration Statement.
4.1* Form of Registrant's Common Stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati Professional
Corporation.
10.1* Form of Indemnification Agreement entered into by the
Registrant with each of its directors and officers.
10.2* 2000 Stock Plan and forms of agreements thereunder.
10.3* 2000 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.4* 2000 Director Option Plan and forms of agreements
thereunder.
10.5 1997 Stock Plan (as amended and restated) and forms of
agreements thereunder.
10.6 Third Amended and Restated Investors' Rights Agreement.
10.7 Master Equipment Lease Agreement between the Registrant and
Relational Funding Corporation dated as of February 1, 2000.
10.8 Loan and Security Agreement between Registrant and Venture
Lending and Leasing II, Inc. dated as of September 21, 1998.
10.9 Amended and Restated Supplement between Registrant and
Venture Lending and Leasing II, Inc. dated as of October 21,
1998.
10.10 Master Loan and Security Agreement between Registrant and
Finova Capital Corporation dated as of May 19, 1999.
10.11 Loan and Security Agreement between Registrant and Silicon
Valley Bank dated as of May 29, 1998.
10.12 Loan Modification Agreement between Registrant and Silicon
Valley Bank dated as of June 22, 1998
10.13 Loan and Security Agreement between Registrant and Silicon
Valley Bank dated as of September 30, 1999.
10.14 Building Lease Agreement between Registrant and Westport
Joint Venture dated as of May 26, 1998.
10.15 Amendment No. 1 to Lease between Registrant and Westport
Joint Venture dated as of September 9, 1999.
10.16 Building Lease Agreement between Registrant and Westport
Joint Venture dated as of September 20, 1999.
22.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney see page II-7.
27.1* Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
(b) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.
II-5
<PAGE> 117
Insofar as indemnification by Registrant for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities other than the payment by Registrant of expenses incurred or paid by
a director, officer, or controlling person of Registrant in the successful
defense of any action, suit or proceeding is asserted by a director, officer or
controlling person in connection with the securities being registered hereunder,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Redwood City, State of
California, on April 28, 2000.
COSINE COMMUNICATIONS, INC.
By: /s/ DEAN E.G. HAMILTON
------------------------------------
Dean E.G. Hamilton
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Dean E.G. Hamilton and Craig B.
Collins, and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this Registration
Statement including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought, and to file the same,
with all exhibits thereto and all other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, with full power of each to act alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DEAN E.G. HAMILTON President, Chief Executive Officer and April 28, 2000
- --------------------------------------------- Director (Principal Executive Officer)
Dean E.G. Hamilton
/s/ CURTIS S. DUDNICK Chief Financial Officer, Vice President April 28, 2000
- --------------------------------------------- of Finance and Secretary (Principal
Curtis S. Dudnick Financial and Accounting Officer)
/s/ GLENN HARTMAN Director April 28, 2000
- ---------------------------------------------
Glenn Hartman
/s/ DONALD GREEN Director April 24, 2000
- ---------------------------------------------
Donald Green
/s/ R. DAVID SPRENG Director April 25, 2000
- ---------------------------------------------
R. David Spreng
/s/ VINTON CERF Director April 28, 2000
- ---------------------------------------------
Vinton Cerf
</TABLE>
II-7
<PAGE> 119
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Fifth Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Form of Restated Certificate of Incorporation to be filed
upon the closing of the offering made pursuant to this
Registration Statement.
3.3 Bylaws of the Registrant.
3.4 Certificate of Amendment of the Bylaws of the Registrant.
3.5* Amended and Restated Bylaws of the Registrant to be
effective upon the closing of the offering made pursuant to
this Registration Statement.
4.1* Form of Registrant's Common Stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati Professional
Corporation.
10.1* Form of Indemnification Agreement entered into by the
Registrant with each of its directors and officers.
10.2* 2000 Stock Plan and forms of agreements thereunder.
10.3* 2000 Employee Stock Purchase Plan and forms of agreements
thereunder.
10.4* 2000 Director Option Plan and forms of agreements
thereunder.
10.5 1997 Stock Plan (as amended and restated) and forms of
agreements thereunder.
10.6 Third Amended and Restated Investors' Rights Agreement.
10.7 Master Equipment Lease Agreement between the Registrant and
Relational Funding Corporation dated as of February 1, 2000.
10.8 Loan and Security Agreement between Registrant and Venture
Lending and Leasing II, Inc. dated as of September 21, 1998.
10.9 Amended and Restated Supplement between Registrant and
Venture Lending and Leasing II, Inc. dated as of October 21,
1998.
10.10 Master Loan and Security Agreement between Registrant and
Finova Capital Corporation dated as of May 19, 1999.
10.11 Loan and Security Agreement between Registrant and Silicon
Valley Bank dated as of May 29, 1998.
10.12 Loan Modification Agreement between Registrant and Silicon
Valley Bank dated as of June 22, 1998.
10.13 Loan and Security Agreement between Registrant and Silicon
Valley Bank dated as of September 30, 1999.
10.14 Building Lease Agreement between Registrant and Westport
Joint Venture dated as of May 26, 1998.
10.15 Amendment No. 1 to Lease between Registrant and Westport
Joint Venture dated as of September 9, 1999.
10.16 Building Lease Agreement between Registrant and Westport
Joint Venture dated as of September 20, 1999.
22.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney see page II-7.
27.1* Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
FIFTH AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
COSINE COMMUNICATIONS, INC.
The undersigned, Dean Hamilton and Curtis S. Dudnick, hereby certify
that:
1. They are the duly elected President and Secretary, respectively, of
CoSine Communications, Inc., a California corporation.
2. The Articles of Incorporation of this corporation are amended and
restated in full to read as follows:
ARTICLE I
The name of this corporation is CoSine Communications, Inc.
ARTICLE II
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
This corporation is authorized to issue two classes of shares to be
designated respectively Common Stock ("COMMON") and Preferred Stock
("PREFERRED"). The total number of shares of Common this corporation shall have
authority to issue is 200,000,000 and the total number of shares of Preferred
this corporation shall have authority to issue is 68,398,995, 2,150,000 of which
are hereby designated as Series A Preferred Stock (the "SERIES A Preferred"),
13,578,649 of which are hereby designated as Series B Preferred Stock (the
"SERIES B PREFERRED"), 27,503,677 of which are hereby designated as Series C
Preferred Stock (the "SERIES C PREFERRED"), 20,500,000 of which are hereby
designated as Series D Preferred Stock (the "SERIES D PREFERRED"), and 4,666,668
of which are hereby designated as Series E Preferred Stock (the "SERIES E
PREFERRED").
The corporation shall from time to time in accordance with the laws of
the State of California increase the authorized amount of its Common if at any
time the number of shares of Common remaining unissued and available for
issuance shall not be sufficient to permit conversion of the Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred or Series E
Preferred.
<PAGE> 2
The relative rights, preferences, privileges and restrictions granted to
or imposed upon the Common and Preferred and the holders thereof are as set
forth below.
Section 1. Liquidation Rights.
(a) Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
corporation (a "LIQUIDATION EVENT") (or the deemed occurrence of such
Liquidation Event pursuant to subsection (d) of this Section 1), the holder of
each share of Series E Preferred, Series D Preferred, Series C Preferred and
Series B Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or property of the corporation to the holders
of the Series A Preferred or the Common by reason of their ownership thereof (i)
in the case of the Series E Preferred, an aggregate amount (the "MAXIMUM SERIES
E LIQUIDATION AMOUNT") equal to the sum of (A) Fifteen Dollars ($15.00) per
share, plus (B) whether or not dividends have been declared on the Series E
Preferred, twelve and a half cents ($0.125) per month for each month completed
after the Original Issue Date (as hereafter defined) at the time of such event
for each share of Series E Preferred then held by them, (ii) in the case of the
Series D Preferred, an amount equal to Three Dollars and Fifty and Five Tenths
Cents ($3.505) per share plus any accrued or declared and unpaid dividends for
each share of Series D Preferred then held by them, (iii) in the case of the
Series C Preferred, an amount equal to Eighty-Nine and Seven-Tenths Cents
($0.897) per share plus any accrued or declared and unpaid dividends for each
share of Series C Preferred then held by them, and (iv) in the case of the
Series B Preferred, an amount equal to Seventy-Three and Eight-Tenths Cents
($0.738) per share plus any accrued or declared and unpaid dividends for each
share of Series B Preferred then held by them.
All of the preferential amount to be paid to the holders of the
Series E Preferred, Series D Preferred, Series C Preferred and Series B
Preferred under this Section 1(a) shall be paid or set apart for payment before
the payment or setting apart for payment of any amount for, or the distribution
of any assets of the corporation to, the holders of the Series A Preferred and
the Common in connection with any Liquidation Event. After the payment or the
setting apart for payment to the holders of the Series E Preferred, Series D
Preferred, Series C Preferred and Series B Preferred of the preferential amounts
so payable to them, the remaining assets of the corporation available for
distribution shall be distributed in accordance with the provisions of Section
1(b).
If the assets or property to be distributed is insufficient to
permit the payment to holders of the Series E Preferred, Series D Preferred,
Series C Preferred and Series B Preferred of their full preferential amount, the
entire assets and property legally available for distribution shall be
distributed ratably among the holders of Series E Preferred, Series D Preferred,
Series C Preferred and Series B Preferred in such a manner that the preferential
amount to be distributed to each such holder at that time shall equal the amount
obtained by multiplying the entire assets and funds of the corporation then
legally available for distribution hereunder by a fraction, the numerator of
which shall be the full preferential amount to which such holder would then be
entitled under this Section 1(a) if the assets and property then available to be
distributed sufficed to permit payment thereof, and the denominator of which
shall be the full preferential amount to which all such holders
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<PAGE> 3
would then be entitled under this Section 1(a) if the assets and property then
available to be distributed sufficed to permit payment thereof.
(b) Series A Preferred Liquidation Preference. After payment to
the holders of the Series E Preferred, Series D Preferred, Series C Preferred
and Series B Preferred of the amounts set forth in Section 1(a), above, the
remaining assets and property of the corporation legally available for
distribution, if any, shall be distributed to the holders of the Series A
Preferred such that the holder of each share of Series A Preferred shall be
entitled to receive, prior and in preference to any distribution of any of the
assets or property of the corporation to the holders of the Common by reason of
their ownership thereof, an amount equal to One and 60/100 Dollars ($1.60) per
share plus any accrued or declared and unpaid dividends for each share of Series
A Preferred then held by them.
All of the preferential amount to be paid to the holders of the
Series A Preferred under this Section 1(b) shall be paid or set apart for
payment before the payment or setting apart for payment of any amount for, or
the distribution of any assets of the corporation to, the holders of the Common
in connection with any Liquidation Event. After the payment or the setting apart
for payment to the holders of the Series A Preferred of the preferential amounts
so payable to them, the remaining assets of the corporation available for
distribution shall be distributed in accordance with the provisions of Section
1(c).
If the remaining assets or property of the corporation, after
payment of the amounts set forth in Section 1(a) above, that are available to be
distributed are insufficient to permit the payment to holders of the Series A
Preferred of their full preferential amount, the entire assets and property
legally available for distribution at that time shall be distributed ratably
among the holders of Series A Preferred in such a manner that the preferential
amount to be distributed to each such holder shall equal the amount obtained by
multiplying the entire remaining assets and funds of the corporation then
legally available for distribution hereunder by a fraction, the numerator of
which shall be the number of shares of Series A Preferred then held by such
holder, and the denominator of which shall be the total number of shares of
Series A Preferred then outstanding.
(c) Distribution after Payment of the Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred and Series E Preferred
Liquidation Preferences. After payment has been made to the holders of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred of the full preferential amounts set forth in Section
1(a) and 1(b) above, the entire remaining assets and funds of the corporation
legally available for distribution, if any, shall be distributed as follows:
(i) in the event the aggregate value of assets and
property to be distributed for the entire corporation, including assets and
property distributed or available for distribution pursuant to Section 1(a) and
1(b), is less than $15 million:
(A) ratably among the holders of Common, Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred in a
manner such that the amount distributed to each holder of Common, Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall
equal the amount obtained by
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multiplying (x) the remaining assets and funds of the corporation legally
available for distribution hereunder after the distributions pursuant to Section
1(a) and 1(b), above, by a fraction, the numerator of which shall be (y) the
number of shares of Common then held by such holder (or, in the case of a holder
of the Series A Preferred, Series B Preferred, Series C Preferred or Series D
Preferred, the number of shares of Common for which such holders of Series A
Preferred, Series B Preferred, Series C Preferred or Series D Preferred may then
be converted), and the denominator of which shall be (z) the sum of the total
number of shares of Common then outstanding and the total number of shares of
Common issuable upon conversion of all then outstanding shares of Series A
Preferred, Series B Preferred, Series C Preferred or Series D Preferred;
provided, however, that the aggregate per share liquidation amount of the Series
D Preferred under this Section 1 shall not exceed Fourteen and 2/100 Dollars
($14.02) (the "MAXIMUM SERIES D LIQUIDATION AMOUNT"); and provided further that
the aggregate per share liquidation amount of the Series C Preferred under this
Section 1 shall not exceed Three and 588/1000 Dollars ($3.588) (the "MAXIMUM
SERIES C LIQUIDATION AMOUNT"); and provided further that the aggregate per share
liquidation amount of the Series B Preferred under this Section 1 shall not
exceed Two and 50/100 Dollars ($2.50) (the "MAXIMUM SERIES B LIQUIDATION
AMOUNT"); and
(B) after payment of the Maximum Series E Liquidation
Amount, Maximum Series D Liquidation Amount, Maximum Series C Liquidation Amount
and Maximum Series B Liquidation Amount, ratably among the holders of Common and
Series A Preferred in a manner such that the amount distributed to each holder
of Common and Series A Preferred shall equal the amount obtained by multiplying
(x) the remaining assets and funds of the corporation legally available for
distribution hereunder after the distributions pursuant to Section 1(a), 1(b)
and 1(c)(i)(A) above, by a fraction, the numerator of which shall be (y) the
number of shares of Common then held by such holder (or, in the case of a holder
of Series A Preferred, the number of shares of Common for which such holder's
shares of Series A Preferred may then be converted), and the denominator of
which shall be (z) the sum of the total number of shares of Common then
outstanding and the total number of shares of Common issuable upon conversion of
all then outstanding shares of Series A Preferred; and
(ii) in the event the aggregate value of assets and
property to be distributed, for the entire corporation including assets and
property distributed or available for distribution pursuant to Section 1(a) and
1(b), is equal to or greater than $15 million:
(A) ratably among the holders of Common, Series B
Preferred, Series C Preferred and Series D Preferred in a manner such that the
amount distributed to each holder of Common, Series B Preferred, Series C
Preferred and Series D Preferred shall equal the amount obtained by multiplying
(x) the remaining assets and funds of the corporation legally available for
distribution hereunder after the distributions pursuant to Section 1(a) and
1(b), above, by a fraction, the numerator of which shall be (y) the number of
shares of Common then held by such holder (or, in the case of a holder of the
Series B Preferred, Series C Preferred or Series D Preferred, the number of
shares of Common for which such
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<PAGE> 5
holder's shares of Series B Preferred, Series C Preferred or Series D Preferred
may then be converted), and the denominator of which shall be (z) the sum of the
total number of shares of Common then outstanding and the total number of shares
of Common issuable upon conversion of all of the then outstanding shares of
Series B Preferred, Series C Preferred and Series D Preferred; provided,
however, that the aggregate per share liquidation amount of the Series D
Preferred shall not exceed the Maximum Series D Liquidation Amount; and provided
further that the aggregate per share liquidation amount of the Series C
Preferred under this Section 1 shall not exceed the Maximum Series C Liquidation
Amount; and provided further that the aggregate per share liquidation amount of
the Series B Preferred under this Section 1 shall not exceed the Maximum Series
B Liquidation Amount.
(B) after payment of the Maximum Series D Liquidation
Amount, Maximum Series C Liquidation Amount and Maximum Series B Liquidation
Amount, ratably among the holders of Common in a manner such that the amount
distributed to each holder of Common shall equal the amount obtained by
multiplying the remaining assets and funds of the corporation legally available
for distribution hereunder after the distributions pursuant to Section 1(a),
1(b) and 1(c)(ii)(A) above, by a fraction, the numerator of which shall be the
number of shares of Common then held by such holder, and the denominator of
which shall be the total number of shares of Common then outstanding.
(d) Deemed Liquidation. For purposes of this Section 1, a merger
or consolidation of the corporation with or into any other corporation or
corporations, or a sale or other transfer in a single transaction or a series of
related transactions of all or substantially all of the assets of the
corporation, shall be deemed to be a Liquidation Event (except, in each case,
where the corporation's shareholders of record as constituted immediately prior
to such merger, consolidation, sale or other transfer will immediately after
such merger, consolidation, sale or transfer hold more than fifty percent (50%)
of the voting power of the surviving or acquiring entity).
(e) Consent. Each holder of an outstanding share of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred shall be deemed to have consented, for purposes of Section 502, 503
and 506 of the General Corporation Law of California, to distributions made by
the corporation in connection with the repurchase of shares of Common issued to
or held by employees or consultants upon termination of their employment or
services pursuant to agreements between the corporation and such persons
providing for the corporation's right of said repurchase; provided, in the case
of any such repurchases to be made at the election of this corporation, such
repurchases are approved by the Board of Directors.
(f) Adjustments. The liquidation preferences provided for herein
with respect to the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred shall be equitably adjusted to reflect
any stock dividend, stock distribution, stock split or reverse stock split,
combination of shares, subdivision of shares or reclassification of shares with
respect to
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the Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred or Series E Preferred as applicable.
(g) Value of Assets. In any of the events specified in Section
1(d), if the consideration received by the corporation is other than cash, its
value will be deemed its fair market value as determined in good faith by the
Board of Directors; provided, however, any securities shall be valued as
follows;
(i) If traded on a securities exchange or through the
Nasdaq National Market or Nasdaq SmallCap Market, the value shall be deemed to
be the average of the closing prices of the securities on such exchange over the
thirty-day period ending three (3) days prior to the closing;
(ii) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty-day period ending three (3) days prior to the
closing; and
(iii) If there is no active public market, the value
shall be the fair market value and shall be determined as follows: the board of
directors of the Corporation will promptly engage an independent competent
appraiser to determine the value of the assets to be distributed to the holders
of Preferred Stock or Common Stock. The corporation upon receipt of such
appraiser's valuation shall give prompt written notice to each holder of shares
of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred and Common of the appraiser's valuation.
Section 2. Conversion Rights. The holders of the Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred shall have conversion rights as follows (the "CONVERSION RIGHTS"):
(a) Right to Convert. Each share of Series A Preferred shall be
convertible, without the payment of any additional consideration by the holder
thereof and at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the corporation or any transfer agent
for the Series A Preferred, into such number of fully paid and nonassessable
shares of Common as is determined by dividing (x) its original issue price
($1.60) by (y) the Series A Conversion Price, determined as hereinafter
provided, as last adjusted and then in effect at the time of conversion. The
"SERIES A CONVERSION PRICE" shall initially be one and 60/100 dollars ($1.60).
Each share of Series B Preferred shall be convertible, without the payment of
any additional consideration by the holder thereof and at the option of the
holder thereof, at any time after the date of issuance of such share, at the
office of the corporation or any transfer agent for the Series B Preferred, into
such number of fully paid and nonassessable shares of Common as is determined by
dividing (x) its original issue price ($0.738) by (y) the Series B Conversion
Price, determined as hereinafter provided, as last adjusted and then in effect
at the time of conversion. The "SERIES B CONVERSION PRICE" shall initially be
seventy-three and eight-tenths cents ($0.738). Each share of Series C Preferred
shall be convertible, without the payment of any additional consideration by the
holder thereof and at the option of the holder thereof, at any time after the
date of issuance of such
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<PAGE> 7
share, at the office of the corporation or any transfer agent for the Series C
Preferred, into such number of fully paid and nonassessable shares of Common as
is determined by dividing (x) its original issue price ($0.897) by (y) the
Series C Conversion Price, determined as hereinafter provided, as last adjusted
and then in effect at the time of conversion. The "SERIES C CONVERSION PRICE"
shall initially be eighty-nine and seven-tenths cents ($0.897). Each share of
Series D Preferred shall be convertible, without the payment of any additional
consideration by the holder thereof and at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
corporation or any transfer agent for the Series D Preferred, into such number
of fully paid and nonassessable shares of Common as is determined by dividing
(x) its original issue price ($3.505) by (y) the Series D Conversion Price,
determined as hereinafter provided, as last adjusted and then in effect at the
time of conversion. The "SERIES D CONVERSION PRICE" shall initially be three
dollars and fifty and five-tenths cents ($3.505). Each share of Series E
Preferred shall be convertible, without the payment of any additional
consideration by the holder thereof and at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
corporation or any transfer agent for the Series E Preferred, into such number
of fully paid and nonassessable shares of Common as is determined by dividing
(x) its original issue price ($15.00) by (y) the Series E Conversion Price,
determined as hereinafter provided, as last adjusted and then in effect at the
time of conversion. The "SERIES E CONVERSION PRICE" shall initially be fifteen
dollars ($15.00). The initial Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price and Series E
Conversion Price shall be subject to adjustment, in order to adjust the number
of shares of Common into which the Series A Preferred, the Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred respectively, are
convertible, as set forth in Section 2(d) and 2(e), below. In May 1998, the
Series A Conversion Price was reduced to forty cents ($0.40) pursuant to Section
2(d)(i) hereof as a result of a stock dividend of three shares of Common on each
share of outstanding Common.
(b) Automatic Conversion.
(i) Initial Public Offering. Each share of Series A
Preferred, Series B Preferred and Series C Preferred shall automatically be
converted into shares of Common at the then effective Series A Conversion Price,
Series B Conversion Price and Series C Conversion Price, respectively, upon the
closing ("CLOSING") of a firm commitment underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common for the account of the
corporation to the public at an offering price to the public of at least Five
Dollars ($5.00) per share (as adjusted for stock splits, stock dividends,
reclassifications, and like events) and in which the aggregate gross proceeds
received by the corporation (net of underwriting discounts) equal or exceed
$15,000,000, and each share of Series E Preferred and Series D Preferred shall
automatically be converted into shares of Common at the then effective Series E
Conversion Price and Series D Conversion Price, respectively, upon the Closing
of a firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common for the account of the corporation to the public at
an offering price to the public of at least Seven Dollars ($7.00) per share (as
adjusted for stock splits, stock dividends, reclassifications, and like events)
and in which the aggregate gross proceeds received by the corporation (net of
underwriting discounts)
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<PAGE> 8
equal or exceed $15,000,000. In the event of the consummation of any such
offering, the person(s) entitled to receive the Common issuable upon such
conversion of the shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred shall not be deemed to have
converted such shares of Preferred until immediately prior to the Closing.
(ii) Shareholder Vote of the Holders of the Series A
Preferred. Each share of Series A Preferred shall automatically be converted
into shares of Common at the then effective Series A Conversion Price upon the
affirmative election of the holders of greater than fifty percent (50%) of the
then outstanding shares of Series A Preferred. In the event of such an election,
the person(s) entitled to receive the Common issuable upon such conversion of
the Series A Preferred shall not be deemed to have converted that Series A
Preferred until written evidence of such election satisfactory to the
corporation is received by the corporation.
(iii) Shareholder Vote of the Holders of the Series B
Preferred. Each share of Series B Preferred shall automatically be converted
into shares of Common at the then effective Series B Conversion Price upon the
affirmative election of the holders of greater than fifty percent (50%) of the
then outstanding shares of Series B Preferred. In the event of such an election,
the person(s) entitled to receive the Common issuable upon such conversion of
the Series B Preferred shall not be deemed to have converted that Series B
Preferred until written evidence of such election satisfactory to the
corporation is received by the corporation.
(iv) Shareholder Vote of the Holders of the Series C
Preferred. Each share of Series C Preferred shall automatically be converted
into shares of Common at the then effective Series C Conversion Price upon the
affirmative election of the holders of greater than fifty percent (50%) of the
then outstanding shares of Series C Preferred. In the event of such an election,
the person(s) entitled to receive the Common issuable upon such conversion of
the Series C Preferred shall not be deemed to have converted that Series C
Preferred until written evidence of such election satisfactory to the
corporation is received by the corporation.
(v) Shareholder Vote of the Holders of the Series D
Preferred. Each share of Series D Preferred shall automatically be converted
into shares of Common at the then effective Series D Conversion Price upon the
affirmative election of the holders of greater than fifty percent (50%) of the
then outstanding shares of Series D Preferred. In the event of such an election,
the person(s) entitled to receive the Common issuable upon such conversion of
the Series D Preferred shall not be deemed to have converted that Series D
Preferred until written evidence of such election satisfactory to the
corporation is received by the corporation.
(vi) Shareholder Vote of the Holders of the Series E
Preferred. Each share of Series E Preferred shall automatically be converted
into shares of Common at the then effective Series E Conversion Price upon the
affirmative election of the holders of greater than fifty percent (50%) of the
then outstanding shares of Series E Preferred. In the event of such an election,
the person(s) entitled to receive the Common issuable upon such conversion of
the Series E Preferred shall not be deemed to have converted that Series E
Preferred until written evidence of such election satisfactory to the
corporation is received by the corporation.
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<PAGE> 9
(c) Mechanics of Conversion. No fractional shares of Common shall
be issued upon conversion of the Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred or Series E Preferred. In lieu of any fractional
shares to which a holder of either the Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred would otherwise be
entitled, the corporation at its election shall either pay cash equal to such
fraction multiplied by the then effective Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price or Series
E Conversion Price, respectively, or issue one whole share for each fraction of
a share outstanding, after aggregating all fractional shares held by each
shareholder. Before any holder of either Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred shall be entitled
to convert the same into full shares of Common pursuant to Section 2(a) hereof,
he shall surrender the certificate or certificates therefor, duly endorsed, at
the office of the corporation or of any transfer agent for such shares of
Preferred, and shall give written notice to the corporation at such office that
such holder elects to convert the same and shall state therein the holder's name
or the name or names of such holder's nominees in which the holder wishes the
certificate or certificates for shares of Common to be issued. The corporation
shall, as soon as practicable thereafter, issue and deliver to such holder of
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
or Series E Preferred, or to such holder's nominee or nominees, a certificate or
certificates for the number of shares of Common to which such holder shall be
entitled as aforesaid, together if so elected by the corporation with cash in
lieu of any fraction of a share. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of Series A Preferred, Series B Preferred, Series C Preferred, Series
D Preferred or Series E Preferred to be converted, and the person or persons
entitled to receive the shares of Common issuable upon conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common on such date.
(d) Adjustments to Conversion Price of Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred and Series E Preferred Upon
Certain Events.
(i) Adjustments for Stock Splits or Stock Dividends.
In the event the outstanding shares of Common shall be subdivided (by stock
split or otherwise), into a greater number of shares of Common, or shares of
Common shall have been issued by stock dividend, the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series D Conversion Price
and Series E Conversion Price then in effect shall, concurrently with the
effectiveness of such subdivision or stock dividend, be proportionately
decreased. In the event the outstanding shares of Common shall be combined or
consolidated by reclassification or otherwise, into a lesser number of shares of
Common, the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price and Series E Conversion Price then
in effect shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
(ii) Adjustments for Other Distributions. In the event
the corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common entitled to receive, any distribution
payable in securities of the corporation other than shares of Common, then and
in each such event provision shall be made so that the holders of
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Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred shall receive upon conversion thereof, in addition to the
number of shares of Common receivable thereupon, the amount of securities of the
corporation which they would have received had their Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred or Series E Preferred,
respectively, been converted into Common on the date of such event and had they
thereafter, during the period from the date of such event to and including the
date of conversion, retained such securities receivable by them as aforesaid
during such period, subject to all other adjustments called for during such
period under this Section 2 with respect to the rights of the holders of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred, respectively.
(iii) Adjustments for Reclassification, Exchange and
Substitution. If the Common issuable upon conversion of the Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
provided for above), the Series A Conversion Price, Series B Conversion Price,
Series C Conversion Price, Series D Conversion Price and Series E Conversion
Price then in effect shall, concurrently with the effectiveness of such
reorganization or reclassification, be proportionately adjusted such that the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred, respectively, shall be convertible into, in lieu of the
number of shares of Common which the holders would otherwise be entitled to
receive, a number of shares of such other class or classes of stock equivalent
to the number of shares of Common that would have been subject to receipt by the
holders upon conversion of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred immediately before that
change.
(iv) Reorganization, Mergers, Consolidations, or Sales
of Assets. If at any time or from time to time there shall be a capital
reorganization of the Common (other than a subdivision, combination,
reclassification, or exchange of shares provided for elsewhere in this Section
2) or a merger or consolidation of this corporation with or into another
corporation, or the sale of all or substantially all of this corporation's
properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation, or sale, provision shall be made so that
the holders of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred shall thereafter be entitled to
receive upon conversion of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred, respectively, the number
of shares of stock or other securities or property of this corporation, or of
the successor corporation resulting from such merger or consolidation or sale,
to which a holder of Common deliverable upon conversion would have been entitled
upon such capital reorganization, merger, consolidation, or sale.
(v) In any case, appropriate adjustment shall be made
in the application of the provisions of this Section 2 with respect to the
rights of the holders of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred, respectively, after the
event giving rise to the adjustment to the end that the provisions of this
Section 2 (including
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adjustment of the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price and Series E Conversion Price then
in effect and the number of shares purchasable upon conversion of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred, respectively) shall be applicable after that event as nearly
equivalent as may be practicable to those obtaining immediately before such
event.
(e) Adjustments to Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price and Series E
Conversion Price for Certain Diluting Issues.
(i) Special Definitions. For purposes of this Section
2(e), the following definitions apply:
(1) "CONVERTIBLE SECURITIES" shall mean any
evidences of indebtedness, shares (other than Common, Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred or Series E Preferred) or
other securities convertible into or exchangeable for Common.
(2) "OPTIONS" shall mean rights, options, or
warrants to subscribe for purchase or otherwise acquire Common, Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred or Convertible Securities.
(3) "ORIGINAL ISSUE DATE" shall mean the date on
which a share of Series E Preferred was first issued.
(4) "ADDITIONAL SHARES OF COMMON" shall mean all
shares of Common issued or deemed to be issued by the corporation after the
Original Issue Date, other than shares of Common issued or issuable:
(A) upon conversion of shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred;
(B) to officers, directors, or employees of,
or consultants to, the corporation on terms approved by the Board of Directors;
(C) to vendors, customers, lenders,
suppliers, or equipment lessors upon terms approved by the Board of Directors;
(D) as a dividend or distribution on Series
A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or
Series E Preferred;
(E) subject to Section 2(e)(ii), upon
exercise or conversion of options or warrants, respectively;
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(F) for which adjustment of the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D
Conversion Price or Series E Conversion Price is made pursuant to Section
2(d)(i); or
(G) in connection with a joint venture
agreement or acquisition agreement upon the terms approved by the Board of
Directors.
(ii) Deemed Issuance of Options and Convertible
Securities. If this corporation at any time or from time to time after the
Original Issue Date issues any Options or Convertible Securities or fixes a
record date for the determination of holders of any class of securities entitled
to receive any Options or Convertible Securities, then the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number and not
counting any shares subject to a material contingency) of Common Stock issuable
upon the exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible Securities,
shall be deemed to be Additional Shares of Common Stock issued as of the time of
such issue or, in case a record date has been fixed, as of the close of business
on such record date.
(iii) No Adjustment of Conversion Price. Any provision
herein to the contrary notwithstanding, no adjustment to the Series A Conversion
Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion
Price or Series E Conversion Price shall be made in respect of the issuance of
Additional Shares of Common unless the consideration per share (determined
pursuant to Section 2(e)(iv) hereof) for an Additional Share of Common issued by
the corporation is less than the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price or Series E
Conversion Price, respectively, in effect on the date of, and immediately prior
to, such issue, and in such event such adjustment shall only be made to
whichever of the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price or Series E Conversion Price exceeds
such consideration per share.
(iv) Adjustment of Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price and
Series E Conversion Price Upon Issuance of Additional Shares of Common. In the
event this corporation issues or is deemed to have issued Additional Shares of
Common without consideration or for a consideration per share less than the
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price,
Series D Conversion Price or Series E Conversion Price, as last adjusted and
then in effect on the date of and immediately prior to such issue, then and in
such event, the then applicable Series A Conversion Price, Series B Preferred
Conversion Price, Series C Conversion Price, Series D Conversion Price or Series
E Conversion Price, respectively, that exceeds such consideration per share
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price or Series
E Conversion Price, respectively, by a fraction, the numerator of which shall be
(x) the number of shares of Common outstanding immediately prior to such issue
or deemed issue plus the number of shares of Common which the aggregate
consideration received by the
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<PAGE> 13
corporation for the total number of Additional Shares of Common so issued would
purchase at such Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price or Series E Conversion Price,
respectively, in effect immediately prior to such issuance, and the denominator
of which shall be (y) the number of shares of Common outstanding immediately
prior to such issue or deemed issue plus the number of such Additional Shares of
Common so issued. For the purpose of the above calculation, the number of shares
of Common outstanding immediately prior to such issue shall be calculated on a
fully diluted basis, as if all shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred and all
Convertible Securities had been fully converted into shares of Common
immediately prior to such issuance and any outstanding warrants, options or
other rights for the purchase of shares of stock or convertible securities had
been fully exercised immediately prior to such issuance (and the resulting
securities fully converted into shares of Common, if so convertible) as of such
date, but not including in such calculation any additional shares of Common
issuable with respect to shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, Convertible
Securities, or outstanding options, warrants, or other rights for the purchase
of shares of stock or convertible securities, solely as a result of the
adjustment of the Series A Conversion Price, the Series B Conversion Price,
Series C Conversion Price, Series D Conversion Price and Series E Conversion
Price, respectively, (or other conversion ratios) resulting from the issuance of
the Additional Shares of Common causing the adjustment in question.
(v) Notwithstanding the foregoing, upon the closing of the
first firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common for the account of the corporation to the public,
if the offering price to the public ("IPO Price") shall be less than fifteen
dollars ($15.00) per share (as adjusted for stock splits, stock dividends,
reclassifications and like events), the Series E Conversion Price shall be
reduced, immediately prior to such Closing such that the Series E Preferred
shall convert at such closing pursuant to Section 2(b)(i) hereof at the Series E
Conversion Price as so reduced, to a price equal to the IPO Price, if the IPO
Price is equal to seven dollars ($7.00) per share or more. If the IPO Price is
less than $7.00 per share (as adjusted for stock splits, stock dividends,
reclassifications and like events), and holders of Series E Preferred do not
elect to convert at the IPO closing, the Series E Conversion Price shall be
reduced to seven dollars ($7.00) per share, subject to subsequent adjustment
upon subsequent events giving rise to antidilution adjustment.
(vi) Determination of Consideration. For purposes of the
operation of Section 2(e), the consideration received (or deemed to have been
received in the case of Options and Convertible Securities) by the corporation
for the issue of any Additional Shares of Common shall:
(1) to the extent it consists of cash, be computed
as the aggregate amount of cash paid before deducting any reasonable brokerage
or underwriting commissions or other expense paid or incurred by the corporation
for the issuance and sale of the securities;
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<PAGE> 14
(2) to the extent it consists of property other
than cash, be computed at the fair value thereof at the time of such issue or
deemed issuance, as determined in good faith by the Board of Directors; and
(3) if Additional Shares of Common are issued
together with other shares or securities or other assets of the corporation for
consideration which covers both, be the proportion of such consideration so
received, computed as provided in clauses (1) and (2) above, as determined in
good faith by the Board of Directors.
(4) for Options and Convertible Securities, be the
sum of the values of (x) the cash and property to be paid to this corporation
for the issue of such Options and Convertible Securities, if any, and (y) the
cash and property payable to this corporation upon the exercise in full of such
Option or the full conversion of such Convertible Securities, if any.
(vii) Calculation of Per Share Amount. The number of
Additional Shares of Common deemed to be issued upon the issuance or deemed
issuance of a Convertible Security shall be the number of shares of Common Stock
issuable upon the exercise in full of such Option or the conversion in full of
such Convertible Security as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent increase in
the number of shares issuable or decrease in the amount of consideration payable
upon the exercise, conversion, or exchange thereof.
(viii) Recomputation of Adjustment as a Result of Changes
in Options or Convertible Securities. If an Option or Convertible Security by
its terms provides, with the passage of time or otherwise, for any change in the
consideration payable to this corporation or in the number of shares of Common
issuable upon the exercise, conversion, or exchange thereof, the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D
Conversion Price and Series E Conversion Price computed upon the original
issuance or deemed issuance of such Option or Convertible Security, and any
subsequent adjustments based thereon, shall each be recomputed, upon any such
change becoming effective, to reflect such change insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities (provided however that no such adjustment of the Series A Conversion
Price, Series B Conversion Price, Series C Conversion Price, Series D Conversion
Price or Series E Conversion Price shall affect Common Stock previously issued
upon conversion of the Series A Preferred, the Series B Preferred, the Series C
Preferred, the Series D Preferred or the Series E Preferred).
(ix) Recomputation of Adjustment as a Result of Expiration
of Options or Conversion. Upon expiration of any Options or any rights of
conversion or exchange under Convertible Securities that have not been exercised
or converted, the Series A Conversion Price, the Series B Conversion Price,
Series C Conversion Price, Series D Conversion Price and Series E Conversion
Price computed upon the original issuance or deemed issuance thereof, and any
subsequent adjustments based thereon, shall each be recomputed, upon such
expiration, as if (a) in the case of Convertible Securities or Options for
Common, the only Additional Shares of Common issued were shares of Common, if
any, actually issued upon the exercise of such Options or the
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<PAGE> 15
conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by this corporation
for the issuance of all such Options, whether or not exercised, plus the
consideration actually received by this corporation upon such exercise, or for
the issuance of all such Convertible Securities that were actually received by
this corporation upon such exercise, or for the issuance of all such Convertible
Securities that were actually converted or exchanged, plus the additional
consideration, if any, actually received by this corporation upon such
conversion or exchange, and (b) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issuance or deemed issuance of such
Options, and the consideration received by this corporation for the Additional
Shares of Common deemed to have been then issued was the consideration actually
received by this corporation for the issuance of all such Options, whether or
not exercised, plus the consideration deemed to have been received by this
corporation upon the issuance of the Convertible Securities with respect to
which such Options were actually exercised.
(x) Limitation on Readjustments.
(1) Readjustment of Conversion Price. No
readjustment pursuant to Section 2 hereof shall have the effect of increasing
the Series A Conversion Price, the Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price or Series E Conversion Price to an
amount that exceeds the lower of (a) the applicable Conversion Price immediately
before the issuance or deemed issuance of such Options or Convertible Securities
or (b) the applicable Conversion Price that would have resulted from any
issuance of Additional Shares of Common between the date immediately before the
issuance or deemed issuance of such Options or Convertible securities and such
readjustment date.
(2) No Adjustment Upon Issuance of Shares Deemed
Outstanding. No adjustment in the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price or Series E
Conversion Price shall be made upon the actual issuance of Additional Shares of
Common Stock if such shares are already deemed issued at the time of issuance
and any adjustment of the applicable conversion price required to be made as a
result of the deemed issuance has been made.
(f) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price or Series E
Conversion Price pursuant to this Section 2, the corporation at its expense
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and furnish to each holder of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred,
respectively, a certificate certified by the corporation's chief financial
officer setting forth such adjustment or readjustment and showing in detail the
facts upon which such adjustment or readjustment is based. The corporation
shall, upon the written request at any time of any holder of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred or Series E
Preferred, respectively, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price,
Series D Conversion Price
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<PAGE> 16
and Series E Conversion Price in effect at that time, and (iii) the number of
shares of Common and the amount, if any, of other property which at the time
would be received upon the conversion of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred,
respectively.
(g) No Impairment. This corporation will not through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this corporation but will at all times in good faith assist in the
carrying out of all the provisions of this Section 2 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred against
impairment.
(h) Issue Taxes. This corporation shall pay any and all issue and
other taxes that may be payable in respect of any issue or delivery of shares of
Common on conversion of shares of Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred and Series E Preferred; provided, however, that
this corporation shall not be liable for personal property taxes or personal
income taxes attributable to the holders of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred upon
conversion thereof.
(i) Reservation of Stock Issuable Upon Conversion. This
corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common solely for the purpose of effecting the conversion
of the shares of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred such number of its shares of Common as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred. If at any time the number
of authorized but unissued shares of Common shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred, this
corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
to such number of shares as shall be sufficient for such purpose.
Section 3. Redemption.
(a) Redemption of Series B Preferred, Series C Preferred, Series
D Preferred and Series E Preferred. If at any time within the ninety (90) day
period following November 23, 2003, the corporation receives a written request
("REDEMPTION REQUEST") from the holders of not less than sixty-seven percent
(67%) of the then outstanding Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred (computed collectively on an as-if-converted
basis) (collectively, the "REDEEMING SHAREHOLDERS") requesting redemption of all
or a portion of the Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred, the corporation shall within ninety (90) days after the
date the Redemption Request is deemed given, redeem pro rata to their respective
requests for redemption one-third of each of the Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred requested to be redeemed
(or, if less, the maximum amount of
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<PAGE> 17
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred it may lawfully redeem or, if less than the maximum amount it may
lawfully redeem, the maximum amount the corporation may redeem without causing
the corporation extraordinary financial distress as reasonably determined in
good faith by the Board of Directors), and shall redeem the Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred remaining
outstanding after such redemption, pro rata to the respective number of shares
of each then outstanding, in two equal installments (or, if less, the maximum
amount it may lawfully redeem, or, if less than the maximum amount it may
lawfully redeem, the maximum amount the corporation may redeem without causing
the corporation extraordinary financial distress as reasonably determined in
good faith by the Board of directors) on November 23, 2004, and November 23,
2005. Each date on which the corporation shall redeem Series B Preferred, Series
C Preferred, Series D Preferred and Series E Preferred shall be a "REDEMPTION
DATE."
(b) Notice to Other Series B, Series C, Series D and Series E
Holders. If any share of Series B Preferred, Series C Preferred, Series D
Preferred or Series E Preferred are to be redeemed pursuant to Section 3(a)
hereof, then upon receipt of the Redemption Request, the corporation shall
promptly mail written notice of the Redemption Request ("REDEMPTION NOTICE"),
first class postage prepaid, to each holder of record of Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred. Each such holder
shall have thirty (30) days from the date the Redemption Notice is mailed to
request in writing the redemption of its Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred on the terms contained herein.
(c) Redemption Price. The corporation shall pay in cash for
Series B Preferred the higher of (i) $0.738 per share, or (ii) the fair market
value of such shares as determined by an qualified independent appraiser
mutually agreed upon by the corporation and holders of a majority of the Series
B Preferred. The aggregate amount payable with respect to Series B Preferred is
hereinafter collectively referred to as the "SERIES B REDEMPTION PRICE." The
corporation shall pay in cash for Series C Preferred the higher of (i) $0.897
per share, or (ii) the fair market value of such shares as determined by an
qualified independent appraiser mutually agreed upon by the corporation and
holders of a majority of the Series C Preferred. The aggregate amount payable
with respect to Series C Preferred is hereinafter collectively referred to as
the "SERIES C REDEMPTION PRICE." The corporation shall pay in cash for Series D
Preferred the higher of (i) $3.505 per share, or (ii) the fair market value of
such shares as determined by an qualified independent appraiser mutually agreed
upon by the corporation and holders of a majority of the Series D Preferred. The
aggregate amount payable with respect to Series D Preferred is hereinafter
collectively referred to as the "SERIES D REDEMPTION PRICE." The corporation
shall pay in cash for Series E Preferred the higher of (i) $15.00 per share, or
(ii) the fair market value of such shares as determined by an qualified
independent appraiser mutually agreed upon by the corporation and holders of a
majority of the Series E Preferred. The aggregate amount payable with respect to
Series E Preferred is hereinafter collectively referred to as the "SERIES E
REDEMPTION PRICE."
(d) Mechanics of Redemption. At least twenty (20) days prior to
each Redemption Date, the corporation shall mail written notice, first class
postage prepaid, to each holder of record (at the close of business on the
business day next preceding the day on which notice is given) of the
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<PAGE> 18
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred to be redeemed, at the address last shown on the records of the
corporation for such holder or given by the holder to the corporation for the
purpose of notice or if no such address appears or is given at the principal
executive office of the corporation, notifying such holder of the redemption to
be effected, specifying the number of shares to be redeemed from such holder,
the Redemption Date, the Series B Redemption Price, the Series C Redemption
Price, the Series D Redemption Price, the Series E Redemption Price, the place
at which payment may be obtained, and calling upon such holder to surrender to
the corporation, in the manner and at the place designated, the certificate or
certificates representing the shares to be redeemed. If less than all the shares
put for redemption are to be redeemed, the notice shall also provide an
explanation of why the corporation is not redeeming all shares put for
redemption and when the corporation expects that it will be able to redeem such
shares. On or after the Redemption Date, each holder of Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred to be redeemed
shall surrender to the corporation the certificate or certificates representing
such shares, in the manner and at the place designated in the Redemption Notice,
and thereupon the Series B Redemption Price, Series C Redemption Price, Series D
Redemption Price or Series E Redemption Price, as the case may be, of such
shares shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. In the event less than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(e) Shareholders Rights. From and after each Redemption Date,
unless there shall have been a default in payment of the Series B Redemption
Price, Series C Redemption Price, Series D Redemption Price or Series E
Redemption Price, as the case may be, all rights of the holders of Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred, as the
case may be, as holders of such shares (except the right to receive the Series B
Redemption Price, Series C Redemption Price, Series D Redemption Price or Series
E Redemption Price, as the case may be) shall cease with respect to such shares
which have been redeemed, and such shares shall not thereafter be transferred on
the books of the corporation or be deemed to be outstanding for any purpose
whatsoever.
(f) Insufficient Funds. If the funds of the corporation available
(whether legally or by determination of the Board of Directors) for redemption
of shares of Series B Preferred, Series C Preferred, Series D Preferred and
Series E Preferred on any Redemption Date are insufficient to redeem the total
number of shares of Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred to be redeemed on such date, or at any later time when
funds become available for the redemption of shares of Series B Preferred,
Series C Preferred, Series D Preferred or Series E Preferred that were not
timely redeemed, those funds that are then available will be used to redeem
shares of Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred such that each holder of Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred receives the same percentage of the
aggregate amount being paid in such partial redemption as such holder would have
received if the corporation were redeeming all of the shares put for redemption
on such date. The shares of Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred not redeemed shall remain outstanding and
entitled to all the rights and preferences
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<PAGE> 19
provided herein and in the corporation's Articles of Incorporation, as amended.
At any time thereafter when additional funds of the corporation are available
for the redemption of shares of Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred, such funds will immediately be used to redeem
the balance (or portion thereof) of the shares of Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred that the corporation has
become obligated to redeem on any Redemption Date but that it has not redeemed.
(g) Escrow of Redemption Price. On or prior to each Redemption
Date, the corporation may deposit the Series B Redemption Price of all shares of
Series B Preferred designated for redemption in the Redemption Notice and not
yet redeemed, the Series C Redemption Price of all shares of Series C Preferred
designated for redemption in the Redemption Notice and not yet redeemed, the
Series D Redemption Price of all shares of Series D Preferred designated for
redemption in the Redemption Notice and not yet redeemed and the Series E
Redemption Price of all shares of Series E Preferred designated for redemption
in the Redemption Notice and not yet redeemed (but not any one or two of the
Series B Redemption Price, Series C Redemption Price, Series D Redemption Price
or Series E Redemption Price) with a bank or trust corporation having aggregate
capital and surplus in excess of $100,000,000 as a trust fund for the benefit of
the respective holders of the shares designated for redemption and not yet
redeemed, with irrevocable instructions and authority to the bank or trust
corporation to pay the Series B Redemption Price, Series C Redemption Price,
Series D Redemption Price and Series E Redemption Price, respectively, for such
shares to their respective holders on or after the Redemption Date upon receipt
of notification from the corporation that such holder has surrendered his share
certificate to the corporation pursuant to Section 3(d) above. As of the
Redemption Date, the deposit shall constitute full payment of the shares to
their holders, and from and after the Redemption Date the shares so called for
redemption shall be redeemed and shall be deemed to be no longer outstanding,
and the holders thereof shall cease to be stockholders with respect to such
shares and shall have no rights with respect thereto except the right to receive
from the bank or trust corporation payment of the Series B Redemption Price, the
Series C Redemption Price, the Series D Redemption Price or the Series E
Redemption Price, as the case may be, of the shares, without interest, upon
surrender of their certificates therefor. Such instructions shall also provide
that any moneys deposited by the corporation pursuant to this Section 3(g) for
the redemption of shares thereafter converted into shares of Common prior to the
Redemption Date shall be returned to the corporation forthwith upon such
conversion. The balance of any moneys deposited by the corporation pursuant to
this Section 3(g) remaining unclaimed at the expiration of two (2) years
following the Redemption Date shall thereafter be returned to the corporation
upon its request, and thereafter holders of any redeemed shares not theretofore
surrendered for redemption shall look to the corporation for payment of the
Series B Redemption Price, Series C Redemption Price, Series D Redemption Price
or Series E Redemption Price, respectively.
Section 4. Voting Rights.
(a)Voting for Other than Directors. Except as otherwise required
by law, (i) each share of Common issued and outstanding shall have one vote, and
(ii) each share of Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred issued and
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outstanding shall have the number of votes equal to the number of shares of
Common into which such share of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred or Series E Preferred, respectively, is
convertible as adjusted from time to time in accordance with the provisions of
Section 2 hereof, and the holders of each of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall
have voting rights and powers equal to the voting rights and powers of the
Common (except as otherwise expressly provided herein or as required by law,
voting together with the Common as a single class). Fractional votes shall not,
however, be permitted and any fractional voting rights resulting from the above
formula (after aggregating all shares into which shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward).
(b) Voting for Directors. The Board of Directors shall consist of
seven (7) members. For so long as at least Five Hundred Thousand (500,000)
shares of Series B Preferred shall be outstanding (as adjusted for stock
dividends, combinations or splits with respect to such shares), the holders of
shares of Series B Preferred, voting together as a separate class, shall be
entitled to elect two directors. For so long as at least Five Hundred Thousand
(500,000) shares of Series A Preferred shall be outstanding (as adjusted for
stock dividends, combinations or splits with respect to such shares), the
holders of shares of Series A Preferred, voting together as a separate class,
shall be entitled to elect one director. The holders of shares of Common, voting
together as a separate class, shall be entitled to elect one director.
Additional directors shall be elected by the holders of the outstanding shares
of the Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred and Common, voting together as a class. Any
vacancy in the Board of Directors occurring because of the death, resignation or
removal of a director shall be filled by the vote or written consent of the
holders of a majority of such class or classes which elected such director. A
director may be removed from the Board of Directors with or without cause only
by the vote or consent of the holders of the outstanding class or classes with
voting power entitled to elect him in accordance with the California
Corporations Code, and the vacancy created thereby may be filled only by the
vote or consent of such holders.
Section 5. Dividends.
(a) The holders of outstanding Series E Preferred shall be
entitled to receive, when and as declared by the Board of Directors and out of
funds legally available therefor, dividends at the annual rate of $1.50 per
share, and no more, payable in preference and priority to any payment of any
dividend on the Common, when and as declared by the Board of Directors. The
right to such dividends on shares of Series E Preferred shall be non-cumulative.
(b) The holders of outstanding Series D Preferred shall be
entitled to receive, when and as declared by the Board of Directors and out of
funds legally available therefor, dividends at the annual rate of $0.3505 per
share, and no more, payable in preference and priority to any payment of any
dividend on the Common, when and as declared by the Board of Directors. The
right to such dividends on shares of Series D Preferred shall be non-cumulative.
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(c) The holders of outstanding Series C Preferred shall be
entitled to receive, when and as declared by the Board of Directors and out of
funds legally available therefor, dividends at the annual rate of $0.0897 per
share, and no more, payable in preference and priority to any payment of any
dividend on the Common, when and as declared by the Board of Directors. The
right to such dividends on shares of Series C Preferred shall be non-cumulative.
(d) The holders of outstanding Series B Preferred shall be
entitled to receive, when and as declared by the Board of Directors and out of
funds legally available therefor, dividends at the annual rate of $0.0738 per
share, and no more, payable in preference and priority to any payment of any
dividend on the Common, when and as declared by the Board of Directors. The
right to such dividends on shares of Series B Preferred shall be non-cumulative.
(e) The holders of outstanding Series A Preferred shall be
entitled to receive, when and as declared by the Board of Directors and out of
funds legally available therefor, dividends at the annual rate of $0.16 per
share, and no more, payable in preference and priority to any payment of any
dividend on the Common, when and as declared by the Board of Directors. The
right to such dividends on shares of Series A Preferred shall be cumulative.
(f) In no event shall any dividend payable on either the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Series
E Preferred with respect to any year expressed as a percentage of the maximum
annual dividend then payable on such series exceed the dividend payable with
respect to such year similarly expressed as a percentage on any other of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
or Series E Preferred.
(g) The dividend rights provided for herein with respect to the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred shall be equitably adjusted to reflect any stock
dividend, stock distribution, stock split or reverse stock split, combination of
shares, subdivision of shares or reclassification of shares with respect to the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
or Series E Preferred, respectively.
(h) Dividends may be paid on the Common as and when declared by
the Board of Directors, subject to the prior dividend rights of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred.
Section 6. Covenants.
(a) So long as at least 500,000 shares (subject to adjustment for
stock dividends, stock distributions, stock splits or reverse stock splits,
combination of shares, subdivision of shares or reclassification of shares) of
Series A Preferred shall be outstanding, the corporation shall not, without
first obtaining the affirmative vote or written consent of holders of greater
than fifty percent (50%) of all outstanding shares of Series A Preferred voting
together as a class:
(i) amend or repeal any provision of, or add any
provision to, the corporation's Articles of Incorporation or Bylaws if such
action would adversely alter or change the
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<PAGE> 22
preferences, rights, privileges or powers of, or the restrictions provided for
the benefit of the Series A Preferred;
(ii) create or issue any new series of Preferred or
reclassify any Common shares into shares having any preference or priority as to
redemption, voting, dividends or liquidation superior to or on a parity with any
such preference or priority of the Series A Preferred;
(iii) except as otherwise provided in Section 3, pay
or declare any dividend or distribution on any shares of capital stock or apply
any of its assets to the redemption, retirement, purchase or other acquisition
of any shares of capital stock except from employees of, or consultants to, the
corporation upon termination of employment or consultancy; provided, in the case
of any such redemptions to be made at the election of this corporation, such
redemptions have been approved by the Board of Directors;
(iv) merge or consolidate with or into any other
corporation, or sell or otherwise transfer in a single transaction or a series
of related transactions all or substantially all of the assets of the
corporation (except, in each case, where the corporation's shareholders of
record as constituted immediately prior to such merger, consolidation, sale or
other transfer will, immediately after such merger, consolidation, sale or
transfer hold more than fifty percent (50%) of the voting power of the surviving
or acquiring entity);
(v) increase the size of the Board of Directors to a
number greater than seven (7); or
(vi) increase the number of authorized shares of
Series A Preferred.
(b) So long as at least 500,000 shares (subject to adjustment for
stock dividends, stock distributions, stock splits or reverse stock splits,
combination of shares, subdivision of shares or reclassification of shares) of
Series B Preferred, Series C Preferred, Series D Preferred or Series E
Preferred, as the case may be, shall be outstanding, the corporation shall not
take any of the following actions, without first obtaining (in the case of
Series B Preferred) the affirmative vote or written consent of holders of
greater than fifty percent (50%) of all outstanding shares of Series B Preferred
voting together as a class, or (in the case of the Series C Preferred) the
affirmative vote or written consent of holders of greater than fifty percent
(50%) of all outstanding shares of Series C Preferred voting together as a
class, or (in the case of the Series D Preferred) the affirmative vote or
written consent of holders of greater than fifty percent (50%) of all
outstanding shares of Series D Preferred voting together as a class, or (in the
case of the Series E Preferred) the affirmative vote or written consent of
holders of greater than fifty percent (50%) of all outstanding shares of Series
E Preferred voting together as a class:
(i) amend or repeal any provision of, or add any
provision to, the corporation's Articles of Incorporation or Bylaws if such
action would adversely alter or change the preferences, rights, privileges or
powers of, or the restrictions provided for the benefit of the Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred, as the
case may be;
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<PAGE> 23
(ii) create or issue any new series of Preferred or reclassify
any Common shares into shares having any preference or priority as to
redemption, voting, dividends or liquidation superior to or on a parity with any
such preference or priority of the Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred, as the case may be;
(iii) except as otherwise provided in Section 3, pay or
declare any dividend or distribution on any shares of capital stock or apply any
of its assets to the redemption, retirement, purchase or other acquisition of
any shares of capital stock except from employees of, or consultants to, the
corporation upon termination of employment or consultancy; provided, in the case
of any such redemptions to be made at the election of this corporation, such
redemptions have been approved by the Board of Directors;
(iv) merge or consolidate with or into any other corporation,
or sell or otherwise transfer in a single transaction or a series of related
transactions all or substantially all of the assets of the corporation (except,
in each case, where the corporation's shareholders of record as constituted
immediately prior to such merger, consolidation, sale or other transfer will,
immediately after such merger, consolidation, sale or transfer hold more than
fifty percent (50%) of the voting power of the surviving or acquiring entity);
(v) increase the size of the Board of Directors to a number
greater than seven (7); or
(vi) increase the number of authorized shares of Series B
Preferred, Series C Preferred, Series D Preferred or Series E Preferred, as the
case may be.
Section 7. Residual Rights. All rights accruing to the outstanding
shares of the corporation not expressly provided for to the contrary herein
shall be vested in the Common.
Section 8. Status of Converted Stock. In the event any shares of Series
A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or
Series E Preferred shall be converted pursuant to Section 2 hereof, the shares
so converted shall be canceled and shall not be reissuable by the corporation,
and the Articles of Incorporation shall be appropriately amended to effect the
corresponding reduction in the corporation's authorized stock.
Section 9. Partial Conversion. In the event that less than all of a
holder's shares of Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred or Series E Preferred shall be converted at any time pursuant
to Section 2 hereof, the corporation shall promptly upon receipt of such
holder's certificate for shares to be converted, issue a new certificate to such
holder representing the unconverted shares.
ARTICLE IV
1. Limitation of Directors' Liability. The liability of the directors of
the corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law.
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<PAGE> 24
2. Indemnification of Corporate Agents. The corporation is authorized to
indemnify the directors and officers of the corporation to the fullest extent
permissible under California law.
3. Repeal or Modification. Any repeal or modification of the foregoing
provisions of this Article IV by the shareholders of the corporation shall not
adversely affect any right or protection of a director of the corporation
existing at the time of such repeal or modification.
4. Board Approval. The foregoing amendment and restatement of the
Articles of Incorporation has been duly approved by the Board of Directors.
5. Shareholder Approval. The foregoing amendment and restatement of the
Articles of Incorporation has been duly approved by the required vote of
shareholders in accordance with Section 902 and 903 of the California
Corporations Code. The total number of Common shares outstanding is _________.
The total number of Preferred shares outstanding is 57,006,135, 1,875,000 of
which are shares of Series A Preferred, 12,884,205 of which are shares of Series
B Preferred, 24,503,677 of which are shares of Series C Preferred and 17,743,253
of which are shares of Series D Preferred. The number of shares voting in favor
of the amendment and restatement of the Articles of Incorporation equaled or
exceeded the vote required pursuant to the Corporations Code. The percentage
vote required was more than 50% of the Common and more than 50% of the Series A
Preferred and more than 50% of the Series B Preferred and more than 50% of the
Series C Preferred and more than 50% of the Series D Preferred.
[Remainder of this Page Intentionally Left Blank]
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<PAGE> 25
We, the undersigned, further declare under penalty of perjury that the
matters set forth in the foregoing Certificate are true and correct of our own
knowledge.
Executed at Redwood City, California, this ______ day of April, 2000.
- ------------------------------- -------------------------------------
Dean Hamilton Curtis S. Dudnick
President Secretary
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<PAGE> 1
EXHIBIT 3.3
BYLAWS
OF
DRAC NETWAVES, INC.
<PAGE> 2
BYLAWS OF
DRAC NETWAVES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES...................................................................1
1.1 PRINCIPAL OFFICE................................................................1
1.2 OTHER OFFICES...................................................................1
ARTICLE II - MEETINGS OF SHAREHOLDERS...........................................................1
2.1 PLACE OF MEETINGS...............................................................1
2.2 ANNUAL MEETING..................................................................1
2.3 SPECIAL MEETING.................................................................2
2.4 NOTICE OF SHAREHOLDERS' MEETINGS................................................2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE....................................3
2.6 QUORUM..........................................................................3
2.7 ADJOURNED MEETING; NOTICE.......................................................3
2.8 VOTING..........................................................................4
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT...............................5
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.........................5
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS.....................6
2.12 PROXIES.........................................................................6
2.13 INSPECTORS OF ELECTION..........................................................7
ARTICLE III - DIRECTORS.........................................................................8
3.1 POWERS..........................................................................8
3.2 NUMBER OF DIRECTORS.............................................................8
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS........................................8
3.4 RESIGNATION AND VACANCIES.......................................................8
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE........................................9
3.6 REGULAR MEETINGS................................................................9
3.7 SPECIAL MEETINGS; NOTICE........................................................9
3.8 QUORUM.........................................................................10
3.9 WAIVER OF NOTICE...............................................................10
3.10 ADJOURNMENT....................................................................10
</TABLE>
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<PAGE> 3
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.11 NOTICE OF ADJOURNMENT..........................................................10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING..............................11
3.13 FEES AND COMPENSATION OF DIRECTORS.............................................11
3.14 APPROVAL OF LOANS TO OFFICERS..................................................11
ARTICLE IV - COMMITTEES........................................................................11
4.1 COMMITTEES OF DIRECTORS........................................................11
4.2 MEETINGS AND ACTION OF COMMITTEES..............................................12
ARTICLE V - OFFICERS...........................................................................13
5.1 OFFICERS.......................................................................13
5.2 ELECTION OF OFFICERS...........................................................13
5.3 SUBORDINATE OFFICERS...........................................................13
5.4 REMOVAL AND RESIGNATION OF OFFICERS............................................13
5.5 VACANCIES IN OFFICES...........................................................13
5.6 CHAIRMAN OF THE BOARD..........................................................14
5.7 PRESIDENT......................................................................14
5.8 VICE PRESIDENTS................................................................14
5.9 SECRETARY......................................................................14
5.10 CHIEF FINANCIAL OFFICER........................................................15
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND
OTHER AGENTS...................................................................15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS......................................15
6.2 INDEMNIFICATION OF OTHERS......................................................15
ARTICLE VII - RECORDS AND REPORTS..............................................................16
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER...................................16
7.2 MAINTENANCE AND INSPECTION OF BYLAWS...........................................17
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS .........................17
7.4 INSPECTION BY DIRECTORS........................................................17
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER..........................................17
7.6 FINANCIAL STATEMENTS...........................................................18
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.................................18
</TABLE>
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<PAGE> 4
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VIII - GENERAL MATTERS.................................................................19
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING..........................19
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS......................................19
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.............................19
8.4 CERTIFICATES FOR SHARES........................................................19
8.5 LOST CERTIFICATES..............................................................20
8.6 CONSTRUCTION; DEFINITIONS......................................................20
ARTICLE IX - AMENDMENTS........................................................................20
9.1 AMENDMENT BY SHAREHOLDERS......................................................20
9.2 AMENDMENT BY DIRECTORS.........................................................20
</TABLE>
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<PAGE> 5
BYLAWS
OF
DRAC NETWAVES, INC.
ARTICLE I
CORPORATE OFFICES
1.1 PRINCIPAL OFFICE
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS
Meetings of shareholders shall be held at any place within or outside
the State of California designated by the board of directors. In the absence of
any such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of shareholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of shareholders shall be held on the first day
of May in each year at 10:00 A.M. However, if such day falls on a legal holiday,
then the meeting shall be held at the same time and place on the next succeeding
full business day. At the meeting, directors shall be elected, and any other
proper business may be transacted.
<PAGE> 6
2.3 SPECIAL MEETING
A special meeting of the shareholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more shareholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
All notices of meetings of shareholders shall be sent or otherwise given
in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if
sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30))
nor more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the shareholders
(but subject to the provisions of the next paragraph of this Section 2.4 any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California (the
"Code"), (ii) an amendment of the articles of incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, then the notice shall also state the general nature of that
proposal.
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<PAGE> 7
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only if
the corporation has outstanding shares held of record by five hundred (500) or
more persons (determined as provided in Section 605 of the Code) on the record
date for the shareholders' meeting, or (iv) by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the shareholder at the address of that shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that shareholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, then all future notices or reports shall be deemed to have been
duly given without further mailing if the same shall be available to the
shareholder on written demand of the shareholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 QUORUM
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the absence
of a quorum, no other business may be transacted at that meeting except as
provided in Section 2.6 of these bylaws.
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<PAGE> 8
When any meeting of shareholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place are announced at the meeting at which the adjournment is
taken. However, if a new record date for the adjourned meeting is fixed or if
the adjournment is for more than forty-five (45) days from the date set for the
original meeting, then notice of the adjourned meeting shall be given. Notice of
any such adjourned meeting shall be given to each shareholder of record entitled
to vote at the adjourned meeting in accordance with the provisions of Sections
2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may
transact any business which might have been transacted at the original meeting.
2.8 VOTING
The shareholders entitled to vote at any meeting of shareholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation or in joint
ownership).
The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may
be otherwise provided in the articles of incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any shareholder entitled to vote on any matter may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or, except when the matter is the election of directors, may
vote them against the proposal; but, if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares which the shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the
shares represented and voting at a duly held meeting (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or a vote by
classes is required by the Code or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes which such shareholder normally
is entitled to cast) if the candidates' names have been placed in nomination
prior to commencement of the voting and the shareholder has given notice prior
to commencement of the voting of the shareholder's intention to cumulate votes.
If any shareholder has given such a notice, then every shareholder entitled to
vote may cumulate votes for candidates in nomination either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among any or all of the candidates, as the shareholder thinks fit. The
candidates receiving the highest number of affirmative votes, up to the
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<PAGE> 9
number of directors to be elected, shall be elected; votes against any candidate
and votes withheld shall have no legal effect.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of shareholders, either annual or
special, however called and noticed, and wherever held, shall be as valid as
though they had been taken at a meeting duly held after regular call and notice,
if a quorum be present either in person or by proxy, and if, either before or
after the meeting, each person entitled to vote, who was not present in person
or by proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of shareholders, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent
or approval shall state the general nature of the proposal. All such waivers,
consents, and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the Code to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be effective
only if signed by the holders of all outstanding shares entitled to vote for the
election of directors. However, a director may be elected at any time to fill
any vacancy on the board of directors, provided that it was not created by
removal of a director and that it has not been filled by the directors, by the
written consent of the holders of a majority of the outstanding shares entitled
to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.
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<PAGE> 10
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders has not been received, then the secretary shall give prompt notice
of the corporate action approved by the shareholders without a meeting. Such
notice shall be given to those shareholders entitled to vote who have not
consented in writing and shall be given in the manner specified in Section 2.5
of these bylaws. In the case of approval of (i) a contract or transaction in
which a director has a direct or indirect financial interest, pursuant to
Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant
to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant
to Section 1201 of the Code, and (iv) a distribution in dissolution other than
in accordance with the rights of outstanding preferred shares, pursuant to
Section 2007 of the Code, the notice shall be given at least ten (10) days
before the consummation of any action authorized by that approval.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only shareholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date, except as otherwise provided in the Code.
If the board of directors does not so fix a record date:
(a) the record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held; and
(b) the record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the board has been taken, shall
be at the close of business on the day on which the board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
other action, whichever is later.
The record date for any other purpose shall be as provided in Article
VIII of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and
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<PAGE> 11
filed with the secretary of the corporation. A proxy shall be deemed signed if
the shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or the
shareholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i) the
person who executed the proxy revokes it prior to the time of voting by
delivering a writing to the corporation stating that the proxy is revoked or by
executing a subsequent proxy and presenting it to the meeting or by voting in
person at the meeting, or (ii) written notice of the death or incapacity of the
maker of that proxy is received by the corporation before the vote pursuant to
that proxy is counted; provided, however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy, unless otherwise
provided in the proxy. The dates contained on the forms of proxy presumptively
determine the order of execution, regardless of the postmark dates on the
envelopes in which they are mailed. The revocability of a proxy that states on
its face that it is irrevocable shall be governed by the provisions of Sections
705(e) and 705(f) of the Code.
2.13 INSPECTORS OF ELECTION
Before any meeting of shareholders, the board of directors may appoint
an inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any shareholder or a shareholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The number
of inspectors shall be either one (1) or three (3). If inspectors are appointed
at a meeting pursuant to the request of one (1) or more shareholders or proxies,
then the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
then the chairman of the meeting may, and upon the request of any shareholder or
a shareholder's proxy shall, appoint a person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence of
a quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
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(g) do any other acts that may be proper to conduct the election
or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the Code and any limitations in the
articles of incorporation and these bylaws relating to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The authorized number of directors shall be not less than three (3) nor
more than five (5), with the initial number of directors being three (3). This
number may be changed by a duly adopted amendment to the articles of
incorporation or by an amendment to this bylaw adopted by the vote or written
consent of holders of a majority of the outstanding shares entitled to vote;
provided, however, that an amendment reducing the fixed number or the minimum
number of directors to a number less than five (5) cannot be adopted if the
votes cast against its adoption at a meeting, or the shares not consenting in
the case of an action by written consent, are equal to more than sixteen and
two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Directors shall be elected at each annual meeting of shareholders to
hold office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for that resignation to become
effective. If the resignation of a director is effective at a future time, the
board of directors may elect a successor to take office when the resignation
becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a
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director by the vote or written consent of the shareholders or by court order
may be filled only by the affirmative vote of a majority of the shares
represented and voting at a duly held meeting at which a quorum is present
(which shares voting affirmatively also constitute a majority of the required
quorum), or by the unanimous written consent of all shares entitled to vote
thereon. Each director so elected shall hold office until the next annual
meeting of the shareholders and until a successor has been elected and
qualified.
A vacancy or vacancies in the board of directors shall be deemed to
exist (i) in the event of the death, resignation or removal of any director,
(ii) if the board of directors by resolution declares vacant the office of a
director who has been declared of unsound mind by an order of court or convicted
of a felony, (iii) if the authorized number of directors is increased, or (iv)
if the shareholders fail, at any meeting of shareholders at which any director
or directors are elected, to elect the number of directors to be elected at that
meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election
other than to fill a vacancy created by removal, if by written consent, shall
require the consent of the holders of a majority of the outstanding shares
entitled to vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place
within or outside the State of California that has been designated from time to
time by resolution of the board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held at any place within or outside the
State of California that has been designated in the notice of the meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
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Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in Section
3.10 of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
Section 310 of the Code (as to approval of contracts or transactions in which a
director has a direct or indirect material financial interest), Section 311 of
the Code (as to appointment of committees), Section 317(e) of the Code (as to
indemnification of directors), the articles of incorporation, and other
applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.
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3.11 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
board of directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.14 APPROVAL OF LOANS TO OFFICERS*
The corporation may, upon the approval of the board of directors alone,
make loans of money or property to, or guarantee the obligations of, any officer
of the corporation or its parent or subsidiary, whether or not a director, or
adopt an employee benefit plan or plans authorizing such loans or guaranties
provided that (i) the board of directors determines that such a loan or guaranty
or plan may reasonably be expected to benefit the corporation, (ii) the
corporation has outstanding shares held of record by 100 or more persons
(determined as provided in Section 605 of the Code) on the date of approval by
the board of directors, and (iii) the approval of the board of directors is by a
vote sufficient without counting the vote of any interested director or
directors.
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* This section is effective only if it has been approved by the
shareholders in accordance with Sections 315(b) and 152 of the Code.
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ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, except with respect to:
(a) the approval of any action which, under the Code, also
requires shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on
the board or any committee;
(d) the amendment or repeal of these bylaws or the adoption of
new bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except
at a rate or in a periodic amount or within a price range determined by the
board of directors; or
(g) the appointment of any other committees of the board of
directors or the members of such committees.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
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meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of the
board of directors, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
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A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform all
the duties of the president and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the president. The vice presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the board of directors, these bylaws,
the president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at shareholders' meetings,
and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names of
all shareholders and their addresses, the number and classes of shares held by
each, the number and
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date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required to be given by law or
by these bylaws. He shall keep the seal of the corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositaries as may
be designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted
by the Code, indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was an agent of the corporation. For purposes of this Section 6.1,
a "director" or "officer" of the corporation includes any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
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The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other than
directors and officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Section 6.2, an "employee" or "agent" of the
corporation (other than a director or officer) includes any person (i) who is or
was an employee or agent of the corporation, (ii) who is or was serving at the
request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
The corporation shall keep either at its principal executive office or
at the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records of shareholders'
names, addresses, and shareholdings during usual business hours on five (5)
days' prior written demand on the corporation, (ii) obtain from the transfer
agent of the corporation, on written demand and on the tender of such transfer
agent's usual charges for such list, a list of the names and addresses of the
shareholders who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which that list has been
compiled or as of a date specified by the shareholder after the date of demand.
Such list shall be made available to any such shareholder by the transfer agent
on or before the later of five (5) days after the demand is received or five (5)
days after the date specified in the demand as the date as of which the list is
to be compiled.
The record of shareholders shall also be open to inspection on the
written demand of any shareholder or holder of a voting trust certificate, at
any time during usual business hours, for a purpose reasonably related to the
holder's interests as a shareholder or as the holder of a voting trust
certificate.
Any inspection and copying under this Section 7.1 may be made in person
or by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
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7.2 MAINTENANCE AND INSPECTION OF BYLAWS
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as amended
to date, which bylaws shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon the
written request of any shareholder, furnish to that shareholder a copy of these
bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written form,
and the accounting books and records shall be kept either in written form or in
any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
7.4 INSPECTION BY DIRECTORS
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney. The
right of inspection includes the right to copy and make extracts of documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent at least
fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the manner specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in financial
position for the fiscal year, and (iv) any report of independent accountants or,
if there is no such report, the certificate of an authorized officer
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of the corporation that the statements were prepared without audit from the
books and records of the corporation.
The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.
7.6 FINANCIAL STATEMENTS
If no annual report for the fiscal year has been sent to shareholders,
then the corporation shall, upon the written request of any shareholder made
more than one hundred twenty (120) days after the close of such fiscal year,
deliver or mail to the person making the request, within thirty (30) days
thereafter, a copy of a balance sheet as of the end of such fiscal year and an
income statement and statement of changes in financial position for such fiscal
year.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
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ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the shareholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
A certificate or certificates for shares of the corporation shall be
issued to each shareholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All certificates
shall be signed in the name of the corporation by the chairman of the board or
the vice chairman of the board or the
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<PAGE> 24
president or a vice president and by the chief financial officer or an assistant
treasurer or the secretary or an assistant secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all of
the signatures on the certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that officer,
transfer agent or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
9.1 AMENDMENT BY SHAREHOLDERS
New bylaws may be adopted or these bylaws may be amended or repealed by
the vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the articles of incorporation of
the corporation set forth the number of authorized directors of the corporation,
then the authorized number of directors may be changed only by an amendment of
the articles of incorporation.
9.2 AMENDMENT BY DIRECTORS
Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors (except
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to fix the authorized number of directors pursuant to a bylaw providing for a
variable number of directors), may be adopted, amended or repealed by the board
of directors.
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CERTIFICATE OF ADOPTION OF BYLAWS
OF
DRAC NETWAVES, INC.
Adoption by Sole Incorporator
The undersigned person appointed in the Articles of Incorporation to act
as the Sole Incorporator of DRAC Netwaves, Inc. hereby adopts the foregoing
bylaws, comprising twenty-one (21) pages, as the Bylaws of the corporation.
Executed this 11th day of April, 1997.
/s/ LAURA L. SHELBURNE
----------------------------------------
Laura L. Shelburne, Sole Incorporator
Certificate by Secretary of Adoption by Incorporator
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of DRAC Netwaves, Inc. and that the foregoing Bylaws,
comprising twenty-one (21) pages, were adopted as the Bylaws of the corporation
on April 11, 1997, by the person appointed in the Articles of Incorporation to
act as the Sole Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 11th day of April, 1997.
/s/ DEAN HAMILTON
----------------------------------------
Dean Hamilton, Secretary
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<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT OF BYLAWS
OF
DRAC NETWAVES, INC.
The undersigned, being the Secretary of DRAC Netwaves, Inc., a
California corporation (the "Company"), hereby certifies that Article 3, Section
3.2 of the Bylaws of the Company was amended, effective October 28, 1997, by all
of the shareholders of the Company entitled to vote to provide in its entirety
as follows:
3.2 NUMBER OF DIRECTORS
The authorized number of directors shall be not less than
four (4) nor more than seven (7), with the initial number of
directors being five (5). The board of directors shall have the
sole right and power to alter the actual size of the board of
directors within the range specified in this Section 3.2 unless
changed by a duly adopted amendment to the articles of
incorporation or by an amendment to this bylaw adopted by the
vote or written consent of holders of a majority of the
outstanding shares entitled to vote; provided, however, that an
amendment reducing the fixed number or the minimum number of
directors to a number less than five (5) cannot be adopted if the
votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal
to more than sixteen and two-thirds percent (16-2/3%) of the
outstanding shares entitled to vote thereon.
No reduction of the authorized number of directors shall
have the effect of removing any director before that director's
term of office expires.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 7th day of November, 1997.
/s/ DEAN HAMILTON
-----------------------------------
Dean Hamilton, Secretary
<PAGE> 1
EXHIBIT 10.5
COSINE COMMUNICATIONS, INC.
1997 STOCK PLAN
Adopted October 28, 1997
Amended and Restated Effective as of March 11, 1998
Amended and Restated Effective as of September 3, 1998
Amended and Restated Effective as of February 17, 1999
Amended and Restated Effective as of April 27, 2000
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock Purchase
Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the
Board in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means CoSine Communications, Inc., a California
corporation.
(h) "Consultant" means any person who is engaged by the Company
or any Parent or Subsidiary to render consulting or advisory services to such
entity.
<PAGE> 2
(i) "Director" means a member of the Board of Directors of the
Company.
(j) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
An Employee shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for the
Common Stock on the last market trading day prior to the day of determination;
or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
<PAGE> 3
(p) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
(r) "Option Agreement" means a written or electronic agreement
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(s) "Option Exchange Program" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option
or a Stock Purchase Right.
(u) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(v) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this 1997 Stock Plan.
(x) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 11 below.
(y) "Section 16(b)" means Section 16(b) of the Securities
Exchange Act of 1934, as amended.
(z) "Service Provider" means an Employee, Director or Consultant.
(aa) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 below.
(bb) "Stock Purchase Right" means a right to purchase Common
Stock pursuant to Section 11 below.
(cc) "Subsidiary" means a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is
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twenty seven million six hundred twenty thousand (27,620,000) Shares. The Shares
may be authorized but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an Option Exchange Program, the unpurchased Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated). However, Shares that have actually been issued under the Plan,
upon exercise of either an Option or Stock Purchase Right, shall not be returned
to the Plan and shall not become available for future distribution under the
Plan, except that if Shares of Restricted Stock are repurchased by the Company
at their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
(a) Administrator. The Plan shall be administered by the Board or
a Committee appointed by the Board, which Committee shall be constituted to
comply with Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by
each such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option
or Stock Purchase Right granted hereunder. Such terms and conditions include,
but are not limited to, the exercise price, the time or times when Options or
Stock Purchase Rights may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or Stock Purchase Right or
the Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock;
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<PAGE> 5
(vii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined. All elections by Optionees
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.
5. Eligibility.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
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<PAGE> 6
6. Term of Plan. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be stated in the Option
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option granted
to an Optionee who, at the time the Option is granted, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant or such shorter term as may be provided in the
Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time
of grant of such Option, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the exercise price shall be no less than 110% of the Fair Market
Value per Share on the date of grant.
(B) granted to any other Service Provider, the per
Share exercise price shall be no less than 85% of the Fair Market Value per
Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be
granted with a per Share exercise price other than as required above pursuant to
a merger or other corporate transaction.
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<PAGE> 7
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Except in the case of Options granted to Officers,
Directors and Consultants, Options shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Options are granted.
Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a
decrease in the number of Shares thereafter available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, such Optionee may exercise his or her
Option within such period of time as is
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<PAGE> 8
specified in the Option Agreement (of at least thirty (30) days) to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of the Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for three (3) months following the Optionee's termination.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Option Agreement, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
(of at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified time
in the Option Agreement, the Option shall remain exercisable for twelve (12)
months following the Optionee's termination due to the Optionee's Disability.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is specified
in the Option Agreement (of at least six (6) months) to the extent that the
Option is vested on the date of death (but in no event later than the expiration
of the term of such Option as set forth in the Option Agreement) by the
Optionee's estate or by a person who acquires the right to exercise the Option
by bequest or inheritance. In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee's death. If, at the time of death, the Optionee is not vested as to
the entire Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. If the Option is not so exercised within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. The
Options and Stock Purchase Rights may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by
the laws of descent or distribution and may be exercised, during the lifetime of
the Optionee, only by the Optionee.
