<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 16, 1999.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
REDBACK NETWORKS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3576 77-0438443
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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1389 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 548-3500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DENNIS L. BARSEMA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
REDBACK NETWORKS INC.
1389 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 548-3500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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ROBERT V. GUNDERSON, JR. JEFFREY D. SAPER
RENEE F. LANAM KURT J. BERNEY
BRETT A. NISSENBERG ANIL P. PATEL
DAVID B. DAVIS WILSON SONSINI GOODRICH & ROSATI
GUNDERSON DETTMER STOUGH PROFESSIONAL CORPORATION
VILLENEUVE FRANKLIN & HACHIGIAN, LLP 650 PAGE MILL ROAD
155 CONSTITUTION DRIVE PALO ALTO, CALIFORNIA 94304
MENLO PARK, CALIFORNIA 94025 (650) 493-9300
(650) 321-2400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, $0.0001 par value............... $37,375,000 $10,391
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued , 1999
Shares
[REDBACK NETWORKS LOGO]
COMMON STOCK
------------------------
REDBACK NETWORKS IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND
$ PER SHARE.
------------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "RBAK."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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PRICE $ A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS REDBACK NETWORKS
---------- ------------- ----------------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total..................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Redback Networks has granted the underwriters the right to purchase up to an
additional shares of common stock to cover over-allotments.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock
to purchasers on , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
, 1999
<PAGE> 3
[GRAPHIC -- INSIDE FRONT COVER]
The heading for the page reads "All Services. All Users. One Solution."
The left third of the page graphically illustrates a variety of uses for
the Internet access infrastructure including a web page and an interactive video
game.
In the center of the page is a picture of a large crowd of people.
On the right third of the page is a picture of the SMS 1000.
Across the bottom of the page runs the following text:
"The Internet is exploding. Thousands of new users go on-line each month.
New high-speed data, audio and video services are constantly being created.
However, bringing large numbers of new users and bandwidth-intensive
services together compromises network performance and can delay the introduction
of new services.
Fortunately, Redback Networks has a solution. Our Subscriber Management
System, or SMS, enables service providers to deploy high-speed services more
quickly and at lower cost than is currently possible.
The SMS bridges the operational gap between high-speed access concentrators
and backbone routers. By providing the missing elements of subscriber management
and traffic translation, the SMS allows service providers to deploy high-speed
services without costly new investments in routers.
At the same time, the SMS allows service providers to use existing
management systems to manage subscribers, regardless of the access technology or
equipment. In addition, the SMS architecture immediately scales to support 4,000
simultaneous subscribers, over 15 times the number available through most large
routers.
Carriers can create wholesale services for multiple service providers.
Service providers can deliver multiple services -- and generate multiple revenue
streams -- through a single connection. With so many features for speeding the
deployment of high-speed services, it's not surprising that the SMS is the
choice of many of the largest U.S. carriers, and leading service providers."
Also on the bottom of the page is a graphic. On the left side of this
graphic, three distinct Internet access modes, DSL, cable and wireless, are all
connected to our SMS 1000 product in the center, which is connected to both the
Internet and a corporate network.
In the bottom right corner is our logo.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 3
Risk Factors........................ 5
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Financial Data............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
Business............................ 28
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PAGE
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Management.......................... 39
Certain Transactions................ 50
Principal Stockholders.............. 53
Description of Capital Stock........ 55
Shares Eligible for Future Sale..... 58
Underwriters........................ 60
Legal Matters....................... 62
Experts............................. 62
Additional Information.............. 63
Index to Financial Statements....... F-1
</TABLE>
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We were incorporated in Delaware in August 1996. Our principal executive
offices are located at 1389 Moffett Park Drive, Sunnyvale, California 94089 and
our telephone number is (408) 548-3500. We have filed for trademark protection
for "REDBACK." This prospectus also contains trademarks of other companies.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or any sale of the common stock. In this prospectus, unless the
context indicates otherwise, the "Company," "Redback Networks," "Redback," "we,"
"us," and "our" refer to Redback Networks Inc.
Unless otherwise indicated, all information in this prospectus (1) gives
effect to the conversion of all outstanding shares of preferred stock into
shares of common stock effective upon the closing of the offering, (2) assumes
no exercise of the underwriters' over-allotment option and (3) assumes no
exercise of outstanding warrants to purchase, as of the closing, 129,471 shares
of our common stock.
UNTIL , 1999 (25 DAYS AFTER COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus.
2
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our Financial Statements and related notes appearing elsewhere in
this prospectus.
REDBACK NETWORKS
Redback Networks is a leading provider of advanced networking solutions
that enable carriers, cable multiple system operators, or MSOs, and service
providers to rapidly deploy high-speed broadband access to the Internet and
corporate networks. Our Subscriber Management System, or SMS, connects and
manages large numbers of subscribers using any of the major high-speed access
technologies, including digital subscriber line, or DSL, cable and wireless. We
sell our SMS product family through our direct sales force, value-added
resellers and distribution partners, such as Nokia and Nortel Networks. Bridging
the gap between high-speed access concentrators and backbone routers, our SMS is
currently being used by many of the largest carriers and service providers,
including UUNET, a subsidiary of MCI Worldcom, SBC, Southwestern Bell
Information Services and Pacific Bell Internet, subsidiaries of SBC, GTE,
Ameritech, Bell South, Concentric, Earthlink, Flashcom, Korea Telecom, Verio and
@Work, a division of @Home.
In recent years, there has been a significant increase in demand by
businesses and consumers for broadband, or high-speed, access to the Internet
and to corporate networks. While carriers, cable MSOs and service providers are
attempting to provide inexpensive and comprehensive broadband access, there are
several major challenges associated with scaling and configuring existing
network architectures to accommodate large numbers of new high-speed
subscribers. We believe widespread deployment of broadband services requires a
new network model for subscriber management, which efficiently terminates
subscriber connections, manages broadband subscribers, provides flexibility for
typical point-to-point broadband connections, and supports multiple broadband
access technologies simultaneously.
Our SMS meets the above requirements. Whether deployed by
telecommunications carriers at their regional access points, by cable MSOs at a
headend or by service providers at a point-of-presence, or POP, the SMS accepts
a large concentration of high-speed data traffic from such devices as DSL access
multiplexers, or DSLAMs, Cable Modem Termination Systems, or CMTSs, and wireless
termination systems. Our SMS reduces the processing requirements placed on
backbone routers in broadband networks. Our SMS product family includes the SMS
1000, our flagship solution, which today supports up to 4,000 simultaneous
subscribers, and the recently introduced SMS 500, designed for
points-of-presence with smaller numbers of subscribers. The key benefits of our
solution include:
- Enhances Broadband Operations. Our SMS bridges the operational gap
between "last mile" access networks that serve businesses and homes and
the backbone routers to the Internet and corporate networks.
- Supports All Major Access Technologies. Our SMS provides a consistent
operational model and supports all major access technologies, including
DSL, cable, wireless and dial.
- Facilitates Rapid and Scalable Deployment. Our SMS leverages service
providers' existing access, accounting and management control systems,
including RADIUS databases, enabling them to quickly deploy high-speed
access and achieve rapid time-to-market for significant
revenue-generating services.
- Provides Platform for the Delivery of Value-Added Services. Our solution
enables carriers, cable MSOs and service providers to create and market
new service offerings that leverage broadband connectivity and
capabilities. For example, our solution enables service selection and
tiered services.
- Simplifies End-User Administration and Support. Our solution allows easy
configuration and administration of end-user broadband modems, further
reducing the cost of providing service.
We are focused on delivering subscriber management solutions to carriers
and service providers and intend to leverage our position in the DSL market to
penetrate the cable and wireless broadband markets. We believe our software
differentiates our solution and provides a competitive advantage by delivering
advanced subscriber management services and functionality. We will continue to
develop features and functionality that further enhance the ability of carriers,
cable MSOs and service providers to deliver profitable services. We intend to
expand our product family to address a range of functionality, density and
application requirements.
3
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THE OFFERING
Common stock offered.......... shares
Common stock to be outstanding
after the offering.......... shares
Over-allotment option......... shares
Use of proceeds............... We intend to use the proceeds for general
corporate purposes, including capital
expenditures and working capital. See "Use of
Proceeds."
Dividend Policy............... We do not anticipate paying cash dividends.
Proposed Nasdaq National
Market symbol................. RBAK
The foregoing information excludes 2,104,725 shares of common stock
issuable upon exercise of outstanding options as of December 31, 1998 at an
average exercise price of $1.49 per share, 129,471 shares of common stock
issuable upon exercise of outstanding warrants at an average exercise price of
$1.51 per share and 1,273,100 shares of common stock reserved for issuance under
our stock plan as of December 31, 1998.
SUMMARY FINANCIAL DATA
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THREE MONTHS ENDED
------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Net revenues........................................ $ 478 $ 1,294 $ 2,933 $ 4,501
Gross profit........................................ 212 618 1,761 3,012
Loss from operations................................ (2,007) (2,153) (2,574) (3,145)
Net loss............................................ (1,981) (2,173) (2,579) (3,143)
Pro forma basic and diluted net loss per share...... $ (.18) $ (.18) $ (.19) $ (.22)
Shares used in computing pro forma basic and diluted
net loss per share................................ 11,254 11,899 13,398 14,185
</TABLE>
The following table presents summary balance sheet data at December 31,
1998, which has been adjusted for the conversion of Redback Networks preferred
stock outstanding as of December 31, 1998 into 10,456,621 shares of common stock
and our sale of shares of our common stock in this offering
and the application of the estimated proceeds, less estimated expenses. See "Use
of Proceeds" and "Capitalization."
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AT DECEMBER 31, 1998
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ACTUAL AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 8,189 $
Working capital............................................. 4,461
Total assets................................................ 14,682
Long-term obligations, less current portion................. 1,275
Total stockholders' equity.................................. 6,254
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RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business, results of operations and financial condition could be seriously
harmed by any of the following risks. The trading price of our common stock
could decline due to any of these risks, and you may lose all or part of any
investment you make in our common stock.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY
We are an early stage company. We were founded in August 1996 and have a
very limited operating history. We did not sell any products or services until
the end of 1997. An investor in our common stock must consider the risks and
difficulties frequently encountered by early stage companies in a new and
rapidly evolving market. From February 28, 1998 to February 28, 1999, we have
experienced significant growth -- from 39 employees to 117 employees. Our
ability to sell products and services, and the level of success, if any, we
achieve, depends, among other things, on the level of demand for broadband
access services, which is a new and rapidly evolving market. See "Risk
Factors -- Sales of our products are dependent on the widespread adoption of
broadband access services." We cannot be certain that our business strategy will
be successful or that we will successfully address the risks we face.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO INCUR FUTURE LOSSES
We incurred net losses of $142,000 from our inception in August 1996
through December 31, 1996, $4.4 million for the year ended December 31, 1997 and
$9.9 million for the year ended December 31, 1998. As of December 31, 1998, we
had an accumulated deficit of approximately $14.4 million. We have not achieved
profitability and we expect to continue to incur net losses in the future. To
date, we have funded our operations from the sale of equity securities, from
bank borrowings and by means of equipment lease financing. We expect to continue
to incur significant product development, sales and marketing, and general and
administrative expenses and, as a result, we would need to generate significant
revenues to achieve profitability. Although our revenues have grown in recent
quarters, we cannot be certain that we can sustain recent growth rates or that
we will ever achieve sufficient revenue levels to achieve profitability. If we
do achieve profitability in some future period, we cannot be certain that we
would sustain profitability on a quarterly or annual basis in the future.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE
SIGNIFICANTLY
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
- Fluctuations in demand for broadband access services;
- The timing and size of sales of our products and services;
- The lack of any significant backlog;
- Announcements of new products and product enhancements by competitors;
- The entry of new competitors into our market, including by acquisition;
- Unexpected delays in introducing new or enhanced products, including
manufacturing delays;
- Our ability to control expenses;
- Our ability to ship products on a timely basis and at a reasonable cost;
and
5
<PAGE> 8
- The mix of our products sold and the mix of distribution channels through
which our products are sold.