11. Stock Purchase Rights.
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(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing or electronically of the terms, conditions and
restrictions related to the offer, including the number of Shares that such
person shall be entitled to purchase, the price to be paid, and the time within
which such person must accept such offer. The terms of the offer shall comply in
all respects with Section 260.140.42 of Title 10 of the California Code of
Regulations. The offer shall be accepted by execution of a Restricted Stock
purchase agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine. Except with respect to Shares purchased by
Officers, Directors and Consultants, the repurchase option shall in no case
lapse at a rate of less than 20% per year over five (5) years from the date of
purchase.
(c) Other Provisions. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
exercised, the purchaser shall have rights equivalent to those of a shareholder
and shall be a shareholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
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12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option or Stock Purchase Right
would not otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased upon
exercise of an Option or Stock Purchase Right shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully
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<PAGE> 11
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option or Stock Purchase Right shall terminate upon the expiration of such
period. For the purposes of this paragraph, the Option or Stock Purchase Right
shall be considered assumed if, following the merger or sale of assets, the
option or right confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right immediately prior
to the merger or sale of assets, the consideration (whether stock, cash, or
other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
13. Time of Granting Options and Stock Purchase Rights. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator. Notice
of the determination shall be given to each Service Provider to whom an Option
or Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Board shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply
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<PAGE> 12
with Applicable Laws and shall be further subject to the approval of counsel for
the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of
an Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.
19. Information to Optionees and Purchasers. The Company shall provide
to each Optionee and to each individual who acquires Shares pursuant to the
Plan, not less frequently than annually during the period such Optionee or
purchaser has one or more Options or Stock Purchase Rights outstanding, and, in
the case of an individual who acquires Shares pursuant to the Plan, during the
period such individual owns such Shares, copies of annual financial statements.
The Company shall not be required to provide such statements to key employees
whose duties in connection with the Company assure their access to equivalent
information.
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<PAGE> 13
EXHIBIT 10.5
COSINE COMMUNICATIONS, INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT -- EARLY EXERCISE
(WITH PROMISSORY NOTE)
Unless otherwise defined herein, the terms defined in the 1997 Stock
Plan shall have the same defined meanings in this Stock Option Agreement (the
"Option Agreement"), and shall be effective as of the Date of Grant set forth
below.
I. NOTICE OF STOCK OPTION GRANT
------------------------------
------------------------------
------------------------------
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number
-----------------------------------
Date of Grant
-----------------------------------
Vesting Commencement Date
-----------------------------------
Exercise Price per Share $
-----------------------------------
Total Number of Shares Granted
-----------------------------------
Total Exercise Price $
-----------------------------------
Type of Option: Incentive Stock Option
--------
Nonstatutory Stock Option
--------
Term/Expiration Date:
-----------------------------------
Exercise and Vesting Schedule:
This Option shall be exercisable in whole or in part, and shall vest
according to the following vesting schedule:
25% OF THE SHARES SUBJECT TO THE OPTION SHALL VEST TWELVE MONTHS AFTER
THE VESTING COMMENCEMENT DATE, AND 1/48 OF THE SHARES SUBJECT TO THE OPTION
SHALL VEST EACH MONTH THEREAFTER, SUBJECT TO OPTIONEE'S CONTINUING TO BE A
SERVICE PROVIDER ON SUCH DATES.
<PAGE> 14
Termination Period:
This Option may be exercised, to the extent it is then vested, for three
months after Optionee ceases to be a Service Provider. Upon death or Disability
of the Optionee, this Option may be exercised, to the extent it is then vested,
for one year after Optionee ceases to be Service Provider. In no event shall
this Option be exercised later than the Term/Expiration Date as provided above.
II. AGREEMENT
1. Grant of Option. The Administrator of the Company hereby grants to
the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option. This Option shall be exercisable during its term
in accordance with the provisions of Section 9 of the Plan as follows:
(a) Right to Exercise.
(i) Subject to subsections 2(a)(ii) and 2(a)(iii)
below, this Option shall be exercisable cumulatively according to the vesting
schedule set forth in the Notice of Grant. Alternatively, at the election of the
Optionee, this Option may be exercised in whole or in part at any time as to
Shares that have not yet vested. Vested Shares shall not be subject to the
Company's repurchase right (as set forth in the Restricted Stock Purchase
Agreement, attached hereto as Exhibit C-1).
(ii) As a condition to exercising this Option for
unvested Shares, the Optionee shall execute the Restricted Stock Purchase
Agreement.
(iii) This Option may not be exercised for a fraction
of a Share.
(b) Method of Exercise. This Option shall be exercisable by
delivery of an exercise notice in the form attached as Exhibit A (the "Exercise
Notice") which shall state the election to exercise the Option, the number of
Shares with respect to which the Option is being exercised, and such other
representations and agreements as may be required by the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised
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<PAGE> 15
Shares. This Option shall be deemed to be exercised upon receipt by the Company
of such fully executed Exercise Notice accompanied by the aggregate
No Shares shall be issued pursuant to the exercise of an Option
unless such issuance and such exercise comply with Applicable Laws. Assuming
such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
3. Optionee's Representations. In the event the Shares have not been
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
B-1.
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(d) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares;
(e) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit B-2, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit B-3. The Note shall bear interest at the "applicable federal
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<PAGE> 16
rate" prescribed under the Code and its regulations at time of purchase, and
shall be secured by a pledge of the Shares purchased by the Note pursuant to the
Security Agreement.
6. Restrictions on Exercise. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
7. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
9. Tax Consequences. Set forth below is a brief summary as of the date
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of NSO. There may be a regular federal income tax
liability upon the exercise of an NSO. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Exercised Shares on the date of
exercise over the Exercise Price. If Optionee is an Employee or a former
Employee, the Company will be required to withhold from Optionee's compensation
or collect from Optionee and pay to the applicable taxing authorities an amount
in cash equal to a percentage of this compensation income at the time of
exercise, and may refuse to honor the exercise and refuse to deliver Shares if
such withholding amounts are not delivered at the time of exercise.
(b) Exercise of ISO. If this Option qualifies as an ISO, there
will be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Exercised Shares on
the date of exercise over the Exercise Price will be treated as an adjustment to
the alternative minimum tax for federal tax purposes and may subject the
Optionee to the alternative minimum tax in the year of exercise.
(c) Exercise of ISO Following Disability. If the Optionee ceases
to be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.
(d) Disposition of Shares. In the case of an NSO, if Shares are
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for
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<PAGE> 17
federal income tax purposes. In the case of an ISO, if Shares transferred
pursuant to the Option are held for at least one year after exercise and at
least two years after the Date of Grant, any gain realized on disposition of the
Shares will also be treated as long-term capital gain for federal income tax
purposes. If Shares purchased under an ISO are disposed of within one year after
exercise or two years after the Date of Grant, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the difference between the Exercise Price of the
Exercised Shares and the lesser of (i) the Fair Market Value of the Exercised
Shares on the date of exercise, or (ii) the sale price of the Exercised Shares.
Different rules may apply if the Shares are subject to a substantial risk of
forfeiture (within the meaning of Section 83 of the Code) at the time of
purchase. Any additional gain will be taxed as capital gain, short-term
depending on the period that the ISO Shares were held.
(e) Notice of Disqualifying Disposition of ISO Shares. If the
Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
(f) Section 83(b) Election for Unvested Shares Purchased Pursuant
to Options. With respect to the exercise of an Option for unvested Shares, an
election (the "Election") may be filed by the Optionee with the Internal Revenue
Service, within 30 days of the purchase of the Shares, electing pursuant to
Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their Fair Market Value on the date of
purchase. In the case of an NSO, this will result in a recognition of taxable
income to the Optionee on the date of exercise, measured by the excess, if any,
of the Fair Market Value of the Exercised Shares, at the time the Option is
exercised over the purchase price for the Exercised Shares. Absent such an
election, taxable income will be measured and recognized by Optionee at the time
or times on which the Company's Repurchase Option lapses. In the case of an ISO,
such an election will result in a recognition of income to the Optionee for
alternative minimum tax purposes on the date of exercise, measured by the
excess, if any, of the Fair Market Value of the Exercised Shares, at the time
the Option is exercised, over the purchase price for the Exercised Shares.
Absent such an election, alternative minimum taxable income will be measured and
recognized by Optionee at the time or times on which the Company's Repurchase
Option lapses. Optionee is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing of the Election under Section 83(b) of the Code. A form
of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS
FILING ON OPTIONEE'S BEHALF.
-5-
<PAGE> 18
10. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This Option Agreement is governed by the internal substantive laws but
not the choice of law rules of California.
11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that
he or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option. Optionee
further agrees to notify the Company upon any change in the residence address
indicated below.
-6-
<PAGE> 19
OPTIONEE COSINE COMMUNICATIONS, INC.
- -------------------------- -----------------------------
Signature By
- -------------------------- -----------------------------
Print Name Title
Residence Address:
- --------------------------
- --------------------------
<PAGE> 20
EXHIBIT A
1997 STOCK PLAN
EXERCISE NOTICE
CoSine Communications, Inc.
1200 Bridge Parkway
Redwood City, CA 94065
Attention: Secretary
1. Exercise of Option. Effective as of today, ________________, ____,
the undersigned ("Optionee") hereby elects to exercise Optionee's option (the
"Option") to purchase ________________ shares of the Common Stock (the "Shares")
of CoSine Communications, Inc. (the "Company") under and pursuant to the 1997
Stock Plan (the "Plan") and the Stock Option Agreement dated (the "Option
Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price of the Shares, as set forth in the Option Agreement.
3. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance of the Shares (as evidenced
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the optioned stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. Company's Right of First Refusal. Before any Shares held by Optionee
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the
<PAGE> 21
Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
option of the Company or its assignee(s), in cash (by check), promissory note,
by cancellation of all or a portion of any outstanding indebtedness of the
Holder to the Company (or, in the case of repurchase by an assignee, to the
assignee), or by any combination thereof within 30 days after receipt of the
Notice or in the manner and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section, then the Holder
may sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Optionee's lifetime or on the Optionee's death by will
or intestacy to the Optionee's immediate family or a trust for the benefit of
the Optionee's immediate family shall be exempt from the provisions of this
Section. "Immediate Family" as used herein shall mean spouse, lineal descendant
or antecedent, father, mother, brother or sister. In such case, the transferee
or other recipient shall receive and hold the Shares so transferred subject to
the provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) Termination of Right of First Refusal. The Right of First
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
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<PAGE> 22
6. Tax Consultation. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
(a) Legends. Optionee understands and agrees that the Company
shall cause the legends set forth below or legends substantially equivalent
thereto, to be placed upon any certificate(s) evidencing ownership of the Shares
together with any other legends that may be required by the Company or by state
or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR,
IN THE OPINION OF COMPANY COUNSEL SATISFACTORY TO THE
ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER,
PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST
REFUSAL OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS
SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND
THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY
BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH
TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE
BINDING ON TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Notices. Optionee agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Exercise Notice or (ii) to treat as
owner of such Shares or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares shall have been so
transferred.
8. Successors and Assigns. The Company may assign any of its rights
under this Exercise Notice to single or multiple assignees, and the terms and
conditions of this Exercise Notice shall inure to the benefit of the successors
and assigns of the Company. Subject to the restrictions on
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<PAGE> 23
transfer herein set forth, the terms and conditions of this Exercise Notice
shall be binding upon Optionee and his or her heirs, executors, administrators,
successors and assigns.
9. Interpretation. Any dispute regarding the interpretation of this
Exercise Notice shall be submitted by Optionee or by the Company forthwith to
the Administrator which shall review such dispute at its next regular meeting.
The resolution of such a dispute by the Administrator shall be final and binding
on all parties.
10. Governing Law; Severability. This Exercise Notice is governed by the
internal substantive laws, but not the choice of law rules, of California.
11. Entire Agreement. The Plan and Option Agreement are incorporated
herein by reference. This Exercise Notice, the Plan, Option Agreement,
Investment Representation Statement, Note, Security Agreement, and Restricted
Stock Purchase Agreement constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the
subject matter hereof, and may not be modified adversely to the Optionee's
interest except by means of a writing signed by the Company and Optionee.
SUBMITTED BY: ACCEPTED BY:
OPTIONEE COSINE COMMUNICATIONS, INC.
- -------------------------- -----------------------------
Signature By
- -------------------------- -----------------------------
Print Name Its
Residence Address: Address:
1200 Bridge Parkway
Redwood City, CA 94065
- --------------------------
- --------------------------
-----------------------------
Date Received
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<PAGE> 24
EXHIBIT B-1
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
---------------------------
COMPANY: CoSine Communications, Inc.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Optionee's
investment intent as expressed herein. In this connection, Optionee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Optionee's representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future. Optionee
further understands that the Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company, and with any other legend required under applicable
state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities"
<PAGE> 25
acquired, directly or indirectly from the issuer thereof, in a non-public
offering subject to the satisfaction of certain conditions. Rule 701 provides
that if the issuer qualifies under Rule 701 at the time of the grant of the
Option to the Optionee, the exercise will be exempt from registration under the
Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
ninety (90) days thereafter (or such longer period as any market stand-off
agreement may require) the Securities exempt under Rule 701 may be resold,
subject to the satisfaction of certain of the conditions specified by Rule 144,
including: (1) the resale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934); and, in the case of
an affiliate, (2) the availability of certain public information about the
Company, (3) the amount of Securities being sold during any three month period
not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at
the time of grant of the Option, then the Securities may be resold in certain
limited circumstances subject to the provisions of Rule 144, which requires the
resale to occur not less than one year after the later of the date the
Securities were sold by the Company or the date the Securities were sold by an
affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than two years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
(d) Optionee and his or her assignees, if any, hereby agrees that if so
requested by the Company or any representative of the underwriters in connection
with any registration of the offering of any securities of the Company under the
Securities Act, Optionee (and his or her assignees, if any) shall not sell, make
short sale of, loan, grant any options for the purchase of, or otherwise
transfer any of the Securities or other securities of the Company held by the
Optionee during the 180-day period following the effective date of a
registration statement of the Company filed under the Securities Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the Securities Act which
include securities to be sold on behalf of the Company to the public in a firm
underwritten public offering under the Securities Act. Optionee and his or her
assigns, if any, further agree to execute any agreement reflecting the foregoing
as may be requested by the underwriters at the time of the public offering. The
Company may impose stop-transfer instructions with respect to any securities
subject to the foregoing restrictions until the end of such 180-day period.
(e) Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that
-2-
<PAGE> 26
such persons and their respective brokers who participate in such transactions
do so at their own risk. Optionee understands that no assurances can be given
that any such other registration exemption will be available in such event.
SIGNATURE OF OPTIONEE:
-----------------------------
Date:
------------------------
-3-
<PAGE> 27
EXHIBIT B-2
NOTE
$_______________ Redwood City, California
------------------, -----
FOR VALUE RECEIVED, _____________________ promises to pay to CoSine
Communications, Inc., a California corporation (the "Company"), or order, the
principal sum of _______________________ ($_____________), together with
interest on the unpaid principal hereof from the date hereof at the rate of
_______________ percent (____%) per annum, compounded semiannually.
Principal and interest shall be due and payable on _______________,
_____. Payment of principal and interest shall be made in lawful money of the
United States of America.
The undersigned may at any time prepay all or any portion of the
principal or interest owing hereunder.
This Note is subject to the terms of the Option, dated as of
________________. This Note is secured in part by a pledge of the Company's
Common Stock under the terms of a Security Agreement of even date herewith and
is subject to all the provisions thereof.
The holder of this Note shall have full recourse against the
undersigned, and shall not be required to proceed against the collateral
securing this Note in the event of default.
In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
--------------------------------------
--------------------------------------
<PAGE> 28
EXHIBIT B-3
SECURITY AGREEMENT
This Security Agreement is made as of __________, _____ between CoSine
Communications, Inc., a California corporation ("Pledgee"), and
_________________________ ("Pledgor").
Recitals
Pursuant to Pledgor's election to purchase Shares under the Option
Agreement dated (the "Option"), between Pledgor and Pledgee under Pledgee's 1997
Stock Plan, and Pledgor's election under the terms of the Option to pay for such
shares with his promissory note (the "Note"), Pledgor has purchased _________
shares of Pledgee's Common Stock (the "Shares") at a price of $________ per
share, for a total purchase price of $__________. The Note and the obligations
thereunder are as set forth in Exhibit B-2 to the Option.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.
The pledged stock (together with an executed blank stock assignment for
use in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
(a) Payment of Indebtedness. Pledgor will pay the principal sum
of the Note secured hereby, together with interest thereon, at the time and in
the manner provided in the Note.
(b) Encumbrances. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
<PAGE> 29
(c) Margin Regulations. In the event that Pledgee's Common Stock
is now or later becomes margin-listed by the Federal Reserve Board and Pledgee
is classified as a "lender" within the meaning of the regulations under Part 207
of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees
to cooperate with Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be
delinquent for a period of 10 days or more; or
(b) Pledgor fails to perform any of the covenants set forth in
the Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
7. Release of Collateral. Subject to any applicable contrary rules under
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial
-4-
<PAGE> 30
number of Shares pledged hereunder as the payment of principal bears to the
initial full principal amount of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment of
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
governed under the internal substantive laws, but not the choice of law rules,
of California.
-5-
<PAGE> 31
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"PLEDGOR"
------------------------------------
Signature
------------------------------------
Print Name
Address:
------------------------------------
------------------------------------
"PLEDGEE"
COSINE COMMUNICATIONS, INC.
a California corporation
------------------------------------
Signature
------------------------------------
Print Name
------------------------------------
Title
"PLEDGEHOLDER"
------------------------------------
Secretary of CoSine Communications,
Inc.
<PAGE> 32
EXHIBIT C-1
COSINE COMMUNICATIONS, INC.
1997 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made between _____________________________ (the
"Purchaser") and CoSine Communications, Inc. (the "Company") as of
__________________, ____.
Unless otherwise defined herein, the terms defined in the 1997 Stock
Plan shall have the same defined meanings in this Agreement.
RECITALS
A. Pursuant to the exercise of the option (grant number ___) granted to
Purchaser under the Plan and pursuant to the Option Agreement dated by and
between the Company and Purchaser with respect to such grant (the "Option"),
which Plan and Option Agreement are hereby incorporated by reference, Purchaser
has elected to purchase _________ of those shares of Common Stock which have not
become vested under the vesting schedule set forth in the Option Agreement
("Unvested Shares"). The Unvested Shares and the shares subject to the Option
Agreement which have become vested are sometimes collectively referred to herein
as the "Shares."
B. As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Agreement, which
sets forth the rights and obligations of the parties with respect to Shares
acquired upon exercise of the Option.
1. Repurchase Option.
(a) If Purchaser's status as a Service Provider is terminated for
any reason, including for cause, death, and Disability, the Company shall have
the right and option to purchase from Purchaser, or Purchaser's personal
representative, as the case may be, all of the Purchaser's Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the "Repurchase Option").
(b) Upon the occurrence of such termination, the Company may
exercise its Repurchase Option by delivering personally or by registered mail,
to Purchaser (or his transferee or legal representative, as the case may be),
within ninety (90) days of the termination, a notice in writing indicating the
Company's intention to exercise the Repurchase Option and setting forth a date
for closing not later than thirty (30) days from the mailing of such notice. The
closing shall take place at the Company's office. At the closing, the holder of
the certificates for the Unvested Shares being transferred shall deliver the
stock certificate or certificates evidencing the Unvested Shares, and the
Company shall deliver the purchase price therefor.
-6-
<PAGE> 33
(c) At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.
(d) If the Company does not elect to exercise the Repurchase
Option conferred above by giving the requisite notice within ninety (90) days
following the termination, the Repurchase Option shall terminate.
(e) The Repurchase Option shall terminate in accordance with the
vesting schedule contained in Optionee's Option Agreement.
2. Transferability of the Shares; Escrow.
(a) Purchaser hereby authorizes and directs the Secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.
(b) To insure the availability for delivery of Purchaser's
Unvested Shares upon repurchase by the Company pursuant to the Repurchase Option
under Section 1, Purchaser hereby appoints the Secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the Secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit C-3 hereto, until the Company
exercises its Repurchase Option, until such Unvested Shares are vested, or until
such time as this Agreement no longer is in effect. As a further condition to
the Company's obligations under this Agreement, the spouse of the Purchaser, if
any, shall execute and deliver to the Company the Consent of Spouse attached
hereto as Exhibit C-4. Upon vesting of the Unvested Shares, the escrow agent
shall promptly deliver to the Purchaser the certificate or certificates
representing such Shares in the escrow agent's possession belonging to the
Purchaser, and the escrow agent shall be discharged of all further obligations
hereunder; provided, however, that the escrow agent shall nevertheless retain
such certificate or certificates as escrow agent if so required pursuant to
other restrictions imposed pursuant to this Agreement.
(c) The Company, or its designee, shall not be liable for any act
it may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.
(d) Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any
-2-
<PAGE> 34
Unvested Shares purchased by Purchaser and shall acknowledge the same by signing
a copy of this Agreement.
3. Ownership, Voting Rights, Duties. This Agreement shall not affect in
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.
4. Legends. The share certificate evidencing the Shares issued hereunder
shall be endorsed with the following legend (in addition to any legend required
under applicable federal and state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH
IN AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY
OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
5. Adjustment for Stock Split. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company pursuant to Section 12 of the Plan after
the date of this Agreement.
6. Notices. Notices required hereunder shall be given in person or by
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.
7. Survival of Terms. This Agreement shall apply to and bind Purchaser
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.
8. Section 83(b) Election. Purchaser hereby acknowledges that he or she
has been informed that, with respect to the exercise of an Option for Unvested
Shares, an election (the "Election") may be filed by the Purchaser with the
Internal Revenue Service, within 30 days of the purchase of the exercised
Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on
any difference between the purchase price of the exercised Shares and their Fair
Market Value on the date of purchase. In the case of a Nonstatutory Stock
Option, this will result in a recognition of taxable income to the Purchaser on
the date of exercise, measured by the excess, if any, of the Fair Market Value
of the exercised Shares, at the time the Option is exercised over the purchase
price for the exercised Shares. Absent such an Election, taxable income will be
measured and recognized by Purchaser at the time or times on which the Company's
Repurchase Option lapses. In the case of an Incentive Stock Option, such an
Election will result in a recognition of income to the Purchaser for alternative
minimum tax purposes on the date of exercise, measured by the excess, if any, of
the Fair Market Value of the exercised Shares, at the time the option is
exercised, over the purchase price for the exercised Shares. Absent such an
Election, alternative minimum taxable income will be measured and recognized by
Purchaser at the time or times on which the Company's Repurchase Option lapses.
Purchaser is strongly encouraged to seek the advice of his or her own tax
consultants
-3-
<PAGE> 35
in connection with the purchase of the Shares and the advisability of filing of
the Election under Section 83(b) of the Code. A form of Election under Section
83(b) is attached hereto as Exhibit C-5 for reference.
PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY
AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b) OF THE
CODE, EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS
FILING ON PURCHASER'S BEHALF.
9. Representations. Purchaser has reviewed with his own tax advisors the
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents. Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.
10. Governing Law. This Agreement shall be governed by the internal
substantive laws, but not the choice of law rules, of California.
Purchaser represents that he has read this Agreement and is familiar
with its terms and provisions. Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.
-4-
<PAGE> 36
IN WITNESS WHEREOF, this Agreement is deemed made as of the date first
set forth above.
OPTIONEE COSINE COMMUNICATIONS, INC.
- ---------------------------------- ---------------------------------
Signature By
- ---------------------------------- ---------------------------------
Print Name Title
Residence Address:
- --------------
- --------------
Dated: ,
----------- ----
<PAGE> 37
EXHIBIT C-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign
and transfer unto CoSine Communications, Inc. ______________________
(__________) shares of the Common Stock of CoSine Communications, Inc. standing
in my name of the books of said corporation represented by Certificate No. _____
herewith and do hereby irrevocably constitute and appoint _______________ to
transfer the said stock on the books of the within named corporation with full
power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between CoSine Communications, Inc. and the undersigned
dated ______________, _____.
Dated:_______________,_____ Signature:_______________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature
line. The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE> 38
EXHIBIT C-3
JOINT ESCROW INSTRUCTIONS
-----------------, ----
Corporate Secretary
CoSine Communications, Inc.
1200 Bridge Parkway
Redwood City, CA 94065
Dear Mr. Secretary:
As Escrow Agent for both CoSine Communications, Inc. (the "Company"),
and the undersigned purchaser of stock of the Company (the "Purchaser"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement (the
"Agreement") between the Company and the undersigned, in accordance with the
following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver the stock assignments, together with the
certificate evidencing the shares of stock to be transferred, to the Company or
its assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
<PAGE> 39
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within 120 days after cessation of Purchaser's continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
-2-
<PAGE> 40
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be an officer or agent of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
16. By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of California.
-3-
<PAGE> 41
OPTIONEE COSINE COMMUNICATIONS, INC.
- ------------------------- ----------------------------
Signature By
- ------------------------- ----------------------------
Print Name Title
Residence Address:
- ---------------
- ---------------
ESCROW AGENT
- -----------------------
Corporate Secretary
Dated: ,
------------------ -----
<PAGE> 42
EXHIBIT C-4
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of granting of the right to my spouse to purchase shares of
____________________________, as set forth in the Agreement, I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under the
Agreement and agree to be bound by the provisions of the Agreement insofar as I
may have any rights in said Agreement or any shares issued pursuant thereto
under the community property laws or similar laws relating to marital property
in effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated: , Signature:
-------------- ----- -------------------------
<PAGE> 43
EXHIBIT C-5
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Sections 55 and
83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer's
gross income or alternative minimum taxable income, as the case may be, for the
current taxable year the amount of any compensation taxable to taxpayer in
connection with taxpayer's receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of
the undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: __________ shares (the "Shares") of the Common Stock of CoSine
Communications, Inc. (the "Company").
3. The date on which the property was transferred is:___________________,
______.
4. The property is subject to the following restrictions:
The Shares may not be transferred and are subject to forfeiture under
the terms of an agreement between the taxpayer and the Company. These
restrictions lapse upon the satisfaction of certain conditions contained
in such agreement.
5. The fair market value at the time of transfer, determined without regard
to any restriction other than a restriction which by its terms will
never lapse, of such property is: $_________________.
6. The amount (if any) paid for such property is: $_________________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated:_______________________, _____ _____________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated:_______________________, _____ _____________________________
Spouse of Taxpayer
<PAGE> 44
EXHIBIT 10.5
COSINE COMMUNICATIONS, INC.
1997 STOCK PLAN
STOCK OPTION AGREEMENT -- EARLY EXERCISE AND CHANGE OF CONTROL
(WITH PROMISSORY NOTE)
Unless otherwise defined herein, the terms defined in the 1997 Stock
Plan shall have the same defined meanings in this Stock Option Agreement (the
"Option Agreement"), and shall be effective as of the Date of Grant set forth
below.
I. NOTICE OF STOCK OPTION GRANT
---------------------------
---------------------------
---------------------------
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number
---------------------
Date of Grant
---------------------
Vesting Commencement Date
---------------------
Exercise Price per Share $
--------------------
Total Number of Shares Granted
---------------------
Total Exercise Price $
--------------------
Type of Option: Incentive Stock Option
-----------
Nonstatutory Stock Option
-----------
Term/Expiration Date:
---------------------
Exercise and Vesting Schedule:
This Option shall be exercisable in whole or in part, and shall vest
according to the following vesting schedule:
<PAGE> 45
25% OF THE SHARES SUBJECT TO THE OPTION SHALL VEST TWELVE MONTHS AFTER
THE VESTING COMMENCEMENT DATE, AND 1/48 OF THE SHARES SUBJECT TO THE OPTION
SHALL VEST EACH MONTH THEREAFTER, SUBJECT TO OPTIONEE'S CONTINUING TO BE A
SERVICE PROVIDER ON SUCH DATES. NOTWITHSTANDING THE ABOVE SCHEDULE, IN THE EVENT
OF A CHANGE OF CONTROL THIS OPTION MAY BE SUBJECT TO ACCELERATED VESTING AS
PROVIDED FOR IN SECTION 9 OF THIS AGREEMENT.
Termination Period:
This Option may be exercised, to the extent it is then vested, for three
months after Optionee ceases to be a Service Provider. Upon death or Disability
of the Optionee, this Option may be exercised, to the extent it is then vested,
for one year after Optionee ceases to be Service Provider. In no event shall
this Option be exercised later than the Term/Expiration Date as provided above.
II. AGREEMENT
1. Grant of Option. The Administrator of the Company hereby grants to
the Optionee named in the Notice of Grant (the "Optionee"), an option (the
"Option") to purchase the number of Shares set forth in the Notice of Grant, at
the exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock
Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option
as defined in Section 422 of the Code. Nevertheless, to the extent that it
exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated
as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option. This Option shall be exercisable during its term
in accordance with the provisions of Section 9 of the Plan as follows:
(a) Right to Exercise.
(i) Subject to subsections 2(a)(ii) and 2(a)(iii) below,
this Option shall be exercisable cumulatively according to the vesting schedule
set forth in the Notice of Grant. Alternatively, at the election of the
Optionee, this Option may be exercised in whole or in part at any time as to
Shares that have not yet vested. Vested Shares shall not be subject to the
Company's repurchase right (as set forth in the Restricted Stock Purchase
Agreement, attached hereto as Exhibit C-1).
(ii) As a condition to exercising this Option for
unvested Shares, the Optionee shall execute the Restricted Stock Purchase
Agreement.
(iii) This Option may not be exercised for a fraction of
a Share.
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<PAGE> 46
(b) Method of Exercise. This Option shall be exercisable by
delivery of an exercise notice in the form attached as Exhibit A (the "Exercise
Notice") which shall state the election to exercise the Option, the number of
Shares with respect to which the Option is being exercised, and such other
representations and agreements as may be required by the Company. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by the aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of an Option
unless such issuance and such exercise comply with Applicable Laws. Assuming
such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
3. Optionee's Representations. In the event the Shares have not been
registered under the Securities Act of 1933, as amended, at the time this Option
is exercised, the Optionee shall, if required by the Company, concurrently with
the exercise of all or any portion of this Option, deliver to the Company his or
her Investment Representation Statement in the form attached hereto as Exhibit
B-1.
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply only to the first registration
statement of the Company to become effective under the Securities Act that
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a formal
cashless exercise program adopted by the Company in connection with the Plan;
(d) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares;
-3-
<PAGE> 47
(e) with the Administrator's consent, delivery of Optionee's
promissory note (the "Note") in the form attached hereto as Exhibit B-2, in the
amount of the aggregate Exercise Price of the Exercised Shares together with the
execution and delivery by the Optionee of the Security Agreement attached hereto
as Exhibit B-3. The Note shall bear interest at the "applicable federal rate"
prescribed under the Code and its regulations at time of purchase, and shall be
secured by a pledge of the Shares purchased by the Note pursuant to the Security
Agreement.
6. Restrictions on Exercise. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any Applicable
Law.
7. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
9. Accelerated Vesting Upon Termination Following a Change of Control.
(a) If, at any time within 24 months following a Change of
Control (as defined in Section 10, below), Optionee's status as a Service
Provider with the Company or successor corporation terminates as the result of
Constructive Termination (as defined below) or for any reason other than Cause
(as defined below), the vesting and exercisability of this Option shall
accelerate in full. In such an event, this Option shall remain exercisable in
accordance with the Plan and this Option Agreement.
(b) "CONSTRUCTIVE TERMINATION" shall mean for purposes of this
Option Agreement (i) without the Optionee's express written consent, a
significant reduction of the Optionee's duties, position or responsibilities, or
the removal of the Optionee from such position and responsibilities as in effect
immediately prior to the Change of Control, unless the Optionee is provided with
a comparable position (i.e., a position of equal or greater organizational
level, duties, authority, compensation and status); (ii) without the Optionee's
express written consent, a substantial reduction, without good business reasons,
of the facilities and perquisites (including office space and location)
available to the Optionee immediately prior to the Change of Control; (iii) a
significant reduction by the Company in the base compensation of the Optionee as
in effect immediately prior to the Change of Control; (iv) without Optionee's
express written consent, a material reduction by the Company in the kind or
level of employee benefits to which the Optionee was entitled immediately prior
to the Change of Control with the result that the Optionee's overall benefits
package is significantly reduced; (v) without the express written consent of
Optionee, the relocation of the Optionee to a facility or a location more than
50 miles from the Optionee's then present location; or
-4-
<PAGE> 48
(vi) the failure of the Company to obtain the assumption of this Agreement by
any successors contemplated in Section 11(a) below.
(c) "CAUSE" shall mean for purposes of this Option Agreement (i)
continued violations by Optionee of Optionee's duties as an employee or director
of the Company which are demonstrably willful and deliberate on Optionee's part
after there has been delivered to Optionee a written demand for performance from
the Company, other than violations resulting from Optionee's complete or partial
incapacity due to physical or mental illness or impairment, (ii) a willful act
by the Optionee which constitutes gross misconduct and which is injurious to the
Company, (iii) a willful breach by the Optionee of a material provision of any
agreement between the Optionee and the Company, (iv) the Optionee's conviction
of a felony applicable to the business of the Company, which the Company's Board
of Directors reasonably believes had or will have a material detrimental effect
on the Company's reputation or business, and (v) any act of personal dishonesty
taken by the Optionee in connection with his responsibilities as an employee or
director and intended to result in substantial personal enrichment of the
Optionee.
(d) Notwithstanding the foregoing, if such vesting acceleration
provided in Section 9(a) above would cause a contemplated Change of Control
transaction that was intended to be accounted for as a "pooling-of-interests"
transaction to become ineligible for such accounting treatment under generally
accepted accounting principles, as determined by the Company's independent
accountants, or such successor accountants, prior to the Change of Control, this
Option shall not be subject to accelerated vesting as provided herein, and the
parties agree to rescind Sections 9 and 10 of this Option.
10. Definition of Change of Control. "CHANGE OF CONTROL" shall mean for
the purposes of this Agreement the occurrence of any of the following events:
(a) Any "PERSON" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) becomes the
"BENEFICIAL OWNER" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities other than in a private financing transaction approved by the
Board;
(b) The closing of a (i) merger or consolidation of the Company
with or into any other corporation or business entity, other than (x) a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, (y) a merger
affected solely for the purpose of changing the Company's domicile, or (ii)
sale, lease or disposition by the Company of all or substantially all of the
Company's assets;
(c) The approval by the shareholders of the Company of a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets; or
-5-
<PAGE> 49
(d) A change in the composition of the Board, as a result of
which fewer than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
of the date hereof, or (B) are elected, or nominated for election, to the Board
with the affirmative votes of at least a majority of those directors whose
election or nomination was not in connection with any transaction described in
subsections (a), (b) or (c) or in connection with an actual or threatened proxy
contest relating to the election of directors of the Company.
11. Successors.
(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Option Agreement and agree
expressly to perform the obligations under this Option Agreement in the same
manner and to the same extent as the Company would be required to perform such
obligations in the absence of a succession. For all purposes under this Option
Agreement, the term "COMPANY" shall include any successor to the Company's
business and/or assets which executes and delivers an assumption agreement
contemplated by this Section 11(a) or which becomes bound by the terms of this
Option Agreement by operation of law.
(b) Optionee's Successors. The terms of this Option Agreement
and all rights of the Optionee hereunder shall inure to the benefit of, and be
enforceable by, the Optionee's personal or legal representatives, executors,
administrators, successors, heirs, distributes, devisees and legatees.
12. Tax Consequences. Set forth below is a brief summary as of the date
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of NSO. There may be a regular federal income tax
liability upon the exercise of an NSO. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Exercised Shares on the date of
exercise over the Exercise Price. If Optionee is an Employee or a former
Employee, the Company will be required to withhold from Optionee's compensation
or collect from Optionee and pay to the applicable taxing authorities an amount
in cash equal to a percentage of this compensation income at the time of
exercise, and may refuse to honor the exercise and refuse to deliver Shares if
such withholding amounts are not delivered at the time of exercise.
(b) Exercise of ISO. If this Option qualifies as an ISO, there
will be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Exercised Shares on
the date of exercise over the Exercise Price will be treated as an adjustment to
the alternative minimum tax for federal tax purposes and may subject the
Optionee to the alternative minimum tax in the year of exercise.
-6-
<PAGE> 50
(c) Exercise of ISO Following Disability. If the Optionee ceases
to be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.
(d) Disposition of Shares. In the case of an NSO, if Shares are
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for federal income tax purposes. In the
case of an ISO, if Shares transferred pursuant to the Option are held for at
least one year after exercise and at least two years after the Date of Grant,
any gain realized on disposition of the Shares will also be treated as long-term
capital gain for federal income tax purposes. If Shares purchased under an ISO
are disposed of within one year after exercise or two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the difference
between the Exercise Price of the Exercised Shares and the lesser of (i) the
Fair Market Value of the Exercised Shares on the date of exercise, or (ii) the
sale price of the Exercised Shares. Different rules may apply if the Shares are
subject to a substantial risk of forfeiture (within the meaning of Section 83 of
the Code) at the time of purchase. Any additional gain will be taxed as capital
gain, short-term depending on the period that the ISO Shares were held.
(e) Notice of Disqualifying Disposition of ISO Shares. If the
Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
(f) Section 83(b) Election for Unvested Shares Purchased
Pursuant to Options. With respect to the exercise of an Option for unvested
Shares, an election (the "Election") may be filed by the Optionee with the
Internal Revenue Service, within 30 days of the purchase of the Shares, electing
pursuant to Section 83(b) of the Code to be taxed currently on any difference
between the purchase price of the Shares and their Fair Market Value on the date
of purchase. In the case of an NSO, this will result in a recognition of taxable
income to the Optionee on the date of exercise, measured by the excess, if any,
of the Fair Market Value of the Exercised Shares, at the time the Option is
exercised over the purchase price for the Exercised Shares. Absent such an
election, taxable income will be measured and recognized by Optionee at the time
or times on which the Company's Repurchase Option lapses. In the case of an ISO,
such an election will result in a recognition of income to the Optionee for
alternative minimum tax purposes on the date of exercise, measured by the
excess, if any, of the Fair Market Value of the Exercised Shares, at the time
the Option is exercised, over the purchase price for the Exercised Shares.
Absent such an election, alternative minimum taxable income will be measured and
recognized by Optionee at the time or times on which the Company's Repurchase
Option lapses. Optionee is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing of the Election under Section 83(b) of the Code. A form
of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.
-7-
<PAGE> 51
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY
AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF
OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON
OPTIONEE'S BEHALF.
13. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This Option Agreement is governed by the internal substantive laws but
not the choice of law rules of California.
14. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and
represents that he or she is familiar with the terms and provisions thereof, and
hereby accepts this Option subject to all of the terms and provisions thereof.
Optionee has reviewed the Plan and this Option in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option and
fully understands all provisions of the Option. Optionee hereby agrees to accept
as binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option. Optionee
further agrees to notify the Company upon any change in the residence address
indicated below.
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<PAGE> 52
OPTIONEE COSINE COMMUNICATIONS, INC.
- ----------------------------------- ------------------------------------
Signature By
- ----------------------------------- ------------------------------------
Print Name Title
Residence Address:
- -----------------------------------
- -----------------------------------
- -----------------------------------
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<PAGE> 53
EXHIBIT A
1997 STOCK PLAN
EXERCISE NOTICE
CoSine Communications, Inc.
1200 Bridge Parkway
Redwood City, CA 94065
Attention: Secretary
1. Exercise of Option. Effective as of today, ________________, ____,
the undersigned ("Optionee") hereby elects to exercise Optionee's option (the
"Option") to purchase ________________ shares of the Common Stock (the "Shares")
of CoSine Communications, Inc. (the "Company") under and pursuant to the 1997
Stock Plan (the "Plan") and the Stock Option Agreement dated (the "Option
Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price of the Shares, as set forth in the Option Agreement.
3. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance of the Shares (as evidenced
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the optioned stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. Company's Right of First Refusal. Before any Shares held by Optionee
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the
<PAGE> 54
Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within
thirty (30) days after receipt of the Notice, the Company and/or its assignee(s)
may, by giving written notice to the Holder, elect to purchase all, but not less
than all, of the Shares proposed to be transferred to any one or more of the
Proposed Transferees, at the purchase price determined in accordance with
subsection (c) below.
(c) Purchase Price. The purchase price ("Purchase Price") for
the Shares purchased by the Company or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the cash equivalent value of the non-cash consideration shall be
determined by the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
option of the Company or its assignee(s), in cash (by check), promissory note,
by cancellation of all or a portion of any outstanding indebtedness of the
Holder to the Company (or, in the case of repurchase by an assignee, to the
assignee), or by any combination thereof within 30 days after receipt of the
Notice or in the manner and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Company and/or its assignee(s) as provided in this Section, then the Holder
may sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Optionee's lifetime or on the Optionee's death by will
or intestacy to the Optionee's immediate family or a trust for the benefit of
the Optionee's immediate family shall be exempt from the provisions of this
Section. "Immediate Family" as used herein shall mean spouse, lineal descendant
or antecedent, father, mother, brother or sister. In such case, the transferee
or other recipient shall receive and hold the Shares so transferred subject to
the provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) Termination of Right of First Refusal. The Right of First
Refusal shall terminate as to any Shares upon the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
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<PAGE> 55
6. Tax Consultation. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
(a) Legends. Optionee understands and agrees that the Company
shall cause the legends set forth below or legends substantially equivalent
thereto, to be placed upon any certificate(s) evidencing ownership of the Shares
together with any other legends that may be required by the Company or by state
or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT")
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED
UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST
REFUSAL OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS
SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND
THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY
BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH
TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE
BINDING ON TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Notices. Optionee agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i)
to transfer on its books any Shares that have been sold or otherwise transferred
in violation of any of the provisions of this Exercise Notice or (ii) to treat
as owner of such Shares or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares shall have been so
transferred.
8. Successors and Assigns. The Company may assign any of its rights
under this Exercise Notice to single or multiple assignees, and the terms and
conditions of this Exercise Notice shall inure to the benefit of the successors
and assigns of the Company. Subject to the restrictions on
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<PAGE> 56
transfer herein set forth, the terms and conditions of this Exercise Notice
shall be binding upon Optionee and his or her heirs, executors, administrators,
successors and assigns.
9. Interpretation. Any dispute regarding the interpretation of this
Exercise Notice shall be submitted by Optionee or by the Company forthwith to
the Administrator which shall review such dispute at its next regular meeting.
The resolution of such a dispute by the Administrator shall be final and binding
on all parties.
10. Governing Law; Severability. This Exercise Notice is governed by the
internal substantive laws, but not the choice of law rules, of California.
11. Entire Agreement. The Plan and Option Agreement are incorporated
herein by reference. This Exercise Notice, the Plan, Option Agreement,
Investment Representation Statement, Note, Security Agreement, and Restricted
Stock Purchase Agreement constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the
subject matter hereof, and may not be modified adversely to the Optionee's
interest except by means of a writing signed by the Company and Optionee.
SUBMITTED BY: ACCEPTED BY:
OPTIONEE COSINE COMMUNICATIONS, INC.
- ----------------------------------- ------------------------------------
Signature By
- ----------------------------------- ------------------------------------
Print Name Its
Residence Address: Address:
- ----------------------------------- 1200 Bridge Parkway
Redwood City, CA 94065
- -----------------------------------
- -----------------------------------
------------------------------------
Date Received
-4-
<PAGE> 57
EXHIBIT B-1
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
---------------------------
COMPANY : CoSine Communications, Inc.
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Securities. Optionee
is acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, and with any other legend
required under applicable state securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and
Rule 144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted
<PAGE> 58
securities" acquired, directly or indirectly from the issuer thereof, in a
non-public offering subject to the satisfaction of certain conditions. Rule 701
provides that if the issuer qualifies under Rule 701 at the time of the grant of
the Option to the Optionee, the exercise will be exempt from registration under
the Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
ninety (90) days thereafter (or such longer period as any market stand-off
agreement may require) the Securities exempt under Rule 701 may be resold,
subject to the satisfaction of certain of the conditions specified by Rule 144,
including: (1) the resale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934); and, in the case of
an affiliate, (2) the availability of certain public information about the
Company, (3) the amount of Securities being sold during any three month period
not exceeding the limitations specified in Rule 144(e), and (4) the timely
filing of a Form 144, if applicable.
In the event that the Company does not qualify under
Rule 701 at the time of grant of the Option, then the Securities may be resold
in certain limited circumstances subject to the provisions of Rule 144, which
requires the resale to occur not less than one year after the later of the date
the Securities were sold by the Company or the date the Securities were sold by
an affiliate of the Company, within the meaning of Rule 144; and, in the case of
acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than two years, the satisfaction of the
conditions set forth in sections (1), (2), (3) and (4) of the paragraph
immediately above.
(d) Optionee and his or her assignees, if any, hereby agrees
that if so requested by the Company or any representative of the underwriters in
connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee (and his or her assignees, if any)
shall not sell, make short sale of, loan, grant any options for the purchase of,
or otherwise transfer any of the Securities or other securities of the Company
held by the Optionee during the 180-day period following the effective date of a
registration statement of the Company filed under the Securities Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the Securities Act which
include securities to be sold on behalf of the Company to the public in a firm
underwritten public offering under the Securities Act. Optionee and his or her
assigns, if any, further agree to execute any agreement reflecting the foregoing
as may be requested by the underwriters at the time of the public offering. The
Company may impose stop-transfer instructions with respect to any securities
subject to the foregoing restrictions until the end of such 180-day period.
(e) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such
-2-
<PAGE> 59
offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk. Optionee understands
that no assurances can be given that any such other registration exemption will
be available in such event.
SIGNATURE OF OPTIONEE:
------------------------------------
Date:
-------------------------------
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<PAGE> 60
EXHIBIT B-2
NOTE
$_______________ Redwood City, California
__________________, _____
FOR VALUE RECEIVED, _____________________ promises to pay to CoSine
Communications, Inc., a California corporation (the "Company"), or order, the
principal sum of _______________________ ($_____________), together with
interest on the unpaid principal hereof from the date hereof at the rate of
_______________ percent (____%) per annum, compounded semiannually.
Principal and interest shall be due and payable on _______________, _____.
Payment of principal and interest shall be made in lawful money of the United
States of America.
The undersigned may at any time prepay all or any portion of the principal or
interest owing hereunder.
This Note is subject to the terms of the Option, dated as of ________________.
This Note is secured in part by a pledge of the Company's Common Stock under the
terms of a Security Agreement of even date herewith and is subject to all the
provisions thereof.
The holder of this Note shall have full recourse against the undersigned, and
shall not be required to proceed against the collateral securing this Note in
the event of default.
In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.
Should any action be instituted for the collection of this Note, the reasonable
costs and attorneys' fees therein of the holder shall be paid by the
undersigned.
____________________________________
____________________________________
<PAGE> 61
EXHIBIT B-3
SECURITY AGREEMENT
This Security Agreement is made as of __________, _____ between CoSine
Communications, Inc., a California corporation ("Pledgee"), and ("Pledgor").
Recitals
Pursuant to Pledgor's election to purchase Shares under the Option Agreement
dated (the "Option"), between Pledgor and Pledgee under Pledgee's 1997 Stock
Plan, and Pledgor's election under the terms of the Option to pay for such
shares with his promissory note (the "Note"), Pledgor has purchased _________
shares of Pledgee's Common Stock (the "Shares") at a price of $________ per
share, for a total purchase price of $__________. The Note and the obligations
thereunder are as set forth in Exhibit B-2 to the Option.
NOW, THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In consideration of
the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number ______, duly endorsed in blank or with executed stock powers, and
herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"),
who shall hold said certificate subject to the terms and conditions of this
Security Agreement.
The pledged stock (together with an executed blank stock assignment for
use in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.
2. Pledgor's Representations and Covenants. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
(a) Payment of Indebtedness. Pledgor will pay the principal sum
of the Note secured hereby, together with interest thereon, at the time and in
the manner provided in the Note.
(b) Encumbrances. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.
-2-
<PAGE> 62
(c) Margin Regulations. In the event that Pledgee's Common Stock
is now or later becomes margin-listed by the Federal Reserve Board and Pledgee
is classified as a "lender" within the meaning of the regulations under Part 207
of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees
to cooperate with Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. Stock Adjustments. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.
5. Options and Rights. In the event that, during the term of this
pledge, subscription Options or other rights or options shall be issued in
connection with the pledged Shares, such rights, Options and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. Default. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be
delinquent for a period of 10 days or more; or
(b) Pledgor fails to perform any of the covenants set forth in
the Option or contained in this Security Agreement for a period of 10 days after
written notice thereof from Pledgee.
In the case of an event of Default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the California
Commercial Code.
7. Release of Collateral. Subject to any applicable contrary rules under
Regulation G, there shall be released from this pledge a portion of the pledged
Shares held by Pledgeholder hereunder upon payments of the principal of the
Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial
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<PAGE> 63
number of Shares pledged hereunder as the payment of principal bears to the
initial full principal amount of the Note.
8. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. Term. The within pledge of Shares shall continue until the payment of
all indebtedness secured hereby, at which time the remaining pledged stock shall
be promptly delivered to Pledgor, subject to the provisions for prior release of
a portion of the Collateral as provided in paragraph 7 above.
10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.
11. Pledgeholder Liability. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.
12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.
13. Successors or Assigns. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein
shall be deemed to include, for all purposes, the respective designees,
successors, assigns, heirs, executors and administrators.
14. Governing Law. This Security Agreement shall be interpreted and
governed under the internal substantive laws, but not the choice of law rules,
of California.
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<PAGE> 64
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
"PLEDGOR"
----------------------------------------
Signature
----------------------------------------
Print Name
Address:
--------------------------------
--------------------------------
--------------------------------
"PLEDGEE"
COSINE COMMUNICATIONS, INC.
a California corporation
----------------------------------------
Signature
----------------------------------------
Print Name
----------------------------------------
Title
"PLEDGEHOLDER"
----------------------------------------
Secretary of CoSine Communications, Inc.
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<PAGE> 65
EXHIBIT C-1
COSINE COMMUNICATIONS, INC.
1997 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made between _____________________________ (the
"Purchaser") and CoSine Communications, Inc. (the "Company") as of
__________________, ____.
Unless otherwise defined herein, the terms defined in the 1997 Stock
Plan shall have the same defined meanings in this Agreement.
RECITALS
A. Pursuant to the exercise of the option (grant number ___) granted to
Purchaser under the Plan and pursuant to the Option Agreement dated by and
between the Company and Purchaser with respect to such grant (the "Option"),
which Plan and Option Agreement are hereby incorporated by reference, Purchaser
has elected to purchase _________ of those shares of Common Stock which have not
become vested under the vesting schedule set forth in the Option Agreement
("Unvested Shares"). The Unvested Shares and the shares subject to the Option
Agreement which have become vested are sometimes collectively referred to herein
as the "Shares."
B. As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Agreement, which
sets forth the rights and obligations of the parties with respect to Shares
acquired upon exercise of the Option.
1. Repurchase Option.
(a) If Purchaser's status as a Service Provider is terminated
for any reason, including for cause, death, and Disability, the Company shall
have the right and option to purchase from Purchaser, or Purchaser's personal
representative, as the case may be, all of the Purchaser's Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the "Repurchase Option").
(b) Upon the occurrence of such termination, the Company may
exercise its Repurchase Option by delivering personally or by registered mail,
to Purchaser (or his transferee or legal representative, as the case may be),
within ninety (90) days of the termination, a notice in writing indicating the
Company's intention to exercise the Repurchase Option and setting forth a date
for closing not later than thirty (30) days from the mailing of such notice. The
closing shall take place at the Company's office. At the closing, the holder of
the certificates for the Unvested Shares being transferred shall deliver the
stock certificate or certificates evidencing the Unvested Shares, and the
Company shall deliver the purchase price therefor.
<PAGE> 66
(c) At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.
(d) If the Company does not elect to exercise the Repurchase
Option conferred above by giving the requisite notice within ninety (90) days
following the termination, the Repurchase Option shall terminate.
(e) The Repurchase Option shall terminate in accordance with the
vesting schedule contained in Optionee's Option Agreement.
2. Transferability of the Shares; Escrow.
(a) Purchaser hereby authorizes and directs the Secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.
(b) To insure the availability for delivery of Purchaser's
Unvested Shares upon repurchase by the Company pursuant to the Repurchase Option
under Section 1, Purchaser hereby appoints the Secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the Secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit C-3 hereto, until the Company
exercises its Repurchase Option, until such Unvested Shares are vested, or until
such time as this Agreement no longer is in effect. As a further condition to
the Company's obligations under this Agreement, the spouse of the Purchaser, if
any, shall execute and deliver to the Company the Consent of Spouse attached
hereto as Exhibit C-4. Upon vesting of the Unvested Shares, the escrow agent
shall promptly deliver to the Purchaser the certificate or certificates
representing such Shares in the escrow agent's possession belonging to the
Purchaser, and the escrow agent shall be discharged of all further obligations
hereunder; provided, however, that the escrow agent shall nevertheless retain
such certificate or certificates as escrow agent if so required pursuant to
other restrictions imposed pursuant to this Agreement.
(c) The Company, or its designee, shall not be liable for any
act it may do or omit to do with respect to holding the Shares in escrow and
while acting in good faith and in the exercise of its judgment.
(d) Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any
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<PAGE> 67
Unvested Shares purchased by Purchaser and shall acknowledge the same by signing
a copy of this Agreement.
3. Ownership, Voting Rights, Duties. This Agreement shall not affect in
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.
4. Legends. The share certificate evidencing the Shares issued hereunder
shall be endorsed with the following legend (in addition to any legend required
under applicable federal and state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS
SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE
STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF
THE COMPANY.
5. Adjustment for Stock Split. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company pursuant to Section 12 of the Plan after
the date of this Agreement.
6. Notices. Notices required hereunder shall be given in person or by
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.
7. Survival of Terms. This Agreement shall apply to and bind Purchaser
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.
8. Section 83(b) Election. Purchaser hereby acknowledges that he or she
has been informed that, with respect to the exercise of an Option for Unvested
Shares, an election (the "Election") may be filed by the Purchaser with the
Internal Revenue Service, within 30 days of the purchase of the exercised
Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on
any difference between the purchase price of the exercised Shares and their Fair
Market Value on the date of purchase. In the case of a Nonstatutory Stock
Option, this will result in a recognition of taxable income to the Purchaser on
the date of exercise, measured by the excess, if any, of the Fair Market Value
of the exercised Shares, at the time the Option is exercised over the purchase
price for the exercised Shares. Absent such an Election, taxable income will be
measured and recognized by Purchaser at the time or times on which the Company's
Repurchase Option lapses. In the case of an Incentive Stock Option, such an
Election will result in a recognition of income to the Purchaser for alternative
minimum tax purposes on the date of exercise, measured by the excess, if any, of
the Fair Market Value of the exercised Shares, at the time the option is
exercised, over the purchase price for the exercised Shares. Absent such an
Election, alternative minimum taxable income will be measured and recognized by
Purchaser at the time or times on which the Company's Repurchase Option lapses.
Purchaser is strongly encouraged to seek the advice of his or her own tax
consultants in connection
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<PAGE> 68
with the purchase of the Shares and the advisability of filing of the Election
under Section 83(b) of the Code. A form of Election under Section 83(b) is
attached hereto as Exhibit C-5 for reference.
PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b) OF THE CODE, EVEN IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE
TO MAKE THIS FILING ON PURCHASER'S BEHALF.
9. Representations. Purchaser has reviewed with his own tax advisors the
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on such
advisors and not on any statements or representations of the Company or any of
its agents. Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.
10. Governing Law. This Agreement shall be governed by the internal
substantive laws, but not the choice of law rules, of California.
Purchaser represents that he has read this Agreement and is familiar
with its terms and provisions. Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.
-4-
<PAGE> 69
IN WITNESS WHEREOF, this Agreement is deemed made as of the date first
set forth above.
OPTIONEE COSINE COMMUNICATIONS, INC.
- ----------------------------------- ------------------------------------
Signature By
- ----------------------------------- ------------------------------------
Print Name Title
Residence Address:
- -----------------------------------
- -----------------------------------
- -----------------------------------
Dated: ____________________, ______
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<PAGE> 70
EXHIBIT C-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign
and transfer unto CoSine Communications, Inc. ______________________
(__________) shares of the Common Stock of CoSine Communications, Inc. standing
in my name of the books of said corporation represented by Certificate No. _____
herewith and do hereby irrevocably constitute and appoint _______________ to
transfer the said stock on the books of the within named corporation with full
power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between CoSine Communications, Inc. and the undersigned
dated______________, _____.
Dated: _______________, ____ Signature:
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE> 71
EXHIBIT C-3
JOINT ESCROW INSTRUCTIONS
-----------------, ----
Corporate Secretary
CoSine Communications, Inc.
1200 Bridge Parkway
Redwood City, CA 94065
Dear Mr. Secretary:
As Escrow Agent for both CoSine Communications, Inc. (the "Company"),
and the undersigned purchaser of stock of the Company (the "Purchaser"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement (the
"Agreement") between the Company and the undersigned, in accordance with the
following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver the stock assignments, together with the
certificate evidencing the shares of stock to be transferred, to the Company or
its assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
<PAGE> 72
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within 120 days after cessation of Purchaser's continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case you obey or comply with any such order, judgment or decree, you shall not
be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
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<PAGE> 73
12. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be an officer or agent of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
16. By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of California.
OPTIONEE COSINE COMMUNICATIONS, INC.
- ----------------------------------- ------------------------------------
Signature By
- ----------------------------------- ------------------------------------
Print Name Title
Residence Address:
- -----------------------------------
- -----------------------------------
- -----------------------------------
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<PAGE> 74
ESCROW AGENT
- -----------------------------------
Corporate Secretary
Dated: ______________________,_____
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<PAGE> 75
EXHIBIT C-4
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of granting of the right to my spouse to purchase shares of
____________________________, as set forth in the Agreement, I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under the
Agreement and agree to be bound by the provisions of the Agreement insofar as I
may have any rights in said Agreement or any shares issued pursuant thereto
under the community property laws or similar laws relating to marital property
in effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated: ___________________,_____ Signature:
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<PAGE> 76
EXHIBIT C-5
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
or alternative minimum taxable income, as the case may be, for the current
taxable year the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: __________ shares (the "Shares") of the Common Stock of CoSine
Communications, Inc. (the "Company").
3. The date on which the property was transferred is:___________________
,______.
4. The property is subject to the following restrictions:
The Shares may not be transferred and are subject to forfeiture under the
terms of an agreement between the taxpayer and the Company. These restrictions
lapse upon the satisfaction of certain conditions contained in such agreement.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never lapse,
of such property is: $_________________.
6. The amount (if any) paid for such property is: $_________________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated: ______________________, _____ ____________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: _____________________, ______ ____________________________________
Spouse of Taxpayer
]
<PAGE> 1
EXHIBIT 10.6
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COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 - GENERAL; DEFINITIONS...................................................1
1.1 Amendment; Waiver of Prior Rights...................................1
1.2 Definitions.........................................................2
1.3 Other Definitions...................................................5
SECTION 2 - REGISTRATION RIGHTS....................................................5
2.1 Request for Registration............................................5
2.2 Company Registration................................................8
2.3 Form S-3 Registration..............................................10
2.4 Obligations of the Company.........................................11
2.5 Furnish Information................................................12
2.6 Delay of Registration..............................................12
2.7 Indemnification....................................................12
2.8 Reports Under Securities Exchange Act of 1934......................15
2.9 Limitations on Subsequent Registration Rights......................16
2.10 "Market Stand-Off" Agreement.......................................16
SECTION 3 - COVENANTS OF THE COMPANY..............................................17
3.1 Basic Financial Information........................................17
3.2 Additional Information.............................................17
3.3 Venture Capital Operating Company..................................17
3.4 Board of Directors.................................................18
3.5 Notice.............................................................18
3.6 Confidential Information...........................................18
3.7 Observer Rights....................................................19
3.8 Liquidation Event Notice...........................................
3.9 Termination of Covenants...........................................20
3.10 Waiver.............................................................20
SECTION 4 - RIGHT OF FIRST REFUSAL................................................20
4.1 First Refusal Notice...............................................20
4.2 Company's Option...................................................20
4.3 Investors' and Founders' Option....................................21
4.4 Transfer of Sale Shares............................................21
4.5 Transfers Void.....................................................21
4.6 Exempt Transfers...................................................22
4.7 Termination of Restrictions........................................22
4.8 Waiver.............................................................22
SECTION 5 - RIGHT OF FIRST REFUSAL TO SUBSCRIBE FOR NEW ISSUANCES.................22
5.1 Grant of Right of First Refusal....................................22
5.2 First Offer Notice.................................................22
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
5.3 Investor/Founder Election..........................................23
5.4 Company Sale to Third Parties......................................23
5.5 Definition of New Securities.......................................23
5.6 Limitation and Apportionment.......................................24
5.7 Termination of Right of First Offer................................24
5.8 Waiver.............................................................24
SECTION 6 - CO-SALE..............................................................24
6.1 Co-Sale Notice.....................................................24
6.2 Investors' Exercise of Co-Sale Right...............................24
6.3 Mechanics of Co-Sale...............................................25
6.4 Sale of Co-Sale Shares to Third Party..............................25
6.5 Exempt Transfers...................................................26
6.6 Prohibited Transfers...............................................26
6.7 Termination of Co-Sale Rights......................................27
6.8 Waiver.............................................................27
SECTION 7 - TRANSFER RESTRICTIONS................................................27
7.1 Restrictions on Transferability....................................27
7.2 Restrictive Legend.................................................27
7.3 Notice of Proposed Transfers.......................................28
7.4 Public Sale........................................................28
SECTION 8 - VOTING AGREEMENT......................................................29
8.1 Definition.........................................................29
8.2 Agreement to Vote..................................................29
8.3 Board of Directors.................................................29
8.4 No Revocation......................................................29
8.5 Stock Splits, Stock Dividends, etc.................................29
8.6 Waivers............................................................29
8.7 Termination........................................................30
SECTION 9 - MISCELLANEOUS.........................................................30
9.1 Successors and Assigns.............................................30
9.2 Governing Law......................................................30
9.3 Counterparts.......................................................30
9.4 Titles and Subtitles...............................................30
9.5 Notices............................................................30
9.6 Expenses...........................................................30
9.7 Amendments and Waivers.............................................30
9.8 Severability.......................................................31
9.9 Aggregation of Stock...............................................31
9.10 Entire Agreement...................................................31
9.11 Assignment of Rights...............................................32
</TABLE>
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<PAGE> 4
THIRD AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS AGREEMENT (this "AGREEMENT") made as of April __, 2000, by and
among CoSine Communications, Inc. (the "COMPANY"), the holders of Series E
Preferred Stock listed on SCHEDULE A attached hereto (the "SERIES E INVESTORS"),
the holders of Series D Preferred Stock listed on SCHEDULE A attached hereto
(the "SERIES D INVESTORS"), the holders of Series C Preferred Stock listed on
SCHEDULE A attached hereto (the "SERIES C INVESTORS") the holders of Series B
Preferred Stock listed on SCHEDULE A attached hereto (the "SERIES B INVESTORS"),
and the holders of Series A Preferred Stock listed on SCHEDULE A attached hereto
(the "SERIES A INVESTORS") (Series E Investors, Series D Investors, Series C
Investors, Series B Investors and Series A Investors are each individually
referred to as an "INVESTOR" and they are collectively referred to as, the
"INVESTORS"), and Dean Hamilton, Lianghwa Jou, and Larry Plummer (who are each
individually referred to herein as a "FOUNDER" and collectively as the
"FOUNDERS"), and the holders of other securities of the Company, who have
registration or other rights with respect to such securities, or the securities
of the Company issuable upon exercise or conversion thereof (the "ADDITIONAL
RIGHTS HOLDERS"), listed on SCHEDULE A attached hereto.
BACKGROUND
Each of the Investors, the Founders, and the Additional Rights Holders
owns (i) that number of outstanding shares of the Company's Common Stock, Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and/or Series E Preferred Stock (collectively, the "EQUITY
SECURITIES") and (ii) such warrants and/or options with respect to the Equity
Securities, in each case, as is set forth opposite his, her, or its name on
SCHEDULE A hereto. The Company, the Investors, the Founders, and the Additional
Rights Holders have reached an understanding concerning various aspects of their
business relationship with each other and the organization and operation of the
Company and its business. This Agreement sets forth the parties' understanding
and amends and restates in its entirety that certain Second Amended and Restated
Investors' Rights Agreement, dated September 17, 1999, by and among the Company
and the parties thereto (the "Second Amended and Restated Investors' Rights
Agreement").
AGREEMENT
In consideration of the mutual promises and covenants set forth herein
the parties hereto agree as follows:
SECTION 1 - GENERAL; DEFINITIONS
1.1 Amendment; Waiver of Prior Rights.
(a) Upon execution of this Agreement by the Company and Founders
and Investors (as such terms are defined in the Second Amended and Restated
Investors' Rights Agreement) holding a majority of the outstanding shares of
Common Stock held by the Founders and of
<PAGE> 5
Preferred Stock (on an as-converted basis), the Second Amended and Restated
Investors' Rights Agreement shall be amended and restated as set forth herein.
If a Series E Investor shall also be a Series A Investor, Series B Investor,
Series C Investor or Series D Investor, or an Affiliate of either, the execution
by such Series E Investor of the Purchase Agreement (as defined in Section 5.5
hereof) shall constitute execution of this Agreement in its capacity as a Series
A Investor, Series B Investor, Series C Investor or Series D Investor, or an
Affiliate of either, as the case may be, and the number of shares of Common
Stock and Preferred Stock (voting on an as-if-converted basis) held by such
Investor shall be counted toward the aforementioned majority.
(b) All rights relating to the registration or qualification of
the Company's securities, under the Securities Act of 1933, as amended (the
"1933 ACT"), or other applicable state and federal securities laws that certain
Additional Rights Holders previously had under any existing warrant, stock
option, or other security or agreement (other than this Agreement) were
terminated upon the execution of the Amended and Restated Investors' Rights
Agreement by the Company and such Additional Rights Holders.
(c) Upon execution of this Agreement by a party to the Second
Amended and Restated Investors' Rights Agreement, such party hereby waives the
Right of First Refusal pursuant to Section 5 of the Second Amended and Restated
Investors' Rights Agreement with regard to the issuance by the Company of its
Series E Preferred Stock. Upon execution of this Agreement by a majority of the
outstanding shares of Common Stock and Preferred Stock (voting on an
as-if-converted basis) held by the Founders and Investors, as such terms were
defined in the Second Amended and Restated Investors' Rights Agreement, entitled
to the Right of First Refusal pursuant to Section 5 of the Second Amended and
Restated Investors' Rights Agreement, such Right of First Refusal with regard to
the issuance by the Company of its Series E Preferred Stock shall be deemed
waived as to all Investors and Founders.
(d) Each party hereto acknowledges that each of Dean Hamilton,
Lianghwa Jou and Donald Green has transferred as permitted by Section 4.6 of the
Second Amended and Restated Investors' Rights Agreement certain shares of Common
Stock held by him. Each party hereto hereby waives the prior notice of such
transfers provided for in such Section. Each party hereto acknowledges that C.J.
Overseas, Ltd. has transferred shares of Series A Preferred Stock to Falcon
Capital, LLC. Each party hereto hereby waives any right of prior notice of such
transfer afforded such party.
1.2 Definitions. For purposes of this Agreement:
"ADDITIONAL REGISTRABLE SECURITIES" means (i) the Common Stock issuable
or issued upon conversion or exercise of any warrant, option, right or other
security of the Company and owned of record by the Additional Rights Holders on
the date hereof, and (ii) any Common Stock or other common stock issued (or
issuable upon the conversion or exercise of any warrant, option, right or other
security which is issued) with respect to the securities referred to in clause
(i) by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization, and (iii) any other shares of Common Stock held by or issuable
upon conversion or exercise of other securities held by persons holding
securities described in clauses (i) or (ii) above; provided, however, that
Additional Registrable Securities shall not include any (a) shares of Common
Stock which have previously been registered, (b) shares of Common Stock which
have previously been sold to the public, (c) shares of Common Stock which
-2-
<PAGE> 6
would otherwise be Additional Registrable Securities held by a Holder who is
then permitted to sell all of such securities within any three (3) month period
following the Company's initial public offering pursuant to Rule 144 if such
securities then held by such Holder constitute less than one percent of the
Company's outstanding equity securities, or (d) shares of Common Stock which
would otherwise be Additional Registrable Securities that have been sold in a
private transaction in which the transferor's rights under this Agreement are
not assigned pursuant to Section 9.11 hereof.
"AFFILIATE" means, with respect to any person, any other person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with such person. James Stableford,
Anthony Ciulla, Ralph H. Cechettini 1995 Trust, Pivotal Partners, L.P., William
Slattery, Marc Weiss, Dan Chapey, Matthew O. Fitzmaurice, Vertex Capital II LLC
and ATGF II, and their respective Permitted Transferees, shall be deemed to be
Affiliates of each other for the purposes of this Agreement.
"BOARD" means the board of directors of the Company.
"CHANGE OF CONTROL TRANSACTION" means any merger or consolidation of the
Company with or into another entity in which the Company's shareholders of
record, as constituted immediately prior to such transaction, hold fifty percent
(50%) or less of the voting power of the surviving entity.
"COMMON STOCK" means shares of the Company's common stock.
"CO-SALE SHARES" shall mean shares of the Common Stock now owned or
subsequently acquired by the Founders.
"DESIGNATED SHAREHOLDER" means any officer, director, Founder or holder
of two percent (2%) or more of the Company's outstanding Common Stock and
Preferred Stock, on an as if converted basis, and who is a party to this
Agreement or has otherwise agreed in writing to be bound by and to comply with
all applicable provisions of Section 4 of this Agreement.
"FORM S-3" means such form under the 1933 Act as is in effect on the
date hereof or any registration form under the 1933 Act subsequently adopted by
the SEC which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
"FOUNDER REGISTRABLE SECURITIES" means (i) shares of Common Stock owned
of record by the Founders on the date hereof, (ii) any shares of Common Stock or
other common stock issued or issuable with respect to the securities referred to
in clause (i) above by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization and (iii) any other shares of Common Stock held by persons
holding securities described in clauses (i) or (ii) above; provided, however,
that Founder Registrable Securities shall not include any (a) shares of Common
Stock which have previously been registered, (b) shares of Common Stock which
have previously been sold to the public, or (c) securities which would otherwise
be Founder Registrable Securities held by a Holder who is then permitted to sell
all of such securities within any three (3) month period following the Company's
initial public offering
-3-
<PAGE> 7
pursuant to Rule 144 if such securities then held by such Holder constitute less
than one percent of the Company's outstanding equity securities, or (d) shares
of Common Stock which would otherwise be Founder Registrable Securities that
have been sold in a private transaction in which the transferor's rights under
this Agreement are not assigned pursuant to Section 9.11 hereof.
"HOLDER" means any person owning or having the right to acquire
Registrable Securities.
"INVESTOR REGISTRABLE SECURITIES" means (i) the Common Stock issuable or
issued upon conversion of the Preferred Stock owned of record by any Investor as
of the date such Investor executes this Agreement, and (ii) any Common Stock or
other common stock issued (or issuable upon the conversion or exercise of any
warrant, option, right or other security which is issued) with respect to the
securities referred to in clause (i) by way of a stock dividend or stock split
or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization, and (iii) any other shares of Common
Stock held by or issuable upon conversion or exercise of other securities held
by persons holding securities described in clauses (i) or (ii) above; provided,
however, that Investor Registrable Securities shall not include any (a) shares
of Common Stock which have previously been registered, (b) shares of Common
Stock which have previously been sold to the public, (c) shares of Common Stock
which would otherwise be Investor Registrable Securities held by a Holder who is
then permitted to sell all of such securities within any three (3) month period
following the Company's initial public offering pursuant to Rule 144 if such
securities then held by such Holder constitute less than one percent of the
Company's outstanding equity securities, or (d) shares of Common Stock which
would otherwise be Investor Registrable Securities that have been sold in a
private transaction in which the transferor's rights under this Agreement are
not assigned pursuant to Section 9.11 hereof.
"1934 ACT" means the Securities Exchange Act of 1934, as amended.
"PERMITTED TRANSFER" means any transfer of the Company's securities (i)
to an Affiliate company in the case of a transferor that is a corporation, (ii)
to any of its general or limited partners or any Affiliate thereof in the case
of a transferor that is a partnership, (iii) to its members or any Affiliates
thereof in the case of a transferor that is a limited liability company, and
(iv) in the case of a transferor that is an individual, to any spouse (or
ex-spouse), or to any parents, brothers, sisters, children (natural or adopted),
stepchildren or grandchildren of such individual or his or her spouse, or to a
trust for any of their benefit or for the benefit of the transferor, or any
transfer not involving a change in the beneficial ownership of the Company's
securities (each, a "PERMITTED TRANSFEREE"); provided, that, prior to such
transfer, such Permitted Transferee shall agree in writing to be bound by the
terms and conditions of this Agreement.
"PREFERRED STOCK" means all shares of the Company's Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock outstanding as of the date in question.
"QUALIFIED PUBLIC OFFERING" means the first firmly underwritten public
offering of the Company's Common Stock
-4-
<PAGE> 8
pursuant to a registration statement (other than a registration statement
relating either to the sale of securities to employees or consultants of the
Company pursuant to a stock option, stock purchase or similar plan or a SEC Rule
145 transaction) under the 1933 Act in which the per share price is not less
than $7.00 (adjusted to reflect subsequent stock dividends, stock splits or
recapitalizations) and the aggregate offering price is $15,000,000 or more;
provided that immediately after such sale the Company's Common Stock will be
listed on the Nasdaq National Market System or a national exchange.
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement or similar document in
compliance with the 1933 Act, and the declaration or ordering of effectiveness
of such registration statement or document.
"REGISTRABLE SECURITIES" shall mean, collectively, the Investor
Registrable Securities, the Founder Registrable Securities, and the Additional
Registrable Securities.
"SALE SHARES" means securities of the Company that a Designated
Shareholder desires to transfer and which have been identified in a First
Refusal Notice delivered under Section 4.1 hereof
"SEC" shall mean the Securities and Exchange Commission.
"VENTURE INVESTOR" means any of Lucent Venture Partners Inc., Worldview
Technology Partners I, L.P., Worldview Technology International I, L.P.,
Worldview Strategic Partners I, L.P., TCV III (Q), L.P., Charter Growth Capital,
L.P. and Bell Canada.
1.3 Other Definitions. Other terms not defined in Section 1.2 above shall
have the meanings assigned to them elsewhere in this Agreement.
SECTION 2 - REGISTRATION RIGHTS
2.1 Request for Registration.
(a) If the Company shall receive, at any time after the earlier
of (A) the third anniversary of the date hereof, or (B) 180 days after the
completion of any Qualified Public Offering, written request from the Holders of
at least 50% of the Investor Registrable Securities (the "INVESTOR INITIATING
HOLDERS") that the Company file a registration statement under the 1933 Act, the
Company shall, provided that in the case of clause (A) above such registration
statement shall contain a per share offering price of not less than $5.00
(adjusted to reflect subsequent stock
-5-
<PAGE> 9
dividends, stock splits or recapitalizations) and shall cover at least that
number of Registrable Securities that would result in an aggregate offering of
at least $15,000,000:
(i) promptly give written notice of such request to
all other Holders; and
(ii) as soon as practicable, use all commercially
reasonable efforts to prepare and file a registration statement with the SEC and
applicable state regulatory authorities, providing, subject to the limitations
of subsection 2.1(b), for the registration under the 1933 Act of (x) all
Registrable Securities that the Holders request to be registered within fifteen
(15) days of the date the notice required by Section 2.1(a)(i) was given to the
Holders and (y) such additional securities as the Company may desire to
register, including, but not limited to, securities of the Company which are
held by officers or directors of the Company or which are held by persons who,
by virtue of agreements with the Company, are entitled to include their
securities in any such registration.
(b) If the Investor Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
subsection 2.1(a) and the Company shall include such information in the written
notice referred to in subsection 2.1(a)(i). The underwriter will be selected by
the Company and shall be reasonably acceptable to a majority in interest of the
Investor Initiating Holders. In such event, the right of any Holder to include
his Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. If
officers or directors of the Company shall request inclusion of securities of
the Company other than Registrable Securities in any registration pursuant to
this Section 2.1, or if holders of securities of the Company who are entitled by
contract with the Company to have securities included in such a registration
(such officers, directors, and other shareholders being collectively referred to
as the "OTHER SHAREHOLDERS") request such inclusion, such securities of the
Other Shareholders may be included in the underwriting, provided that such Other
Shareholders accept the further applicable provisions of this Agreement. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall (together with the Company as provided in subsection 2.4(e))
enter into an underwriting agreement in customary form with the underwriter
selected for such underwriting. Notwithstanding any other provision of this
Section 2.1, if the underwriter advises the Company in writing (with a copy to
the Investor Initiating Holders) that marketing factors require a limitation of
the number of shares to be underwritten, then the Company shall so advise all
Holders of Registrable Securities which would otherwise be underwritten pursuant
hereto, and the number of shares of securities that are entitled to be included
in the registration and underwriting shall be allocated in the following
priority:
(i) first, the Investor Registrable Securities and
Additional Registrable Securities requested to be included in such registration
(pro rata among the Holders of such Investor Registrable Securities and
Additional Registrable Securities on the basis of the number of Investor
Registrable Securities and Additional Registrable Securities then held by each
such Holder);
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(ii) second, Founder Registrable Securities requested
to be included in such registration, (pro rata among the Holders on the basis of
the number of Founder Registrable Securities then held by each such Holder); and
(iii) third, among all Other Shareholders in
proportion, as nearly as practicable, to the amounts of securities which they
had requested to be included in such registration at the time of filing the
registration statement.
If any Holder of Registrable Securities or Other Shareholder disapproves
of the terms of any such underwriting, such person may elect to withdraw
therefrom by written notice to the Company and the underwriter. Any Investor
Registrable Securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration. If the underwriter has not limited the number
of Investor Registrable Securities or other securities to be underwritten, the
Company may include its securities for its own account in such registration if
the underwriter so agrees and if the number of Investor Registrable Securities
and other securities which would otherwise have been included in such
registration and underwriting will not thereby be limited. To facilitate the
allocation of shares in accordance with the above provisions, the Company or the
Underwriter may round the number of shares allocated to any holder to the
nearest one hundred (100) shares.
(c) Notwithstanding the foregoing, if the Company shall furnish
to the Investor Initiating Holders a certificate signed by the Chief Executive
Officer of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its shareholders for such registration to be filed on or before the time filing
would be required or to become effective, the Company shall have the right to
defer taking action with respect to such registration for a period of not more
than one hundred twenty (120) days after receipt of the request of the Investor
Initiating Holders; provided, however, that the Company may not utilize this
right more than once in any twelve-month period.
(d) In addition, the Company shall not be obligated to file or
effect, or to take any action to file or effect, any registration pursuant to
this Section 2.1:
(i) In any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the 1933 Act;
(ii) After the Company has effected two (2)
registrations pursuant to this Section 2.1 and such registrations have been
declared or ordered effective;
(iii) During the period starting with the date sixty
(60) days prior to the Company's good faith estimate of the date of filing of,
and ending on a date one hundred eighty (180) days after the effective date of,
a registration subject to this Section 2; or
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(iv) If the Investor Initiating Holders propose to
dispose of shares of Registrable Securities that may be immediately registered
on Form S-3 pursuant to Section 2.3 below.
(e) The Company shall bear and pay all expenses incident to the
Company's performance of or compliance with its obligations under this Agreement
in connection with registrations, filings or qualifications of Registrable
Securities pursuant to Section 2.1, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company (including fees and disbursements
of counsel for the Company in its capacity as counsel to the selling Holders
hereunder; if Company counsel does not make itself available for this purpose,
the Company will pay the reasonable fees and disbursements of one counsel for
all of the selling Holders); provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 2.1 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities to be
registered (in which case all participating Holders shall bear such expenses pro
rata in proportion to the number of Registrable Securities proposed to be sold
by each Holder), unless (i) the Holders of a majority of the Investor
Registrable Securities agree to forfeit their right to one demand registration
pursuant to this Section 2.1, or (ii) at the time of such withdrawal, the
Holders have learned of a material adverse change in the condition, business, or
prospects of the Company from that known to the Holders at the time of their
request and have withdrawn the request with reasonable promptness following
disclosure by the Company of such material adverse change, then the Holders
shall not be required to pay any of such expenses and shall retain their rights
pursuant to Section 2.1. The Holders including Registrable Securities in such
registration statements shall bear all underwriting discounts and commissions,
if any, in respect of the Registrable Securities, pro rata in proportion to the
number of Registrable Securities being sold by each Holder.
(f) The right for Investors to cause the Company to register
Registrable Securities under this Section 2.1 shall terminate upon the earlier
of eight (8) years from the date hereof or three (3) years after a Qualified
Public Offering.
2.2 Company Registration.
(a) If after the completion of any Qualified Public Offering the
Company proposes to register (including for this purpose a registration effected
by the Company for shareholders other than the Holders) any of its stock or
other securities under the 1933 Act in connection with the public offering of
such securities solely for cash (other than a registration relating solely to
the sale of securities to participants in a Company stock or other employee
benefit plan, a registration relating solely to a Rule 145 transaction, or a
registration on any form which does not permit secondary sales or does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Registrable Securities),
the Company shall, at such time, promptly give each Holder written notice of
such registration. Upon the written request of each Holder given within fifteen
(15) days after the Company gives such notice, the Company shall, subject to the
provisions of Subsections 2.2(b) and (c), include in the registration
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statement to be filed all of the Registrable Securities that each such Holder
has requested to be registered.