A high percentage of our expenses, including those related to engineering,
sales and marketing, research and development, and general administrative
functions, are essentially fixed in the short term. As a result, if we
experience delays in generating or recognizing revenue, our quarterly operating
results are likely to be materially adversely affected. In addition, we plan to
increase our operating expenses to expand our engineering and sales and
marketing operations, broaden our customer support capabilities, develop new
distribution channels, fund increased levels of research and development and
build our operational infrastructure. If growth in our revenues does not outpace
the increase in these expenses, our business, results of operations and
financial condition could be materially adversely affected.
We rely on a single third-party manufacturer to build our products. Any
interruption in the operations of this manufacturer would adversely affect our
ability to meet our scheduled product deliveries to our customers. This would
cause significant variations in our quarterly operating results and our
business, results of operations and financial condition would be materially
adversely affected.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should not rely
on our results for one quarter as any indication of our future performance. It
is likely that in some future quarter our operating results may be below the
expectations of public market analysts or investors. If this occurs, the price
of our common stock would likely decrease.
OUR LENGTHY AND VARIABLE SALES CYCLE MAKES IT DIFFICULT TO PREDICT THE
TIMING OF A SALE OR WHETHER A SALE WILL BE MADE
The timing of our sales revenue is difficult to predict because of the
length and variability of the sales cycle for our products. Customers often view
the purchase of our products as a significant and strategic decision. As a
result, customers typically undertake significant procedures relating to the
evaluation, testing, implementation and acceptance of our products. This
evaluation process frequently results in a lengthy sales cycle, typically
ranging from three months to over one year. While our customers are evaluating
our products and before they place an order with us, we may incur substantial
sales and marketing expenses and expend significant management efforts. In
addition, product purchases are frequently subject to unplanned processing and
other delays, particularly with respect to larger customers for whom our
products represent a very small percentage of overall purchase activity. As a
result, if sales forecasted from a specific customer for a particular quarter
are not realized in that quarter, our business, results of operations and
financial condition could be materially adversely affected.
OUR QUARTERLY RESULTS DEPEND ON A SMALL NUMBER OF LARGE ORDERS
To date, a significant portion of our quarterly revenues has resulted from
a small number of relatively large orders. For example, in each of the last four
quarters in the period ended December 31, 1998, we had at least one customer
that accounted for 15% or more of our total revenue in such quarter. In the
fourth quarter of 1998, UUNET, Nortel Networks and GTE and its affiliated
entities accounted for 28%, 13% and 12%, respectively, of our total revenue. We
anticipate that our operating results for any given period will continue to
depend to a significant extent on large orders from a small number of customers.
If we fail to receive a large order in any future period, our business, results
of operations and financial condition would be materially adversely affected.
WE ARE ENTIRELY DEPENDENT ON THE SUCCESS OF THE SMS PRODUCT FAMILY,
INCLUDING THE SMS 1000, THE RECENTLY INTRODUCED SMS 500 AND THE
INTRODUCTION OF FUTURE PRODUCTS
To date, the SMS product family is the only product family that we have.
The SMS 1000 and SMS 500 are the only products that we currently sell. We intend
to extend the offerings under the SMS
6
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product family in the future, both by introducing new SMS products and by
introducing enhancements to existing SMS products. Our inability to timely and
successfully introduce new SMS products and SMS product enhancements, or the
failure of these new products or enhancements to achieve market acceptance,
could materially adversely affect our business, results of operations and
financial condition.
To date, substantially all of our revenues have been derived from sales and
service related to the SMS 1000 product. The SMS 1000 and any other new high-end
SMS product that we may develop and introduce in the future are marketed
primarily to large customers. There are only a limited number of large existing
and potential customers and this number is not expected to increase
significantly in the future.
We recently introduced the SMS 500, which is designed for use by customers
that intend to provide services to a smaller number of subscribers than those
using the SMS 1000. Given this targeted market, sales of the SMS 500 may involve
sales to smaller customers. Sales to smaller customers entail certain risks,
including increased credit risks and the need for additional sales and support
personnel to support an increased volume of customers. Our business, results of
operations and financial condition could be materially adversely affected if any
of these risks materialize. The SMS 500 may not achieve a significant degree of
market acceptance. If the SMS 500 is not successful, our ability to generate
revenues will be limited to sales of the SMS 1000 to our customers with a large
number of subscribers, which will have a material adverse effect on our
business, results of operations and financial condition.
Many of our customers require product features and capabilities that our
SMS products may not have. The requirement that we add features to our products
in order to achieve a sale may result in a longer sales cycle, increased
research and development expenses and reduced margins on our products. To
achieve market acceptance for our products, we must effectively and timely
anticipate and adapt to customer requirements and offer products and services
that meet customer demands. Our failure to develop products or offer services
that satisfy customer requirements would materially adversely affect our
business, results of operations and financial condition.
We intend to continue to invest in product and technology development. The
development of new or enhanced products is a complex and uncertain process that
requires the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. The introduction of new or enhanced products also requires that we
manage the transition from older products in order to minimize disruption in
customer ordering patterns and ensure that adequate supplies of new products can
be delivered to meet anticipated customer demand. Our inability to effectively
manage this transition would materially adversely affect our business, results
of operations and financial condition.
WE NEED TO GAIN ACCEPTANCE IN OTHER BROADBAND ACCESS MARKETS
To date, we have derived substantially all of our revenues from sales of
the SMS 1000 for use in the DSL market for broadband access. We intend to expend
a substantial amount of time and resources to achieve market acceptance of our
products in other markets, including the cable and wireless markets. We cannot
be certain that we will be able simultaneously or effectively to address
evolving demands in these markets, or that customers in these markets will not
choose to implement competing technologies or products. In addition, if we are
not first in these markets, there is a risk that competitors will gain market
acceptance first, thereby making it difficult, if not impossible, for us to gain
subsequent market acceptance. If we are unable to achieve acceptance of our
products in these markets, our ability to generate revenues will be limited, and
our business, results of operations and financial condition would be materially
adversely affected.
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WE EXPECT INCREASED COMPETITION
We may not be able to compete successfully with current or future
competitors. If we do not compete successfully against current or future
competitors, our business, results of operations and financial condition will be
materially adversely affected. Currently, competition in our market is intense.
The broadband access markets we are targeting, including DSL, cable and
wireless, are new and rapidly evolving and we expect these markets to become
highly competitive in the future. In addition, we expect new competitors to
emerge in the broadband access market as that market evolves due to
technological innovation and regulatory changes. We face actual and potential
competition from public and private companies providing backbone routers, access
concentrators and subscriber aggregation systems.
Cisco, the leading provider of backbone routers, offers products that
compete directly with our SMS products, and also provides a comprehensive range
of broadband access systems. We expect companies that offer access concentrators
and routers, such as Ascend, which recently announced its pending acquisition by
Lucent, to incorporate some subscriber management functionality into their
products. In addition, there are private companies that provide subscriber
management features in access concentrators or routing platforms.
Many of our principal competitors, including Cisco, Alcatel and
Lucent/Ascend, and some companies that may compete with us in the future, are
large public companies that have longer operating histories and significantly
greater financial, technical, marketing and other resources than we have. As a
result, these competitors are able to devote greater resources to the
development, promotion, sale and support of their products. In addition, our
competitors that have large market capitalizations or cash reserves are much
better positioned than we are to acquire other companies, including our
competitors, and thereby acquire new technologies or products that may displace
our product lines. Any of these acquisitions could give our competitors a
strategic advantage that would materially adversely affect our business, results
of operations and financial condition.
Many of our competitors have significantly more established customer
support and professional services organizations than we do. In addition, many of
our competitors have much greater name recognition and have a more extensive
customer base, broader customer relationships and broader product offerings than
our company. These companies can leverage their customer bases and broader
product offerings and adopt aggressive pricing policies to gain market share. We
have encountered, and expect to continue to encounter, potential customers that,
due to existing relationships with certain of our larger competitors, are
committed to the product offerings of these competitors. As a result, these
potential customers may not consider purchasing our products. We expect to face
competition in the following areas:
- Product pricing;
- Breadth of product lines;
- Sales and distribution capability;
- Product features and enhancements, including product performance,
reliability, size, compatibility and scalability;
- Product ease of deployment;
- Conformance to industry standards; and
- Technical support and service.
We expect that competitive pressures may result in price reductions,
reduced margins and loss of market share, which would materially adversely
affect our business, results of operations and financial condition.
8
<PAGE> 11
WE ARE DEPENDENT ON A SINGLE CONTRACT MANUFACTURER AND SOME OF THE KEY
COMPONENTS IN OUR PRODUCTS COME FROM SINGLE OR LIMITED SOURCES OF SUPPLY
We rely on a single third-party manufacturer, Electromax, to build our
products. We may not be able to effectively manage our relationship with
Electromax and Electromax may not meet our future requirements for timely
delivery. We have no written agreement with Electromax. Any interruption in the
operations of Electromax would adversely affect our ability to meet our
scheduled product deliveries to our customers, which could cause the loss of
existing or potential customers and could materially adversely affect our
business, results of operations and financial condition. In addition, the
products that Electromax builds for us may be insufficient in quality or in
quantity to meet our needs. Electromax or any other manufacturer may not meet
the technological or delivery requirements of our current products or any future
products that we may develop and introduce. The inability of Electromax or any
other of our contract manufacturers in the future to provide us with adequate
supplies of high-quality products, or the loss of Electromax or any other of our
contract manufacturers in the future, would cause a delay in our ability to
fulfill customer orders while we obtain a replacement manufacturer and would
have a material adverse effect on our business, results of operations and
financial condition.
We currently purchase several key components used in the manufacture of our
SMS 1000 product from single or limited sources of supply. We have no guaranteed
supply arrangement with these suppliers. Although we currently maintain, and
expect to continue to maintain, an inventory of these supplies in an amount
equal to our projected needs based on a rolling 3-month forecast, our
manufacturers may fail to obtain these supplies in a timely manner in the
future. Financial or other difficulties faced by these suppliers or significant
changes in demand for these components could limit the availability to us of
these components. Any interruption or delay in the supply of any of these
components, or the inability to obtain these components from alternate sources
at acceptable prices and within a reasonable amount of time, would adversely
affect our ability to meet scheduled product deliveries to our customers and
would materially adversely affect our business, results of operations and
financial condition. In addition, qualifying additional suppliers is
time-consuming and expensive.
We currently use a rolling 6-month forecast based on anticipated product
orders, product order history and backlog to determine our materials
requirements. Lead times for the materials and components that we order vary
significantly and depend on numerous factors, including the specific supplier,
contract terms and demand for a component at a given time. If actual orders do
not match our forecasts, we may have excess or inadequate inventory of certain
materials and components, which could materially adversely affect our business,
results of operations and financial condition.
WE MAY BE UNABLE TO PROPERLY MANAGE GROWTH
We have expanded our operations rapidly since our inception. The number of
our employees increased from 39 in February 1998 to 117 in February 1999. We
currently intend to continue to expand in order to pursue existing and potential
market opportunities. We are currently in the process of hiring additional
engineering and sales personnel. We intend to hire a significant number of
engineers in 1999. Our ability to continue to attract and retain highly skilled
personnel will be a critical factor in determining whether we will be successful
in the future. Competition for highly skilled personnel is intense, especially
in the San Francisco Bay Area. We may not be successful in attracting,
assimilating or retaining qualified personnel to fulfill our current or future
needs. If we are unable to do so, our business, results of operations and
financial condition could be materially adversely affected. Our planned rapid
growth places a significant demand on management and financial and operational
resources. In order to grow and achieve future success, we will be required to:
- Retain existing personnel;
- Hire, train, manage and retain additional qualified personnel; and
- Effectively manage multiple relationships with our customers, suppliers
and other third parties.
9
<PAGE> 12
We are currently seeking to lease additional office space to accommodate
our growing operations. We may not be able to locate necessary office space on
commercially reasonable terms or in a timely manner. Failure to do so would have
a material adverse effect on our business, results of operations and financial
condition. Our current office lease expires in September 1999. Any required
relocation may be disruptive to our business.