(b) The Company shall not be required under Section 2.2(a) to
include any of a Holder's Registrable Securities in a registered public offering
involving an underwriting unless such Holder accepts the terms of the
underwriting as agreed upon between the Company and the underwriter selected by
the Company.
(c) If the total amount of securities, including Registrable
Securities, requested to be included in such offering exceeds the amount of
securities that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, that the underwriters determine in their sole discretion
will not jeopardize the success of the offering. If the underwriters determine
that the number of shares to be included in the registration must be limited,
the Company shall so advise all holders of securities requesting registration,
and the number of shares of securities that are entitled to be included in the
registration and underwriting shall be allocated according to the following
priority:
(i) first, the securities the Company proposes to
sell;
(ii) second, the Investor Registrable Securities and
Additional Registrable Securities requested to be included in such registration,
pro rata among the Holders of such Investor Registrable Securities and
Additional Registrable Securities on the basis of the number of Investor
Registrable Securities and Additional Registrable Securities then held by each
such Holder;
(iii) third, the Founder Registrable Securities
requested to be included in such registration, pro rata among the Holders of
such Founder Registrable Securities on the basis of the number of Founder
Registrable Securities then held by each such Holder;
(iv) fourth, other securities requested to be included
in such registration.
To facilitate the allocation of shares in accordance with the above
provision, the Company may round the number of shares allocated to any holder to
the nearest one hundred (100) shares. If any holder disapproves of the terms of
any such underwriting, he may elect to withdraw therefrom by written notice to
the Company and the underwriters. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
(d) The Company shall bear and pay all expenses, incident to the
Company's performance of, or compliance with, its obligations under this
Agreement in connection with any registration, filing or qualification of
Registrable Securities with respect to the registrations pursuant to this
Section 2.2, including (without limitation) all registration, filing, and
qualification fees, printers and accounting fees relating or apportionable
thereto and the fees and disbursements of counsel for the Company in its
capacity as counsel to the selling Holders hereunder (if Company
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counsel does not make itself available for this purpose, the Company will pay
the reasonable fees and disbursements of one counsel for the selling Holders).
The Holders including Registrable Securities in such registration statements
shall bear all underwriting discounts and commissions, if any, in respect of the
Registrable Securities, pro rata in proportion to the number of Registrable
Securities being sold by each Holder.
2.3 Form S-3 Registration. If the Company receives from any Holder or
Holders of the lesser of (i) at least 20% of the outstanding Registrable
Securities or (ii) outstanding Registrable Securities having a market value at
the time of such request of at least $40,000,000 (market value being the average
of the closing stock price of Company Common Stock during the ten trading days
prior to such request) in either case a written request that the Company effect
a registration on Form S-3 with respect to all or a part of the Registrable
Securities owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed registration to
all other Holders of the receipt of a request for registration pursuant to this
Section 2.3 and shall provide a reasonable opportunity for all such other
Holders to participate in the registration; and
(b) prepare and file a registration statement covering such
Registrable Securities and all or such portion of the Registrable Securities of
any other Holder(s) joining in such request as are specified in a written
request given within fifteen (15) days after the date the Company gave such
written notice; provided, however, that the Company shall not be obligated to
file or effect any such registration pursuant to this Section 2.3 (i) if Form
S-3 is not available for such offering by the Holders; (ii) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public of less than
$1,000,000; (iii) within one hundred eighty (180) days following the effective
date of a registration statement filed by the Company pursuant to a request by
any of the Holders under this Agreement, (iv) prior to one hundred eighty (180)
days following the effective date of a Company-initiated registration (other
than a registration effected solely to qualify an employee benefit plan or to
effect a business combination pursuant to Rule 145), or (v) if the Company shall
furnish to the Holders a certificate signed by the chief executive officer of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 registration to be filed or effected at such
time, in which event the Company shall have the right to defer the filing of the
Form S-3 registration statement for a period of not more than 90 days after the
Holders' request was given under this Section 2.3; provided, however, that the
Company shall not utilize this right more than once in any twelve (12) month
period. In the event the underwriters determine that market factors require a
limitation on the number of shares to be underwritten pursuant to a registration
effected under this Section 2.3, then shares shall be excluded from such
registration and underwriting pursuant to the method described in Section
2.1(b).
(c) bear and pay all expenses, incident to the Company's
performance of or compliance with its obligation under this Agreement in
connection with any registration requested pursuant to this Section 2.3,
including (without limitation) all registration, filing, qualification,
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<PAGE> 14
printer's and accounting fees relating or apportionable thereto and the fees and
disbursements of one counsel for the selling Holders them). The Holders
including Registrable Securities in such registration statement shall bear all
underwriters' discounts and commissions, if any, in respect of the Registrable
Securities pro rata in proportion to the number of Registrable Securities being
sold by each Holder. Registrations effected pursuant to this Section 2.3 shall
not be counted as demands for registration or registrations effected pursuant to
Section 2.1.
2.4 Obligations of the Company. Whenever required under this Section 2
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective until the earlier of the expiration of the
90-day period following effectiveness of such registration statement or the
completion of the distribution contemplated in such registration statement.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
1933 Act with respect to the disposition of all Registrable Securities covered
by such registration statement.
(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities laws of such
jurisdictions as shall be reasonably requested by the Holders; provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions, unless the Company is already subject to
service in such jurisdiction and except as may be required by the 1933 Act.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact regarding the Company
or omits to state a material fact regarding the Company required to be stated
therein or necessary to
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<PAGE> 15
make the statements therein regarding the Company not misleading in the light of
the circumstances then existing.
(g) Cause all such Registrable Securities registered hereunder to
be listed on each securities exchange, Nasdaq National Market, Nasdaq SmallCap
Market or over-the-counter market on which similar securities issued by the
Company are then listed, or, if no such securities are then listed, on an
exchange or market whose listing requirements the Company and the Registrable
Securities satisfy, if any.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered hereunder and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such registration.
(i) Furnish, at the request of any Holder requesting registration
of Registrable Securities pursuant to this Section 2, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 2, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
2.5 Furnish Information. Each selling Holder shall, as a condition to
including Registrable Securities in such registration statement, furnish to the
Company and to the underwriter, if any, such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as the Company and any such underwriter may from time to time
reasonably request in writing in connection with such registration statement. At
any time during the effectiveness of any registration statement covering
Registrable Securities offered by a Holder, if such Holder becomes aware of any
change materially affecting the accuracy of the information contained in such
registration statement or the prospectus (as then amended or supplemented)
relating to such Holder, it shall immediately notify the Company of such change.
2.6 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 2.
2.7 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 2:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the 1933 Act) for
such Holder and each person, if any,
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<PAGE> 16
who controls such Holder or underwriter within the meaning of the 1933 Act or
the 1934 Act, against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the 1933 Act, the 1934 Act or
other federal or state securities laws, insofar as such losses, claims, damages,
or liabilities (or actions in respect thereof) arise out of or are based upon
any of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation by the Company of the 1933 Act,
the 1934 Act, any state securities law or any rule or regulation promulgated
under the 1933 Act, the 1934 Act, or any state securities law applicable to the
Company and relating to action or inaction required of the Company in connection
with any registration or qualification that has been effected pursuant to this
Section 2; and the Company will pay to each such Holder, underwriter or
controlling person, as incurred, any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the indemnity agreement
contained in this subsection 2.7(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, underwriter or controlling person;
and provided, further, that the Company shall not be liable with respect to any
loss, claim, damage or liability with respect to any person who purchased
Registrable Securities and to whom there was not sent or who was not given a
copy of any amended or final prospectus with respect to such Registrable
Securities, if (x) such loss, claim, damage or liability results from an untrue
statement or an omission or alleged untrue statement or omission contained in
any preliminary or other prospectus that was corrected in such amended or final
prospectus and (y) the Company had previously furnished copies of such amended
or final prospectus to such Holder or the underwriters for such Holder.
(b) To the extent permitted by law, each selling Holder
(severally and not jointly) will indemnify and hold harmless the Company, each
of its directors, each of its officers who has signed the registration
statement, each person, if any, who controls the Company within the meaning of
the 1933 Act, any underwriter, any other Holder selling securities in such
registration statement and any controlling person of any such underwriter or
other Holder, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject, under the
1933 Act, the 1934 Act or other federal or state securities laws, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereto)
arise out of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Holder expressly for use
in connection with such registration or to the extent that such loss, claim,
damage or liability is with respect to any person who purchased Registrable
Securities and to whom there was not sent or who was not given a copy of any
amended or final prospectus with respect to such Registrable Securities, if (x)
such loss,
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<PAGE> 17
claim, damage or liability results from an untrue statement or an omission or
alleged untrue statement or omission contained in any preliminary or other
prospectus that was corrected in such amended or final prospectus and (y) the
Company had previously furnished copies of such amended or final prospectus to
such Holder or the underwriters for such Holder; and each such Holder will pay
any legal or other expenses reasonably incurred by any person intended to be
indemnified pursuant to this subsection 2.7(b), in connection with investigating
or defending any such loss, claim, damage, liability, or action as such expenses
are incurred; provided, however, that the indemnity agreement contained in this
subsection 2.7(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder, (which consent shall not be unreasonably withheld);
provided further, that, in no event shall any indemnity under this subsection
2.7(b) exceed the net proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 2.7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.7, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
2.7, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 2.7. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom. No
indemnifying party in the defense of any such claim or litigation shall, except
with the consent of each indemnified party, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such indemnified party of a
release from all liability in respect to such claim or litigation.
(d) If the indemnification provided for in this Section 2.7 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
herein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the
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<PAGE> 18
indemnified party on the other in connection with the Violations that resulted
in such loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission; provided that in the event that any contribution under
this Section 2.7(d) shall be made by any Investor Indemnifying Party, the amount
thereof shall not exceed the net proceeds from the offering received by such
Investor Indemnifying Party.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in an underwriting
agreement entered into by both the indemnified party and the indemnifying party
in connection with the underwritten public offering are in conflict with the
foregoing provisions, the provisions in the underwriting agreement shall
control.
(f) The obligations of the Company and Holders under this Section
2.7 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 2, and otherwise.
2.8 Reports Under Securities Exchange Act of 1934. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the 1933 Act
and any other rule or regulation of the SEC that may at any time permit a Holder
to sell securities of the Company to the public without registration or pursuant
to a registration on Form S-3, the Company agrees that, following the completion
of any Qualified Public Offering, the Company shall:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of such Qualified Public Offering to the extent
required under the 1933 Act;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the registration statement relating to such Qualified Public Offering is
declared effective;
(c) prepare and file with the SEC in a timely manner all reports
and other documents required of the Company under the 1933 Act and the 1934 Act
at any time after it has become subject to such reporting requirements; and
(d) furnish to any Holder forthwith upon written request (i) a
written statement by the Company that it has complied with the reporting
requirements of SEC Rule 144 (at any time after ninety (90) days after the
effective date of the registration statement relating to such Qualified Public
Offering), the 1933 Act and the 1934 Act (at any time after it has become
subject to such reporting requirements), or that it qualifies as a registrant
whose securities may be resold pursuant to Form S-3 (at any time after it so
qualifies), and (ii) a copy of the most recent annual or quarterly report of the
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Company and such other reports and documents so filed by the Company with the
SEC on a non-confidential basis that such Holder may reasonably request in
availing itself of any rule or regulation of the SEC which permits the selling
of any such securities without registration or pursuant to such form at any time
after the Company has become subject to the reporting requirements of the 1934
Act.
2.9 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of at least a majority of the then outstanding Investor
Registrable Securities enter into any agreement with any holder or prospective
holder of any securities of the Company that would allow such holder or
prospective holder (a) to include such securities in any registration filed
under Section 2.1, Section 2.2, or Section 2.3 unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of his securities will
not reduce the amount of the Investor Registrable Securities of the Holders (or
shares of any other class or series of capital stock issued on conversion
thereof) which is included or (b) to make a demand registration which could
result in such registration statement being declared effective prior to the
earlier of either of the dates set forth in subsection 2.1(a) or within one
hundred eighty (180) days of the effective date of any registration effected
pursuant to Section 2.1.
2.10 "Market Stand-Off" Agreement. Each of the parties hereto agrees:
(a) during a period of time determined by the Company and the
underwriter (not to exceed 180 days in the event of the Company's initial public
offering and 90 days in the event of any other public offering) following the
effective date of a registration statement of the Company filed under the 1933
Act, not to, directly or indirectly, sell, offer to sell, make any short sale
of, loan, grant any option for the purchase of, or otherwise transfer or dispose
of any securities of the Company held by such party that were purchased or
acquired before the effective date of such registration statement filed in
connection with the Company's initial public offering; and
(b) if so requested by the Company or its underwriters, to enter
into a lockup agreement to the effect set forth in Subsection 2.10(a) above, and
in a form satisfactory to the Company and such underwriter, provided that all
Founders, executive officers, and directors of the Company who then hold Common
Stock (or other securities) of the Company, enter into similar agreements.
The Company may impose stop-transfer instructions with respect to those
securities subject to the foregoing restrictions until the end of said period.
The foregoing restrictions shall expire two years after the date of the
Company's initial public offering.
Notwithstanding anything in this Section 2.10 to the contrary, the
foregoing shall not restrict Goldman, Sachs & Co. and its Affiliates from
engaging in any brokerage, investment advisory, financial advisory, anti-raid
advisory, merger advisory, financing, asset management, trading, market making,
arbitrage and other similar activities conducted in the ordinary course of its
or its Affiliates' business, so long as such activities are not conducted in
respect of the shares of Common Stock (or by virtue of a short position
undertaken to benefit from the cover of such shares of Common Stock,
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or the issuance of a derivative security designed to benefit from the value of
such shares of Common Stock) of the Company issuable upon the conversion of the
Series D Preferred Stock purchased by The Goldman Sachs Group, Inc. or Stone
Street Fund 1999, L.P. pursuant to the Purchase Agreement (as hereafter
defined).
SECTION 3 - COVENANTS OF THE COMPANY
The Company hereby covenants and agrees that:
3.1 Basic Financial Information. For so long as any Holder owns,
separately, or together with any of its Affiliates, 798,000 (500,000 in the case
of Series E Investors) or more shares of Common Stock and Preferred Stock, on an
as if converted basis (adjusted for stock splits, combinations, and the like),
the Company will furnish the following reports to such Holder:
(a) As soon as practicable after the end of each fiscal year of
the Company, and in any event within ninety (90) days thereafter, a consolidated
balance sheet of the Company and its subsidiaries, if any, as at the end of such
fiscal year, and consolidated statements of income and cash flows of the Company
and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles ("GAAP") consistently applied, all in
reasonable detail and certified by an independent public accountant of
recognized national standing selected by the Company; and
(b) As soon as practicable after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Company, and in
any event within forty-five (45) days thereafter, a consolidated balance sheet
of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and consolidated statements of income and cash flows of the
Company and its subsidiaries for such period, prepared in accordance with GAAP
consistently applied, subject to changes resulting from year-end audit
adjustments and the absence of notes, all in reasonable detail and certified by
the principal financial or accounting officer of the Company.
3.2 Additional Information. The Company will permit any Holder, so long
as such Holder owns, separately, or together with any of its Affiliates, 798,000
(500,000 in the case of Series E Investors) or more shares of Common Stock and
Preferred Stock, on an as if converted basis (adjusted for stock splits,
combinations, and the like), to visit, at such person's expense, and inspect any
of the properties of the Company, including its books of account and to discuss
its affairs, finances and accounts with the Company's officers and its
independent public accountants, all at such reasonable times and as often as any
such Holder may reasonably request. In addition, the Company will deliver to
each such Holder who so requests in writing, as soon as available (but in any
event within ninety (90) days after the commencement of its fiscal year) a
summary of the financial plan or annual budget of the Company for the fiscal
year as contained in its operating plan approved by the Company's Board of
Directors.
3.3 Venture Capital Operating Company. For so long as an Investor's
organizational documents require that the Investor have and maintain the status
of a "venture capital operating company" (a "VCOC") as defined in the Department
of Labor Regulations, Section 25101.3-101(d),
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such Investor shall, in addition to any rights such Investor may have under
Sections 3.1 and 3.2 above, have the following rights:
(a) Such Investor shall be entitled to consult with and advise
management of the Company on significant business issues, including management's
proposed annual and quarterly operating plans, and management will meet with the
Investor, upon the Investor's written request, within thirty days after the end
of each fiscal quarter at the Company's facilities at mutually agreeable times
for such consultation and advice and to review progress in achieving said plans;
(b) Such Investor may examine the books and records of the
Company and inspect its facilities, and may request information at reasonable
times and intervals concerning the general status of the Company's financial
condition and operations, provided that access to highly confidential
proprietary information and facilities need not be provided except to the extent
provided to all Investors;
(c) If such Investor is not represented on the Company's Board of
Directors, such Investor shall be deemed to be a Venture Investor for purposes
of Section 3.7 hereof and shall be entitled to the rights, and subject to the
obligations, of a Venture Investor under such Section; provided, however, that
such Venture Investor need not satisfy any of the share ownership thresholds set
forth in Section 3.7.
3.4 Board of Directors. Meetings of the Board will be held monthly,
unless the directors agree otherwise. The Company will not incur any costs for
outside directors unless approved by the Board.
3.5 Notice. The Company shall give each Holder of record of Preferred
Stock written notice of any impending merger or consolidation of the Company
with or into any other corporation or corporations, or a sale or other transfer
in a single transaction or a series of related transactions of all or
substantially all of the assets of the Company not later than twenty (20) days
prior to the shareholders' meeting called to approve such transaction, or twenty
(20) days prior to the closing of the transaction, whichever is earlier, and
will also notify these holders in writing of the final approval of the
transaction. The notice will describe the material terms and conditions of the
impending transaction. The corporation will give the holders prompt notice of
any material changes in the terms and conditions of the impending transaction.
3.6 Confidential Information. Anything in this Section 3 to the contrary
notwithstanding, no Holder, by reason of this Agreement shall have access to any
trade secrets or classified information of the Company. Each Holder hereby
agrees to hold in confidence and trust and not to misuse or disclose any
confidential or proprietary information provided to such Holder pursuant to this
Section 3. Each Holder further acknowledges and understands that any information
so obtained which may be considered "inside" non-public information will not be
utilized by such Holder in connection with purchases and/or sales of the
Company's securities except in compliance with applicable state and federal
anti-fraud statutes. The Company shall not be required to comply with this
Section 3 in respect of any Holder whom the Company reasonably determines to be
a competitor
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<PAGE> 22
of the Company or an officer, employee, director or greater than ten percent
(10%) stockholder of such competitor.
3.7 Observer Rights. For so long as a Venture Investor owns at least
1,000,000 shares of Common Stock, on an as if converted basis (adjusted for
stock splits, combinations and the like), and any Series C Investor without
regard to share ownership, such Venture Investor or Series C Investor shall be
entitled to designate, upon written notice to the Company, one (1) individual
reasonably acceptable to the Company (such designee, the "OBSERVER") who shall
be entitled to notice of, to attend, and to any documentation distributed to the
directors before, during or after, all meetings (including any action to be
taken by written consent) of the Board and all committees thereof; provided,
however, that the Company reserves the right to withhold any information and to
exclude such Observer from any meeting or portion thereof if access to such
information or attendance at such meeting could
(i) in the judgment of the Company's outside counsel, adversely
affect the attorney-client privilege between the Company and its
counsel or cause the Board to breach its fiduciary duties, or
(ii) in the good faith determination of a majority of the Board,
result in a conflict between the interests of the Company and
those of such Observer, such Venture Investor, such Series C
Investor or any of their affiliates.
The Company will use its best efforts to ensure that any withholding of
information or any restriction on attendance is strictly limited only to the
extent necessary set forth in the preceding sentence. Such Observer shall not be
permitted to vote at any meeting of the Board or be counted for purposes of
determining whether there is sufficient quorum for the Board to conduct its
business. Each Venture Investor, Series C Investor and Observer shall maintain
the confidentiality of all financial, confidential and proprietary information
of the Company obtained by them as a result of the rights granted pursuant to
this Section 3.7. By designating an Observer, a Venture Investor or Series C
Investor agrees to cause such Observer upon the Company's request to execute an
agreement providing for nondisclosure of the Company's proprietary information
consistent with such agreements signed by the Company's employees. The parties
hereto hereby acknowledge and agree that, except as set forth in this Section
3.7, an Observer shall not owe any fiduciary or other duties to the shareholders
of the Company or otherwise have any directorial or other duties or liabilities
to the Company or its shareholders as a result of the Observer's exercise of his
rights hereunder. A Venture Investor or Series C Investor shall designate, and
may replace, its Observer with or without cause in its sole discretion by
providing written notice to the Company at least five (5) business days prior to
any such action taking effect. In addition to the limitations set forth in
Section 3.8, any rights granted to an Observer under this Section 3.7 shall
immediately terminate if the Venture Investor who appointed such Observer (x) in
the case of a Venture Investor who is entitled to appoint an observer solely
because of his stock ownership, no longer owns at least 1,000,000 shares of
Common Stock, on an as if converted basis (adjusted for stock splits,
combinations and the like) or (y) in the case of a Venture Investor who is
deemed to be a Venture Investor solely because of his status as a VCOC, no
longer is a VCOC. Exercise of the observer
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rights granted in this Section 3.7 by a transferee or assignee of shares of the
Company's capital stock shall be subject to the Board of Directors prior
resolution that the conditions set forth in Section 9.11 shall all have been
satisfied. Notwithstanding anything contained herein to the contrary, the
Company's failure to comply with any provision of this Section 3.7 shall not
affect the validity of any action taken (whether at a meeting or by written
consent) by the Board, or any committee thereof, or by any or all of the
Company's stockholders.
3.8 Liquidation Event Notice. The Company shall give each Series E
Investor no less than ten days advance notice of any Liquidation Event (as
defined in the Restated Articles).
3.9 Termination of Covenants. The covenants set forth in this Section 3
shall terminate and be of no further force or effect upon the earliest to occur
of (a) the closing of any Qualified Public Offering, (b) the date on which this
Agreement is terminated by a writing executed by the parties hereto, (c) the
dissolution of the Company, (d) a Change of Control Transaction or (e)
consummation of the sale of all or substantially all of the assets of the
Company; provided, however, that the confidentiality provisions of this Section
3 will survive any such termination.
3.10 Waiver. Any right granted to a Holder or Subsequent Investor
pursuant to this section 3 may be waived as to all Holders or Subsequent
Investors entitled to such right by a majority of the sum of (a) number of the
outstanding shares of Common Stock held by the Holders or Subsequent Investors,
as the case may be, who are entitled to such right, plus (b) the number of
shares of Common Stock issuable upon conversion in full of all shares of
outstanding Preferred Stock then held by such Holders or Subsequent Investors.
SECTION 4 - RIGHT OF FIRST REFUSAL
4.1 First Refusal Notice. If a Designated Shareholder desires to
transfer any securities of the Company owned by it, then at least 60 days prior
to such transfer, other than a Permitted Transfer, such Designated Shareholder
must give notice (the "FIRST REFUSAL NOTICE") to the Company, the Founders, and
the Investors, of its intention to effect such transfer. The First Refusal
Notice must set forth (a) the number and class of Sale Shares to be sold by the
Designated Shareholder, (b) the date or proposed date of such transfer and the
name and address of the transferee (the "DISCRETIONARY TRANSFEREE"), (c) the
principal terms of such transfer, including the cash or other property or
consideration to be received upon such transfer, and (d) the percentage which
the number of Sale Shares constitutes with respect to the aggregate number of
securities of the Company then held by the transferring Designated Shareholder.
The Company, the Founders, and the Investors agree to keep the information
contained in the First Refusal Notice confidential if so requested by the
Designated Shareholder.
4.2 Company's Option. The Company shall have the option, but not the
obligation, to purchase all, but not less than all of the Sale Shares on the
same terms as specified in the First Refusal Notice. Within 20 days after the
date the First Refusal Notice is given, the Company shall give written notice to
the transferring Designated Shareholder and the Investors stating its intention
to exercise such option, and a date and time for consummation of the purchase
not less than 60 days nor more than 90 days after the date the First Refusal
Notice was given. Failure by the Company to give such notice within such time
period shall be deemed an election by it not to exercise its option.
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<PAGE> 24
4.3 Investors' and Founders' Option.
(a) If the Company fails to exercise the option with respect to
all of the Sale Shares, each of the Investors and Founders (or any combination
thereof) shall have the option, but not the obligation, to purchase all but not
less than all of the Sale Shares on the same terms as specified in the First
Refusal Notice. After the expiration of the 20 day period in Section 4.2 hereof,
but within 30 days after the First Refusal Notice is given, any electing
Investor or Founder shall give written notice to the transferring Designated
Shareholder and the Company stating that it elects to exercise its option and a
date and time for consummation of the purchase not more than 90 days after the
date the First Refusal Notice is given. Failure by an Investor or Founder to
give such notice within such time period shall be deemed an election by it not
to exercise its option. If more than one Investor and/or Founder exercises this
option, the number of Sale Shares that each such Investor and/or Founder shall
be entitled to purchase shall be equal to such Investor's or Founder's Pro Rata
Share.
(b) "PRO RATA SHARE" of the Investor or Founder for purposes of
this Section 4 shall be calculated as of the date of the First Refusal Notice
and shall be determined by dividing:
(i) the sum of (A) the number of outstanding shares of
Common Stock then held by such Investor or Founder, plus (B) the number of
shares of Common Stock issuable upon conversion in full of all shares of
outstanding Preferred Stock then held by such Investor or Founder; by
(ii) the sum of (A) the number of outstanding shares
of Common Stock then held by all Investors and Founders exercising their option
under this Section 4.3 with respect to the securities to be sold pursuant to
such First Refusal Notice (the "PURCHASING SHAREHOLDERS"), plus (B) the number
of shares of Common Stock issuable upon conversion in full of all outstanding
shares of Preferred Stock then held by all Purchasing Shareholders.
4.4 Transfer of Sale Shares. Subject to Section 6 of this Agreement
regarding co-sale rights of Investors and Founders, if none of the Company, the
Founders, or the Investors elect to exercise their rights to purchase the Sale
Shares pursuant to this Section 4, the Designated Shareholder may, within 60
days of the expiration of the Investors' and Founders' option pursuant to
Section 4.3, transfer the Sale Shares to the Discretionary Transferee on the
terms and condition set forth in the First Refusal Notice; provided that, if
such transferee will, after such transfer, be an officer, director, or holder of
2% or more of the Company's outstanding Common Stock and Preferred Stock, on an
as if converted basis, then prior to such transfer the Discretionary Transferee
shall agree in writing to be bound by the terms and conditions of this
Agreement.
4.5 Transfers Void. Any attempted transfer in violation of the terms of
this Section 4 shall be ineffective to vest in any Discretionary Transferee any
interest held by the transferring Designated Shareholder in the shares. Without
limiting the foregoing, any purported transfer in violation hereof shall be
ineffective as against the Company, and the Company, the Investors, and the
Founders shall have a continuing right and option (but not an obligation), until
the restrictions contained in this Section 4 terminate, to purchase the
securities purported to be transferred by the Designated
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<PAGE> 25
Shareholder in violation of this Section 4 for a price and on terms the same as
those at which the purported transfer was effected.
4.6 Exempt Transfers. Notwithstanding the foregoing, the provisions of
Sections 4.1 through 4.5 shall not apply to (i) any Permitted Transfer; (ii) any
repurchase of a Designated Shareholders' unvested shares pursuant to a stock
restriction agreement; or (iii) any bona fide gift or pledge; provided that (A)
the transferring Designated Shareholder shall inform the Company of such pledge,
transfer or gift prior to effecting it and (B) the pledgee, Permitted Transferee
or donee shall furnish the Company with a written agreement executed by such
pledgee, Permitted Transferee, or donee, whereby such pledgee, Permitted
Transferee, or donee agrees to be bound by and comply with all provisions of
this Agreement as well as any and all other stock restrictions that the Company
may reasonably request. Such transferred Sale Shares shall remain "Sale Shares"
hereunder, and such pledgee, Permitted Transferee or donee shall be treated as a
"DESIGNATED SHAREHOLDER" for purposes of this Agreement.
4.7 Termination of Restrictions. The provisions of this Section 4 shall
terminate upon the earliest to occur of (a) the closing of any Qualified Public
Offering, (b) the date on which this Agreement is terminated by a writing
executed by the parties hereto, (c) the dissolution of the Company, (d) the
effective date of a Change of Control Transaction, or (e) consummation of the
sale of all or substantially all of the assets of the Company.
4.8 Waiver. The option granted to the Investors and Founders in Section
4.3 as to any proposed transfer pursuant to a First Refusal Notice may be waived
as to all Investors and Founders in advance of or after such transfer by a
majority of the sum of (a) number of the outstanding shares of Common Stock held
by the Investors and Founders as of the date of the First Refusal Notice, plus
(b) the number of shares of Common Stock issuable upon conversion in full of all
shares of outstanding Preferred Stock then held by the Investors and Founders.
SECTION 5 - RIGHT OF FIRST REFUSAL TO SUBSCRIBE FOR NEW ISSUANCES
5.1 Grant of Right of First Refusal. For so long as an Investor or
Founder owns, separately, or together with any of its Affiliates, 798,000
(500,000 in the case of Series E Investors) or more shares of Common Stock and
Preferred Stock, on an as if converted basis (adjusted for stock splits,
combinations, and the like), such Investor or Founder shall have the right of
first refusal (the "RIGHT OF FIRST REFUSAL") with respect to future sales by the
Company of New Securities (as defined in Section 5.5 below) in accordance with
the provisions of this Section 5.
5.2 First Offer Notice. Each time the Company proposes to offer any New
Securities for sale, the Company shall give a notice ("FIRST OFFER NOTICE") to
each such Investor and each such Founder stating (i) its bona fide intention to
offer such securities, (ii) the total number of such securities to be offered,
(iii) the number of securities to be offered to such Investor or Founder
pursuant to this Section 5 (i.e., such Investor's or Founder's Pro Rata Share of
such securities), and (iv) the price and terms, if any, upon which it proposes
to offer such securities.
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5.3 Investor/Founder Election. Within ten (10) days after the First
Offer Notice is given, each Investor and each Founder may elect to purchase or
obtain, at the price and on the terms specified in the First Offer Notice, up to
its Pro Rata Share of such securities.
(a) "PRO RATA SHARE" of an Investor or Founder for purposes of
this Section 5 shall be calculated as of the date of the relevant First Offer
Notice and shall be determined by dividing:
(i) the sum of (A) the number of outstanding shares of
Common Stock then held by such Investor or Founder plus (B) the number of shares
of Common Stock issuable upon conversion in full of all shares of outstanding
Preferred Stock then held by such Investor or Founder; by
(ii) the sum of (A) the total number of shares of
Common Stock then outstanding, plus (B) the total number of shares of Common
Stock issuable upon conversion in full of all Preferred Stock then outstanding.
5.4 Company Sale to Third Parties. If all such securities referred to in
the First Offer Notice which the Investors and Founders are entitled to purchase
are not elected to be purchased as provided in Section 5.3 hereof, the Company
may, during the 90-day period following the expiration of the period provided in
Section 5.3 hereof, sell the remaining unsubscribed portion of such securities
to any person or persons at a price not less than, and upon terms no more
favorable to the purchaser than those specified in the First Offer Notice. If
the Company does not sell such securities within such 90-day period, the right
provided hereunder shall be deemed to be revived and such securities shall not
be offered unless first reoffered to the Investors and the Founders in
accordance herewith.
5.5 Definition of New Securities. "NEW SECURITIES" means any of the
Company's equity securities (as defined in Section 3(a)(11) of the 1934 Act)
except those: (i) issued to the Company's employees, officers, directors or
consultants pursuant to any stock option or other employee benefit plan,
arrangement or agreement approved by the Board of Directors, (ii) issued upon
the conversion of the Company's currently outstanding Preferred Stock (including
the Series E Preferred Stock), (iii) issued pursuant to the exercise or
conversion of options and warrants, (iv) issued in connection with a bona fide
business acquisition of or by the Company, whether by merger, consolidation,
sale of assets, sale or exchange of stock or otherwise, or a joint venture
approved by the Board of Directors, (v) issued in connection with any stock
split, subdivision, stock dividend, distribution, reverse stock split,
combination or reclassification of the Company's securities, (vi) issued to
vendors, customers, lenders or equipment lessors pursuant to any agreement the
terms of which were approved by the Board of Directors, (vii) offered to the
public pursuant to a registration statement filed under the 1933 Act, (viii)
purchased pursuant to that certain Series E Preferred Stock Purchase Agreement
entered into by certain of the parties hereto in conjunction with this Agreement
(the "PURCHASE AGREEMENT"); or (ix) currently authorized and approved for
issuance by the Board of Directors.
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5.6 Limitation and Apportionment. Subject to the provisions of Section
9.7 hereof, the number of the securities that will be subject to the Investors'
Right of First Refusal under this Section 5 may be limited by agreement among
the Company and the holders of a majority of the shares of Preferred Stock
(voting on an as-if-converted basis) and Common Stock issued upon conversion of
the Preferred Stock. This Right of First Refusal is nonassignable except as
provided in Section 9.11 of this Agreement.
5.7 Termination of Right of First Offer. The provisions of this Section
5 shall terminate upon the earliest to occur of (a) the closing of any Qualified
Public Offering, (b) the date on which this Agreement is terminated by a writing
executed by the parties hereto, (c) the dissolution of the Company, (d) the
effective date of a Change of Control Transaction, or (e) consummation of the
sale of all or substantially all of the assets of the Company.
5.8 Waiver. The Right of First Refusal may be waived as to all Investors
and Founders with respect to an issuance of New Securities by a majority of the
outstanding shares of Common Stock and Preferred Stock (voting on an
as-if-converted basis) held by the Founders and Investors entitled to the Right
of First Refusal as of the date of the First Offer Notice.
SECTION 6 - CO-SALE
6.1 Co-Sale Notice. If a Founder proposes to sell or transfer (other
than transfers that are exempt under Section 6.5 below) any Co-Sale Shares in
one or more related transactions which will result in (i) the transfer of
100,000 or more shares of Co-Sale Shares by such Founder or (ii) the transferee
of such shares holding securities representing more than 50% of the voting power
of the Company, the Founder shall promptly give written notice (the "CO-SALE
NOTICE") to the Company, each of the Investors, and to each of the other
Founders ("NON-TRANSFERRING FOUNDERS") at least 30 days prior to the closing of
such sale or transfer. The Co-Sale Notice shall describe in reasonable detail
the terms of the proposed sale or transfer including, without limitation, the
number of Co-Sale Shares to be sold or transferred, the nature of such sale or
transfer, the consideration to be paid, and the name and address of each
prospective purchaser or transferee (the "ACQUIROR"). In the event that the sale
or transfer is being made pursuant to the provisions of Section 6.5 hereof, the
Co-Sale Notice shall state under which subsection thereof the sale or transfer
is being made.
6.2 Investors' Exercise of Co-Sale Right.
(a) Each Investor and Non-Transferring Founder shall have the
right, exercisable upon written notice given to such Founder within 10 days
after the date the Co-Sale Notice was given to the Investor or Non-Transferring
Founder, as the case may be, to participate in such sale on the same terms and
conditions specified in the Co-Sale Notice. Each Investor and Non-Transferring
Founder shall have the right to sell all or any part of its Pro Rata Share. To
the extent that one or more of the Investors and/or Non-Transferring Founders
exercise such right of participation, the number of Co-Sale Shares that the
Founder may sell in the transaction shall be correspondingly reduced.
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(b) "PRO RATA SHARE" of an Investor or Non-Transferring Founder
for the purposes of this Section 6 shall be calculated as of the date of the
Co-Sale Notice and shall be determined by dividing:
(i) the sum of (A) the number of outstanding shares of
Common Stock then held by such Investor or Non-Transferring Founder plus (B) the
number of shares of Common Stock issuable upon conversion in full of all shares
of outstanding Preferred Stock then held by such Investor of Non-Transferring
Founder; by
(ii) the sum of (A) the number of outstanding shares
of Common Stock then held by all Investors and Founders, plus (B) the number of
shares of Common Stock issuable upon conversion in full of all outstanding
shares of Preferred Stock then held by all Investors and Founders.
6.3 Mechanics of Co-Sale. Each Investor and Non-Transferring Founder
electing to participate (the "PARTICIPANTS") will effect its participation in
the sale by promptly delivering to the Founder for transfer to the Acquiror one
or more certificates, properly endorsed for transfer, which represent:
(a) the type and number of shares of Common Stock which such
Participant elects to sell; or
(b) that number of shares of Preferred Stock which is at such
time convertible into the number of shares of Common Stock which such
Participant elects to sell; provided, however, that if the Acquiror objects to
the delivery of Preferred Stock in lieu of Common Stock, such Participant shall
convert such Preferred Stock into Common Stock and deliver Common Stock as
provided in clause (i) above. The Company agrees to make any such conversion
that is otherwise permitted concurrent with the actual transfer of such shares
to the Acquiror.
The stock certificate or certificates that the Participant delivers to
the Founder shall be transferred to the Acquiror in consummation of the sale of
Co-Sale Shares pursuant to the terms and conditions specified in the Co-Sale
Notice, and the Founder shall concurrently therewith remit to such Participant
that portion of the sale proceeds to which such Participant is entitled by
reason of its participation in such sale. To the extent that any Acquiror
prohibits such assignment or otherwise refuses to purchase shares or other
securities from a Participant exercising its rights of co-sale hereunder, the
Founder shall not sell to such Acquiror any Co-Sale Shares unless and until,
simultaneously with such sale, the Founder shall purchase such Participant's Pro
Rata Share from such Participant at the price and on the terms specified in the
Co-Sale Notice. The exercise or non-exercise of the rights of Participant
hereunder to participate in one or more sales of Co-Sale Shares made by the
Founder shall not adversely affect their rights to participate in subsequent
sales of Co-Sale Shares subject to Section 6.
6.4 Sale of Co-Sale Shares to Third Party. If none of the Investors or
Non-Transferring Founders elects to participate in the sale of the Co-Sale
Shares subject to the Co-Sale Notice, the Founder may, not later than 40 days
following the date the Co-Sale Notice is given to the Company
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<PAGE> 29
and each of the Investors and the Non-Transferring Founders of the Co-Sale
Notice, enter into an agreement providing for the closing of the transfer of the
Co-Sale Shares covered by the Co-Sale Notice within 60 days of such agreement on
terms and conditions no more favorable to the transferee than those described in
the Co-Sale Notice. Any proposed transfer on terms and conditions more favorable
than those described in the Co-Sale Notice, as well as any subsequent proposed
transfer of any of the Co-Sale Shares by the Founder, shall again be subject to
the co-sale rights of the Investors and shall require compliance by the Founder
with the procedures described in this Section 6.
6.5 Exempt Transfers.
(a) Notwithstanding the foregoing, the provisions of this Section
6 shall not apply to (i) any Permitted Transfer; (ii) any repurchase of a
Founder's unvested shares pursuant to a stock restriction agreement; or (iii)
any bona fide gift or pledge; provided that (A) the Founder shall inform the
Investors and other Founders of such pledge, transfer or gift prior to effecting
it, and (B) the pledgee, Permitted Transferee or donee shall agree in writing to
be bound by and comply with all provisions of this Agreement and any and all
other stock restrictions that the Company may reasonably request. Such
transferred Co-Sale Shares shall remain "Co-Sale Shares" hereunder, and such
pledgee, Permitted Transferee or donee shall be treated as a "Founder" for
purposes of this Agreement.
(b) Notwithstanding the foregoing, the provisions of this Section
6 shall not apply to the sale of any Co-Sale shares (i) to the public pursuant
to a registration statement filed with, and declared effective by, the SEC under
the 1933 Act or (ii) to the Company.
6.6 Prohibited Transfers. If a Founder sells any Co-Sale Shares in
contravention of this Section 6 (a "PROHIBITED TRANSFER"), each Investor and
Non-Transferring Founder, in addition to such other remedies as may be available
at law, in equity or hereunder, shall have the option to sell to the Founder
such Investors' Pro Rata Share and the Founder shall be obligated to purchase
such Investor's Pro Rata Share at the price per share equal to the price per
share paid by the Acquiror to the Founder in the Prohibited Transfer. The
Founder shall also reimburse each Investor for any and all reasonable fees and
expenses, including legal fees and expenses, incurred pursuant to the exercise
or the attempted exercise of the Investor's rights under Section 6. Within 90
days after the later of the dates on which the Investors and Non-Transferring
Founders (A) received notice of the Prohibited Transfer or (B) otherwise became
aware of the Prohibited Transfer, each Investor and Non-Transferring Founder
shall, if exercising the option created hereby, deliver to the Founder the
certificate or certificates representing shares to be sold, each certificate to
be properly endorsed for transfer. The Founder shall, upon receipt of the
certificate or certificates for the shares to be sold by an Investor or a
Non-Transferring Founder, pursuant to this Section 6.6, pay the aggregate
purchase price therefor and the amount of reimbursable fees and expenses, as
specified in cash or by other means acceptable to the Investor or
Non-Transferring Founder. Notwithstanding the foregoing, any attempt by a
Founder to transfer Co-Sale Shares in violation of Section 6 hereof shall be
voidable and the Company agrees it will not effect such a transfer nor will it
treat any alleged transferee as the holder of such shares without the written
consent of the holders of a majority of the Shares.
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<PAGE> 30
6.7 Termination of Co-Sale Rights. The provisions of this Section 6
shall terminate upon the earliest to occur of (a) the closing of any Qualified
Public Offering, (b) the date on which this Agreement is terminated by a writing
executed by the parties hereto, (c) the dissolution of the Company, (d) the
effective date of a Change of Control Transaction or (e) consummation of the
sale of all or substantially all of the assets of the Company.
6.8 Waiver. The right granted to the Investors and Non-Transferring
Founders in Section 6.2 as to any proposed transfer pursuant to a Co-Sale Notice
may be waived as to all Investors and Non-Transferring Founders in advance or
after such transfer by a majority of the sum of (a) the number of outstanding
shares of Common Stock held by the Investors and Non-Transferring Founders as of
the date of the Co-Sale Notice plus (b) the number of shares of Common Stock
issuable upon conversion in full of all shares of outstanding Preferred Stock
then held by the Investors and Non-Transferring Founders.
SECTION 7 - TRANSFER RESTRICTIONS
7.1 Restrictions on Transferability. The securities of the Company held
by the parties hereto shall not be transferred except upon the conditions
specified in this Agreement, which conditions are intended to insure compliance
with the provisions of the 1933 Act or, in the case of Section 2.10 hereof, to
assist in an orderly distribution. Each party hereto will cause any proposed
transferee of such securities held by such party hereto to agree to take and
hold those securities subject to the provisions and upon the conditions
specified in this Agreement.
7.2 Restrictive Legend. All certificates representing any securities of
the Company that are subject to this Agreement shall be stamped or otherwise
imprinted with a legend substantially in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE
CONDITIONS SPECIFIED IN THE THIRD AMENDED AND RESTATED INVESTORS' RIGHTS
AGREEMENT, DATED AS OF APRIL __, 2000, AND ANY AMENDMENT THERETO OR
RESTATEMENTS THEREOF (SUCH AGREEMENT INCLUDING ANY SUCH AMENDMENT OR
RESTATEMENTS, THE "AGREEMENT") AMONG COSINE COMMUNICATIONS, INC. AND
CERTAIN OTHER SIGNATORIES THERETO, AND NO TRANSFER OF THESE SECURITIES
SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A VOTING
AGREEMENT CONTAINED IN THE AGREEMENT AND BY ACCEPTING ANY INTEREST IN
SUCH SECURITIES, THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO
AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF THE AGREEMENT.
UPON THE
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<PAGE> 31
FULFILLMENT OF CERTAIN OF SUCH CONDITIONS COSINE COMMUNICATIONS, INC.
HAS AGREED TO DELIVER TO THE HOLDER HEREOF A NEW CERTIFICATE NOT BEARING
THIS LEGEND FOR THE SECURITIES REPRESENTED HEREBY REGISTERED IN THE NAME
OF THE HOLDER HEREOF. A COPY OF THE AGREEMENT MAY BE OBTAINED AT NO COST
BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO
THE SECRETARY OF COSINE COMMUNICATIONS, INC.
The foregoing legend shall be removed with respect to such securities
upon request of the holder of such securities at such time as this Agreement is
terminated.
7.3 Notice of Proposed Transfers. The holder of each certificate
representing securities of the Company by acceptance thereof agrees to comply in
all respects with the provisions of this Section 7.3. Prior to any proposed
transfer of any such securities (other than under circumstances described in
Sections 2.1, 2.2, and 2.3 hereof), the holder thereof shall give written notice
to the Company of such holder's intention to effect such transfer. Each such
notice shall describe the manner and circumstances of the proposed transfer in
sufficient detail, and shall be accompanied (except for a Permitted Transfer) by
either:
(a) a written opinion of legal counsel to the holder who shall be
reasonably satisfactory to the Company, addressed to the Company and reasonably
satisfactory in form and substance to the Company's counsel, to the effect that
the proposed transfer of such securities may be effected without registration
under the 1933 Act or
(b) a "no-action" letter from the SEC to the effect that the
distribution of such securities without registration will not result in a
recommendation by the staff of the SEC that action be taken with respect
thereto, whereupon the Holder of such securities shall be entitled to transfer
them in accordance with the terms of the notice delivered by such holder to the
Company.
Each certificate evidencing such securities transferred as above
provided shall bear the restrictive legend set forth in Section 7.2 above,
except that such certificate shall not bear such restrictive legend after the
date of any Qualified Public Offering under the 1933 Act if the opinion of
counsel or "no-action" letter referred to above expressly indicates that such
legend is not required in order to establish compliance with the 1933 Act or if
such legend is no longer required pursuant to Rule 144(k).
7.4 Public Sale. Each party hereto agrees not to make, without the prior
written consent of the Company, any public offering or sale of the Company's
securities although permitted to do so pursuant to Rule 144(k) promulgated under
the 1933 Act, until the earlier of (i) the date on which the Company effects its
initial registered public offering pursuant to the 1933 Act or (ii) the date on
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<PAGE> 32
which it becomes a registered company pursuant to Section 12(g) of the 1934 Act,
or (iii) five years after the date hereof.
SECTION 8 - VOTING AGREEMENT
8.1 Definition. As used in this Section 8, the term "VOTE" shall have
the meaning set forth in Section 194 of the California Corporations Code (the
"CODE").
8.2 Agreement to Vote. Subject to Section 8.7 below, the Series A
Investors, the Series B Investors, Series C Investors, Series D Investors,
Series E Investors and the Founders (collectively, the "VOTING HOLDERS") agree
to vote the shares of the Company's Common Stock, Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock (collectively, the "SHARES") then held by them at any
regular or special meeting of shareholders of the Company, or, in lieu of any
such meeting, to give their written consent, as provided in Section 8.3 below.
8.3 Board of Directors. With respect to any proposal concerning the
election of one or more directors who are to be elected by the holders of a
majority of the outstanding shares of the Series A Preferred Stock, the Series B
Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the
Series E Preferred Stock and the Common Stock, voting together as a class, the
Voting Holders hereby covenant and agree that each Voting Holder shall vote its
Shares to elect those nominees approved by a majority of the outstanding shares
of each of the Common Stock, Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
voting together as a class. Any vacancy on the Board occurring because of the
death, resignation or removal of a director elected by the holders of a majority
of the outstanding shares of Common Stock, Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock voting together as a class, shall be filled in accordance with
the provisions set forth hereinabove.
8.4 No Revocation. The voting agreements contained herein are coupled
with an interest and may not be revoked during the term of this Section 8.
8.5 Stock Splits, Stock Dividends, etc. In the event of any stock split,
stock dividend, recapitalization, reorganization, or the like, any securities
issued as a result thereof with respect to the Voting Holders' Shares shall
become Voting Holders' Shares for purposes of this Section 8 and shall be
endorsed with the legend set forth in Section 7.2 hereof.
8.6 Waivers. Any term of this Section 8 may be amended and the
observance of any term of this Section 8 may be waived either generally or in a
particular instance and either retroactively or prospectively only with the
written consent of the Company and the holders of a majority of the outstanding
shares of the Common Stock held by the Founders, the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock voting together as a class.
-29-
<PAGE> 33
8.7 Termination. All parties' rights under this Section 8 will terminate
upon the earliest to occur of (i) any Qualified Public Offering , (ii) the date
on which this Agreement is terminated by a writing executed by the parties
hereto, (iii) the dissolution of the Company, (iv) the effective date of a
Change of Control Transaction, or (v) consummation of the sale of all or
substantially all of the assets of the Company.
SECTION 9 - MISCELLANEOUS
9.1 Successors and Assigns. Subject to the provisions of Section 9.11,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
9.2 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
9.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Executed signature pages
in the form of facsimile transmission are deemed acceptable as originals.
9.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
9.5 Notices. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed effectively
given upon personal delivery to the party to be notified or 3 business days
after deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
9.6 Expenses. If any action at law or in equity is necessary to enforce
or interpret the terms of this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees, costs and necessary disbursements in addition to
any other relief to which such party may be entitled.
9.7 Amendments and Waivers. Unless otherwise provided herein, any term
of this Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of each of the
Company and the holders of a majority of the shares of Preferred Stock (voting
on an as-if-converted basis) and/or Common Stock issued upon conversion of the
Preferred Stock. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each party hereto; provided, however, that no
such amendment or waiver shall reduce
-30-
<PAGE> 34
the percentage of shares necessary to amend this Agreement without the consent
of the holders of all shares of Preferred Stock (voting on an as-if-converted
basis) and Common Stock issued upon conversion of the Preferred Stock then
outstanding, and provided, further, that (i) any amendment that would adversely
affect the holders of a specific class or series of the Company's capital stock
in manner different than the holders of other shares of capital stock shall also
require the consent of the holders of a majority of the shares of such class or
series of so affected, and (ii) any amendment that would adversely affect any of
the Investors, the Founders, or the Additional Rights Holders in a manner
different than the holders of other shares of capital stock shall also require
the consent of, if the Investors are so affected, the Investors (or their
assignees to whom Investors have expressly assigned their rights in compliance
with Section 9.11 hereof) who then hold at least fifty percent (50%) of the
Investor Registrable Securities then held by persons entitled to registration
rights hereunder and, if the Founders are so affected, the Founders (or their
assignees to whom they have expressly assigned their rights in compliance with
Section 9.11 hereof) who then hold at least fifty percent (50%) of the Founder
Registrable Securities then held by persons entitled to registration rights
hereunder and, if the Additional Rights Holders are so affected, the Additional
Rights Holders (or their assignees to whom Additional Rights Holders have
expressly assigned their rights in compliance with Section 9.11 hereof) who then
hold at least fifty percent (50%) of the Additional Registrable Securities then
held by persons entitled to registration rights hereunder; provided further, any
such amendment, waiver or modification applies by its terms to each applicable
Investor, Founder, or Additional Rights Holders, and each such assignee and,
provided further, that any Investor, Founder, or Additional Rights Holder, or
any such assignee thereof may waive hereunder any of such holder's rights or the
Company's obligations hereunder without obtaining the consent of any other
Investor, Founder, or Additional Rights Holder, or assignee.
Notwithstanding anything herein to the contrary, in the event of a
subsequent closing with a Series E Investor as provided for in Section 1.2 of
the Purchase Agreement, such Series E Investor shall become a party to this
Agreement as a "Series E Investor" without the need for any consent, approval or
signature of any other Investor upon (i) receipt from such Series E Investor of
a fully executed signature page hereto with the Company's consent and (ii)
payment of all consideration for the purchase by such Series E Investor of
shares of Series E Preferred Stock pursuant to the terms of the Purchase
Agreement.
9.8 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provisions were so excluded and shall be enforceable in accordance with its
terms.
9.9 Aggregation of Stock. All shares of the Company's capital stock held
or acquired by a party hereto and its Affiliates shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
9.10 Entire Agreement. This Agreement and the other agreements
referenced herein constitute the full and entire understanding and agreement
between the parties with regard to the subject matter hereof and thereof.
-31-
<PAGE> 35
9.11 Assignment of Rights. The rights pursuant to Sections 2, 3, 4, 5
and 6 of this Agreement may only be assigned by a party hereto to a transferee
or assignee of shares of the Company's capital stock, if: (a) the Company is,
within a reasonable time after such transfer, furnished with written notice of
the name and address of such transferee or assignee and the securities with
respect to which such rights are being assigned; (b) such transferee or assignee
agrees in writing to be bound by and subject to the terms and conditions of this
Agreement, including, but not limited to, those obligations of the transferor
related to its status as an Investor, Founder or Additional Rights Holder
hereunder; (c) such transferee or assignee is not deemed by the Board of
Directors of the Company, in its reasonable judgment, to be a competitor of the
Company and (d) in the case of the transfer of rights pursuant to Section 2, the
transferee acquires at least 250,000 (adjusted for stock splits, combinations
and the like) shares of Registrable Securities and, in the case of a transfer of
the rights pursuant to Sections 3, 4, 5, and 6, the transferee acquires at least
1,000,000 (or 500,000 in the case of Series E Investors) (as adjusted in each
case for stock splits, combinations and the like) shares of Common Stock or such
number of shares of Preferred Stock as are then Convertible into at least
1,000,000 (or 500,000 in the case of Series E Investors) shares of Common Stock,
except that, with respect to clause (d) above, if a party hereto transfers any
securities of the Company to any of its Affiliates or any liquidating trust for
such party, such party may assign to such Affiliates or such liquidating trust
any of its rights under Sections 2, 3, 4, 5, and 6 of this Agreement (subject to
the provisions thereof) without satisfying the thresholds established in clause
(d) above but otherwise complying with this Section 9.11; and such Affiliates or
such liquidating trust shall be entitled to further assign such rights in a
transfer complying with this Section 9.11 as excepted.
[Remainder of this Page Intentionally Left Blank]
A SEPARATE SIGNATURE PAGE FOR
EACH OF THE PARTIES TO THIS AGREEMENT FOLLOWS.
-32-
<PAGE> 36
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
COSINE COMMUNICATIONS, INC.
By:
-----------------------
(Signature)
Name: Dean Hamilton
---------------------
(Print or Type)
Title: President
--------------------
Address:
3200 Bridge Parkway
Redwood City, CA 94065
Phone: (650) 637-4771
Fax: (650) 637-4779
<PAGE> 37
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
HAMILTON
By:
-----------------------
Dean Hamilton
<PAGE> 38
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
LIANGHWA JOU`
By:
--------------------
Lianghwa Jou
<PAGE> 39
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
LARRY V. PLUMMER
By:
--------------------
Larry V. Plummer
<PAGE> 40
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
DONNA M. CHESS AND JOHN J. CHESS, JR., JOINTLY
By:
--------------------
Donna M. Chess
By:
-------------------
John J. Chess, Jr.
<PAGE> 41
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
C.J. OVERSEAS, LTD.
By:
--------------------
Name:
Title:
<PAGE> 42
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
BRUNO ANDRIGHETTO
By:
-------------------
Bruno Andrighetto
<PAGE> 43
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JOHN J. CHESS, JR.
By:
--------------------
John J. Chess, Jr.
<PAGE> 44
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
COSINUS INVESTMENT FUND, LLC
By: Synapse Fund II, LLC
By:
--------------------
Name: Henri Tchen
Title: Manager
<PAGE> 45
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
NORWEST VENTURE PARTNERS VII, LP
By its General Partner
Itasca VC Partners VII, LLP
By:
--------------------
Name: Promod Haque
Title: General Partner
<PAGE> 46
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
KPCB HOLDINGS, INC. AS NOMINEE
By:
--------------------
Name:
Title:
<PAGE> 47
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
WS INVESTMENT COMPANY 99A
By:
--------------------
Name:
Title:
<PAGE> 48
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JOHN A. FORE
By:
--------------------
John A. Fore
<PAGE> 49
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
EDWARD F. VERMEER AND ANGELA L. VERMEER, JOINTLY
By:
--------------------
Edward F. Vermeer
By:
--------------------
Angela L. Vermeer
<PAGE> 50
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
PAUL D. ANAWALT AND VALERIA A. ANAWALT, JOINTLY
By:
--------------------
Paul D. Anawalt
By:
-------------------
Valeria A. Anawalt
<PAGE> 51
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CRESCENDO III, L.P.
by its General Partner, Crescendo Ventures III, LLC
By:
--------------------
Name:
Title:
CRESCENDO III EXECUTIVE FUND, L.P.
by its General Partner, Crescendo Ventures III, LLC
By:
--------------------
Name:
Title:
CRESCENDO III, GBR
By its Managing Members, Crescendo Ventures III, LLC and
Verbier Ventures, LLC
By: By:
-------------------- -----------------------
Name: Name:
Title: Title:
<PAGE> 52
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CRESCENDO WORLD FUND, LLC
by its Managing Member, Crescendo Ventures WF, LLC
By:
--------------------
Name:
Title:
EAGLE VENTURES WF, LLC
By:
--------------------
Name:
Title:
<PAGE> 53
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
COMMUNICATIONS VENTURES II, L.P.
By its General Partner
ComVen II, LLC
By:
--------------------
Name: David Helfrich
Title: Member
COMMUNICATIONS VENTURES III, L.P.
By its General Partner
ComVen III, LLC
By:
--------------------
Name: David Helfrich
Title: Member
COMMUNICATIONS VENTURES
AFFILIATES FUND II, L.P.
By its General Partner
ComVen II, LLC
By:
--------------------
Name: David Helfrich
Title: Member
<PAGE> 54
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
COMMUNICATIONS VENTURES III
CEO & ENTREPRENEURS' FUND, L.P.
By its General Partner
ComVen III, LLC
By:
--------------------
Name: David Helfrich
Title: Member
<PAGE> 55
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
WORLDVIEW TECHNOLOGY PARTNERS I, L.P.
By: Worldview Capital I, L.P., its General Partner
By: Worldview Equity I, L.L.C., its General Partner
By:
--------------------
Name: Michael Orsak
Title: Member
WORLDVIEW TECHNOLOGY INTERNATIONAL I, L.P.
By: Worldview Capital I, L.P., its General Partner
By: Worldview Equity I, L.L.C., its General Partner
By:
--------------------
Name: Michael Orsak
Title: Member
<PAGE> 56
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
WORLDVIEW STRATEGIC PARTNERS I, L.P.
By: Worldview Capital I, L.P., its General Partner
By: Worldview Equity I, L.L.C., its General Partner
By:
--------------------
Name: Michael Orsak
Title: Member
<PAGE> 57
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
FALCON CAPITAL, L.L.C.
By:
--------------------
Name:
Title:
<PAGE> 58
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
SILICON VALLEY BANK
By:
--------------------
Name:
Title:
<PAGE> 59
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
U.S. TELESOURCE, INC.
By:
--------------------
Name:
Title:
<PAGE> 60
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
WESTPORT JOINT VENTURE
By:
--------------------
Name:
Title:
<PAGE> 61
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
VENTURE LENDING & LEASING II, INC.
By:
--------------------
Name:
Title:
<PAGE> 62
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
BIGGERSTAFF FAMILY TRUST
By:
--------------------
Name:
Title: Trustee
By:
--------------------
Name:
Title: Co-Trustee
<PAGE> 63
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
TOM & JERRY HOLDINGS, LLC.
By:
--------------------
Name:
Title:
<PAGE> 64
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
BELL CANADA
By:
--------------------
Name:
Title:
<PAGE> 65
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
LUCENT VENTURE PARTNERS INC.
By:
--------------------
Name:
Title:
<PAGE> 66
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CHARTER GROWTH CAPITAL, L.P.
By: CGC Partners, L.P.
Its: General Partner
By:
--------------------
Name: Steven P. Bird
Title: General Partner
CHARTER GROWTH CAPITAL CO-INVESTMENT FUND, L.P.
By: CGC Partners, L.P.
Its: General Partner
By:
--------------------
Name: Steven P. Bird
Title: General Partner
<PAGE> 67
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CGC INVESTORS, L.P.
By: CGC Partners, L.P.
Its: General Partner
By:
--------------------
Name: Steven P. Bird
Title: General Partner
<PAGE> 68
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
TCV III (GP)
a Delaware General Partnership
By: Technology Crossover Management III, L.L.C.
Its: General Partner
By:
--------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.
Its: General Partner
By:
-------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III (Q), L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.
Its: General Partner
By:
--------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
<PAGE> 69
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
TCV III STRATEGIC PARTNERS, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.
Its: General Partner
By:
--------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
<PAGE> 70
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CLIPPERBAY & CO.
(NAME ON STOCK CERTIFICATE)
CAPITAL RESEARCH & MANAGEMENT, on behalf of SMALLCAP World Fund, Inc.
By:
--------------------
Name:
Title:
<PAGE> 71
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
RADER REINFRANK HOLDINGS NO. 6
By: Rader Reinfrank Investors, LP
Its: Managing Partner
By: Rader Reinfrank & Co., LLC
Its: General Partner
By:
--------------------
Name: R. Rudolph Reinfrank
Its: Managing Member
<PAGE> 72
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
TELESOFT PARTNERS IA, L.P.
By: TeleSoft IA-GP, Inc.
Its: General Partner
By:
--------------------
Name: Arjun Gupta
Title: President
<PAGE> 73
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
ANTHONY CIULLA
By:
--------------------
Anthony Ciulla
<PAGE> 74
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
DAN CHAPEY
By:
--------------------
Dan Chapey
<PAGE> 75
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
MATTHEW O. FITZMAURICE
By:
--------------------
Matthew O. Fitzmaurice
<PAGE> 76
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
VERTEX CAPITAL II L.L.C.
By:
-------------------
Name: Matthew O. Fitzmaurice
Title: Managing Member
<PAGE> 77
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
ATGF II
By:
--------------------
Name: Gary Tanaka
Title: Director
<PAGE> 78
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JAMES STABLEFORD
By:
--------------------
James Stableford
<PAGE> 79
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
MARC WEISS
By:
--------------------
Marc Weiss
<PAGE> 80
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
WILLIAM SLATTERY
By:
--------------------
William Slattery
<PAGE> 81
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
RALPH H. CECHETTINI 1995 TRUST
By:
--------------------
Ralph H. Cechettini, Trustee
<PAGE> 82
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
PIVOTAL PARTNERS, L.P.
By:
--------------------
Ralph H. Cechettini, General Partner
<PAGE> 83
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
HAMBRECHT & QUIST CALIFORNIA
By:
--------------------
Its:
-------------------
By:
--------------------
Name:
Title:
HAMBRECHT & QUIST CALIFORNIA
By:
--------------------
Its:
-------------------
By:
--------------------
Name:
Title:
HAMBRECHT & QUIST EMPLOYEE VENTURE FUND, L.P. II
By: H&Q VENTURE MANAGEMENT, L.L.C.
Its: General Partner
By:
--------------------
Name:
Title:
<PAGE> 84
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
H&Q EMPLOYEE VENTURE FUND 2000, L.P.
By: H&Q VENTURE MANAGEMENT, L.L.C.
Its: General Partner
By:
--------------------
Name:
Title:
ACCESS TECHNOLOGY PARTNERS, L.P.
By: ACCESS TECHNOLOGY MANAGEMENT, L.L.C.
Its: General Partner
By: H&Q VENTURE MANAGEMENT, L.L.C.
Its: Managing Member
By:
--------------------
Name:
Title:
<PAGE> 85
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
ACCESS TECHNOLOGY PARTNERS BROKERS FUND, L.P.
By: H&Q VENTURE MANAGEMENT, L.L.C.
Its: General Partner
By:
--------------------
Name:
Title:
<PAGE> 86
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
H&Q COSINE COMMUNICATIONS INVESTORS, LP
By:
--------------------
Name:
Title:
Address:
One Bush Street
San Francisco, CA 94104
Phone: (415) 439-3000
Fax: (415) 439-3818
<PAGE> 87
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
THE GOLDMAN SACHS GROUP, INC.
By:
--------------------
Name:
Title:
STONE STREET FUND 1999, L.P.
By: Stone Street 1999 Corp.,
Its: General Partner
By:
--------------------
Name:
Title:
<PAGE> 88
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
TUDOR BVI FUTURES, LTD
Tudor Investment Corporation as Investment Advisor
By:
--------------------
Name: James J. Pallotta
Title: Managing Director
RAPTOR GLOBAL FUND, L.P.
Tudor Investment Corporation as General Partner
By:
--------------------
Name: James J. Pallotta
Title: Managing Director
<PAGE> 89
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
RAPTOR GLOBAL FUND, LTD.
By:
--------------------
Name: James J. Pallotta
Title: Managing Director
<PAGE> 90
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
AT&T VENTURE FUND II, LP
By: Venture Management, LLC
Its: General Partner
By:
--------------------
Neal M. Douglas, Manager
<PAGE> 91
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
SPECIAL PARTNERS FUND, LP
By: Venture Management III, LLC
Its: General Partner
By:
-------------------
Neal M. Douglas, Manager
<PAGE> 92
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
SPECIAL PARTNERS FUND INTERNATIONAL, LP
By: Venture Management III, LLC
Its: Investment General Partner
By:
--------------------
Neal M. Douglas, Manager
<PAGE> 93
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
GREEN VENTURE CAPITAL II, L.P.
By:
--------------------
Name:
Title:
The following signature is exclusively to confirm termination of all rights of
the signatory under the Second Amended and Restated Investors' Rights Agreement,
dated as of September 17, 1999.
DONALD GREEN
By:
--------------------
Donald Green
<PAGE> 94
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
PAUL JOHNSON
By:
--------------------
(Signature)
<PAGE> 95
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
TW CAPITAL I INC.
By:
--------------------
Name: Robert Boucai
Title: Secretary
<PAGE> 96
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
SINGTEL VENTURES (SINGAPORE) PTE LTD
By:
--------------------
Name: Andrew Buay
Title: Director
<PAGE> 97
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
COSINE COMMUNICATIONS, INC.
By:
--------------------
Name: Dean Hamilton
Title: President
<PAGE> 98
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
ANSCHUTZ FAMILY INVESTMENT COMPANY LLC
By:
--------------------
Name:
Title:
A.C.E. INVESTMENT PARTNERSHIP
By:
--------------------
Name:
Title:
<PAGE> 99
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
ATGF II
By:
--------------------
Name:
Title:
<PAGE> 100
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CLIPPERBAY & CO.
(NAME ON STOCK CERTIFICATE)
CAPITAL RESEARCH AND MANAGEMENT COMPANY, ON BEHALF OF SMALLCAP WORLD
FUND, INC.
By:
--------------------
Name:
Title:
<PAGE> 101
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
COSINUS INVESTMENT FUND II, LLC
By:
--------------------
Name:
Title:
<PAGE> 102
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CRESCENDO III, L.P.
By its General Partner, Crescendo Ventures III, LLC
By:
--------------------
Name:
Title:
CRESCENDO III, GBR
By its Managing Members, Crescendo Ventures III, LLC and
Verbier Ventures, LLC
By:
--------------------
Name:
Title:
By:
--------------------
Name:
Title:
<PAGE> 103
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CRESCENDO III EXECUTIVE FUND, L.P.
By its General Partner, Crescendo Ventures III, LLC
By:
--------------------
Name:
Title:
<PAGE> 104
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JEANNETTE SCHIRTZINGER
By:
--------------------
Jeannette Schirtzinger
DAVID L. SCHIRTZINGER
By:
--------------------
David L. Schirtzinger
<PAGE> 105
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
TELESOFT PARTNERS IA, L.P.
By: TeleSoft IA-GP, Inc.
Its: General Partner
By:
--------------------
Name: Arjun Gupta
Title: President
TELESOFT STRATEGIC SIDE FUND I, L.L.C.
By: TeleSoft Management, L.L.C.
Its: Manager
By:
--------------------
Name: Arjun Gupta
Title: Executive Manager
<PAGE> 106
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JOHN ARRILLAGA, TRUSTEE OR SUCCESSOR TRUSTEE
OF THE RICHARD T, PEERY 1976 CHILDREN TRUSTS
UNDER TRUST AGREEMENT DATED 12/27/76
By:
--------------------
Name:
Title:
<PAGE> 107
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JOHN ARRILLAGA, JR., TRUSTEE OR SUCCESSOR TRUSTEE
OF THE JOHN ARRILLAGA 1976 CHILDREN TRUSTS
UNDER TRUST AGREEMENT DATED 12/27/76
FBO LAURA K. ARRILLAGA
By:
--------------------
Name:
Title:
<PAGE> 108
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
LAURA K. ARRILLAGA, TRUSTEE OR SUCCESSOR TRUSTEE OF THE JOHN ARRILLAGA
1976 CHILDREN TRUSTS UNDER TRUST AGREEMENT DATED 12/27/76 FBO JOHN
ARRILLAGA, JR.
By:
--------------------
Name:
Title:
<PAGE> 109
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
NETWORK ASSOCIATES, INC.
By:
--------------------
Name:
Title:
<PAGE> 110
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
NISSHO ELECTRONICS CORPORATION
By:
--------------------
Name:
Title:
<PAGE> 111
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
GLOBE LINQ INTERNATIONAL FUND I, LLC
By:
--------------------
Name:
Title:
<PAGE> 112
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
FUSION COMMUNICATIONS CORPORATION
By:
--------------------
Name:
Title:
<PAGE> 113
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
INTERNET INITIATIVE JAPAN
By:
--------------------
Name:
Title:
<PAGE> 114
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
DAVE ROBISON
By:
--------------------
Dave Robison
<PAGE> 115
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
MARTY HAHNFELD
By:
--------------------
Marty Hahnfeld
<PAGE> 116
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
STEVE DANIELS
By:
--------------------
Steve Daniels
<PAGE> 117
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
SCOTT SPRAGUE
By:
--------------------
Scott Sprague
<PAGE> 118
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
DAN JACKSON
By:
--------------------
Dan Jackson
<PAGE> 119
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JEFF SPERBECK
By:
--------------------
Jeff Sperbeck
<PAGE> 120
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
REYNIE ORTIZ
By:
--------------------
Reynie Ortiz
<PAGE> 121
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
DAN O'CALLAGHNAN
By:
--------------------
Dan O'Callaghnan
<PAGE> 122
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
BRIAN LEVY
By:
--------------------
Brian Levy
<PAGE> 123
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JEFF DONAHUE
By:
--------------------
Jeff Donahue
<PAGE> 124
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JEFFREY LEWIS
By:
--------------------
Jeffrey Lewis
<PAGE> 125
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
DONALD CRUME
By:
--------------------
Donald Crume
<PAGE> 126
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CATHERINE HAPKA
By:
--------------------
Catherine Hapka
<PAGE> 127
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CHRIS DEMARCHE
By:
--------------------
Chris DeMarche
<PAGE> 128
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
GERARD M. VAZQUEZ
By:
--------------------
Gerard M. Vazquez
<PAGE> 129
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
BARKLAY KNAPP
By:
--------------------
Barklay Knapp
<PAGE> 130
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
PETE WILLS
By:
--------------------
Pete Wills
<PAGE> 131
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JIM BLUMSOM
By:
--------------------
Jim Blumsom
<PAGE> 132
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
MIKE HENRY
By:
--------------------
Mike Henry
<PAGE> 133
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
TERRY LEE
By:
--------------------
Terry Lee
<PAGE> 134
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CROSBY HAFNER
By:
--------------------
Crosby Hafner
<PAGE> 135
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
DANA ZITEK & ROXANN ZITEK
By:
--------------------
Dana Zitek & Roxann Zitek
<PAGE> 136
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
GLOBE LINQ INTERNATIONAL FUND I, LLC
By:
--------------------
Name:
Title:
<PAGE> 137
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
INTERNET INITIATIVE JAPAN
By:
--------------------
Name:
Title:
<PAGE> 138
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
SYBAT PARTNERS
By:
--------------------
Name:
Title:
<PAGE> 139
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CHAMPION ANGELS
By:
--------------------
Name:
Title:
<PAGE> 140
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
JOHN ELWAY
By:
--------------------
John Elway
<PAGE> 141
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
CHRISTOS COTSAKOS
By:
--------------------
Christos Cotsakos
<PAGE> 142
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
FREDERICK W. WEIDINGER
By:
--------------------
Frederick W. Weidinger
<PAGE> 143
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
THOMSEN LIVING TRUST DATED 5/27/99
By:
--------------------
Name:
Title:
<PAGE> 144
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
WILLIAM L SCHRADER
By:
--------------------
William L Schrader
<PAGE> 145
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
RUANN F. ERNST & WILLIAM C. RIFFLE
By:
--------------------
Ruann F. Ernst & William C. Riffle
<PAGE> 146
COSINE COMMUNICATIONS, INC.
THIRD AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
SIGNATURE PAGE
The undersigned has duly executed this Third Amended and Restated Investors'
Rights Agreement as of the date indicated in the preamble to this Agreement.
OCTANE CAPITAL
By:
-------------------
Name:
Title:
<PAGE> 147
SCHEDULE A
TO
COSINE COMMUNICATIONS, INC.
INVESTORS' RIGHTS AGREEMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEAN HAMILTON 4,000,000
LIANGHWA JOU 1,833,332
LARRY V. PLUMMER 833,332
C.J. OVERSEAS, LTD. 1,171,875
Lornehouse Castletown
Isle of Mann
British Isles
DONNA M. CHESS AND JOHN J. CHESS, 234,375
JR., JOINTLY
JOHN J. CHESS, JR. 156,250
BRUNO ANDRIGHETTO 312,500
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COSINUS INVESTMENT FUND, LLC 613,526
CRESCENDO III, GBR 17,444 3,926
CRESCENDO III EXECUTIVE FUND, L.P. 25,187 5,655
CRESCENDO III, L.P. 3,048,780 2,954,292 847,359 190,419
CRESCENDO WORLD FUND, LLC 648,386 638,328 190,663
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EAGLE VENTURES WF, LLC 31,050 30,569 9,130
COMMUNICATIONS VENTURES II, L.P. 1,379,339 842,410 329,197
COMMUNICATIONS VENTURES III, L.P. 2,129,306 1,302,127 508,845
COMMUNICATIONS VENTURES AFFILIATES
FUND II, L.P. 113,105 69,078 26,994
COMMUNICATIONS VENTURES III CEO
AND ENTREPRENEURS' FUND, L.P. 106,465 65,106 25,442
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 150
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FALCON CAPITAL, L.L.C. 681,367
BIGGERSTAFF FAMILY TRUST 136,273
TOM & JERRY HOLDINGS, LLC. 545,094
c/o Paul Landsman
BELL CANADA 1,355,013 828,197 323,642
LUCENT VENTURE PARTNERS INC. 1,355,013 828,197 323,642
WORLDVIEW TECHNOLOGY PARTNERS I, L.P. 918,099 3,399,114 483,279
WORLDVIEW TECHNOLOGY INTERNATIONAL
I, L.P. 357,834 1,324,822 188,360
WORLDVIEW STRATEGIC PARTNERS I, L.P. 79,081 292,786 41,628
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 151
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NORWEST VENTURE PARTNERS VII, L.P. 5,016,722 743,686
KPCB HOLDINGS, INC., AS NOMINEE 5,685,618 842,845
ANSCHUTZ FAMILY INVESTMENT CO. LLC 1,059,085 157,001 75,100
A.C.E. INVESTMENT PARTNERSHIP 55,741 27,013 4,900
WS INVESTMENT COMPANY 99A 83,612
JOHN A. FORE 16,723
EDWARD F. VERMEER AND ANGELA L.
VERMEER 5,575
PAUL D. ANAWALT AND VALERIA A.
ANAWALT 5,575
SILICON VALLEY BANK
(1)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 152
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VENTURE LENDING AND LEASING II,
INC.
(2)
U.S. TELESOURCE, INC. (4)
WESTPORT JOINT VENTURE
(3)
CHARTER GROWTH CAPITAL, L.P. 1,141,227 34,423
With a copy to:
Tara Farnsworth, Fund Administrator
Charter Growth Capital, L.P.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 153
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHARTER GROWTH CAPITAL 213,980 6,454
CO-INVESTMENT FUND, L.P.
Attn: Jim Boettcher
With a copy to:
Tara Farnsworth, Fund Administrator
Charter Growth Capital, L.P.
CGC INVESTORS, L.P. 71,327 2,151
Attn: Jim Boettcher
With a copy to:
Tara Farnsworth, Fund Administrator
Charter Growth Capital, L.P.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 154
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TCV III (GP) 15,020
Mailing Address:
Technology Crossover Ventures
Attn: Robert C. Bensky
With a copy to:
Technology Crossover Ventures
Attn: Richard Kimball
TCV III, L.P. 71,344
Mailing Address:
Technology Crossover Ventures
Attn: Robert C. Bensky
With a copy to:
Technology Crossover Ventures
Attn: Richard Kimball
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 155
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TCV III (Q), L.P. 1,896,239
Mailing Address:
Technology Crossover Ventures
Attn: Robert C. Bensky
With a copy to:
Technology Crossover Ventures
Attn: Richard Kimball
TCV III STRATEGIC PARTNERS, L.P. 85,871
Mailing Address:
Technology Crossover Ventures
Attn: Robert C. Bensky
With a copy to:
Technology Crossover Ventures
Attn: Richard Kimball
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 156
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLIPPERBAY & CO. 1,925,820 608,098
Notice Address:
Capital Research and Management
Company
Attn: Walter Burkley
RADER REINFRANK HOLDINGS NO. 6 285,308
C/o Rader Reinfrank & Co., LLC
TELESOFT PARTNERS IA, L.P. 912,981 26,161
Attn: Arjun Gupta
With a copy to:
Attn: Tom Dennedy
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 157
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
TELESOFT STRATEGIC SIDE
FUND I, L.L.C. 1,377
C/o TeleSoft Management, L.L.C.
Attn: Arjun Gupta
With a copy to:
Attn: Tom Dennedy
Fax: 650-358-2501
ANTHONY CIULLA 10,000
C/o Amerindo Investment Advisors
Inc.
DAN CHAPEY 600
C/o Amerindo Investment Advisors
Inc.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 158
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ATGF II 560,880 26,667
C/o Amerindo Investments Advisors
Inc.
Attn: Gary Tanaka
Marc Weiss
Attorney Contact
Attn: David Mainzer
Buchalter Nemer Fields & Younger
JAMES STABLEFORD 7,250
C/o Amerindo Investment Advisors
Inc.
MARC WEISS 4,500
C/o Amerindo Investment Advisors
Inc.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 159
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WILLIAM SLATTERY 1,500
C/o Amerindo Investment Advisors
Inc.
RALPH H. CECHETTINI 1995 TRUST 57,654
C/o Pivotal Asset Management
PIVOTAL PARTNERS, L.P. 85,000
C/o Pivotal Asset Management
Attn: Ralph Cechettini
MATTHEW O. FITZMAURICE 14,265
VERTEX CAPITAL II L.L.C. 57,062
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 160
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
HAMBRECHT & QUIST CALIFORNIA 39,943 3,920
Attn: Shannon Horton
HAMBRECHT & QUIST CALIFORNIA 2,333
Attn: Shannon Horton
HAMBRECHT & QUIST EMPLOYEE VENTURE
FUND, L.P. II 39,943
Attn: Shannon Horton
H&Q EMPLOYEE VENTURE FUND
2000, L.P. 2,333
Attn: Shannon Horton
ACCESS TECHNOLOGY PARTNERS, L.P. 639,087 37,333
Attn: Shannon Horton
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 161
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ACCESS TECHNOLOGY PARTNERS BROKERS
FUND, L.P. 12,782 747
Attn: Shannon Horton
H&Q COSINE COMMUNICATIONS
INVESTORS, LLC 67,104
THE GOLDMAN SACHS GROUP, INC. 718,973 59,260
ATTN: Joe di Sabato
STONE STREET FUND 1999, L.P. 79,886 7,407
ATTN: Joe di Sabato
TUDOR BVI FUTURES, LTD. 154,750
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 162
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RAPTOR GLOBAL FUND, L.P. 70,556
RAPTOR GLOBAL FUND, LTD. 345,307
AT&T VENTURE FUND II, LP 314,408
SPECIAL PARTNERS FUND, LP 117,137
SPECIAL PARTNERS FUND
INTERNATIONAL, LP 652,620
GREEN VENTURE CAPITAL II, L.P. 142,653
Attn: Donald Green
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 163
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PAUL JOHNSON 14,265
TW CAPITAL I INC. 14,265
SINGTEL VENTURES (SINGAPORE)
LTD PTE 570,613
COSINUS INVESTMENT FUND II, LLC 1,333,334
c/o Synapse Capital, LLC
Attn: Henri Tchen
OCTANE CAPITAL 666,667
ATTN: Emeric Macdonald
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 164
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EMERIC MCDONALD 133,333
JEANNETTE AND DAVID L. SCHIRTZINGER 2,667
Attn: Jeannette Schirtzinger
JOHN ARRILLAGA, TRUSTEE OR 33,333
SUCCESSOR TRUSTEE OF THE RICHARD
T, PEERY 1976 CHILDREN TRUSTS
UNDER TRUST AGREEMENT DATED
12/27/76.
Attn: Jeannette Schirtzinger
JOHN ARRILLAGA, JR., TRUSTEE OR 16,667
SUCCESSOR TRUSTEE OF THE JOHN
ARRILLAGA 1976 CHILDREN TRUSTS
UNDER TRUST AGREEMENT DATED
12/27/76 FBO LAURA K. ARRILLAGA
Attn: Jeannette Schirtzinger
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LAURA K. ARRILLAGA, TRUSTEE OR 16,667
SUCCESSOR TRUSTEE OF THE JOHN
ARRILLAGA 1976 CHILDREN TRUSTS
UNDER TRUST AGREEMENT DATED
12/27/76 FBO JOHN ARRILLAGA, JR.