OUR PLANNED EXPANSION TO INTERNATIONAL MARKETS WILL INVOLVE NEW RISKS
In 1998, we derived approximately 15% of our revenues from sales to
customers outside of the United States. Our ability to achieve future success
will depend in part on the expansion of our international sales and operations.
International operations are generally subject to a number of risks, including:
- Expenses associated with customizing products for foreign countries;
- Protectionist laws and business practices that favor local competition;
- Dependence on local vendors;
- Multiple, conflicting and changing governmental laws and regulations;
- Longer sales cycles;
- Longer accounts receivable cycles;
- Increased difficulties in collecting accounts receivable;
- Difficulties in managing operations across disparate geographic areas;
- Difficulties associated with enforcing agreements through foreign legal
systems;
- Reduced or limited protection of our intellectual property rights in some
countries;
- Foreign currency exchange rate fluctuations; and
- Political and economic instability.
In addition, if we grow internationally, we will need to expand our
worldwide operations and enhance our communications infrastructure. If we fail
to implement and improve these systems, our ability to accurately forecast sales
demand, manage our supply chain and record and report financial and management
information would be adversely affected. This could materially adversely affect
our business, results of operations and financial condition.
UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD HAVE A MATERIAL ADVERSE EFFECT
ON US
Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. We have
experienced minor errors in the past in connection with new products. We expect
that errors will be found from time to time in new or enhanced products after we
begin commercial shipments. These problems may cause us to incur significant
warranty and repair costs, divert the attention of our engineering personnel
from our product development efforts and cause significant customer relations
problems. The occurrence of these problems could result in the delay or loss of
market acceptance of our products and would likely have a material adverse
effect on our business, results of operations and financial condition.
Since our customers use our products to provide broadband access to their
customers, defects or other performance problems in our products could result in
financial or other damages to our customers. They could seek damages for losses
from us, which, if they were successful, could have a material adverse effect on
our business, results of operations and financial condition. We have not
experienced any product
10
<PAGE> 13
liability claims to date. However, a product liability claim brought against us,
even if unsuccessful, would likely be time consuming and costly.
OUR FAILURE AND THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR
2000 COMPLIANT COULD NEGATIVELY IMPACT OUR BUSINESS
The Year 2000 computer issue creates a variety of risks for us. If systems
do not correctly recognize date information when the year changes to 2000, our
business, results of operations and financial condition could be materially
adversely affected. The risks involve:
- Potential warranty or other claims by our customers;
- Errors in systems we use to run our business;
- Errors in systems used by our suppliers;
- Errors in systems used by our customers; and
- Potential reduced spending by other companies on broadband Internet
access products as a result of significant information systems spending
on Year 2000 remediation.
Our internal systems include both our information technology, or IT, and
non-IT systems. We have conducted an initial audit of our material internal IT
systems, including both our own software products and third-party software and
hardware technology. We have not yet initiated an assessment of our non-IT
systems. To the extent that we are unable to test the technology provided by
third-party vendors, we are seeking assurances from these vendors that their
systems are Year 2000 compliant. We may experience material unanticipated
problems and costs caused by undetected errors or defects in the technology used
in our internal IT and non-IT systems. These unanticipated problems and costs
could have a material adverse effect on our business, results of operations and
financial condition.
We intend to contact our critical suppliers to determine if the suppliers'
operations and the products and services provided to us are Year 2000 compliant.
Where practicable, we will attempt to mitigate our risks with respect to the
failure of our suppliers to be Year 2000 compliant by locating Year 2000
compliant replacement suppliers. However, our failure to mitigate our Year 2000
risks remains a possibility and could have a material adverse impact on our
business, results of operations and financial condition.
We have been informed by Electromax, our contract manufacturer, that its
manufacturing systems are Year 2000 compliant. However, Electromax may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in their internal IT and non-IT systems. These
unanticipated problems and costs could cause manufacturing delays or
difficulties for our products and harm Electromax's operations. Additionally,
Electromax has not yet ascertained whether any of its suppliers is Year 2000
compliant. The failure of a supplier of Electromax to be Year 2000 compliant
could also adversely affect Electromax's operations. Any of these events could
materially adversely affect our business, results of operations and financial
condition.
We believe that the SMS 1000 is Year 2000 compliant. However, despite
testing by us and by current and potential customers, and despite assurances
from developers of products incorporated into the SMS 1000, the SMS 1000 may
contain undetected errors or defects associated with Year 2000 date functions.
We believe that, based solely on internal testing, the recently introduced SMS
500 is Year 2000 compliant. We have made assurances to our customers that the
SMS 1000 and the SMS 500 are Year 2000 compliant. The failure of our SMS
products to be Year 2000 compliant would result in numerous customer claims,
which could have a material adverse impact on our business, results of
operations and financial condition.
11
<PAGE> 14
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or potential customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, spending on Year 2000 issues
could reduce or eliminate the budgets that our current or potential customers
could have for purchases of our products. As a result, our business, results of
operations and financial condition could be materially adversely affected.
To date, our Year 2000 related costs have not been material. We have funded
these costs from available cash without separately accounting for these costs.
Although our future Year 2000 compliance costs are not expected to be
significant, we may experience unanticipated material problems and costs
associated with Year 2000 compliance that could adversely affect our business,
results of operations and financial condition. We have not yet developed any
contingency plan to address situations that may result if we are unable to
achieve Year 2000 readiness of our critical operations. The cost of developing
and implementing a Year 2000 contingency plan may be material.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We have filed one U.S. patent application. There can be no assurance that this
application will be approved, that any issued patents will protect our
intellectual property or that any issued patents will not be challenged by third
parties. Furthermore, other parties may independently develop similar or
competing technology or design around any patents that may be issued to us. We
attempt to protect our intellectual property rights by limiting access to the
distribution of our software, documentation and other proprietary information.
In addition, we enter into confidentiality agreements with our employees and
certain customers, vendors and strategic partners. We cannot be certain that the
steps we have taken will prevent the misappropriation of our intellectual
property, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.
Others may allege that our products infringe upon their proprietary rights.
Any parties asserting that our products infringe upon their proprietary rights
would force us to defend ourselves or our customers, manufacturers or suppliers
against alleged infringement of intellectual property rights. We could incur
substantial costs to prosecute or defend this litigation. In addition,
intellectual property litigation could force us to do one or more of the
following:
- Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- Obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on acceptable terms, if at all; or
- Redesign those products or services that incorporate the disputed
technology.
In the event of a successful claim of infringement against us and our
failure or inability to develop non-infringing technology or license the
infringed technology on acceptable terms and on a timely basis, our business,
results of operations and financial condition would be materially adversely
affected. We may be subject to these claims in the future.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights in order to determine the scope and
validity of our proprietary rights or the proprietary rights of competitors.
These claims could result in costly litigation and the diversion of our
technical and management personnel. As a result, our business, results of
operations and financial condition could be materially adversely affected.
12
<PAGE> 15
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE
At December 31, 1998, we had approximately $8.2 million in cash, cash
equivalents and short-term investments. At December 31, 1998, we had a line of
credit in the amount of $2.0 million that expires at the end of July 1999, upon
which we had drawn down $1.5 million, and a term loan in the amount of $750,000
that expires at July 31, 2000, $391,000 of which was outstanding. Subsequent to
December 31, 1998, we increased the line of credit to $5.0 million. We believe
that these amounts, combined with proceeds from this offering and cash
anticipated to be available from future operations, will enable us to meet our
working capital requirements for at least the next 12 months. We do not
currently anticipate the need for additional capital but if cash from available
sources is insufficient, or if cash is used for acquisitions or other
unanticipated uses, we may need additional capital. The development and
marketing of new products and the expansion of reseller channels and associated
support personnel will require a significant commitment of resources. In
addition, if the market for broadband access 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 continue to incur significant operating
losses and utilize significant amounts of capital. As a result, we could be
required to raise substantial additional capital. We cannot be certain that
additional capital will be available to us at all, or that, if it is available,
it will be on terms favorable to us. Any inability to raise additional capital
when we require it would materially adversely affect our business, results of
operations and financial condition. Any additional issuance of equity or
equity-related securities will be dilutive to our stockholders.
RISKS RELATED TO THE BROADBAND ACCESS INDUSTRY
SALES OF OUR PRODUCTS ARE DEPENDENT ON THE WIDESPREAD ADOPTION OF BROADBAND
ACCESS SERVICES
Sales of our products depend on the increased use and widespread adoption
of broadband access services, and the ability of our customers to market and
sell broadband access services. Our business, results of operations and
financial condition would be materially adversely affected if the use of
broadband access services does not increase as anticipated or if our customers'
broadband access services are not received well by the marketplace. Certain
critical issues concerning use of broadband access services are unresolved and
will likely affect use of broadband access services. These issues include:
- Security;
- Reliability;
- Bandwidth;
- Congestion;
- Cost;
- Ease of access; and
- Quality of service.
Even if these issues are resolved, if the market for products that provide
broadband access to the Internet and to corporate networks fails to develop, or
develops at a slower pace than anticipated, our business, results of operations
and financial condition would be materially adversely affected.
THE BROADBAND ACCESS SERVICES MARKET IS SUBJECT TO RAPID CHANGE
The broadband access services market is new and is characterized by rapid
technological change, frequent enhancements to existing products and new product
introductions, changes in customer requirements and evolving industry standards.
We may not be able to respond quickly or effectively to these developments. 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 products obsolete, which would materially adversely
affect our business, results of operations and financial condition.
13
<PAGE> 16
The emergence of new industry standards might require us to redesign our
products. If our products are not in compliance with industry standards that
become widespread, our customers and potential customers may not purchase our
products. This would have a material adverse effect on our business, results of
operations and financial condition.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY GOVERNMENT REGULATION OF THE
COMMUNICATIONS INDUSTRY
The jurisdiction of the Federal Communications Commission, or FCC, extends
to the communications industry, to our customers and to the products and
services that our customers sell. Future FCC regulations, or regulations set
forth by other regulatory bodies, may adversely affect the broadband access
services industry. Regulation of our customers may have a material adverse
affect on our business, results of operations and financial condition. For
example, FCC regulatory policies that affect the availability of data and
Internet services may impede our customers' penetration into certain markets. In
addition, international regulatory bodies are beginning to adopt standards for
the communications industry. The delays that these governmental processes entail
may cause order cancellations or postponements of product purchases by our
customers, which would materially adversely affect our business, results of
operations and financial condition.
RISKS RELATED TO THE SECURITIES MARKETS
OUR STOCK PRICE MAY BE VOLATILE
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. We will negotiate and determine the initial
public offering price with the representatives of the underwriters based on
several factors. This price may vary from the market price of the common stock
after this offering. The market price of the common stock may fluctuate
significantly in response to the following factors:
- Variations in our quarterly operating results;
- Changes in financial estimates by securities analysts;
- Changes in market valuations of broadband access technology companies;
- Changes in market valuations of networking and telecommunications
companies;
- Announcements by us or our competitors of significant contracts, new
products or product enhancements, acquisitions, strategic partnerships,
joint ventures or capital commitments;
- Loss of a major customer;
- Additions or departures of key personnel;
- Sales of common stock or other securities in the future; and
- Fluctuations in stock market prices and volumes.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CLASS ACTION LITIGATION DUE TO
STOCK PRICE VOLATILITY
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of the
company's securities. We may in the future be the target of similar litigation.
If we become engaged in securities class action litigation, our management's
attention and resources may be diverted and we may incur substantial costs,
resulting in a material adverse effect to our business, results of operations
and financial condition.
CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE
OUTCOME OF DIRECTOR ELECTIONS AND CERTAIN TRANSACTIONS
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will beneficially own approximately
% of our outstanding common stock ( % if the
14
<PAGE> 17
underwriters' over-allotment option is exercised in full). These stockholders,
if acting together, would be able to significantly influence all matters
requiring approval by our stockholders, including the election of directors and
the approval of mergers or other business combination transactions.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK
PRICE
Sales of a substantial number of shares of our common stock after this
offering could adversely affect the market price of our common stock by
potentially introducing a large number of sellers of our common stock into a
market in which our common stock price is already volatile, thus driving our
common stock price down. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional equity securities. Based
on shares outstanding as of December 31, 1998, upon completion of this offering,
we will have shares of common stock outstanding, or shares if the
underwriters' over-allotment option is exercised in full. Our directors,
executive officers and current stockholders have executed lock-up agreements
that limit their ability to sell shares of our common stock. These stockholders
have agreed, subject to limited exceptions, not to sell or otherwise dispose of
any shares of our common stock for a period of at least 180 days after the date
of this prospectus without the prior written approval of Morgan Stanley & Co.
Incorporated. When these lock-up agreements expire, these shares and the shares
of common stock underlying any options held by these individuals will become
eligible for sale, in some cases pursuant only to the volume, manner of sale and
notice requirements of Rule 144. See "Management -- Stock Plans" and "Shares
Eligible for Future Sale."
INVESTORS WILL EXPERIENCE IMMEDIATE DILUTION
The initial public offering price of our common stock is expected to be
substantially higher than the book value per share of our outstanding common
stock immediately after the offering. Accordingly, if you purchase our common
stock in this offering, you will incur immediate dilution of approximately
$ in the book value per share of our common stock from the price you pay for
our common stock. This calculation assumes that you purchased our common stock
for $ per share.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY
Provisions in our bylaws and in our certificate of incorporation, both as
amended and restated upon the closing of this offering, may have the effect of
delaying or preventing a change of control or changes in management of our
company. These provisions include:
- The stipulation that a special meeting of stockholders may only be called
by stockholders owning at least 50% of our outstanding shares;
- The ability of our board of directors to issue preferred stock without
stockholder approval; and
- The right of our board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors.
Furthermore, we are subject to the provisions of section 203 of the Delaware
General Corporation Law. These provisions prohibit a stockholder owning 15% or
more of our outstanding voting stock from consummating a merger or combination
with us unless this stockholder receives board approval for the transaction or
unless 66 2/3% of the outstanding shares of our voting stock not owned by this
stockholder approve the merger or combination.
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<PAGE> 18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," "intend" or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of the forward-looking
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results
or to changes in our expectations.
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<PAGE> 19
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the
shares of common stock we are offering will be
approximately $ , or $ if the underwriters exercise their
over-allotment option in full, at an assumed initial public offering price of
$ and after deducting estimated underwriting discounts and commissions
and our estimated offering expenses of $ .
We expect to use the net proceeds from this offering for general corporate
purposes, including capital expenditures and working capital. A portion of the
net proceeds may also be used to acquire or invest in complementary businesses,
technologies, product lines or products. We have no current plans, agreements or
commitments with respect to any such acquisitions or investments, and are not
engaged in any negotiations with respect to any such acquisitions or
investments. Our management will have broad discretion concerning the use of the
net proceeds of this offering. We intend to invest the net proceeds of this
offering in investment grade, interest-bearing securities pending their use.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock or other
securities and do not currently anticipate paying cash dividends in the future.
Our bank line of credit currently prohibits the payment of dividends.
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<PAGE> 20
CAPITALIZATION
- - The following table sets forth our capitalization as of December 31, 1998.
- - The pro forma information reflects the filing of an amendment to our amended
and restated certificate of incorporation to provide for authorized capital
stock of 80,000,000 shares of common stock and 10,000,000 shares of
undesignated preferred stock and the conversion of all outstanding shares of
preferred stock into 10,456,621 shares of common stock on the closing of this
offering.
- - The pro forma as adjusted information reflects the sale of the shares of
common stock offered hereby after deducting estimated underwriting discounts
and commissions and our estimated offering expenses.
The outstanding share information excludes 2,104,725 shares of common stock
issuable upon exercise of outstanding options as of December 31, 1998 at an
average exercise price of $1.49 per share, 129,471 shares of common stock
issuable upon exercise of outstanding warrants at an average exercise price of
$1.51 per share and 1,273,100 shares of common stock reserved for issuance under
our stock plan as of December 31, 1998. This table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the related notes.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ------------- ---------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, less current portion..... $ 1,275 $ 1,275 $
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $.0001 par value; 13,500,000
shares authorized; 10,456,621 shares issued
and outstanding, actual; 10,000,000 shares
authorized, pro forma and pro forma as
adjusted; no shares issued or outstanding,
pro forma and pro forma as adjusted........ 18,884 --
Common stock, $.0001 par value; 22,500,000
shares authorized; 7,825,302 shares issued
and outstanding, actual; 80,000,000 shares
authorized, 18,281,923 shares issued and
outstanding, pro forma; 80,000,000 shares
authorized, issued and
outstanding, pro forma as adjusted......... 6,741 25,625
Deferred stock compensation................... (4,731) (4,731)
Notes receivable from stockholders............ (211) (211)
Accumulated deficit........................... (14,429) (14,429)
-------- -------- --------
Total stockholders' equity............ 6,254 6,254
-------- -------- --------
Total capitalization.................. $ 7,529 $ 7,529 $
======== ======== ========
</TABLE>
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<PAGE> 21
DILUTION
The pro forma net tangible book value of our common stock as of December
31, 1998, giving effect to the conversion of all shares of preferred stock
outstanding as of December 31, 1998 into common stock on the closing of this
offering, was $6,254,000, or approximately $.34 per share of common stock. Pro
forma net tangible book value per share represents the amount of our total
tangible assets reduced by the amount of our total liabilities divided by
18,281,923 shares of common stock outstanding after giving effect to the
conversion of the preferred stock outstanding as of December 31, 1998 into
common stock. After giving effect to the issuance and sale of shares of our
common stock in this offering and after deducting estimated underwriting
discounts and commissions and our estimated offering expenses, our pro forma net
tangible book value as of December 31, 1998 would have been $ , or
approximately $ per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of $ per
share to new investors. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ $
Pro forma net tangible book value per share as of
December 31, 1998..................................... .34
Increase in pro forma net tangible book value per share
attributable to new investors.........................
----
Pro forma net tangible book value per share after the
offering..................................................
-------
Dilution per share to new investors......................... $
=======
</TABLE>
The following table summarizes on a pro forma basis, giving effect to the
conversion of all outstanding shares of preferred stock into common stock on the
closing of this offering, as of December 31, 1998, the difference between the
number of shares of common stock purchased from Redback Networks by existing
stockholders and by new investors, the total consideration paid to Redback
Networks by existing stockholders and new investors and the average price per
share paid by existing stockholders and by new investors, before deduction of
estimated underwriting discounts and commissions and our estimated offering
expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 18,281,923 $20,014,000 $1.10
New investors...................
---------- ----- ----------- -----
Totals................ 100.0% 100.0%
========== ===== =========== =====
</TABLE>
As of December 31, 1998, there were options outstanding to purchase a total
of 2,104,725 shares of common stock at a weighted average exercise price of
approximately $1.49 per share; 129,471 shares of common stock issuable upon
exercise of outstanding warrants at a weighted average exercise price of $1.51
per share; and 1,273,100 shares of common stock reserved for issuance under our
stock plan. To the extent outstanding options or warrants are exercised, there
will be further dilution to new investors. See "Management -- Stock Plans."
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<PAGE> 22
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our Financial Statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The statement of operations data for the period from August 30,
1996 (inception) through December 31, 1996 and for the fiscal years ended
December 31, 1997 and December 31, 1998, and the balance sheet data at December
31, 1997 and December 31, 1998 are derived from audited financial statements
included elsewhere in this prospectus. The balance sheet data at December 31,
1996 is derived from audited financial statements not included in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 30, 1996 YEAR ENDED
(INCEPTION) THROUGH DECEMBER 31,
DECEMBER 31, ------------------
1996 1997 1998
------------------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $ -- $ 48 $ 9,206
Cost of revenues.................................. -- 29 3,603
----- ------- -------
Gross profit...................................... -- 19 5,603
----- ------- -------
Operating expenses:
Research and development........................ 124 3,249 5,727
Selling, general and administrative............. 19 1,317 8,875
Amortization of deferred stock compensation..... -- -- 880
----- ------- -------
Total operating expenses................ 143 4,566 15,482
----- ------- -------
Loss from operations.............................. (143) (4,547) (9,879)
Interest and other income......................... 1 221 254
Interest expense.................................. -- (85) (251)
----- ------- -------
Net loss.......................................... $(142) $(4,411) $(9,876)
===== ======= =======
Basic and diluted net loss per share.............. $(.22) $ (4.10) $ (3.57)
===== ======= =======
Shares used in computing net loss per share....... 658 1,076 2,769
===== ======= =======
Pro forma net loss per share:
Basic and diluted net loss per share............ $ (.78)
=======
Shares used in computing net loss per share..... 12,684
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997 1998
----- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 119 $ 3,084 $ 8,189
Working capital........................................... 12 5,630 4,461
Total assets.............................................. 216 7,849 14,682
Long-term obligations, less current portion............... -- 827 1,275
Accumulated deficit....................................... (142) (4,553) (14,429)
Total stockholders' equity................................ 83 6,081 6,254
</TABLE>
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the Financial
Statements and related notes contained elsewhere in this prospectus. The
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In many cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "intend" or "continue," or the
negative of such terms and other comparable terminology. These statements are
only predictions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
Redback Networks provides advanced networking solutions that enable
carriers, cable MSOs and service providers to rapidly deploy high-speed
broadband access technologies such as DSL, cable and wireless. We sell our
products to a number of different types of carriers, including incumbent local
exchange carriers, or ILECs, competitive local exchange carriers, or CLECs,
cable MSOs and service providers. Our products are sold through a direct sales
force, value-added resellers, or VARs, and strategic distribution partners.
We recognize revenues, net of allowances, when we ship products to our
customers, provided no significant outstanding vendor obligations remain and
collection is considered probable. We recognize support revenue ratably over the
support period and service revenues as services are performed. Currently, all of
our product sales and service arrangements provide for pricing and payment in
U.S. dollars. Since we have no other product line, our business, financial
condition and results of operations are dependent on acceptance of our SMS
solution in the broadband market.
From inception through December 1997, our operating activities consisted
primarily of research and development activities and building our management
team. We shipped our first products in December 1997, but did not begin shipping
our products in material quantities until the second quarter of 1998. To date,
we have derived substantially all of our revenues from sales of our flagship
product, the SMS 1000, in the DSL market. Our success will depend on our ability
to sell products not only in the DSL market, but also in other markets,
including the cable and wireless markets. We released the SMS 500 in early March
1999. The SMS 500 is targeted at service provider facilities supporting a
smaller number of subscribers than facilities using the SMS 1000. We cannot be
certain that the SMS 1000, the SMS 500 or any future products will achieve
widespread market acceptance.
To date, a significant portion of our revenues has resulted from a small
number of relatively large orders. Substantially all of our sales are made on
the basis of purchase orders rather than long-term agreements. As a result, we
may commit resources to the production of products without having received
advance purchase commitments from customers. If we are unable to sell products
to which we have devoted significant resources or if orders for our products are
cancelled or delayed, our inventory levels could become excessive. Any
subsequent write-off of inventory could have a material adverse effect on our
business, results of operations and financial condition.
We anticipate that our operating results for any given period will continue
to be dependent to a significant extent on large purchase orders, which can be
delayed or cancelled by our customers without penalty. In addition, we
anticipate that our operating results for a given period will continue to be
dependent on a small number of customers. Sales to UUNET, a subsidiary of MCI
Worldcom, Nortel Networks and GTE and its affiliated entities accounted for 28%,
13% and 12%, respectively, of our total revenues for the quarter ended December
31, 1998. If we fail to receive a significant purchase order that
21
<PAGE> 24
we expected for a given quarter, our revenues for that quarter, or following
quarters, will be adversely affected. This could adversely affect our business,
results of operations and financial condition. Furthermore, if any of our
customers experience financial difficulties, our sales to these customers may be
reduced and we may have difficulty in collecting accounts receivable from these
customers. Any delay in large customer orders or customer financial difficulties
could have a material adverse effect on our business, results of operations and
financial condition.