Attn: Jeannette Schirtzinger
NETWORK ASSOCIATES, INC. 666,667
Attn: Prabhat K. Goyal
Attn: Kent Roberts
NISSHO ELECTRONICS CORP 100,000
ATTN: Fumio Ohashi
FUSION COMMUNICATIONS CORPORATION 33,333
ATTN: Tak Tsuji
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 166
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GLOBE LINQ INTERNATIONAL FUND I,
LLC 66,667
Attn: Ken Yasunaga
INTERNET INITIATIVE JAPAN 44,667
Attn: Toshiya Asaba
SYBAT
PARTNERS 33,333
Attn: Mory Ejabat
DAVE ROBISON 16,667
MARTY HAHNFELD 13,333
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 167
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STEVE DANIELS 3,333
SCOTT SPRAGUE 10,000
DAN JACKSON 10,000
CHAMPION ANGELS 50,000
Attn: Ronnie Lott
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 168
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JOHN ELWAY 8,000
Attn: Jeff Sperbeck
JEFF SPERBECK 2,000
REYNIE ORTIZ 20,000
DAN O'CALLAGHNAN 13,333
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 169
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BRIAN LEVY 6,667
JEFF DONAHUE 20,000
CHRISTOS COTSAKOS 13,333
Attn: Tom Bevilacqua
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 170
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DONALD CRUME 10,000
RUANN F. ERNST & WILLIAM C. RIFFLE 3,333
Attn: Bill Riffle
CATHERINE HAPKA 6,667
FREDERICK W. WEIDINGER 6,667
Attn: Rick Weidinger
CHRIS DEMARCHE 6,667
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 171
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GERARD M. VAZQUEZ 6,667
THOMSEN LIVING TRUST DATED 5/27/99 6,667
Attn: Marcia Thomsen
BARKLAY KNAPP 13,333
Log Cabin LLC 6,667
Attn: William L. Schrader
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 172
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PETE WILLS 6,667
MIKE HENRY 10,000
TERRY LEE 6,667
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 173
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
INVESTOR STOCK A B C D E
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CROSBY HAFNER 6,667
DANA ZITEK & ROXANN ZITEK 10,000
Attn: Dana Zitek
- --------------------------------------------------------------------------------------------------------------
TOTAL: 6,666,664 1,875,000 12,884,205 24,503,677 17,118,253 4,666,668
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes:
(1) Holder of this warrant is entitled to purchase 84,688 shares of Series B
Preferred Stock.
(2) Holder of this warrant is entitled to purchase up to a maximum of
304,878 shares of Series B Preferred Stock, subject to certain
contingencies.
(3) Holder of this warrant is entitled to purchase 157,915 shares of Series
A Preferred Stock.
(4) Holder of this warrant is entitled to purchase 1,875,403 shares of
Series C Preferred Stock.
<PAGE> 1
EXHIBIT 10.7
MASTER EQUIPMENT LEASE AGREEMENT
DATED AS OF
FEBRUARY 1, 2000
BETWEEN
RELATIONAL FUNDING CORPORATION, LESSOR
AND
COSINE COMMUNICATIONS, INC., LESSEE
1
<PAGE> 2
MASTER EQUIPMENT LEASE AGREEMENT
THIS MASTER EQUIPMENT LEASE AGREEMENT ("Master Lease") is between RELATIONAL
FUNDING CORPORATION, an Illinois corporation having its principal place of
business at 3701 Algonquin Road, Suite 450, Rolling Meadows, Illinois
60008-3118 ("Lessor"), and COSINE COMMUNICATIONS, INC., a California
corporation having its principal place of business at 3200 Bridge Parkway,
Redwood City, California 94065 ("Lessee").
Lessor, by its acceptance hereof, agrees to lease to Lessee, and Lessee agrees
to lease from Lessor, in accordance with the terms and conditions hereinafter
set forth, the equipment and features, together with all replacements, parts,
repairs, additions, attachments and accessories incorporated therein
(collectively called the "Equipment" and individually called a "Unit") described
in each related equipment schedule ("Schedule") which is executed from time to
time by Lessor and Lessee. Each Schedule shall refer to and incorporate by
reference this Master Lease and, when signed by Lessor and Lessee, shall
constitute a separate lease ("Lease") for the Equipment therein described on the
terms and conditions stated therein and on the terms and conditions stated in
this Master Lease. To the extent that any term or condition contained in any
Schedule conflicts with any term or condition contained herein, the terms and
conditions contained in such Schedule shall govern and prevail over the terms
and conditions contained herein as to said Schedule.
SECTION 1. DEFINITIONS.
(A) "Base Term" shall mean the full consecutive calendar months set forth on
the Schedule commencing with and including the month in which the Base Term
Date shall occur. The Lease may be terminated by either Lessor and Lessee at
the end of said Base Term, provided not less than ninety (90) days prior
written notice of such termination is delivered to the other party, otherwise
the Lease shall remain in full force and effect. Thereafter, the Lease may be
terminated by either Lessor or Lessee at the end of any month provided not less
than ninety (90) days prior written notice of such termination is delivered to
the other party by the party desiring termination. Periods of each such
extension of the Base Term of a Lease shall not be less than ninety (90) days.
(B) "Base Term Date" shall mean the day of the month coincident with (a) the
date of installation by the manufacturer or manufacturers of the Equipment
(collectively, the "Manufacturer") and acceptance by the Lessee of all Units or
(b) the date set forth on the related Schedule as "Base Term Date", whichever
shall later occur. If such date is on a day other than the first day of a
month, the Base Term Date shall be the first day of the first month after such
date.
(C) "Commencement Date" shall mean the earlier of (i) the date upon which the
first Unit shall have been installed, and certified by the Manufacturer as
ready for Lessee's first use, or (ii) the date upon which the first Unit shall
have been accepted by the Lessee.
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(D) The terms "BASE RENT", "OVERDUE RATE", "BASE RENT DATES", and "STIPULATED
LOSS VALUE" shall have the meaning, if any, set forth in each Schedule.
SECTION 2. TERM OF LEASE The term of this Master Lease shall commence on
the date accepted by Lessor and shall continue until the date of expiration or
termination of the term, or any renewal thereof, of all Leases. The term of a
Lease ("LEASE TERM") shall commence upon the Commencement Date and shall
continue in full force thereafter until the Lease is terminated by Lessee upon
not less than ninety (90) days prior written notice to Lessor; provided,
however, that: (A) a Lease shall in no event be terminated as to any Unit prior
to the last day of the last full calendar month of the Base Term; and (B) that
the Lease has not been earlier terminated by Lessor as hereinafter provided.
Any notice of termination given by Lessor or Lessee may not be withdrawn
without the written consent of the other party.
SECTION 3. RENTAL CHARGES & TAXES The Base Rent for Equipment shall
commence on the Base Term Date and shall be due and payable, together with all
other amounts arising under the related Lease which are then due and payable by
Lessee (collectively "Additional Rent"), at Lessor's address set forth above,
or such other address as Lessor may designate in writing, without notice or
demand, on the Base Rent Dates and thereafter until the Equipment is returned
to Lessor in accordance with the return provisions contained herein. In
addition, Lessee shall pay as prorata rent on the Base Term Date one-thirtieth
(1/30) of the Base Rent for each day from, and including, the Commencement Date
(but not earlier than the 15th of the month in which the Commencement Date
occurs), and excluding, the Base Term Date.
Lessee covenants and agrees to pay, and discharge before the same become due,
to the appropriate taxing authority all taxes, fees and other charges of any
nature whatsoever (together with any related interest, fines or penalties
collectively, "IMPOSITIONS") now or hereafter imposed, assessed or payable
during the Lease Term (excepting only federal, state and local taxes measured
solely by the net income of Lessor or any franchise tax upon Lessor measured by
Lessor's capital, capital stock or net worth) by any federal, state, county or
local government or taxing authority upon or with respect to: (i) any Unit;
(ii) the leasing, ordering, purchase, sale, ownership, use, operation, return
or other disposition of any Unit; (iii) the Base Rent or Additional Rent for
each Unit; (iv) the leasing of any Unit. Lessee shall, to the extent permitted
by law, cause all Impositions to be billed to Lessee. Lessee shall, at its
expense, timely file all forms and returns and timely do all things required to
be done in connection with the levy, assessment and payment of any
Impositions. Upon Lessor's request, Lessee shall submit written evidence to
Lessor of the payment of all Impositions required to be paid by Lessee
hereunder promptly after such payment. If Lessor pays any Imposition, Lessee
shall, when billed by Lessor, reimburse Lessor for any such payment and any
reasonable expenses incurred in the preparation and filing of any tax returns
relating to such Imposition. Lessee shall inform Lessor as to any governmental
jurisdiction imposing personal property taxes on ownership or use of the
Equipment, and as to the amount of such taxes.
Lessee's obligation to pay all amounts due and to become due under any Lease
shall be absolute and unconditional and shall not be subject to any abatement,
reduction, defense, counterclaim, set-off,
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or recoupment, including without limitation any present or future claim against
Lessor, the Manufacturer, or any other person or entity; and the respective
obligations and rights of Lessee and Lessor and its assignees under Leases shall
not terminate or diminish for any reason, including without limitation any
defect in, or any destruction or loss of use of, any Unit.
Section 4. USE OF EQUIPMENT. Each Unit shall be kept by Lessee in its sole
possession and control and will be used only by Lessee's qualified employees in
compliance with: (A) all applicable laws, statutes and regulations; (B) the
Manufacturer's expressed warranties, specifications and anticipated use of the
Equipment; and (C) the terms of the insurance policies pertaining to the
Equipment and its use. Each Unit will at all times be located at the location
stated in the related Schedule and will not be removed therefrom without (a)
providing Lessor with prior written notice and (b) executing reasonable
documentation required by Lessor to protect and perfect Lessor's interests in
the Equipment. All costs and expenses of every nature that may be incurred in
connection with the permitted movement of the Equipment between locations shall
be borne by Lessee. Lessee will not make, or permit to be made any alteration or
addition to the Equipment (other than manufacturer's approved engineering
changes) without the prior written consent of Lessor, such consent not to be
unreasonable withheld. Lessee may make functional improvements in the Equipment
which do not diminish or impair the function or value of the Equipment, provided
that prior to returning the Equipment to Lessor, Lessee (a) returns any
improvements made to the Equipment to Lessor and conveys good and marketable
title to any such improvements to Lessor if said improvements were leased by
Lessor or (b) if said improvements were not provided to Lessee by Lessor,
removes said improvements and restores the Equipment to its original value,
function and configuration, ordinary wear and tear excepted. Lessor shall not be
liable for any loss, damage or expense of any kind or nature whatsoever and
howsoever, directly or indirectly, caused (including, without limitation, any
loss of business) by: (i) any Unit; (ii) the use, maintenance, repair, service
or adjustment thereof; (ii) any delay or failure to provide any maintenance,
repair, service or adjustment thereto; or (iv) any interruption of service or
loss of use thereof.
Section 5. LOSS OR DAMAGE TO EQUIPMENT AND INSURANCE. Lessee shall be
responsible for, and assumes the entire risk of the Equipment being lost,
damaged, destroyed, stolen or otherwise rendered unfit or unavailable for use
("EVENT OF LOSS") from the date of its shipment to Lessee until the date of
return to, and receipt of possession by, Lessor. Upon the occurrence of an
Event of Loss to any Unit, Lessee shall give Lessor immediate notice thereof and
the Lease to which such Equipment is subject shall continue in full force and
effect without abatement in the Base Rent applicable thereto. Lessee shall
determine, and notify Lessor, within thirty (30) days after the date of the
occurrence of such Event of Loss whether such Unit can be repaired. In the event
Lessee determines that such Unit can be repaired, Lessee shall, prior to
expiration of the Base Term and at its expense, cause such Unit to be promptly
repaired. If any Unit is lost, destroyed, stolen, damaged beyond repair or
rendered unfit or unavailable for use for a period of time extending beyond the
date of expiration of the applicable Base Term, Lessee shall, within thirty (30)
days of such Event of Loss, pay to Lessor on the next Base Rent Date an amount
equal to the percentage set forth in the Stipulated Loss Value Schedule attached
to the related Schedule opposite the applicable Base Rent Date multiplied by
Lessor's cost of such Unit. Upon receipt by Lessor of such payment, and all
other
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amounts then due and payable by Lessee to Lessor pertaining to said Unit,
Lessee's obligation to pay further Base Rent for such Unit shall cease and
Lessor shall transfer all of its right, title and interest in said Unit to
Lessee, free and clear of all liens and encumbrances created or incurred by
Lessor or parties claiming by or through Lessor, but the Lease shall continue in
full force and effect as to all remaining Equipment subject to the Lease.
Lessee shall, at its sole expense, cause the Equipment to be insured by
insurance companies reasonably acceptable to Lessor against all risks of loss or
damage for the Lease Term for not less than the greater of the replacement or
insurable values of the Equipment and shall carry comprehensive general
liability and property damage insurance in amounts of not less than
$1,000,000.00 per occurrence covering Lessee, the Equipment and its use. Lessee
shall cause Lessor to be provided with Certificates of Insurance, and other
reasonable evidence of insurance coverage in form acceptable to Lessor, which
names Lessor, and any assignee of Lessor's right, title or interest in the
Equipment or the Lease ("Lessor's Assignee"), as loss payees and additional
insureds, as their interests may appear in the Lease. Lessee shall timely pay
the premiums for all insurance coverage and shall deliver evidence thereof to
Lessor, together with industry-standard loss payable endorsements thereon
whereby each insurer agrees that it will give to Lessor: (A) not less than
thirty (30) days prior written notice of cancellation or material alteration in
said coverage; and (B) the right to make payment of premiums without obligation.
The proceeds of such insurance, at the option of Lessor, shall be applied to the
replacement, restoration or repair of the Equipment, or to payment of the
obligations of Lessee under the related Lease. Lessee hereby appoints Lessor as
Lessee's attorney-in-fact to make claims for, receive payment of, and execute
and endorse all documents, checks or drafts for, loss or damage under any said
insurance coverage.
SECTION 6. MAINTENANCE AND RETURN. Lessee shall, at its expense: (A) unless
expressly otherwise consented to by Lessor, as to any material Unit obtain and
keep in full effect, throughout the term of a Lease, a contract from the
Manufacturer (or other maintenance organization authorized by Manufacturer) if
such contracts are reasonably available at the manufacturer's then standard
rates from said parties providing for not less than standard service, including
parts, maintenance service and repairs and, at the request of Lessor, provide
Lessor with a copy thereof; (B) otherwise maintain the Equipment up to the
standards set by the Manufacturer and in good working order and appearance,
ordinary wear and tear excepted; (C) supply all parts, supplies, utilities and a
suitable installation site, necessary for the proper operation of the Equipment
as specified by the Manufacturer; and (D) make all reasonably necessary or
recommended adjustments, engineering changes and repairs thereto. Upon
reasonable notice, Lessee will grant access to the Equipment, and all records
relating to the use and maintenance thereof, subject to Lessee's reasonable
security requirements, to Lessor, Lessor's Assignee, their agents and the
organization providing maintenance services for the Equipment during normal
working hours for inspection, repair, maintenance, installation or required
engineering changes and for any other reasonable purposes. Lessee shall promptly
notify Lessor of all details concerning any accident arising out of the alleged
or apparent improper manufacture, functioning or operation of any Unit. Lessee
will at all times cooperate with the Manufacturer so as to permit the prompt
installation of all engineering changes to the Equipment as and when reasonably
determined necessary or desirable by the Manufacturer. Upon receipt of
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written request from Lessee, and so long as the related Lease shall remain in
force, Lessor shall take all reasonable action requested by Lessee to enforce
any manufacturer or vendor warranty, express or implied, issued or applicable to
the Equipment, which is enforceable by Lessor in its own name, provided,
however, that Lessor shall not be obligated to resort to litigation to enforce
any such warranty unless Lessee shall pay all reasonable expenses in connection
therewith. Similarly, if any such warranty shall be enforceable by Lessee in its
own name, Lessee hereby agrees upon receipt of written request from Lessor and
so long as the related Lease shall remain in force, to take all reasonable
action requested by Lessor to enforce any such warranty, provided, however, that
Lessee shall not be obligated to resort to litigation to enforce any such
warranty unless Lessor shall pay all expenses in connection therewith. Lessor
hereby assigns to Lessee any warranty rights which Lessor may have against the
Manufacturer, to the extent such warranty rights are assignable. With respect to
such warranty rights as are not assignable, Lessor hereby appoints Lessee as its
agent and attorney-in-fact for the purpose of enforcing such warranty rights at
Lessee's expense.
Before a Lease shall be terminated and the Equipment has been deemed to have
been returned to Lessor, Lessee shall have given notice to Lessor of Lessee's
intention to return the Equipment as provided herein and shall give additional
notice to Lessor in the event the Equipment is not returned in accordance with
the prior notice, and shall, at Lessee's sole cost and expense, cause the
Equipment to be certified for a continuing standard maintenance agreement at
standard pricing by the Manufacturer) if such agreements are available from
Manufacturer and applicable in the reasonable judgment of Lessor, deinstall and
pack each Unit separately in the original boxes or crates in accordance with the
Manufacturer's specifications and deliver every Unit to Lessor, clean and in the
same condition as when delivered to Lessee by the Manufacturer, ordinary wear
and tear excepted in addition to any specific return provisions contained in the
applicable Schedule, at such location as Lessor shall designate within the
United States or, in the case of computer equipment, Ontario, Canada, provided
that Lessor shall prepare and bear the cost of all documents, duties, fees and
taxes incurred in transporting the Equipment into Canada.
SECTION 7. TITLE. Each Unit shall remain personal property of, and title thereto
shall remain in, Lessor or Lessor's Assignee exclusively. Lessee shall have only
a leasehold right to use the Equipment in accordance with the terms and
conditions of this Master Lease as it relates to a Lease and shall have no other
right, title or interest in or to, or right to purchase or otherwise acquire
title to or ownership of, a Lease or any Unit subject thereto, except as may be
expressly set forth in the related Schedule. All accessions, substitutions,
replacement parts and additions (including, without limitation, all feature
additions or model changes, as those terms are defined by the Manufacturer)
incorporated in or affixed to the Equipment shall be the property of Lessor,
provided however, that prior to returning the Equipment to Lessor, Lessee may
remove any such accessions, substitutions, replacement parts or additions which
are not leased to Lessee by Lessor if such removal can be made without causing
material damage to the Equipment and that Lessee restores the Equipment to its
original configuration, value and function, ordinary wear and tear excepted. At
its expense, Lessee shall immediately notify Lessor of any pending or threatened
claim of, and protect and defend Lessor's good and marketable title to the
Equipment against, all persons claiming against or through Lessee and keep the
Equipment free from any claim, legal process or encumbrance whatsoever.
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including without limitation, liens, attachment, levies and executions (except
any placed thereon by or through Lessor or Lessor's Assignee and except for
Permitted Liens). Lessee indemnifies Lessor against, and shall not create,
incur, assume or suffer to exist, any mortgage, lien, pledge or other
encumbrance or attachment of any kind whatsoever (except any placed thereon by
or through Lessor or Lessor's Assignee and except for Permitted Liens) upon,
affecting or regarding the Equipment or the related Lease, or any interest of
Lessor or Lessor's Assignee. For the purposes of this Lease, the term "Permitted
Lien" shall mean: (i) liens for taxes or for other governmental charges either
not yet due or being contested in good faith by Lessee and (ii) materialmens',
mechanics', artisans', workmens', repairmens', employees', or other like liens
arising in the ordinary course of business, which either are not delinquent or
are being contested in good faith by Lessee, provided that any such Permitted
Lien shall be, to the extent necessary, bonded against or shall not otherwise
effect Lessor's right, title or interest in the Equipment. Upon Lessor's
request, Lessee shall execute, or cause to be executed by any other party, and
deliver to Lessor such further instruments or assurances as Lessor reasonably
deems necessary or advisable for the confirmation or perfection of Lessor's
right, title or interest hereunder. In order to perfect Lessor's security
interest in the Equipment in the event a Lease is determined to be a security
agreement, Lessee authorizes Lessor, at Lessee's reasonable expense, to cause
the Lease, or any statement or other instrument reflecting Lessor's interests in
the Equipment, including Uniform Commercial Code financing statements, to be
filed or recorded, or re-filed or re-recorded, and Lessee grants Lessor the
right to execute any such statement or instrument on behalf of Lessee. Lessee
agrees to pay, or reimburse Lessor, for any searches, filing, recording or stamp
fees, expenses or taxes arising from the filing or recording of any such
instrument or statement. Lessee represents and warrants that the Equipment is,
and at all times be and remain, personal property and not a fixture
notwithstanding the manner in which any Unit may now be, or hereafter become,
affixed to real property or any improvement thereon. If Lessor provides Lessee
with labels, Lessee shall affix labels to any and all Units, shall keep the same
affixed in a prominent place and shall not permit said labels to be removed or
concealed.
SECTION 8. DISCLAIMER OF WARRANTIES. LESSOR MAKES NO DIRECT OR INDIRECT
WARRANTIES, GUARANTIES OR REPRESENTATIONS, EXPRESSED OR IMPLIED, OF ANY KIND OR
NATURE WHATSOEVER, WITH RESPECT TO THE EQUIPMENT INCLUDING, WITHOUT LIMITATION,
THE MERCHANTABILITY, VALUE, QUALITY, CONDITION, CAPACITY, DESIGN, MATERIAL,
WORKMANSHIP, SUITABILITY FOR LESSEE'S PURPOSE, FITNESS FOR A PARTICULAR
PURPOSE, COMPLIANCE WITH REQUIREMENTS OF ANY APPLICABLE LAW, RULE,
SPECIFICATION OR CONTRACT, PATENT OR TRADEMARK INFRINGEMENT OR PATENT DEFECTS
OR, WITH RESPECT TO THE LEASES, TREATMENT OF ANY LEASE FOR TAX OR ACCOUNTING
PURPOSES. Lessee selected the Equipment, its size and design and, as between
Lessor and Lessee, Lessee leases the Equipment in "as is" condition. Lessor
shall in no event be responsible or liable for any damages, including without
limitation, direct, indirect, special, incidental or consequential damages or
losses of business or profits, resulting from or relating to the Lease, the
Equipment or any products manufactured thereby. Further, notwithstanding
Lessor's acceptance of any order or supplemental order, Lessor is not the
Manufacturer or its agent and shall not be responsible or liable for any such
damages or losses,
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restitution, specific performance or other remedy in the event Manufacturer or
any vendor of the Equipment fails to timely deliver any Unit to Lessor or
Lessee for any reason or in any manner or respect breaches or fails to perform
its contract with Lessor.
SECTION 9. TRANSPORTATION AND INSTALLATION. Lessee shall pay all costs of
transportation, rigging, drayage, in-transit insurance, installation,
deinstallation and other charges related to delivery of the Equipment to and
from Lessee.
SECTION 10. NO WAIVER. Time is of the essence and Lessor's failure or delay at
any time to require strict performance by Lessee of any of the provisions of a
Lease shall not diminish or waive Lessor's right to demand strict compliance
therewith or with any other provision. Waiver of any default shall not waive
any other contemporaneous or subsequent default. Lessor's rights under a Lease
are cumulative and not exclusive and may be exercised successively or
concurrently and in addition to any rights or remedies available at law or in
equity.
SECTION 11. QUIET ENJOYMENT. Lessor warrants to Lessee that Lessee shall be
entitled to quietly hold, possess and use the Equipment subject to the terms of
this Lease so long as no Event of Default has occurred and is continuing,
without interference by Lessor, Lessor's Assignee, their creditors or any other
person claiming through, under or against Lessor or Lessor's Assignee.
SECTION 12. DEFAULT AND REMEDIES. The occurrence of any one of the following
events ("EVENT OF DEFAULT") shall constitute a default under any Lease: (A)
Lessee fails to pay Base Rent or Additional Rent on or before five (5) business
days after the date upon which said amounts are due; (B) any information,
representation, warranty or financial statement is false or misleading in any
material respect as of the date it was given to Lessor by or on behalf of
Lessee; (C) Lessee fails to observe or perform any term, condition, obligation,
agreement or covenant set forth in the Master Lease or any Lease and such
failure continues for a period of thirty (30) days after written notice thereof
is given to Lessee; (D) Lessee assigns a Lease or sells, transfers, removes,
encumbers, subleases, lends, abandons or parts with possession of any Unit, or
attempts to do, or suffers or permits, any of the foregoing, except as expressly
consented to by Lessor; (E) Lessee or any guarantor of Lessee's obligations to
Lessor ("GUARANTOR") ceases doing business as a going concern or mergers with,
or a substantial portion of Lessee's assets are acquired by, any other entity;
(F) Lessee or any Guarantor, or their shareholders or partners, take any act of
dissolution or liquidation; (G) Lessee or any Guarantor (i) becomes insolvent,
(ii) fails or admits in writing its inability or unwillingness to pay its debts
as they become due, (iii) makes an assignment for the benefit of creditors,
(iv) applies for, acquiesces in or consents to the appointment of any receiver,
trustee or other custodian for it or any substantial part of its property, or
such receiver, trustee or other custodian is appointed without its application
or consent and such appointment continues undischarged for a period of sixty
(60) days; (H) any bankruptcy, reorganization, debt arrangement or other case
or proceeding under any bankruptcy or insolvency law, dissolution or
liquidation proceeding or other law or statute for the relief of debtor's, is
commenced in respect of Lessee or any Guarantor and, if such case or proceeding
is not commenced by Lessee, it is consented to or acquiesced in by Lessee or
any Guarantor, or remains undismissed for more than sixty (60) days, or
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if Lessee or any Guarantor takes any action to authorize, or in furtherance of,
any of the foregoing; (I) the occurrence of a material adverse change in the
financial condition or general creditworthiness of Lessee or any Guarantor; (J)
an Event of Default by Lessee under any other Lease with Lessor; (K) a Unit is
seized, attached or levied upon; or (L) if Lessee or Guarantor is a natural
person, the death of the Lessee or Guarantor. Upon the occurrence of an Event of
Default which is uncured by Lessee within the cure periods set forth above,
Lessor may at its option, do any or all of the following:
(a) without notice to Lessee, declare immediately due and payable by Lessee, as
liquidated damages for loss of a bargain and not as a penalty, an amount equal
to the Stipulated Loss Value set forth in the related Schedule, which amount,
together with all accrued and unpaid payments of Base Rent, Additional Rent and
any other sums due and payable for all periods up to and including the date on
which Lessor receives the total of such amount, shall be immediately payable by
Lessee; (b) at Lessor's option and with notice to Lessee, terminate the Lease in
default; (c) regardless of whether the Lease in default is terminated, take
possession of any or all Units or render them unusable and, for this purpose,
enter upon any premises where any Unit is located without notice, court order or
other process of law and without any liability to Lessee or any other party for
any damage, loss, cause of action or claim, except for any claims, costs,
damages, expenses or liabilities arising from, and to the extent of, the gross
negligence or willful misconduct of Lessor or any parties claiming by or through
Lessor; (d) regardless of whether the Lease in default is terminated, require
Lessee to deliver any or all Units to Lessor in accordance with Section 6
hereof; (e) sell, dispose of, hold, use or re-lease any Unit as Lessor in its
sole discretion may determine (without giving preference to any sale, re-lease
or other disposition of any Unit or similar equipment owned or lease by Lessor)
by public or private disposition; (f) proceed by appropriate court actions at
law or in equity to enforce performance by Lessee of the terms and conditions of
the Lease or to recover damages from Lessee for any breach thereof.
Upon any sale, re-lease or other disposition of any Unit, Lessor shall apply to
all of Lessee's obligations under the defaulted Lease: (x) in the case of a
sale, the proceeds of the sale less the estimated fair market value of such Unit
as of the end of the Base Term of the Lease; (y) in the case of a re-lease, the
present value of the rental due thereunder for a period co-terminus with the
scheduled expiration date of the Lease Term or applicable renewal thereof,
discounted at the interest rate at which said re-lease is financed; or (z) if
the re-lease of the Unit is not financed, Lessee shall receive no credit for the
re-lease rents but, instead, shall pay Lessor forthwith all remaining
obligations under the defaulted Lease and, upon such payment, Lessor will remit
to Lessee such re-lease rents as they are received. Lessee shall be liable for
the deficiency balance payable under a defaulted Lease, together with all costs,
expenses, losses, and damages, including without limitation, all court costs and
reasonable attorneys' fees and reasonable expenses, incurred by Lessor, Lessor's
Assignee or any other party in repossessing, moving, reconditioning, selling,
re-leasing or otherwise recovering or disposing of any Unit, or in enforcing the
terms and conditions of any Lease or Lessor's interests, or the priority
thereof, in any Lease or the Equipment. All proceeds of any disposition of the
Equipment in excess of Lessee's obligations under the Lease shall be the
property of Lessor.
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To the extent permitted by applicable law, Lessee hereby waives any and all
rights and remedies conferred upon a lessee by Sections 2A-401 and 2A-402, and
Sections 2A-508 through 2A-522 of the Uniform Commercial Code as adopted in the
applicable state, provided, however, that the foregoing waiver shall in no
event impair or diminish any right or remedy otherwise conferred upon Lessee
hereunder. To the extent permitted by applicable law, Lessee further waives any
rights now or hereafter conferred by statute or otherwise which may require
Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's
damages hereunder or which may otherwise limit or modify any of Lessor's rights
or remedies hereunder.
SECTION 13. ASSIGNMENT. Lessee acknowledges and agrees that Lessor entered
into this Master Lease, and may enter into any Lease, in anticipation of
assigning, mortgaging or otherwise transferring its right, title or interest in
a Lease and/or the Equipment subject thereto to Lessor's Assignee without
notice to, or consent of, Lessee. Accordingly, Lessor and Lessee agree that
upon such assignment, Lessee shall: (A) upon Lessor's request, acknowledge such
assignment in writing by executing a notice of assignment furnished by Lessor;
(B) promptly pay all Base Rent and Additional Rent to Lessor's Assignee and
Lessee's obligation to make such payments shall be absolute and unconditional
and shall not be subject to any claim, defense, set-off, deduction,
counterclaim or recoupment, including without limitation any present or future
claim against Lessor, the Manufacturer or any other person or entity or any
defect in, or any destruction or loss of use of, any Unit; (C) not permit the
Lease so assigned to be amended or any of the terms or conditions thereof
waived without the prior written consent of Lessor's Assignee; and (D) not
require Lessor's Assignee to perform any obligation of Lessor under such Lease
except the obligation not to breach Lessee's right to quiet enjoyment of the
Equipment as set forth in Section 11 hereof. Any Lessor's Assignee may reassign
its rights and interests with the same effect as the assignment by Lessor
described herein. Lessor shall not be relieved of any of its obligations
hereunder by any assignment unless expressly assumed by Lessor's Assignee and
consented to by Lessee, which consent shall not be unreasonably withheld.
LESSEE SHALL NOT ASSIGN ITS INTERESTS UNDER ANY LEASE OR TRANSFER OR SUBLEASE
ANY UNIT SUBJECT THERETO WITHOUT LESSOR'S PRIOR WRITTEN CONSENT. NO PURPORTED
ASSIGNMENT, TRANSFER OR SUBLEASE BY LESSEE SHALL IN ANY MANNER RELIEVE LESSEE
OF ANY OF ITS OBLIGATIONS HEREUNDER, AND LESSEE SHALL REMAIN PRIMARILY LIABLE
TO PERFORM ALL OF THE TERMS AND CONDITIONS HEREUNDER AND UNDER ALL LEASES
NOTWITHSTANDING ANY PURPORTED ASSIGNMENT, TRANSFER OR SUBLEASE.
SECTION 14. LESSEE'S INDEMNIFICATIONS. Lessee indemnifies and saves Lessor
harmless from, and agrees to defend Lessor against, any and all claims,
actions, proceedings, injuries, deaths, expenses, losses, damages (whether
direct, indirect, special, incidental or consequential) and liabilities,
including all court costs and reasonable attorneys' fees and reasonable
expenses, arising in connection with the Equipment and any Lease, including
without limitation, the manufacture, selection, purchase, delivery, possession,
use, operation, maintenance, leasing and return of the Equipment, acts of
Lessee in failing to maintain the Equipment in good repair or patent, trademark
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or copyright infringement. Lessee shall promptly notify Lessor of any pending
or threatened claim arising from any of the foregoing. Notwithstanding anything
contained in this Section 14, Lessee shall not indemnify any party pursuant to
this Section 14 for any claims, losses, costs, damages, expenses or liabilities
occasioned by, and solely to the extent of, the gross negligence or willful
misconduct of such party.
SECTION 15. LESSEE'S PERFORMANCE AND EXECUTION. Lessee represents and warrants
to Lessor that (A) the execution and performance of this Master Lease and each
Lease hereto has been and will be duly authorized by Lessee and that, upon
execution by Lessee and acceptance by Lessor of this Master Lease and each
Lease, such Lease will constitute a valid obligation enforceable against Lessee
in accordance with its terms, subject to applicable bankruptcy, reorganization
or other similar laws affecting the enforceability generally of the rights of
creditors or lessors; (B) that neither the execution of this Master Lease, nor
any Lease, nor the due performance thereof by Lessee will result in a breach of,
or constitute a default under or violation of Lessee's certificate or articles
of incorporation or bylaws (or loan, indenture or shareholder agreements to
which Lessee is a party); (C) Lessee is duly organized and in good standing
under the laws of its jurisdiction of organization and is and will continue to
be duly qualified to do business and in good standing in any jurisdiction where
any of the Equipment shall be located; (D) the person executing this Master
Lease on behalf of Lessee has been, and each person executing a Schedule, at
the time of such execution, shall be authorized to do so; (E) any and all
financial statements and other information with respect to Lessee furnished by
Lessee to Lessor will be, when furnished, and will remain at the time of
execution of any Schedule, true and correct in all material respects without
any misleading omissions, excepting any changes which have been disclosed in a
written notice to Lessor; and (F) to the best of Lessee's knowledge, there are
no actions, suits, or proceedings pending before any court, administrative
agency, arbitration tribunal or governmental body which will, if determined
adversely to Lessee, materially affect its ability to perform its obligations
under this Master Lease, each Schedule or any related agreement to which it is
a party.
SECTION 16. ADDITIONAL INFORMATION AND CONFIDENTIALITY OF INFORMATION. Lessee
shall promptly deliver to Lessor the following documentation as and when
requested by Lessor: (A) copies of quarterly financial statements as published
in reports filed with the Securities and Exchange Commission or, if none, such
financial information, including Lessee's balance sheets and income statements,
and such other current financial information with respect to the financial
condition and operations of Lessee as Lessor may from time to time reasonably
request; (B) a certificate of the resolutions of the board of directors of
Lessee duly authorizing or ratifying this Master Lease or any Schedule; (C) a
certificate of incumbency setting forth the names and signatures of those
persons authorized to execute this Master Lease or any Schedule on behalf of
Lessee; (D) use commercially reasonable efforts to obtain landlord's and
mortgagee's waivers in form and substance reasonably satisfactory to Lessor and
Lessor's Assignee with respect to any promises upon which any Unit is located;
(E) upon the reasonable request of Lessor, an opinion of the legal counsel of
Lessee as to the matters set forth in Subsections 15(A) through 15(D) hereof,
and as to such other matters as Lessor reasonably may request, which opinion
may be provided by Lessee's internal legal counsel; (F) such documentation
confirming the
11
<PAGE> 12
execution of any Lease necessary or desirable to effect any assignment, perfect
any interest of Lessor or any Lessor's Assignee, or for such other purposes
relating to any Lease or any assignment thereof as Lessor may reasonably
request; and (G) such additional instruments, information or assurances as
Lessor or Lessor's Assignee may reasonably request concerning Lessee in order to
enable Lessor to determine whether the covenants, terms and provisions of any
Lease have been complied with by Lessee and to confirm and perfect this Master
Lease and Lessor's rights hereunder. If such request for documentation is made
prior to the delivery of any Unit, receipt by Lessor of such documentation shall
be a condition precedent to Lessor's acceptance of the related Lease.
Notwithstanding anything contained in this Section 16 to the contrary, Lessor
hereby agrees to hold in confidence and trust and not to misuse or disclose any
confidential or proprietary information, including without limitation any
financial statements and other financial information, provided to Lessor
pursuant to this Section 16, provided however, that (a) Lessor may disclose such
information received by it to persons within its organization who have a need to
know such information in the course of the performance of their duties and to
persons in organizations who have a need to know such information in the course
of the performance of their duties to provide lease financing or other financial
accommodations to Lessor for the purpose of providing financing for transactions
between Lessee and Lessor. The obligations of Lessor specified herein shall not
apply with respect to any such information to the extent Lessor can demonstrate,
by clear and convincing evidence, that such information: (a) is generally known
to the public at the time of disclosure or becomes generally known through no
wrongful act on the part of Lessor; (b) is in Lessor's possession at the time of
disclosure otherwise than as a result of Lessor's breach of any legal
obligation; (c) becomes known to Lessor through disclosure by sources other than
Lessee having the legal right to disclose such information; (d) is independently
developed by Lessor without reference to or reliance upon the information
provided by Lessee; or (e) is required to be disclosed by Lessor to comply with
orders from courts of appropriate jurisdiction, applicable laws or governmental
regulations, provided that Lessor provides prior written notice of such
disclosure to Lessee and takes reasonable and lawful actions to avoid and/or
minimize the extent of such disclosure.
SECTION 17. LESSOR'S DISCHARGE OF LESSEE'S OBLIGATIONS. In the event Lessee
fails to comply with any provision of a Lease, Lessor has the right, but not the
obligation, to effect such compliance on behalf of Lessee upon five (5) business
days prior written notice to Lessee. In such event, all monies advanced or
extended by Lessor, and all reasonable expenses incurred by Lessor in affecting
such compliance, shall be deemed to be Additional Rent and shall be paid by
Lessee to Lessor on the next Base Rent Date.
SECTION 18. PAST DUE PAYMENTS. Any payment of Base Rent, Additional Rent or
Stipulated Loss Value payable to Lessor under a Lease which is not paid when due
shall accrue interest until the date of receipt by Lessor of such payment at the
rate equal to the lesser of one and one-half percent (1.5%) of such past due
amounts per month or any portion thereof, or the maximum rate permitted by
applicable law.
SECTION 19. INCOME TAX BENEFITS. This Master Lease has been entered into with
the expectation that Lessor shall be entitled to such deductions, credits and
other benefits as are provided
12
<PAGE> 13
to an owner of personal property under the Internal Revenue Code of 1986 (the
"CODE") including, without limitation, (A) deductions for accelerated
depreciation of the Equipment permitted under the Accelerated Cost Recovery
System provided for by the Code based upon a five-year useful life, or such
other useful life as is specified on the applicable Schedule, employing
Accelerated Cost Recovery System for recovery property placed in service after
December 31, 1986 ("DEPRECIATION DEDUCTION"); and (B) deductions under Section
163 of the Code in an amount not less than the amount of interest paid or
accrued by Lessor on any indebtedness incurred by Lessor in financing its
purchase of the Equipment ("INTEREST DEDUCTION") (all such deductions and other
benefits, as applicable, collectively referred to hereinafter as the
("DEDUCTIONS"). If, with respect to the Equipment, by reason of any act, failure
to act or misrepresentation of Lessee, Lessor shall lose or not have available
or there shall be disallowed or recaptured with respect to Lessor, all or any
portion of the Deductions for any taxable year of Lessor ("TAX LOSS"), then
Lessee shall pay to Lessor and shall indemnify and hold Lessor harmless from any
claim against or loss suffered by Lessor arising out of such Tax Loss. With
respect to the Interest Deduction and the Depreciation Deduction, the Tax Loss
shall be determined by multiplying the sum of the maximum federal and applicable
state corporate income tax rates times the amount of the Interest Deduction and
the Depreciation Deduction not available to Lessor. With respect to any Tax
Loss, all interest, and penalties which may be assessed against Lessor by the
federal or any applicable state taxing authority and Lessor's reasonable
attorney's fees shall be included. The applicable state corporate income tax
rate shall be the rate of the state in which the greatest value of Equipment,
based on Lessor's cost of such Equipment, is located. Lessee shall be liable to
indemnify Lessor against any Tax Loss only if: (i) Lessor gives Lessee notice
that a Tax Loss has occurred; (ii) Lessor permits Lessee, at its expense, to
defend Lessor against such Tax Loss in administrative and judicial proceedings
(including reasonable suits for refund of taxes erroneously assessed); and (iii)
Lessor cooperates fully with Lessee in any such defense. In the event of a
successful suit for refund of tax for which Lessee has indemnified Lessor
pursuant to this Section, Lessor shall immediately pay over to Lessee in cash an
amount equal to the amount of such refund but not more than the amount paid by
Lessee to Lessor by way of such indemnity. For purposes of this Section only,
Lessor shall include any corporation with which Lessor files a consolidated
federal or state income tax return. All of Lessor's rights under this Section 19
shall survive termination of this Lease.
SECTION 20. NOTICES. Any notice or other communication relating to a Lease shall
be hand-delivered or mailed by certified mail, return receipt requested, to
Lessor or Lessee at its address above shown or at any later address last known
to the sender. Any notice or other communication mailed as aforesaid shall be
deemed to have been given five (5) days after the date mailed. In the event
Lessor terminates any Lease with regard to some Units but not all of the
Equipment, Lessor shall advise Lessee in writing of those Units which remain
subject to the Lease and the Base Rent payable in respect of such Units. Upon
Lessee's receipt of such written notice, such Lease shall, without further
action, be deemed amended to the extent set forth in such notice.
SECTION 21. SURVIVABILITY. All representations, warranties, indemnities and
covenants contained in this Master Lease and any Schedule shall continue in full
force and effect and shall
13
<PAGE> 14
survive notwithstanding the full payment of all amounts due hereunder and
thereunder or the termination of Lessee's right of possession and/or the taking
of possession by Lessor of any Unit.
SECTION 22: CONSTRUCTION. This Master Lease and the rights and obligations of
the parties hereunder shall in all respects be governed by, and construed in
accordance with, the internal laws of the State of Illinois, including all
matters of interpretation, construction, enforcement, validity and performance,
regardless of the location of the Equipment. The parties agree that any action
or proceeding arising out of or relating to this Lease may be commenced
exclusively in any State or Federal court of competent jurisdiction in the State
of Illinois and each party agrees that a summons and complaint commencing an
action or proceeding in any such court shall be properly served, and shall
confer personal jurisdiction, if served personally or by certified mail, return
receipt requested to it at its address designated pursuant hereto, or as
otherwise provided under the laws of the State of Illinois. THE PARTIES HERETO
WAIVE THE RIGHT TO TRIAL BY JURY TO EXTENT SUCH RIGHT MAY BE WAIVED.
SECTION 23. BENEFIT TO PARTIES AND SUCCESSORS. This Master Lease shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors, representatives and (to the extent specified in any assignment)
Lessor's Assignees.
SECTION 24. COUNTERPARTS, PERFECTION OF SECURITY INTERESTS. This Master Lease
and each Schedule may be executed in two (2) counterparts marked Counterpart No.
1 and Counterpart No. 2, each counterpart constituting an original but all
together one and the same instrument and contract. Counterpart No. 1 of the
Master Lease and each Schedule shall be stamped "Original" and Counterpart No. 2
shall, prior to execution, be stamped "Duplicate". Only Counterpart No. 1 of
each Scheduled stamped "Original", together with a photocopy of this Master
Lease, shall constitute "chattel paper" under the Uniform Commercial Code and no
security interest in any Lease may be created through the transfer of possession
of any counterpart other than Counterpart No. 1 thereof.
The titles of the sections of this Lease are for convenience only and shall not
define or limit any of the terms or provisions hereof.
SECTION 25. SEVERABILITY. Any provision of this Master Lease or any Lease
prohibited by, or unlawful or unenforceable under, any applicable law of any
jurisdiction shall be ineffective as to such jurisdiction to the extent of such
prohibition, without invalidating the remaining provisions hereof or thereof,
provided, however, that where the provisions of any such applicable law may be
waived, they are hereby waived by Lessee and Lessor to the full extent permitted
by law.
SECTION 26. ENTIRE AGREEMENT AND AMENDMENTS.
This Master Lease, and each Schedule into which this Master Lease is
incorporated by reference, constitutes the entire agreement between Lessor and
Lessee with respect to the Equipment and supersede any other oral or written
agreement pertaining thereto. This Master Lease or any Lease
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<PAGE> 15
may be amended or modified only by a writing signed by the parties hereto, or
their respective successors and assignees.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease to be executed by
their duly authorized representative as of the date accepted by Lessor.
Lessor: Lessee:
RELATIONAL FUNDING CORPORATION COSINE COMMUNICATIONS, INC.
By: By: /s/ Curtis Dudnick
___________________________ ________________________
Title: Title: CFO
___________________________ ________________________
Accepted by Lessor as of:
Date:
____________
15
<PAGE> 1
EXHIBIT 10.8
LOAN AND SECURITY AGREEMENT
Dated as of September 21, 1998
between
CoSine Communications, Inc.
a California corporation
as "Borrower",
and
VENTURE LENDING & LEASING II, INC.,
a Maryland corporation
as "Lender"
<PAGE> 2
LOAN AND SECURITY AGREEMENT
The Borrower and Lender identified on the cover page of this document have
entered or anticipate entering into one or more transactions pursuant to which
Lender agrees to make available to Borrower a loan facility governed by the
terms and conditions set forth in this document and one or more Supplements
executed by Borrower and Lender which incorporate this document by reference.
Each Supplement constitutes a supplement to and forms part of this document, and
will be read and construed as one with this document, so that this document and
the Supplement constitute a single agreement between the parties (collectively
referred to as this "Agreement").
Accordingly, the parties agree as follows:
ARTICLE 1 - INTERPRETATION
1.1 DEFINITIONS. The terms defined in Article 10 and in the Supplement will
have the meanings therein specified for purposes of this Agreement.
1.2 INCONSISTENCY. In the event of any inconsistency between the provisions
of any Supplement and this document, the provisions of the Supplement will be
controlling for the purpose of all relevant transactions.
ARTICLE 2 - THE COMMITMENT AND LOANS
2.1 THE COMMITMENT. Subject to the terms and conditions of this Agreement,
Lender agrees to make term loans to Borrower from time to time from the Closing
Date and to, but not including, the Termination Date in an aggregate principal
amount not exceeding the Commitment. The Commitment is not a revolving credit
commitment, and Borrower does not have the right to repay and reborrow
hereunder. Each Loan requested by Borrower to be made on a single Business Day
shall be for a minimum principal amount set forth in the Supplement, except to
the extent the remaining Commitment is a lesser amount.
2.2 NOTES EVIDENCING LOANS; REPAYMENT. Each Loan shall be evidenced by a
separate Note payable to the order of Lender, in the total principal amount of
the Loan. Principal and interest of each Loan shall be payable at the times and
in the manner set forth in the Note.
2.3 PROCEDURES FOR BORROWING.
(a) Borrower shall give Lender, at least five (5) Business Days' prior
to a proposed Borrowing Date, written notice of any request for borrowing
hereunder (a "Borrowing Request"). Each Borrowing Request shall be in
substantially the form of Exhibit "B" to the Supplement, shall be executed
by a responsible executive or financial officer of Borrower, and shall
state how much is requested, and shall be accompanied by such other
information and documentation as Lender may reasonably request.
(b) No later than 1:00 p.m. Pacific Standard Time on the Borrowing
Date, if Borrower has satisfied the conditions precedent in Article 4,
Lender shall make the Loan available to Borrower in immediately available
funds.
2.4 INTEREST. Basic Interest on the outstanding principal balance of each
Loan shall accrue daily at the Designated Rate from the Borrowing Date until the
Maturity Date.
2.5 TERMINAL PAYMENT. Borrower shall pay the Terminal Payment with respect
to each Loan on the Maturity Date of such Loan.
2.6 INTEREST RATE CALCULATION. Basic Interest, along with charges and fees
under this Agreement and any Loan Document, shall be calculated for actual days
elapsed on the basis of a 360-day year, which results in higher interest, charge
or fee payments than if a 365-day year were used. In no event shall Borrower be
obligated to pay Lender interest, charges or fees at a rate in excess of the
highest rate permitted by applicable law from time to time in effect.
2.7 DEFAULT INTEREST. Any unpaid payments of principal or interest or the
Terminal Payment with respect to any Loan shall bear interest from their
respective maturities, whether scheduled or accelerated, at the Designated Rate
for such Loan plus five percent (5.00%) per annum, until paid in full, whether
before or after judgment (the "Default Rate"). Borrower shall pay such interest
on demand.
2.8 LATE CHARGES. If Borrower is late in making any payment of principal or
interest or Terminal Payment under this Agreement by more than fifteen
<PAGE> 3
(15) days. Borrower agrees to pay a late charge of five percent (5%) of the
installment due, but not less than fifty dollars ($50.00) for any one such
delinquent payment. This late charge may be charged by Lender for the purpose of
defraying the expenses incidental to the handling of such delinquent amounts.
Borrower acknowledges that such late charge represents a reasonable sum
considering all of the circumstances existing on the date of this Agreement and
represents a fair and reasonable estimate of the costs that will be sustained by
Lender due to the failure of Borrower to make timely payments. Borrower further
agrees that proof of actual damages would be costly and inconvenient. Such late
charge shall be paid without prejudice to the right of Lender to collect any
other amounts provided to be paid or to declare a default under this Agreement
or any of the other Loan Documents or from exercising any other rights and
remedies of Lender.
2.9 LENDER'S RECORDS. Principal, Basic Interest, Terminal Payments and all
other sums owed under any Loan Document shall be evidenced by entries in records
maintained by Lender for such purpose. Each payment on and any other credits
with respect to principal, Basic Interest, Terminal Payments and all other sums
outstanding under any Loan Document shall be evidenced by entries in such
records. Absent manifest error, Lender's records shall be conclusive evidence
thereof.
2.10 GRANT OF SECURITY INTERESTS. To secure the timely payment and
performance of all of Borrower's Obligations to Lender, Borrower hereby grants
to Lender continuing security interests in all of the Collateral.
Notwithstanding the foregoing, the security interest granted herein shall not
extend to and the term "Collateral" shall not include any property, rights or
licenses to the extent the granting of a security interest therein would be
contrary to applicable law.
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that, except as set forth in the
Supplement or any schedule of exceptions executed by the parties, as of the
Closing Date and each Borrowing Date:
3.1 DUE ORGANIZATION. Borrower is a corporation duly organized and
validly existing in good standing under the laws of the jurisdiction of its
incorporation, and is duly qualified to conduct business and is in good standing
in each other jurisdiction in which its business is conducted or its properties
are located, except where the failure to be so qualified would not reasonably be
expected to have a Material Adverse Effect.
3.2 AUTHORIZATION, VALIDITY AND ENFORCEABILITY. The execution, delivery
and performance of all Loan Documents executed by Borrower are within Borrower's
powers, have been duly authorized, and are not in conflict with Borrower's
articles or certificate of incorporation or by-laws, or the terms of any charter
or other organizational document of Borrower, as amended from time to time; and
all such Loan Documents constitute valid and binding obligations of Borrower,
enforceable in accordance with their terms (except as may be limited by
bankruptcy, insolvency and similar laws affecting the enforcement of creditors'
rights in general, and subject to general principles of equity).
3.3 COMPLIANCE WITH APPLICABLE LAWS. Borrower has complied with all
licensing, permit and fictitious name requirements necessary to lawfully conduct
the business in which it is engaged, and to any sales, leases or the furnishing
of services by Borrower, including without limitation those requiring consumer
or other disclosures, the noncompliance with which would have a Material Adverse
Effect.
3.4 COPYRIGHTS, PATENTS, TRADEMARKS AND LICENSES.
(a) Borrower owns or is licensed or otherwise has the right to use
all of the patents, trademarks, service marks, trade names, copyrights,
contractual franchises, authorizations and other similar rights that are
reasonably necessary for the operation of its business, without conflict with
the rights of any other Person.
(b) To Borrower's knowledge, no slogan or other advertising device,
product, process, method, substance, part or other material now employed, or now
contemplated to be employed, by Borrower infringes upon any rights held by any
other Person.
(c) No claim or litigation regarding any of the foregoing is pending
or, to Borrower's knowledge, threatened, and no patent, invention, device,
application, principle or any statute, law, rule, regulation, standard or code
is pending or proposed which, in either case, could reasonably be expected to
have a Material Adverse Effect.
3.5 NO CONFLICT. To the best of Borrower's knowledge, the execution,
delivery, and performance by Borrower of all Loan Documents are not in conflict
<PAGE> 4
with any law, rule, regulation, order or directive, or any indenture,
agreement, or undertaking to which Borrower is a party or by which Borrower may
be bound or affected.
3.6 NO LITIGATION, CLAIMS OR PROCEEDINGS. There is no litigation, tax
claim, proceeding or dispute pending, or, to the knowledge of Borrower,
threatened against or affecting Borrower or its property which could reasonably
be expected to have a Material Adverse Effect.
3.7 CORRECTNESS OF FINANCIAL STATEMENTS. Borrower's financial statements
which have been delivered to Lender fairly and accurately reflect Borrower's
financial condition as of the latest date of such financial statements; and,
since that date there has been no Material Adverse Change.
3.8 NO SUBSIDIARIES. Borrower is not a majority owner of or in a control
relationship with any other business entity.
3.9 ENVIRONMENTAL MATTERS. Borrower is in compliance with such
Environmental Laws, except to the extent a failure to be in such compliance
could not reasonably be expected to have a Material Adverse Effect on Borrower's
operations, properties or financial condition.
3.10 NO EVENT OF DEFAULT. No Default or Event of Default has occurred and
is continuing.
3.11 FULL DISCLOSURE. None of the representations or warranties made by
Borrower in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of Borrower
in connection with the Loan Documents (including disclosure materials delivered
by or on behalf of Borrower to Lender prior to the Closing Date) taken as a
whole, contains any untrue statement of a material fact or omits any material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they are made, not misleading
as of the time when made or delivered. It is recognized by the Lender that
projections and forecasts provided by or on behalf of the Borrower, although
reflecting the Borrower's good faith projections or forecasts based on methods
and data which the Company believes to be reasonable and accurate, are not to be
viewed as facts and that actual results during the periods covered by and such
projections and forecasts may (and are likely to) differ from the projected or
forecasted results.
3.12 SPECIFIC REPRESENTATIONS REGARDING COLLATERAL.
(a) TITLE. Except for the security interests created by this Agreement and
Permitted Liens, (i) Borrower is and will be the unconditional legal and
beneficial owner of the Collateral, and (ii) the Collateral is genuine and
subject to no Liens, rights or defenses of others. There exist no prior
assignments or encumbrances of record with the U.S. Patent and Trademark Office
affecting any Collateral in favor of any third party other than Lender.
(b) RIGHTS TO PAYMENT. The names of the obligors, amount owing to Borrower,
due dates and all other information with respect to the Rights to Payment are
and will be correctly stated in all material respects in all Records relating to
the Rights to Payment. Borrower further represents and warrants, to its
knowledge, that each Person appearing to be obligated on a Right to Payment has
authority and capacity to contract and is bound as it appears to be.
(c) LOCATION OF COLLATERAL. Borrower's chief executive office, Inventory,
Records, Equipment, and any other offices or places of business are located at
the address(es) shown on the Supplement.
(d) BUSINESS NAMES. Other than its full corporate name, Borrower has not
conducted business using any trade names or fictitious business names except as
shown on the Supplement.
ARTICLE 4 - CONDITIONS PRECEDENT
4.1 CONDITIONS TO FIRST LOAN. The obligation of Lender to make its first
Loan hereunder is, in addition to the conditions precedent specified in Article
4.2, subject to the fulfillment of the following conditions and to the receipt
by Lender of the documents described below, duly executed and in form and
substance satisfactory to Lender and its counsel:
(a) RESOLUTIONS. A certified copy of the resolutions of the Board of
Directors of Borrower authorizing the execution, delivery and performance by
Borrower of the Loan Documents.
(b) INCUMBENCY AND SIGNATURES. A certificate of the secretary of Borrower
certifying the names of the officer or officers of Borrower authorized to sign
the Loan Documents, together with a sample of the true signature of each such
officer.
<PAGE> 5
(c) LEGAL OPINION. The opinion of legal counsel for Borrower as to such
matters as Lender may reasonably request, including the matters covered by
Sections 3.1, 3.2, 3.5 and 3.6 hereof.
(d) ARTICLES AND BY-LAWS. Certified copies of the Articles or Certificate
of Incorporation and By-Laws of Borrower, as amended through the Closing Date.
(e) THIS AGREEMENT. A counterpart of this Agreement and an initial
Supplement, with all schedules completed and attached thereto, and disclosing
such information as is acceptable to Lender.
(f) FINANCING STATEMENTS. Filing copies (or other evidenced of filing
satisfactory to Lender and its counsel) of such Uniform Commercial Code
financing statements, collateral assignments and termination statements, with
respect to the Collateral as Lender shall request.
(g) PATENT AND TRADEMARK ASSIGNMENTS. If required by the Supplement,
patent and trademark collateral assignments executed by Borrower.
(h) LIEN SEARCHES. Uniform Commercial Code lien, judgment, bankruptcy and
tax lien searches of Borrower from such jurisdictions or offices as Lender may
reasonably request, all as of a date reasonably satisfactory to Lender and its
counsel.
(i) GOOD STANDING CERTIFICATE. A Certificate of status or good standing of
Borrower as of a date acceptable to Lender from the jurisdiction of Borrower's
organization and any foreign jurisdictions where Borrower is or should be
qualified to do business.
(j) WARRANT. A warrant issued by Borrower to Lender exercisable for such
number, type and class of shares of Borrower's capital stock, and for an
initial exercise price as is specified in the Supplement.
4.2 CONDITIONS TO ALL LOANS. The obligation of Lender to make its initial
Loan and each subsequent Loan is subject to the following further conditions
precedent that:
(a) NO DEFAULT. No Default or Event of Default has occurred and is
continuing or will result from the making of any such Loan, and the
representations and warranties of Borrower contained in Article 3 of this
Agreement are true and correct as of the Borrowing Date of such Loan.
(b) NO MATERIAL ADVERSE CHANGE. No Material Adverse Change shall have
occurred since the date of the most recent financial statements submitted to
Lender.
(c) BORROWING REQUEST. Borrower shall have delivered to Lender a Borrowing
Request for such Loan.
(d) NOTE. Borrower shall have delivered an executed Note evidencing such
Loan, in form and substance satisfactory to Lender.
(e) SUPPLEMENTAL LIEN FILINGS. Borrower shall have executed and delivered
such amendments or supplements to this Agreement and such financing statements
as Lender may reasonably request in connection with the proposed Loan, in order
to create or perfect or to maintain the perfection of Lender's Liens on the
Collateral.
(f) VCOC LIMITATION. Lender shall not be obligated to make any Loan under
its Commitment if at the time of or after giving effect to the proposed Loan
Lender would no longer qualify as: (A) a "venture capital operating company"
under U.S. Department of Labor Regulations Section 25103-101(d), Title 29 of
the Code of Federal Regulations, as amended; and (B) a "business development
company" under the provisions of federal Investment Company Act of 1940, as
amended; and (C) a "regulated investment company" under the provisions of the
Internal Revenue Code of 1986, as amended.
ARTICLE 5 - AFFIRMATIVE COVENANTS
During the term of this Agreement and until its performance of all
obligations to Lender, Borrower will:
5.1 NOTICE TO LENDER. Promptly give written notice to Lender of:
(a) Any litigation or administrative or regulatory proceeding affecting
Borrower where the amount claimed against Borrower is at the Threshold Amount
or more, or where the granting of relief requested could have a Material
Adverse Effect.
(b) Any substantial dispute which may exist between Borrower or any
governmental or regulatory authority.
(c) The occurrence of any Default or any Event of Default.
<PAGE> 6
(d) Any change in the location of any of Borrower's places of business or
Collateral at least thirty (30) days in advance of such change, or of the
establishment of any new, or the discontinuance of any existing, place of
business.
(e) Any dispute or default by Borrower or any other party under any joint
venture, partnering, distribution, cross-licensing, strategic alliance,
collaborative research or manufacturing, license or similar agreement which
could reasonably be expected to have a Material Adverse Effect.
(f) Any other manner which has resulted or might reasonably result in a
Material Adverse Change.
5.2 FINANCIAL STATEMENTS. Deliver to each Lender or cause to be delivered
to Lender, in form and detail satisfactory to Lender the following financial
information, which Borrower warrants shall be accurate and complete in all
material respects:
(a) MONTHLY FINANCIAL STATEMENTS. As soon as available but no later than
thirty (30) days after the end of each month, Borrower's balance sheet as of
the end of such period, and Borrower's income statement for such period and for
that portion of Borrower's financial reporting year ending with such period,
prepared and attested by a responsible financial officer of Borrower as being
complete and correct in all material respects and fairly presenting Borrower's
financial condition and the results of Borrower's operations. After a Qualified
Public Offering, the foregoing interim financial statements shall be delivered
no later than 45 days after each fiscal quarter and for the quarter-annual
fiscal period then ended.
(b) YEAR-END FINANCIAL STATEMENTS. As soon as available but no later than
ninety (90) days after and as of the end of each financial reporting year, a
complete copy of Borrower's audit report, which shall include balance sheet,
income statement, statement of changes in equity and statement of cash flows
for such year, prepared and certified by an independent certified public
accountant selected by Borrower and satisfactory to Lender (the "Accountant").
The Accountant's certification shall not be qualified or limited due to a
restricted or limited examination by the Accountant of any material portion of
Borrower's records or otherwise.
(c) COMPLIANCE CERTIFICATES. Simultaneously with the delivery of each set
of financial statements referred to in paragraphs (a) and (b) above, a
certificate of the chief financial officer of Borrower substantially in the
form of Exhibit "C" to the Supplement (i) setting forth in reasonable detail
any calculations required to establish whether Borrower is in compliance with
any financial covenants or tests set forth in the Supplement, and (ii) stating
whether any Default or Event of Default exists on the date of such certificate,
and if so, setting forth the details thereof and the action which Borrower is
taking or proposes to take with respect thereto.
(d) GOVERNMENT REQUIRED REPORTS; PRESS RELEASES. Promptly after sending,
issuing, making available, or filing, copies of all statements released to any
news media for publication, all material reports, proxy statements, and
financial statements that Borrower sends or makes available to its
stockholders, and, not later than five (5) days after actual filing or the date
such filing was first due, all material registration statements and reports that
Borrower files or is required to file with the Securities and Exchange
Commission, or any other governmental or regulatory authority.
(e) OTHER INFORMATION. Such other statements, lists of property and
accounts, budgets, forecasts, reports, or other information as Lender may from
time to time reasonably request.
5.3 MANAGERIAL ASSISTANCE FROM LENDER. Permit Lender, as a "venture
capital operating company" to participate in, and influence the conduct of
management of Borrower through the exercise of "management rights," as such
terms are defined in 29 C.F.R. Section 25103-101(d), and:
(a) Permit Lender to make available to Borrower, at no cost to Borrower,
"significant managerial assistance", as defined in Section 2(a)(47) of the
Investment Company Act of 1940, as amended, either in the form of: (i)
consulting arrangements with Lender or any of its officers, directors,
employees or affiliates, (ii) Borrower's allowing Lender to provide
recommendations of prospective candidates for election to Borrower's Board of
Directors, or (iii) Lender, at Borrower's request, seeking the services of
third-party consultants to aid Borrower with respect to its management and
operations;
(b) Permit Lender to make available consulting and advisory services to
officers of Borrower regarding Borrower's equipment acquisition and financing
plans, and such other matters affecting the business, financial condition and
prospects of Borrower as Lender shall reasonably deem relevant; and
<PAGE> 7
(c) If Lender reasonably believes that financial or other developments
affecting Borrower have impaired or are likely to impair Borrower's ability to
perform its obligations under this Agreement, permit Lender reasonable access
to Borrower's management and/or Board of Directors and opportunity to present
Lender's views with respect to such developments.
5.4 EXISTENCE. Maintain and preserve Borrower's existence, present form of
business, and all rights and privileges necessary or desirable in the normal
course of its business; and keep all Borrower's property in good working order
and condition, ordinary wear and tear excepted.
5.5 INSURANCE. Obtain and keep in force insurance in such amounts and
types as is usual in the type of business conducted by Borrower. Such insurance
policies must be in form and substance satisfactory to Lender, and shall list
Lender as an additional insured or loss payee, as applicable, on endorsement(s)
in form reasonably acceptable to Lender. Borrower shall furnish to Lender such
endorsements, and upon Lender's request, copies of any or all such policies.
5.6 ACCOUNTING RECORDS. Maintain adequate books, accounts and records, and
prepare all financial statements in accordance with GAAP (except as otherwise
noted therein or for the absence of footnotes and subject to normal year-end
adjustments with respect to unaudited financial statements), and in compliance
with the regulations of any governmental or regulatory authority having
jurisdiction over Borrower or Borrower's business; and permit employees or
agents of Lender at such reasonable times and upon such reasonable notice as
Lender may request, at Lender's expense, to inspect Borrower's properties, and
to examine, and make copies and memoranda of Borrower's books, accounts and
records.
5.7 COMPLIANCE WITH LAWS. Comply with all laws (including Environmental
Laws), rules, regulations applicable to, and all orders and directives of any
governmental or regulatory authority having jurisdiction over, Borrower or
Borrower's business, and with all material agreements to which Borrower is a
party, except where the failure to so comply would not have a Material Adverse
Effect.
5.8 TAXES AND OTHER LIABILITIES. Pay all Borrower's material obligations
when due; pay all material taxes and other governmental or regulatory
assessments before delinquency or before any penalty attaches thereto, except
as may be contested in good faith by the appropriate procedures and for which
Borrower shall maintain appropriate reserves; and timely file all required
material tax returns.
5.9 SPECIAL COLLATERAL COVENANTS.
(a) MAINTENANCE OF COLLATERAL; INSPECTION. Do all things reasonably
necessary to maintain, preserve, protect and keep all Collateral in good
working order and salable condition, ordinary wear and tear excepted, deal with
the Collateral in all ways as are considered good practice by owners of like
property, and use the Collateral lawfully and, to the extent applicable, only
as permitted by Borrower's insurance policies. Maintain, or cause to be
maintained, Records, which are complete and accurate in all material respects
relating to the Collateral. Upon reasonable prior notice at reasonable times
during normal business hours, Borrower hereby authorizes Lender's officers,
employees, representatives and agents to inspect the Collateral and to discuss
the Collateral and the Records relating thereto with Borrower's officers and
employees, and, in the case of any Right to Payment, with any Person which is
or may be obligated thereon.
(b) FINANCING STATEMENTS AND OTHER ACTIONS. Execute and deliver to Lender
all financing statements, notices and other documents (including, without
limitation, any filings with the United States Patent and Trademark Office)
from time to time reasonably requested by any Lender to maintain a first
perfected security interest in the Collateral in favor of Lender; perform such
other acts, and execute and deliver to Lender such additional conveyances,
assignments, agreements and instruments, as Lender may at any time request in
connection with the administration and enforcement of this Agreement or
Lender's rights, powers and remedies hereunder.
(c) LIENS. Not create, incur, assume or permit to exist any Lien or grant
any other Person a negative pledge on any Collateral, except Permitted Liens.
(d) DOCUMENTS OF TITLE. Not sign or authorize the signing of any financing
statement or other document naming Borrower as debtor or obligor, or
acquiesce or cooperate in the issuance of any bill of lading, warehouse receipt
or other document or instrument of title with respect to any Collateral, except
those negotiated to Lender, or those naming Lender as secured party.
(e) DISPOSITION OF COLLATERAL. Not sell, transfer, lease or otherwise
dispose of any Equipment; or dispose of any other Collateral except for fair
<PAGE> 8
consideration and in the ordinary course of its business.
(f) CHANGE IN LOCATION OR NAME. Without at least 30 days prior written
notice to Lender: (a) not relocate any Collateral or Records, its chief
executive office, or establish a place of business at a location other than as
specified in the Supplement; and (b) not change its name, mailing address,
location of Collateral, or its legal structure.
(g) AGREEMENT WITH REAL PROPERTY OWNER/LANDLORD. Obtain and maintain such
acknowledgements, consents, waivers and agreements from the owner, lienholder,
mortgagee and landlord with respect to any real property on which Equipment is
located as Lender may require, all in form and substance satisfactory to Lender.
(h) CERTAIN AGREEMENTS ON RIGHTS TO PAYMENT. Other than in the ordinary
course of business, not make any material discount, credit, rebate or other
reduction in the original amount owing on a Right to Payment or accept in
satisfaction of a Right to Payment less than the original amount thereof.
ARTICLE 6 - NEGATIVE COVENANTS
During the term of this Agreement and until the performance of all
obligations to Lender, Borrower will not (without Lender's prior written
consent):
6.1 INDEBTEDNESS. Be indebted for borrowed money, the deferred purchase
price of property, or leases which would be capitalized in accordance with
GAAP; or become liable as a surety, guarantor, accommodation party or otherwise
for or upon the obligation of any other Person, except:
(a) Indebtedness incurred for the acquisition of supplies or inventory on
normal trade credit; and other indebtedness incurred pursuant to one or more
transactions permitted under Section 6.4;
(b) Indebtedness not to exceed One Hundred Thousand Dollars ($100,000) in
aggregate principal amount outstanding at any time secured by security interests
covered by clause (c) of the definition of Permitted Lien;
(c) Indebtedness of Borrower under this Agreement; and
(d) Any Indebtedness approved by Lender prior to the Closing Date.
6.2 LIENS. Create, incur, assume or permit to exist any Lien, or grant
any other Person a negative pledge, on any of Borrower's property, except
Permitted Liens. Borrower and Lender agree that this covenant is not intended
to constitute a lien, deed of trust, equitable mortgage, or security interest
of any kind on any of Borrower's real property, and this Agreement shall not be
recorded or recordable. Notwithstanding the foregoing, however, violation of
this covenant by Borrower shall constitute an Event of Default.
6.3 DIVIDENDS. Except after a Qualified Public Offering, pay any
dividends or purchase, redeem or otherwise acquire or make any other
distribution with respect to any of Borrower's capital stock, except (a)
dividends or other distributions solely of capital stock of Borrower, (b)
repurchases of capital stock from directors, officers, employees and/or
consultants upon exercise of Borrower's right of repurchase upon termination of
employment or services under reverse vesting or similar repurchase plans, (c)
conversion by Borrower of any of its convertible securities into other
securities pursuant to the terms of such convertible securities or otherwise in
exchange therefor, and (d) capital stock repurchased with the proceeds of the
issuance of other capital stock of the Borrower.
6.4 CHANGES/MERGERS. Liquidate or dissolve, or enter into any
consolidation, merger, where Borrower is the surviving entity and which would
not reasonably be expected to increase the credit risk of Borrower to Lender.
6.5 SALES OF ASSETS. Sell, transfer, lease or otherwise dispose of any
of Borrower's assets except for fair consideration and in the ordinary course of
its business.
6.6 LOANS/INVESTMENTS. Make or suffer to exist any loans, guaranties,
advances, or investments, except:
(a) Accounts receivable in the ordinary course of Borrower's business;
(b) Investments in domestic certificates of deposit issued by, and other
domestic investments with, financial institutions organized under the laws of
the United States or a state thereof, having One Hundred Million Dollars
($100,000,000) in capital and a rating of at least "investment grade" or "A" by
Moody's or any successor rating agency;"
<PAGE> 9
(c) Investments in marketable obligations of the United States of America
and in open market commercial paper given the highest credit rating by a
national credit agency and maturing not more than one year from the creation
thereof; and
(d) Temporary advances to cover incidental expenses to be incurred in the
ordinary course of business.
(e) loans, guaranties, advances or investments in subsidiaries of Borrower;
(f) (1) travel advances and employee relocation loans and other employee
loans and advances in the ordinary course of business and (2) loans to
employees, officers or directors relating to the purchase of equity securities
of Borrower pursuant to employee stock purchase plans or agreements approved by
Borrower's Board of Directors;
(g) investments consisting of endorsements of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
business;
(h) any investment permitted by Borrower's investment policy, as amended
from time to time, provided such investment policy (and any amendments thereto)
has been previously approved by Lender.
(i) investments permitted by Article 6.4;
(j) investments (including debt obligations) received in connection with
the bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with customers or suppliers
arising in the ordinary course of business;
(k) investments consisting of notes receivable of, or prepaid royalties
and other credit extensions to, customers and suppliers, in the ordinary course
of business;
(l) hedge investments arising under currency agreements or interest rate
agreements entered into in the ordinary course of business;
(m) investments in joint ventures or strategic partnerships in the
ordinary course of business;
(n) deposit accounts of Borrower; and
(o) other investments not otherwise permitted in the Article 6.5 in an
aggregate principal amount not to exceed $250,000 at any one time.
6.7 TRANSACTIONS WITH RELATED PERSONS. Directly or indirectly enter into
any transaction with or for the benefit of a Related Person on terms more
favorable to the Related Person than would have been obtainable in an "arms'
length" dealing.
6.8 OTHER BUSINESS. Engage in any material line of business other than the
business Borrower conducts as of the Closing Date.
ARTICLE 7 - EVENTS OF DEFAULT
7.1 EVENTS OF DEFAULT; ACCELERATION. Upon the occurrence and during the
continuation of any Default, the obligation of Lender to make any additional
Loan shall be suspended. The occurrence of any of the following (each, an
"Event of Default") shall terminate any obligation of Lender to make any
additional Loan; and shall, at the option of Lender (1) make all sums of Basic
Interest and principal, all Terminal Payments, and any Obligations and other
amounts owing under any Loan Documents immediately due and payable without
notice of default, presentment or demand for payment, protest or notice of
nonpayment or dishonor or any other notices or demands, and (2) give Lender the
right to exercise any other right or remedy provided by contract or applicable
law:
(a) Borrower shall fail to pay any principal, interest or Terminal Payment
under this Agreement, or fail to pay any fees or other charges when due under
any Loan Document, and such failure continues for five(5) Business Days or more
after the same first becomes due; or an Event of Default as defined in any
other Loan Document shall have occurred.
(b) Any representation or warranty made, or financial statement,
certificate or other document provided, by Borrower under any Loan Document
shall prove to have been false or misleading in any material respect when made
or deemed made herein.
(c) Borrower shall fail to pay its debts generally as they become due or
shall commence any Insolvency Proceeding with respect to itself; an involuntary
Insolvency Proceeding shall be filed against Borrower, or a custodian,
receiver, trustee, assignee for the benefit of creditors, or other similar
official, shall be appointed to take possession, custody or control of the
<PAGE> 10
properties of Borrower, and such involuntary Insolvency Proceeding, petition or
appointment is acquiesced to by Borrower, or is not dismissed within sixty (60)
days; or the dissolution or termination of the business of the Borrower.
(d) Borrower shall be in default beyond any applicable period of grace or
cure under any other agreement involving the borrowing of money, the purchase
of property, the advance of credit or any other monetary liability of any kind
to Lender or to any Person which results in the acceleration of payment of such
obligation in an amount in excess of the Threshold Amount.
(e) Any governmental or regulatory authority shall take any judicial or
administrative action, or any defined benefit pension plan maintained by
Borrower shall have any unfunded liabilities, any of which, in the reasonable
judgment of Lender, might have a Material Adverse Effect.
(f) Any sale, transfer or other disposition of all or substantially all of
the assets of Borrower, including without limitation to any trust or similar
entity, shall occur.
(g) Any judgement(s) singly or in the aggregate in excess of the Threshold
Amount shall be entered against Borrower which remain unsatisfied, unvacated or
unstayed pending appeal for ten (10) or more days after entry thereof.
(h) Intentionally Omitted.
(i) Borrower shall fail to perform or observe any covenant contained in
Article 6 of this Agreement.
(j) Borrower shall fail to perform or observe any covenant contained in
this Agreement or any other Loan Document (other than a covenant which is dealt
with specifically elsewhere in this Article 7) and the breach of such covenant
is not cured within 30 days after the sooner to occur of Borrower's receipt of
notice of such breach from Lender or the date on which such breach first
becomes known to any officer of Borrower; provided, however, that if such
breach is not capable of being cured within such 30-day period and Borrower
timely notifies Lender of such fact and Borrower diligently pursues such cure,
then the cure period shall be extended to the date requested in Borrower's
notice but in no event more than 90 days from the initial breach; provided,
further, that such additional 60-day opportunity to cure shall not apply in the
case of any failure to perform or observe any covenant which has been the
subject of a prior failure within the preceding 180 days or which is a willful
and knowing breach by Borrower.
7.2 REMEDIES UPON DEFAULT. Upon the occurrence and during the continuance of
an Event of Default, Lender shall be entitled to, at its option, exercise any
or all of the rights and remedies available to a secured party under the
Uniform Commercial Code or any other applicable law, and exercise any or all of
its rights and remedies provided for in this Agreement and in any other Loan
Document. The obligations of Borrower under this Agreement shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
any Obligations is rescinded or must otherwise be returned by Lender upon, on
account of, or in connection with, the insolvency, bankruptcy or reorganization
of Borrower or otherwise, all as though such payment had not been made.
7.3 SALE OF COLLATERAL. Upon the occurrence and during the continuance of an
Event of Default, Lender may sell all or any part of the Collateral, at public
or private sales, to itself, a wholesaler, retailer or investor, for cash, upon
credit or for future delivery, and at such price or prices as Lender may deem
commercially reasonable. To the extent permitted by law, Borrower hereby
specifically waives all rights of redemption and any rights of stay or appraisal
which it has or may have under any applicable law in effect from time to time.
Any such public or private sales shall be held at such times and at such
place(s) as Lender may determine. In case of the sale of all or any part of the
Collateral on credit or for future delivery, the Collateral so sold may be
retained by Lender until the selling price is paid by the purchaser, but Lender
shall not incur any liability in case of the failure of such purchaser to pay
for the Collateral and, in case of any such failure, such Collateral may be
resold. Lender, may, instead of exercising its power of sale, proceed to enforce
its security interest in the Collateral by seeking a judgment or decree of a
court of competent jurisdiction. Without limiting the generality of the
foregoing, if an Event of Default is in effect.
(1) Subject to the rights of any third parties, Lender may license, or
sublicense, whether general, special or otherwise, and whether on an exclusive
or non-exclusive basis, any Patents or Trademarks included in the Collateral
throughout the world for such term or terms, on such conditions and in such
manner as Lender shall in its sole discretion determine.
(2) Lender may (without assuming any obligations or liability thereunder),
at any time and from time to time, enforce (and shall have the
<PAGE> 11
exclusive right to enforce) against any licensee or sublicensee all rights and
remedies of Borrower in, to and under any Patent Licenses or Trademark Licenses
and take or refrain from taking any action under any thereof, and Borrower
hereby releases Lender from, and agrees to hold Lender free and harmless from
and against any claims arising out of, any lawful action so taken or omitted to
be taken with respect thereto other than claims arising out of Lender's gross
negligence or willful misconduct; and
(3) Upon request by Lender, Borrower will execute and deliver to Lender a
power of attorney, in form and substance reasonably satisfactory to Lender for
the implementation of any lease, assignment, license, sublicense, grant of
option, sale or other disposition of a Patent or Trademark. In the event of any
such disposition pursuant to this clause 3, Borrower shall supply its know-how
and expertise relating to the products or services made or rendered in
connection with Patents, the manufacture and sale of the products bearing
Trademarks, and its customer lists and other records relating to such Patents
or Trademarks and to the distribution of said products, to Lender.
7.4 BORROWER'S OBLIGATIONS UPON DEFAULT. Upon the request of Lender after
the occurrence and during the continuance of an Event of Default, Borrower will:
(a) Assemble and make available to Lender the Collateral at such place(s)
as Lender shall reasonably designate, segregating all Collateral so that each
item is capable of identification; and
(b) Subject to the rights of any lessor, permit Lender, by Lender's
officers, employees, agents and representatives, to enter any premises where
any Collateral is located, to take possession of the Collateral, to complete
the processing, manufacture or repair of any Collateral, and to remove the
Collateral, or to conduct any public or private sale of the Collateral, all
without any liability of Lender for rent or other compensation for the use of
Borrower's premises.
ARTICLE 8 - SPECIAL COLLATERAL PROVISIONS
8.1 COMPROMISE AND COLLECTION. Borrower and Lender recognize that
setoffs, counterclaims, defenses and other claims may be asserted by obligors
with respect to certain of the Rights to Payment, that certain of the Rights to
Payment may be or become uncollectible in whole or in part; and that the
expense and probability of success of litigating a disputed Right to Payment
may exceed the amount that reasonably may be expected to be recovered with
respect to such Right to Payment. Borrower hereby authorizes Lender, after and
during the continuance of an Event of Default, to compromise with the obligor,
accept in full payment of any Right to Payment such amount as Lender shall
negotiate with the obligor, or abandon any Right to Payment. Any such action by
Lender shall be considered commercially reasonable so long as Lender acts in
good faith based on information known to it at the time it takes any such
action.
8.2 PERFORMANCE OF BORROWER'S OBLIGATIONS. Without having any obligation
to do so, upon reasonable prior notice to Borrower, Lender may perform or pay
any obligation which Borrower has agreed to perform or pay under this
Agreement, including, without limitation, the payment or discharge of taxes or
Liens levied or placed on or threatened against the Collateral. In so
performing or paying, Lender shall determine the action to be taken and the
amount necessary to discharge such obligations. Borrower shall reimburse Lender
on demand for any amounts paid by Lender pursuant to this Section, which
amounts shall constitute Obligations secured by the Collateral and shall bear
interest from the date of demand at the Default Rate.