We currently use Electromax to assemble our products. We also rely on
single or limited source suppliers to manufacture certain key components of our
products. A significant portion of our cost of revenues is related to these
outsourcing arrangements. These relationships are subject to a variety of risks.
Currently, competition in our market is intense. We continue to add
features to our products based on the needs of our customers. This has resulted
in increased research and development expenses and may result in reduced
operating margins on our products and a longer sales cycle. We expect
competition to increase in the future. This competition may also result in price
reductions and loss of market share. We expect that product life cycles will
remain relatively short and that the average selling price and gross margins for
our products will decline as each product matures. Accordingly, we must
introduce new products on a timely basis with improved performance
characteristics. Further, we must reduce production costs and sell sufficient
volumes in order to maintain gross margins. If we fail to reduce our production
costs or achieve volume shipment requirements, our product margins will decline
rapidly. Any of the above events could have a material adverse effect on our
business, results of operations and financial condition.
In 1998, we recorded total deferred stock compensation of $5.6 million in
connection with stock and stock options granted during 1998 at prices
subsequently deemed to be below fair market value on the date of grant. Options
granted are typically subject to a four year vesting period. Stock grants are
generally subject to our right to repurchase the stock, which lapses over a four
year period. We are amortizing the deferred stock compensation over the vesting
periods of the applicable options and the repurchase periods for the restricted
stock. We amortized $880,000 of deferred stock compensation in the year ended
December 31, 1998, leaving approximately $4.7 million to be amortized over the
remaining vesting periods. In 1999, we recorded approximately $3.0 million in
additional deferred stock compensation for stock options granted in January and
February 1999 at prices subsequently deemed to be below fair market value on the
date of grant.
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<PAGE> 25
RESULTS OF OPERATIONS
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited quarterly results of
operations, in dollars and as a percentage of net revenues, for the four
quarters ended December 31, 1998. You should read the following table in
conjunction with the Financial Statements and related notes contained elsewhere
in this prospectus. We have prepared this unaudited information on the same
basis as the audited Financial Statements. This table includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results for the
quarters presented. You should not draw any conclusions about our future results
from the results of operations for any quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998
-------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues........................................ $ 478 $ 1,294 $ 2,933 $ 4,501
Cost of revenues.................................... 266 676 1,172 1,489
------- ------- ------- -------
Gross profit........................................ 212 618 1,761 3,012
------- ------- ------- -------
Operating expenses:
Research and development.......................... 863 1,062 1,583 2,219
Selling, general and administrative............... 1,333 1,656 2,519 3,367
Amortization of deferred stock compensation....... 23 53 233 571
------- ------- ------- -------
Total operating expenses.................. 2,219 2,771 4,335 6,157
------- ------- ------- -------
Loss from operations................................ (2,007) (2,153) (2,574) (3,145)
Other income (expense).............................. 26 (20) (5) 2
------- ------- ------- -------
Net loss............................................ $(1,981) $(2,173) $(2,579) $(3,143)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET REVENUES
---------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net revenues........................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................... 55.6 52.2 40.0 33.1
------- ------- ------- -------
Gross profit........................................ 44.4 47.8 60.0 66.9
------- ------- ------- -------
Operating expenses:
Research and development.......................... 180.5 82.1 54.0 49.3
Selling, general and administrative............... 278.9 128.0 85.9 74.8
Amortization of deferred stock compensation....... 4.8 4.1 7.9 12.7
------- ------- ------- -------
Total operating expenses.................. 464.2 214.2 147.8 136.8
------- ------- ------- -------
Loss from operations................................ (419.8) (166.4) (87.8) (69.9)
Other income (expense).............................. 5.4 (1.5) (.1) .1
------- ------- ------- -------
Net loss............................................ (414.4)% (167.9)% (87.9)% (69.8)%
======= ======= ======= =======
</TABLE>
Net Revenues. Our net revenues increased in each of the four quarters ended
December 31, 1998 due to the sale of an increasing number of SMS 1000s, our
principal product. Significant revenues from GTE began in the third quarter of
1998 and from UUNET and Nortel Networks in the fourth quarter of 1998.
23
<PAGE> 26
Cost of Revenues; Gross Profit. Cost of revenues includes all costs
associated with the production of our product, including cost of materials,
manufacturing and assembly costs paid to contract manufacturers and related
overhead costs associated with our manufacturing personnel. Additionally, all
warranty costs and any inventory provisions or write-downs are expensed as cost
of revenues. Cost of revenues, expressed in absolute dollars, increased in each
of the four quarters ended December 31, 1998 primarily as a result of increased
product sales. Gross margin, expressed as a percentage of net revenues,
increased in each quarter primarily due to reduced costs of certain key
components, a decrease in related overhead costs resulting from shipments of our
products in material quantities and changes in product configuration.
Specifically, over the last two quarters of 1998, our customers have been
purchasing the SMS 1000 with more interface slots filled, which increases gross
margins. Changes in product configuration will cause our gross margins to vary
in future periods.
Research and Development. Research and development expenses consist
primarily of salaries and related costs of employees engaged in research and
development activities, as well as related cost of materials. Our research and
development expenditures increased in absolute dollars in each of the four
quarters ended December 31, 1998 primarily as a result of increased personnel
costs. This increase reflects research and development efforts associated with
new products, such as the SMS 500, and new features and functionality for the
SMS 1000. To date, we have expensed research and development expenses as
incurred. Because the market for our products is characterized by rapidly
changing technology, industry standards and customer demands, we expect our
research and development expenses to increase in absolute dollars.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of employee-related expenses, including commissions
paid to sales representatives and marketing and facility-related expenses.
During each of the four quarters ended December 31, 1998, selling, general and
administrative expenses increased in absolute dollars. These increases were
mainly due to the hiring of additional sales and administrative personnel, the
payment to sales representatives of increased commissions resulting from
increased sales, and additional marketing expenses. We anticipate that selling,
general and administrative expenses will continue to increase in absolute
dollars as a result of increases in sales force personnel, commissions on higher
revenues, additional marketing activities and costs associated with public
company reporting requirements.
Amortization of Deferred Stock Compensation. Amortization of deferred stock
compensation increased during each of the four quarters ended December 31, 1998.
This increase was a result of a greater number of shares of stock and stock
options granted during the last two quarters of the year, which was associated
with our increased hiring efforts and the amortization of deferred compensation
on prior grants.
Other Income (Expense). Our other income consists of interest earned on our
cash and cash equivalents offset by other expenses, principally interest expense
paid on our capital leases and borrowings.
We have not recorded a provision for income taxes because we experienced
net losses from inception through 1998. As of December 31, 1998, we had net
operating loss carryforwards of approximately $11.6 million. These carryforwards
will expire at various dates beginning in 2004 through 2018, if not utilized.
Utilization of the net operating losses may be subject to a substantial annual
limitation due to the ownership change limitations contained in the Internal
Revenue Code and similar state provisions. There is sufficient uncertainty
regarding the reliability of the deferred tax assets such that a full valuation
allowance has been recorded. The annual limitation may result in the expiration
of the net operating loss and credits before utilization. See note 4 of the
notes to Financial Statements.
24
<PAGE> 27
INCEPTION TO DECEMBER 31, 1996 AND YEARS ENDED DECEMBER 31, 1997 AND 1998
Net Revenues. We did not generate any revenues until December 1997. Our net
revenues increased from $48,000 in 1997 to $9.2 million in 1998 as we began
shipping the SMS 1000 in volume.
Cost of Revenues; Gross Profit. Our cost of revenues increased from $29,000
in 1997 to $3.6 million in 1998 as we began shipping the SMS 1000 in material
quantities. Gross margin increased from 40% in 1997 to 61% in 1998 primarily due
to reduced costs of certain key components, a decrease in related overhead costs
as a percentage of revenues resulting from an increase in shipments, and changes
in product configuration.
Research and Development. Our research and development expenses increased
from $124,000 for the period from inception to December 31, 1996 to $3.2 million
in 1997 and $5.7 million in 1998. These increases were due mainly to an increase
in the number of research and development personnel and related costs associated
with the development of the SMS 500 and new features and functionality of the
SMS 1000.
Selling, General and Administrative. Our selling, general and
administrative expenses for the period from inception to December 31, 1996 were
not material. These expenses increased from $1.3 million in 1997 to $8.9 million
in 1998 due to the addition of sales and administrative personnel, commissions
on higher sales and additional marketing and facility-related expenses.
Amortization of Deferred Stock Compensation. In 1998, we recorded
amortization of deferred stock compensation of $880,000 in connection with stock
and stock options granted during 1998 at prices subsequently deemed to be below
fair market value on the date of grant.
Other Income (Expense). Our other income, net of expenses, for the period
from inception to December 31, 1996 was not material. Our other income, net of
expenses, decreased from $136,000 in 1997 to $3,000 in 1998 due primarily to
higher interest expense charges resulting from increases in the amount of
capital equipment we leased, partially offset by interest earned on our cash and
cash equivalents.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations through private sales
of securities and, to a lesser extent, bank borrowings and equipment lease
financing. During 1998, we used $6.6 million in cash for operating activities,
compared to $3.8 million in 1997. This increase resulted from the significant
expansion of our operations during this period, including increases in inventory
and accounts receivable. We expect that accounts receivable and inventory will
continue to increase if our revenues continue to rise and that we will continue
to increase our investment in capital assets to expand our operations.
Our principal source of liquidity as of December 31, 1998 consisted of $8.2
million in cash and cash equivalents. As of December 31, 1998, we had a credit
facility that includes a term loan and a revolving line of credit that provides
for borrowings up to the lesser of $2.0 million or 80% of eligible accounts
receivable, as defined in the credit facility. Our line of credit bears interest
at the bank's prime lending rate plus .5% and expires on July 31, 1999. As of
December 31, 1998, we had $1.9 million in outstanding bank indebtedness,
consisting of $391,000 under the term loan and $1.5 million under the line of
credit. In January 1999, we repaid the amount outstanding under the line of
credit. As of December 31, 1998, we were not in compliance with the
profitability covenant under the line of credit. We obtained a waiver of this
covenant as of December 31, 1998. In January 1999, we increased the limit on the
line of credit from $2.0 million to $5.0 million.
Purchases of property and equipment, including equipment purchased under
capital leases, increased from $1.5 million in 1997 to $2.7 million in 1998, and
consisted primarily of purchases of computer equipment, including workstations
and servers to support our increased research and develop-
25
<PAGE> 28
ment activities. We expect our capital expenditures to increase as we further
expand our research and development efforts and as our employee base grows. The
timing and amount of future capital expenditures will depend primarily on our
future growth. We expect to spend approximately $4.1 million for capital
expenditures in fiscal 1999 for computer equipment, including workstations and
servers to support our increased research and development activities.
We believe that the net proceeds from this offering, together with our
existing cash balances, anticipated cash flows from operations and credit line
and capital lease financing, will be sufficient to meet our operating and
capital requirements for at least the next 12 months. However, we could be
required, or could elect, to raise additional funds during that period and we
may need to raise additional capital in the future. Additional capital may not
be available at all, or may only be available on terms unfavorable to us. Any
additional issuance of equity or equity-related securities will be dilutive to
our stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP, No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1
requires that entities 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, results of operations
or cash flows. We will be required to implement SOP No. 98-1 for the year ending
December 31, 1999.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. We expect that the adoption of SOP No. 98-5 will not have a material
impact on our financial position, results of operations or cash flows. We will
be required to implement SOP No. 98-5 for the year ending December 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because we currently
hold no derivative instruments and do not engage in hedging activities, we
expect that the adoption of SFAS No. 133 will not have a material impact on our
financial position, results of operations or cash flows. We will be required to
implement SFAS No. 133 for the year ending December 31, 2000.
YEAR 2000 COMPLIANCE
Historically, computer programs used two digits -- rather than four -- to
designate specific years. Computer programs that use two digits to designate a
specific year may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in normal business activities.