8.3 POWER OF ATTORNEY. For the purpose of protecting and preserving the
Collateral and Lender's rights under this Agreement, Borrower hereby irrevocably
appoints Lender, with full power of substitution, as its attorney-in-fact with
full power and authority, after the occurrence and during the continuance of an
Event of Default, to do any act which Borrower is obligated to do hereunder; to
exercise such rights with respect to the Collateral as Borrower might exercise;
to use such Inventory, Equipment, Fixtures or other property as Borrower might
use; to enter Borrower's premises; to give notice of Lender's security interest
in, and to collect the Collateral; and to execute and file in Borrower's name
any financing statements, amendments and continuation statements necessary or
desirable to perfect or continue the perfection of Lender's security interests
in the Collateral. Borrower hereby ratifies all
<PAGE> 12
that Lender shall lawfully do or cause to be done by virtue of this appointment.
8.4 AUTHORIZATION FOR LENDER TO TAKE CERTAIN ACTION. The power of attorney
created in Section 8.3 is a power coupled with an interest and shall be
irrevocable. The powers conferred on Lender hereunder are solely to protect its
interests in the Collateral and shall not impose any duty upon Lender to
exercise such powers. Lender shall be accountable only for amounts that it
actually receives as a result of the exercise of such powers and in no event
shall Lender or any of its directors, officers, employees, agents or
representatives be responsible to Borrower for any act or failure to act, except
for gross negligence or willful misconduct. After the occurrence and during the
continuance of an Event of Default, Lender may exercise this power of attorney
without notice to or assent of Borrower, in the name of Borrower, or in Lender's
own name, from time to time in Lender's sole discretion and at Borrower's
expense. To further carry out the terms of this Agreement, after the occurrence
and during the continuance of an Event of Default, Lender may:
(a) Execute any statements or documents or take possession of, and
endorse and collect and receive delivery or payment of, any checks, drafts,
notes, acceptances or other instruments and documents constituting Collateral,
or constituting the payment of amounts due and to become due or any performance
to be rendered with respect to the Collateral.
(b) Sign and endorse any invoices, freight or express bills, bills of
lading, storage or warehouse receipts; drafts, certificates and statements
under any commercial or standby letter of credit relating to Collateral;
assignments, verifications and notices in connection with Accounts; or any other
documents relating to the Collateral, including without limitation the Records.
(c) Use or operate Collateral or any other property of Borrower for
the purpose of preserving or liquidating Collateral.
(d) File any claim or take any other action or proceeding in any
court of law or equity or as otherwise deemed appropriate by Lender for the
purpose of collecting any and all monies due or securing any performance to be
rendered with respect to the Collateral.
(e) Commence, prosecute or defend any suits, actions or proceedings
or as otherwise deemed appropriate by Lender for the purpose of protecting or
collecting the Collateral. In furtherance of this right, upon the occurrence
and during the continuance of an Event of Default, Lender may apply for the
appointment of a receiver or similar official to operate Borrower's business.
(f) Prepare, adjust, execute, deliver and receive payment under
insurance claims, and collect and receive payment of and endorse any instrument
in payment of loss or returned premiums or any other insurance refund or
return, and apply such amounts at Lender's sole discretion, toward repayment of
the Obligations or replacement of the Collateral.
8.5 APPLICATION OF PROCEEDS. Any Proceeds and other monies or property
received by Lender pursuant to the terms of this Agreement or any Loan Document
may be applied by Lender first to the payment of expenses of collection,
including without limitation reasonable attorneys' fees, and then to the
payment of the Obligations in such order of application as Lender may elect.
8.6 DEFICIENCY. If the Proceeds of any disposition of the Collateral are
insufficient to cover all costs and expenses of such sale and the payment in
full of all the Obligations, plus all other sums required to be expended or
distributed by Lender, then Borrower shall be liable for any such deficiency.
8.7 LENDER TRANSFER. Upon the transfer of all or any part of the
Obligations, Lender may transfer all or part of the Collateral and shall be
fully discharged thereafter from all liability and responsibility with respect
to such Collateral so transferred, and the transferee shall be vested with all
the rights and powers of Lender hereunder with respect to such Collateral so
transferred, but with respect to any Collateral not so transferred, Lender
shall retain all rights and powers hereby given.
8.8 LENDER'S DUTIES. Lender shall use reasonable care in the custody and
preservation of any Collateral in its possession. Without limitation on other
conduct which may be considered the exercise of reasonable care. Lender shall
be deemed to have exercised reasonable care in the custody and preservation of
such Collateral if such Collateral is accorded treatment substantially equal to
that which Lender accords its own property. It being understood that Lender
shall not have any responsibility for ascertaining or taking action with
respect to calls, conversions, exchanges, maturities, declining value, tenders
or other matters relative to any Collateral, regardless of whether Lender has
or is deemed to have knowledge of such matters; or taking any necessary
<PAGE> 13
steps to preserve any rights against any Person with respect to any Collateral.
Under no circumstances shall Lender be responsible for any injury or loss to
the Collateral, or any part thereof, arising from any cause beyond the
reasonable control of Lender.
8.9 TERMINATION OF SECURITY INTERESTS. Upon the payment in full of the
Obligations and if Lender has no further obligations under its Commitment, the
security interest granted hereby shall terminate and all rights to the
Collateral shall revert to Borrower. Upon any such termination, the Lender
shall, at Borrower's expense, execute and deliver to Borrower such documents as
Borrower shall reasonably request to evidence such termination.
ARTICLE 9 - GENERAL PROVISIONS
9.1 NOTICES. Any notice given by any party under any Loan Document shall
be in writing and personally delivered, sent by overnight courier, or United
States mail, postage prepaid, or sent by facsimile or other authenticated
message, charges prepaid, to the other party's or parties' addresses shown on
the Supplement. Each party may change the address or facsimile number to which
notices, requests and other communications are to be sent by giving written
notice of such change to each other party. Notice given by hand delivery shall
be deemed received on the date delivered; if sent by overnight courier, on the
next business day after delivery to the courier service; if by first class
mail, on the third business day after deposit in the U.S. Mail; and if by
facsimile, on the date of transmission.
9.2 BINDING EFFECT. The Loan Documents shall be binding upon and inure
to the benefit of Borrower and Lender and their respective successors and
assigns; provided, however, that Borrower may not assign or transfer Borrower's
rights or obligations under any Loan Document without Lender's prior written
consent. Lender reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in, Lender's rights
and obligations under the Loan Documents. In connection with any of the
foregoing, Lender may disclose all documents and information which Lender now
or hereafter may have relating to the Loans, Borrower, or its business;
provided that any person who receives such information shall have agreed in
writing in advance to maintain the confidentiality of such information on terms
reasonably acceptable to Borrower.
9.3 NO WAIVER. Any waiver, consent or approval by Lender of any Event of
Default or breach of any provision, condition, or covenant of any Loan Document
must be in writing and shall be effective only to the extent set forth in
writing. No waiver of any breach or default shall be deemed a waiver of any
later breach or default of the same or any other provision of any Loan
Document. No failure or delay on the part of Lender in exercising any power,
right, or privilege under any Loan Document shall operate as a waiver thereof,
and no single or partial exercise of any such power, right, or privilege shall
preclude any further exercise thereof or the exercise of any other power, right
or privilege. Lender has the right at its sole option to continue to accept
interest and/or principal payments due under the Loan Documents after default,
and such acceptance shall not constitute a waiver of said default or an
extension of the Maturity Date unless Lender agrees otherwise in writing.
9.4 RIGHTS CUMULATIVE. All rights and remedies existing under the Loan
Documents are cumulative to, and not exclusive of, any other rights or remedies
available under contract or applicable law.
9.5 UNENFORCEABLE PROVISIONS. Any provision of any Loan Document
executed by Borrower which is prohibited or unenforceable in any jurisdiction,
shall be so only as to such jurisdiction and only to the extent of such
prohibition or unenforceability, but all the remaining provisions of any such
Loan Document shall remain valid and enforceable.
9.6 ACCOUNTING TERMS. Except as otherwise provided in this Agreement,
accounting terms and financial covenants and information shall be determined
and prepared in accordance with GAAP.
9.7 INDEMNIFICATION; EXCULPATION. Borrower shall pay and protect, defend
and indemnify Lender and Lender's employees, officers, directors, shareholders,
affiliates, correspondents, agents and representatives (other than Lender,
collectively "Agents") against, and hold Lender and each such Agent harmless
from, all claims, actions, proceedings, liabilities, damages, losses, expenses
(including, without limitation, attorneys' fees and costs) and other amounts
incurred by Lender and each such Agent, arising from (i) the matters
contemplated by this Agreement or any other Loan Documents or (ii) any
contention that Borrower has failed to comply with any law, rule, regulation,
order or directive applicable to Borrower's business; provided, however, that
this indemnification shall not apply to any of the foregoing incurred solely as
the result of Lender's or any Agent's gross negligence or willful misconduct.
This
<PAGE> 14
indemnification shall survive the payment and satisfaction of all of Borrower's
Obligations to Lender.
9.8 REIMBURSEMENT. In any action or proceeding between Borrower and
Lender arising out of the Loan Documents, the prevailing party will be entitled
to recover its reasonable attorneys' fees and other costs and expenses
incurred, in addition to any other relief to which it may be entitled.
9.9 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts which, when taken together, shall constitute but one
agreement.
9.10 ENTIRE AGREEMENT. The Loan Documents are intended by the parties as
the final expression of their agreement and therefore contain the entire
agreement between the parties and supersede all prior understandings or
agreements concerning the subject matter hereof. This Agreement may be amended
only in a writing signed by Borrower and Lender.
9.11 GOVERNING LAW AND JURISDICTION.
(a) THIS AGREEMENT AND THE LOAN DOCUMENTS SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR
OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION
AND DELIVERY OF THIS AGREEMENT, EACH OF BORROWER AND LENDER CONSENTS, FOR
ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF
THOSE COURTS. EACH OF BORROWER AND LENDER IRREVOCABLY WAIVES ANY OBJECTION,
INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM
NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION
OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT
RELATED HERETO. BORROWER AND LENDER EACH WAIVE PERSONAL SERVICE OF ANY
SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS
PERMITTED BY CALIFORNIA LAW.
9.12 WAIVER OF JURY TRIAL. BORROWER AND LENDER EACH WAIVES ITS
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR
THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR
OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER
PARTY OR ANY PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS,
TORT CLAIMS, OR OTHERWISE, BORROWER AND LENDER EACH AGREES THAT ANY SUCH CLAIM
OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT
LIMITING THE FOREGOING. THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT
TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION,
COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEMS, IN WHOLE OR IN PART, TO CHALLENGE
THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR
ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE
OTHER LOAN DOCUMENTS.
<PAGE> 15
9.13 CONFIDENTIAL INFORMATION. Lender agrees to take normal and reasonable
precautions and exercise due care to maintain the confidentiality of all
information relating to Borrower which have been identified as "confidential" by
Borrower, and neither Lender nor any of its Affiliates shall use any such
information for any purpose or in any manner other than pursuant to the terms
contemplated by this Loan Agreement; except to the extent such information (i)
was or becomes generally available to the public other than as a result of a
disclosure by Lender, or (ii) was or becomes available on a non-confidential
basis from a source other than Borrower, provided that such source is not bound
by a confidentiality agreement with Borrower known to Lender; provided further,
however that any Lender may disclose such information (A) at the request or
pursuant to any requirement of any governmental authority to which Lender is
subject or in connection with an examination of such Lender by any such
authority, (B) pursuant to subpoena or other court process, (C) when required to
do so in accordance with the provisions of any applicable law, (D) to Lender's
independent auditors and other professional advisors, and (E) to any person or
entity and in any proceeding necessary in Lender's judgment to protect such
Lender's interests in connection with any claim or dispute involving Lender (F)
when approved in writing by Borrower. Notwithstanding the foregoing, Borrower
authorizes Lender to disclose to any participant or assignee (each, a
"Transferee"), to any prospective Transferee and to any Affiliate, such
financial and other information in Lender's possession concerning Borrower which
has been delivered to Lender pursuant to this Loan Agreement, provided that,
unless otherwise agreed by Borrower, the Transferee agrees in writing to such
Lender to keep such information confidential to the same extent required of
Lender hereunder.
ARTICLE 10 - DEFINITIONS
The definitions appearing in this Agreement or any Supplement shall be
applicable to both the singular and plural forms of the defined terms:
"ACCOUNT" means a right to payment for goods sold or leased by Borrower or for
services rendered by Borrower, which right is not evidenced by an instrument or
chattel paper, whether or not earned by performance.
"AFFILIATE" means any Person which directly or indirectly controls, is
controlled by, or is under common control with Borrower. "Control," "controlled
by" and "under common control with" mean direct or indirect possession of the
power to direct or cause the direction of management or policies (whether
through ownership of voting securities, by contract or otherwise); provided,
that control shall be conclusively presumed when any Person or affiliated group
directly or indirectly owns fifty percent (50%) or more of the securities having
ordinary voting power for the election of directors of a corporation.
"AGREEMENT" means this Loan and Security Agreement and each Supplement thereto,
as each may be amended or supplemented from time to time.
"BANKRUPTCY CODE" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C.
Section 101. et seq.), as amended
"BASIC INTEREST" means the fixed rate of interest payable on the outstanding
balance of each Loan at the applicable Designated Rate.
"BORROWING DATE" means the Business Day on which the proceeds of a Loan are
disbursed by Lender.
"BORROWING REQUEST" means a written request from Borrower in substantially the
form of Exhibit "B" to the Supplement, requesting the funding of one or more
Loans on a particular Borrowing Date.
"BUSINESS DAY" means any day other than a Saturday, Sunday or other day on which
commercial banks in New York City or San Francisco are authorized or required by
law to close.
"CLOSING DATE" means the date of this Agreement.
"COLLATERAL" means all Borrower's Accounts, Deposit Accounts, Equipment,
Fixtures, General Intangibles, Goods, Inventory, Rights to Payment, and
securities now owned or hereafter acquired or arising, wherever located, and
whether held by Borrower or any third party, and all royalties, proceeds and
products thereof, including all insurance and condemnation proceeds
("Proceeds"), and all monies now or at any time hereafter in the possession or
under the control of Lender or a bailee or affiliate of Lender, including any
cash collateral in any cash collateral or other account, and all Records.
"COMMITMENT" means the obligation of Lender to make Loans to Borrower up to the
aggregate principal amount set forth in the Supplement.
"DEFAULT" means an event which with the giving of notice, passage of time, or
both would constitute an Event of Default.
<PAGE> 16
"DEFAULT RATE" is defined in Section 2.7.
"DEPOSIT ACCOUNTS" means all Borrower's demand, time, savings, passbook or
similar accounts maintained with a financial institution or credit union.
"DESIGNATED RATE" means the rate of interest per annum described in the
Supplement as being applicable to an outstanding Loan from time to time.
"ENVIRONMENTAL LAWS" means all federal, state or local laws, statutes, common
law duties, rules, regulations, ordinances and codes, together with all
administrative orders, directed duties, requests, licenses, authorizations and
permits of, and agreements with, any governmental authorities, in each case
relating to environmental, health, or safety matters.
"EQUIPMENT" means all of Borrower's equipment now owned or hereafter acquired,
including but not limited to machinery, machine parts, furniture, furnishings
and all tangible personal property used in the business of Borrower and all
such property which is or is to become fixtures on real property, and all
improvements, replacements, accessions and additions thereto, wherever located,
and all proceeds thereof arising from the sale, lease, rental or other use or
disposition of any such property, including all rights to payment with respect
to insurance or condemnation, returned premiums, or any cause of action
relating to any of the foregoing.
"EVENT OF DEFAULT" means any event described in Section 7.1.
"FIXTURES" means all items of personal property of Borrower that are so related
to the real property upon which they are located that an interest in them
arises under real property law, and improvements, replacements, parts,
accessions and additions thereto, and substitutions therefor.
"GAAP" means generally accepted accounting principles and practices consistent
with those principles and practices promulgated or adopted by the Financial
Accounting Standards Board and the Board of the American Institute of Certified
Public Accountants, their respective predecessors and successors. Each
accounting term used but not otherwise expressly defined herein shall have the
meaning given it by GAAP.
"GENERAL INTANGIBLES" means all personal property of Borrower, other than
Goods, not otherwise defined as Collateral, including without limitation all
interests or claims in insurance policies; literary property; trade names,
trade name rights; Trademarks, Trademark rights, copyrights, Patents, and all
applications therefor; licenses, permits, franchises and like privileges or
rights issued by any governmental or regulatory authority; income tax refunds;
customer lists; claims and causes of action (whether in contract, tort or
otherwise), judgments and all guaranty claims, leasehold interests in personal
property, security interests or other security held by or guaranteed to the
Borrower to secure the payment by an account debtor of any of the Accounts.
"GOODS" means all money and other personal property of Borrower, other than
General Intangibles, not otherwise defined as Collateral.
"INDEBTEDNESS" of any Person means at any date, without duplication and without
regard to whether matured or unmatured, absolute or contingent: (i) all
obligations of such Person for borrowed money; (ii) all obligations of such
Person evidenced by bonds, debentures, notes, or other similar instruments;
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business; (iv) all obligations of such Person as lessee under capital
leases; (v) all obligations of such Person to reimburse or prepay any bank or
other Person in respect of amounts paid under a letter of credit, banker's
acceptance, or similar instrument, whether drawn or undrawn; (vi) all
obligations of such Person to purchase securities which arise out of or in
connection with the sale of the same or substantially similar securities; (vii)
all obligations to repurchase assets previously sold (including any obligation
to repurchase any accounts or chattel paper under any factoring, receivables
purchase, or similar arrangement); (viii) obligations of such Person under
interest rate swap, cap, collar or similar hedging arrangements; and (ix) all
obligations of others of any type described in clause (i) through clause (viii)
above guaranteed by such Person.
"INSOLVENCY PROCEEDING" means (a) any case, action or proceeding before any
court or other governmental authority relating to bankruptcy, reorganization,
insolvency, liquidation, receivership, dissolution, winding-up or relief of
debtors, or (b) any general assignment for the benefit of creditors,
composition, marshalling of assets for creditors, or other, similar arrangement
in respect of its creditors generally or any substantial portion of its
creditors, undertaken under U.S. Federal, state or foreign law, including
the Bankruptcy Code.
<PAGE> 17
"INVENTORY" means all Borrower's raw materials, advertising, packaging and
shipping materials, work in process, finished goods and goods held for sale or
lease or furnished under contracts of service, and all returned and repossessed
goods, and all goods covered by documents of title, including warehouse
receipts, bills of lading and all other documents of every type covering all or
any part of the Collateral.
"LIEN" means any voluntary or involuntary security interest, mortgage, pledge,
claim, charge, encumbrance, title retention agreement, or third party interest,
covering all or any part of the property of Borrower or any other Person.
"LOAN" means an extension of credit by Lender under Section 2 of this Agreement.
"LOAN DOCUMENTS" means, individually and collectively, this Loan and
Security Agreement, each Supplement, each Note, and any other security or pledge
agreement(s), any Warrants issued by Borrower in connection with this Agreement,
and all other contracts, instruments, addenda and documents executed in
connection with this Agreement or the extensions of credit which are the
subject of this Agreement.
"MATERIAL ADVERSE EFFECT" or "MATERIAL ADVERSE CHANGE" means (a) a material
adverse change in, or a material adverse effect upon, the operations, business,
properties, or condition (financial or otherwise) of Borrower; (b) a material
impairment of the ability of Borrower to perform under any Loan Document; or
(c) a material adverse effect upon the legality, validity, binding effect or
enforceability against Borrower of any Loan Document.
"MATURITY DATE" means, with regard to a Loan, the earlier of (i) its maturity
by reason of acceleration, or (ii) its stated maturity date; and is the date
on which payment of all outstanding principal, accrued interest, and the
Terminal Payment with respect to such Loan is due.
"NOTE" means a promissory note substantially in the form attached to the
Supplement as Exhibit "A", executed by Borrower evidencing each Loan.
"OBLIGATIONS" means all debts, obligations and liabilities of Borrower to Lender
currently existing or now or hereafter made, incurred or created under,
pursuant to or in connection with this Agreement, whether voluntary or
involuntary and however arising or evidenced, whether direct or acquired by
Lender by assignment or succession, whether due or not due, absolute or
contingent, liquidated or unliquidated, determined or undetermined, and whether
Borrower may be liable individually or jointly, or whether recovery upon such
debt may be or become barred by any statute of limitations or otherwise
unenforceable; and all renewals, extensions and modifications thereof; and all
attorneys' fees and costs incurred by Lender in connection with the collection
and enforcement thereof as provided for in any Loan Document.
"PATENT LICENSE" means any written agreement now or hereafter in existence
granting to Borrower any right to make, use, sell or practice any invention on
which a Patent is in existence.
"PATENTS" means all of the following: (i) all letters patent of the United
States or any other country, all registrations and recordings thereof, and all
applications for letters patent of the United States or any other country,
including without limitation, registrations, recordings and applications in the
United States Patent and Trademark Office or in any similar office or agency of
the United States, any state thereof or any other country or any political
subdivision thereof, and (ii) all reissues, divisions, continuations,
continuations-in-part, renewals or extensions thereof.
"GRANT OF SECURITY INTEREST IN PATENTS" means any Patent Collateral Assignment
executed and delivered by Borrower in favor of Lender, as the same may be
amended from time to time.
"PERMITTED LIEN" means
(a) Involuntary Liens which, in the aggregate, would not have a Material
Adverse Effect and which in any event would not exceed the Threshold Amount;
(b) Liens for current taxes or other governmental or regulatory
assessments which are not delinquent, or which are contested in good faith by
the appropriate procedures and for which appropriate reserves are maintained;
(c) security interests on any property held or acquired by Borrower in the
ordinary course of business securing Indebtedness incurred or assumed for the
purpose of financing all or any part of the cost of acquiring such property;
provided, that such Lien attaches solely to the property acquired with such
Indebtedness and that the principal amount of such Indebtedness does not exceed
one hundred percent (100%) of the cost of such property; and further provided,
that such property is not equipment with respect to which a Loan has been made
hereunder.
<PAGE> 18
(d) Liens in favor of Lender,
(e) bankers' liens, rights of setoff and similar Liens incurred on
deposits made in the ordinary course of business;
(f) materialmen's, mechanics', repairmen's, employees' or other like Liens
arising in the ordinary course of business and which are not delinquent for more
than 45 days or are being contested in good faith by appropriate proceedings;
(g) any judgment, attachment or similar Lien, unless the judgment it
secures has not been discharged or execution thereof effectively stayed and
bonded against pending appeal within 30 days of the entry thereof;
(h) licenses or sublicenses of Patents, Patent Licenses, Trademarks or
Trademark Licenses permitted under the Trademark Collateral Assignment or the
Patent Collateral Assignment;
(i) Liens which have been approved by Lender in writing prior to the
Closing Date;
(j) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business not interfering in any material respect
with the business of Borrower, and any interest or title of a lessor, licensor
or under any lease or license;
(k) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payments of customs duties in connection with the importation
of goods;
(l) Deposits under worker's compensation, unemployment insurance, social
security and other similar laws, or to secure the performance of bids, tenders
or contracts (other than for the repayment of borrowed money) or to secure
indemnity, performance or other similar bonds for the performance of bids,
tenders or contracts (other than for the repayment of borrowed money) or to
secure statutory obligations (other than liens arising under ERISA or
environmental liens) or surety or appeal bonds, or to secure indemnity,
performance or other similar bonds in the ordinary course of business.
"PERSON" means any individual or entity.
"QUALIFIED PUBLIC OFFERING" means the closing of a firmly underwritten public
offering of Borrower's common stock with aggregate proceeds of not less than
$20,000,000 (prior to underwriting expenses and commissions).
"RECORDS" means all Borrower's computer programs, software, hardware, source
codes and data processing information, all written documents, books, invoices,
ledger sheets, financial information and statements, and all other writings
concerning Borrower's business.
"RELATED PERSON" means any Affiliate of Borrower of any officer, employee,
director or equity security holder of Borrower or any Affiliate.
"RIGHTS TO PAYMENT" means all Borrower's accounts, instruments, contract
rights, documents, chattel paper and all other rights to payment, including,
without limitation, the Accounts, all negotiable certificates of deposit and
all rights to payment under any Patent License, any Trademark License, or any
commercial or standby letter of credit.
"TERMINAL PAYMENT" means, with respect to each Loan, an amount payable on the
Maturity Date of such Loan in an amount equal to that percentage of the
original principal amount of such Loan specified in the Supplement.
"TERMINATION DATE" has the meaning specified in the Supplement.
"THRESHOLD AMOUNT" has the meaning specified in the Supplement.
"TRADEMARK LICENSE" means any written agreement now or hereafter in existence
granting to Borrower any right to use any Trademark.
"TRADEMARKS" means all of the following: (i) all trademarks, trade names,
corporate names, company names, business names, fictitious business names, trade
styles, service marks, logos, other source or business identifiers, prints and
labels on which any of the foregoing have appeared or will appear, designs and
general intangibles of like nature, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all applications in
connection therewith, including, without limitation, registrations, recordings
and applications in the United States Patent and Trademark Office or in any
similar office or agency of the United States, any state thereof or any other
country or any political subdivision thereof, and (ii) all reissues, divisions,
continuations, continuations-in-part, renewals or extensions thereof.
<PAGE> 19
"GRANT OF SECURITY INTEREST IN TRADEMARK" means any Trademark Collateral
Assignment executed and delivered by Borrower in favor of Lender, as the same
may be amended from time to time.
"UCC" means the Uniform Commercial Code as enacted in the applicable
jurisdiction, in effect on the Closing Date and as amended from time to time.
<PAGE> 20
SUPPLEMENT
TO THE
LOAN AND SECURITY AGREEMENT
DATED AS OF SEPTEMBER 21, 1998
BETWEEN
COSINE COMMUNICATIONS, INC. ("BORROWER")
AND
VENTURE LENDING & LEASING II, INC. ("LENDER")
- --------------------------------------------------------------------------------
This is a Supplement identified in the document entitled Loan and Security
Agreement dated as of September 21, 1998 between Borrower and Lender. All
capitalized terms used in this Supplement and not otherwise defined in this
Supplement have the meanings ascribed to them in Section 10 of the Loan and
Security Agreement, which is incorporated in its entirety into this Supplement.
In the event of any inconsistency between the provisions of that document and
this Supplement, this Supplement is controlling. Execution of this Supplement
by the Lender and Borrower shall constitute execution of the Loan and Security
Agreement.
In addition to the provisions of the Loan and Security Agreement, the
parties agree as follows:
PART 1 - ADDITIONAL DEFINITIONS:
"COMMITMENT": Lender commits to make Loans to Borrower (either as
Equipment Loans or Term Loans) up to the aggregate, original principal amount
of Two Million Dollars ($2,000,000.00). Subject to the limitations set forth in
this Supplement and the Loan and Security Agreement, a Loan may be advanced as
an Equipment Loan, the proceeds of which shall be used to finance Borrower's
acquisition or carrying of computer, research and development and general
purpose office equipment, and software imbedded in or necessary to the use or
operation of such equipment, or for tenant improvements at premises leased by
Borrower. A Loan may also be advanced as a Term Loan, the proceeds of which
shall be used by Borrower for general working capital purposes. Except to the
extent the remaining Commitment is a lesser amount, each Equipment Loan
requested by Borrower to be made on a single Business Day shall be for a minimum
principal amount of $50,000, and each Term Loan requested by Borrower to be
made on a single Business Day shall be for a minimum principal amount of
$250,000 or a multiple thereof.
"DESIGNATED RATE": The Designated Rate is fixed rate of interest per annum
of (i) seven and one-half percent (7.50%) for each Equipment Loan, and (ii)
seven and three-eighths percent (7.375%) for each Term Loan.
"EQUIPMENT LOAN" means any Loan requested by Borrower and funded by Lender
to finance Borrower's acquisition or carrying of specific items of Equipment,
software or tenant improvements.
"TERM LOAN" means any Loan requested by Borrower and funded by Lender for
general working capital purposes of Borrower, and not to finance the
acquisition or carrying of specific items of Equipment, software or tenant
improvements.
"TERMINAL PAYMENT": Each Terminal Payment shall be an amount equal to (i)
ten percent (10%) of the original principal amount of the associated Equipment
Loan, or (ii) seven and one-half percent (7.50%) of the original principal
amount of the associated Term Loan.
"TERMINATION DATE": The Termination Date is the earlier of (a) the date
Lender may terminate making Loans or extending other credit pursuant to the
rights of Lender under Article 7 of the Agreement, or (b) June 30, 1999.
"THRESHOLD AMOUNT": One Hundred Thousand Dollars ($100,000.00).
<PAGE> 21
PART 2 - ADDITIONAL COVENANTS AND CONDITIONS:
ISSUANCE OF WARRANT TO LENDER. As additional consideration for the
making of the Loans under the Loan and Security Agreement, upon the making of,
and as a condition to, the initial Loan, Lender shall be entitled to receive a
warrant to purchase a number of shares of Series B Preferred Stock of Borrower
("Warrant Shares") with an aggregate initial exercise price of $50,000
determined on the basis of the per share price of such preferred stock in the
next round of equity financing after the Closing Date; provided that if no such
equity financing has occurred by June 30, 1999, then the initial per share
exercise price shall be $8.00 (pre 4 for 1 split). The warrant shall vest for
additional shares with a value equal to 5% of any fundings under the Equipment
facility in excess of $1,000,000 and 10% of any fundings under the Working
Capital facility. The warrant issued under this Agreement shall be substantially
the form attached hereto as Exhibit "C"; shall be transferable by Lender,
subject to compliance with applicable securities laws; shall expire on June 30,
2006; and shall include piggy-back registration rights, "net issuance"
provisions, and anti-dilution protections reasonably satisfactory to Lender and
its counsel.
COMPLETION OF DUE DILIGENCE; DISPOSITION OF COMMITMENT FEE. As an
additional condition precedent under Section 4.1 of the Loan and Security
Agreement, Lender shall have completed to its satisfaction its due diligence
review of Borrower's business and financial condition and prospects, and
Lender's credit committee shall have approved the Commitment. If this condition
is not satisfied, Lender shall refund to Borrower the $10,000 commitment fee
previously paid to Lender. Lender agrees that with respect to each Loan
advanced, on the Borrowing Date applicable to such Loan, Lender shall credit
against the payments due from Borrower on such date in respect of such Loan an
amount equal to the product of $10,000 and a fraction the numerator of which is
the principal amount of such Loan and the denominator of which is $1,000,000,
until the aggregate amount of such credits equals but does not exceed $10,000.
CONDITION TO ADVANCES OF TERM LOANS. The funding of any Term Loan
shall be at the sole and absolute discretion of Lender based on Lender's
assessment at the time of (i) Borrower's ratio of assets to liabilities and
such other financial ratios as Lender determines appropriate, or (ii) the
amount of equity capital raised by or committed to Borrower or the status of
any corporate partnering arrangements or strategic alliances with third parties.
LIMITATION ON EQUIPMENT LOANS. Each Equipment Loan shall be in an
amount not to exceed one hundred percent (100%) of the amount paid or payable
by Borrower to a non-affiliated manufacturer, vendor or dealer for an item of
equipment as shown on an invoice therefor (excluding any commissions and any
portion of the payment which relates to the servicing of the equipment and
sales tax payable by Borrower upon acquisition, and delivery charges);
provided, however, that with respect to any item of Equipment which has either
been owned by Borrower or in service for more than six (6) months as of the
proposed Borrowing Date of the associated Equipment Loan. Lender shall not
advance against such Equipment more than 100% of its book value. Lender
reserves the right to approve each item of Equipment, Software and any tenant
improvements proposed by Borrower to be financed with proceeds of an Equipment
Loan.
AGREEMENT TO SUBORDINATE LIENS. Lender acknowledges that Borrower is
currently indebted to Silicon Valley Bank, and that such indebtedness is secured
by Lien in favor of Silicon Valley Bank on certain assets of Borrower which
constitute Collateral. It is understood and agreed that the lien of Lender in
all items of Equipment financed with the proceeds of Equipment Loans will be a
first priority, perfected Lien, and that such items of Equipment shall be
subject to no other Liens other than Permitted Liens. Lender agrees that its
Lien on any other items of Collateral in which Silicon Valley Bank has a Lien to
secure indebtedness under it's $1.0 million 90 day bridge facility expiring
XX/XX/1998 will be subordinate in priority of perfection to the Lien of Silicon
Valley Bank. It is further understood and agreed that the lien of Silicon Valley
Bank in all items of Equipment financed with the proceeds of $1.2 million
equipment financing will be a first priority, perfected Lien on the items
financed by that facility. Borrower will cooperate with Lender in obtaining
releases of any Liens of Silicon Valley Bank or third parties against Equipment
proposed to be financed with the proceeds of an Equipment Loan.
LIMITATION ON REIMBURSEMENT OF DOCUMENTATION COSTS. Borrower shall
reimburse Lender for all costs and expenses, including without limitation
reasonable attorney's fees and disbursements expended or incurred by Lender in
connection with (a) the preparation and negotiation of the Loan Documents,
limited to $3,000 which will be deducted from the first funding, (b) the
amendment and enforcement of the Loan Documents, including without
2
<PAGE> 22
limitation during any workout, attempted workout, and/or in connection with the
rendering of legal advice as to Lender's rights, remedies and obligations under
the Loan Documents, (c) collecting any sum which becomes due Lender under any
Loan Document.
PART 3 - ADDITIONAL REPRESENTATIONS:
Borrower represents and warrants that as of the Closing Date and each
Borrowing Date:
- Its chief executive office is located at: 1070 Sixth Avenue,
Belmont, CA 94002
- Its Equipment is located at: 1070 Sixth Avenue, Belmont, CA, and
- 1200 Bridge Parkway, Redwood City, CA.
- Its Records are located at: 1200 Bridge Parkway, Redwood City, CA.
- In addition to its chief executive office, Borrower maintains
offices or operates its business at the following locations:
- Other than its full corporate name, Debtor has conducted business
using the following trade names or fictitious business names:
PART 4 - ADDITIONAL LOAN DOCUMENTS:
Form of Note Exhibit "A"
Form of Borrowing Request Exhibit "B"
Form of Compliance Certificate Exhibit "C"
Form of Grant of Security Interest in Patents Exhibit "D"
Form of Grant of Security Interest in Trademark Exhibit "E"
Form of Warrant Exhibit "F"
3
<PAGE> 23
IN WITNESS WHEREOF, the parties have executed this Supplement as of the
date first above written.
BORROWER:
COSINE COMMUNICATIONS, INC.
By: /s/ Curtis Dudnick
Name: Curtis Dudnick
Title: CFO
Address for Notices: Attn: Chief Financial Officer
1200 Bridge Parkway
Redwood City, CA 94065
Fax # (650) 637-2453
LENDER:
VENTURE LENDING & LEASING II, INC.
By: /s/ Salvador D. Gutierrez
Name: Salvador D. Gutierrez
Title: President
Address for Notices: Attn: Chief Financial Officer
2010 North First Street, Suite 310
San Jose, CA 95131
Fax # (408) 436-8625
4
<PAGE> 24
EXHIBIT "A"
[Note No. X-XXX]
FORM OF PROMISSORY NOTE
[EQUIPMENT LOAN] [TERM LOAN]
$ ________________ _______________, 199__
San Jose, California
The undersigned ("Borrower") promises to pay to the order of VENTURE
LENDING & LEASING II, INC., a Maryland corporation ("Lender"), at its office at
2010 North First Street, Suite 310, San Jose, California 95131, or at such
other place as Lender may designate in writing, in lawful money of the United
States of America, the principal sum of __________________________ Dollars
($_______), with Basic Interest thereon from the date hereof until maturity,
whether scheduled or accelerated, at a fixed rate per annum of _______________
percent (____%) [7.50% FOR EQUIPMENT LOAN, OR 7.375% FOR TERM LOAN], and a
Terminal Payment in the sum of [10% OF FACE AMOUNT OF EQUIPMENT LOAN, OR 7.50%
IF A TERM LOAN] Dollars ($__________) payable on the Maturity Date.
This Note is one of the Notes referred to in, and is entitled to all the
benefits of, a Loan and Security Agreement dated as of September ___, 1998,
between Borrower and Lender. Each capitalized term not otherwise defined herein
shall have the meaning set forth in the Loan Agreement. The Loan Agreement
contains provisions for the acceleration of the maturity of this Note upon the
happening of certain stated events.
Principal of and interest on this Note shall be payable as follows:
On the Borrowing Date, Borrower shall pay (i) Basic Interest, in advance,
on the outstanding principal balance of this Note at the Designated Rate for
the period from the Borrowing Date through [THE LAST DAY OF THE SAME MONTH];
and (ii) a first (1st) amortization installment of principal and Basic Interest
in the amount of _______________, in advance for the month of [FIRST FULL MONTH
AFTER BORROWING DATE] and (iii) a [42ND IF AN EQUIPMENT LOAN, OR 30TH IF A TERM
LOAN] amortization installment of principal and Basic Interest in the amount of
$____________, in advance for the month of [DATE OF LAST REGULAR AMORTIZATION
PAYMENT].
Commencing on the first day of the second full month after the Borrowing
Date, and continuing on the first day of each consecutive month thereafter,
principal and Basic Interest shall be payable, in advance, in [39 OR 27, AS
APPROPRIATE] equal consecutive installments of _______________________ Dollars
($__________) each, with a [40TH OR 28TH, AS APPROPRIATE] installment equal to
the entire unpaid principal balance and accrued Basic Interest on _____________,
200__. The Terminal Payment amount shall be payable on [ONE MONTH LATER], 200__.
Any unpaid payments of principal or interest on this Note shall bear
interest from their respective maturities, whether scheduled or accelerated, at
a rate per annum equal to the Default Rate. Borrower shall pay such interest
on demand.
<PAGE> 25
Interest, charges and fees shall be calculated for actual days elapsed on
the basis of a 360-day year, which results in higher interest, charge or fee
payments than if a 365-day year were used. In no event shall Borrower be
obligated to pay interest, charges or fees at a rate in excess of the highest
rate permitted by applicable law from time to time in effect.
If Borrower is late in making any payment under this Note by more than
five (5) days, Borrower agrees to pay a "late charge" of five percent (5%) of
the installment due, but not less than fifty dollars ($50.00) for any one such
delinquent payment. This late charge may be charged by Lender for the purpose
of defraying the expenses incidental to the handling of such delinquent
amounts. Borrower acknowledges that such late charge represents a reasonable sum
considering all of the circumstances existing on the date of this Note and
represents a fair and reasonable estimate of the costs that will be sustained
by Lender due to the failure of Borrower to make timely payments. Borrower
further agrees that proof of actual damages would be costly and inconvenient.
Such late charge shall be paid without prejudice to the right of Lender to
collect any other amounts provided to paid or to declare a default under this
Note or any of the other Loan Documents or from exercising any other rights and
remedies of Lender.
This Note shall be governed by, and construed in accordance with, the laws
of the State of California.
CoSINE COMMUNICATIONS, INC.
By:____________________________
Name:__________________________
Its:___________________________
<PAGE> 26
EXHIBIT "B"
FORM OF BORROWING REQUEST
[Date]
Venture Lending & Leasing II, Inc.
2010 North First Street, Suite 310
San Jose, CA 95131
Re: [Borrower]
Gentlemen:
Reference is made to the Loan and Security Agreement dated as of
September , 1998 (as amended from time to time, the "Loan Agreement", the
capitalized terms used herein as defined therein), between Venture Lending &
Leasing II, Inc. ("VLLI") and CoSine Communications, Inc. (the "Company").
The undersigned is the ______________________ of the Company, and
hereby requests on behalf of the Company a Loan under the Loan Agreement, and
in that connection certifies as follows:
1. The type of the proposed Loan is [an Equipment Loan] [a Term
Loan]. The amount of the proposed Loan is _______________ and __/100 Dollars
($__________). The Borrowing Date of the proposed Loan is ____________, 199_.
[2. The proceeds of the proposed Equipment Loan shall be used by the
Company to acquire new [and to finance used] items of Equipment [and software
and/or tenant improvements] described more particularly on Schedule I hereto,
and on invoices and other documentation furnished to you with this Borrowing
Request. As of the date hereof, the items of Equipment proposed to be financed
with proceeds of the Equipment Loan are not subject to any third party Lien,
and Lender shall have a first priority security interest in such Equipment as
required under the Loan Agreement.]
3. As of this date, no Default or Event of Default has occurred and
is continuing, or will result from the making of the proposed Loan, the
representations and warranties of the Company contained in Article 3 of the
Loan Agreement are true and correct, and the conditions precedent described in
Article 4 of the Loan Agreement have been met.
4. No Material Adverse Change has occurred since the date of the most
recent financial statements submitted to you by the Company.
[5. Any other applicable representations or conditions]
The Company shall notify you promptly before the funding of the Loan
if any of the matters to which I have certified above shall not be true and
correct on the Borrowing Date.
Very truly yours,
_____________________________________
Name: _______________________________
Title:_______________________________
<PAGE> 27
EXHIBIT C
COMPLIANCE CERTIFICATE
Venture Lending & Leasing II, Inc.
2010 North First Street, Suite 310
San Jose, CA 95131
Re: ____________
Gentlemen:
Reference is made to the two Loan and Security Agreement dated as of
_______________ (as the same have been and may be amended from time to time, the
"Loan Agreement", the capitalized terms used herein as defined therein), between
Venture Lending & Leasing II, Inc., on one hand and _______________ (the
"Company") on the other.
The undersigned authorized representative of the Company hereby certifies
that in accordance with the terms and conditions of the Loan Agreement, the
Company is in complete compliance for the period ending _______________ of all
required conditions and terms except as noted below. Attached herewith are the
required documents supporting the above certification. The representative
further certifies that these are prepared in accordance with Generally Accepted
Accounting Principles and are consistent from one period to the next except as
explained below.
Indicate compliance status by circling Yes/No under "Complies"
REPORTING REQUIREMENT REQUIRED COMPLIES
Interim Financial Statements Monthly within 45 days YES/NO
Audited Financial Statements FYE within 90 days YES/NO
FINANCIAL COVENANTS REQUIRED COMPLIES
REQUIRED EXPLANATIONS:
_______________________________________________________________________________
_______________________________________________________________________________
Very Truly Yours,
By:__________________________
Name:________________________
Its:_________________________
<PAGE> 1
EXHIBIT 10.9
AMENDED AND RESTATED
SUPPLEMENT
TO THE
LOAN AND SECURITY AGREEMENT
DATED AS OF SEPTEMBER 21, 1998
BETWEEN
COSINE COMMUNICATIONS, INC. ("BORROWER")
AND
VENTURE LENDING & LEASING II, INC. ("LENDER")
- --------------------------------------------------------------------------------
This Amended and Restated Supplement is a Supplement identified in the
document entitled Loan and Security Agreement dated as of September 21, 1998
between Borrower and Lender. This Supplement amends, restates and replaces in
its entirety the Supplement executed by Borrower and Lender dated as of
September 21, 1998 (the "Prior Supplement"). Exhibits "A" through "E" to the
Prior Supplement shall be deemed attached hereto and made a part hereof without
change; Exhibit "F" to the Prior Supplement shall be deemed replaced in its
entirety by the form of Warrant attached hereto as Exhibit "F". All capitalized
terms used in this Supplement and not otherwise defined in this Supplement have
the meanings ascribed to them in Section 10 of the Loan and Security Agreement,
which is incorporated in its entirety into this Supplement. In the event of any
inconsistency between the provisions of the Loan and Security Agreement and
this Supplement, this Supplement is controlling. Execution of this Supplement
by the Lender and Borrower shall constitute execution of the Loan and Security
Agreement.
In addition to the provisions of the Loan and Security Agreement, the
parties agree as follows:
PART 1 - ADDITIONAL DEFINITIONS:
"COMMITMENT": Lender commits to make Term Loans to Borrower up to the
aggregate, original principal amount of Two Million Dollars ($2,000,000.00);
and Lender commits to make Equipment Loans to Borrower up to the aggregate,
original principal amount of Two Million Five Hundred Thousand Dollars
($2,500,000.00). Subject to the limitations set forth in this Supplement and
the Loan and Security Agreement, a Loan may be advanced as an Equipment Loan,
the proceeds of which shall be used to finance Borrower's acquisition or
carrying of computer, research and development and general purpose office
equipment, and software imbedded in or necessary to the use or operation of
such equipment, or for tenant improvements at premises leased by Borrower. A
Loan may also be advanced as a Term Loan, the proceeds of which shall be used
by Borrower for general working capital purposes. Except to the extent the
remaining Commitment is a lesser amount, each Equipment Loan requested by
Borrower to be made on a single Business Day shall be for a minimum principal
amount of $50,000, and each Term Loan requested by Borrower to be made on a
single Business Day shall be for a minimum principal amount of $250,000 or a
multiple thereof.
"DESIGNATED RATE": The Designated Rate is fixed rate of interest per annum
of (i) seven and one-half percent (7.50%) for each Equipment Loan, and (ii)
seven and three-eighths percent (7.375%) for each Term Loan.
"EQUIPMENT LOAN" means any Loan requested by Borrower and funded by Lender
to finance Borrower's acquisition or carrying of specific items of Equipment,
software or tenant improvements.
"TERM LOAN" means any Loan requested by Borrower and funded by Lender for
general working capital purposes of Borrower, and not to finance the acquisition
or carrying of specific items of Equipment, software or tenant improvements.
"TERMINAL PAYMENT": Each Terminal Payment shall be an amount equal to (i)
ten percent (10%) of the original principal amount of the associated Equipment
Loan, or (ii) seven and one-half percent (7.50%) of the original principal
amount of the associated Term Loan.
<PAGE> 2
"TERMINATION DATE": The Termination Date is the earlier of (a) the date
Lender may terminate making Loans or extending other credit pursuant to the
rights of Lender under Article 7 of the Agreement, or (b) June 30, 1999.
"THRESHOLD AMOUNT": One Hundred Thousand Dollars ($100,000.00).
PART 2 - ADDITIONAL COVENANTS AND CONDITIONS:
ISSUANCE OF WARRANT TO LENDER. As additional consideration for the making
of the Loans under the Loan and Security Agreement, upon the making of, and as
a condition to, the initial Loan, Lender shall be entitled to receive a warrant
to purchase 20,808 shares of Series A Preferred Stock of Borrower at a per
share exercise price of $8.41; provided that if Series B Preferred Stock of the
Borrower is issued and sold prior to June 30, 1999, then such warrant shall be
exercisable at an initial exercise price equal to the per share price of such
Series B Preferred Stock sold by the Borrower on the closing of such sale, and
for a number of shares of Series B Preferred Stock having an aggregate exercise
price of $175,000.00 (such shares of Series A or Series B Preferred Stock being
"Warrant Shares"). With each availability of the remaining $1 million in Term
Loans, the warrant shall vest, for additional Warrant Shares with a value equal
to $50,000. With each funding of a Term Loan, the warrant shall vest, from time
to time, for additional Warrant Shares with a value equal to 5% of the
principal amount of the Term Loan. The warrant issued under this Agreement
shall be in substantially the form attached hereto as Exhibit "C"; shall be
transferable by Lender, subject to compliance with applicable securities laws;
shall expire on June 30, 2006; and shall include piggy-back registration
rights, "net issuance" provisions, and anti-dilution protections reasonably
satisfactory to Lender and its counsel.
COMPLETION OF DUE DILIGENCE; DISPOSITION OF COMMITMENT FEE. As an
additional condition precedent under Section 4.1 of the Loan and Security
Agreement, Lender shall have completed to its satisfaction its due diligence
review of Borrower's business and financial condition and prospects, and
Lender's credit committee shall have approved the Commitment. If this condition
is not satisfied, Lender shall refund to Borrower the $20,000 commitment fee
previously paid to Lender. Lender agrees that with respect to each Loan
advanced, on the Borrowing Date applicable to such Loan, Lender shall credit
against the payments due from Borrower on such date in respect of such Loan an
amount equal to the product of $20,000 and a fraction the numerator of which is
the principal amount of such Loan and the denominator of which is $4,500,000,
until the aggregate amount of such credits equals but does not exceed $20,000.
CONDITION TO ADVANCES OF LOANS IN EXCESS OF $1MM. The funding of any Loan
subsequent to the first $1,000,000.00 in original principal amount of Loans
advanced shall be at the sole and absolute discretion of Lender based on
Lender's assessment at the time of (i) Borrower's ratio of assets to
liabilities and such other financial ratios as Lender determines appropriate,
or (ii) the amount of equity capital raised by or committed to Borrower or the
status of any corporate partnering arrangements or strategic alliances with
third parties.
LIMITATION ON EQUIPMENT LOANS. Each Equipment Loan shall be in an amount
not to exceed one hundred percent (100%) of the amount paid or payable by
Borrower to a non-affiliated manufacturer, vendor or dealer for an item of
equipment as shown on an invoice therefor (excluding any commissions and any
portion of the payment which relates to the servicing of the equipment and
sales taxes payable by Borrower upon acquisition, and delivery charges);
provided, however, that with respect to any item of Equipment which has either
been owned by Borrower or in service for more than six (6) months as of the
proposed Borrowing Date of the associated Equipment Loan, Lender shall not
advance against such Equipment more than 100% of its book value. Lender
reserves the right to approve each item of Equipment, software and any tenant
improvements proposed by Borrower to be financed with proceeds of an Equipment
Loan. The proceeds of any Equipment Loan used to finance Equipment previously
financed by Silicon Valley Bank shall be used, as necessary, to repay loans
outstanding from Silicon Valley Bank and to discharge such Bank's Liens against
such Equipment.
LIMITATION ON REIMBURSEMENT OF DOCUMENTATION COSTS. Borrower shall
reimburse Lender for all costs and expenses, including without limitation
reasonable attorneys' fees and disbursements expended or incurred by Lender in
connection with (a) the preparation and negotiation of the Loan Documents,
limited to $3,000 which will be deducted from the first funding, (b) the
amendment and enforcement of the Loan Documents, including without limitation
during any workout, attempted workout, and/or in connection with the rendering
of legal advice as to
2
<PAGE> 3
Lender's rights, remedies and obligations under the Loan Documents, (c)
collecting any sum which becomes due Lender under any Loan Document.
PART 3 - ADDITIONAL REPRESENTATIONS:
Borrower represents and warrants that as of the Closing Date and each
Borrowing Date:
- Its chief executive office is located at: 1200 Bridge Parkway,
Redwood City, CA.
- Its Equipment is located at: 1070 Sixth Avenue, Belmont, CA. and
- 1200 Bridge Parkway, Redwood City, CA.
- Its Records are located at: 1200 Bridge Parkway, Redwood City,
CA.
- In addition to its chief executive office, Borrower maintains
offices or operates its business at the following locations:
- Other than Its full corporate name, Debtor has conducted business
using the following trade names or fictitious business names:
NONE
PART 4 - AMENDMENTS TO LOAN AND SECURITY AGREEMENT:
AMENDMENT TO SECTION 2.10 AND DEFINITION OF COLLATERAL. Section 2.10
of the Loan and Security Agreement is hereby amended by replacing the last
sentence of such section in its entirety with the following sentence:
"Notwithstanding the foregoing, the security interest granted herein
shall not extend to, and the term "Collateral" shall not include, any
property, rights or licenses to the extent the granting of a security
interest therein (i) would be contrary to applicable law, or (ii) is
prohibited by or would constitute a default under any agreement of
document governing such property, rights or licenses (but only to the
extent such prohibition is enforceable under applicable law."
AMENDMENT TO SECTION 6.1. Section 6.1 of the Loan and Security
Agreement is hereby amended by adding the following new subsection (e) after
subsection (d): "(e) Indebtedness of Borrower arising under any unsecured,
convertible promissory notes, provided that the aggregate outstanding principal
balance of such convertible promissory notes shall at no time exceed
$1,500,000.00:
PART 5 - ADDITIONAL LOAN DOCUMENTS:
Form of Note Exhibit "A"
Form of Borrowing Request Exhibit "B"
Form of Compliance Certificate Exhibit "C"
Form of Grant of Security Interest in Patents Exhibit "D"
Form of Grant of Security Interest in Trademark Exhibit "E"
Form of Warrant Exhibit "F"
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Amended and Restated
Supplement as of October 21, 1998.
BORROWER:
COSINE COMMUNICATIONS, INC.
By: /s/ Curtis Dudnick
-------------------------------
Name: Curtis Dudnick
-----------------------------
Title: CFO
----------------------------
Address for Notices: Attn: Chief Financial Officer
1200 Bridge Parkway
Redwood City, CA 94065
Fax # (650) 637-2453
LENDER:
VENTURE LENDING & LEASING II, INC.
By: /s/ Salvador O. Gutierrez
-------------------------------
Name: Salvador O. Gutierrez
-----------------------------
Title: President
----------------------------
Address for Notices: Attn: Chief Financial Officer
2010 North First Street, Suite 310
San Jose, CA 95131
Fax # (408) 436-8625
4
<PAGE> 1
EXHIBIT 10.10
[FINOVA LETTERHEAD]
MASTER LOAN AND SECURITY AGREEMENT
Master Loan and Security Agreement No. S730 Dated May 19, 1999
FINOVA Capital Corporation ("we," "us" or "FINOVA"), having its principal place
of business at 1850 North Central Avenue, Phoenix, Arizona 85004 is willing to
make a loan (the "Loan") to CoSine Communications, Inc. ("you" or "Borrower"),
having its principal place of business at 1200 Bridge Parkway, Redwood City, CA
94065, in one or more advances made from time to time (individually, an
"Advance" and collectively, the "Advances"), in the aggregate principal amount
of up to Two-Million Five-hundred Thousand Dollars ($2,500,000.00), under the
terms and conditions contained in this Master Loan and Security Agreement (this
"Master Agreement"). The entire Loan will be "cross collateralized" and secured
by the collateral (the "Collateral") described in each schedule (individually,
a "Schedule" and collectively, "Schedules") which will be executed in
connection with each Advance and the related Note (as hereinafter defined). The
Collateral includes the Equipment hereinafter described and any and all
replacement parts, additions, accessories and accessions that you may add to
the Equipment, as well as all replacements and substitutions of the Equipment
and all proceeds of the Equipment, including, without limitation, insurance
proceeds. We may treat any Schedule as a separate loan and security agreement
containing all of the provisions of this Master Agreement.
1. THE CREDIT
(a) ADVANCES. Each Advance shall be evidenced by and the specific terms
applicable thereto set forth in a Note and related Schedule. All of the Notes
and Schedules, taken together, will evidence the entire Loan. We will only make
the Loan to you if all the conditions in this Master Agreement have been met to
our satisfaction. We will rely on your representations and warranties contained
in this Master Agreement, in making the Loan. The terms of this Master
Agreement will each apply to the entire Loan.
(b) USE OF PROCEEDS. The proceeds of the Advances will be used solely to
reimburse you for your payment of the purchase price for equipment which is
satisfactory to us and which is described in the applicable Schedule
("Equipment"). If you have not yet paid for the Equipment (but the same is
otherwise satisfactory to us), the proceeds of the Advance will be paid by us
directly to the supplier (which you have chosen) to pay the purchase price of
the Equipment.
(c) NOTES. Your obligation to repay the Advance and to pay interest
thereon will be evidenced by separate secured promissory notes (individually, a
"Note" and collectively, the "Notes'). Each Note will be dated the date of the
<PAGE> 2
Schedule to which the Advance evidenced by the Note is related. The related
Schedule will be deemed to be part of the Note.
(d) TERM. The term ("Term") of each Schedule (and the related Advance)
begins upon the date that we make payment for the Collateral covered under the
Schedule (the "Closing Date"). The Term continues until you fully perform all
of your obligations under this Master Agreement, each related Schedule and the
related Note(s).
(e) LOAN ACCOUNT. We will keep a loan account on our books and records
for the Loan. We will record all payments of principal and interest in the loan
account. Unless the entries in the loan account are clearly in error, the loan
account will definitively indicate the outstanding principal balance and
accrued interest on the Loan.
(f) PAYMENTS. The scheduled payments of principal and interest (the
"Payments") are indicated on and due and payable in accordance with the terms
and applicable Note and Schedule. The Payments are payable in advance and
otherwise on the dates and in the amounts set forth on the applicable Schedule.
(g) FIRST PAYMENT AND SUBSEQUENT PAYMENTS. The first payment under a Note
and Advance ("First Payment") is due at the beginning of its Term and shall, at
our option, either be deducted from the proceeds of the Advance or paid
directly to us by you. Subsequent Payments are due on the thirtieth (30th) day
of each successive month as set forth on the Schedule until you pay to us in
full all of the Payments and any other fees, costs, charges and expenses that
you owe us.
(h) INTEREST. Prior to Maturity of an Advance, you will pay us interest
on the Advance at the interest rate indicated in the applicable Schedule (the
"Interest Rate"). "Maturity" means the scheduled maturity or any earlier date
on which we accelerate the Loan. The Payment amount indicated in the Schedule
includes interest at the applicable Interest Rate. Interest is calculated in
advance using a year of 360 days with twelve months of 30 days.
(i) INTERIM INTEREST PAYMENT. If an Advance is made on a day other than
the thirtieth (30th) or thirty-first (31st) day of a month, you will also pay
to us, together with the First Payment, interest on the Advance at the
applicable interest rate for the period from the date the Advance is made until
the twenty-ninth (29th) day of the month in which the Advance is made. If an
Advance is made on the thirty-first (31st) day of a month, you will also
pay to us, together with the First Payment, interest on the Advance at the
applicable interest rate for the period from the date the Advance is made until
the twenty-ninth (29th) day of the following month. If an Advance is made on
the thirtieth (30th) day of a month, no interim interest will be due.
(j) DEFAULT INTEREST RATE. After Maturity of the Loan or any Advance, you
will pay us interest thereon at a rate of four (4%) percent per year above the
applicable Interest Rate. This is referred to as the "Default Rate."
(k) USURY. You and we intend to obey the law. If the Interest Rate
charged would exceed the maximum legal rate, you will only have to pay the
maximum legal rate. You do not have to pay any excess interest over and above
the maximum legal rate of interest. However, if it later becomes legal for you
to pay all or part of any excess interest, you will then pay it to us upon our
request.
(l) PAYMENT DETAILS. You will make all Payments due under this Master
Agreement by 12:00 P.M., Connecticut time, on the day they are due. You will
make all Payments in US Dollars (US$) in immediately available funds. We do not
have to make or give "presentment, demand, protest or notice" to get paid. You
waive "presentment, demand, protest and notice."
(m) APPLICATION OF PAYMENTS. Each Payment under this Master Agreement is
to be applied in the following order: first, to any fees, costs, expenses and
charges you may owe us; second, to any interest due; and third to the principal
balance.
2
<PAGE> 3
(n) PREPAYMENT. You may not prepay the Loan or any Advance, in whole or
in part.
(o) NO SETOFFS. Your obligation to pay us all Payments is absolute and
unconditional. You are not excused from making the Payments, in full, for any
reason. You agree that you have no defense for failure to make the Payments and
you will not make any counterclaims or setoffs to avoid making the Payments.
2. SECURITY INTEREST
(a) You grant us a first and only lien on and security interest in the
Collateral. The Collateral secures the full and timely payment and performance
of all of your now existing or hereafter arising indebtedness, liabilities and
obligations to us, whether under this Master Agreement, the Schedules, the
Notes and any other agreement, loan or lease that you may at any time or times
have with us or otherwise (collectively, the "Obligations"). You also grant us
a security interest in any additional collateral identified in any Schedule.
Any additional collateral is considered to be "Collateral" and it secures all
of the Obligations.
(b) If we request, you will put labels supplied by us stating "PROPERTY
SUBJECT TO A SECURITY INTEREST HELD BY FINOVA CAPITAL CORPORATION" on the
Collateral where they are clearly visible.
(c) You give us permission to add to this Master Agreement or any
Schedule the serial numbers and other information about the Collateral.
(d) You give us permission to file this Master Agreement or Uniform
Commercial Code financing statements, at your expense, in order to perfect our
security interest in the Collateral. You also give us permission to sign your
name on the Uniform Commercial Code financing statements where this is
permitted by law.
(e) You will pay our fees and costs for documentation, closing,
administration and termination of this Master Agreement, the Notes and
Schedules. These fees include such items as reasonable attorneys fees and
expenses incurred in preparing this Master Agreement and all agreements,
instruments and documents executed in connection herewith, and all amendments,
supplements and waivers hereto and thereto, as well as due diligence searches
and fees for preparing and filing UCC terminations and releases. You will also
pay any filing, recording or stamp fees or taxes resulting from filing this
Master Agreement or Uniform Commercial Code financing statements.
(f) At your expense, you will defend our first priority security interest
in the Collateral against, and keep the Collateral free of, any legal process,
liens, other security interests, attachments, levies and executions. You will
give us immediate written notice of any legal process, liens, attachments,
levies or executions, and you will indemnify us against any loss that results
to us from these causes.
(g) You will notify us at least 15 days before you change the address of
your principal executive office or principal place of business. Your principal
executive office and principal place of business are set forth at the beginning
of this Master Agreement.
(h) You will promptly sign and return additional documents that we may
reasonably request in order to protect our first priority security interest in
the Collateral.
(i) Except as set forth in a Schedule, the Collateral is personal
property and will remain personal property. Except as set forth in a Schedule,
you will not incorporate it into real estate and will not do anything that will
cause the Collateral to become part of real estate or a fixture.
3. CONDITIONS OF LENDING
(a) See our Commitment Letter to you dated May 10, 1999 (the "Commitment
Letter"), which you and we consider to be a part of this Master Agreement. The
terms and conditions of the Commitment Letter continue following the making of
the first Advance, including, without
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limitation, conditions to the Loan. However, if there is a conflict between the
terms and conditions of this Master Agreement, any Schedule or any Note and the
terms and conditions of the Commitment Letter, then you and we agree that the
terms and conditions of this Master Agreement, the Schedules and the Notes
control over the Commitment Letter terms and conditions.
(b) Before we disburse any proceeds of any Advance, we also require the
following:
(i) That no payment is past due to us under any other agreement,
loan or lease that you or any guarantor have with us.
(ii) That you are complying with all terms of this Master Agreement,
the Schedules and the Notes and there are no defaults hereunder or thereunder.
(iii) That we have received all the documents we requested, including
the signed Schedule and Note.
(iv) That there has been no material adverse change in your
financial condition, business or operations, or that any guarantor, from the
financial condition that you or any guarantor have disclosed to us.
(v) All conditions contained in the Commitment Letter have been
satisfied.
4. REPRESENTATIONS AND WARRANTIES
You represent and warrant to us as follows:
(a) You and each guarantor are duly organized, existing and in good
standing wherever you or it are required by law to be so qualified. You and
each guarantor have full power and authority to execute, deliver and carry out
the provisions of this Master Agreement, the Schedules and the Notes and to
borrow hereunder and thereunder. This Master Agreement, the Schedules and the
Notes are validly executed and delivered by you and the guarantors and are the
legal, valid and binding obligations of you and the guarantors, each
enforceable in accordance with its terms.
(b) Neither you nor any guarantor is a defendant under any material
litigation and there are no judgments outstanding against you or any guarantor.
(c) All of the Equipment has been delivered to you and installed at the
location set forth on the Schedule and you have accepted all of the Equipment
for all purposes of this Master Agreement.
(d) You have good title to all of your assets, including, without
limitation, the Collateral, and in the case of the Collateral, free and clear
of all security interests, liens and other encumbrances. Upon filing of UCC-1
financing statements in all applicable filing offices, we will be granted a
first and only perfected lien on and security interest in all of the Collateral.
There are no other security interests, liens or encumbrances covering the
Collateral.
(e) You have supplied us with information about the Collateral. You
promise to us that the amount of our Advance as to each item of Equipment is no
more than the fair and usual price for this kind of Equipment, taking into
account any discounts, rebates and allowances that you or any affiliate of
yours may have been given for the Equipment.
(f) The Collateral is located at the premises set forth on the Schedule.
(g) All financial information and other information that you or any
guarantor have given us is true and complete. You or any guarantor have not
failed to tell us anything that would make the financial information not
misleading. There has been no material adverse change in your financial
condition, business or operations, or the financial condition of any guarantor,
from the financial condition that you disclosed to us.
(h) You have complied with all "environmental laws" and will continue to
comply with all "environmental laws." No "hazardous substances" are used,
generated, treated, stored, or
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<PAGE> 5
disposed of by you or at your properties except in compliance with all
environmental laws. "Environmental laws" mean all federal, state or local
environmental laws and regulations, including the following laws: CERCLA, RCRA,
Hazardous Materials Transport act and The Federal Water Pollution Control Act.
"Hazardous substances" means all hazardous or toxic wastes, materials or
substances, as defined in the environmental laws, as well as oil, flammable
substances, asbestos that is or could become friable, urea formaldehyde
insulation, polychlorinated biphenyls and radon gas.
5. COVENANTS
You agree to do the following things (or not to do the following things if so
stated) until full payment of all amounts due to us under this Master
Agreement, the Schedules and the Notes:
(a) CARE, USE, LOCATION, TRANSFER, ENCUMBRANCE AND ALTERATION OF THE
COLLATERAL.
(i) You will make sure that the Collateral is maintained in good
operating condition, and that it is serviced, repaired and overhauled when this
is necessary to keep the Collateral in good operating condition. All
maintenance must be done according to the Supplier's or Manufacturer's
requirements or recommendations. All maintenance must also comply with any
legal or regulatory requirements.
(ii) You will maintain service logs for the Collateral, if
applicable, and permit us or our agents to inspect the Collateral, the service
logs and service reports. You give us and our agents permission to make copies
of the service logs and service reports.
(iii) We will give you prior notice if we, or our agents, want to
inspect the Collateral or the service logs or service reports. We may inspect
it during regular business hours. If we find during an inspection that you are
not complying with this Master Agreement or if you are otherwise in default
under this Master Agreement, you (and not us) will pay our travel, meals and
lodging costs, our salary costs, and our costs and fees and those of our agents
for reinspection. You will promptly cure any problems with the Collateral that
are discovered during our inspections.
(iv) You will use the Collateral only for business purposes. You
will obey all legal and regulatory requirements in your use of the Collateral.
(v) You will make all additions, modifications and improvements to
the Collateral that are required by law or government regulation. Otherwise,
you will not alter the Collateral without our written permission. You will
replace all worn, lost, stolen or destroyed parts of the Collateral with
replacement parts that are as good or better than the original parts.
The new parts will become subject to our security interest upon replacement.
(vi) You will not remove the Collateral from the location indicated
in the Schedule.
(vii) You have and will have good and merchantable title to all of
the Collateral.
(viii) You will not convey, assign, sell, mortgage, transfer,
encumber, pledge, hypothecate, grant a security interest in, grant options with
respect to, lease or otherwise dispose of all or any part of any interest
whatsoever in or to any or all of the Collateral, or any interest therein.
(b) YEAR 2000 COMPLIANT.
You represent, warrant and agree to take all action necessary, including, but
not limited to, due inquiry and due diligence with critical business partners
to assure that there will be no material adverse change to your business by
reason of the advent of the year 2000, including, without limitation, that all
computer-based systems, embedded microchips and other processing capabilities
effectively recognize and process all dates before and after December 31, 1999
("Y2K Compliant"). At our request, you shall provide to us assurance reasonably
acceptable to us that your computer-based systems, embedded microchips and
other processing capabilities are Y2K Compliant.
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(c) RISK OF LOSS.
(i) You have the complete risk of loss or damage to the Collateral.
Loss or damage to the Collateral will not relieve you of your obligation to make
the Payments.
(ii) If any Collateral is lost or damaged, you have two choices
although if you are in default under this Master Agreement, we and not you will
have the two options. The choices are:
(A) Repair or replace the damaged or lost Collateral so that, once
again, the Collateral is in good operating condition and we have a perfected
first priority security interest in it.
(B) Pay us the present value (as of the date of payment) of the
remaining Payments. We will calculate the present value using a discount rate of
five (5%) percent per year. Once you have paid us this amount and any other
amount that you may owe us, we will release our security interest in the damaged
or lost Collateral and you (or your insurer) may keep the Collateral for salvage
purposes, on an "AS IS, WHERE IS" basis and without any representation or
warranty whatsoever.
(d) INSURANCE.
(i) Until you have made all Payments to us under this Master Agreement,
the Schedules and the Notes and all Obligations have been satisfied in full, you
will keep the Collateral insured. The amount of insurance, the coverage, and the
insurance company must be acceptable to us.
(ii) If you do not provide us with written evidence of insurance that
is acceptable to us, we may buy the insurance ourselves, at your expense. You
will promptly pay us the cost of this insurance. We have no obligation to
purchase any insurance. Any insurance that we purchase will be our insurance,
and not yours, and we may insure the Collateral beyond the date of satisfaction
of the Obligations.
(iii) Insurance proceeds may be used to repair or replace damaged or
lost Collateral or to pay us the present value of the Payments, as provided
above.
(iv) You appoint us as your "attorney-in-fact" to make claims under the
insurance policies, to receive payments under the insurance policies, and to
endorse your name on all documents, checks or drafts relating to insurance
claims for Collateral.
(e) TAXES.
(i) You will pay all sales, use, excise, stamp, documentary and ad
valorum taxes, license, recording and registration fees, assessments, fines,
penalties and similar charges imposed on the ownership, possession, use lease or
rental of the Collateral or on the Loan.
(ii) You will pay all taxes (other than our federal or state net income
taxes) imposed on you or on us regarding the Payments.
(iii) You will reimburse us for any of these taxes that we pay or
advance.
(vi) You will file and pay for any personal property taxes on the
Collateral.
(f) INFORMATION SUPPLIED BY YOU AND ANY GUARANTOR.
(i) During the Term you will promptly provide us with copies of any
current, quarterly and annual reports and all proxy (or information) statements
you or any guarantor file with the Securities and Exchange Commission ("SEC").
(ii) You and any guarantor will also provide us with the following
financial statements:
(A) Quarterly balance sheet and statements of earnings and cash flow -
within 45 days after the end of your first three fiscal quarters in each fiscal
year. These will be certified by the chief financial officer.
(B) Annual balance sheet and statements of earnings and cash flow -
within 90 days after the end of each fiscal year. These will be audited
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by independent auditors acceptable to us. Their audit report must be
unqualified.
All financial statements will be prepared according to generally accepted
accounting principles, consistently applied. All financial statements and SEC
filings that you or any guarantor provide us will be true and complete. They
will not fail to tell us anything that would make them not misleading.
(iii) At the same time you deliver the financial statements described in
paragraph 5(f)(ii)(A), you will also provide us with a certificate of your
chief financial officer stating that no default exists, or, if he cannot
certify this because a default does exist, he must specify in reasonable detail
the nature of the default.
(iv) The audited financial statements described in paragraph
5(f)(ii)(B), must be accompanied by a certificate of such independent auditor
stating that no default exists, or, if it cannot certify this because a default
does exist, it must specify in reasonable detail the nature of the default.
6. DEFAULTS
(a) DEFAULTS. You are in default if any of the following happens:
(i) You do not pay us, when it is due, any Payment or other
payment that you owe us under this Master Agreement, any Schedule or any Note
or that you owe under any other agreement, loan, lease or other financial
arrangement that you have with us.
(ii) Any of the financial information that you give us is not true
and complete, or you fail to tell us anything that would make the financial
information not misleading.
(iii) You do something you are not permitted to do, or you fail to
do anything that is required of you, under this Master Agreement, any Schedule
or any other lease, loan or other financial arrangement that you have with us.
(iv) An event of default occurs for any other lease, loan or
obligation of yours (or any guarantor) that exceeds $50,000 in the aggregate.
(v) You or any guarantor file bankruptcy, or involuntary
bankruptcy is filed against you or any guarantor and such involuntary
bankruptcy is not dismissed within sixty (60) days.
(vi) You or any guarantor are subject to any other insolvency
proceeding other than bankruptcy (for example, a receivership action or an
assignment for the benefit of creditors) and such proceeding that is
involuntary is not dismissed within sixty (60) days.
(vii) Without our permission, you or any guarantor sell all or a
substantial part of its assets, merge or consolidate, or a majority of your
voting stock or interests (or any guarantor's voting stock or interests) is
transferred.
(viii) There is a material adverse change in your financial
condition, business or operations, or that of any guarantor.
(b) REMEDIES, DEFAULT INTEREST, LATE FEES.
If you are in default we may exercise one or more of our
"remedies." Each of our remedies is independent. We may exercise any of our
remedies, all of our remedies or none of our remedies. We may exercise them in
any order we choose. Our exercise of any remedy will not prevent us from
exercising any other remedy or be an "election of remedies." If we do not
exercise a remedy, or if we delay in exercising a remedy, this does not mean
that we are forgiving your default or that we are giving up our right to
exercise the remedy. Our remedies allow us to do one or more of the following:
(i) "Accelerate" the Loan balance under any or all Notes. This
means that we may require you to immediately pay us the entire outstanding
principal balance of the entire Loan.
(ii) Require you to immediately pay us all amounts that you are
required to pay us for the entire Term of any other agreements, loan, leases or
financial arrangements that you have with us.
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(iii) Sue you for the entire outstanding principal balance of the Loan
and all other amounts you owe us (including, without limitation, all accrued and
unpaid interest, including interest at the Default Rate), outstanding fees,
costs, expenses and charges, plus all prepayment premiums.
(iv) Require you at your expense to assemble the Collateral at a
location we request in the United States of America.
(v) Remove and repossess the Collateral from where it is located,
without demand or notice, or make the Collateral inoperable. We have your
permission to remove any physical obstructions to removal of the Collateral. We
may also disconnect and separate all Collateral from other property. No court
order, court hearing or "legal process" will be required for us to repossess the
Collateral. You will not be entitled to any damages resulting from removal or
repossession of the Collateral. We may use, ship, store, repair or lease any
Collateral that we repossess. We may sell any repossessed Collateral at private
or public sale. You give us permission to show the Collateral to buyers at your
location free of charge during normal business hours. If we do this, we do not
have to remove the Collateral from your location. If we repossess the Collateral
and sell it, we will give you credit for the net sale price, after subtracting
our costs of repossessing and selling the Collateral. If we rent the Collateral
to somebody else, we will give you credit for the net rent received, after
subtracting our costs of repossessing and renting the Collateral, but the credit
will be discounted to present value using a discount rate equal to the Default
Rate. The credit will be applied against what you owe us under this Master
Agreement, the Schedules, the Notes and any other agreements, loans, leases or
financial arrangements that you have with us, we will refund the amount of the
excess to you.
(vi) We will have all of our rights and remedies under this Master
Agreement, the Notes, the Schedules and all agreements, instruments and
documents executed in connection herewith and therewith and all of our rights
and remedies under applicable law, whether as a secured party or otherwise.
(vii) Return conditions:
(A) Following a default, at our request you will return the Collateral,
freight and insurance prepaid by you, to us at a location we request in the
United States of America. It will be returned in good operating condition, as
required by Section 5 above. The Collateral will not be subject to any liens
when it is returned.
(B) You will pack or crate the Collateral for shipping in the original
containers, or comparable ones. You will do this carefully and follow all
recommendations of the Supplier and the Manufacturer as to packing or crating.
(C) You will also return to us the plans, specifications, operating
manuals, software, documentation, discs, warranties and other documents
furnished by the Manufacturer or Supplier. You will also return to us all
service logs and service reports, as well as all written materials that you may
have concerning the maintenance and operation of the Collateral.
(D) At our request, you will provide us with up to 60 days free storage
of the Collateral at your location, and will let us (or our agent) have access
to the Collateral in order to inspect it, display it to others for purchase and
sell it.
(E) You will pay us what it costs us to repair the Collateral if you do
not return it in the required condition.
(viii) You will also pay us the following:
(A) All our expenses of enforcing our remedies. This includes all our
expenses to repossess, store, ship, repair and sell the Collateral.
(B) Our reasonable attorney's fees and expenses.
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(C) Default interest on everything you owe us from the date of your
default to the date on which we are paid in full at the Default Rate.
(D) A premium in the amount of five percent (5%) of the outstanding
principal balance of the Loan.
(ix) You will pay us a late fee whenever you pay any amount that you owe
us more than ten (10) days after it is due. You will pay the late fee within
one month after the late Payment was originally due. The late fee will be ten
(10%) percent of the late Payment. If this exceeds the highest legal amount we
can charge you, you will only be required to pay the highest legal amount. The
late fee is intended to reimburse us for our collection costs that are caused
by late Payment. It is charged in addition to all other amounts you are required
to pay us, including Default Interest.
(x) You realize that the damages we could suffer as a result of your
default are very uncertain. This is why we have agreed with you in advance on
the Default Rate to be used in calculating the payments you will owe us if you
default. You agree that, for these reasons, the payments you will owe us if you
default are "agreed" or "liquidated" damages. You understand that these payments
are not "penalties" or "forfeitures."
7. PERFORMING YOUR OBLIGATIONS IF YOU DO NOT
If you do not perform one or more of your obligations under this Master
Agreement of a Schedule or Note, we may perform it for you. We will notify you
in writing at least ten (10) days before we do this. We do not have to perform
any of your obligations for you. If we do choose to perform them, you will pay
us all of our expenses to perform the obligations. You will also reimburse us
for any money that we advance to perform your obligations, together with
interest at the Default Rate on that amount. These will be additional
"Payments" that you will owe us and you will pay them at the same time that
your next Payment is due.
8. INDEMNITY
(a) You will indemnify us, defend us and hold us harmless from and against
any and all claims, expenses and attorney's fees concerning or arising from the
Collateral, this Master Agreement, any Schedule or Note, or your breach of any
representation, warranty or covenant. It includes, without limitation, any
claims, losses or charges concerning, arising out of or in connection with the
manufacture, selection, delivery, possession, use, operation or return of the
Collateral and any claims, losses or damages concerning, arising out of or in
connection with this Master Agreement, any Schedule or the Notes.
(b) This obligation of yours to indemnify us continues even after the
Term is over.
9. MISCELLANEOUS
(a) ASSIGNMENT.
WE MAY ASSIGN OR GRANT A SECURITY INTEREST IN THIS MASTER AGREEMENT, ANY
SCHEDULE, ANY NOTE OR ANY PAYMENTS WITHOUT YOUR PERMISSION. THE PERSON TO WHOM
WE ASSIGN IS CALLED THE "ASSIGNEE." THE ASSIGNEE WILL NOT HAVE ANY OF OUR
OBLIGATIONS UNDER THIS MASTER AGREEMENT. YOU WILL NOT BE ABLE TO RAISE ANY
DEFENSE, COUNTERCLAIM OR OFFSET AGAINST THE ASSIGNEE. NOTWITHSTANDING ANY SUCH
ASSIGNMENT OR GRANTING OF A SECURITY INTEREST, WE WILL CONTINUE TO BE LIABLE
FOR ALL OF OUR OBLIGATIONS UNDER THIS MASTER AGREEMENT.
UNLESS YOU RECEIVE OUR WRITTEN PERMISSION, YOU MAY NOT ASSIGN OR TRANSFER YOUR
RIGHTS UNDER THIS MASTER AGREEMENT OR ANY SCHEDULE. YOU ALSO ARE NOT ALLOWED TO
LEASE OR RENT THE COLLATERAL OR LET ANYBODY ELSE USE IT UNLESS WE GIVE YOU OUR
WRITTEN PERMISSION.
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(b) ACCEPTANCE BY FINOVA, GOVERNING LAW, JURISDICTION, VENUE, SERVICE
OF PROCESS, WAIVER OF JURY TRIAL.
THIS MASTER AGREEMENT WILL ONLY BE BINDING WHEN WE HAVE ACCEPTED IT IN WRITING.
THIS MASTER AGREEMENT IS GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF
ARIZONA (NOT INCLUDING THE "CHOICE OF LAW" DOCTRINE), THE STATE IN WHICH OUR
OFFICE IS LOCATED IN WHICH FINAL APPROVAL OF THE TERMS OR CONDITIONS OF THIS
MASTER AGREEMENT OCCURRED AND FROM WHICH DISBURSEMENT OF THE LOAN PROCEEDS WILL
BE ORDERED. HOWEVER, IF THIS MASTER AGREEMENT IS UNENFORCEABLE UNDER ARIZONA
LAW, IT WILL INSTEAD BE GOVERNED BY THE LAWS OF THE STATE IN WHICH THE
COLLATERAL IS LOCATED.
YOU MAY ONLY SUE US IN FEDERAL OR STATE COURT THAT IS LOCATED IN MARICOPA
COUNTY, ARIZONA. THIS APPLIES TO ALL LAWSUITS UNDER ALL LEGAL THEORIES,
INCLUDING CONTRACT, TORT AND STRICT LIABILITY. YOU CONSENT TO THE PERSONAL
JURISDICTION OF THESE ARIZONA COURTS. YOUR WILL NOT CLAIM THAT MARICOPA COUNTY,
ARIZONA, IS AN "INCONVENIENT FORUM" OR THAT IT IS NOT A PROPER "VENUE."
WE MAY SUE YOU IN ANY COURT THAT HAS JURISDICTION. WE MAY SERVE YOU WITH
PROCESS IN A LAWSUIT BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO YOUR
ADDRESS INDICATED AFTER YOUR SIGNATURE BELOW.
YOU AND WE EACH WAIVE ANY RIGHT YOU OR WE MAY HAVE TO A JURY TRIAL IN ANY
LAWSUIT BETWEEN YOU AND US.
(c) NOTICES. Your address for notices is your address set forth below
your name on the signature page of this Master Agreement. We may give you
written notice in person, by mail, by overnight delivery service, or by fax.
Mail notice will be effective three (3) days after we deposit it with the U.S.
Postal Service. Overnight delivery notice requires a receipt and tracking
number. Fax notice requires a receipt from the sending machine showing that it
has been sent to your fax number and received.