This is known as the Year 2000 problem.
We have relationships with, and are to varying degrees dependent upon, a
large number of third parties that provide information, goods and services to us
or who manufacture and ship our products. Our business, results of operations
and financial condition could be materially adversely affected if any of the
third parties with whom we have relationships were to experience significant
Year 2000 related problems. In addition, our business, results of operations and
financial condition could be materially adversely affected if any of our key
customers encounter significant Year 2000 related problems that cause them to
delay or cancel substantial purchase orders or product deliveries.
26
<PAGE> 29
We have been informed by Electromax, our contract manufacturer, that its
manufacturing systems are Year 2000 compliant. However, Electromax may
experience material unanticipated problems and costs caused by undetected errors
or defects in the technology used in their internal IT and non-IT systems. These
unanticipated problems and costs could have a material adverse effect on their
business, results of operations and financial condition. Additionally,
Electromax is unable to ascertain whether any of its suppliers is Year 2000
compliant. The failure of a supplier of Electromax to be Year 2000 compliant
could adversely affect Electromax's operations, which could materially adversely
affect our business, results of operations and financial condition.
Our products are ultimately used with a number of different hardware and
software products, and to the extent any third-party products are not Year 2000
compliant, the interoperability of our products could be adversely affected.
Given the large number of third-party components used in conjunction with our
products and our limited resources, we do not expect to review third-party
products for Year 2000 compliance.
We have conducted an initial audit of our critical internal financial,
informational and operational systems to identify and evaluate those areas that
may be affected as a result of the Year 2000 problem. To date, we have not
incurred material expense associated with our efforts to become Year 2000
compliant and do not anticipate that any future costs associated with our Year
2000 remediation efforts will be material.
Although we plan to complete modifications or upgrades of our systems prior
to the Year 2000, we may not be able to develop and implement a plan that
adequately addresses the Year 2000 problem in a timely manner. If we are not
able to address the Year 2000 problem adequately, we may be unable to conduct
our business. This would have a material adverse effect on our results of
operations and financial condition.
27
<PAGE> 30
BUSINESS
OVERVIEW
Redback Networks is a leading provider of advanced networking solutions
that enable carriers, cable multiple system operators, or MSOs, and service
providers to rapidly deploy high-speed broadband access to the Internet and
corporate networks. Our Subscriber Management System, or SMS, connects and
manages large numbers of subscribers using any of the major high-speed access
technologies, including digital subscriber line, or DSL, cable and wireless. We
sell our SMS product family through our direct sales force, VARs and
distribution partners, such as Nokia and Nortel Networks. Bridging the gap
between high-speed access concentrators and backbone routers, our SMS is
currently being used by many of the largest carriers and service providers,
including UUNET, a subsidiary of MCI Worldcom, SBC, Southwestern Bell
Information Services and Pacific Bell Internet, subsidiaries of SBC, GTE,
Ameritech, Bell South, Concentric, Earthlink, Flashcom, Korea Telecom, Verio and
@Work, a division of @Home.
INDUSTRY BACKGROUND
INCREASING DEMAND FOR BROADBAND ACCESS SERVICES
In recent years, there has been a significant increase in demand by
businesses and consumers for broadband, or high-speed, access to the Internet
and to corporate networks. Increasing numbers of users are relying on Internet
Protocol, or IP, based networks to access corporate intranets and the World Wide
Web and to participate in network-dependent activities such as email, electronic
commerce, telecommuting and on-line entertainment. Consumers are seeking
low-cost, high-speed access to bandwidth-intensive Internet content and services
such as highly graphical Web sites, audio, video and high-speed data.
International Data Corporation, or IDC, predicts that by the end of 1999, one in
three U.S. households will be online. Businesses have even greater requirements
for high-speed access in order to implement electronic commerce strategies or
Web-based business models, and to provide employees and others with robust
telecommuting capabilities. These applications often require the transmission of
large, multimedia-intensive files, which is practical only with high-speed data
access services.
EMERGING BROADBAND INTERNET ACCESS OPTIONS
Carriers, cable MSOs and service providers are responding to this demand
for high-speed access by providing inexpensive and comprehensive broadband
services. These services deliver "always on" availability that eliminates the
tedious dial-up process associated with analog modem technologies. Changes in
telecommunications regulations have facilitated the development of broadband
strategies by local access providers, using the following technologies:
DSL. The market for digital subscriber line, or DSL, services is expanding
rapidly. DSL operates over standard copper telephone wires, leveraging an
extensive network infrastructure that can be upgraded for broadband services.
Various implementations of DSL are being developed and deployed, including
full-rate ADSL, or Asymmetrical DSL, and G.lite for consumer applications and
SDSL, or Symmetrical DSL, for business applications. Certain applications of DSL
can also serve as an affordable replacement for dedicated lines used to deliver
high-speed data services. Incumbent local exchange carriers, or ILECs, including
Ameritech, Bell Atlantic, Bell South, GTE, Pacific Bell, SBC and US West, have
deployed DSL services. Telecommunications regulatory reform has enabled the new
competitive local exchange carriers, or CLECs, and leading Internet exchange
carriers including Covad Communications, MCI Worldcom, NorthPoint
Communications, Rhythms NetConnections, and Sprint, to provide DSL service over
the same telephone infrastructure used by the ILECs.
28
<PAGE> 31
Interactive Cable. High-speed interactive communication across the cable
infrastructure is made possible by the combination of two-way cable, cable
modems installed in the home and cable modem termination systems, or CMTSs,
installed at major cable concentration points, known as headends. Several
companies are currently deploying broadband access services across two-way
cable, including @Home and TimeWarner, through its Roadrunner service. IDC
estimates that, as of the end of 1998, there were 95 million homes passed by
cable. With upgrades to two-way cable, cable MSOs are well positioned to deploy
broadband access services.
Wireless. As an alternative to wireline access, certain carriers and
service providers are using wireless technologies to provide cost-effective
broadband access. Many of these providers are in the early stages of using their
licenses to deploy broadband wireless access services.
Fiber-to-the-Curb. Fiber optic cable supports an alternative broadband
access technology based on light and photonics that offers nearly unlimited
bandwidth capacity. Where deployment costs are justified by service opportunity,
fiber optic cable is being deployed in the "last mile" from the telephone
central office to the subscriber. Recent fiber-to-the-curb initiatives have been
pursued by several ILECs.
OBSTACLES TO DEPLOYING BROADBAND ACCESS
Regardless of the type of broadband access delivered, deployments of
broadband services pose several major challenges associated with scaling and
configuring existing architectures to accommodate large numbers of new
high-speed subscribers. The traditional dial network model, relying on analog
modems and standard telephone lines, is structured so that service providers can
aggregate subscribers using remote access servers, or RASs, located at the
service providers' data centers. Although constrained by speed, this network
model allows service providers not only to aggregate subscriber connections and
pass the traffic to routers, but also to manage subscriber provisioning,
authentication and accounting in the RAS.
With broadband access technologies, however, subscriber connections are
first concentrated by the carriers and cable MSOs using technology-specific
access concentrators such as DSL access multiplexers, or DSLAMs, and CMTSs. From
there, high-speed data circuits are aggregated at a central facility by
carriers, cable MSOs or other service providers who terminate subscriber
connections and provide backbone connectivity to the Internet. These service
providers therefore need to manage thousands of subscribers' connections and to
route subscribers' data to and from the Internet. While service providers have
been using traditional routers to provide both the circuit termination and
Internet connectivity functions, routers were only designed to address the
Internet connection task and are limited to managing several hundred
subscribers, significantly less than the thousands of potential subscribers
associated with a widely deployed service. In addition, unlike existing RASs
used in the traditional analog modem dial network model, routers were not
designed to provide broadband subscriber management functions such as
provisioning, authentication and accounting.
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<PAGE> 32
Broadband technologies pose additional challenges for service providers
interested in offering more than one type of broadband service. Each broadband
access technology uses different equipment at the service provider's facility.
As a result, service providers offering multiple broadband services
significantly increase their costs, as they must purchase different routers and
deploy different operational models for each broadband service they choose to
offer to their subscribers. The traditional broadband network model is depicted
below:
SEPARATE NETWORKS FOR EACH ACCESS TECHNOLOGY
[DIAGRAM]
Another obstacle to deploying broadband services is the point-to-point, or
dedicated, nature of broadband access technologies. Whether the access method is
DSL, cable or wireless, each of these technologies provides a dedicated link
from one starting point, such as a home or small office, to a single destination
network, such as a service provider or a corporation. Thus, a telecommuter who
purchases a DSL service for connecting to a corporate network is unable to use
the same line to access directly a consumer service provider for personal Web
surfing.
There is a growing demand from carriers, cable MSOs and service providers
to address these issues so that they are able to provide their customers with
reliable, scalable, easy-to-use high-speed access on a cost-effective basis.
Carriers, cable MSOs and service providers require highly scalable networks and
the ability to manage and groom individual subscriber data streams into
simplified IP flows for backbone routers. Service providers must be able to
rapidly and cost-effectively aggregate data streams from diverse broadband
access technologies from different carriers and cable MSOs.
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THE REDBACK NETWORKS SOLUTION
Redback Networks provides solutions that make it possible for carriers,
cable MSOs and service providers to connect and manage large numbers of
subscribers using high-speed access technologies such as DSL, cable and
wireless. Our Subscriber Management System, or SMS, lets carriers, cable MSOs
and service providers connect thousands of subscribers quickly and
cost-effectively, as well as manage subscriber accounts and service profiles.
Carriers, cable MSOs and service providers are able to deliver different kinds
of high-speed broadband access and a variety of service offerings with a single
operational structure. Our SMS network model is described below:
REDBACK SUPPORTS ALL MAJOR BROADBAND TECHNOLOGIES
[DIAGRAM]
Key benefits of our solution include the following:
Enhances Broadband Operations. The SMS bridges the operational gap between
"last mile" access networks that serve businesses and homes and the backbone
routers used by service providers. The SMS accepts a large concentration of
high-speed data traffic from multiple access concentrators and translates it to
an IP data stream, relieving backbone routers of traffic translation and
management responsibilities. In this process, the SMS manages individual
subscriber connections and reduces the number of routers required for widespread
deployment of broadband services.
Supports All Major Access Technologies. The SMS provides and supports a
consistent operational model across major access technologies including DSL,
cable, wireless and dial, and can be deployed by all types of access providers,
including ILECs and CLECs, cable MSOs and service providers. For example, a
service provider, using the SMS, can offer DSL services today and later add or
resell a cable or wireless service offering through the same SMS. With the SMS,
providers are able to utilize one product and one familiar operational model to
deliver multiple broadband access technologies to serve thousands of
subscribers.
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Facilitates Rapid and Scalable Deployment. The SMS supports service
providers' existing access, accounting and management control systems, including
RADIUS, enabling them to quickly deploy high-speed access and achieve rapid
time-to-market for significant revenue-generating services. RADIUS is the
industry standard database used by traditional remote access servers, or RASs.
We designed our solution to be interoperable with equipment from multiple
vendors, for easy integration into existing network environments. For example,
the SMS has built-in support for the major DSL protocols and implementations.
Additionally, the SMS is compatible with existing backbone routers and leverages
the high-performance levels of these routers. Once in place, the SMS
architecture is inherently more scalable than a router-based architecture. The
SMS 1000 today supports up to 4,000 simultaneous subscriber sessions, over
fifteen times the number of subscribers supported by conventional routers.
Provides Platform for the Delivery of Value-Added Services. Our solution
enables providers to create and market new service offerings that leverage basic
broadband connectivity and capabilities. The multiple context functionality of
the SMS lets service providers configure subscribers to access multiple services
across a single physical link. For example, a telecommuter can access a
corporate network from home while his or her family simultaneously accesses
consumer Internet services through the same connection. Thus, a service provider
previously generating a flat monthly access fee can offer value-added services
and generate multiple revenue streams through "re-profiling". In addition, a
wholesale provider of network services can partition high-speed transport
services among multiple service providers or corporate customers through a
single SMS with "re-selling". A large provider can use this capability to
provide wholesale access to up to 20 smaller providers per SMS chassis -- a
significant improvement for wholesale transactions.