Our address for notices if our address set forth below our name on the signature
page of this Master Agreement, with Attention: Director, Contract
Administration. You will also give copies of all notices to us at our principal
place of business at the address set forth in the opening paragraph of this
Master Agreement, with attention to Vice President, Law Department. You may
give us notice the same way that we may give you notice.
(d) GENERAL
This Master Agreement benefits our successors and assigns. This Master Agreement
benefits only those successors and assigns of yours that we have approved in
writing.
This Master Agreement binds your successors and assigns. This Master Agreement
binds only those successors and assigns of ours that clearly assume our
obligations in writing.
TIME IS OF THE ESSENCE OF THIS MASTER AGREEMENT.
This Master Agreement, all of the Schedules and the Notes and the Commitment
Letter are together the entire agreement between you and us concerning the
Collateral.
Only an employee of FINOVA who is authorized by corporate resolution or policy
may modify or amend this Master Agreement or any Schedule or Note on our
behalf, and this must be in writing. Only he or she may give up any of our
rights, and this must be in writing. If more than one person is the Borrower
under this Master Agreement, then each of you is jointly and severally liable
for your obligations under this Master Agreement and all Schedules and Notes.
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This Master Agreement is only for your benefit and for our benefit, as well as
our successors and assigns. It is not intended to benefit any other person.
If any provision in this Master Agreement is unenforceable, then that provision
must be deleted. Only unenforceable provisions are to be deleted. The rest of
this Master Agreement will remain as written.
We may make press releases and publish a tombstone announcing this transaction
and its total amount. You may publicize this transaction with our prior written
consent.
LENDER: BORROWER:
FINOVA CAPITAL CORPORATION COSINE COMMUNICATIONS, INC.
10 WATERSIDE DRIVE 1200 BRIDGE PARKWAY
FARMINGTON, CT 06032-3065 REDWOOD CITY, CA 94065
BY: BY: /s/ CURTIS DUDNICK
----------------------------------- -----------------------------------
PRINTED NAME: PRINTED NAME: CURTIS DUDNICK
------------------------ ------------------------
TITLE: TITLE: CFO
-------------------------------- --------------------------------
FAX NUMBER: (860) 676-1814 Taxpayer ID# 94-3280301
-------------------------
DATE ACCEPTED:
------------------------ FAX NUMBER: 650.437.2453
-------------------------
DATED: 6.22.99
--------------------------------
STATE OF CALIFORNIA
----------
COUNTY OF SAN MATEO
---------
I acknowledge that CURTIS DUDNICK who stated that he is C.F.O. of the Borrower
named above, signed this Master Loan and Security Agreement in my presence
today: June 22, 1999. He acknowledged to me that his signature on this Master
Loan and Security Agreement was authorized by a valid resolution or other valid
authorization from Borrower's board of directors or other governing body.
[NOTARY PUBLIC SEAL]
VIRGINIA O'BRIEN /s/ VIRGINIA O'BRIEN
Commission # 1203924 ----------------------------------
Notary Public - California Notary Public
San Mateo County
My Comm. Expires Jan 2, 2003 [SEAL]
11
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EXHIBIT 10.11
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
COSINE COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
1 ACCOUNTING AND OTHER TERMS 1
2 LOAN AND TERMS OF PAYMENT 1
2.1 Credit Extensions 1
2.2 Interest Rate, Payments 2
2.3 Fees 2
3 CONDITIONS OF LOANS 2
3.1 Conditions Precedent to Initial Credit Extension 2
3.2 Conditions Precedent to all Credit Extensions 2
4 CREATION OF SECURITY INTEREST 3
4.1 Grant of Security Interest 3
5 REPRESENTATION AND WARRANTIES 3
5.1 Due Organization and Authorization 3
5.2 Collateral 3
5.3 Litigation 4
5.4 No Material Adverse Change in Financial Statements 4
5.5 Solvency 4
5.6 Regulatory Compliance 4
5.7 Subsidiaries 5
5.8 Full Disclosure 5
6 AFFIRMATIVE COVENANTS 5
6.1 Government Compliance 5
6.2 Financial Statements, Reports, Certificates 5
6.3 Inventory; Returns 6
6.4 Taxes 6
6.5 Insurance 6
6.6 Primary Accounts 6
6.7 Financial Covenants 6
6.8 Registration of Intellectual Property Rights 6
6.9 Further Assurances 7
7 NEGATIVE COVENANTS 7
7.1 Dispositions 7
7.2 Changes in Business, Ownership, Management or Business Locations 7
7.3 Mergers or Acquisitions 7
7.4 Indebtedness 8
</TABLE>
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<TABLE>
<S> <C>
7.5 Encumbrance...................................... 8
7.6 Distributions; Investments....................... 8
7.7 Transactions with Affiliates..................... 8
7.8 Subordinated Debt................................ 8
7.9 Compliance....................................... 8
8 EVENTS OF DEFAULT........................................ 9
8.1 Payment Default.................................. 9
8.2 Covenant Default................................. 9
8.3 Material Adverse Change.......................... 9
8.4 Attachment....................................... 9
8.5 Insolvency....................................... 10
8.6 Other Agreements................................. 10
8.7 Judgments........................................ 10
8.8 Misrepresentations............................... 10
9 BANK'S RIGHTS AND REMEDIES............................... 10
9.1 Rights and Remedies.............................. 10
9.2 Power of Attorney................................ 11
9.3 Accounts Collection.............................. 11
9.4 Bank Expenses.................................... 12
9.5 Bank's Liability for Collateral.................. 12
9.6 Remedies Cumulative.............................. 12
9.7 Demand Waiver.................................... 12
10 NOTICES................................................. 12
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER.............. 13
12 GENERAL PROVISIONS...................................... 13
12.1 Successors and Assigns........................... 13
12.2 Indemnification.................................. 13
12.3 Time of Essence.................................. 13
12.4 Severability of Provision........................ 13
12.5 Amendments in Writing Integration................ 14
12.6 Counterparts..................................... 14
12.7 Survival......................................... 14
12.8 Confidentiality.................................. 14
12.9 Attorneys' Fees, Costs and Expenses.............. 14
13 DEFINITIONS............................................. 14
13.1 Definitions...................................... 14
</TABLE>
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This LOAN AND SECURITY AGREEMENT dated May 29, 1998, between SILICON VALLEY
BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara, California 95054
with a loan production office located at 1731 Embarcadero, Ste. 220, Palo Alto,
California 94303 and COSINE COMMUNICATIONS, INC. ("Borrower"), whose address is
1070 Sixth Avenue, Suite 200, Belmont, California 94002 provides the terms on
which Bank will lend to Borrower and Borrower will repay Bank. The parties agree
as follows:
1. ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed following
GAAP Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation," in
this or any Loan Document. This Agreement shall be construed to impart upon
Bank a duty to act reasonably at all times.
2. LOAN AND TERMS OF PAYMENT
2.1 Credit Extensions
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 Equipment Advances.
(a) Through February 15, 1999 (the "Equipment Availability
End Date"), Bank will make advances ("Equipment Advance" and, collectively,
"Equipment Advances") not exceeding the Committed Equipment Line. The Equipment
Advances may only be used to finance Equipment and may not exceed 100% of the
equipment invoice excluding taxes, shipping, warranty charges, freight discounts
and installation expense. Software may constitute up to 60% of the aggregate
Equipment Advances.
(b) Interest accrues from the date of each Equipment
Advance at the rate in Section 2.2(a) and is payable monthly until the
Equipment Availability End Date occurs. Equipment Advances outstanding on the
Equipment Availability End Date are payable in 36 equal monthly installments of
principal, plus accrued interest, beginning on the twenty-eighth (28th) of each
month following the Equipment Availability End Date and ending on February 15,
2002 (the "Equipment Maturity Date"). Equipment Advances when repaid may not be
reborrowed.
(c) To obtain an Equipment Advance, Borrower must notify
Bank (the notice is irrevocable) by facsimile no later than 3:00 p.m. Pacific
time 1 Business Day before the day on which the Equipment Advance is to be
made. The notice in the form of Exhibit B
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(Payment/Advance Form) must be signed by a Responsible Officer or designee and
include a copy of the invoice for the Equipment being financed.
2.2 Interest Rate, Payments.
(a) Interest Rate. Equipment Advances accrue interest on the
outstanding principal balance at a per annum rate of 0.75 percentage points
above the Prime Rate. After an Event of Default, Obligations accrue interest at
5.00 percentage points above the rate effective immediately before the Event of
Default. The interest rate increases or decreases when the Prime Rate changes.
Interest is computed on a 360 day year for the actual number of days elapsed.
(b) Payments. Interest due on the Equipment Advances is payable
on the twenty-eighth (28th) of each month. Bank may debit any of Borrower's
deposit accounts including Account Number _______________ for principal and
interest payments or any amounts Borrower owes Bank. Bank will notify Borrower
when it debits Borrower's accounts. These debits are not a set-off. Payments
received after 12:00 noon Pacific time are considered received at the opening
of business on the next Business Day. When a payment is due on a day that is
not a Business Day, the payment is due the next Business Day and additional
fees or interest accrue.
2.3 Fees
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee
of $3,125 due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable
attorney's fees and expenses) incurred through and after the date of this
Agreement, are payable when due.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Credit Extension.
Bank's obligation to make the initial Credit Extension is subject to the
condition precedent that it receive the agreements, documents and fees it
requires.
3.2 Conditions Precedent to all Credit Extensions.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
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(b) the representations and warranties in Section 5 must be
materially true on the date of the Payment/Advance Form and on the effective
date of each Credit Extension and no Event of Default may have occurred and be
continuing, or result from the Credit Extension. Each Credit Extension is
Borrower's representation and warranty on that date that the representations
and warranties of Section 5 remain true.
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and
performance of each of Borrower's duties under the Loan Documents. Except for
Permitted Liens, any security interest will be a first priority security
interest in the Collateral. Bank may place a "hold" on any deposit account
pledged as Collateral. Notwithstanding the foregoing, the security interest
granted herein shall not extend to and the term "Collateral" shall not include
any property, rights or licenses to the extent the granting of a security
interest therein (i) would be contrary to applicable law or (ii) is prohibited
by or would constitute a default under any material agreement or document
governing such property, rights or licenses, of which Borrower has given Bank
prior written notice in a form reasonably acceptable to Bank (but only to the
extent such prohibition is enforceable under applicable law); provided however
that the term "Collateral" shall include such property, rights or licenses upon
the cessation of contractual restrictions (i) and (ii) above on the grant of a
security interest in such otherwise excluded "Collateral".
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Authorization.
Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified (except for states as to which any
failure so to qualify would not have a Material Adverse Effect).
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower
is bound. Borrower is not in default under any agreement to which or by which
it is bound in which the default would reasonably be expected to have a
Material Adverse Change.
5.2 Collateral.
Borrower has good title to the Collateral, free of Liens except Permitted
Liens. All Inventory is in all material aspects of good and marketable quality,
free from material defects.
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Borrower is the sole owner of the Intellectual Property, except for
non-exclusive licenses granted to its customers in the ordinary course of
business. Each Patent is valid and enforceable and no part of the Intellectual
Property has been judged invalid or unenforceable, in whole or in part, and no
claim has been made that any part of the Intellectual Property violates the
rights of any third party.
5.3 Litigation.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision would reasonably be expected to cause a
Material Adverse Change.
5.4 No Material Adverse Change in Financial Statements.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 Solvency.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as
they mature.
5.6 Regulatory Compliance.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied with the Federal Fair Labor Standards Act. Borrower has not violated
any laws, ordinances or rules, the violation of which could cause a Material
Adverse Change. None of Borrower's or any Subsidiary's properties or assets has
been used by Borrower or any Subsidiary or, to the best of Borrower's
knowledge, by previous Persons, in disposing, producing, storing, treating, or
transporting any hazardous substance other than legally. Borrower and each
Subsidiary has timely filed all required tax returns and paid, or made adequate
provision to pay, all taxes, except those being contested in good faith with
adequate reserves under GAAP. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all government authorities that are necessary
to continue its business as currently conducted, except where any failure to do
so could not reasonably be expected to cause a Material Adverse Change.
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5.7 Subsidiaries.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 Full Disclosure.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank taken together with all such
certificates and written statements given to Bank, contains any untrue
statement of a material fact or omits to state a material fact necessary to
make the statements contained in the certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 Government Compliance.
Borrower will maintain its and all Subsidiaries' legal existence and good
standing in its jurisdiction of formation and maintain qualification in each
jurisdiction in which the failure to so qualify could reasonably be expected to
have a material adverse effect on Borrower's business or operations. Borrower
will comply, and have each Subsidiary comply, with all laws, ordinances and
regulations to which it is subject, noncompliance with which could have a
material adverse effect on Borrower's business or operations or cause a
Material Adverse Change.
6.2 Financial Statements, Reports, Certificates.
(a) Borrower will deliver to Bank: (i) as soon as available,
but no later than 30 days after the last day of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period, in a form and certified by a Responsible Officer
acceptable to Bank; (ii) as soon as available, but no later than 90 days after
the last day of Borrower's fiscal year, audited consolidated financial
statements prepared under GAAP, consistently applied, together with an opinion
on the financial statements, approved by Bank in its sole discretion, from an
independent certified public accounting firm acceptable to Bank; (iii) a prompt
report of any legal actions pending or threatened against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any Subsidiary
of $100,000 or more; (iv) budgets, sales projections, operating plans or other
financial information Bank requests; and (v) prompt notice of any material
change in the composition of the Intellectual Property, including any
subsequent ownership right of Borrower in or to any Copyright, Patent or
Trademark not shown in any intellectual property security agreement between
Borrower and Bank or knowledge of an event that materially adversely affects
the value of the Intellectual Property.
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<PAGE> 9
(b) Within 30 days after the last day of each month, Borrower will
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit C.
6.3 Inventory; Returns.
Borrower will keep all Inventory in good and marketable condition, free
form material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution
of this Agreement. Borrower must promptly notify Bank of all returns,
recoveries, disputes and claims, that involve more than $50,000.
6.4 Taxes.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
6.5 Insurance.
Borrower will keep its business and the Collateral insured for risks and
in amounts, as Bank requests. Insurance policies will be in a form, with
companies, and in amounts that are reasonably satisfactory to Bank. All
property policies will have a lender's loss payable endorsement showing Bank as
an additional loss payee and all liability policies will show the Bank as an
additional insured and provide that the insurer must give Bank at least 20 days
notice before canceling its policy. At Bank's request, Borrower will deliver
certified copies of policies and evidence of all premium payments. Proceeds
payable under any policy will, at Bank's option, be payable to Bank on account
of the Obligations.
6.6 Primary Accounts.
Borrower will maintain its principal depository accounts with Bank.
6.7 Financial Covenants.
Borrower hereby covenants and agrees with Bank that its cash balances
will not deviate more than 10% below the figures stated in its business plan
dated April 20, 1998, measured quarterly, within twenty (20) days of quarter
end.
6.8 Registration of Intellectual Property Rights.
Borrower will register with the United States Patent and Trademark Office
or the United States Copyright Office Intellectual Property rights on Exhibits
A, B, C, and D to the Intellectual Property Security Agreement within 30 days
of the date of this Agreement, and additional
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<PAGE> 10
Intellectual Property rights developed or acquired including revisions or
additions with any product before the sale or licensing of the product to any
third party.
Borrower will (i) protect, defend and maintain the validity and
enforceability of the Intellectual Property and promptly advise Bank in writing
of material infringements and (ii) not allow any Intellectual Property to be
abandoned, forfeited or dedicated to the public without Bank's written consent.
6.9 Further Assurances.
Borrower will execute any further instruments and take further action as
Bank reasonably requests to perfect or continue Bank's security interest in the
Collateral or to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower will not do any of the following:
7.1 Dispositions.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business; (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business; (iii) otherwise permitted under this Section 7; (iv) in an
aggregate amount not exceeding One Hundred Twenty-Five Thousand Dollars
($125,000) in any fiscal year; or (v) of worn-out or obsolete Equipment, or new
Equipment financed by other vendors.
7.2 Changes in Business, Ownership, Management or Business Locations.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by borrower or have a material
change in its ownership of greater than 25%, other than the sale by Borrower of
equity securities of Borrower. Borrower will not, without at least 30 days
prior written notice, relocate its chief executive office or add any new
offices or business locations.
7.3 Mergers or Acquisitions.
(i) Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except if no Event of Default has occurred and is
continuing or wold result from such action during the term of this Agreement or
result in a decrease of more than 25% of Tangible Net Worth; or (ii) merge or
consolidate a Subsidiary into another Subsidiary or into Borrower.
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7.4 Indebtedness.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
7.5 Encumbrance.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest
granted herein subject only to Permitted Liens.
7.6 Distributions; Investments.
Directly or indirectly acquire or own any Person, or make any
Investment in any Person, other than Permitted Investments, or permit any of
its Subsidiaries to do so. Pay any dividends or make any distribution or
payment or redeem, retire or purchase any capital stock, except for (i) the
repurchase of capital stock from directors, officers, employees and/or
consultants upon exercise of Borrower's right of repurchase upon termination of
employment or services to Borrower in an aggregate amount not to exceed One
Hundred Twenty-Five Thousand Dollars ($125,000), provided, however, that
immediately prior to and following such repurchases there exists no Event of
Default under the Loan Documents (ii) the conversion by Borrower of any of its
convertible securities into other securities pursuant to the terms of such
convertible securities or otherwise in exchange therefor, and (iii) the
repurchase of Borrower's capital stock from the proceeds of the issuance by
Borrower of capital stock or Subordinated Debt.
7.7 Transactions with Affiliates.
Directly or indirectly enter or permit any material transaction with
any Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an
arm's length transaction with a non-affiliated Person.
7.8 Subordinated Debt.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
7.9 Compliance.
Become an "investment company" or a company controlled by an
"investment company," under the Investment Company Act of 1940 or undertake as
one of its important activities extending credit to purchase or carry margin
stock, or use the proceeds of any Advance for that purpose; fail to meet the
minimum funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur; fail to comply with the Federal
Fair Labor
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Standards Act or violate any other law or regulation, if the violation could
have a material adverse effect on Borrower's business or operations or cause a
Material Adverse Change, or permit any of its Subsidiaries to do so.
8. EVENTS OF DEFAULT
Any one of the following is an Event of Default:
8.1 Payment Default.
If Borrower fails to pay the principal of, or any interest on, any
Equipment Advances when due and payable; or fails to pay any portion of any
other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by
Borrower of an invoice for such other Obligations;
8.2 Covenant Default.
If Borrower does not perform any obligation in Sections 6.6, 6.7, 6.8,
or 6.9 or violates any covenant in Section 7 or does not perform or observe any
other material term, condition or covenant in this Agreement, any Loan
Documents, or in any agreement between Borrower and Bank and as to any default
under a term, condition or covenant that can be cured, has not cured the
default within 10 days after it occurs, or if the default cannot be cured
within 10 days or cannot be cured after Borrower's attempts within such 10 day
period, and the default may be cured within a reasonable time, then Borrower
has an additional period (of not more than 30 days) to attempt to cure the
default. During the additional time, the failure to cure the default is not an
Event of Default (but no Credit Extensions will be made during the cure period);
8.3 Material Adverse Change.
(i) If there occurs a material impairment in the perfection
or priority of the Bank's security interest in the Collateral or in the value
of such Collateral which is not covered by adequate insurance or (ii) if the
Bank determines, based upon information available to it and in its reasonable
judgment, that there is a reasonable likelihood that Borrower will fail to
comply with one or more of the financial covenants in Section 6 during the next
succeeding financial reporting period.
8.4 Attachment.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice.
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These are not Events of Default if stayed or if a bond is posted pending contest
by Borrower (but no Credit Extensions will be made during the cure period);
8.5 Insolvency.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 45 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
8.6 Other Agreements.
If there is a default in any agreement between Borrower and a third party
that gives the third party the right to accelerate any Indebtedness exceeding
$100,000 or that could cause a Material Adverse Change;
8.7 Judgments.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 30 days (but no Advances
will be made before the judgment is stayed or satisfied); or
8.8 Misrepresentations.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies.
When an Event of Default occurs and continues Bank may, without notice or
demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 occurs all Obligations are
immediately due and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, on terms and in any order that Bank considers advisable;
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(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's
rights or remedies;
(e) Apply to the Obligations any (i) balances and deposits of
Borrower it holds, or (ii) any amount held by Bank owing to or for the credit
or the account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell the Collateral. Bank is granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower's labels, Patents, Copyrights, Mask Works, rights of use of any name,
trade secrets, trade names, Trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section, Borrower's
rights under all licenses and all franchise agreements inure to Bank's
benefit; and
(g) Dispose of the Collateral according to the Code.
9.2 Power of Attorney.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's
name on any checks or other forms of payment or security; (ii) sign Borrower's
name on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts
directly with account debtors, for amounts and on terms Bank determines
reasonable; and (v) transfer the Collateral into the name of Bank or a third
party as the Code permits. Bank may exercise the power of attorney to sign
Borrower's name on any documents necessary to perfect or continue the
perfection of any security interest regardless of whether an Event of Default
has occurred. Bank's appointment as Borrower's attorney in fact, and all of
Bank's rights and powers, coupled with an interest, are irrevocable until all
Obligations have been fully repaid and performed and Bank's obligation to
provide Credit Extensions terminates.
9.3 Accounts Collection.
When an Event of Default occurs and continues, Bank may notify any Person
owing Borrower money of Bank's security interest in the funds and verify the
amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
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9.4 Bank Expenses.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 Bank's Liability for Collateral.
If Bank complies with its obligations under Section 9207 of the Code and
other applicable law it is not liable for: (a) the safekeeping of the
Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the
value of the Collateral; or (d) any act or default of any carrier,
warehouseman, bailee, or other person. Borrower bears all risk of loss, damage
or destruction of the Collateral.
9.6 Remedies Cumulative.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank's exercise of one right or remedy is
not an election, and Bank's waiver of any Event of Default is not a continuing
waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is
effective unless signed by Bank and then is only effective for the specific
instance and purpose for which it was given.
9.7 Demand Waiver.
Borrower waives demand, notice of default or dishonor, notice of payments
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10. NOTICES
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice.
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11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS.
THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
12.2 Indemnification.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 Severability of Provision.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
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<PAGE> 17
12.5 Amendments in Writing, Integration.
All amendments to this Agreement must be in writing and signed by Borrower
and Bank. This Agreement represents the entire agreement about this subject
matter, and supersedes prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement merge into this Agreement
and the Loan Documents.
12.6 Counterparts.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
12.7 Survival.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The
obligations of Borrower in Section 12.2 to indemnify Bank will survive until
all statutes of limitations for actions that may be brought against Bank have
run.
12.8 Confidentiality.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, (iii) as required by
law, regulation, subpoena, or other order, (iv) as required in connection with
Bank's examination or audit and (v) as Bank considers appropriate exercising
remedies under this Agreement. Confidential information does not include
information that either: (a) is in the public domain or in Bank's possession
when disclosed to Bank, or becomes part of the public domain after disclosure
to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know
that the third party is prohibited from disclosing the information.
12.9 Attorneys' Fees, Costs and Expenses.
In any action or proceeding between Borrower and Bank arising out of the
Loan Documents, the prevailing party will be entitled to recover its reasonable
attorneys' fees and other costs and expenses incurred, in addition to any other
relief to which it may be entitled.
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<PAGE> 18
13. DEFINITIONS
13.1 Definitions.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs
or any equipment containing the information.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code.
"COLLATERAL" is the property described on Exhibit A.
"COMMITTED EQUIPMENT LINE" is a Credit Extension of up to $1,250,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does
15
<PAGE> 19
not include endorsements in the ordinary course of business. The amount of a
Contingent Obligation is the stated or determined amount of the primary
obligation for which the Contingent Obligation is made or, if not determinable,
the maximum reasonably anticipated liability for it determined by the Person in
good faith; but the amount may not exceed the maximum of the obligations under
the guarantee or other support arrangement.
"COPYRIGHTS" are all copyright rights, applications or registrations and
like protections in each work or authorship or derivative work, whether
published or not (whether or not it is a trade secret) now or later existing,
created, acquired or held.
"CREDIT EXTENSION" is each Equipment Advance or any other extension of
credit by Bank for Borrower's benefit.
"CURRENT LIABILITIES" are the aggregate amount of Borrower's total
liabilities which mature within one (1) year.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"EQUIPMENT ADVANCE" is defined in Section 2.1.1.
"EQUIPMENT AVAILABILITY END DATE" is defined in Section 2.1.1.
"EQUIPMENT MATURITY DATE" is defined in Section 2.1.1.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INTELLECTUAL PROPERTY" is:
16
<PAGE> 20
(a) Copyrights, Trademarks, Patents, and Mask Works including
amendments, renewals, extensions, and all licenses or other rights to use and
all license fees and royalties from the use;
(b) Any trade secrets and any intellectual property rights in
computer software and computer software products now or later existing, created,
acquired or held;
(c) All design rights which may be available to Borrower now or
later created, acquired or held;
(d) Any claims for damages (past, present or future) for
infringement of any of the rights above, with the right, but not the obligation,
to sue and collect damages for use or infringement of the intellectual property
rights above;
All proceeds and products of the foregoing, including all insurance,
indemnity or warranty payments.
"INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or any guarantor, and any other present or
future agreement between Borrower and/or for the benefit of Bank in connection
with this Agreement, all as amended, extended or restated.
"MASK WORKS" are all mask works or similar rights available for the
protection of semiconductor chips, now owned or later acquired.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and Foreign
Exchange Contracts and
17
<PAGE> 21
including interest accruing after Insolvency Proceedings begin and debts,
liabilities, or obligations of Borrower assigned to Bank.
"PATENTS" are patents, patent applications and like protections,
including improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other
Loan Document;
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors and with respect to surety bonds
and similar obligations incurred in the ordinary course of business;
(e) Indebtedness secured by Permitted Liens;
(f) Indebtedness of Borrower to any Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of Borrower (provided
that the primary obligations are not prohibited hereby), and Indebtedness of
any Subsidiary to any other Subsidiary and Contingent Obligations of any
Subsidiary with respect to obligations of any other Subsidiary (provided that
the primary obligations are not prohibited hereby);
(g) Capital leases or indebtedness incurred solely to purchase
equipment which is secured in accordance with clause (c) of "Permitted Liens"
below and is not in excess of the purchase price of such equipment plus related
financing costs;
(h) Other Indebtedness not otherwise permitted by Section 7.4 not
exceeding One Hundred Twenty-Five Thousand Dollars ($125,000) in the aggregate
outstanding at any time; and
(i) Extensions, refinancings, modifications, amendments and
restatements of any of items of Permitted Indebtedness (a) through (h) above,
provided that the principal amount thereof is not increased or the terms
thereof are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial
18
<PAGE> 22
paper maturing no more than 1 year after its creation and having the highest
rating from either Standard & Poor's Corporation or Moody's Investors Service,
Inc., and (iii) Bank's certificates of deposit issued maturing no more than 1
year after issue.
(c) any Investments permitted by Borrower's investment policy, as amended
from time to time, provided such investment policy (and any amendments
thereto) has been previously approved by Bank in writing;
(d) Investments consisting of the endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business;
(e) Investments accepted in connection with Transfers permitted by
Section 7.1;
(f) Investments of Subsidiaries in or to other Subsidiaries or Borrower,
and Investments by Borrower in Subsidiaries not exceeding One Hundred
Twenty-Five Thousand Dollars ($125,000) in the aggregate at any time;
(g) Investments consisting of (i) travel advances and employee relocation
loans and other employee loans and advances in the ordinary course of business,
and (ii) loans to employees, officers or directors relating to the purchase of
equity securities of Borrower or its Subsidiaries pursuant to employee stock
purchase plans or agreements approved by Borrower's Board of Directors;
(h) Investments (including debt obligations) received in connection with
the bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of business;
(i) Investments consisting of notes receivable of, or prepaid royalties and
other credit extensions to, customers and suppliers who are not Affiliates, in
the ordinary course of business; provided that this paragraph (i) shall not
apply to Investments by Borrower in any Subsidiary;
(j) Deposit accounts of Borrower in which Bank has a Lien prior to any
other lien; and
(k) Other Investments not otherwise permitted by Section 7.6 not exceeding
One Hundred Twenty-Five Thousand Dollars ($125,000) in the aggregate at any
time.
"PERMITTED LIENS" ARE:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority
over any of Bank's security interests;
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<PAGE> 23
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower or
its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and (non-exclusive) licenses or sublicenses
granted in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as a
whole, and any interest or title of a lessor, licensor or under any lease or
license;
(e) Liens on assets (including the proceeds thereof and accessions
thereto) that existed at the time such assets were acquired by Borrower or any
Subsidiary (including Liens on assets of any corporation that existed at the
time it became or becomes a Subsidiary); provided such Liens are not granted in
contemplation of or in connection with the acquisition of such asset by
Borrower or a Subsidiary;
(f) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payments of customs duties in connection with the importation
of goods;
(g) Liens that are not prior to the Lien of Bank which constitute rights
of set-off of a customary nature or banker's Liens with respect to amount on
deposit, whether arising by operation of law or by contract, in connection with
arrangements entered into with banks in the ordinary course of business;
(h) Liens on insurance proceeds in favor of insurance companies granted
solely as security for financed premiums;
(i) Liens arising from judgments, decrees or attachments in circumstances
not constituting an Event of Default under Section 8.7;
(j) Easements, reservations, rights-of-way, restrictions, minor defects
or irregularities in title and other similar charges or encumbrances affecting
real property not constituting a Material Adverse Effect;
(k) Deposits under worker's compensation, unemployment insurance, social
security and other similar laws, or to secure the performance of bids, tenders
or contracts (other than for the repayment of borrowed money) or to secure
indemnity, performance or other similar bonds for the performance of bids,
tenders or contracts (other than for the repayment of borrowed money) or to
secure statutory obligations (other than liens arising under ERISA or
environmental liens) or surety or appeal bonds, or to secure indemnity,
performance or other similar bonds in the ordinary course of business;
20
<PAGE> 24
(l) Liens arising by operation of law such as mechanics',
materialman's, carriers', warehousemen's liens incurred in the ordinary course
of business, where such claim is stayed or an adequate bond has been posted
pending a good faith contest by Borrower (provided that no Equipment Advances
will be required to be made during such cure period); and
(m) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a), (c), (d), (e), (f), (g), (h),
(k), and (l), but any extension, renewal or replacement Lien must be limited to
the property encumbered by the existing Lien and the principal amount of the
indebtedness may not increase.
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or government agency.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"QUICK ASSETS" is, on any date, the Borrower's consolidated,
unrestricted cash, cash equivalents, net billed accounts receivable and
investments with maturities of fewer than 12 months determined according to
GAAP.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"TRADEMARKS" are trademark and servicemark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of any assignor connected with the trademarks.
21
<PAGE> 25
BORROWER:
COSINE COMMUNICATIONS, INC.
By: /s/ DEAN HAMILTON
----------------------------------------
Title:
-------------------------------------
BANK:
SILICON VALLEY BANK
By: /s/ GREG OLSEN
----------------------------------------
Title: Vice President
-------------------------------------
22
<PAGE> 26
EXHIBIT A
The Collateral consists of all of Borrower's right, title and interest
in and to the following:
All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
All not existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefor, as well
as all merchandise returned to or reclaimed by Borrower;
All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, investment property, financial assets,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired and Borrower's Books relating to the foregoing;
All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any
of the foregoing; and
All Borrower's Books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.
<PAGE> 1
EXHIBIT 10.12
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of June 22, 1998, by
and between COSINE COMMUNICATIONS, INC. ("Borrower") whose address is 1070 Sixth
Avenue, Suite 200, Belmont, CA 94002 and Silicon Valley Bank ("Bank") whose
address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may be
owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other
documents, a Loan and Security Agreement, dated May 29, 1998, as may be amended
from time to time, (the "Loan Agreement"). The Loan Agreement provided for,
among other things, a Committed Equipment Line in the original principal amount
of One Million Two Hundred Fifty Thousand and 00/100 Dollars ($1,250,000.00) the
"Revolving Facility"). Defined terms used but not otherwise defined herein shall
have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the indebtedness is
secured by the Collateral as described in the Loan Agreement and that certain
Intellectual Property Security Agreement, dated May 29, 1998.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGES IN TERMS.
A. Modification(s) to Loan Agreement.
1. The following Section is hereby incorporated to read as follows:
2.1.2 Lease Advance Sublimit. Through the Equipment Availability
Date, Bank will make advances (each, a "Lease Advance" and
collectively, the "Lease Advances"), not exceeding $275,000 (the
"Lease Advance Sublimit"). The Lease Advances may be used only to
support lease arrangements. Borrower to provide to Bank invoices
for the Lease Advances no later than the Equipment Availability
Date, however such invoice do not need to accompany the advance
request. All Lease Advances will be treated as Credit Extensions
under the Committed Equipment Line. Lease Advances when repaid
may not be reborrowed.
2.1.3 Overadvances. If Borrower's Obligations under Sections
2.1.1 and 2.1.2 exceed the Committed Equipment Line, Borrower
must immediately pay in cash to Bank the excess.
2. The following definition is hereby incorporated into the Loan
Agreement:
"Lease Advance" is described in Section 2.1.2
4. CONSISTENT CHANGES: The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
1
<PAGE> 2
5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of
Three Hundred Fifty and 00/100 Dollars ($350.00) (the "Loan Fee") plus all
out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of the date hereof, it has no defenses against the
obligations to pay any amounts under the indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing indebtedness, Bank
is relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to modifications
to the existing indebtedness pursuant to this Loan Modification Agreement in no
way shall obligate Bank to make any future modifications to the indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the indebtedness. It is the intention of Bank and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
COSINE COMMUNICATIONS, INC. SILICON VALLEY BANK
By: /s/ CURTIS DUDNICK By: /s/ GREG OLSEN
--------------------------- ---------------------------
Name: Curtis Dudnick Name: Greg Olsen
------------------------- -------------------------
Title: CFO Title: Vice President
------------------------ ------------------------
2
<PAGE> 1
EXHIBIT 10.13
LOAN AND SECURITY AGREEMENT
by and between
SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
Attn: Loan Services
(408) 406-2429
and
COSINE COMMUNICATIONS, INC.
1200 Bridge Parkway
Redwood City, CA 94065
TOTAL CREDIT AMOUNT: $3,000,000
Date: September 30, 1999
Repayment Period: 48 months
Treasury Note Maturity: 48 months
Loan Margin: 607 basis points
Minimum Funding Amount: $50,000
Maximum Number of Loans: 6 - 1 per month
Commitment Termination Date: February 29, 2000
The terms and information set forth on this cover page are a part of the
attached Loan and Security Agreement, dated as of the date first written above
(this "Agreement"), entered into by and between Silicon Valley Bank ("Bank")
and the borrower ("Borrower") set forth above. The terms and conditions of this
Agreement agreed to between Bank and Borrower are as follows:
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
1 ACCOUNTING AND OTHER TERMS................................................. 4
2 LOAN AND TERMS OF PAYMENT.................................................. 4
2.1 Credit Extensions................................................... 4
2.2 Interest Rate, Payments............................................. 5
2.3 Fees................................................................ 6
3 CONDITIONS OF LOANS........................................................ 6
3.1 Conditions Precedent to Initial Credit Extension.................... 6
3.2 Conditions Precedent to all Credit Extensions....................... 6
4 CREATION OF SECURITY INTEREST.............................................. 6
4.1 Grant of Security Interest.......................................... 6
5 REPRESENTATIONS AND WARRANTIES............................................. 6
5.1 Due Organization and Authorization.................................. 7
5.2 Collateral.......................................................... 7
5.3 Litigation.......................................................... 7
5.4 No Material Adverse Change in Financial Statements.................. 7
5.5 Solvency............................................................ 7
5.6 Regulatory Compliance............................................... 7
5.7 Subsidiaries........................................................ 8
5.8 Full Disclosure..................................................... 8
6 AFFIRMATIVE COVENANTS...................................................... 8
6.1 Government Compliance............................................... 8
6.2 Financial Statements, Reports, Certificates......................... 8
6.3 Taxes............................................................... 8
6.4 Insurance........................................................... 8
6.5 Primary Accounts.................................................... 9
6.6 Loss; Destruction; or Damage........................................ 9
6.7 Further Assurances.................................................. 9
7 NEGATIVE COVENANTS......................................................... 9
7.1 Borrower will not do any of the following without the prior
written consent of Bank ............................................ 9
8 EVENTS OF DEFAULT.......................................................... 10
8.1 Payment Default.................................................... 10
8.2 Covenant Default................................................... 10
8.3 Material Adverse Change............................................ 10
8.4 Attachment......................................................... 10
8.5 Insolvency......................................................... 11
8.6 Other Agreements................................................... 11
8.7 Judgments.......................................................... 11
8.8 Misrepresentations................................................. 11
9 BANK'S RIGHTS AND REMEDIES................................................. 11
9.1 Rights and Remedies................................................ 11
9.2 Power of Attorney.................................................. 12
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
9.3 Bank Expenses...................................................... 12
9.4 Bank's Liability for Collateral.................................... 12
9.5 Remedies Cumulative................................................ 12
9.6 Demand Waiver...................................................... 12
10 NOTICES................................................................... 13
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER................................ 13
12 GENERAL PROVISIONS........................................................ 13
12.1 Successors and Assigns............................................. 13
12.2 Indemnification.................................................... 13
12.3 Time of Essence.................................................... 13
12.4 Severability of Provision.......................................... 13
12.5 Amendments in Writing, Integration................................. 13
12.6 Counterparts....................................................... 14
12.7 Survival........................................................... 14
12.8 Confidentiality.................................................... 14
12.9 Attorneys' Fees, Costs and Expenses................................ 14
13 DEFINITIONS............................................................... 14
13.1 Definitions........................................................ 14
SILICON VALLEY BANK..................................................... 1
</TABLE>
3
<PAGE> 4
This LOAN AND SECURITY AGREEMENT dated September 30, 1999, between SILICON
VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara,
California 95054 and COSINE COMMUNICATIONS, INC. ("Borrower"), whose address is
1200 Bridge Parkway, Redwood City, California 94065 provides the terms on which
Bank will lend to Borrower and Borrower will repay Bank. The parties agree as
follows:
1. ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed following
GAAP Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation," in this
or any Loan Document. This Agreement shall be construed to impart upon Bank a
duty to act reasonably at all times.
2. LOAN AND TERMS OF PAYMENT
2.1 CREDIT EXTENSIONS
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 EQUIPMENT ADVANCES.
(a) Subject to the terms and conditions of this Agreement, Bank agrees
to lend to Borrower, from time to time prior to the Commitment Termination Date,
equipment advances (each an "Equipment Advance" and collectively the "Equipment
Advances") in an aggregate amount not to exceed the Committed Equipment Line.
When repaid, the Equipment Advances may not be re-borrowed. The proceeds of the
Equipment Advances will be used solely to reimburse Borrower for the purchase of
Eligible Equipment purchased within 90 days of the Equipment Advance, with the
exception of the initial Equipment Advance which will be used for Eligible
Equipment purchased on or after March 1, 1999. Each Equipment Advance shall be
considered a promissory note evidencing the amounts due hereunder for all
purposes. Bank's obligation to lend hereunder shall terminate on the earlier of
(i) the occurrence and continuance of an Event of Default, or (ii) the
Commitment Termination Date. For purposes of this Section, the minimum amount of
each Equipment Advance is $50,000; provided that Borrower may borrow less than
$50,000 if the available amount remaining under the Committed Equipment Line is
less than $50,000. The maximum number of Equipment Advances that will be made is
5; and only 1 per month is allowed.
(b) To obtain an Equipment Advance, Borrower will deliver to Bank a
completed supplement in substantially the form attached as Exhibit C ("Loan
Supplement"), copies of invoices for the Financed Equipment, together with a UCC
Financing Statement covering the Equipment described on the Loan Supplement, and
such additional information as Bank may request at least five (5) Business Days
before the proposed funding date (the "Funding Date"). On each Funding Date,
Bank will specify in the Loan Supplement for each Equipment Advance, the Basic
Rate, the Loan Factor, and the Payment Dates. If Borrower satisfies the
conditions of each Equipment Advance specified herein, Bank will disburse such
Equipment Advance by internal transfer to Borrower's deposit account with Bank.
Each Equipment Advance may not exceed 100% of the Original Stated Cost.
(c) Bank's obligations to lend the undisbursed portion of the Committed
Equipment Line will terminate if, in Bank's sole discretion, there has been a
material adverse change in the general affairs, management results of operation,
condition (financial or otherwise) or the prospects of Borrower, whether or not
arising from transactions in the ordinary course of business, or there has been
any material adverse deviation by Borrower from the most recent
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business plan of Borrower presented to and accepted by Bank prior to the
execution of this Agreement.
2.2 INTEREST RATE, PAYMENTS.
(a) Principal and interest Payments on Payment Dates. Borrower will
repay the Equipment Advances on the terms provided in the Loan Supplement.
Borrower will made payments monthly in advance of principal and accrued interest
for each Equipment Advance (collectively, "Scheduled Payments"), on the first
Business Day of the month following the Funding Date (or commencing on the
Funding Date if the Funding Date is the first Business Day of the month) with
respect to such Equipment Advance and continuing thereafter during the Repayment
period on the first Business Day of each calendar month (each a "Payment Date"),
in an amount equal to the Loan Factor multiplied by the Loan Amount for such
Equipment Advance, as of such Payment Date. All unpaid principal and accrued
interest is due and payable in full on the last Payment Date with respect to
such Equipment Advance. Payments received after 12:00 noon Pacific time are
considered received at the opening of business on the next Business Day. An
Equipment Advance may only be prepaid in accordance with Sections 2.2(e) and
2.2(f).
(b) Interest Rate. Borrower will pay interest on the Payment Dates (as
described above) at the per annum rate of interest equal to the Basic Rate
determined by Bank as of the Funding Date for each Equipment Advance in
accordance with the definition of the Basic Rate. Any amounts outstanding during
the continuance of an Event of Default shall bear interest at a per annum rate
equal to the Basic Rate plus five percent (5%) (the "Default Rate"). If any
change in the law increases Bank's expenses or decreases its return from the
Equipment Advances. Borrower will pay Bank upon request the amount of such
increase or decrease.
(c) Interim Payment. In addition to the Scheduled Payments, on the
Funding Date for each Equipment Advance (unless the Equipment Advance is made on
the first day of the month) Borrower shall pay to Bank, on behalf of Bank, an
amount (the "Interim Payment") equal to interest on the amount of the Equipment
Advance at the applicable Basic Rate calculated for the number of days from the
Funding Date of the Equipment Advance until the first Payment Date with respect
to such Equipment Advance.
(d) Prepayment Upon an Event of Loss. If any Financed Equipment is
subject to an Event of Loss and Borrower is required to or elects to prepay the
Equipment Advance with respect to such Financed Equipment pursuant to Section
6.6, then such Equipment Advance shall be prepaid to the extent and in the
manner provided in such section.
(e) Mandatory Prepayment Upon an Acceleration. If the Equipment Advances
are accelerated following the occurrence of an Event of Default or otherwise
(other than following an Event of Loss), then Borrower will immediately pay to
Bank (i) all unpaid Scheduled Payments due prior to the date of such prepayment,
together with all remaining Scheduled Payments with respect to each Equipment
Advance, (ii) all additional interest due as a result of the Default Rate of
interest, to the date of the prepayment, (iii) all other sums, if any, that
shall have become due and payable with respect to any Equipment Advance.
(f) Permitted Prepayment of Loans. With Bank's prior written consent,
Borrower shall have the option to prepay all, but not less than all, of the
Equipment Advances advanced by Bank under this Agreement, provided Borrower (i)
provides written notice to Bank of its election to prepay the Equipment Advances
at least 5 days prior to such prepayment, and (ii) pays, on the date of the
prepayment (A) all unpaid Scheduled Payments due prior to the date of such
prepayment; (B) all remaining Schedule Payments that would otherwise be due
after such prepayment date, each discounted to present value at 5%; (C) all
other sums, if any, that shall have become due and payable hereunder with
respect to any Equipment Advance.
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2.2.1 REQUEST TO DEBIT.
Bank may debit any of Borrower's deposit accounts including Account
Number _______________ for principal and interest payments or any amounts
Borrower owes Bank when due. Bank will notify Borrower when it debits
Borrower's accounts. These debits are not a set-off.
2.3 FEES.
Borrower will pay:
(a) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and reasonable expenses) incurred through and after the date of this
Agreement, are payable when due.
3 CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to the
condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the Initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing,
or result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and
warranties of Section 5 remain true in all material respects, except for such
representations and warranties made as of a specified earlier date shall be
true as of such earlier date.
4 CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and
performance of each of Borrower's duties under the Loan Documents. Any security
interest will be a first priority security interest in the Collateral. Bank
may place a "hold" on any deposit account pledged as Collateral. If this
Agreement is terminated, Bank's lien and security interest in the Collateral
will continue until Borrower fully satisfies its Obligations.
5 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
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5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified, except where the failure to do so could
not reasonably be expected to cause a Material Adverse Change.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause or reasonably be expected to cause a
Material Adverse Change.
5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens.
5.3 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to the knowledge of Borrower's Responsible Officers and legal
counsel, threatened by or against Borrower or any Subsidiary in which a likely
adverse decision could reasonably be expected to cause a Material Adverse
Change.
5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 SOLVENCY.
Borrower is able to pay its debts (including trade debts) as they mature.
5.6 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could reasonably be expected to cause a Material Adverse Change. None of
Borrower's or any Subsidiary's properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP.
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that are necessary to continue its business as
currently conducted, except where the failure to do so could not reasonably be
expected to cause a Material Adverse Change.
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5.7 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities.
5.8 FULL DISCLOSURE.
No written representation, warranty or other statement of Borrower in
any certificate or written statement given to Bank (taken together with all such
written certificates and written statements to Bank) contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained in the certificates or statements not misleading. If
being recognized by Bank that the projections and forecasts provided by Borrower
in good faith and based upon reasonable assumptions are not viewed as facts and
that actual results during the period or periods covered by such projections and
forecasts may differ from the projected and forecasted results.
6 AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and
good standing in its jurisdiction of formation and maintain qualification in
each jurisdiction in which the failure to so qualify would reasonably be
expected to cause a material adverse effect on Borrower's business or
operations. Borrower will comply, and have each Subsidiary comply, with all
laws, ordinances and regulations to which it is subject, noncompliance with
which could reasonably be expected to have a material adverse effect on
Borrower's business or operations or would reasonably be expected to cause a
Material Adverse Change.
6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) as soon as available, but no
later than 30 days after the last day of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period, in a form and certified by a Responsible Officer
acceptable to Bank; (ii) as soon as available, but no later than 120 days after
the last day of Borrower's fiscal year, audited consolidated financial
statements prepared under GAAP, consistently applied, together with an opinion
which is unqualified or otherwise consented to by Bank on the financial
statements from an independent certified public accounting firm reasonably
acceptable to Bank; (iii) a prompt report of any legal actions pending or
threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of $100,000 or more; and (iv) budgets, sales
projections, operating plans or other financial information Bank reasonably
requests.
(b) Bank has the right to audit Borrower's Collateral at Borrower's
expense, if an Event of Default has occurred and is continuing.
6.3 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
6.4 INSURANCE.
Borrower will keep its business and the Collateral insured for risks and
in amounts, as Bank requests. Insurance policies will be in a form, with
companies, and in amounts that are
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reasonably satisfactory to Bank. All property policies with respect to the
Collateral will have a lender's loss payable endorsement showing Bank as an
additional loss payee and all liability policies will show the Bank as an
additional insured and all policies will provide that the insurer must give
Bank at least 20 days notice before cancelling its policy. At Bank's request,
Borrower will deliver certified copies of policies and evidence of all premium
payments. Subject to Section 6.6(a) below, so long as no Event of Default has
occurred and is continuing, proceeds payable under any casualty policy will,
at Borrower's option, be payable to Borrower to replace the property subject
to the claim, provided that any such replacement property shall be deemed
Collateral in which Bank has been granted a first priority security interest.
If an Event of Default has occurred and is continuing, then, at Bank's option,
proceeds payable under any policy will be payable to Bank on account of the
Obligations.
6.5 PRIMARY ACCOUNTS.
Borrower will maintain its primary operating accounts with Bank.
6.6 LOSS; DESTRUCTION; OR DAMAGE.
Borrower will bear the risk of the Financed Equipment being lost, stolen,
destroyed, or damaged. If during the term of this Agreement any item of
Financed Equipment is lost, stolen, destroyed, damaged beyond repair, rendered
permanently unfit for use, or seized by a governmental authority for any reason
for a period equal to at least the remainder of the term of this Agreement (an
"Event of Loss"), then in each case, Borrower:
(a) prior to the occurrence of an Event of Default, at Borrower's option,
will (i) pay to Bank on account of the Obligations (with respect to the
Financed Equipment subject to the Event of Loss) all accrued unpaid interest to
the date of the prepayment, plus all outstanding principal, or (ii) repair or
replace any Financed Equipment subject to an Event of Loss provided the
repaired or replaced Financed Equipment is of equal or like value to the
Financed Equipment subject to an Event of Loss and provided further that Bank
has a first priority perfected security interest in such repaired or replaced
Financed Equipment.
(b) during the continuance of an Event of Default, on or before the
Payment Date after such Event of Loss for each such item of Financed Equipment
subject to such Event of Loss, Borrower will, at Bank's option, pay to Bank an
amount equal to the sum of (i) all accrued and unpaid Scheduled Payments (with
respect to such Equipment Advance related to the Event of Loss) due prior to
the next such Payment Date, (ii) all Regularly Scheduled Payments (including
principal and interest), (iii) all other sums, if any, that shall have become
due and payable, including interest at the Default Rate with respect to any
past due amounts.
(c) On the date of receipt by Bank of the amount specified above with
respect to each such item of Financed Equipment subject to an Event of Loss,
this Agreement shall terminate as to such Financed Equipment. If any proceeds
of insurance or awards received from governmental authorities are in excess of
the amount owed under this Section, Bank shall promptly remit to Borrower the
amount in excess of the amount owed to Bank.
6.7 FURTHER ASSURANCES.
Borrower will execute any further instruments and take further action as
Bank reasonably requests to perfect or continue Bank's security interest in the
Collateral or to effect the purposes of this Agreement.
7 NEGATIVE COVENANTS
7.1 Borrower will not do any of the following without the prior written
consent of Bank:
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Change its name or the chief executive office or principal place of
business, move or dispose of any interest in the Collateral, permit any lien or
security interest to attach to the Collateral, or enter into any transaction
outside the ordinary course of Borrower's business.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Credit Extension for that purpose; fail to meet the minimum
funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur; fail to comply with the Federal
Fair Labor Standards Act or violate any other law or regulation, if the
violation could have a material adverse effect on Borrower's business or
operations or cause a Material Adverse Change, or permit any of its
Subsidiaries to do so.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other then Permitted Indebtedness.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest
granted here.
8 EVENTS OF DEFAULT
Any one of the following is an Event of Default:
8.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations within 3 days after their
due date. During the additional period the failure to cure the default is not
an Event of Default (but no Credit Extension will be made during the cure
period);
8.2 COVENANT DEFAULT.
If Borrower violates any covenant in Section 7 or does not perform or
observe any other material term, condition or covenant in this Agreement, any
Loan Documents, or in any agreement between Borrower and Bank and as to any
default under a term, condition or covenant that can be cured, has not cured
the default within 10 days after if occurs, or if the default cannot be cured
within 10 days or cannot be cured after Borrower's attempts within 10 day
period, and the default may be cured within a reasonable time, then Borrower
has an additional period (of not more than 30 days) to attempt to cure the
default. During the additional time, the failure to cure the default is not an
Event of Default (but no Credit Extensions will be made during the cure period);
8.3 MATERIAL ADVERSE CHANGE.
If there (i) occurs a material impairment in the perfection or priority of
the Bank's security interest in the Collateral or in the value of such
Collateral which is not covered by adequate insurance or (ii) is a material
adverse change in the business, operations or condition (financial or
otherwise) of Borrower (a "Material Adverse Change").
8.4 ATTACHMENT.
(i) Any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days;
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(ii) Borrower is enjoined, restrained, or prevented by court order from
conducting a material part of its business; (iii) a judgment or other claim
becomes a Lien on a material portion of Borrower's assets; or (iv) a notice of
lien, levy, or assessment if filed against any of Borrower's assets by any
government agency and not paid within 10 days after Borrower receives notice.
These are not Events of Default if stayed or if a bond is posted pending contest
by Borrower (but no Credit Extensions will be made during the cure period);
8.5 INSOLVENCY.
(i) Borrower becomes insolvent: (ii) Borrower begins an insolvency
Proceeding; or (iii) an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 45 days (but no Credit Extensions will be made
before any Insolvency Proceeding is dismissed);
8.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third party
that gives the third party the right to accelerate any indebtedness exceeding
$250,000 or that could reasonably be expected to cause a Material Adverse
Change;
8.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $250,000 is rendered
against Borrower and is unsatisfied and unstayed for 30 days and is not covered
by insurance (but no Credit Extensions will be made before the judgment is
stayed or satisfied); or
8.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any communication delivered to Bank or
to induce Bank to enter this Agreement or any Loan Document.
9 BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice or
demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 8.5 occurs all Obligations are immediately due
and payable without nay action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's
rights or remedies;
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(e) Apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral; and
(g) Dispose of the Collateral according to the Code.
9.2 POWER OF ATTORNEY.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's
name on any checks or other forms of payment or security; (ii) make, settle,
and adjust all claims under Borrower's insurance policies; and (iii) transfer
the Collateral into the name of Bank or a third party as the Code permits.
Bank may exercise the power of attorney to sign Borrower's name on any documents
necessary to perfect or continue the perfection of any security interest
regardless of whether an Event of Default has occurred. Bank's appointment as
Borrower's attorney in fact, and all of Bank's rights and powers, coupled with
an interest, are irrevocable until all Obligations have been fully repaid and
performed and Bank's obligation to provide Credit Extensions terminates.
9.3 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons, Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable within 10 days, bearing interest at the then
applicable rate and secured by the Collateral. No payments by Bank are deemed an
agreement to make similar payments in the future or Bank's waiver of any Event
of Default.
9.4 BANK'S LIABILITY FOR COLLATERAL.
If Bank complies with reasonable banking practices and Section 9-207 of
the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any
loss or damage to the Collateral; (c) any diminution in the value of the
Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or
other person. Borrower bears all risk of loss, damage or destruction of the
Collateral.
9.5 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank's exercise of one right or remedy is
not an election, and Bank's waiver of any Event of Default is not a continuing
waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is
effective unless signed by Bank and then is only effective for the specific
instance and purpose for which it was given.
9.6 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
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10 NOTICES
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A party may change its notice address by giving the other party
written notice.
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS.
THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12 GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without consent of or notice
to Borrower, to sell, transfer, negotiate, or grant participation in all or any
part of, or any interest in, Bank's obligations, rights and benefits under this
Agreement.
12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank form, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses cause by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
12.5 AMENDMENT IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing and signed by Borrower
and Bank. This Agreement represents the entire agreement about this subject
matter, and supersedes prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement merge into this Agreement
and the Loan Documents.
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12.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made: (i) to Bank's subsidiaries or affiliates
in connection with their present or prospective business relations with
Borrower; (ii) to prospective transferees or purchasers of any interest in the
Loans; (iii) as required by law, regulation, subpoena, or other order, (iv) as
required in connection with Bank's examination or audit; and (v) as Bank
considers appropriate in exercising remedies under this Agreement. Confidential
information does not include information that either: (a) is in the public
domain or in Bank's possession when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank; or (b) is disclosed to Bank by a third
party, if Bank does not know that the third party is prohibited from disclosing
the information.
12.9 ATTORNEYS' FEES, COSTS AND EXPENSES.
In any action or proceeding between Borrower and Bank arising out of
the Loan Documents, the prevailing party will be entitled to recover its
reasonable attorneys' fees and other reasonable costs and expenses incurred, in
addition to any other relief to which it may be entitled.
13 DEFINITIONS
13.1 DEFINITIONS.
In this Agreement:
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs
and expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BASIC RATE" is, as of the Funding Date, the per annum rate of
interest (based on a year of 360 days) equal to the sum of (a) the U.S.
Treasury note yield to maturity for a term equal to the Treasury Note Maturity
as quoted in The Wall Street Journal on the day the Loan Supplement is
prepared, plus (b) the Loan Margin.
"BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs
or any equipment containing the information.
14
<PAGE> 15
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code.
"COLLATERAL" is the property described on Exhibit A.
"COMMITMENT TERMINATION DATE" is February 29, 2000.
"COMMITTED EQUIPMENT LINE" is a Credit Extension of up to $3,000,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"CREDIT EXTENSION" is each Equipment Advance or any other extension of
credit by Bank for Borrower's benefit.
"ELIGIBLE EQUIPMENT" is general purpose computer equipment, office
equipment, test and laboratory equipment, furnishings, and, subject to the
limitations set forth below, Other Equipment that complies with all of
Borrower's representations and warranties to Bank and which is acceptable to
Bank in all respects. All Equipment financed with the proceeds of Equipment
Advances shall be new, provided that Bank, in its sole discretion, may finance
used equipment.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"EQUIPMENT ADVANCE" is defined in Section 2.1.1.
"ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.
"FINANCED EQUIPMENT" is defined in the Loan Supplement.
"FUNDING DATE" is any date on which an Equipment Advance is made to or
on account of Borrower.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services (excluding accounts payable to trade creditors
for goods or services which are not aged more than 180 days, unless contested
in good faith and by appropriate proceedings), such as reimbursement and other
obligations for surety bonds and letters of credit, (b) obligations
15
<PAGE> 16
evidenced by notes, bonds, debentures or similar instruments, (c) capital lease
obligations and (d) Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United State Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"LOAN AMOUNT" is the aggregate amount of the Equipment Advance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"LOAN FACTOR" is the percentage which results from amortizing the
Equipment Advance over the Repayment Period, using the Basic Rate as the
interest rate.
"LOAN MARGIN" is 607 basis points.
"LOAN SUPPLEMENT" is attached as Exhibit C.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
"MATURITY DATE" is, with respect to each Equipment Advance, the last day
of the Repayment Period for such Equipment Advance, or if earlier, the date of
acceleration of such Equipment Advance by Bank following an Event of Default.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including cash management services,
letters of credit and foreign exchange contracts, if any and including interest
accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank.
"ORIGINAL STATED COST" is (I), the original cost to the Borrower of the
item of new Equipment net of any and all freight, installation, tax or (II) the
fair market value assigned to such item of used Equipment by mutual agreement of
Borrower and Bank at the time of making of the Equipment Advance.
"OTHER EQUIPMENT" is leasehold improvements, intangible property such as
computer software and software licenses, equipment specifically designed or
manufactured for Borrower, other intangible property, limited use property and
other similar property, and other soft costs. Unless otherwise agreed to by
Bank: not more than 25% of the Equipment financed with the proceeds of each
Equipment Advance shall consist of Other Equipment.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
<PAGE> 17
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority
over any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower or
its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired. If the Lien is confined to the
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business, if the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase;
(f) Liens arising from judgments, decrees or attachments in circumstances
not constituting an Event of Default under Section 8.4 or 8.7;
(g) Liens in favor of other financial institutions arising in connection
with Borrower's deposit accounts held at such institutions; and
(h) Other Liens not described above arising in the ordinary course of
business and not having or not reasonably likely to have a material adverse
effect on Borrower and its Subsidiaries taken as a whole.
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or government agency.
"REPAYMENT PERIOD," as to the Equipment Advances, is 48 months.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.
"TREASURY NOTE MATURITY" is 48 months.
17
<PAGE> 18
BORROWER:
COSINE COMMUNICATIONS, INC.
By: /s/ CURTIS DUDNICK
------------------------------------
Title: CFO
---------------------------------
BANK:
SILICON VALLEY BANK
By: /s/ TIMOTHY M. WALSH
------------------------------------
Title: VP
---------------------------------
18
<PAGE> 19
EXHIBIT A
The Collateral consists of all of Borrower's right, title and interest in
and to the following:
Each item of equipment, or personal property financed with a "Equipment
Advance" pursuant to that certain Loan and Security Agreement, dated as of
September 30, 1999 (the "Loan Agreement") by and between Debtor and Secured
Party, including, without limitation, the property described in Annex A hereto,
whether now owned or hereafter acquired, together with all substitutions,
renewals or replacements of and additions, improvements, and accessions to any
and all of the foregoing, and all proceeds from sales, renewals, releases or
other dispositions thereof.
<PAGE> 20
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
--------------------------
FAX#: (408) 496-2426 TIME:
--------------------------
FROM: COSINE COMMUNICATIONS, INC.
--------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
----------------------------------------------------------
PHONE NUMBER:
------------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
--------------------- ------------------------------
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $
--------------------------------------
PRINCIPAL PAYMENT (ONLY) $
--------------------------------------
INTEREST PAYMENT (ONLY) $
--------------------------------------
PRINCIPAL AND INTEREST (PAYMENT) $
--------------------------------------
OTHER INSTRUCTIONS:
------------------------------------------------------------
- -------------------------------------------------------------------------------
All Borrower's representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
telephone request for and Advance confirmed by this Borrowing Certificate; but
those representations and warranties expressly referring to another date shall
be true, correct and complete in all material respects as of that date.
- -------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- ------------------------------- --------------------------------
Authorized Requester Phone #
- ------------------------------- --------------------------------
Received By (Bank) Phone #
-------------------------------
Authorized Signature (Bank)
<PAGE> 21
EXHIBIT C
FORM OF LOAN AGREEMENT SUPPLEMENT
LOAN AGREEMENT SUPPLEMENT NO. []
LOAN AGREEMENT SUPPLEMENT [], dated ____________, 19__ ("Supplement"), to the
Loan and Security Agreement dated as of September 30, 1999 (the "Loan
Agreement) by and between the undersigned ("Borrower"), and Silicon Valley Bank
("Bank").
Capitalized terms used herein but not otherwise defined herein are used with
the respective meanings given to such terms in the Loan Agreement.
To secure the prompt payment by Borrower of all amounts from time to time
outstanding under the Loan Agreement, and the performance by Borrower of all the
terms contained in the Loan Agreement, Borrower grants Bank, a first priority
security interest in each item of equipment and other property described in
Annex A hereto, which equipment and other property shall be deemed to be
additional Financed Equipment and Collateral. The Loan Agreement is hereby
incorporated by reference herein and is hereby ratified, approved and confirmed.
Annex A (Equipment Schedule) and Annex B (Loan Terms Schedule) are attached
hereto.
The proceeds of the Loan should be transferred to Borrower's account with Bank
set forth below:
Bank Name: Silicon Valley Bank
Account No.: ___________________
Borrower hereby certifies that (a) the foregoing information is true and
correct and authorizes Bank to endorse in its respective books and records, the
Basic Rate applicable to the Funding Date of the Loan contemplated in this Loan
Agreement Supplement and the principal amount set forth in the Loan Terms
Schedule; (b) the representations and warranties made by Borrower in the Loan
Agreement are true and correct on the date hereof and will be true and correct
on such Funding Date in all material respects, except that any representation
and warranty made as a specified earlier date shall be true and correct as of
such earlier date. No Event of Default has occurred and is continuing under the
Loan Agreement. This Supplement may be executed by Borrower and Bank in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
This Supplement is delivered as of this day and year first above written.
SILICON VALLEY BANK COSINE COMMUNICATIONS, INC.
By: _________________________________ By: ____________________________________
Name: ___________________________ Name: __________________________________
Title: __________________________ Title: _________________________________
Annex A - Description of Financed Equipment
Annex B - Loan Terms Schedule
<PAGE> 22
Annex A to Exhibit C
The Financed Equipment being financed with the Equipment Advance which this
Loan Agreement Supplement is being executed is listed below. Upon the funding
of such Equipment Advance, this schedule automatically shall be deemed to be a
part of the Collateral.
2
<PAGE> 23
Annex B to Exhibit C
LOAN TERMS SCHEDULE # _________
Loan Funding Date: ________, 199___
Original Loan Amount: $ ___________
Basic Rate: _________%
Loan Factor: _________%
Scheduled Payment Dates and Amounts*:
One (1) payment of $__________ due _________________
_______ payment of $__________ due monthly in advance
from _______ through _______.
One (1) payment of $__________ due _________________
Maturity Date: ______________
<TABLE>
<CAPTION>
Payment No. Payment Date
<S> <C>
1
2
3
4
...
47
[48]
...
</TABLE>
*/ The amount of each Scheduled Payment will change as the Loan Amount
changes.
3
<PAGE> 24
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: COSINE COMMUNICATIONS, INC.
LOAN OFFICER: TIM WALSH
DATE: SEPTEMBER 30, 1999
<TABLE>
<S> <C>
Credit Report 35.00
UCC Search Fee 75.00
UCC Filing Fee 100.00
Documentation Fee 1,500.00
TOTAL FEE DUE $1,710.00
=========
</TABLE>
Please indicate the method of payment:
( ) A check for the total amount if attached.
( ) Debit DDA # ______________ for the total amount.
( ) Loan proceeds.
Borrower:
By: /s/ CURTIS DUDNICK
--------------------------------
(Authorized Signer)
/s/ TIMOTHY M. WALSH 10/25/99
- -----------------------------------
Silicon Valley Bank (Date)
Account Officer's Signature
<PAGE> 25
EXHIBIT C
FORM OF LOAN AGREEMENT SUPPLEMENT
LOAN AGREEMENT SUPPLEMENT NO. [ ]
LOAN AGREEMENT SUPPLEMENT No. (f). dated 10-28, 1999 ("Supplement"), to the Loan
and Security Agreement dated as of September 30, 1999 (the "Loan Agreement) by
and between the undersigned ("Borrower"), and Silicon Valley Bank ("Bank").
Capitalized terms used herein but not otherwise defined herein are used with
the respective meanings given to such terms in the Loan Agreement.
To secure the prompt payment by Borrower of all amounts from time to time
outstanding under the Loan Agreement, and the performance by Borrower of all the
terms contained in the Loan Agreement, Borrower grants Bank, a first priority
security interest in each item of equipment and other property described in
Annex A hereto, which equipment and other property shall be deemed to be
additional Financed Equipment and Collateral. The Loan Agreement is hereby
incorporated by reference herein and is hereby ratified, approved and confirmed.
Annex A (Equipment Schedule) and Annex B (Loan Terms Schedule) are attached
hereto.
The proceeds of the Loan should be transferred to Borrower's account with Bank
set forth below:
Bank Name: Silicon Valley Bank
Account No.:
-------------------
Borrower hereby certifies that (a) the foregoing information is true and
correct and authorizes Bank to endorse in its respective books and records, the
Basic Rate applicable to the Funding Date of the Loan contemplated in this Loan
Agreement Supplement and the principal amount set forth in the Loan Terms
Schedule; (b) the representations and warranties made by Borrower in the Loan
Agreement are true and correct on the date hereof and will be true and correct
on such Funding Date in all material respects, except that any representation
and warranty made as a specified earlier date shall be true and correct as of
such earlier date. No Event of Default has occurred and is continuing under the
Loan Agreement. This Supplement may be executed by Borrower and Bank in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
This Supplement is delivered as of this day and year first above written.
SILICON VALLEY BANK COSINE COMMUNICATIONS, INC.
By: /s/ TIMOTHY M. WALSH By: /s/ CURTIS DUDNICK
------------------------------- -----------------------------------
Name: Timothy M. Walsh Name: Curtis Dudnick
Title: VP Title: CFO
Annex A -- Description of Financed Equipment
Annex B -- Loan Terms Schedule
<PAGE> 1
EXHIBIT 10.14
BLDG: Westport 4
OWNER: 90
PROP: 904
UNIT: 1
TENANT: 90401
LEASE AGREEMENT
THIS LEASE, made this 26th day of May, 1998 between WESTPORT JOINT
VENTURE, a California general partnership, hereinafter called Landlord, and
COSINE COMMUNICATIONS, INC., a California corporation, hereinafter called
Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit "A,"
attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
All of that certain 48,384 +/- square foot, two-story building
located at 1200 Bridge Parkway, Redwood City, California 94065.
Said Premises is more particularly shown within the area outlined
in Red on Exhibit A attached hereto. The entire parcel, of which
the Premises is a part is shown within the area outlined in Green
on Exhibit A attached. The Premises shall be improved by Landlord
as shown on Exhibit B to be attached hereto, and is leased on an
"as-is" basis, in its present condition, and in the configuration
as shown in Red on Exhibit B to be attached hereto.
As used herein the Complex shall mean and include all of the land outlined in
Green and described in Exhibit "A," attached hereto, and all of the buildings,
common area private roads within the Complex, improvements, fixtures and
equipment now or hereafter situated on said land.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
office, light manufacturing, research and development, and storage and other
uses necessary for Tenant to conduct Tenant's business, provided that such uses
shall be in accordance with all applicable governmental laws and ordinances, and
for no other purpose. Tenant shall not do or permit to be done in or about the
Premises or the Complex nor bring or keep or permit to be brought or kept in or
about the Premises or the Complex anything which is prohibited by or will in any
way increase the existing rate of (or otherwise affect) fire or any insurance
covering the Complex or any part thereof, or any of its contents, or will cause
a cancellation of any insurance covering the Complex or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in, on or
about the Premises or the Complex which will in any way obstruct or interfere
with the rights of other tenants or occupants of the Complex or injure or annoy
them, or use or allow the Premises to be used for any improper, immoral,
unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit
any nuisance in, on or about the Premises or the Complex. No sale by auction
shall be permitted on the Premises. Tenant shall not place any loads upon the
floors, walls, or ceiling, which endanger the structure, or place any harmful
fluids or other materials in the drainage system of the building, or overload
existing electrical or other mechanical systems. No waste materials or refuse
shall be dumped upon or permitted to remain upon any part of the Premises or
outside of the building in which the Premises are a part, except in trash
containers placed inside exterior enclosures designated by Landlord for that
purpose or inside of the building proper where designated by Landlord. No
materials, supplies, equipment, finished products or semi-finished products, raw
materials or articles of any nature shall be stored upon or permitted to remain
outside the Premises or on any portion of common area of the Complex. No
loudspeaker or other device, system or apparatus which can be heard outside the
Premises shall be used in or at the Premises without the prior written consent
of Landlord. Tenant shall not commit or suffer to be committed any waste in or
upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless
against any loss, expense, damage, attorneys' fees, or liability arising out of
failure of Tenant to comply with any applicable law. Tenant shall comply with
any covenant, condition, or restriction ("CC&R's") affecting the Premises. The
provisions of this paragraph are for the benefit of Landlord only and shall not
be construed to be for the benefit of any tenant or occupant of the Complex.
2. TERM*
A. The term of this Lease shall be for a period of TWELVE (12) years
(unless sooner terminated as hereinafter provided) and, subject to Paragraphs
2(B) and 3, shall commence on the 1st day of August, 1998 and end on the 31st
day of July, 2010.
B. Possession of the Premises shall be deemed tendered and the term of
this Lease shall commence when the first of the following occurs:
(a) One day after a Certificate of Occupancy is granted by the
proper governmental agency, or, if the governmental agency having jurisdiction
over the area in which the Premises are situated does not issue certificates of
occupancy, then the same number of days after certification by Landlord's
architect or contractor that Landlord's construction work has been completed; or
(b) Upon the occupancy of the Premises by any of Tenant's
operating personnel; or
(c) When the Tenant Improvements have been substantially
completed for Tenant's use and occupancy, in accordance and compliance with
Exhibit B of this Lease Agreement; or
(d) As otherwise agreed in writing.
3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver possession
of said premises to Tenant at the commencement of the said term, as hereinbefore
specified, this Lease shall not be void or voidable; no obligation of Tenant
shall be affected thereby; nor shall Landlord or Landlord's agents be liable to
Tenant for any loss or damage resulting therefrom; but in that event the
commencement and termination dates of the Lease, and all other dates affected
thereby shall be revised to conform to the date of Landlord's delivery of
possession, as specified in Paragraph 2(b), above. The above is, however,
subject to the provision that the period of delay, of delivery of the Premises
shall not exceed 90 days from the commencement date herein (except those delays
caused by Acts of God, strikes, war, utilities, governmental bodies, weather,
unavailable materials, and delays beyond Landlord's control shall be excluded in
calculating such period) in which instance Tenant, at its option, may, by
written notice to Landlord, terminate this Lease.
- ----------
* It is agreed in the event said Lease commences on a date other than the first
day of the month the term of the Lease will be extended to account for the
number of days in the partial month. The Basic Rent during the resulting partial
month will be pro-rated (for the number of days in the partial month) at the
Basic Rent scheduled for the projected commencement date as shown in Paragraph
43.
Page 1 of 8
<PAGE> 2
4. RENT
A. Basic Rent. Tenant agrees to pay to Landlord at such place as
Landlord may designate without deduction, offset, prior notice, or demand, and
Landlord agrees to accept as Basic Rent for the leased Premises the total sum of
TWENTY THREE MILLION SEVEN HUNDRED FIFTY FOUR THOUSAND ONE HUNDRED TWENTY FOUR
AND 80/100 ($ 23,754,124.80 ) Dollars in lawful money of the United States of
America, payable as follows:
See Paragraph 43 for Basic Rent Schedule
B. Time for Payment. In the event that the term of this Lease commences
on a date other than the first day of a calendar month, on the date of
commencement of the term hereof Tenant shall pay to Landlord as rent for the
period from such date of commencement to the first day of the next succeeding
calendar month that proportion of the monthly rent hereunder which the number of
days between such date of commencement and the first day of the next succeeding
calendar month bears to thirty (30). In the event that the term of this Lease
for any reason ends on a date other than the last day of a calendar month, on
the first day of the last calendar month of the term hereof Tenant shall pay to
Landlord as rent for the period from said first day of said last calendar month
to and including the last day of the term hereof that proportion of the monthly
rent hereunder which the number of days between said first day of said last
calendar month and the last day of the term hereof bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if
Tenant is in default in the payment of rental as set forth in this Paragraph 4
when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the
delinquent rental due, a late charge for each rental payment in default ten (10)
days. Said late charge shall equal ten (10%) percent of each rental payment so
in default.
D. Additional Rent. Beginning with the commencement date of the term of
this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as
Additional Rent the following:
(a) Tenant's proportionate share of all Taxes relating to the
Complex as set forth in Paragraph 12, and
(b) Tenant's proportionate share of all insurance premiums relating
to the Complex, as set forth in Paragraph 15, and
(c) Tenant's proportionate share of expenses for the operation,
management, maintenance and repair of the Building (including
common areas of the Building) and Common Areas of the Complex in
which the Premises are located as set forth in Paragraph 7, and
(d) All charges, costs and expenses, which Tenant is required to pay
hereunder, together with all interest and penalties, costs and
expenses including attorneys' fees and legal expenses, that may
accrue thereto in the event of Tenant's failure to pay such
amounts, and all damages, reasonable costs and expenses which
Landlord may incur by reason of default of Tenant or failure on
Tenant's part to comply with the terms of this Lease. In the
event of nonpayment by Tenant of Additional Rent Landlord shall
have all the rights and remedies with respect thereto as
Landlord has for nonpayment of rent.
The Additional Rent due hereunder shall be paid to Landlord or
Landlord's agent (i) within five days for taxes and insurance and within thirty
days for all other Additional Rent items after presentation of invoice from
Landlord or Landlord's agent setting forth such Additional Rent and/or (ii) at
the option of Landlord, Tenant shall pay to Landlord monthly, in advance,
Tenant's prorata share of an amount estimated by Landlord to be Landlord's
approximate average monthly expenditure for such Additional Rent items, which
estimated amount shall be reconciled within 120 days of the end of each calendar
year or more frequently if Landlord so elects to do so at Landlord's sole and
absolute discretion, as compared to Landlord's actual expenditure for said
Additional Rent items, with Tenant paying to Landlord, upon demand, any amount
of actual expenses expended by Landlord in excess of said estimated amount, or
Landlord crediting to Tenant (providing Tenant is not in default in the
performance of any of the terms, covenants and conditions of this Lease) any
amount of estimated payments made by Tenant in excess of Landlord's actual
expenditures for said Additional Rent items.
The respective obligations of Landlord and Tenant under this paragraph
shall survive the expiration or other termination of the term of this Lease, and
if the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365.
See Paragraph 54
E. Fixed Management Fee. Beginning with the Commencement Date of the
Term of this Lease, Tenant shall pay, in addition to the Basic Rent and
Additional Rent, a fixed monthly management fee equal to 3% of the Basic Rent
due for each month during the Lease Term ("Management Fee"). For the period of
August 1, 1998 through July 31, 1999, the Management Fee shall be fixed at
$2,951.42 per month. The Management Fee shall be paid to A&P Property Management
Company at 2560 Mission College Blvd., Suite 101, Santa Clara, CA 95054.
F. Place of Payment of Rent and Additional Rent. All Basic Rent
hereunder and all payments hereunder for Additional Rent shall be paid to
Landlord at the office of Landlord at 2560 Mission College Blvd., Suite 101,
Santa Clara, CA 95054 or to such other person or to such other place as Landlord
may from time to time designate in writing.
G. *Security Deposit. Concurrently with Tenant's execution of this
Lease, Tenant shall deposit with Landlord the sum of FOUR HUNDRED ONE THOUSAND
FIVE HUNDRED EIGHTY SEVEN AND 20/100 ($ 401,587.20 ) Dollars. Said sum shall be
held by Landlord as a Security Deposit for the faithful performance by Tenant of
all of the terms, covenants, and conditions of this Lease to be kept and
performed by Tenant during the term hereof. If Tenant defaults with respect to
any provision of this Lease, including, but not limited to, the provisions
relating to the payment of rent and any of the monetary sums due herewith,
Landlord may (but shall not be required to) use, apply or retain all or any part
of this Security Deposit for the payment of any other amount which Landlord may
spend by reason of Tenant's default or to compensate Landlord for any other loss
or damage which Landlord may suffer by reason of Tenant's default. If any
portion of said Deposit is so used or applied, Tenant shall, within ten (10)
days after written demand therefor, deposit cash with Landlord in the amount
sufficient to restore the Security Deposit to its original amount. Tenant's
failure to do so shall be a material breach of this Lease. Landlord shall not be
required to keep this Security Deposit separate from its general funds, and
Tenant shall not be entitled to interest on such Deposit. If Tenant fully and
faithfully performs every provision of this Lease to be performed by it, the
Security Deposit or any balance thereof shall be returned to Tenant (or at
Landlord's option, to the last assignee of Tenant's interest hereunder) at the
expiration of the Lease term and after Tenant has vacated the Premises. In the
event of termination of Landlord's interest in this Lease, Landlord shall
transfer said Deposit to Landlord's successors in interest whereupon Tenant
agrees to release Landlord from liability for the return of such Deposit or the
accounting therefor.
5. RULES AND REGULATIONS AND COMMON AREA Subject to the terms and conditions of
this Lease and such Rules and Regulations as Landlord may from time to time
prescribe, Tenant and Tenant's employees, invitees and customers shall, in
common with other occupants of the Complex in which the Premises are located,
and their respective employees, invitees and customers, and others entitled to
the use thereof, have the non-exclusive right to use the access roads, parking
areas, and facilities provided and designated by Landlord for the general use
and convenience of the occupants of the Complex in which the Premises are
located, which areas and facilities are referred to herein as "Common Area."
This right shall terminate upon the termination of this Lease. Landlord reserves
the right from time to time to make changes in the shape, size, location, amount
and extent of Common Area. Landlord further reserves the right to promulgate
such reasonable rules and regulations relating to the use of the Common Area,
and any part or parts thereof, as Landlord may deem appropriate for the best
interests of the occupants of the Complex. The Rules and Regulations shall be
binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall
abide by them and cooperate in their observance. Such Rules and Regulations may
be amended by Landlord from time to time, with or without advance notice, and
all amendments shall be effective upon delivery of a copy to Tenant. Landlord
shall not be responsible to Tenant for the non-performance by any other tenant
or occupant of the Complex of any of said Rules and Regulations. Landlord shall
operate, manage and maintain the Common Area. The manner in which the Common
Area shall be maintained and the expenditures for such maintenance shall be at
the discretion of Landlord.
- ----------
* $200,793.60 Cash due upon Lease execution.
$200.793.60 Promissory Note due August 1, 1999.
Page 2 of 8
<PAGE> 3
6. PARKING Tenant shall have the right to use with other tenants or occupants of
the Complex 218 parking spaces in the common parking areas of the Complex.
Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or
invitees shall not use parking spaces in excess of said 218 spaces allocated to
Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion,
to specifically designate the location of Tenant's parking spaces within the
common parking areas of the Complex in the event of a dispute among the tenants
occupying the building and/or Complex referred to herein, in which event Tenant
agrees that Tenant, Tenant's employees, agents, representatives and/or invitees
shall not use any parking spaces other than those parking spaces specifically
designated by Landlord for Tenant's use. Said parking spaces, if specifically
designated by Landlord to Tenant, may be relocated by Landlord at any time, and
from time to time. Landlord reserves the right, at Landlord's sole discretion,
to rescind any specific designation of parking spaces, thereby returning
Tenant's parking spaces to the common parking area. Landlord shall give Tenant
written notice of any change in Tenant's parking spaces. Tenant shall not, at
any time, park, or permit to be parked, any trucks or vehicles adjacent to the
loading areas so as to interfere in any way with the use of such areas, nor
shall Tenant at any time park, or permit the parking of Tenant's trucks or other
vehicles or the trucks and vehicles of Tenant's suppliers or others, in any
portion of the common area not designated by Landlord for such use by Tenant.