Simplifies End-User Administration and Support. Our approach allows easy
configuration and administration of end-user broadband modems, reducing service
providers' costs and enhancing their ability to rapidly deploy services to
thousands of subscribers. For example, we utilize point-to-point over Ethernet,
or PPPoE, technology to provide individualized services for multiple users
sharing a single connection, such as multiple PCs in a home or office. The SMS
also supports a variety of means to manage users, resulting in reduced training
and lower operational expenses.
STRATEGY
Our objective is to be the leading provider of advanced solutions that
enable carriers, cable MSOs and service providers to rapidly deploy high-speed
broadband access to the Internet and corporate networks. Key elements of our
strategy include the following:
Extend Leadership in the Carrier and Service Provider Market. We are
focused on delivering subscriber management solutions to carriers and service
providers and have established early market leadership in the DSL market through
account wins in several major networks. We currently have orders or
installations at four of the five RBOCs, including SBC, Bell Atlantic, Bell
South and Ameritech, as well as installations at other national and
international carriers, including GTE and Korea Telecom. Additionally, we have
several leading service providers as customers, including UUNET, a subsidiary of
MCI Worldcom, Earthlink, Concentric, Southwestern Bell Information Services and
Pacific Bell Internet, subsidiaries of SBC, and @Work, a division of @Home. We
plan to extend our market leadership position by continuing to invest in sales
and marketing efforts that let us further penetrate existing accounts, develop
early customer relationships and win new service provider accounts for all types
of broadband access.
Penetrate Cable and Wireless Broadband Markets. We intend to leverage our
leadership position in DSL subscriber management to penetrate other critical
broadband access markets, such as cable, wireless and fiber-to-the-curb. We plan
to continue to enhance our solutions that support multiple broadband access
technologies and to expand our sales and marketing efforts accordingly. By
offering
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service providers the ability to support multiple broadband access technologies,
we believe our solution will gain acceptance across multiple broadband access
markets.
Expand Global Distribution and Strengthen Strategic Relationships. We
currently pursue a direct and indirect sales strategy to penetrate carrier,
cable MSO and service provider organizations in North America, focusing
primarily on large Internet service providers, or ISPs, ILECs and CLECs. We also
target smaller service providers through VARs that participate in our authorized
PowerPartners program. We are expanding our presence globally by increasing the
scope and size of our sales force, including adding dedicated sales resources in
both Europe and Asia. To further support our global sales objectives, we have
established strategic relationships with leading communications and networking
companies that have significant customer relationships in place. These partners,
including Nortel Networks and Nokia, have enabled us to rapidly expand our
global sales presence and to leverage their established relationships with major
carriers and service providers.
Leverage Leading Software Capabilities. We believe our Access Operating
System, or AOS, software differentiates our solution and gives us a competitive
advantage in the marketplace. Leveraging our highly experienced team of software
engineers, we intend to continue to enhance our wholesale, security, bandwidth
management, subscriber accounting and billing, and network management
capabilities. We expect our current and future products will share a common
software foundation and offer a consistent operational model.
Enable New Consumer and Business Services. We believe our solution provides
a highly flexible platform for the creation and delivery of new value-added
services. We will continue to work directly with our customers to develop
features and functionality that further enhance the ability of service providers
to deliver profitable new broadband-based services. We believe this approach
will increase the value we offer in both new and existing installations, as well
as contribute to the continued business success of our customers. Examples of
these new services include tiered "gold" or "platinum" high-availability
services, virtual private networks, or VPNs, and bundled teleworker services.
Deliver Broad Product Family. Our flagship SMS 1000 is targeted at
carriers, cable MSOs and large service providers. We have expanded our product
offering with the SMS 500, which is targeted at service provider facilities with
fewer subscribers than those using the SMS 1000. Our strategy is to continue to
leverage our AOS software across multiple access technologies and products. In
so doing, we intend to address a range of functionality, density and application
requirements of carriers, cable MSOs and small and large service providers.
CUSTOMERS
The following is a representative list of companies that have purchased our
products and services:
<TABLE>
<S> <C> <C>
SERVICE PROVIDERS: CARRIERS: RESELLERS:
Concentric Ameritech ECI Telecom
Earthlink AT&T Wireless Fujitsu
Flashcom Bell Atlantic GTI
Pacific Bell Internet, Bell South Lucent
a subsidiary of SBC GTE Nokia
Southwestern Bell Information Systems, Korea Telecom Nortel Networks
a subsidiary of SBC SBC Sumitomo Electronics
UUNET, a subsidiary of MCI Worldcom Sprint
Verio Williams Communications
@Work, a division of @Home
</TABLE>
The following examples illustrate how organizations are using our products
to deploy broadband service offerings.
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NETWORK SERVICE PROVIDER
One of the world's largest network service providers, or NSPs, announced
that it intended to roll out its DSL service by early 1999. The rollout, which
has the potential to be the largest DSL deployment offered by any service
provider to date, includes two different categories of DSL services: (1)
Symmetrical DSL, or SDSL, services designed to support business applications
such as Web hosting, e-commerce and bulk file transfer; and (2) Asymmetrical
DSL, or ADSL, services targeted at consumer applications such as Internet
surfing, home shopping and interactive games. In order to offer a broad
deployment on a rapid time schedule, the service provider required a solution
that would enable it to quickly and easily scale to large proportions.
The NSP chose us to anchor its DSL service offering, and plans to deploy
the SMS 1000 as an edge device that performs all of the aggregation, management
and conversion functions necessary to deliver router-ready IP data streams to
the backbone. The NSP will aggregate as many as 4,000 subscribers per SMS 1000
over high-speed links issuing from various central office sources. The NSP will
be able to handle the extra volume of traffic resulting from high-speed DSL
without adding any more router power to its backbone. Using the SMS 1000's
powerful multiple context functionality, the NSP will deliver wholesale DSL
services.
INTERNET SERVICE PROVIDER
One of the largest consumer ISPs, was interested in adding broadband access
to its portfolio of access services. The ISP was already a leader in traditional
dial-up access with hundreds of thousands of subscribers, and was looking to add
cable access and ADSL access over various transfer modes. Specifically, the ISP
received DSL capacity from strategic wholesale partners, and cable capacity
through an affiliated cable MSO. The ISP was facing the issue of how to
cost-effectively aggregate subscriber traffic from these different access
technologies while maintaining its existing, and highly successful, operational
model.
By using our SMS 1000 in its large points-of-presence, or POPs, the ISP was
able to aggregate its different DSL and cable feeds using a single vendor's
device. Additionally, because the SMS 1000 was fully integrated with the ISP's
existing RADIUS billing and authentication systems, the ISP was able to leverage
and retain its many years of operating expertise and continue using its existing
operational model with new broadband service offerings.
INCUMBENT LOCAL EXCHANGE CARRIER AFFILIATE
An unregulated affiliate of an ILEC, had been operating trials of its DSL
Internet access service in a limited number of communities and households for
over a year and planned to announce a much broader service deployment and
breakthrough pricing levels. The ILEC affiliate needed a highly scalable and
production-proven solution to handle the massive demand it expected to receive
for its services. It was looking for a solution that would improve upon the
router-based architecture already in use in the service trials.
The ILEC affiliate selected our SMS 1000 as the subscriber management
platform to aggregate subscriber traffic in its service. Today, SMS 1000s are
being deployed in the ILEC affiliate's DSL-enabled POPs to manage live traffic
from thousands of subscribers, and the service deployment has been scaling
rapidly.
SALES AND MARKETING
We sell our products through a direct sales force, VARs, and strategic
distribution partners.
Direct Sales. Our direct sales force is located in North America and is
focused on the largest service provider, cable MSO and carrier opportunities. As
of February 28, 1999, our direct sales force
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consisted of 35 persons located in various cities throughout North America. In
addition, we are currently building sales organizations in Europe and Asia, both
of which will be focused on large international accounts.
VARs. We sell our SMS solutions through VARs and network integrators that
participate in our authorized PowerPartners reseller program. PowerPartners are
responsible for system installation, preliminary technical support and follow-on
services to customers in their respective locations. Our authorized
PowerPartners program provides a wide range of sales and marketing support
materials, sales and technical training courses, a partners-only web site, and
various cooperative marketing opportunities.
Strategic Distribution Partners. In order to further support our global
sales objectives, we have established strategic relationships with leading
communications and networking companies that have significant customer
relationships already in place. These partners, including Nortel Networks and
Nokia, have enabled us to rapidly expand our global sales presence and to
leverage their established relationships with major carriers and service
providers.
Marketing. We have a variety of marketing programs and initiatives to
support the sale and distribution of our products. The audience for these
activities includes our sales organization, strategic partners and authorized
resellers, existing and prospective customers, and the trade press, analysts and
others who are influential in the industry. Marketing activities include
participation in technical conferences, preparation of sales tools, business
cases, competitive analyses and other marketing collateral, sales training,
publication of customer deployments, new product information and educational
articles in industry journals, maintenance of our World Wide Web site and direct
marketing to prospective customers. We also participate in leading industry
tradeshows, such as Networld + InterOp at Las Vegas, where we received an award
for Best of Show in May 1998 in the Wide Area Network, or WAN, and remote access
devices category.
PRODUCTS AND TECHNOLOGY
Our SMS solutions enable broadband service providers to deliver high-speed
Internet access and services by bridging the operational gap between high-speed
access equipment in the telco central office or cable/wireless headend and
network service provider backbone routers. Whether deployed by
telecommunications carriers at their regional access points, by cable MSOs at a
headend or by service providers at a point-of-presence, or POP, the SMS accepts
a large concentration of high-speed data traffic from such devices as DSL access
multiplexers, or DSLAMs, Cable Modem Termination Systems, or CMTSs, and wireless
termination systems. The SMS applies scalable user configuration and management
to the data streams, and then performs all of the translations necessary to
convert the traffic to IP, relieving the service provider backbone routers of
frame translations that can cause congestion on high-volume networks.
DESCRIPTION OF THE SMS PRODUCT FAMILY
We currently offer two SMS solutions, (1) the SMS 1000 and (2) the SMS 500.
SMS 1000. We began shipping the flagship SMS 1000 in December 1997. To
date, our customers for the SMS 1000 have included UUNET, a subsidiary of MCI
Worldcom, SBC, Southwestern Bell Information Services and Pacific Bell Internet,
subsidiaries of SBC, GTE, Ameritech, Bell South, Concentric, Earthlink,
Flashcom, Korea Telecom, Verio and @Work, a division of @Home. Each SMS 1000
today can support up to 4,000 simultaneous subscribers and is targeted at major
ISPs, ILECs, CLECs and cable MSOs. The chassis consists of six modular interface
slots, which can be populated with modules supporting DS-3 and OC-3 ATM, DS-3
Frame Relay, 10/100 megabit Ethernet and other transmission protocols.
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SMS 500. Targeted initially for service provider facilities with fewer
subscribers than those using the SMS 1000, we released the SMS 500 for general
availability in March 1999. The SMS 500 is a smaller chassis with two modular
interface slots and supports up to 1,000 simultaneous subscribers. The SMS 500
supports ATM, Frame Relay and 10/100 megabit Ethernet, as well as T-1
connections.
ACCESS OPERATING SYSTEM SOFTWARE
Our Access Operating System software, or AOS, is an advanced operating
system developed to optimize the subscriber management and routing functions in
our SMS products. AOS operates on both the SMS 500 and SMS 1000, and was
developed specifically to support the aggregation of large numbers of subscriber
circuits. It supports a large variety of encapsulations in use in the networking
industry today, and provides sophisticated traffic management features such as
traffic shaping and rate policing.