Tenant shall not park nor permit to be parked, any inoperative vehicles or
equipment on any portion of the common parking area or other common areas of the
Complex. Tenant agrees to assume responsibility for compliance by its employees
with the parking provision contained herein. If Tenant or its employees park in
other than such designated parking areas, then Landlord may charge Tenant, as an
additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for
each day or partial day each such vehicle is parked in any area other than that
designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow
away from the Complex any vehicle belonging to Tenant or Tenant's employees
parked in violation of these provisions, or to attach violation stickers or
notices to such vehicles. Tenant shall use the parking areas for vehicle parking
only, and shall not use the parking areas for storage.
7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF THE
COMPLEX As Additional Rent and in accordance with Paragraph 4D of this Lease,
Tenant shall pay to Landlord Tenant's proportionate share (calculated on a
square footage or other equitable basis as calculated by Landlord) of all
expenses of operation, management, maintenance and repair of the Common Areas of
the Complex including, but not limited to, license, permit, and inspection fees;
security; utility charges associated with exterior landscaping and lighting
(including water and sewer charges); all charges incurred in the maintenance and
replacement of landscaped areas, private roads within the Complex and roads with
reciprocal easement areas; lakes, parking lots and paved areas (including
repairs, replacement, resealing and restriping), sidewalks, driveways;
maintenance, repair and replacement of all fixtures and electrical, mechanical,
and plumbing systems; structural elements and exterior surfaces of the
buildings; salaries and employee benefits of personnel and payroll taxes
applicable thereto; supplies, materials, equipment and tools; the cost of
capital expenditures which have the effect of reducing operating expenses,
provided, however, that in the event Landlord makes such capital improvements,
Landlord may amortize its investment in said improvements (together with
interest at the rate of fifteen (15%) percent per annum on the unamortized
balance) as an operating expense in accordance with standard accounting
practices, provided, that such amortization is not at a rate greater than the
anticipated savings in the operating expenses.
"Additional Rent" as used herein shall not include Landlord's debt
repayments; interest on charges; expenses directly or indirectly incurred by
Landlord for the benefit of any other tenant; cost for the installation of
partitioning or any other tenant improvements; cost of attracting tenants;
depreciation; interest, or executive salaries.
8. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder, Tenant accepts the
Premises as being in good and sanitary order, condition and repair and accepts
the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the condition
of such building or as to the use or occupancy which may be made thereof. Any
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner
termination of this Lease, to surrender the Premises promptly and peaceably to
Landlord in good condition and repair (damage by Acts of God, fire, normal wear
and tear excepted), with all interior walls painted, or cleaned so that they
appear freshly painted, and repaired and replaced, if damaged; all floors
cleaned and waxed; all carpets cleaned and shampooed; the air conditioning and
heating equipment serviced by a reputable and licensed service firm and in good
operating condition (provided the maintenance of such equipment has been
Tenant's responsibility during the term of this Lease) together with all
alterations, additions, and improvements which may have been made in, to, or on
the Premises (except movable trade fixtures installed at the expense of Tenant)
except that Tenant shall ascertain from Landlord within thirty (30) days before
the end of the term of this Lease whether Landlord desires to have the Premises
or any part or parts thereof restored to their condition and configuration as
when the Premises were delivered to Tenant and if Landlord shall so desire, then
Tenant shall restore said Premises or such part or parts thereof before the end
of this Lease at Tenant's sole cost and expense. Tenant, on or before the end of
the term or sooner termination of this Lease, shall remove all of Tenant's
personal property and trade fixtures from the Premises, and all property not so
removed on or before the end of the term or sooner termination of this Lease
shall be deemed abandoned by Tenant and title to same shall thereupon pass to
Landlord without compensation to Tenant. Landlord may, upon termination of this
Lease, remove all moveable furniture and equipment so abandoned by Tenant, at
Tenant's sole cost, and repair any damage caused by such removal at Tenant's
sole cost. If the Premises be not surrendered at the end of the term or sooner
termination of this Lease, Tenant shall indemnify Landlord against loss or
liability resulting from the delay by Tenant in so surrendering the Premises
including, without limitation, any claims made by any succeeding tenant founded
on such delay. Nothing contained herein shall be construed as an extension of
the term hereof or as a consent of Landlord to any holding over by Tenant. The
voluntary or other surrender of this Lease or the Premises by Tenant or a mutual
cancellation of this Lease shall not work as a merger and, at the option of
Landlord, shall either terminate all or any existing subleases or subtenancies
or operate as an assignment to Landlord of all or any such subleases or
subtenancies.
9. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord first had and obtained by Tenant, but at the cost of Tenant,
and any addition to, or alteration of, the Premises, except moveable furniture
and trade fixtures, shall at once become a part of the Premises and belong to
Landlord. Landlord reserves the right to approve all contractors and mechanics
proposed by Tenant to make such alterations and additions. Tenant shall retain
title to all moveable furniture and trade fixtures placed in the Premises. All
heating, lighting, electrical, air conditioning, floor to ceiling partitioning,
drapery, carpeting, and floor installations made by Tenant, together with all
property that has become an integral part of the Premises, shall not be deemed
trade fixtures. Tenant agrees that it will not proceed to make such alteration
or additions, without having obtained consent from Landlord to do so, and until
five (5) days from the receipt of such consent, in order that Landlord may post
appropriate notices to avoid any liability to contractors or material suppliers
for payment for Tenant's improvements. Tenant will at all times permit such
notices to be posted and to remain posted until the completion of work. Tenant
shall, if required by Landlord, secure at Tenant's own cost and expense, a
completion and lien indemnity bond, satisfactory to Landlord, for such work.
Tenant further covenants and agrees that any mechanic's lien filed against the
Premises or against the Complex for work claimed to have been done for, or
materials claimed to have been furnished to Tenant, will be discharged by
Tenant, by bond or otherwise, within ten (10) days after the filing thereof, at
the cost and expense of Tenant. Any exceptions to the foregoing must be made in
writing and executed by both Landlord and Tenant. Notwithstanding anything to
the contrary herein, under no circumstances shall Tenant be authorized to
penetrate the soil to a depth that exceeds three and one-half feet from the
uppermost surface of the soil.
10. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, and in good and sanitary condition. Tenant's
maintenance and repair responsibilities herein referred to include, but are not
limited to, all windows, window frames, plate glass, glazing, truck doors,
plumbing systems (such as water and drain lines, sinks, toilets, faucets,
drains, showers and water fountains), electrical systems (such as panels,
conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating
and air-conditioning systems (such as compressors, fans, air handlers, ducts,
mixing boxes, thermostats, time clocks, boilers, heaters, supply and return
grills), store fronts, roofs, downspouts, all interior improvements within the
premises including but not limited to wall coverings, window coverings, carpet,
floor coverings, partitioning, ceilings, doors (both interior and exterior,
including closing mechanisms, latches, locks, skylights (if any), automatic fire
extinguishing systems, and elevators and all other interior improvements of any
nature whatsoever. Tenant agrees to provide carpet shields under all rolling
chairs or to otherwise be responsible for wear and tear of the carpet caused by
such rolling chairs if such wear and tear exceeds that caused by normal foot
traffic in surrounding areas. Areas of excessive wear shall be replaced at
Tenant's sole expense upon Lease termination. Tenant hereby waives all rights
under, and benefits of, subsection 1 of Section 1932 and Section 1941 and 1942
of the California Civil Code and under any similar law, statute or ordinance now
or hereafter in effect.
11. UTILITIES Tenant shall pay promptly, as the same become due, all charges for
water, gas, electricity, telephone, telex and other electronic communications
service, sewer service, waste pick-up and any other utilities, materials or
services furnished directly to or used by Tenant on or about the Premises during
the term of this Lease, including, without limitation, any temporary or
permanent utility surcharge or other exactions whether or not hereinafter
imposed.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
12. TAXES A. As Additional Rent and in accordance with Paragraph 4D of this
Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real
Property Taxes, which prorata share shall be allocated to the leased Premises by
square footage or other equitable basis, as calculated by Landlord. The term
"Real Property Taxes," as used herein, shall mean (i) all taxes, assessments,
levies and other charges of any kind or nature whatsoever, general and special,
foreseen and unforeseen (including all installments of principal and interest
required to pay any general or special assessments for public improvements and
any increases resulting from reassessments caused by
Page 3 of 8
<PAGE> 4
any change in ownership of the Complex) now or hereafter imposed by any
governmental or quasi-governmental authority or special district having the
direct or indirect power to tax or levy assessments, which are levied or
assessed against, or with respect to the value, occupancy or use of, all or any
portion of the Complex (as now constructed or as may at any time hereafter be
constructed, altered, or otherwise changed) or Landlord's interest therein; any
improvements located within the Complex (regardless of ownership); the fixtures,
equipment and other property of Landlord, real or personal, that are an integral
part of and located in the Complex; or parking areas, public utilities, or
energy within the Complex; (ii) all charges, levies or fees imposed by reason of
environmental regulation or other governmental control of the Complex; and (iii)
all costs and fees (including attorneys' fees) incurred by Landlord in
contesting any Real Property Tax and in negotiating with public authorities as
to any Real Property Tax. If at any time during the term of this Lease the
taxation or assessment of the Complex prevailing as of the commencement date of
this Lease shall be altered so that in lieu of or in addition to any Real
Property Tax described above there shall be levied, assessed or imposed (whether
by reason of a change in the method of taxation or assessment, creation of a new
tax or charge, or any other cause) an alternate or additional tax or charge (i)
on the value, use or occupancy of the Complex or Landlord's interest therein or
(ii) on or measured by the gross receipts, income or rentals from the Complex,
on Landlord's business of leasing the Complex, or computed in any manner with
respect to the operation of the Complex, then any such tax or charge, however
designated, shall be included within the meaning of the term "Real Property
Taxes" for purposes of this Lease. If any Real Property Tax is based upon
property or rents unrelated to the Complex, then only that part of such real
Property Tax that is fairly allocable to the Complex shall be included within
the meaning of the term "Real Property Taxes." Notwithstanding the foregoing,
the term "Real Property Taxes" shall not include estate, inheritance, gift or
franchise taxes of Landlord or the federal or state net income tax imposed on
Landlord's income from all sources. The term "Real Estate Taxes" shall also
include supplemental taxes related to the period of Tenant's Lease Term
whenever levied, including any such taxes that may be levied after the Lease
Term has expired.
A. Taxes on Tenant's Property
(a) Tenant shall be liable for and shall pay ten days before
delinquency, taxes levied against any personal property or trade fixtures placed
by Tenant in or about the Premises. If any such taxes on Tenant's personal
property or trade fixtures are levied against Landlord or Landlord's property or
if the assessed value of the Premises is increased by the inclusion therein of a
value placed upon such personal property or trade fixtures of Tenant and if
Landlord, after written notice to Tenant, pays the taxes based on such increased
assessment, which Landlord shall have the right to do regardless of the validity
thereof, but only under proper protest if requested by Tenant, Tenant shall upon
demand, as the case may be, repay to Landlord the taxes so levied against
Landlord, or the proportion of such taxes resulting from such increase in the
assessment; provided that in any such event Tenant shall have the right, in the
name of Landlord and with Landlord's full cooperation, to bring suit in any
court of competent jurisdiction to recover the amount of any such taxes so paid
under protest, and any amount so recovered shall belong to Tenant.
(b) if the Tenant improvements in the Premises, whether
installed, and/or paid for by Landlord or Tenant and whether or not affixed to
the real property so as to become a part thereof, are assessed for real property
tax purposes at a valuation higher than the valuation at which standard office
improvements in other space in the Complex are assessed, then the real property
taxes and assessments levied against Landlord or the Complex by reason of such
excess assessed valuation shall be deemed to be taxes levied against personal
property of Tenant and shall be governed by the provisions of 12Ba above. If the
records of the County Assessor are available and sufficiently detailed to serve
as a basis for determining whether said Tenant improvements are assessed at a
higher valuation than standard office improvements in other space in the
Complex, such records shall be binding on both the Landlord and the Tenant. If
the records of the County Assessor are not available or sufficiently detailed to
serve as a basis for making said determination, the actual cost of construction
shall be used.
13. LIABILITY INSURANCE Tenant, at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability insurance
with a combined single limit coverage of not less than Two Million Dollars
($2,000,000) per occurrence for injuries to or death of persons occurring in, on
or about the Premises or the Complex, and property damage insurance with limits
of $500,000. The policy or policies affecting such insurance, certificates of
insurance of which shall be furnished to Landlord, shall name Landlord as
additional insureds, and shall insure any liability of Landlord, contingent or
otherwise, as respects acts or omissions of Tenant, its agents, employees or
invitees or otherwise by any conduct or transactions of any of said persons in
or about or concerning the Premises, including any failure of Tenant to observe
or perform any of its obligations hereunder; shall be issued by an insurance
company admitted to transact business in the State of California; and shall
provide that the insurance effected thereby shall not be canceled, except upon
thirty (30) days' prior written notice to Landlord. If, during the term of this
Lease, in the considered opinion of Landlord's Lender, insurance advisor, or
counsel, the amount of insurance described in this paragraph 13 is not adequate,
Tenant agrees to increase said coverage to such reasonable amount as Landlord's
Lender, insurance advisor, or counsel shall deem adequate.
14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE
Tenant shall maintain a policy or policies of fire and property damage insurance
in "all risk" form with a sprinkler leakage endorsement insuring the personal
property, inventory, trade fixtures, and leasehold improvements within the
leased Premises for the full replacement value thereof. The proceeds from any of
such policies shall be used for the repair or replacement of such items so
insured.
Tenant shall also maintain a policy or policies of workman's
compensation insurance and any other employee benefit insurance sufficient to
comply with all laws.
15. PROPERTY INSURANCE Landlord shall purchase and keep in force and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (calculated on a square footage or other equitable basis as
calculated by Landlord) of the deductibles on insurance claims and the cost of
policy or policies of insurance covering loss or damage to the Premises and
Complex in the amount of the full replacement value thereof, providing
protection against those perils included within the classification of "all
risks" insurance and flood and/or earthquake insurance, if available, plus a
policy of rental income insurance in the amount of one hundred (100%) percent of
twelve (12) months Basic Rent, plus sums paid as Additional Rent and any
deductibles related thereto. If such insurance cost is increased due to Tenant's
use of the Premises or the Complex, Tenant agrees to pay to Landlord the full
cost of such increase. Tenant shall have no interest in nor any right to the
proceeds of any insurance procured by Landlord for the Complex.
Landlord and Tenant do each hereby respectively release the other, to
the extent of insurance coverage of the releasing party, from any liability for
loss or damage caused by fire or any of the extended coverage casualties
included in the releasing party's insurance policies, irrespective of the cause
of such fire or casualty; provided, however, that if the insurance policy of
either releasing party prohibits such waiver, then this waiver shall not take
effect until consent to such waiver is obtained. If such waiver is so
prohibited, the insured party affected shall promptly notify the other party
thereof.
16. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises or the Complex by
or from any cause whatsoever, including, without limitation, gas, fire, oil,
electricity or leakage of any character from the roof, walls, basement or other
portion of the Premises or the Complex but excluding, however, willful
misconduct or negligence of Landlord, its agents, servants, employees, invitees,
or contractors of which negligence Landlord has knowledge and reasonable time to
correct. Except as to injury to persons or damage to property to the extent
arising from the willful misconduct or the negligence of Landlord, its agents,
servants, employees, invitees, or contractors, Tenant shall hold Landlord
harmless from and defend Landlord against any and all expenses, including
reasonable attorneys' fees, in connection therewith, arising out of any injury
to or death of any person or damage to or destruction of property occurring in,
on or about the Premises, or any part thereof, from any cause whatsoever.
17. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply with
all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of the
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction or the
admission of Tenant in any action against Tenant, whether Landlord be a party
thereto or not, that Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. This paragraph shall not
be interpreted as requiring Tenant to make structural changes or improvements,
except to the extent such changes or improvements are required as a result of
Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply
with any and all requirements pertaining to said Premises, of any insurance
organization or company, necessary for the maintenance of reasonable fire and
public liability insurance covering the Premises.
18. LIENS Tenant shall keep the Premises and the Complex free from any liens
arising out of any work performed, materials furnished or obligation incurred by
Tenant. In the event that Tenant shall not, within ten (10) days following the
imposition of such lien, cause the same to be released of record, Landlord shall
have, in addition to all other remedies provided herein and by law, the right,
but no obligation, to cause the same to be released by such means as it shall
deem proper, including payment of the claim giving rise to such lien. All sums
paid by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant on demand with interest at the
prime rate of interest as quoted by the Bank of America.
Page 4 of 8
<PAGE> 5
19. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer, or hypothecate
the leasehold estate under this Lease, or any interest therein, and shall not
sublet the Premises, or any part thereof, or any right or privilege appurtenant
thereto, or suffer any other person or entity to occupy or use the Premises, or
any portion thereof, without, in each case, the prior written consent of
Landlord which consent will not be unreasonably withheld. As a condition for
granting this consent to any assignment, transfer, or subletting, Landlord shall
require Tenant to pay to Landlord, as Additional Rent, all rents and/or
additional consideration due Tenant from its assignees, transferees, or
subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the
assigned, transferred and/or subleased space. Tenant shall, by thirty (30) days
written notice, advise Landlord of its intent to assign or transfer Tenant's
interest in the Lease or sublet the Premises or any portion thereof for any part
of the term hereof. Within thirty (30) days after receipt of said written
notice, Landlord may, in its sole discretion, elect to terminate this Lease as
to the portion of the Premises described in Tenant's notice on the date
specified in Tenant's notice by giving written notice of such election to
terminate. If no such notice to terminate is given to Tenant within said thirty
(30) day period, Tenant may proceed to locate an acceptable sublessee, assignee,
or other transferee for presentment to Landlord for Landlord's approval, all in
accordance with the terms, covenants, and conditions of this paragraph 19. If
Tenant intends to sublet the entire Premises and Landlord elects to terminate
this Lease, this Lease shall be terminated on the date specified in Tenant's
notice. If, however, this Lease shall terminate pursuant to the foregoing with
respect to less than all the Premises, the rent, as defined and reserved
hereinabove shall be adjusted on a pro rata basis to the number of square feet
retained by Tenant, and this Lease as so amended shall continue in full force
and effect. In the event Tenant is allowed to assign, transfer or sublet the
whole or any part of the Premises, with the prior written consent of Landlord,
no assignee, transferee or subtenant shall assign or transfer this Lease, either
in whole or in part, or sublet the whole or any part of the Premises, without
also having obtained the prior written consent of Landlord. A consent of
Landlord to one assignment, transfer, hypothecation, subletting, occupation or
use by any other person shall not release Tenant from any of Tenant's
obligations hereunder or be deemed to be a consent to any subsequent similar or
dissimilar assignment, transfer, hypothecation, subletting, occupation or use by
any other person. Any such assignment, transfer, hypothecation, subletting,
occupation or use without such consent shall be void and shall constitute a
breach of this Lease by Tenant and shall, at the option of Landlord exercised by
written notice to Tenant, terminate this Lease. The leasehold estate under this
Lease shall not, nor shall any interest therein, be assignable for any purpose
by operation of law without the written consent of Landlord. As a condition to
its consent, Landlord shall require Tenant to pay all expenses in connection
with the assignment, and Landlord shall require Tenant's assignee or transferee
(or other assignees or transferees) to assume in writing all of the obligations
under this Lease and for Tenant to remain liable to Landlord under the Lease.
Notwithstanding the above, in no event will Landlord consent to a sub-sublease.
20. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord,
Tenant shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease. Notwithstanding any such subordination, Tenant's possession under this
Lease shall not be disturbed if Tenant is not in default and so long as Tenant
shall pay all rent and observe and perform all of the provisions set forth in
this Lease.
21. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times after
at least 24 hours notice (except in emergencies) have, the right to enter the
Premises to inspect them; to perform any services to be provided by Landlord
hereunder; to submit the Premises to prospective purchasers, mortgagers or
tenants; to post notices of nonresponsibility; and to alter, improve or repair
the Premises and any portion of the Complex, all without abatement of rent; and
may erect scaffolding and other necessary structures in or through the Premises
where reasonably required by the character of the work to be performed;
provided, however that the business of Tenant shall be interfered with to the
least extent that is reasonably practical. For each of the foregoing purposes,
Landlord shall at all times have and retain a key with which to unlock all of
the doors in an emergency in order to obtain entry to the Premises, and any
entry to the Premises obtained by Landlord by any of said means, or otherwise,
shall not under any circumstances be construed or deemed to be a forcible or
unlawful entry into or a detainer of the Premises or an eviction, actual or
constructive, of Tenant from the Premises or any portion thereof. Landlord shall
also have the right at any time to change the arrangement or location of
entrances or passageways, doors and doorways, and corridors, elevators, stairs,
toilets or other public parts of the Complex and to change the name, number or
designation by which the Complex is commonly known, and none of the foregoing
shall be deemed an actual or constructive eviction of Tenant, or shall entitle
Tenant to any reduction of rent hereunder.
22. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired Lease, the trustee or
receiver shall notify Landlord in writing of its election within thirty (30)
days after an order for relief in a liquidation action or within thirty (30)
days after the commencement of any action.
Within thirty (30) days after court approval of the assumption of this
Lease, the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure) any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under said Lease to the reasonable satisfaction of Landlord.
Adequate assurance of future performance, as used herein, includes, but shall
not be limited to: (i) assurance of source and payment of rent, and other
consideration due under this Lease; (ii) assurance that the assumption or
assignment of this Lease will not breach substantially any provision, such as
radius, location, use, or exclusivity provision, in any agreement relating to
the above described Premises.
Nothing contained in this section shall affect the existing right of
Landlord to refuse to accept an assignment upon commencement of or in connection
with a bankruptcy, liquidation, reorganization or insolvency action or an
assignment of Tenant for the benefit of creditors or other similar act. Nothing
contained in this Lease shall be construed as giving or granting or creating an
equity in the demised Premises to Tenant. In no event shall the leasehold estate
under this Lease, or any interest therein, be assigned by voluntary or
involuntary bankruptcy proceeding without the prior written consent of Landlord.
In no event shall this Lease or any rights or privileges hereunder be an asset
of Tenant under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or
representation made under this Lease shall constitute a default hereunder by
Tenant upon expiration of the appropriate grace period hereinafter provided.
Tenant shall have a period of five (5) days from the date of written notice from
Landlord within which to cure any default in the payment of rental or adjustment
thereto. Tenant shall have a period of thirty (30) days from the date of written
notice from Landlord within which to cure any other default under this Lease;
provided, however, that if the nature of Tenant's failure is such that more than
thirty (30) days is reasonably required to cure the same, Tenant shall not be in
default so long as Tenant commences performance within such thirty (30) day
period and thereafter prosecutes the same to completion. Upon an uncured default
of this Lease by Tenant, Landlord shall have the following rights and remedies
in addition to any other rights or remedies available to Landlord at law or in
equity:
(a) The rights and remedies provided for by California Civil Code
Section 1951.2, including but not limited to, recovery of the worth at the time
of award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of rental loss for the same period
that Tenant proves could be reasonably avoided, as computed pursuant to
subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraph
(2) and (3) of Section 1951.2 of the California Civil Code of the amount of
rental loss that could be reasonably avoided shall be made in the following
manner: Landlord and Tenant shall each select a licensed real estate broker in
the business of renting property of the same type and use as the Premises and in
the same geographic vicinity. Such two real estate brokers shall select a third
licensed real estate broker, and the three licensed real estate brokers so
selected shall determine the amount of the rental loss that could be reasonably
avoided from the balance of the term of this Lease after the time of award. The
decision of the majority of said licensed real estate brokers shall be final and
binding upon the parties hereto.
(b) The rights and remedies provided by California Civil Code
Section which allows Landlord to continue the Lease in effect and to enforce all
of its rights and remedies under this Lease, including the right to recover rent
as it becomes due, for so long as Landlord does not terminate Tenant's right to
possession: acts of maintenance or preservation, efforts to relet the Premises,
or the appointment of a receiver upon Landlord's initiative to protect its
interest under this Lease shall not constitute a termination of Tenant's right
to possession.
(c) The right to terminate this Lease by giving notice to Tenant
in accordance with applicable law.
(d) To the extent permitted by law, the right and power to enter
the Premises and remove therefrom all persons and property, to store such
property in a public warehouse or elsewhere at the cost of and for the account
of Tenant, and to sell such property and apply such proceeds therefrom pursuant
to applicable California Law. Landlord may from time to time sublet the Premises
or any part thereof for such term or terms (which may extend beyond the term of
this Lease) and at such rent and such other terms as Landlord in its sole
discretion may deem advisable, with the right to make alterations and repairs to
the Premises. Upon each subletting, (i) Tenant shall be immediately liable to
pay Landlord, in addition to indebtedness other than rent due hereunder, the
cost of such subletting, including, but not limited to, reasonable attorneys'
fees, and any real estate commissions actually paid, and the cost of such
alterations and repairs incurred by Landlord and the amount, if any, by which
the rent hereunder for the period of such subletting (to the extent such period
does not exceed the term hereof) exceeds the amount to be paid as rent for the
Premises for such period or (ii) at the option of Landlord, rents received from
such subletting shall be applied first to payment of indebtedness other than
rent due hereunder from Tenant to Landlord; second, to the payment of any costs
of such subletting and of such alterations and repairs; third to payment of rent
due and unpaid hereunder; and the residue, if any, shall be held by Landlord and
applied in payment of future rent as the same becomes due hereunder. If Tenant
has been credited with any rent to be received by such subletting under option
(i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or
if such rentals received from such subletting under option (ii) during any month
be less than that to be paid during that month by Tenant hereunder, Tenant shall
pay any such deficiency to Landlord. Such deficiency shall be calculated and
paid monthly. No taking possession of the Premises by Landlord shall be
construed as an election on its part to terminate this Lease unless a written
notice of such
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intention be given to Tenant. Notwithstanding any such subletting without
termination, Landlord may at any time hereafter elect to terminate this Lease
for such previous breach.
(e) The right to have a receiver appointed for Tenant upon
application by Landlord, to take possession of the Premises and to apply any
rental collected from the Premises and to exercise all other rights and remedies
granted to Landlord (except that Tenant may vacate so long as it pays rent,
provides an on-site security guard during normal business hours from Monday
through Friday, and otherwise performs its obligations hereunder) pursuant to
subparagraph (d) above.
23. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease and if Tenant shall abandon, vacate or surrender
said Premises, or be dispossessed by the process of law, or otherwise, any
personal property belonging to Tenant and left on the Premises shall be deemed
to be abandoned, at the option of Landlord, except such property as may be
mortgaged to Landlord.
24. DESTRUCTION In the event the Premises are destroyed in whole or in part from
any cause, except for routine maintenance and repairs and incidental damage and
destruction caused from vandalism and accidents for which Tenant is responsible
for under Paragraph 10, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to
the damage or destruction, or
(b) Terminate this Lease (providing that the Premises is damaged
to the extent of 33-1/3% of the replacement cost).
If Landlord does not give Tenant notice in writing within thirty (30)
days from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense, promptly to rebuild or restore the Premises to the condition prior to
the damage or destruction. Tenant shall be entitled to a reduction in rent while
such repair is being made in the proportion that the area of the Premises
rendered untenantable by such damage bears to the total area of the Premises. If
Landlord initially estimates that the rebuilding or restoration will exceed 180
days or if Landlord does not complete the rebuilding or restoration within one
hundred eighty (180) days following the date of destruction (such period of time
to be extended for delays caused by the fault or neglect of Tenant or because of
Acts of God, acts of public agencies, labor disputes, strikes, fires, freight
embargoes, rainy or stormy weather, inability to obtain materials, supplies or
fuels, acts of contractors or subcontractors, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond the control of
Landlord), then Tenant shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Landlord. Notwithstanding anything
herein to the contrary, Landlord's obligation to rebuild or restore shall be
limited to the building and interior improvements constructed by Landlord as
they existed as of the commencement date of the Lease and shall not include
restoration of Tenant's trade fixtures, equipment, merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions,
this Lease shall remain in full force and effect. Tenant hereby expressly waives
the provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of
the California Civil Code.
In the event that the building in which the Premises are situated is
damaged or destroyed to the extent of not less than 33-1/3% of the replacement
cost thereof, Landlord may elect to terminate this Lease, whether the Premises
be injured or not. Notwithstanding anything to the contrary herein, Landlord may
terminate this Lease in the event of an uninsured event or if insurance proceeds
are insufficient to cover one hundred percent of the rebuilding costs net of the
deductible.
25. EMINENT DOMAIN If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or conveyance
in lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title vests in the condemnor, and Landlord
shall be entitled to any and all payment, income, rent, award, or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance, and Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this Lease. Notwithstanding the foregoing
paragraph, any compensation specifically awarded Tenant for loss of business,
Tenant's personal property, moving cost or loss of goodwill, shall be and remain
the property of Tenant.
If (i) any action or proceeding is commenced for such taking of the
Premises or any part thereof, or if Landlord is advised in writing by any entity
or body having the right or power of condemnation of its intention to condemn
the premises or any part thereof, or (ii) any of the foregoing events occur with
respect to the taking of any space in the Complex not leased hereby, or if any
such spaces so taken or conveyed in lieu of such taking and Landlord shall
decide to discontinue the use and operation of the Complex, or decide to
demolish, alter or rebuild the Complex, then, in any of such events Landlord
shall have the right to terminate this Lease by giving Tenant written notice
thereof within sixty (60) days of the date of receipt of said written advice, or
commencement of said action or proceeding, or taking conveyance, which
termination shall take place as of the first to occur of the last day of the
calendar month next following the month in which such notice is given or the
date on which title to the Premises shall vest in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if
the portion of the Premises taken or conveyed is so substantial that the Tenant
can no longer reasonably conduct its business, Tenant shall have the privilege
of terminating this Lease within sixty (60) days from the date of such taking or
conveyance, upon written notice to Landlord of its intention so to do, and upon
giving of such notice this Lease shall terminate on the last day of the calendar
month next following the month in which such notice is given, upon payment by
Tenant of the rent from the date of such taking or conveyance to the date of
termination.
If a portion of the Premises be taken by condemnation or conveyance in
lieu thereof and neither Landlord nor Tenant shall terminate this Lease as
provided herein, this Lease shall continue in full force and effect as to the
part of the Premises not so taken or conveyed, and the rent herein shall be
apportioned as of the date of such taking or conveyance so that thereafter the
rent to be paid by Tenant shall be in the ratio that the area of the portion of
the Premises not so taken or conveyed bears to the total area of the Premises
prior to such taking.
26. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the
Complex or any interest therein, by any owner of the reversion then constituting
Landlord, the transferor shall thereby be released from any further liability
upon any of the terms, covenants or conditions (express or implied) herein
contained in favor of Tenant, and in such event, insofar as such transfer is
concerned. Tenant agrees to look solely to the responsibility of the successor
in interest of such transferor in and to the Complex and this Lease. This Lease
shall not be affected by any such sale or conveyance, and Tenant agrees to
attorn to the successor in interest of such transferor.
27. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord in
the land and buildings in which the leased Premises are located (whether such
interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale, Tenant hereby agrees to attorn to the
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this Lease. In the event the lien of the deed of trust securing
the loan from a Lender to Landlord is prior and paramount to the Lease, this
Lease shall nonetheless continue in full force and effect for the remainder of
the unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
28. HOLDING OVER Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly provided
in this Lease. Any holding over after the expiration or other termination of the
term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent
required during the last month of the Lease term.
29. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten (10)
days' prior written notice to Landlord execute, acknowledge and deliver to
Landlord a statement in writing (i) certifying that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any, are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that this Lease is in full force and effect, without modification
except as may be represented by Landlord; that there are no uncured defaults in
Landlord's performance, and that not more than one month's rent has been paid in
advance.
30. CONSTRUCTION CHANGES It is understood that the description of the Premises
and the location of ductwork, plumbing and other facilities therein are subject
to such minor changes as Landlord or Landlord's architect determines to be
desirable in the course of construction of the Premises, and no such changes, or
any changes in plans for any other portions of the Complex shall affect this
Lease or entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any
drawings supplied to Tenant and verification of the accuracy of such drawings
rests with Tenant.
31. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid by
it hereunder and such failure shall continue for five (5) days after written
notice thereof by Landlord, or shall fail to perform any other term or covenant
hereunder on its part to be performed, and such failure shall continue for
thirty (30) days after written notice thereof by Landlord, Landlord, without
waiving or releasing Tenant from any obligation of Tenant hereunder, may, but
shall not be obligated to, make any such payment or perform
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any such other term or covenant on Tenant's part to be performed. All sums so
paid by Landlord and all necessary costs of such performance by Landlord
together with interest thereon at the rate of the prime rate of interest per
annum as quoted by the Bank of America from the date of such payment or
performance by Landlord, shall be paid (and Tenant covenants to make such
payment) to Landlord on demand by Landlord, and Landlord shall have (in addition
to any other right or remedy of Landlord) the same rights and remedies in the
event of nonpayment by Tenant as in the case of failure by Tenant in the payment
of rent hereunder.
32. ATTORNEYS' FEES.
(A) In the event that either Landlord or Tenant should bring suit for
the possession of the Premises, for the recovery of any sum due under this
Lease, or because of the breach of any provision of this Lease, or for any other
relief against the other party hereunder, then all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party therein shall be
paid by the other party, which obligation on the part of the other party shall
be deemed to have accrued on the date of the commencement of such action and
shall be enforceable whether or not the action is prosecuted to judgment.
(B) Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant
shall pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorney's fee.
33. WAIVER The waiver by either party of the other party's failure to perform or
observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any way
affect, the right of either party to insist upon performance and observance by
the other party in strict accordance with the terms hereof.
34. NOTICES All notices, demands, requests, advices or designations which may be
or are required to be given by either party to the other hereunder shall be in
writing. All notices, demands, requests, advices or designations by Landlord to
Tenant shall be sufficiently given, made or delivered if personally served on
Tenant by leaving the same at the Premises or if sent by United States certified
or registered mail, postage prepaid, addressed to Tenant at the Premises. All
notices, demands, requests, advices or designations by Tenant to Landlord shall
be sent by United States certified or registered mail, postage prepaid,
addressed to Landlord at its offices at 2560 Mission College Blvd., Suite 101,
Santa Clara, CA 95054. Each notice, request, demand, advice or designation
referred to in this paragraph shall be deemed received on the date of the
personal service or mailing thereof in the manner herein provided, as the case
may be.
35. EXAMINATION OF LEASE Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
36. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event earlier than thirty (30) days after written notice by Tenant to Landlord
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have heretofore been furnished to Tenant in
writing, specifying wherein Landlord has failed to perform such obligations;
provided, however, that if the nature of Landlord's obligations is such that
more than thirty (30) days are required for performance, then Landlord shall not
be in default if Landlord commences performance within such thirty (30) day
period and thereafter diligently prosecutes the same to completion.
37. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the
by-laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or partnership)
in accordance with its terms. If Tenant is a corporation, Tenant shall, within
thirty (30) days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease.
38. LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder,
Tenant and all successors and assigns covenant and agree that, in the event of
any actual or alleged failure, breach or default hereunder by Landlord:
(i) the sole and exclusive remedy shall be against Landlord's interest
in the Premises leased herein;
(ii) no partner of Landlord shall be sued or named as a party in any
suit or action (except as may be necessary to secure jurisdiction of the
partnership);
(iii) no service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the partnership);
(iv) no partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(v) no judgment will be taken against any partner of Landlord;
(vi) any judgment taken against any partner of Landlord may be vacated
and set aside at any time without hearing;
(vii) no writ of execution will ever be levied against the assets of any
partner of Landlord;
(viii) these covenants and agreements are enforceable both by Landlord
and also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall
be applicable to any covenant or agreement either expressly contained in this
Lease or imposed by statute or at common law.
39. MISCELLANEOUS AND GENERAL PROVISIONS
a. Tenant shall not, without the written consent of Landlord, use the
name of the building for any purpose other than as the address of the
business conducted by Tenant in the Premises.
b. This Lease shall in all respects be governed by and construed in
accordance with the laws of the State of California. If any provision of
this Lease shall be invalid, unenforceable or ineffective for any reason
whatsoever, all other provisions hereof shall be and remain in full
force and effect.
c. The term "Premises" includes the space leased hereby and any
improvements now or hereafter installed therein or attached thereto. The
term "Landlord" or any pronoun used in place thereof includes the plural
as well as the singular and the successors and assigns of Landlord. The
term "Tenant" or any pronoun used in place thereof includes the plural
as well as the singular and individuals, firms, associations,
partnerships and corporations, and their and each of their respective
heirs, executors, administrators, successors and permitted assigns,
according to the context hereof, and the provisions of this Lease shall
inure to the benefit of and bind such heirs, executors, administrators,
successors and permitted assigns.
The term "person" includes the plural as well as the singular and
individuals, firms, associations, partnerships and corporations. Words
used in any gender include other genders. If there be more than one
Tenant the obligations of Tenants hereunder are joint and several. The
paragraph headings of this Lease are for convenience of reference only
and shall have no effect upon the construction or interpretation of any
provision hereof.
d. Time is of the essence of this Lease and of each and all of its
provisions.
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e. At the expiration or earlier termination of this Lease, Tenant shall
execute, acknowledge and deliver to Landlord, within ten (10) days after
written demand from Landlord to Tenant, any quitclaim deed or other
document required by any reputable title company, licensed to operate in
the State of California, to remove the cloud or encumbrance created by
this Lease from the real property of which Tenant's Premises are a part.
f. This instrument along with any exhibits and attachments hereto
constitutes the entire agreement between Landlord and Tenant relative to
the Premises and this agreement and the exhibits and attachments may be
altered, amended or revoked only by an instrument in writing signed by
both Landlord and Tenant. Landlord and Tenant agree hereby that all
prior or contemporaneous oral agreements between and among themselves
and their agents or representatives relative to the leasing of the
Premises are merged in or revoked by this agreement.
g. Neither Landlord nor Tenant shall record this Lease or a short form
memorandum hereof without the consent of the other.
h. Tenant further agrees to execute any amendments required by a lender
to enable Landlord to obtain financing, so long as Tenant's rights
hereunder are not substantially affected.
i. Paragraphs 42 through 55 are added hereto and are included as a part
of this lease.
j. Clauses, plats and riders, if any, signed by Landlord and Tenant and
endorsed on or affixed to this Lease are a part hereof.
k. Tenant covenants and agrees that no diminution or shutting off of
light, air or view by any structure which may be hereafter erected
(whether or not by Landlord) shall in any way affect his Lease, entitle
Tenant to any reduction of rent hereunder or result in any liability of
Landlord to Tenant.
40. BROKERS Tenant warrants that it had dealings with only the following real
estate brokers or agents in connection with the negotiation of this Lease: none
and that it knows of no other real estate broker or agent who is entitled to a
commission in connection with this Lease.
41. SIGNS No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice without notice to
and at the expense of Tenant. If Tenant is allowed to print or affix or in any
way place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on outside doors shall be printed,
painted, affixed or inscribed at the expense of Tenant by a person approved of
by Landlord.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door partition or wall which may appear unsightly from
outside the Premises.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year last written below.
LANDLORD: TENANT:
WESTPORT JOINT VENTURE INC. COSINE COMMUNICATIONS,
a California general partnership a California corporation
JOHN ARRILLAGA SURVIVOR'S TRUST
By: /s/ JOHN ARRILLAGA By: /s/ CURTIS DUDNICK
-------------------------------- -----------------------------------
John Arrillaga, Trustee Curtis Dudnick, CFO
Date: 7/7/98 Date: 7/8/98
------------------------------ ----------------------------------
PEERY PRIVATE INVESTMENT
COMPANY-WP, L.P.,
a California limited partnership
By: /s/ RICHARD T. PEERY
-------------------------------------------
Richard T. Peery, Trustee of the Richard T.
Peery Separate Property Trust dated
7/20/77, as its General Partner
Date: 7/9/98
-----------------------------------------
PEERY PUBLIC INVESTMENT COMPANY-WP,
L.P., a California limited partnership
By: /s/ RICHARD T. PEERY
-------------------------------------------
Richard T. Peery, Trustee of the Richard T.
Peery Separate Property Trust dated
7/20/77, as its General Partner
Date: 7/9/98
-----------------------------------------
Page 8 of 8
<PAGE> 9
Paragraphs 42 through 55 to Lease Agreement dated May 26, 1998, By and
Between Westport Joint Venture, a California general partnership, as Landlord,
and COSINE COMMUNICATIONS, INC., a California corporation, as Tenant for 48,384+
Square Feet of Space Located at 1200 Bridge Parkway, Redwood City, California.
42. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum
of TWENTY THREE MILLION SEVEN HUNDRED FIFTY FOUR THOUSAND ONE HUNDRED TWENTY
FOUR AND 80/100 DOLLARS ($23,754,124.80), shall be payable as follows:
For the period August 1, 1998 through January 31, 1999 no Basic Rent
will be due; however, Tenant will be responsible for all Additional Rent
expenses as outlined in Paragraph 4D from the Commencement Date of the Lease.
Upon Tenant's execution of this Lease Agreement, the sum of SEVENTY
THREE THOUSAND SEVEN HUNDRED EIGHTY FIVE AND 60/100 DOLLARS ($73,785.60) shall
be due, representing the rental for the period February 1, 1999 through February
28, 1999.
On March 1, 1999, the sum of SEVENTY THREE THOUSAND SEVEN HUNDRED EIGHTY
FIVE AND 60/100 DOLLARS ($73,785.60) shall be due, and a like sum due on the
first day of each month thereafter, through and including July 1, 1999.
On August 1, 1999, the sum of ONE HUNDRED FIFTY TWO THOUSAND FOUR
HUNDRED NINE AND 60/100 DOLLARS ($152,409.60) shall be due, and a like sum due
on the first day of each month thereafter, through and including July 1, 2000.
On August 1, 2000, the sum of ONE HUNDRED FIFTY SEVEN THOUSAND TWO
HUNDRED FORTY EIGHT AND NO/100 DOLLARS ($157,248.00) shall be due, and a like
sum due on the first day of each month thereafter, through and including July 1,
2001.
On August 1, 2001, the sum of ONE HUNDRED SIXTY TWO THOUSAND EIGHTY SIX
AND 40/100 DOLLARS ($162,086.40) shall be due, and a like sum due on the first
day of each month thereafter, through and including July 1, 2002.
On August 1, 2002, the sum of ONE HUNDRED SIXTY SIX THOUSAND NINE
HUNDRED TWENTY FOUR AND 80/100 DOLLARS ($166,924.80) shall be due, and a like
sum due on the first day of each month thereafter, through and including July 1,
2003.
On August 1, 2003, the sum of ONE HUNDRED SEVENTY ONE THOUSAND SEVEN
HUNDRED SIXTY THREE AND 20/100 DOLLARS ($171,763.20) shall be due, and a like
sum due on the first day of each month thereafter, through and including July 1,
2004.
On August 1, 2004, the sum of ONE HUNDRED SEVENTY SIX THOUSAND SIX
HUNDRED ONE AND 60/100 DOLLARS ($176,601.60 shall be due, and a like sum due on
the first day of each month thereafter, through and including July 1, 2005.
On August 1, 2005, the sum of ONE HUNDRED EIGHTY ONE THOUSAND FOUR
HUNDRED FORTY AND NO/100 DOLLARS ($181,440.00) shall be due, and a like sum due
on the first day of each month thereafter, through and including July 1, 2006.
On August 1, 2006, the sum of ONE HUNDRED EIGHTY SIX THOUSAND TWO
HUNDRED SEVENTY EIGHT AND 40/100 DOLLARS ($186,278.40) shall be due, and a like
sum due on the first day of each month thereafter, through and including July 1,
2007.
On August 1, 2007, the sum of ONE HUNDRED NINETY ONE THOUSAND ONE
HUNDRED SIXTEEN AND 80/100 DOLLARS ($191,116.80) shall be due, and a like sum
due on the first day of each month thereafter, through and including July 1,
2008.
On August 1, 2008, the sum of ONE HUNDRED NINETY FIVE THOUSAND NINE
HUNDRED FIFTY FIVE AND 20/100 DOLLARS ($195,955.20) shall be due, and a like sum
due on the first day of each month thereafter, through and including July 1,
2009.
On August 1, 2009, the sum of TWO HUNDRED THOUSAND SEVEN HUNDRED
Page 9
<PAGE> 10
NINETY THREE AND 60/100 DOLLARS ($200,793.60) shall be due, and a like sum due
on the first day of each month thereafter, through and including July 1, 2010;
or until the entire aggregate sum of TWENTY THREE MILLION SEVEN HUNDRED FIFTY
FOUR THOUSAND ONE HUNDRED TWENTY FOUR AND 80/100 DOLLARS ($23,754,124.80) has
been paid.
43. "AS-IS" BASIS: Subject only to Paragraph 44 and to Landlord making the
improvements shown on Exhibit B to be attached hereto, it is hereby agreed that
the Premises leased hereunder is leased strictly on an "as-is" basis and in its
present condition, and in the configuration as shown on Exhibit B to be attached
hereto, and by reference made a part hereof. Except as noted herein, it is
specifically agreed between the parties that after Landlord makes the interior
improvements as shown on Exhibit B, Landlord shall not be required to make, nor
be responsible for any cost, in connection with any repair, restoration, and/or
improvement to the Premises in order for this Lease to commence, or thereafter,
throughout the Term of this Lease. Notwithstanding anything to the contrary
within this Lease, Landlord makes no warranty or representation of any kind or
nature whatsoever as to the condition or repair of the Premises, nor as to the
use or occupancy which may be made thereof.
44. TENANT INTERIOR IMPROVEMENTS: Landlord shall, at its sole cost and expense,
construct certain interior improvements (the "Tenant Improvements") in the
Premises, as shown on Exhibit B to be attached to the Lease and Landlord agrees
to deliver the Premises leased hereunder to Tenant, at Landlord's expense, in
the configuration shown in Red on Exhibit B to be attached hereto.
Notwithstanding anything to the contrary above, it is specifically understood
and agreed that Landlord shall be required to furnish only a standard air
conditioning/heating system, normal electrical outlets, standard fire sprinkler
systems, standard bathroom, standard lobby, 2' x 4' suspended acoustical tile
drop ceiling throughout the entire space leased, carpeting and/or vinyl-coated
floor tile, and standard office partitions and doors, as shown on Exhibit B to
be attached hereto; provided however, that any special HVAC and/or plumbing
and/or electrical requirements over and above that normally supplied by Landlord
shall be 100 percent the responsibility of and be paid for 100 percent by
Tenant.
Notwithstanding anything to the contrary, it is agreed that in the event Tenant
makes changes, additions, or modifications to the plans and specifications to be
constructed by Landlord as set forth herein, or improvements are installed for
Tenant in excess of those to be provided Tenant by Landlord as set forth on
Exhibit B, any increased cost(s) resulting from said changes, additions, and/or
modifications and/or improvements in excess of those to be provided Tenant shall
be contracted for with Landlord and paid for one hundred percent (100%) by
Tenant.
The interior shall be constructed in accordance with Exhibit B of the Lease, it
being agreed, however, that if the interior improvements constructed by Landlord
relating thereto, do not conform exactly to the plans and specifications as set
forth in the Lease, and the general appearance, structural integrity, and
Tenant's uses and occupancy of the Premises and interior improvements relating
thereto are not materially or unreasonably affected by such deviation, it is
agreed that the commencement date of the Lease, and Tenant's obligation to pay
rental, shall not be affected, and Tenant hereby agrees, in such event, to
accept the Premises and interior improvements as constructed by Landlord.
Tenant shall have thirty (30) days after the Commencement Date to provide
Landlord with a "punch list" pertaining to Landlord's work with respect to
Tenant's interior improvements. As soon as reasonably possible thereafter,
Landlord, or one of Landlord's representatives (if so approved by Landlord), and
Tenant shall conduct a joint walk-through of the Premises (if Landlord so
requires), and inspect such Tenant Improvements, using their best efforts to
agree on the incomplete or defective construction related to the Tenant
Improvements installed by Landlord. After such inspection has been completed,
Landlord shall prepare, and both parties shall sign, a list of all "punch list"
items which the parties reasonably agree are to be corrected by Landlord (but
which shall exclude any damage or defects caused by Tenant, its employees,
agents or parties Tenant has contracted with to work on the Premises). Landlord
shall have thirty (30) days thereafter (or longer if necessary, provided
Landlord is diligently pursuing the completion of the same) to complete, at
Landlord's expense, the repairs on the "punch list" without the Commencement
Date of the Lease and Tenant's obligation to pay Rental thereunder being
affected. This Paragraph shall be of no force and effect if Tenant shall fail to
give any such notice to Landlord within thirty (30) days after the Commencement
Date of this Lease.
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<PAGE> 11
45. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consent shall not be unreasonably withheld.
46. CHOICE OF LAW; SEVERABILITY. This Lease shall in all respects be governed by
and construed in accordance with the laws of the State of California. If any
provisions of this Lease shall be invalid, unenforceable, or ineffective for any
reason whatsoever, all other provisions hereof shall be and remain in full force
and effect.
47. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the terms, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
48. ASSESSMENT CREDITS: The demised property herein may be subject to a special
assessment levied by the City of Redwood City as part of an Improvement
District. As a part of said special assessment proceedings (if any), additional
bonds were or may be sold and assessments were or may be levied to provide for
construction contingencies and reserve funds. Interest shall be earned on such
funds created for contingencies and on reserve funds which will be credited for
the benefit of said assessment district. To the extent surpluses are created in
said district through unused contingency funds, interest earnings or reserve
funds, such surpluses shall be deemed the property of Landlord. Notwithstanding
that such surpluses may be credited on assessments otherwise due against the
Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the
time of any such credit of surpluses, an amount equal to all such surpluses so
credited. For example: if (i) the property is subject to an annual assessment of
$1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's
assessment which reduces the assessment amount shown on the property tax bill
from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord,
pay to Landlord said $200.00 credit as Additional Rent.
49. ASSIGNMENT AND SUBLETTING (CONTINUED):
A. In addition to and notwithstanding anything to the contrary in
Paragraph 19 of this Lease, Landlord hereby agrees to consent to Tenant's
assigning or subletting said Lease to any parent or subsidiary corporation
(including an assignment resulting from a merger and/or acquisition of Tenant),
provided that the net worth of said parent or subsidiary corporation of said
corporation has a net worth equal to or greater than the net worth of Tenant (a)
at the time of Lease execution or (b) at the time of such assignment (whichever
is greater). No such assignment or subletting will release Tenant from its
liabilities, obligations, and responsibilities under this Lease. Notwithstanding
the above, Tenant shall be required to (a) give Landlord written notice prior to
such assignment or subletting to any party as described above, (b) execute
Landlord's consent document prepared by Landlord reflecting the assignment or
subletting and (c) pay Landlord's costs for processing said Consent prior to the
effective date of said assignment or sublease.
B. Proposed Sublet Premises. Landlord hereby acknowledges that, during
the first year of the Lease Term, Tenant intends to sublease up to fifty percent
of the Leased Premises. Provided Tenant is not in default of this Lease,
Landlord agrees that it will not exercise its right, as provided for in
Paragraph 19, to terminate the Lease as a result of a request by Tenant to
sublease fifty percent or less of the Premises for a sublease term not to extend
beyond July 14, 1999. In such event, Landlord agrees to issue Landlord's
standard consent to said sublease, subject to (a) Tenant submitting to Landlord
a copy of said sublease (prior to said sublease commencing), (b) Landlord,
Tenant and Subtenant thereafter executing Landlord's standard Consent to
Sublease agreement and (c) Landlord receives payment from Tenant of Landlord's
costs for processing said Sublease Consent prior to said sublease commencing.
In addition to and notwithstanding anything to the contrary in Paragraph
19, Tenant shall be entitled to retain one hundred percent of any rents due
Tenant from a subtenant on the Proposed Sublet Premises in excess of the Rent
payable by Tenant to Landlord hereunder ("Excess Rent") during the period prior
to July 15, 1999.
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<PAGE> 12
C. Notwithstanding the foregoing, Landlord and Tenant agree that it
shall not be unreasonable for Landlord to refuse to consent to a proposed
assignment, sublease or other transfer ("Proposed Transfer") if the Premises or
any other portion of the Property would become subject to additional or
different Government Requirements as a direct or indirect consequence of the
Proposed Transfer and/or the Proposed Transferee's use and occupancy of the
Premises and the Property. However, Landlord may, in its sole discretion,
consent to such a Proposed Transfer where Landlord is indemnified by Tenant and
(i) Subtenant or (ii) Assignee, in form and substance satisfactory to Landlord's
counsel, by Tenant and/or the Proposed Transferee from and against any and all
costs, expenses, obligations and liability arising out of the Proposed Transfer
and/or the Proposed Transferee's use and occupancy of the Premises and the
Property.
D. Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to the
requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any
reason whatsoever, to terminate the Master Lease prior to the scheduled
Master Lease termination date, then this Sublease (if then still in
effect) shall terminate concurrently with the termination of the Master
Lease. Subtenant expressly acknowledges and agrees that (1) the
voluntary termination of the Master Lease by Landlord and Tenant and the
resulting termination of this Sublease shall not give Subtenant any
right or power to make any legal or equitable claim against Landlord,
including without limitation any claim for interference with contract or
interference with prospective economic advantage, and (2) Subtenant
hereby waives any and all rights it may have under law or at equity
against Landlord to challenge such an early termination of the Sublease,
and unconditionally releases and relieves Landlord, and its officers,
directors, employees and agents, from any and all claims, demands,
and/or causes of action whatsoever (collectively, "Claims"), whether
such matters are known or unknown, latent or apparent, suspected or
unsuspected, foreseeable or unforeseeable, which Subtenant may have
arising out of or in connection with any such early termination of this
Sublease. Subtenant knowingly and intentionally waives any and all
protection which is or may be given by Section 1542 of the California
Civil Code which provides as follows: "A general release does not extend
to claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known by him must
have materially affected his settlement with debtor.
The term of this Sublease is therefore subject to early
termination. Subtenant's initials here below evidence (a) Subtenant's
consideration of and agreement to this early termination provision, (b)
Subtenant's acknowledgment that, in determining the net benefits to be
derived by Subtenant under the terms of this Sublease, Subtenant has
anticipated the potential for early termination, and (c) Subtenant's
agreement to the general waiver and release of Claims above.
Initials: Initials: "
---------------- -------------
Subtenant Tenant
50. BANKRUPTCY AND DEFAULT: Paragraph 22 is modified to provide that with
respect to non-monetary defaults not involving Tenant's failure to pay Basic
Rent or Additional Rent, Tenant shall not be in default of any non-monetary
obligation if (i) more than thirty (30) days is required to cure such
non-monetary default, and (ii) Tenant commences cure of such default as soon as
reasonably practicable after receiving written notice of such default from
Landlord and thereafter continuously and with due diligence prosecutes such cure
to completion.
51. ABANDONMENT: Paragraph 23 is modified to provide that Tenant shall not be in
default under the Lease if it leaves all or any part of Premises vacant so long
as (i) Tenant is performing all of its other obligations under the Lease
including the obligation to pay Basic Rent and Additional Rent, (ii) Tenant
provides on-site security during normal business hours for those parts of the
Premises left vacant, (iii) such vacancy does not materially and adversely
affect the validity or coverage of any policy of insurance carried by Landlord
with respect to the Premises, and (iv) the utilities and heating and ventilation
system are operated and maintained to the extent necessary to prevent damage to
the Premises or its systems.
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52. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
the existence or use of "Hazardous Materials" (as defined herein) on, in, under
or about the Premises and real property located beneath said Premises and the
common areas of the Complex (hereinafter collectively referred to as the
"Property"):
A. As used herein, the term "Hazardous Materials" shall mean any
material, waste, chemical, mixture or byproduct which is or hereafter is
defined, listed or designated under Environmental Laws (defined below) as a
pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or
material, or any other unwholesome, hazardous, toxic, biohazardous, or
radioactive material, waste, chemical, mixture or byproduct, or which is listed,
regulated or restricted by any Environmental Law (including, without limitation,
petroleum hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental
Laws" shall mean any applicable Federal, State of California or local government
law (including common law), statute, regulation, rule, ordinance, permit,
license, order, requirement, agreement, or approval, or any determination,
judgment, directive, or order of any executive or judicial authority at any
level of Federal, State of California or local government (whether now existing
or subsequently adopted or promulgated) relating to pollution or the protection
of the environment, ecology, natural resources, or public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be withheld
in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Materials Activities (defined below); provided, however, that Landlord's consent
shall not be required for normal use in compliance with applicable Environmental
Laws of customary household and office supplies (Tenant shall first provide
Landlord with a list of said materials use), such as mild cleaners, lubricants
and copier toner. As used herein, the term "Tenant's Hazardous Materials
Activities" shall mean any and all use, handling, generation, storage, disposal,
treatment, transportation, release, discharge, or emission of any Hazardous
Materials on, in, beneath, to, from, at or about the Property, in connection
with Tenant's use of the Property, or by Tenant or by any of Tenant's agents,
employees, contractors, vendors, invitees, visitors or its future subtenants or
assignees. Tenant agrees that any and all Tenant's Hazardous Materials
Activities shall be conducted in strict, full compliance with applicable
Environmental Laws at Tenant's expense, and shall not result in any
contamination of the Property or the environment. Tenant agrees to provide
Landlord with prompt written notice of any spill or release of Hazardous
Materials at the Property during the term of the Lease of which Tenant becomes
aware, and further agrees to provide Landlord with prompt written notice of any
violation of Environmental Laws in connection with Tenant's Hazardous Materials
Activities of which Tenant becomes aware. If Tenant's Hazardous Materials
Activities involve Hazardous Materials other than normal use of customary
household and office supplies, Tenant also agrees at Tenant's expense: (i) to
install such Hazardous Materials monitoring, storage and containment devices as
Landlord reasonably deems necessary (Landlord shall have no obligation to
evaluate the need for any such installation or to require any such
installation); (ii) provide Landlord with a written inventory of such Hazardous
Materials, including an update of same each year upon the anniversary date of
the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each
Anniversary Date, to retain a qualified environmental consultant, acceptable to
Landlord, to evaluate whether Tenant is in compliance with all applicable
Environmental Laws with respect to Tenant's Hazardous Materials Activities.
Tenant, at its expense, shall submit to Landlord a report from such
environmental consultant which discusses the environmental consultant's findings
within two (2) months of each Anniversary Date. Tenant, at its expense, shall
promptly undertake and complete any and all steps necessary, and in full
compliance with applicable Environmental Laws, to fully correct any and all
problems or deficiencies identified by the environmental consultant, and
promptly provide Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its
expense, shall (i) properly remove from the Property all Hazardous Materials
which come to be located at the Property in connection with Tenant's Hazardous
Materials Activities, and (ii) fully comply with and complete all facility
closure requirements of applicable Environmental Laws regarding Tenant's
Hazardous Materials Activities, including but not limited to (x) properly
restoring and repairing the Property to the extent damaged by such closure
activities, and (y) obtaining from the local Fire Department or other
appropriate governmental authority with jurisdiction a written concurrence that
closure has been completed in compliance with applicable Environmental Laws.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
such closure activities.
D. If Landlord, in its sole discretion, believes that the Property has
become contaminated as a result of Tenant's Hazardous Materials Activities,
Landlord in addition to any other rights it may have under this Lease or under
Environmental Laws or other laws, may enter
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<PAGE> 14
upon the Property and conduct inspection, sampling and analysis, including but
not limited to obtaining and analyzing samples of soil and groundwater, for the
purpose of determining the nature and extent of such contamination. Tenant shall
promptly reimburse Landlord for the costs of such an investigation, including
but not limited to reasonable attorneys' fees Landlord incurs with respect to
such investigation, that discloses Hazardous Materials contamination for which
Tenant is liable under this Lease. Except as may be required of Tenant by
applicable Environmental Laws, Tenant shall not perform any sampling, testing,
or drilling to identify the presence of any Hazardous Materials at the Property,
without Landlord's prior written consent which may be withheld in Landlord's
discretion. Tenant shall promptly provide Landlord with copies of any claims,
notices, work plans, data and reports prepared, received or submitted in
connection with any sampling, testing or drilling performed pursuant to the
preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to
Landlord, whose consent shall not unreasonably be withheld) and hold harmless
Landlord, its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and all claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but not
limited to reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's Hazardous
Materials Activities; (ii) any Hazardous Materials contamination caused by
Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any
obligation of Tenant under this Paragraph 53 (collectively, "Tenant's
Environmental Indemnification"). Tenant's Environmental Indemnification shall
include but is not limited to the obligation to promptly and fully reimburse
Landlord for losses in or reductions to rental income, and diminution in fair
market value of the Property. Tenant's Environmental Indemnification shall
further include but is not limited to the obligation to diligently and properly
implement to completion, at Tenant's expense, any and all environmental
investigation, removal, remediation, monitoring, reporting, closure activities,
or other environmental response action (collectively, "Response Actions").
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
Response Actions.
F. Landlord hereby informs Tenant, and Tenant hereby acknowledges, that
the Premises and adjacent properties overlie a former solid waste landfill site
commonly known as the Westport Landfill ("Former Landfill"). Landlord further
informs Tenant, and Tenant hereby acknowledges, that (i) prior testing has
detected the presence of low levels of certain volatile and semi-volatile
organic compounds and other contaminants in the groundwater, in the leachate
from the landfilled solid waste, and/or in certain surface waters of the
Property, as more fully described in Section 2.3.2 of the report entitled
"Revised Discharge Monitoring Plan, Westport Landfill Site, Redwood City,
California" prepared by Geomatrix Consultants, dated May 1996 ("Discharge
Plan"), (ii) methane gas is or may be generated by the landfilled solid waste
(item "i" immediately preceding and this item "ii" are hereafter collectively
referred to as the "Landfill Contamination"), and (iii) the Premises and the
Former Landfill are subject to the California Regional Water Quality Control
Board's ("Regional Board") Waste Discharge Requirements Order No. 94-181 (the
"Order"). The Order is attached hereto as Exhibit C. As evidenced by their
initials set forth immediately below, Tenant acknowledges that Landlord has
provided Tenant with copies of the environmental reports listed on Exhibit D,
and Tenant acknowledges that Tenant and Tenant's experts (if any) have had ample
opportunity to review such reports and that Tenant has satisfied itself as to
the environmental conditions of the Property and the suitability of such
conditions for Tenant's intended use of the Property.
Initial: /s/ CD Initial: /s/ JP
--------- ---------
Tenant Landlord
G. Landlord shall indemnify, defend, and hold harmless Tenant against
any and all claims asserted by third parties (excluding any agents, employees,
contractors, vendors, invitees, visitors, future subtenants and assignees of
Tenant, and excluding any other parties related to Tenant), including all
liabilities, judgments, damages, suits, orders, government directives, costs and
expenses in connection with such claims, which arise from (i) the Landfill
Contamination, or (ii) the Order, as may be amended ("Landlord's Environmental
Indemnity"); provided however that Landlord's Environmental Indemnity shall be
subject to the following limitations and conditions:
(1) Landlord's Environmental Indemnity shall not apply to any
economic or consequential damages suffered by Tenant, including
but not limited to loss of business or profits.
(2) Landlord's Environmental Indemnity shall not apply, without
limitation, to any
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releases caused by Tenant's Hazardous Materials Activities.
(3) Tenant acknowledges that Landlord must comply with the Order, as
may be amended, and with directives of government authorities
including the Regional Board, with respect to the Contamination
and the Former Landfill. Tenant further acknowledges that
groundwater monitoring wells, methane recovery wells and
equipment, and other environmental control devices are located
on and about the Premises and may be modified or added to during
the term of the Lease (collectively, "Environmental Equipment"),
and that environmental investigation, monitoring, closure and
post-closure activities (collectively, "Environmental
Activities") will be performed on the Premises during the term
of the Lease. Tenant shall allow Landlord, and any other party
named as a discharger under the Order, as may be amended, and
their respective agents, consultants and contractors, and agents
of governmental environmental authorities with jurisdiction
("Government Representatives") to enter the Premises to access
the Environmental Equipment and to perform Environmental
Activities during the term of the Lease, provided that Tenant's
use and occupancy of the Premises shall not unreasonably be
disturbed.
(4) Tenant and Landlord shall reasonably cooperate with each other
regarding any Environmental Activities to be performed, and
regarding any Environmental Equipment to be installed,
maintained, or removed on the Premises during the term of the
Lease.
(5) Tenant shall be responsible at its expense for repairing any
Environmental Equipment damaged due to the negligence of Tenant
or Tenant's agents, employees, contractors, vendors, invitees,
visitors, future subtenants or assignees (such terms "invitees"
and "visitors" as used in this Paragraph 52 shall not include
Landlord or any other party named as a discharger under the
Order as may be amended, or any of their respective agents,
consultants or contractors, or any Government Representatives).
It is agreed that the Tenant's responsibilities related to Hazardous
Materials will survive the expiration or termination of this Lease and
that Landlord may obtain specific performance of Tenant's
responsibilities under this Paragraph 52.
53. ADDITIONAL RENT CONTINUED: The following items shall be excluded from
"Additional Rent":
A. Leasing commissions, attorney's fees, costs, disbursements, and other
expenses incurred in connection with negotiations with other tenants, or
disputes between Landlord and other tenants, or in connection with marketing,
leasing, renovating, or improving space for other current or prospective tenants
or other current or prospective occupants of the Complex; notwithstanding
anything to the contrary herein, any costs and expenses Landlord is entitled to
be reimbursed for as stated under Paragraph 22 ("Bankruptcy and Default") ARE
NOT excluded Additional Rent items as reflected in this Paragraph 53.
B. The cost of any service sold to any other tenant or other occupant
whose leased premises are not part of the Premises leased herein and for which
Landlord is entitled to be reimbursed as an additional charge or rental over and
above the basic rent and additional rent payable under the lease agreement with
said other tenant (including, without limitation, after-hours HVAC costs or
over-standard electrical consumption costs incurred by other tenants).
C. Any costs for which Landlord is entitled to be reimbursed by any
other tenant or other occupant whose leased premises are not part of the
Premises leased herein.
D. Any costs, fines, or penalties incurred due to violations by Landlord
of any governmental rule or authority, provided Tenant is not responsible under
the Lease for such costs, fines and/or penalties, and/or provided Tenant's
actions or inactions did not cause, in whole or in part, such costs, fines
and/or penalties.
E. Wages, salaries, or other compensation paid to executive employees
above the grade of Property Manager.
F. Repairs or other work occasioned by fire, windstorm, or other insured
peril, to the
Page 15
<PAGE> 16
extent that Landlord shall receive proceeds of such insurance or would have
received such proceeds had Landlord maintained the insurance coverage required
under this Lease providing said insurance coverage was available and Tenant paid
its share of the premium as required under the Lease (excluding any insurance
deductible(s) which Tenant is responsible for paying).
G. Except as otherwise noted in this Lease, any mortgage debt, or ground
rents or any other amounts payable under any ground lease for the Property or
any expense which Landlord is responsible for paying under said Lease or which
results from Landlord's willful misconduct or Landlord's negligence of which
negligence Landlord has received notice of and has reasonable time to correct.
H. Any amounts paid to any person, firm, or corporation related or
otherwise affiliated with Landlord or any general partner, officer, or director
of Landlord or any general partners, to the extent same exceeds arms-length
competitive prices paid in the Santa Clara, California metropolitan area for the
services or goods provided.
54. SUBORDINATION AND MORTGAGES: Paragraph 20 is modified to provide that,
provided Tenant is not in default in the terms of this Lease, this Lease shall
not be subordinate to a mortgage or deed of trust unless the Lender holding such
mortgage or deed of trust enters into a written subordination, non-disturbance
and attornment agreement in which the Lender agrees that notwithstanding any
subordination of this Lease to such Lender's mortgage or deed of trust, (i) such
Lender shall recognize all of Tenant's rights under this Lease, and (ii) in the
event of a foreclosure, this Lease shall not be terminated so long as Tenant is
not in default of its obligations under this Lease, but shall continue in effect
and Tenant and such Lender (or any party acquiring the Premises through such
foreclosure) shall each be bound to perform the respective obligations of Tenant
and Landlord with respect to the Premises arising after such foreclosure.
55. TAXES CONTINUED: Paragraph 12 ("Taxes") is modified by the following:
A. The amount of Real Property Taxes payable by Tenant hereunder shall
be prorated to reflect the dates of Lease Commencement and Lease Termination.
B. It is agreed that if any special assessments for capital improvements
are assessed, and if Landlord has the option to either pay the entire assessment
in cash or go to bond, and if Landlord elects to pay the entire assessment in
cash in lieu of going to bond, the entire portion of the assessment assigned to
Tenant's Leased Premises will be prorated over the same period that the
assessment would have been prorated had the assessment gone to bond.
Page 16
<PAGE> 1
EXHIBIT 10.15
AMENDMENT NO. 1
TO LEASE
THIS AMENDMENT NO. 1 is made and entered into this 9th day of September,
1999, by and between WESTPORT JOINT VENTURE, a California joint venture, as
LANDLORD, and COSINE COMMUNICATIONS, INC., A CALIFORNIA CORPORATION, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated May 26, 1998 Landlord leased to
Tenant all of that certain 48,384+ square foot building located at 1200 Bridge
Parkway, Redwood City, California, the details of which are more particularly
set forth in said May 26, 1998 Lease Agreement, and
B. WHEREAS, said Lease was amended by the Commencement Letter dated August
17, 1998 which confirmed the August 1, 1998 Lease Commencement Date and the July
31, 2010 Lease Termination Date, and,
C. WHEREAS, it is now the desire of the parties hereto to amend the Lease
by (i) extending the Term for one year and five months, changing the Termination
Date from July 31, 2010 to December 31, 2011, (ii) amending the Basic Rent
schedule and Aggregate Rent accordingly, (iii) increasing the Security Deposit
required under the Lease, (iv) amending Lease Paragraph 12 ("Taxes"), and (v)
adding paragraphs ("Co-Terminous") and ("Cross Default") to said Lease Agreement
as hereinafter set forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1. TERM OF LEASE: It is agreed between the parties that the Term of said
Lease Agreement shall be extended for an additional one (1) year five (5) month
period, and the Lease Termination Date shall be changed from July 31, 2010 to
December 31, 2011.
2. BASIC RENTAL FOR EXTENDED TERM OF LEASE: The monthly Basic Rental for
the Extended Term of Lease shall be as follows:
On August 1, 2010, the sum of TWO HUNDRED FIVE THOUSAND SIX HUNDRED THIRTY
TWO AND NO/100 DOLLARS ($205,632.00) shall be due, and a like sum due on the
first day of each month thereafter through and including July 1, 2011.
On August 1, 2011, the sum of TWO HUNDRED TEN THOUSAND FOUR HUNDRED
SEVENTY AND 40/100 DOLLARS ($210,470.40) shall be due, and a like sum due on the
first day of each month thereafter through and including December 1, 2011.
The Aggregate Basic Rent for the Lease shall be increased by $3,519,936.00
or from $23,754,124.80 to $27,274,060.80.
3. SECURITY DEPOSIT: Tenant's Security Deposit shall be increased by
$19,353.60, or from $401,587.20 to $420,940.80, payable upon Tenant's execution
of this Amendment No. 1.
4. TAXES: Lease paragraph 12 ("Taxes") shall be amended to include the
following language:
<PAGE> 2
"The term "Real Estate Taxes" shall also include supplemental
taxes related to the period of Tenant's Lease Term whenever levied,
including any such taxes that may be levied after the Lease Term has
expired".
5. LEASE TERMS CO-TERMINOUS: It is acknowledged that (i) concurrently
with the execution of this Amendment No. 1, Landlord and Tenant are also
executing a lease agreement dated September 20, 1999 (hereinafter referred to
as the "New Premises Lease") affecting property located at 3200 Bridge Parkway,
Redwood City, California and (ii) it is the intention of the parties that the
term of this Lease be co-terminous with the term of the New Premises Lease such
that the terms of both leases expire on the same date; provided, however, the
termination of this Lease resulting from the terms and conditions stated under
Paragraph 22 "Bankruptcy and Default" (subject to Landlord's option as stated
in the respective leases' "Cross Default" Paragraph) or Paragraph 24
"Destruction" or Paragraph 25 "Eminent Domain" shall not result in a
termination of the New Premises Lease, unless Landlord elects, at its sole
and absolute discretion, to terminate both of the leases.
5. CROSS DEFAULT: As a material part of the consideration for the
execution of the New Premises Lease by Landlord, it is agreed between Landlord
and tenant that a default under this Lease, or a default under said New
Premises Lease may, at the option of Landlord, be considered a default under
both leases, in which event Landlord shall be entitled (but in no event
required) to apply all rights and remedies of Landlord under the terms of one
lease to both leases including, but not limited to, the right to terminate one
or both of said leases by reason of a default under said New Premises Lease or
hereunder.
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions
of said Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment
No. to Lease as of the day and year last written below.
LANDLORD: TENANT:
WESTPORT JOINT VENTURE COSINE COMMUNICATIONS, INC.
A California joint venture a California corporation
JOHN ARRILLAGA SURVIVOR'S TRUST By /s/ CURTIS DUDNICK
--------------------------------
By /s/ JOHN ARRILLAGA Curtis Dudnick, CFO
---------------------------- --------------------------------
Print or Type Name/Title
Date: 9/28/99 Date: 9-24-99
------------------------ -----------------------------
PEERY PRIVATE INVESTMENT
COMPANY-WP, L.P.,
A California limited partnership
By /s/ RICHARD T. PEERY
----------------------------
Richard T. Peery, Trustee of the
Richard T. Peery Separate Property
Trust dated 7/20/77, as its General
Partner
Date: 9/27/99
----------------------
(Signatures Continued on Following Page)
<PAGE> 3
PEERY PUBLIC INVESTMENT
COMPANY-WP, L.P.,
A California limited partnership
By: /s/ RICHARD T. PEERY
-------------------------------------------
Richard T. Peery, Trustee of the
Richard T. Peery Separate Property
Trust dated 7/20/77, as its General Partner
Date: 9/27/99
-------
<PAGE> 1
EXHIBIT 10.16
BLDG: Westport 17
OWNER: 30
PROP: 117
UNIT: 1
TENANT: COS101
LEASE: 0117-COS101-01
LEASE AGREEMENT
THIS LEASE, made this 20th day of September, 1999 between WESTPORT JOINT
VENTURE, a California joint venture, hereinafter called Landlord, and COSINE
COMMUNICATIONS, INC., a California corporation, hereinafter called Tenant.
WITNESSETH:
Landlord hereby leases to Tenant and Tenant hereby hires and takes from
Landlord those certain premises (the "Premises") outlined in red on Exhibit "A,"
attached hereto and incorporated herein by this reference thereto more
particularly described as follows:
All of that certain 48,384+ square foot, two-story building
located at 3200 Bridge Parkway, Redwood City, California 94065.
Said Premises is more particularly shown within the area outlined
in Red on Exhibit A attached hereto. The entire parcel, of which
the Premises is a part, is shown within the area outlined in
Green on Exhibit A attached. The Premises shall be improved by
Landlord as shown on Exhibit B to be attached hereto, and is
leased on an "as-is" basis, in its present condition, and in the
configuration as shown in Red on Exhibit B to be attached hereto.
As used herein the Complex shall mean and include all of the land outlined in
Green and described in Exhibit "A," attached hereto, common area private roads
within the Complex, and all of the buildings, improvements, fixtures and
equipment now or hereafter situated on said land.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth and Tenant covenants as a material part of the
consideration for this Lease to perform and observe each and all of said terms,
covenants and conditions. This Lease is made upon the conditions of such
performance and observance.
1. USE Tenant shall use the Premises only in conformance with applicable
governmental laws, regulations, rules and ordinances for the purpose of general
office, light manufacturing, research and development, and storage and other
uses necessary for Tenant to conduct Tenant's business, provided that such uses
shall be in accordance with all applicable governmental laws and ordinances, and
for no other purpose. Tenant shall not do or permit to be done in or about the
Premises or the Complex nor bring or keep or permit to be brought or kept in or
about the Premises or the Complex anything which is prohibited by or will in any
way increase the existing rate of (or otherwise affect) fire or any insurance
covering the Complex or any part thereof, or any of its contents, or will cause
a cancellation of any insurance covering the Complex or any part thereof, or any
of its contents. Tenant shall not do or permit to be done anything in, on or
about the Premises or the Complex which will in any way obstruct or interfere
with the rights of other tenants or occupants of the Complex or injure or annoy
them, or use or allow the Premises to be used for any improper, immoral,
unlawful or objectionable purposes, nor shall Tenant cause, maintain or permit
any nuisance in, on or about the Premises or the Complex. No sale by auction
shall be permitted on the Premises. Tenant shall not place any loads upon the
floors, walls, or ceiling, which endanger the structure, or place any harmful
fluids or other materials in the drainage system of the building, or overload
existing electrical or other mechanical systems. No waste materials or refuse
shall be dumped upon or permitted to remain upon any part of the Premises or
outside of the building in which the Premises are a part, except in trash
containers placed inside exterior enclosures designated by Landlord for that
purpose or inside of the building proper where designated by Landlord. No
materials, supplies, equipment, finished products or semi-finished products, raw
materials or articles of any nature shall be stored upon or permitted to remain
outside the Premises or on any portion of common area of the Complex. No
loudspeaker or other device, system or apparatus which can be heard outside the
Premises shall be used in or at the Premises without the prior written consent
of Landlord. Tenant shall not commit or suffer to be committed any waste in or
upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless
against any loss, expense, damage, attorneys' fees, or liability arising out of
failure of Tenant to comply with any applicable law. Tenant shall comply with
any covenant, condition, or restriction ("CC&R's") affecting the Premises. The
provisions of this paragraph are for the benefit of Landlord only and shall not
be construed to be for the benefit of any tenant or occupant of the Complex.
2. TERM*
A. The term of this Lease shall be for a period of TWELVE (12) years
(unless sooner terminated as hereinafter provided) and, subject to Paragraphs
2(B) and 3, shall commence on the 1st day of January, 2000 and end on the 31st
day of December, 2013.
B. Possession of the Premises shall be deemed tendered and the term of
this Lease shall commence when the first of the following occurs:
(a) One day after a Certificate of Occupancy is granted by the
proper governmental agency, or, if the governmental agency having jurisdiction
over the area in which the Premises are situated does not issue certificates of
occupancy, then the same number of days after certification of Landlord's
architect or contractor that Landlord's construction work has been completed; or
(b) Upon the occupancy of the Premises by any of Tenant's
operating personnel; or
(c) When the Tenant Improvements have been substantially
completed for Tenant's use and occupancy, in accordance and compliance with
Exhibit B of this Lease Agreement; or
(d) As otherwise agreed in writing.
3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver
possession of said premises to Tenant at the commencement of said term, as
hereinbefore specified, this Lease shall not be void or voidable; no obligation
of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be
liable to Tenant for any loss or damage resulting therefrom; but in that event
the commencement and termination dates of the Lease, and all other dates
affected thereby shall be revised to conform to the date of Landlord's delivery
of possession, as specified in Paragraph 2(b), above. The above is, however,
subject to the provision that the period of delay, of delivery of the Premises
shall not exceed 45 days from the commencement date herein (except those delays
caused by Acts of God, strikes, war, utilities, governmental bodies, weather,
unavailable materials, and delays beyond Landlord's control shall be excluded in
calculating such period) in which instance Tenant, at its option, may, by
written notice to Landlord, terminate this Lease.
- ----------
* It is agreed in the event said Lease commences on a date other than the first
day of the month the term of the Lease will be extended to account for the
number of days in the partial month. The Basic Rent during the resulting partial
month will be pro-rated (for the number of days in the partial month) at the
Basic Rent scheduled for the projected commencement date as shown in Paragraph
43.
Page 1 of 8
<PAGE> 2
4. RENT
A. Basic Rent. Tenant agrees to pay to Landlord at such place as
Landlord may designate without deduction, offset, prior notice, or demand, and
Landlord agrees to accept as Basic Rent for the leased Premises the total sum of
TWENTY EIGHT MILLION TWO HUNDRED SEVENTEEN THOUSAND FIVE HUNDRED FORTY EIGHT AND
80/100 ($28,217,548.80) Dollars in lawful money of the United States of America,
payable as follows:
See Paragraph 43 for Basic Rent Schedule
B. Time for Payment. In the event that the term of this Lease commences
on a date other than the first day of a calendar month, on the date of the
commencement of the term hereof Tenant shall pay to Landlord as rent for the
period from such date of commencement to the first day of the next succeeding
calendar month that proportion of the monthly rent hereunder which the number of
days between such date of commencement and the first day of the next succeeding
calendar month bears to thirty (30). In the event that the term of this Lease
for any reason ends on a date other than the last day of a calendar month, on
the first day of the last calendar month of the term hereof Tenant shall pay to
Landlord as rent for the period from said first day of said last calendar month
to and including the last day of the term hereof that proportion of the monthly
rent hereunder which the number of days between said first day of said last
calendar month and the last day of the term hereof bears to thirty (30).
C. Late Charge. Notwithstanding any other provision of this Lease, if
Tenant is in default in the payment of rental as set forth in this Paragraph 4
when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the
delinquent rental due, a late charge for each rental payment in default ten (10)
days. Said late charge shall equal ten (10%) percent of each rental payment so
in default.
D. Additional Rent. Beginning with the commencement date of the term of
this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as
Additional Rent the following:
(a) Tenant's proportionate share of all Taxes relating to the
Complex as set forth in Paragraph 12, and
(b) Tenant's proportionate share of all insurance premiums and
deductibles relating to the Complex, as set forth in Paragraph
15, and
(c) Tenant's proportionate share of expenses for the operation,
management, maintenance and repair of the Building (including
common areas of the Building) and Common Areas of the Complex in
which the Premises are located as set forth in Paragraph 7, and
(d) All charges, costs and expenses, which Tenant is required to pay
hereunder, together with all interest and penalties, costs and
expenses including attorneys' fees and legal expenses, that may
accrue thereto in the event of Tenant's failure to pay such
amounts, and all damages, reasonable costs and expenses which
Landlord may incur by reason of default of Tenant or failure on
Tenant's part to comply with the terms of this Lease. In the
event of nonpayment by Tenant of Additional Rent Landlord shall
have all the rights and remedies with respect thereto as
Landlord has for nonpayment of rent.
The Additional Rent due hereunder shall be paid to Landlord or
Landlord's agent (i) within five days for taxes and insurance and within thirty
days for all other Additional Rent items after presentation of invoice from
Landlord or Landlord's agent setting forth such Additional Rent and/or (ii) at
the option of Landlord. Tenant shall pay to Landlord monthly, in advance,
Tenant's pro rata share of an amount estimated by Landlord to be Landlord's
approximate average monthly expenditure for such Additional Rent items, which
estimated amount shall be reconciled within 120 days of the end of each calendar
year or more frequently if Landlord so elects to do so at Landlord's sole and
absolute discretion, as compared to Landlord's actual expenditure for said
Additional Rent items, with Tenant paying to Landlord, upon demand, any amount
of actual expenses expended by Landlord in excess of said estimated amount, or
Landlord crediting to Tenant (providing Tenant is not in default in the
performance of any of the terms, covenants and conditions of this Lease) any
amount of estimated payments made by Tenant in excess of Landlord's actual
expenditures for said Additional Rent items.
The respective obligations of Landlord and Tenant under this paragraph
shall survive the expiration or other termination of the term of this Lease, and
if the term hereof shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the term hereof expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365.
E. Fixed Management Fee. Beginning with the Commencement Date of the
Term of this Lease, Tenant shall pay, in addition to the Basic Rent and
Additional Rent, a fixed monthly management fee ("Management Fee") equal to two
percent (2%) of the Basic Rent due for each month during the Lease Term. Said
Management Fee shall be paid by Tenant to A&P Property Management Company at
2560 Mission College Blvd., Suite 101, Santa Clara, CA 95054.
F. Place of Payment of Rent and Additional Rent. All Basic Rent
hereunder and all payments hereunder for Additional Rent shall be paid to
Landlord at the office of Landlord at Westport Joint Venture, 2560 Mission
College Blvd., Suite 101, Santa Clara, CA 95054 or to such other person or to
such other place as Landlord may from time to time designate in writing.
G. *Security Deposit. Concurrently with Tenant's execution of this
Lease, Tenant shall deposit with Landlord the sum of FOUR HUNDRED FORTY FIVE
THOUSAND ONE HUNDRED THIRTY TWO AND 80/100 ($ 445,132.80 ) Dollars. Said sum
shall be held by Landlord as a Security Deposit for the faithful performance by
Tenant of all of the terms, covenants, and conditions of this Lease to be kept
and performed by Tenant during the term hereof. If Tenant defaults with respect
to any provision of this Lease, including, but not limited to, the provisions
relating to the payment of rent and any of the monetary sums due herewith,
Landlord may (but shall not be required to) use, apply or retain all or any part
of this Security Deposit for the payment of any other amount which Landlord may
spend by reason of Tenant's default or to compensate Landlord for any other loss
or damage which Landlord may suffer by reason of Tenant's default. If any
portion of said Deposit is so used or applied, Tenant shall, within ten (10)
days after written demand therefor, deposit cash with Landlord in the amount
sufficient to restore the Security Deposit to its original amount. Tenant's
failure to do so shall be a material breach of this Lease. Landlord shall not be
required to keep this Security Deposit separate from its general funds, and
Tenant shall not be entitled to interest on such Deposit. If Tenant fully and
faithfully performs every provision of this Lease to be performed by it, the
Security Deposit or any balance thereof shall be returned to Tenant (or at
Landlord's option, to the last assignee of Tenant's interest hereunder) at the
expiration of the Lease term and after Tenant has vacated the Premises. In the
event of termination of Landlord's interest in this Lease, Landlord shall
transfer said Deposit to Landlord's successors in interest whereupon Tenant
agrees to release Landlord from liability for the return of such Deposit or the
accounting therefor.
5. RULES AND REGULATIONS AND COMMON AREA Subject to the terms and conditions
of this Lease and such Rules and Regulations as Landlord may from time to time
prescribe, Tenant and Tenant's employees, invitees and customers shall, in
common with other occupants of the Complex in which the Premises are located,
and their respective employees, invitees and customers, and others entitled to
the use thereof, have the non-exclusive right to use the access roads, parking
areas, and facilities provided and designated by Landlord for the general use
and convenience of the occupants of the Complex in which the Premises are
located, which areas and facilities are referred to herein as "Common Area."
This right shall terminate upon the termination of this Lease. Landlord reserves
the right from time to time to make changes in the shape, size, location, amount
and extent of Common Area. Landlord further reserves the right to promulgate
such reasonable rules and regulations relating to the use of the Common Area,
and any part or parts thereof, as Landlord may deem appropriate for the best
interests of the occupants of the Complex. The Rules and Regulations shall be
binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall
abide by them and cooperate in their observance. Such Rules and Regulations may
be amended by Landlord from time to time, with or without advance notice, and
all amendments shall be effective upon delivery of a copy to Tenant. Landlord
shall not be responsible to Tenant for the non-performance by any other tenant
or occupant of the Complex of any of said Rules and Regulations.
Landlord shall operate, manage and maintain the Common Area. The manner
in which the Common Area shall be maintained and the expenditures for such
maintenance shall be at the discretion of Landlord.
- ----------
* $222,566.40 Cash due upon Lease execution.
$222,566.40 Promissory Note due January 1, 1001.
Page 2 of 8
<PAGE> 3
6. PARKING Tenant shall have the right to use with other tenants or occupants of
the Complex 161 parking spaces in the common parking areas of the Complex.
Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or
invitees shall not use parking spaces in excess of said 161 spaces allocated to
Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion,
to specifically designate the location of Tenant's parking spaces within the
common parking areas of the Complex in the event of a dispute among the tenants
occupying the building and/or Complex referred to herein, in which event Tenant
agrees that Tenant, Tenant's employees, agents, representatives and/or invitees
shall not use any parking spaces other than those parking spaces specifically
designated by Landlord for Tenant's use. Said parking spaces, if specifically
designated by Landlord to Tenant, may be relocated by Landlord at any time, and
from time to time. Landlord reserves the right, at Landlord's sole discretion,
to rescind any specific designation of parking spaces, thereby returning
Tenant's parking spaces to the common parking area. Landlord shall give Tenant
written notice of any change in Tenant's parking spaces. Tenant shall not, at
any time, park, or permit to be parked, any trucks or vehicles adjacent to the
loading areas so as to interfere in any way with the use of such areas, nor
shall Tenant at any time park, or permit the parking of Tenant's trucks or other
vehicles or the trucks and vehicles of Tenant's suppliers or others, in any
portion of the common area not designated by Landlord for such use by Tenant.
Tenant shall not park nor permit to be parked, any inoperative vehicles or
equipment on any portion of the common parking area or other common areas of the
Complex. Tenant agrees to assume responsibility for compliance by its employees
with the parking provision contained herein. If Tenant or its employees park in
other than such designated parking areas, then Landlord may charge Tenant, as an
additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day or
partial day each such vehicle is parked in any area other than that designated.
Tenant hereby authorizes Landlord at Tenant's sole expense to tow away from the
Complex any vehicle belonging to Tenant or Tenant's employees parked in
violation of these provisions, or to attach violation stickers or notices to
such vehicles. Tenant shall use the parking areas for vehicle parking only, and
shall not use the parking areas for storage.
7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF THE
COMPLEX As Additional Rent and in accordance with Paragraph 4D of this Lease,
Tenant shall pay to Landlord Tenant's proportionate share (calculated on a
square footage or other equitable basis as calculated by Landlord) of all
expenses of operation, management, maintenance and repair of the Common Areas of
the Complex including, but not limited to, license, permit, and inspection fees;
security; utility charges associated with exterior landscaping and lighting
(including water and sewer charges); all charges incurred in the maintenance and
replacement of landscaped areas; private roads within the Complex and roads with
reciprocal easement areas; lakes, parking lots and paved areas (including
repairs, replacement, resealing and restriping), sidewalks, driveways;
maintenance, repair and replacement of all fixtures and electrical, mechanical,
and plumbing systems; structural elements and exterior surfaces of the
buildings; salaries and employee benefits of personnel and payroll taxes
applicable thereto; supplies, materials, equipment and tools; the cost of
capital expenditures which have the effect of reducing operating expenses,
provided, however, that in the event Landlord makes such capital improvements,
Landlord may amortize its investment in said improvements (together with
interest at the rate of fifteen (15%) percent per annum on the unamortized
balance) as an operating expense in accordance with standard accounting
practices, provided, that such amortization is not at a rate greater than the
anticipated savings in the operating expenses.
"Additional Rent" as used herein shall not include Landlord's debt
repayments; interest on charges; expenses directly or indirectly incurred by
Landlord for the benefit of any other tenant; cost for the installation of
partitioning or any other tenant improvements; cost of attracting tenants;
depreciation; interest, or executive salaries.
8. ACCEPTANCE AND SURRENDER OF PREMISES By entry hereunder, Tenant accepts the
Premises as being in good and sanitary order, condition and repair and accepts
the building and improvements included in the Premises in their present
condition and without representation or warranty by Landlord as to the condition
of such building or as to the use or occupancy which may be made thereof. Any
exceptions to the foregoing must be by written agreement executed by Landlord
and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner
termination of this Lease, to surrender the Premises promptly and peaceably to
Landlord in good condition and repair (damage by Acts of God, fire, normal wear
and tear excepted), with all interior walls painted, or cleaned so that they
appear freshly painted, and repaired and replaced, if damaged; all floors
cleaned and waxed; all carpets cleaned and shampooed; the air-conditioning and
heating equipment serviced by a reputable and licensed service firm and in good
operating condition (provided the maintenance of such equipment has been
Tenant's responsibility during the term of this Lease) together with all
alterations, additions, and improvements which may have been made in, to, or on
the Premises (except movable trade fixtures installed at the expense of Tenant)
except that Tenant shall ascertain from Landlord within thirty (30) days before
the end of the term of this Lease whether Landlord desires to have the Premises
or any part or parts thereof restored to their condition and configuration as
when the Premises were delivered to Tenant and if Landlord shall so desire, then
Tenant shall restore said Premises or such part or parts thereof before the end
of this Lease at Tenant's sole cost and expense. Tenant, on or before the end of
the term or sooner termination of this Lease, shall remove all of Tenant's
personal property and trade fixtures from the Premises, and all property not so
removed on or before the end of the term or sooner termination of this Lease
shall be deemed abandoned by Tenant and title to same shall thereupon pass to
Landlord without compensation to Tenant. Landlord may, upon termination of this
Lease, remove all moveable furniture and equipment so abandoned by Tenant, at
Tenant's sole cost, and repair any damage caused by such removal at Tenant's
sole cost. If the Premises be so not surrendered at the end of the term or
sooner termination of this Lease, Tenant shall indemnify Landlord against loss
or liability resulting from the delay by Tenant in so surrendering the Premises
including, without limitation, any claims made by any succeeding tenant founded
on such delay. Nothing contained herein shall be construed as an extension of
the term hereof or as a consent of Landlord to any holding over by Tenant. The
voluntary or other surrender of this Lease or the Premises by Tenant or a mutual
cancellation of this Lease shall not work as a merger and, at the option of
Landlord, shall either terminate all or any existing subleases or subtenancies
or operate as an assignment to Landlord of all or any such subleases or
subtenancies.
9. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any
alteration or addition to the Premises, or any part thereof, without the written
consent of Landlord first had and obtained by Tenant, but at the cost of Tenant,
and any addition to, or alteration of, the Premises, except moveable furniture
and trade fixtures, shall at once become a part of the Premises and belong to
Landlord. Landlord reserves the right to approve all contractors and mechanics
proposed by Tenant to make such alterations and additions. Tenant shall retain
title to all moveable furniture and trade fixtures placed in the Premises. All
heating, lighting, electrical, air-conditioning, floor to ceiling partitioning,
drapery, carpeting, and floor installations made by Tenant, together with all
property that has become an integral part of the Premises, shall not be deemed
trade fixtures. Tenant agrees that it will not proceed to make such alteration
or additions, without having obtained consent from Landlord to do so, and until
five (5) days from the receipt of such consent, in order that Landlord may post
appropriate notices to avoid any liability to contractors or material suppliers
for payment for Tenant's improvements. Tenant will at all times permit such
notices to be posted and to remain posted until the completion of work. Tenant
shall, if required by Landlord, secure at Tenant's own cost and expense, a
completion and lien indemnity bond, satisfactory to Landlord, for such work.
Tenant further covenants and agrees that any mechanic's lien filed against the
Premises or against the Complex for work claimed to have been done for, or
materials claimed to have been furnished to Tenant, will be discharged by
Tenant, by bond or otherwise, within ten (10) days after the filing thereof, at
the cost and expense of Tenant. Any exceptions to the foregoing must be made in
writing and executed by both Landlord and Tenant. Notwithstanding anything to
the contrary herein, under no circumstances shall tenant be authorized to
penetrate the soil to a depth that exceeds three and one-half feet from the
uppermost surface of the soil.
10. TENANT MAINTENANCE Tenant shall, at its sole cost and expense, keep and
maintain the Premises (including appurtenances) and every part thereof in a high
standard of maintenance and repair, and in good and sanitary condition. Tenant's
maintenance and repair responsibilities herein referred to include, but are not
limited to, all windows, window frames, plate glass, glazing, truck doors,
plumbing systems (such as water and drain lines, sinks, toilets, faucets,
drains, showers and water fountains), electrical systems (such as panels,
conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating
and air-conditioning systems (such as compressors, fans, air handlers, ducts,
mixing boxes, thermostats, time clocks, boilers, heaters, supply and return
grills), store fronts, roofs, downspouts, all interior improvements within the
premises including but not limited to wall coverings, window coverings, carpet,
floor coverings, partitioning, ceilings, doors (both interior and exterior,
including closing mechanisms, latches, locks, skylights (if any), automatic fire
extinguishing systems, and elevators and all other interior improvements of any
nature whatsoever. Tenant agrees to provide carpet shields under all rolling
chairs or to otherwise be responsible for wear and tear of the carpet caused by
such rolling chairs if such wear and tear exceeds that caused by normal foot
traffic in surrounding areas. Areas of excessive wear shall be replaced at
Tenant's sole expense upon Lease termination. Tenant hereby waives all rights
under, and benefits of, subsection 1 of Section 1932 and Section 1941 and 1942
of the California Civil Code and under any similar law, status or ordinance nor
or hereafter in effect.
11. UTILITIES Tenant shall pay promptly, as the same become due, all charges for
water, gas, electricity, telephone, telex and other electronic communications
service, sewer service, waste pick-up and any other utilities, materials or
services furnished directly to or used by Tenant on or about the Premises during
the term of this Lease, including, without limitation, any temporary or
permanent utility surcharge or other exactions whether or not hereinafter
imposed.
Landlord shall not be liable for and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any interruption or failure of
utility services to the Premises when such interruption or failure is caused by
accident, breakage, repair, strikes, lockouts, or other labor disturbances or
labor disputes of any nature, or by any other cause, similar or dissimilar,
beyond the reasonable control of Landlord.
12. TAXES A. As Additional Rent and in accordance with Paragraph 4D of this
Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real
Property Taxes, which pro rata share shall be allocated to the leased Premises
by square footage or other equitable basis, as calculated by Landlord. The term
"Real Property Taxes," as used herein, shall mean (i) all taxes, assessments,
levies and other charges of any kind or nature whatsoever, general and special,
foreseen and unforeseen (including all installments of principal and interest
required to pay any general or special assessments for public improvements and
any increases resulting from reassessments caused by
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<PAGE> 4
any change in ownership of the Complex) now or hereafter imposed by any
governmental or quasi-governmental authority or special district having the
direct or indirect power to tax or levy assessments, which are levied or
assessed against, or with respect to the value, occupancy or use of, all or any
portion of the Complex (as now constructed or as may at any time hereafter be
constructed, altered, or otherwise changed) or Landlord's interest therein; any
improvements located within the Complex (regardless of ownership); the fixtures,
equipment and other property of Landlord, real or personal, that are an integral
part of and located in the Complex; or parking areas, public utilities, or
energy within the Complex; (ii) all charges, levies or fees imposed by reason of
environmental regulation or other governmental control of the Complex; and (iii)
all costs and fees (including attorneys' fees) incurred by Landlord in
contesting any Real Property Tax and in negotiating with public authorities as
to any Real Property Tax. If at any time during the term of this Lease the
taxation or assessment of the Complex prevailing as of the commencement date of
this Lease shall be altered so that in lieu of or in addition to any Real
Property Tax described above there shall be levied, assessed or imposed (whether
by reason of a change in the method of taxation or assessment, creation of a new
tax or charge, or any other cause) an alternate or additional tax or charge (i)
on the value, use or occupancy of the Complex or Landlord's interest therein or
(ii) on or measured by the gross receipts, income or rentals from the Complex,
on Landlord's business of leasing the Complex, or computed in any manner with
respect to the operation of the Complex, then any such tax or charge, however
designated, shall be included within the meaning of the term "Real Property
Taxes" for purposes of this Lease. If any Real Property Tax is based upon
property or rents unrelated to the Complex, then only that part of such real
Property Tax that is fairly allocable to the Complex shall be included within
the meaning of the term "Real Property Taxes." Notwithstanding the foregoing,
the term "Real Property Taxes" shall not include estate, inheritance, gift or
franchise taxes of Landlord or the federal or state net income tax imposed on
Landlord's income from all sources. The term "Real Estate Taxes" shall also
include supplemental taxes related to the period of Tenant's Lease Term whenever
levied, including any such taxes that may be levied after the Lease Term has
expired.
A. Taxes on Tenant's Property
(a) Tenant shall be liable for and shall pay ten days before
delinquency, taxes levied against any personal property or trade fixtures placed
by Tenant in or about the Premises. If any such taxes on Tenant's personal
property or trade fixtures are levied against Landlord or Landlord's property or
if the assessed value of the Premises is increased by the inclusion therein of a
value placed upon such personal property or trade fixtures of Tenant and if
Landlord, after written notice to Tenant, pays the taxes based on such increased
assessment, which Landlord shall have the right to do regardless of the validity
thereof, but only under proper protest if requested by Tenant, Tenant shall upon
demand, as the case may be, repay to Landlord the taxes so levied against
Landlord, or the proportion of such taxes resulting from such increase in the
assessment; provided that in any such event Tenant shall have the right, in the
name of Landlord and with Landlord's full cooperation, to bring suit in any
court of competent jurisdiction to recover the amount of any such taxes so paid
under protest, and any amount so recovered shall belong to Tenant.
(b) If the Tenant improvements in the Premises, whether
installed, and/or paid for by Landlord or Tenant and whether or not affixed to
the real property so as to become a part thereof, are assessed for real property
tax purposes at a valuation higher than the valuation at which standard office
improvements in other space in the Complex are assessed, then the real property
taxes and assessments levied against Landlord or the Complex by reason of such
excess assessed valuation shall be deemed to be taxes levied against personal
property of Tenant and shall be governed by the provisions of 12Ba above. If the
records of the County Assessor are available and sufficiently detailed to serve
as a basis for determining whether said Tenant improvements are assessed at a
higher valuation than standard office improvements in other space in the
Complex, such records shall be binding on both the Landlord and the Tenant. If
the records of the County Assessor are not available or sufficiently detailed to
serve as a basis for making said determination, the actual cost of construction
shall be used.
13. LIABILITY INSURANCE Tenant, at Tenant's expense, agrees to keep in force
during the term of this Lease a policy of commercial general liability insurance
with a combined single limit coverage of not less than Two Million Dollars
($2,000,000) per occurrence for injuries to or death of persons occurring in, on
or about the Premises or the Complex, and property damage insurance with limits
of $500,000. The policy or policies affecting such insurance, certificates of
insurance of which shall be furnished to Landlord, shall name Landlord as
additional insureds, and shall insure any liability of Landlord, contingent or
otherwise, as respects acts or omissions of Tenant, its agents, employees or
invitees or otherwise by conduct or transactions of any of said persons in or
about or concerning the Premises, including any failure of Tenant to observe or
perform any of its obligations hereunder; shall be issued by an insurance
company admitted to transact business in the State of California; and shall
provide that the insurance effected thereby shall not be canceled, except upon
thirty (30) days' prior written notice to Landlord. If, during the term of this
Lease, in the considered opinion of Landlord's Lender, insurance advisor, or
counsel, the amount of insurance described in this paragraph 13 is not adequate,
Tenant agrees to increase said coverage to such reasonable amount as Landlord's
Lender, insurance advisor, or counsel shall deem adequate.
14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE
Tenant shall maintain a policy or policies of fire and property damage insurance
in "all risk" form with a sprinkler leakage endorsement insuring the personal
property, inventory, trade fixtures, and leasehold improvements within the
leased Premises for the full replacement value thereof. The proceeds from any of
such policies shall be used for the repair or replacement of such items so
insured.
Tenant shall also maintain a policy or policies of workman's
compensation insurance and any other employee benefit insurance sufficient to
comply with all laws.
15. PROPERTY INSURANCE Landlord shall purchase and keep in force and as
Additional Rent and in accordance with Paragraph 4D of this Lease. Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (calculated on a square footage or other equitable basis as
calculated by Landlord) of the deductibles on insurance claims and the cost of
policy or policies of insurance covering loss or damage to the Premises and
Complex in the amount of the full replacement value thereof, providing
protection against those perils included within the classification of "all
risks" insurance and flood and/or earthquake insurance, if available, plus a
policy of rental income insurance in the amount of one hundred (100%) percent of
twelve (12) months Basic Rent, plus sums paid as Additional Rent and any
deductibles related thereto. If such insurance cost is increased due to Tenant's
use of the Premises or the Complex, Tenant agrees to pay to Landlord the full
cost of such increase. Tenant shall have no interest in nor any right to the
proceeds of any insurance procured by Landlord for the Complex.
Landlord and Tenant do each hereby respectively release the other, to
the extent of insurance coverage of the releasing party, from any liability for
loss or damage caused by fire or any of the extended coverage casualties
included in the releasing party's insurance policies, irrespective of the cause
of such fire or casualty; provided, however, that if the insurance policy of
either releasing party prohibits such waiver, then this waiver shall not take
effect until consent to such waiver is obtained. If such waiver is so
prohibited, the insured party affected shall promptly notify the other party
thereof.
16. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby
waives all claims against Landlord for any injury to or death of any person or
damage to or destruction of property in or about the Premises or the Complex by
or from any cause whatsoever, including, without limitation, gas, fire, oil,
electricity or leakage of any character from the roof, walls, basement or other
portion of the Premises or the Complex but excluding, however, the willful
misconduct or negligence of Landlord, its agents, servants, employees, invitees,
or contractors of which negligence Landlord has knowledge and reasonable time to
correct. Except as to injury to persons or damage to property to the extent
arising from the willful misconduct or the negligence of Landlord, its agents,
servants, employees, invitees, or contractors, Tenant shall hold Landlord
harmless from and defend Landlord against any and all expenses, including
reasonable attorneys' fees, in connection therewith, arising out of any injury
to or death of any person or damage to or destruction of property occurring in,
on or about the Premises, or any part thereof, from any cause whatsoever.
17. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply with
all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of the
provisions if Tenant, immediately upon notification, commences to remedy or
rectify said failure. The judgment of any court of competent jurisdiction or the
admission of Tenant in any action against Tenant, whether Landlord be a party
thereto or not, that Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. This paragraph shall not
be interpreted as requiring Tenant to make structural changes or improvements,
except to the extent such changes or improvements are required as a result of
Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply
with any and all requirements pertaining to said Premises, of any insurance
organization or company, necessary for the maintenance of reasonable fire and
public liability insurance covering the Premises.
18. LIENS Tenant shall keep the Premises and the Complex free from any liens
arising out of any work performed, materials furnished or obligation incurred by
Tenant. In the event that Tenant shall not, within ten (10) days following the
imposition of such lien, cause the same to be released of record, Landlord shall
have, in addition to all other remedies provided herein and by law, the right,
but no obligation, to cause the same to be released by such means as it shall
deem proper, including payment of the claim giving rise to such lien. All sums
paid by Landlord for such purpose, and all expenses incurred by it in connection
therewith, shall be payable to Landlord by Tenant on demand with interest at the
prime rate of interest as quoted by the Bank of America.
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19. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer, or hypothecate
the leasehold estate under this Lease, or any interest herein, and shall not
sublet the Premises, or any part thereof, or any right or privilege appurtenant
thereto, or suffer any other person or entity to occupy or use the Premises, or
any portion thereof, without, in each case, the prior written consent of
Landlord which consent will not be unreasonably withheld. As a condition for
granting this consent to any assignment, transfer, or subletting, Landlord shall
require Tenant to pay to Landlord, as Additional Rent, all rents and/or
additional consideration due Tenant from its assignees, transferees, or
subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the
assigned, transferred and/or subleased space. Tenant shall, by thirty (30) days
written notice, advise Landlord of its intent to assign or transfer Tenant's
interest in the Lease or sublet the Premises or any portion thereof for any part
of the term hereof. Within thirty (30) days after receipt of said written
notice, Landlord may, in its sole discretion, elect to terminate this Lease as
to the portion of the Premises described in Tenant's notice on the date
specified in Tenant's notice by giving written notice of such election to
terminate. If no such notice to terminate is given to Tenant within said thirty
(30) day period, Tenant may proceed to locate an acceptable sublessee, assignee,
or other transferee for presentment to Landlord for Landlord's approval, all in
accordance with the terms, covenants, and conditions of this paragraph 19. If
Tenant intends to sublet the entire Premises and Landlord elects to terminate
this Lease, this Lease shall be terminated on the date specified in Tenant's
notice. If, however, this Lease shall terminate pursuant to the foregoing with
respect to less than all the Premises, the rent, as defined and reserved
hereinabove shall be adjusted on a pro rata basis to the number of square feet
retained by Tenant, and this Lease as so amended shall continue in full force
and effect. In the event Tenant is allowed to assign, transfer or sublet the
whole or any part of the Premises, with the prior written consent of Landlord,
no assignee, transferee or subtenant shall assign or transfer this Lease, either
in whole or in part, or sublet the whole or any part of the Premises, without
also having obtained the prior written consent of Landlord. A consent of
Landlord to one assignment, transfer, hypothecation, subletting, occupation or
use by any other person shall not release Tenant from any of Tenant's
obligations hereunder or be deemed to be a consent to any subsequent similar or
dissimilar assignment, transfer, hypothecation, subletting, occupation or use by
any other person. Any such assignment, transfer, hypothecation, subletting,
occupation or use without such consent shall be void and shall constitute a
breach of this Lease by Tenant and shall, at the option of Landlord exercised by
written notice to Tenant, terminate this Lease. The leasehold estate under this
Lease shall not, nor shall any interest therein, be assignable for any purpose
by operation of law without the written consent of Landlord. As a condition to
its consent, Landlord shall require Tenant to pay all expenses in connection
with the assignment, and Landlord shall require Tenant's assignee or transferee
(or other assignees or transferees) to assume in writing all of the obligations
under this Lease and for Tenant to remain liable to Landlord under the Lease.
Notwithstanding the above, in no event will Landlord consent to a sub-sublease.
20. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold
interest is now or hereafter encumbered by a deed of trust, upon the interest of
Landlord in the land and buildings in which the demised Premises are located, to
secure a loan from a lender (hereinafter referred to as "Lender") to Landlord,
Tenant shall, at the request of Landlord or Lender, execute in writing an
agreement subordinating its rights under this Lease to the lien of such deed of
trust, or, if so requested, agreeing that the lien of Lender's deed of trust
shall be or remain subject and subordinate to the rights of Tenant under this
Lease. Notwithstanding any such subordination, Tenant's possession under this
Lease shall not be disturbed if Tenant is not in default and so long as Tenant
shall pay all rent and observe and perform all of the provisions set forth in
this Lease.
21. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times after
at least 24 hours notice (except in emergencies) have, the right to enter the
Premises to inspect them; to perform any services to be provided by Landlord
hereunder; to submit the Premises to prospective purchasers, mortgagers or
tenants; to post notices of nonresponsibility; and to alter, improve or repair
the Premises and any portion of the Complex, all without abatement of rent; and
may erect scaffolding and other necessary structures in or through the Premises
where reasonably required by the character of the work to be performed;
provided, however that the business of Tenant shall be interfered with to the
least extent that is reasonably practical. For each of the foregoing purposes,
Landlord shall at all times have and retain a key with which to unlock all of
the doors in an emergency in order to obtain entry to the Premises, and any
entry to the Premises obtained by Landlord by any of said means, or otherwise,
shall not under any circumstances be construed or deemed to be a forcible or
unlawful entry into or a detainer of the Premises or an eviction, actual or
constructive, of Tenant from the Premises or any portion thereof. Landlord shall
also have the right at any time to change the arrangement or location of
entrances or passageways, doors and doorways, and corridors, elevators, stairs,
toilets or other public parts of the Complex and to change the name, number or
designation by which the Complex is commonly known, and none of the foregoing
shall be deemed an actual or constructive eviction of Tenant, or shall entitle
Tenant to any reduction of rent hereunder.
22. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or
liquidation action or reorganization action or insolvency action or an
assignment of or by Tenant for the benefit of creditors, or any similar action
undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option,
constitute a breach of this Lease by Tenant. If the trustee or receiver
appointed to serve during a bankruptcy, liquidation, reorganization, insolvency
or similar action elects to reject Tenant's unexpired Lease, the trustee or
receiver shall notify Landlord in writing of its election within thirty (30)
days after an order for relief in a liquidation action or within thirty (30)
days after the commencement of any action.
Within thirty (30) days after court approval of the assumption of this
Lease, the trustee or receiver shall cure (or provide adequate assurance to the
reasonable satisfaction of Landlord that the trustee or receiver shall cure) any
and all previous defaults under the unexpired Lease and shall compensate
Landlord for all actual pecuniary loss and shall provide adequate assurance of
future performance under said Lease to the reasonable satisfaction of Landlord.
Adequate assurance of future performance, as used herein, includes, but shall
not be limited to: (i) assurance of source and payment of rent, and other
consideration due under this Lease; (ii) assurance that the assumption or
assignment of this Lease will not breach substantially any provision, such as
radius, location, use, or exclusivity provision, in any agreement relating to
the above described Premises.
Nothing contained in this section shall affect the existing right of
Landlord to refuse to accept an assignment upon commencement of or in connection
with a bankruptcy, liquidation, reorganization or insolvency action or an
assignment of Tenant for the benefit of creditors or other similar act. Nothing
contained in this Lease shall be construed as giving or granting or creating an
equity in the demised Premises to Tenant. In no event shall the leasehold estate
under this Lease, or any interest therein, be assigned by voluntary or
involuntary bankruptcy proceeding without the prior written consent of Landlord.
In no event shall this Lease or any rights or privileges hereunder be an asset
of Tenant under any bankruptcy, insolvency or reorganization proceedings.
The failure to perform or honor any covenant, condition or
representation made under this Lease shall constitute a default hereunder by
Tenant upon expiration of the appropriate grace period hereinafter provided.
Tenant shall have a period of five (5) days from the date of written notice from
Landlord within which to cure any default in the payment of rental or adjustment
thereto. Tenant shall have a period of thirty (30) days from the date of written
notice from Landlord within which to cure any other default under this Lease;
provided, however, that if the nature of Tenant's failure is such that more than
thirty (30) days is reasonably required to cure the same, Tenant shall not be in
default so long as Tenant commences performance within such thirty (30) day
period and thereafter prosecutes the same to completion. Upon an uncured default
of this Lease by Tenant, Landlord shall have the following rights and remedies
in addition to any other rights or remedies available to Landlord at law or in
equity:
(a) The rights and remedies provided for by California Civil Code
Section 1951.2, including but not limited to, recovery of the worth at the time
of award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of rental loss for the same period
that Tenant proves could be reasonably avoided, as computed pursuant to
subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraph
(2) and (3) of Section 1951.2 of the California Civil Code of the amount of
rental loss that could be reasonably avoided shall be made in the following
manner: Landlord and Tenant shall each select a licensed real estate broker in
the business of renting property of the same type and use as the Premises and in
the same geographic vicinity. Such two real estate brokers shall select a third
licensed real estate broker, and the three licensed real estate brokers so
selected shall determine the amount of the rental loss that could be reasonably
avoided from the balance of the term of this Lease after the time of award. The
decision of the majority of said licensed real estate brokers shall be final and
binding upon the parties hereto.
(b) The rights and remedies provided by California Civil Code
Section which allows Landlord to continue the Lease in effect and to enforce all
of its rights and remedies under this Lease, including the right to recover rent
as it becomes due, for so long as Landlord does not terminate Tenant's right to
possession: acts of maintenance or preservation, efforts to relet the Premises,
or the appointment of a receiver upon Landlord's initiative to protect its
interest under this Lease shall not constitute a termination of Tenant's right
to possession.
(c) The right to terminate this Lease by giving notice to Tenant
in accordance with applicable law.
(d) To the extent permitted by law, the right and power to enter
the Premises and remove therefrom all persons and property, to store such
property in a public warehouse or elsewhere at the cost of and for the account
of Tenant, and to sell such property and apply such proceeds therefrom pursuant
to applicable California Law. Landlord may from time to time sublet the Premises
or any part thereof for such term or terms (which may extend beyond the term of
this Lease) and at such rent and such other terms as Landlord in its sole
discretion may deem advisable, with the right to make alterations and repairs to
the Premises. Upon each subletting, (i) Tenant shall be immediately liable to
pay Landlord, in addition to indebtedness other than rent due hereunder, the
cost of such subletting, including, but not limited to, reasonable attorneys'
fees, and any real estate commissions actually paid, and the cost of such
alterations and repairs incurred by Landlord and the amount, if any, by which
the rent hereunder for the period of such subletting (to the extent such period
does not exceed the term hereof) exceeds the amount to be paid as rent for the
Premises for such period or (ii) at the option of Landlord, rents received from
such subletting shall be applied first to payment of indebtedness other than
rent due hereunder from Tenant to Landlord; second, to the payment of any costs
of such subletting and of such alterations and repairs; third to payment of rent
due and unpaid hereunder; and the residue, if any, shall be held by Landlord and
applied in payment of future rent as the same becomes due hereunder. If Tenant
has been credited with any rent to be received by such subletting under option
(i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or
if such rentals received from such subletting under option (ii) during any month
be less than that to be paid during that month by Tenant hereunder, Tenant shall
pay any such deficiency to Landlord. Such deficiency shall be calculated and
paid monthly. No taking possession of the Premises by Landlord shall be
construed as an election on its part to terminate this Lease unless a written
notice of such
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intention be given to Tenant. Notwithstanding any such subletting without
termination, Landlord may at any time hereafter elect to terminate this Lease
for such previous breach.
(e) The right to have a receiver appointed for Tenant upon
application by Landlord, to take possession of the Premises and to apply any
rental collected from the Premises and to exercise all other rights and remedies
granted to Landlord above.
23. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time
during the term of this Lease and if Tenant shall abandon, vacate or surrender
said Premises, or be dispossessed by the process of law, or otherwise, any
personal property belonging to Tenant and left on the Premises shall be deemed
to be abandoned, at the option of Landlord, except such property as may be
mortgaged to Landlord.
24. DESTRUCTION In the event the Premises are destroyed in whole or in part from
any cause, except for routine maintenance and repairs and incidental damage and
destruction caused from vandalism and accidents for which Tenant is responsible
for under Paragraph 10, Landlord may, at its option:
(a) Rebuild or restore the Premises to their condition prior to
the damage or destruction, or
(b) Terminate this Lease (providing that the Premises is damaged
to the extent of 33-1/3% of the replacement cost).
If Landlord does not give Tenant notice in writing within thirty (30)
days from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense, promptly to rebuild or restore the Premises to the condition prior to
the damage or destruction. Tenant shall be entitled to a reduction in rent while
such repair is being made in the proportion that the area of the Premises
rendered untenantable by such damage bears to the total area of the Premises. If
Landlord initially estimates that the rebuilding or restoration will exceed 180
days or if Landlord does not complete the rebuilding or restoration within one
hundred eighty (180) days following the date of destruction (such period of time
to be extended for delays caused by the fault or neglect of Tenant or because of
Acts of God, acts of public agencies, labor disputes, strikes, fires, freight
embargoes, rainy or stormy weather, inability to obtain materials, supplies or
fuels, acts of contractors or subcontractors, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond the control of
Landlord), then Tenant shall have the right to terminate this Lease by giving
fifteen (15) days prior written notice to Landlord. Notwithstanding anything
herein to the contrary, Landlord's obligation to rebuild or restore shall be
limited to the building and interior improvements constructed by Landlord as
they existed as for the commencement date of the Lease and shall not include
restoration of Tenant's trade fixtures, equipment, merchandise, or any
improvements, alterations or additions made by Tenant to the Premises, which
Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense
provided this Lease is not cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions,
this Lease shall remain in full force and effect. Tenant hereby expressly waives
the provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision of
the California Civil Code.
In the event that the building in which the Premises are situated is
damaged or destroyed to the extent of not less than 33-1/3% of the replacement
cost thereof, Landlord may elect to terminate this Lease, whether the Premises
be injured or not. Notwithstanding anything to the contrary herein, Landlord may
terminate this Lease in the event of an uninsured event or if insurance proceeds
are insufficient to cover one hundred percent of the rebuilding costs net of the
deductible.
25. EMINENT DOMAIN If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or conveyance
in lieu thereof, this Lease shall terminate as to any portion of the Premises so
taken or conveyed on the date when title vests in the condemnor, and Landlord
shall be entitled to any and all payment, income, rent, award, or any interest
therein whatsoever which may be paid or made in connection with such taking or
conveyance, and Tenant shall have no claim against Landlord or otherwise for the
value of any unexpired term of this Lease. Notwithstanding the foregoing
paragraph, any compensation specifically awarded Tenant for loss of business,
Tenant's personal property, moving cost or loss of goodwill, shall be and remain
the property of Tenant.
If (i) any action or proceeding is commenced for such taking of the
Premises or any part thereof, or if Landlord is advised in writing by any entity
or body having the right or power of condemnation of its intention to condemn
the premises or any part thereof, or (ii) any of the foregoing events occur with
respect to the taking of any space in the Complex not leased hereby, or if any
such spaces so taken or conveyed in lieu of such taking and Landlord shall
decide to discontinue the use and operation of the Complex, or decide to
demolish, alter or rebuild the Complex, then, in any of such events Landlord
shall have the right to terminate this Lease by giving Tenant written notice
thereof within sixty (60) days of the date of receipt of said written advice, or
commencement of said action or proceeding, or taking conveyance, which
termination shall take place as of the first to occur of the last day of the
calendar month next following the month in which such notice is given or the
date on which title to the Premises shall vest in the condemnor.
In the event of such a partial taking or conveyance of the Premises, if
the portion of the Premises taken or conveyed is so substantial that the Tenant
can no longer reasonably conduct its business, Tenant shall have the privilege
of terminating this Lease within sixty (60) days from the date of such taking or
conveyance, upon written notice to Landlord of its intention so to do, and upon
giving of such notice this Lease shall terminate on the last day of the calendar
month next following the month in which such notice is given, upon payment by
Tenant of the rent from the date of such taking or conveyance to the date of
termination.
If a portion of the Premises be taken by condemnation or conveyance in
lieu thereof and neither Landlord nor Tenant shall terminate this Lease as
provided herein, this Lease shall continue in full force and effect as to the
part of the Premises not so taken or conveyed, and the rent herein shall be
apportioned as of the date of such taking or conveyance so that thereafter the
rent to be paid by Tenant shall be in the ratio that the area of the portion of
the Premises not so taken or conveyed bears to the total area of the Premises
prior to such taking.
26. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the
Complex or any interest therein, by any owner of the reversion then constituting
Landlord, the transferor shall thereby be released from any further liability
upon any of the terms, covenants or conditions (express or implied) herein
contained in favor of Tenant, and in such event, insofar as such transfer is
concerned. Tenant agrees to look solely to the responsibility of the successor
in interest of such transferor in and to the Complex and this Lease. This Lease
shall not be affected by any such sale or conveyance, and Tenant agrees to
attorn to the successor in interest of such transferor.
27. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord in
the land and buildings in which the leased Premises are located (whether such
interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by the lender or any
third party through judicial foreclosure or by exercise of a power of sale at
private trustee's foreclosure sale, Tenant hereby agrees to attorn to the
purchaser at any such foreclosure sale and to recognize such purchaser as the
Landlord under this Lease. In the event the lien of the deed of trust securing
the loan from a Lender to Landlord is prior and paramount to the Lease, this
Lease shall nonetheless continue in full force and effect for the remainder of
the unexpired term hereof, at the same rental herein reserved and upon all the
other terms, conditions and covenants herein contained.
28. HOLDING OVER Any holding over by Tenant after expiration or other
termination of the term of this Lease with the written consent of Landlord
delivered to Tenant shall not constitute a renewal or extension of the Lease or
give Tenant any rights in or to the leased Premises except as expressly provided
in this Lease. Any holding over after the expiration or other termination of the
term of this Lease, with the consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent
required during the last month of the Lease term.
29. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten (10)
days' prior written notice to Landlord execute, acknowledge and deliver to
Landlord a statement in writing (i) certifying that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any, are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that this Lease is in full force and effect, without modification
except as may be represented by Landlord; that there are no uncured defaults in
Landlord's performance, and that not more than one month's rent has been paid in
advance.
30. CONSTRUCTION CHANGES It is understood that the description of the Premises
and the location of ductwork, plumbing and other facilities therein are subject
to such minor changes as Landlord or Landlord's architect determines to be
desirable in the course of construction of the Premises, and no such changes, or
any changes in plans or any other portions of the Complex shall affect this
Lease or entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any
drawings supplied to Tenant and verification of the accuracy of such drawings
rests with Tenant.
31. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this
Lease to be performed or observed by Tenant shall be performed or observed by
Tenant at Tenant's sole cost and expense and without any reduction of rent. If
Tenant shall fail to pay any sum of money, or other rent, required to be paid by
it hereunder and such failure shall continue for five (5) days after written
notice thereof by Landlord, or shall fail to perform any other term or covenant
hereunder on its part to be performed, and such failure shall continue for
thirty (30) days after written notice thereof by Landlord, Landlord, without
waiving or releasing Tenant from any obligation of Tenant hereunder, may, but
shall not be obligated to, make any such payment or perform
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<PAGE> 7
any such other term or covenant on Tenant's part to be performed. All sums so
paid by Landlord and all necessary costs of such performance by Landlord
together with interest thereon at the rate of the prime rate of interest per
annum as quoted by the Bank of America from the date of such payment or
performance by Landlord, shall be paid (and Tenant covenants to make such
payment) to Landlord on demand by Landlord, and Landlord shall have (in addition
to any other right or remedy of Landlord) the same rights and remedies in the
event of nonpayment by Tenant as in the case of failure by Tenant in the payment
of rent hereunder.
32. ATTORNEYS' FEES
A. In the event that either Landlord or Tenant should bring suit for the
possession of the Premises, for the recovery of any sum due under this Lease, or
because of the breach of any provision of this Lease, or for any other relief
against the other party hereunder, then all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party therein shall be
paid by the other party, which obligation on the part of the other party shall
be deemed to have accrued on the date of the commencement of such action and
shall be enforceable whether or not the action is prosecuted to judgment.
B. Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant
shall pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorney's fee.
33. WAIVER The waiver by either party of the other party's failure to perform or
observe any term, covenant or condition herein contained to be performed or
observed by such waiving party shall not be deemed to be a waiver of such term,
covenant or condition or of any subsequent failure of the party failing to
perform or observe the same or any other such term, covenant or condition
therein contained, and no custom or practice which may develop between the
parties hereto during the term hereof shall be deemed a waiver of, or in any way
affect, the right of either party to insist upon performance and observance by
the other party in strict accordance with the terms hereof.
34. NOTICES All notices, demands, requests, advices or designations which may be
or are required to be given by either party to the other hereunder shall be in
writing. All notices, demands, requests, advices or designations by Landlord to
Tenant shall be sufficiently given, made or delivered if personally served on
Tenant by leaving the same at the Premises or if sent by United States certified
or registered mail, postage prepaid, addressed to Tenant at the Premises. All
notices, demands, requests, advices or designations by Tenant to Landlord shall
be sent by United States certified or registered mail, postage prepaid,
addressed to Landlord at its offices at Westport Joint Venture, 2560 Mission
College Blvd., #101, Santa Clara, CA 95054. Each notice, request, demand, advice
or designation referred to in this paragraph shall be deemed received on the
date of the personal service or mailing thereof in the manner herein provided,
as the case may be.
35. EXAMINATION OF LEASE Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its execution
and delivery by both Landlord and Tenant.
36. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails
to perform obligations required of Landlord within a reasonable time, but in no
event earlier than thirty (30) days after written notice by Tenant to Landlord
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have heretofore been furnished to Tenant in
writing, specifying wherein Landlord has failed to perform such obligation;
provided, however, that if the nature of Landlord's obligations is such that
more than thirty (30) days are required for performance, then Landlord shall not
be in default if Landlord commences performance within such thirty (30) day
period and thereafter diligently prosecutes the same to completion.
37. CORPORATE AUTHORITY If Tenant is a corporation (or a partnership), each
individual executing this Lease on behalf of said corporation (or partnership)
represents and warrants that he is duly authorized to execute and deliver this
Lease on behalf of said corporation (or partnership) in accordance with the
by-laws of said corporation (or partnership in accordance with the partnership
agreement) and that this Lease is binding upon said corporation (or partnership)
in accordance with its terms. If Tenant is a corporation, Tenant shall, within
thirty (30) days after execution of this Lease, deliver to Landlord a certified
copy of the resolution of the Board of Directors of said corporation authorizing
or ratifying the execution of this Lease.
38. LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder,
Tenant and all successors and assigns covenant and agree that, in the event of
any actual or alleged failure, breach or default hereunder by Landlord:
(i) the sole and exclusive remedy shall be against Landlord's interest
in the Premises leased herein;
(ii) no partner of Landlord shall be sued or named as a party in any
suit or action (except as may be necessary to secure jurisdiction of the
partnership);
(iii) no service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the partnership);
(iv) no partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(v) no judgment will be taken against any partner of Landlord;
(vi) any judgment taken against any partner of Landlord may be vacated
and set aside at any time without hearing;
(vii) no writ of execution will ever be levied against the assets of any
partner of Landlord;
(viii) these covenants and agreements are enforceable both by Landlord
and also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall
be applicable to any covenant or agreement either expressly contained in this
Lease or imposed by statute or at common law.
39. MISCELLANEOUS AND GENERAL PROVISIONS
a. Tenant shall not, without the written consent of Landlord, use the
name of the building for any purpose other than as the address of the
business conducted by Tenant in the Premises.
b. This Lease shall in all respects be governed by and construed in
accordance with the laws of the State of California. If any provision of
this Lease shall be invalid, unenforceable or ineffective for any reason
whatsoever, all other provisions hereof shall be and remain in full
force and effect.
c. The term "Premises" includes the space leased hereby and any
improvements now or hereafter installed therein or attached thereto. The
term "Landlord" or any pronoun used in place thereof includes the plural
as well as the singular and the successors and assigns of Landlord. The
term "Tenant" or any pronoun used in place thereof includes the plural
as well as the singular and individuals, firms, associations,
partnerships and corporations, and their and each of their respective
heirs, executors, administrators, successors and permitted assigns,
according to the context hereof, and the provisions of this Lease shall
inure to the benefit of and bind such heirs, executors, administrators,
successors and permitted assigns.
The term "person" includes the plural as well as the singular
and individuals, firms, associations, partnerships and corporations.
Words used in any gender include other genders. If there be more than
one Tenant the obligations of Tenants hereunder are joint and several.
The paragraph headings of this Lease are for convenience of reference
only and shall have no effect upon the construction or interpretation of
any provision hereof.
d. Time is of the essence of this Lease and of each and all of its
provisions.
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<PAGE> 8
e. At the expiration or earlier termination of this Lease, Tenant shall
execute, acknowledge and deliver to Landlord, within ten (10) days after
written demand from Landlord to Tenant, any quitclaim deed or other
document required by any reputable title company, licensed to operate in
the State of California, to remove the cloud or encumbrance created by
this Lease from the real property of which Tenant's Premises are a part.
f. This instrument along with any exhibits and attachments hereto
constitutes the entire agreement between Landlord and Tenant relative to
the Premises and this agreement and the exhibits and attachments may be
altered, amended or revoked only by an instrument in writing signed by
both Landlord and Tenant. Landlord and Tenant agree hereby that all
prior or contemporaneous oral agreements between and among themselves
and their agents or representatives relative to the leasing of the
Premises are merged in or revoked by this agreement.
g. Neither Landlord nor Tenant shall record this Lease or a short form
memorandum hereof without the consent of the other.
h. Tenant further agrees to execute any amendments required by a lender
to enable Landlord to obtain financing, so long as Tenant's rights
hereunder are not substantially affected.
i. Paragraphs 42 through 57 are added hereto and are included as a part
of this lease.
j. Clauses, plats and riders, if any, signed by Landlord and Tenant and
endorsed on or affixed to this Lease are a part hereof.
k. Tenant covenants and agrees that no diminution or shutting off of
light, air or view by any structure which may be hereafter erected
(whether or not by Landlord) shall in any way affect his Lease, entitle
Tenant to any reduction of rent hereunder or result in any liability of
Landlord to Tenant.
40. BROKERS Tenant warrants that it had dealings with only the following real
estate brokers or agents in connection with the negotiation of this Lease: none
and that it knows of no other real estate broker or agent who is entitled to a
commission in connection with this Lease.
41. SIGNS No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the written consent
of Landlord first had and obtained and Landlord shall have the right to remove
any such sign, placard, picture, advertisement, name or notice without notice to
and at the expense of Tenant. If Tenant is allowed to print or affix or in any
way place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on outside doors shall be printed,
painted, affixed or inscribed at the expense of Tenant by a person approved of
by Landlord.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door partition or wall which may appear unsightly from
outside the Premises.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year last written below.
LANDLORD: TENANT:
WESTPORT JOINT VENTURE INC. COSINE COMMUNICATIONS,
a California joint venture a California corporation
JOHN ARRILLAGA SURVIVOR'S TRUST
By: /s/ JOHN ARRILLAGA By: /s/ CURTIS DUDNICK
------------------------------- -------------------------------------
John Arrillaga, Trustee
Date: 9/29/99 Title: CFO
---------------------------- ----------------------------------
PEERY PRIVATE INVESTMENT
COMPANY-WP, L.P., Print or Type Name: CURTIS DUDNICK
a California limited partnership ---------------------
By: /s/ RICHARD T. PERRY Date: 9.24.99
------------------------------------------- -----------------------
Richard T. Peery, Trustee of the Richard T.
Peery Separate Property Trust dated
7/20/77, as its General Partner
Date: 9/28/99
----------------------------
PEERY PUBLIC INVESTMENT COMPANY-WP, L.P.,
a California limited partnership
By: /s/ RICHARD T. PEERY
-------------------------------------------
Richard T. Peery, Trustee of the Richard T.
Peery Separate Property Trust dated
7/20/77, as its General Partner
Date: 9/28/99
-----------------------------------------
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<PAGE> 9
Paragraphs 42 through 57 to Lease Agreement dated September 20, 1999, By
and Between Westport Joint Venture, a California joint venture, as Landlord, and
COSINE COMMUNICATIONS, INC., A CALIFORNIA CORPORATION, as Tenant for 48,384+
Square Feet of Space Located at 3200 Bridge Parkway, Redwood City, California.
42. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum
of TWENTY EIGHT MILLION TWO HUNDRED SEVENTEEN THOUSAND FIVE HUNDRED FORTY EIGHT
AND 80/100 DOLLARS ($28,217,548.80), shall be payable as follows:
On January 1, 2000, the sum of ONE HUNDRED SIXTY NINE THOUSAND THREE
HUNDRED FORTY FOUR AND NO/100 DOLLARS ($169,344.00) shall be due, and a like sum
due on the first day of each month thereafter, through and including December 1,
2000.
On January 1, 2001, the sum of ONE HUNDRED SEVENTY FOUR THOUSAND ONE
HUNDRED EIGHTY TWO AND 40/100 DOLLARS ($174,182.40) shall be due, and a like sum
due on the first day of each month thereafter, through and including December 1,
2001.
On January 1, 2002, the sum of ONE HUNDRED SEVENTY NINE THOUSAND TWENTY
AND 80/100 DOLLARS ($179,020.80) shall be due, and a like sum due on the first
day of each month thereafter, through and including December 1, 2002.
On January 1, 2003, the sum of ONE HUNDRED EIGHTY THREE THOUSAND EIGHT
HUNDRED FIFTY NINE AND 20/100 DOLLARS ($183,859.20) shall be due, and a like sum
due on the first day of each month thereafter, through and including December 1,
2003.
On January 1, 2004, the sum of ONE HUNDRED EIGHTY EIGHT THOUSAND SIX
HUNDRED NINETY SEVEN AND 60/100 DOLLARS ($188,697.60) shall be due, and a like
sum due on the first day of each month thereafter, through and including
December 1, 2004.
On January 1, 2005, the sum of ONE HUNDRED NINETY THREE THOUSAND FIVE
HUNDRED THIRTY SIX AND NO/100 DOLLARS ($193,536.00) shall be due, and a like sum
due on the first day of each month thereafter, through and including December 1,
2005.
On January 1, 2006, the sum of ONE HUNDRED NINETY EIGHT THOUSAND THREE
HUNDRED SEVENTY FOUR AND 40/100 DOLLARS ($198,374.40) shall be due, and a like
sum due on the first day of each month thereafter, through and including
December 1, 2006.
On January 1, 2007, the sum of TWO HUNDRED THREE THOUSAND TWO HUNDRED
TWELVE AND 80/100 DOLLARS ($203,212.80) shall be due, and a like sum due on the
first day of each month thereafter, through and including December 1, 2007.
On January 1, 2008, the sum of TWO HUNDRED EIGHT THOUSAND FIFTY ONE AND
20/100 DOLLARS ($208,051.20) shall be due, and a like sum due on the first day
of each month thereafter, through and including December 1, 2008.
On January 1, 2009, the sum of TWO HUNDRED TWELVE THOUSAND EIGHT HUNDRED
EIGHTY NINE AND 60/100 DOLLARS ($212,889.60) shall be due, and a like sum due on
the first day of each month thereafter, through and including December 1, 2009.
On January 1, 2010, the sum of TWO HUNDRED SEVENTEEN THOUSAND SEVEN
HUNDRED TWENTY EIGHT AND NO/100 DOLLARS ($217,728.00) shall be due, and a like
sum due on the first day of each month thereafter, through and including
December 1, 2010.
On January 1, 2011, the sum of TWO HUNDRED TWENTY TWO THOUSAND FIVE
HUNDRED SIXTY SIX AND 40/100 DOLLARS ($222,566.40) shall be due, and a like sum
due on the first day of each month thereafter, through and including December 1,
2011; or until the entire aggregate sum of TWENTY EIGHT MILLION TWO HUNDRED
SEVENTEEN THOUSAND FIVE HUNDRED FORTY EIGHT AND 80/100 DOLLARS ($28,217,548.80)
has been paid.
9
<PAGE> 10
43. "AS-IS" BASIS: Subject only to Paragraph 44 and to Landlord making the
improvements shown on Exhibit B to be attached hereto, it is hereby agreed that
the Premises leased hereunder is leased strictly on an "as-is" basis and in its
present condition, and in the configuration as shown on Exhibit B to be attached
hereto, and by reference made a part hereof. Except as noted herein, it is
specifically agreed between the parties that after Landlord makes the interior
improvements as shown on Exhibit B, Landlord shall not be required to make, nor
be responsible for any cost, in connection with any repair, restoration, and/or
improvement to the Premises in order for this Lease to commence, or thereafter,
throughout the Term of this Lease. Notwithstanding anything to the contrary
within this Lease, Landlord makes no warranty or representation of any kind or
nature whatsoever as to the condition or repair of the Premises, nor as to the
use or occupancy which may be made thereof.
44. TENANT INTERIOR IMPROVEMENTS: Landlord shall, at its sole cost and expense,
construct certain interior improvements (the "Tenant Improvements") in the
Premises, as shown on Exhibit B to be attached to the Lease and Landlord agrees
to deliver the Premises leased hereunder to Tenant, at Landlord's expense, in
the configuration shown in Red on Exhibit B to be attached hereto.
Notwithstanding anything to the contrary above, it is specifically understood
and agreed that Landlord shall be required to furnish only a standard
air-conditioning/heating system, normal electrical outlets, standard fire
sprinkler systems, standard bathroom, standard lobby, 2' x 4' suspended
acoustical tile drop ceiling throughout the entire space leased, carpeting
and/or vinyl-coated floor tile, and standard office partitions and doors, as
shown on Exhibit B to be attached hereto; provided however, that any special
HVAC and/or plumbing and/or electrical requirements over and above that normally
supplied by Landlord shall be 100 percent the responsibility of and be paid for
100 percent by Tenant.
Notwithstanding anything to the contrary, it is agreed that in the event
Tenant makes changes, additions, or modifications to the plans and
specifications to be constructed by Landlord as set forth herein, or
improvements are installed for Tenant in excess of those to be provided Tenant
by Landlord as set forth on Exhibit B, any increased cost(s) resulting from said
changes, additions, and/or modifications and/or improvements in excess of those
to be provided Tenant shall be contracted for with Landlord and paid for one
hundred percent (100%) by Tenant.
The interior shall be constructed in accordance with Exhibit B of the
Lease, it being agreed, however, that if the interior improvements constructed
by Landlord relating thereto, do not conform exactly to the plans and
specifications as set forth in the Lease, and the general appearance, structural
integrity, and Tenant's uses and occupancy of the Premises and interior
improvements relating thereto are not materially or unreasonably affected by
such deviation, it is agreed that the commencement date of the lease, and
Tenant's obligation to pay rental, shall not be affected, and Tenant hereby
agrees, in such event, to accept the Premises and interior improvements as
constructed by Landlord.
Tenant shall have thirty (30) days after the Commencement Date to
provide Landlord with a "punch list" pertaining to Landlord's work with respect
to Tenant's interior improvements. As soon as reasonably possible thereafter,
Landlord, or one of Landlord's representatives (if so approved by Landlord), and
Tenant shall conduct a joint walk-through of the Premises (if Landlord so
requires), and inspect such Tenant Improvements, using their best efforts to
agree on the incomplete or defective construction related to the Tenant
Improvements installed by Landlord. After such inspection has been completed,
Landlord shall prepare, and both parties shall sign, a list of all "punch list"
items which the parties reasonably agree are to be corrected by Landlord (but
which shall exclude any damage or defects caused by Tenant, its employees,
agents or parties Tenant has contracted with to work on the Premises). Landlord
shall have thirty (30) days thereafter (or longer if necessary, provided
Landlord is diligently pursuing the completion of the same) to complete, at
Landlord's expense, the repairs on the "punch list" without the Commencement
Date of the Lease and Tenant's obligation to pay Rental thereunder being
affected. This Paragraph shall be of no force and effect if Tenant shall fail to
give any such notice to Landlord within thirty (30) days after the Commencement
Date of this Lease.
45. CONSENT: Whenever the consent of one party to the other is required
hereunder, such consent shall not be unreasonably withheld.
46. CHOICE OF LAW; SEVERABILITY. This Lease shall in all respects be governed by
and construed in accordance with the laws of the State of California. If any
provisions of this Lease shall be invalid, unenforceable, or ineffective for any
reason whatsoever, all other provisions hereof shall be and remain in full force
and effect.
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47. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby
warrant and represent that they are properly authorized to execute this Lease
Agreement and bind the parties on behalf of whom they execute this Lease
Agreement and to all of the terms, covenants and conditions of this Lease
Agreement as they relate to the respective parties hereto.
48. ASSESSMENT CREDITS: The demised property herein may be subject to a special
assessment levied by the City of Redwood City as part of an Improvement
District. As part of said special assessment proceedings (if any), additional
bonds were or may be sold and assessments were or may be levied to provide for
construction contingencies and reserve funds. Interest shall be earned on such
funds created for contingencies and on reserve funds which will be credited for
the benefit of said assessment district. To the extent surpluses are created in
said district through unused contingency funds, interest earnings or reserve
funds, such surpluses shall be deemed the property of Landlord. Notwithstanding
that such surpluses may be credited on assessments otherwise due against the
Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the
time of any such credit of surpluses, an amount equal to all such surpluses so
credited. For example: if (i) the property is subject to an annual assessment of
$1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's
assessment which reduces the assessment amount shown on the property tax bill
from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord,
pay to Landlord said $200.00 as credit as Additional Rent.
49. ASSIGNMENT AND SUBLETTING (CONTINUED):
A. In addition to and notwithstanding anything to the contrary in
Paragraph 19 of this Lease, Landlord hereby agrees to consent to Tenant's
assigning or subletting said Lease to any parent or subsidiary corporation
(including an assignment resulting from a merger and/or acquisition of Tenant),
provided that the net worth of said parent or subsidiary corporation of said
corporation has a net worth equal to or greater than the net worth of Tenant (a)
at the time of Lease execution or (b) at the time of such assignment (whichever
is greater). No such assignment or subletting will release Tenant from its
liabilities, obligations, and responsibilities under this Lease. Notwithstanding
the above, Tenant shall be required to (a) give Landlord written notice prior to
such assignment or subletting to any party as described above, (b) execute
Landlord's consent document prepared by Landlord reflecting the assignment or
subletting and (c) pay Landlord's costs for processing said Consent prior to the
effective date of said assignment or sublease.
B. Notwithstanding the foregoing, Landlord and Tenant agree that it
shall not be unreasonable for Landlord to refuse to consent to a proposed
assignment, sublease or other transfer ("Proposed Transfer") if the Premises or
any other portion of the Property would become subject to additional or
different Government Requirements as a direct or indirect consequence of the
Proposed Transfer and/or the Proposed Transferee's use and occupancy of the
Premises and the Property. However, Landlord may, in its sole discretion,
consent to such a Proposed Transfer where Landlord is indemnified by Tenant and
(i) Subtenant or (ii) Assignee, in form and substance satisfactory to Landlord's
counsel, by Tenant and/or the Proposed Transferee from and against any and all
costs, expenses, obligations and liability arising out of the Proposed Transfer
and/or the Proposed Transferee's use and occupancy of the Premises and the
Property.
C. Any and all sublease agreement(s) between Tenant and any and all
subtenant(s) (which agreements must be consented to by Landlord, pursuant to the
requirements of this Lease) shall contain the following language:
"If Landlord and Tenant jointly and voluntarily elect, for any
reason whatsoever, to terminate the Master Lease prior to the scheduled
Master Lease termination date, then this Sublease (if then still in
effect) shall terminate concurrently with the termination of the Master
Lease. Subtenant expressly acknowledges and agrees that (1) the
voluntary termination of the Master Lease by Landlord and Tenant and the
resulting termination of this Sublease shall not give Subtenant any
right or power to make any legal or equitable claim against Landlord,
including without limitation any claim for interference with contract or
interference with prospective economic advantage, and (2) Subtenant
hereby waives any and all rights it may have under law or at equity
against Landlord to challenge such an early termination of the Sublease,
and unconditionally releases and relieves Landlord, and its officers,
directors, employees and agents, from any and all claims, demands,
and/or causes of action whatsoever (collectively, "Claims"), whether
such matters are known or unknown, latent or apparent, suspected or
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unsuspected, foreseeable or unforeseeable, which Subtenant may have
arising out of or in connection with any such early termination of this
Sublease. Subtenant knowingly and intentionally waives any and all
protection which is or may be given by Section 1542 of the California
Civil Code which provides as follows: "A general release does not extend
to claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known by him must
have materially affected his settlement with debtor.
The term of this Sublease is therefore subject to early
termination. Subtenant's initials here below evidence (a) Subtenant's
consideration of and agreement to this early termination provision, (b)
Subtenant's acknowledgment that, in determining the net benefits to be
derived by Subtenant under the terms of this Sublease, Subtenant has
anticipated the potential for early termination, and (c) Subtenant's
agreement to the general waiver and release of Claims above.
Initials: Initials: CD "
---------------- -------------
Subtenant Tenant
50 BANKRUPTCY AND DEFAULT: Paragraph 22 is modified to provide that with
respect to non-monetary defaults not involving Tenant's failure to pay Basic
Rent or Additional Rent, Tenant shall not be in default of any non-monetary
obligation if (i) more than thirty (30) days is required to cure such
non-monetary default, and (ii) Tenant commences cure of such default as soon as
reasonably practicable after receiving written notice of such default from
Landlord and thereafter continuously and with due diligence prosecutes such cure
to completion.
51 ABANDONMENT: Paragraph 23 is modified to provide that Tenant shall not be in
default under the Lease if it leaves all or any part of Premises vacant so long
as (i) Tenant is performing all of its other obligations under the Lease
including the obligation to pay Basic Rent and Additional Rent, (ii) Tenant
provides on-site security during normal business hours for those parts of the
Premises left vacant, (iii) such vacancy does not materially and adversely
affect the validity or coverage of any policy of insurance carried by Landlord
with respect to the Premises, and (iv) the utilities and heating and ventilation
system are operated and maintained to the extent necessary to prevent damage to
the Premises or its systems.
52 HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to
the existence or use of "Hazardous Materials" (as defined herein) on, in, under
or about the Premises and real property located beneath said Premises and the
common areas of the Complex (hereinafter collectively referred to as the
"Property"):
A. As used herein, the term "Hazardous Materials" shall mean any
material, waste, chemical, mixture or byproduct which is or hereafter is
defined, listed or designated under Environmental Laws (defined below) as a
pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or
material, or any other unwholesome, hazardous, toxic, biohazardous, or
radioactive material, waste, chemical, mixture or byproduct, or which is listed,
regulated or restricted by any Environmental Law (including, without limitation,
petroleum hydrocarbons or any distillates or derivatives or fractions thereof,
polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental
Laws" shall mean any applicable Federal, State of California or local government
law (including common law), statute, regulation, rule, ordinance, permit,
license, order, requirement, agreement, or approval, or any determination,
judgment, directive, or order of any executive or judicial authority at any
level of Federal, State of California or local government (whether now existing
or subsequently adopted or promulgated) relating to pollution or the protection
of the environment, ecology, nature resources, or public health and safety.
B. Tenant shall obtain Landlord's written consent, which may be withheld
in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous
Materials Activities (defined below); provided, however, that Landlord's consent
shall not be required for normal use in compliance with applicable Environmental
Laws of customary household and office supplies (Tenant shall first provide
Landlord with a list of said materials use), such as mild cleaners, lubricants
and copier toner. As used herein, the term "Tenant's Hazardous Materials
Activities" shall mean any and all use, handling, generation, storage, disposal,
treatment, transportation, release, discharge, or emission of any Hazardous
Materials on, in, beneath, to, from, at or about the property, in connection
with Tenant's use of the Property, or by Tenant or by any of Tenant's agents,
employees, contractors, vendors, invitees,
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visitors or its future subtenants or assignees. Tenant agrees that any and all
Tenant's Hazardous Materials Activities shall be conducted in strict, full
compliance with applicable Environmental Laws at Tenant's expense, and shall not
result in any contamination of the Property or the environment. Tenant agrees to
provide Landlord with prompt written notice of any spill or release of Hazardous
Materials at the Property during the term of the Lease of which Tenant becomes
aware, and further agrees to provide Landlord with prompt written notice of any
violation of Environmental Laws in connection with Tenant's Hazardous Materials
Activities of which Tenant becomes aware. If Tenant's Hazardous materials
Activities involve Hazardous Materials other than normal use of customary
household and office supplies, Tenant also agrees at Tenant's expense: (i) to
install such Hazardous Materials monitoring, storage and containment devices as
Landlord reasonably deems necessary (Landlord shall have no obligation to
evaluate the need for any such installation or to require any such
installation); (ii) provide Landlord with a written inventory of such Hazardous
Materials, including an update of same each year upon the anniversary date of
the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each
Anniversary Date, to retain a qualified environmental consultant, acceptable to
Landlord, to evaluate whether Tenant is in compliance with all applicable
Environmental Laws with respect to Tenant's Hazardous Materials Activities.
Tenant, at its expense, shall submit to Landlord a report from such
environmental consultant which discusses the environmental consultant's findings
within two (2) months of each Anniversary Date. Tenant, at its expense, shall
promptly undertake and complete any and all steps necessary, and in full
compliance with applicable Environmental Laws, to fully correct any and all
problems or deficiencies identified by the environmental consultant, and
promptly provide Landlord with documentation of all such corrections.
C. Prior to termination or expiration of the Lease, Tenant, at its
expense, shall (i) properly remove from the Property all Hazardous Materials
which come to be located at the Property in connection with Tenant's Hazardous
Materials Activities, and (ii) fully comply with and complete all facility
closure requirements of applicable Environmental Laws regarding Tenant's
Hazardous Materials Activities, including but not limited to (x) properly
restoring and repairing the Property to the extent damaged by such closure
activities, and (y) obtaining from the local Fire Department or other
appropriate governmental authority with jurisdiction a written concurrence that
closure has been completed in compliance with applicable Environmental Laws.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
such closure activities.
D. If Landlord, in its sole discretion, believes that the Property has
become contaminated as a result of Tenant's Hazardous Materials Activities,
Landlord in addition to any other rights it may have under this Lease or under
Environmental Laws or other laws, may enter upon the Property and conduct
inspection, sampling and analysis, including but not limited to obtaining and
analyzing samples of soil and groundwater, for the purpose of determining the
nature and extent of such contamination. Tenant shall promptly reimburse
Landlord for the costs of such an investigation, including but not limited to
reasonable attorneys' fees Landlord incurs with respect to such investigation,
that discloses Hazardous Materials contamination for which Tenant is liable
under this Lease. Except as may be required of Tenant by applicable
Environmental Laws, Tenant shall not perform any sampling, testing, or drilling
to identify the presence of any Hazardous Materials at the Property, without
Landlord's prior written consent which may be withheld in Landlord's discretion.
Tenant shall promptly provide Landlord with copies of any claims, notices, work
plans, data and reports prepared, received or submitted in connection with any
sampling, testing or drilling performed pursuant to the preceding sentence.
E. Tenant shall indemnify, defend (with legal counsel acceptable to
Landlord, whose consent shall not unreasonably be withheld) and hold harmless
Landlord, its employees, assigns, successors, successors-in-interest, agents and
representatives from and against any and all claims (including but not limited
to third party claims from a private party or a government authority),
liabilities, obligations, losses, causes of action, demands, governmental
proceedings or directives, fines, penalties, expenses, costs (including but not
limited to reasonable attorneys', consultants' and other experts' fees and
costs), and damages, which arise from or relate to: (i) Tenant's Hazardous
Materials Activities; (ii) any Hazardous Materials contamination caused by
Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any
obligation of Tenant under this Paragraph 53 (collectively, "Tenant's
Environmental Indemnification"). Tenant's Environmental Indemnification shall
include but is not limited to the obligation to promptly and fully reimburse
Landlord for losses in or reductions to rental income, and diminution in fair
market value of the Property. Tenant's Environmental Indemnification shall
further include but is not limited to the obligation to diligently and properly
implement to completion, at Tenant's expense, any and all environmental
investigation, removal, remediation, monitoring, reporting, closure activities,
or other environmental response action (collectively, "Response Actions").
Tenant shall promptly provide Landlord with copies of any claims,
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notices, work plans, data and reports prepared, received or submitted in
connection with any Response Actions.
F. Landlord hereby informs Tenant, and Tenant hereby acknowledges, that
the Premises and adjacent properties overlie a former solid waste landfill site
commonly known as the Westport Landfill ("Former Landfill"). Landlord further
informs Tenant, and Tenant hereby acknowledges, that (i) prior testing has
detected the presence of low levels of certain volatile and semi-volatile
organic compounds and other contaminants in the groundwater, in the leachate
from the landfilled solid waste, and/or in certain surface waters of the
Property, as more fully described in Section 2.3.2 of the report entitled
"Revised Discharge Monitoring Plan, Westport Landfill Site, Redwood City,
California" prepared by Geomatrix Consultants, dated May 1996 ("Discharge
Plan"), (ii) methane gas is or may be generated by the landfilled solid waste
(item "i" immediately preceding and this item "ii" are hereafter collectively
referred to as the "Landfill Contamination"), and (iii) the Premises and the
Former Landfill are subject to the California Regional Water Quality Control
Board's ("Regional Board") Waste Discharge Requirements Order No. 94-181 (the
"Order"). The Order is attached hereto as Exhibit C. As evidenced by their
initials set forth immediately below, Tenant acknowledges that Landlord has
provided Tenant with copies of the environmental reports listed on Exhibit D,
and Tenant acknowledges that Tenant and Tenant's experts (if any) have had ample
opportunity to review such reports and that Tenant has satisfied itself as to
the environmental conditions of the Property and the suitability of such
conditions for Tenant's intended use of the Property.
Initial: CD Initial: [ILLEGIBLE]
---------------- ----------------
Tenant Landlord
G. Landlord shall indemnify, defend, and hold harmless Tenant against
any and all claims asserted by third parties (excluding any agents, employees,
contractors, vendors, invitees, visitors, future subtenants and assignees of
Tenant, and excluding any other parties related to Tenant), including all
liabilities, judgments, damages, suits, orders, government directives, costs and
expenses in connection with such claims, which arise from (i) the Landfill
Contamination, or (ii) the Order, as may be amended ("Landlord's Environmental
Indemnity"); provided however that Landlord's Environmental Indemnity shall be
subject to the following limitations and conditions:
(1) Landlord's Environmental Indemnity shall not apply to any
economic or consequential damages suffered by Tenant, including
but not limited to loss of business or profits.
(2) Landlord's Environmental Indemnity shall not apply, without
limitation, to any releases caused by Tenant's Hazardous
Materials Activities.
(3) Tenant acknowledges that Landlord must comply with the Order, as
may be amended, and with directives of government authorities
including the Regional Board, with respect to the Contamination
and the Former Landfill. Tenant further acknowledges that
groundwater monitoring wells, methane recovery wells and
equipment, and other environmental control devices are located
on and about the Premises and may be modified or added to during
the term of the Lease (collectively, "Environmental Equipment"),
and that environmental investigation, monitoring, closure and
post-closure activities (collectively, "Environmental
Activities") will be performed on the Premises during the term
of the Lease. Tenant shall allow Landlord, and any other party
named as a discharger under the Order, as may be amended, and
their respective agents, consultants and contractors, and agents
of governmental environmental authorities with jurisdiction
("Government Representatives") to enter the Premises to access
the Environmental Equipment and to perform Environmental
Activities during the term of the Lease, provided that Tenant's
use and occupancy of the Premises shall not unreasonably be
disturbed.
(4) Tenant and Landlord shall reasonably cooperate with each other
regarding any Environmental Activities to be performed, and
regarding any Environmental Equipment to be installed,
maintained, or removed on the Premises during the term of the
Lease.
(5) Tenant shall be responsible at its expense for repairing any
Environmental Equipment damaged due to the negligence of Tenant
or Tenant's agents, employees, contractors, vendors, invitees,
visitors, future subtenants or assignees (such terms "invitees"
and "visitors" as used in this Paragraph 53 shall not include
Landlord or any other party named as a discharger under the
Order as may be amended, or any of their respective agents,
consultants or contractors, or any Government Representatives).
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It is agreed that the Tenant's responsibilities related to Hazardous
Materials will survive the expiration or termination of this Lease and
that Landlord may obtain specific performance of Tenant's
responsibilities under this Paragraph 53.
53 ADDITIONAL RENT CONTINUED: The following items shall be excluded from
"Additional Rent":
A. Leasing commissions, attorney's fees, costs, disbursements, and other
expenses incurred in connection with negotiations with other tenants, or
disputes between Landlord and other tenants, or in connection with marketing,
leasing, renovating, or improving space for other current or prospective tenants
or other current or prospective occupants of the Complex; notwithstanding
anything to the contrary herein, any costs and expenses Landlord is entitled to
be reimbursed for as stated under Paragraph 22 ("Bankruptcy and Default") ARE
NOT excluded Additional Rent items as reflected in this Paragraph 54.
B. The cost of any service sold to any other tenant or other occupant
whose leased premises are not part of the Premises leased herein and for which
Landlord is entitled to be reimbursed as an additional charge or rental over and
above the basic rent and additional rent payable under the lease agreement with
said other tenant (including, without limitation, after-hours HVAC costs or
over-standard electrical consumption costs incurred by other tenants).
C. Any costs for which Landlord is entitled to be reimbursed by any
other tenant or other occupant whose leased premises are not part of the
Premises leased herein.
D. Any costs, fines, or penalties incurred due to violations by Landlord
of any governmental rule or authority, provided Tenant is not responsible under
the Lease for such costs, fines and/or penalties, and/or provided Tenant's
actions or inactions did not cause, in whole or in part, such costs, fines
and/or penalties.
E. Wages, salaries, or other compensation paid to executive employees
above the grade of Property Manager.
F. Repairs or other work occasioned by fire, windstorm, or other insured
peril, to the extent that Landlord shall receive proceeds of such insurance or
would have received such proceeds had Landlord maintained the insurance coverage
required under this Lease providing said insurance coverage was available and
Tenant paid its share of the premium as required under the Lease (excluding any
insurance deductible(s) which Tenant is responsible for paying).
G. Except as otherwise noted in this lease, any mortgage debt, or ground
rents or any other amounts payable under any ground lease for the Property or
any expense which Landlord is responsible for paying under said Lease or which
results from Landlord's willful misconduct or Landlord's negligence of which
negligence Landlord has received notice of and has reasonable time to correct.
H. Any amounts paid to any person, firm, or corporation related or
otherwise affiliated with Landlord or any general partner, officer, or director
of Landlord or any general partners, to the extent same exceeds arms-length
competitive prices paid in the Santa Clara, California metropolitan area for the
services or goods provided.
54 SUBORDINATION AND MORTGAGES: Paragraph 20 is modified to provide that,
provided Tenant is not in default in the terms of this Lease, this Lease shall
not be subordinate to a mortgage or deed of trust unless the Lender holding such
mortgage or deed of trust enters into a written subordination, non-disturbance
and attornment agreement in which the Lender agrees that notwithstanding any
subordination of this Lease to such Lender's mortgage or deed of trust, (i) such
Lender shall recognize all of Tenant's rights under this Lease, and (ii) in the
event of a foreclosure, this Lease shall not be terminated so long as Tenant is
not in default of its obligations under this Lease, but shall continue in effect
and Tenant and such Lender (or any party acquiring the Premises through such
foreclosure) shall each be bound to perform the respective obligations of Tenant
and Landlord with respect to the Premises arising after such foreclosure.
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55. TAXES CONTINUED: Paragraph 12 ("Taxes") is modified by the following:
A. The amount of Real Property Taxes payable by Tenant hereunder shall
be prorated to reflect the dates of Lease Commencement and Lease Termination.
B. It is agreed that if any special assessments for capital improvements
are assessed, and if Landlord has the option to either pay the entire assessment
in cash or go to bond, and if Landlord elects to pay the entire assessment in
cash in lieu of going to bond, the entire portion of the assessment assigned to
Tenant's Leased Premises will be prorated over the same period that the
assessment would have been prorated had the assessment gone to bond.
56. LEASE TERMS CO-TERMINOUS: It is acknowledged that (i) concurrently with the
execution of this Lease, Landlord and Tenant are also executing an amendment no.
1 dated September 9, 1999 to existing Lease Agreement dated May 26, 1998
(hereinafter referred to as the "Existing Lease") affecting property located at
1200 Bridge Parkway, Redwood City, California and (ii) it is the intention of
the parties that the term of this Lease be co-terminous with the term of the
Existing Lease such that the terms of both leases expire on the same date;
provided, however, the termination of this Lease resulting from the terms and
conditions stated under Paragraph 22 "Bankruptcy and Default" (subject to
Landlord's option as stated in the respective leases' "Cross Default" Paragraph)
or Paragraph 24 "Destruction" or Paragraph 25 "Eminent Domain" shall not result
in a termination of the Existing Lease, unless Landlord elects, at its sole and
absolute discretion, to terminate both of the leases.
57. CROSS DEFAULT: As a material part of the consideration for the execution of
this Lease by Landlord, it is agreed between Landlord and Tenant that a default
under this Lease, or a default under the Existing Lease may, at the option of
Landlord, be considered a default under both leases, in which event Landlord
shall be entitled (but in no event required) to apply all rights and remedies of
Landlord under the terms of one lease to both leases including, but not limited
to, the right to terminate one or both of said leases by reason of a default
under said Existing Lease or hereunder.
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EXHIBIT 22.1
SUBSIDIARIES OF REGISTRANT
SUBSIDIARY NAME JURISDICTION
CoSine Communications Ltd. United Kingdom
CoSine Cayman Ltd. Cayman Islands
CoSine Communications KK Japan
Communications SARL France
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
March 2, 2000, in the Registration Statement (Form S-1) and related Prospectus
of CoSine Communications, Inc.
/s/ Ernst & Young LLP
Palo Alto, California
April 28, 2000