In addition, our AOS supports the routing and bridging of IP packets and is
capable of running dynamic routing protocols. It supports authentication
mechanisms such as Challenge Handshake Authentication Protocol, or CHAP, and
Password Authentication Protocol, or PAP, and provides tools necessary to manage
a large network of subscribers. AOS supports the unique capability to
dynamically bind subscriber sessions to services. This capability enables
dynamic service selection to be deployed by carriers and service providers
alike. The AOS also supports the Layer 2 Tunneling Protocol, or L2TP, which is
critical to the deployment of virtual private networks by service providers. We
are a co-author of the PPP-over-Ethernet specification, or PPPoE, a protocol
that greatly simplifies broadband access and service provider selection, and the
PPPoE functionality in our AOS is a leading implementation. Another
distinguishing feature of our AOS is its support for multiple contexts, which
allows a service provider to partition a single SMS unit into as many as twenty
multiple virtual logical devices.
Some of the key functions that our AOS supports include:
Policing and Rate Limiting. Policing and rate limiting supports the
creation of different service classes and provides service providers with
predictable traffic behavior for better management of their networks.
Routing Protocol Support. AOS includes support for certain popular routing
protocols. In addition, we will continue to leverage and expand the routing
protocol support that our SMS product line offers.
Layer 2 Tunneling Protocol (L2TP). We support Layer 2 Tunneling Protocol,
or L2TP, the standard method of building a virtual private network, or VPN,
allowing fixed and mobile users, including telecommuters, to simulate a private
network using a shared infrastructure, such as the Internet. VPNs also allow
mobile users to make secure connections to their corporate intranets or
extranets over the public Internet.
Web-based Management. The Web-based management capabilities in our AOS
allow service providers to streamline operations and simplify troubleshooting
through a common, easy-to-use browser interface.
Bulk Statistics. The bulk statistics capabilities in our AOS allow service
providers access to information that enables them to provide efficient storage
and transfer of high volume accounting data.
RESEARCH AND DEVELOPMENT
We have assembled a team of highly experienced networking engineers with
experience at leading communications companies. Our engineering expertise
includes routers and routing protocols, access products, ATM/Frame Relay
switching, WAN interfaces and network management. As of February 28, 1999, we
employed 51 engineers, with plans to continue expanding all functional areas of
the engineering organization. During 1998 we spent $5.7 million on research and
development.
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Our research and development process is driven by market demand. Product
development begins with a comprehensive functional product specification based
on input from the product management and sales organizations. In addition, we
value feedback from customers and have incorporated a significant amount of
customer-requested functionality to date. We are also active in industry bodies
and standards committees and utilize information from these organizations in the
product development process.
We are focusing development efforts on, among other things, supporting
carrier services and additional industry standards, expanding the capacity of
existing products and extending network management capabilities. In addition, we
are committed to extending the functionality of our AOS software to enable
additional competitive advantage for our customers.
CUSTOMER SERVICE AND SUPPORT
Our customer service and support organization installs and maintains
products sold in North America by our direct sales force, as well as certain
products sold by our authorized resellers and partners. Generally, our strategic
distribution partners and authorized resellers provide installation and
first-level, or preliminary, support to their customers, while we provide backup
support.
Our Technical Assistance Center, or TAC, employs systems engineers who work
closely with our direct sales personnel, partners and resellers to assist end
users with post-sales support issues. We have retained field systems engineers
to provide pre-sales support and installation services for direct sales
customers.
MANUFACTURING
Our manufacturing operations consist primarily of prototype development,
materials planning and procurement, final assembly, testing and quality control.
We use several independent suppliers to provide certain printed circuit boards,
chassis and subassemblies. We subcontract substantially all of our manufacturing
to Electromax, located in San Jose, California. In addition, we use a
combination of standard parts and components obtained through Wyle Electronics,
located in Santa Clara, California. Several key components are purchased from
sole or limited sources of supply. See "Risk Factors -- We are dependent on a
single contract manufacturer and some of the key components in our products come
from single or limited sources of supply."
COMPETITION
The broadband access markets we are targeting, including DSL, cable and
wireless, are new and rapidly evolving and we expect these markets to become
highly competitive in the future. In addition, we expect that new competitors
will emerge as the market for broadband access itself evolves due to
technological innovation and regulatory changes. We encounter current or
potential competition from public and private companies providing backbone
routers, access concentrators and subscriber aggregation systems.
Cisco, the leading provider of backbone routers, offers products that
compete directly with our SMS products, and also provides a comprehensive range
of broadband access systems. We expect companies that offer access concentrators
and routers, such as Nortel Networks and Ascend, which recently announced its
pending acquisition by Lucent, to incorporate some subscriber management
functionality into their products. In addition, there are private companies that
provide subscriber management features in access concentrators or routing
platforms.
Some of our current and potential competitors, including Cisco, Alcatel and
Lucent/Ascend are large public companies that have longer operating histories
and significantly greater financial, technical, marketing and other resources
than we do. As a result, these competitors are able to devote greater resources
to the development, promotion, sale and support of their products. In addition,
competitors with large market capitalizations or cash reserves are much better
positioned than we are to acquire other companies, including our competitors,
and thereby acquire new technologies or products that may displace our product
lines. Any
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of these acquisitions could give the acquiring competitor a strategic advantage
that would materially adversely affect our business, results of operations and
financial condition.
Many of our competitors have significantly more established customer
support and professional services organizations than we do. In addition, many of
our competitors have more extensive customer bases and broader customer
relationships than us, including relationships with many of our current and
potential customers. Moreover, these competitors often have broader product
offerings than we do. These companies can leverage their customer relationships
and broader product offerings and adopt aggressive pricing policies to gain
market share. As a result, we may not be able to maintain a competitive position
against current or future competitors. Our failure to maintain and enhance our
competitive position within the market could seriously harm our business,
results of operations and financial condition.
PATENTS AND PROPRIETARY RIGHTS
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology. We rely on a combination
of patent, trademark, copyright and trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect our intellectual
property. These legal protections afford only limited protection for our
technology. We have one patent application pending in the United States and we
have no foreign patents or patent applications. Our pending patent application
may not result in the issuance of any patents. If any patent is issued, it might
be invalidated or circumvented or otherwise fail to provide us any meaningful
protection. In addition, we cannot be certain that others will not independently
develop substantially equivalent intellectual property or otherwise gain access
to our trade secrets or intellectual property, or disclose our intellectual
property or trade secrets, or that we can meaningfully protect our intellectual
property. Our failure to protect our intellectual property effectively could
have a material adverse effect on our business, financial condition or results
of operations. We have licensed technology from third parties for incorporation
into our units, and we expect to continue to enter into such agreements for
future products. Our licenses may result in royalty payments to third parties,
the cross-license of technology by us or payment of other consideration. If our
arrangements are not concluded on commercially reasonable terms, our business,
financial condition or results of operations could be materially adversely
affected.
EMPLOYEES
At February 28, 1999, we had a total of 117 employees, all of whom were
based in the United States. Of the total, 51 were in research and development,
41 were engaged in sales, marketing and business development, 7 were engaged in
customer support services operations, and 18 were in administration, finance and
operations. None of our employees are subject to a collective bargaining
agreement and we believe that our relations with our employees are good.
FACILITIES
Our principal administrative, sales, marketing and research and development
facility occupies approximately 32,000 square feet in Sunnyvale, California
pursuant to a lease that expires in September 1999. We believe that our existing
facilities are adequate until this lease expires and that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed. We have sales offices throughout the United States, including
regional sales offices in California, Colorado, Virginia and Washington.
LEGAL PROCEEDINGS
We are not aware of any pending legal proceedings against us that,
individually or in the aggregate, would have a material adverse effect on our
business, results of operations or financial condition. We may in the future be
party to litigation arising in the course of our business, including claims that
we allegedly infringe third-party trademarks and other intellectual property
rights. These claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.
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MANAGEMENT
DIRECTORS AND OFFICERS
The following table sets forth certain information regarding our directors
and officers as of December 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dennis L. Barsema(1)................. 44 President, Chief Executive Officer and Director
Geoffrey C. Darby(1)................. 52 Vice President of Finance, Chief Financial
Officer and Secretary
Randall J. Kruep(1).................. 38 Vice President of Worldwide Sales
William E. Miskovetz(1).............. 40 Vice President of Engineering
Larry D. Blair....................... 46 Vice President of Marketing
David D. Childers.................... 51 Director of Customer Support
Gilles G. Concordel.................. 37 Vice President of Business Development
Gaurav Garg.......................... 33 Vice President of Business Development and
Strategic Planning
Edward S. Harriman................... 44 Chief Technology Officer
Sean K. Laskey....................... 37 Vice President of Operations
Carrie J. Perzow..................... 42 Vice President of Human Resources
William M. Salkewicz................. 38 Director of Software Development
Daniel A. Simone..................... 39 Vice President of Product Management
James R. Flach(2).................... 51 Director
Pierre R. Lamond(3).................. 68 Director, Chairman of the Board
Daniel J. Warmenhoven(2)(3).......... 48 Director
</TABLE>
- -------------------------
(1) Executive officer
(2) Member of compensation committee
(3) Member of audit committee
Dennis L. Barsema has served as our President and Chief Executive Officer
and has been a director since joining us in November 1997. Prior to that time,
Mr. Barsema was the Senior Vice President and General Manager at Centigram, a
telecommunications company, from January 1996 to November 1997. From October
1993 to December 1995, he served as Vice President at SoftSwitch, a
telecommunications company. Prior to that time, he served as Vice President at
Primary Access and AT&T Paradyne. Mr. Barsema holds a BS in Business Management
from Northern Illinois University.
Geoffrey C. Darby has served as our Vice President of Finance, Chief
Financial Officer and Secretary since August 1998. From August 1994 to July
1998, he served as Vice President of Finance and Chief Financial Officer of
Visioneer, a digital imaging company. From February 1989 to August 1994, he
served as Vice President of Finance and Chief Financial Officer of Megatest, a
provider of testing equipment for the semiconductor industry. Prior to that
time, Mr. Darby was Assistant Treasurer of Compaq from February 1987 to December
1988. Mr. Darby holds a BS (Hons) from Southampton University in England and is
a Chartered Accountant in the United Kingdom.
Randall J. Kruep has served as our Vice President of Worldwide Sales since
January 1999. From September 1997 to January 1999, Mr. Kruep served as our Vice
President of Sales. Previously, Mr. Kruep was Senior Director of Telecom Sales
for Fore Systems, an ATM/switching company, from May 1996 to July 1997. Prior to
that time, he was a Regional Sales Manager at Cisco, a networking company, from
May 1992 to May 1996. From May 1982 to May 1992 he was Director of Sales at
Motorola in the Information Systems Group. Mr. Kruep holds a BA in Finance and
Communications from Southern Illinois University and an MBA from Fontbonne
College.
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William E. Miskovetz has served as our Vice President of Engineering since
May 1998. Previously, he was Vice President of Engineering at FreeGate, a
networking company, from January 1997 to May 1998. From May 1991 to January
1997, he held various engineering and management positions at Cisco, a
networking company. Mr. Miskovetz holds a BS in Computer Science from the
University of Illinois.
Larry D. Blair has served as our Vice President of Marketing since January
1998. Previously, Mr. Blair was Vice President of Marketing at Ipsilon Networks,
a high-performance IP switch company. Prior to that time, Mr. Blair was a
co-founder and the Vice President of Marketing at Kalpana, an ethernet switch
company, from January 1990 to June 1995. Mr. Blair holds a BSEE from Rochester
Institute of Technology.
David D. Childers has served as our Director of Customer Support since July
1998. Previously, Mr. Childers was Senior Manager of Customer Support at Ascend,
a networking company, from April 1995 to July 1998. From May 1975 to April 1995,
Mr. Childers held various management positions at US West, a telecommunications
company. Mr. Childers holds an AA from Community College Denver.
Gilles G. Concordel is one of our co-founders and has served as Vice
President of Business Development since December 1996. From November 1994 to
December 1996, Mr. Concordel worked for Pacific Telesis, a telecommunications
company, as Director of Multimedia Technology. From March 1991 to October 1994,
he headed the multimedia business unit at Teknekron Communications Systems, a
communications systems company. Mr. Concordel holds a Masters degree in
Physics/Math from Ecole Polytechnique, a Masters degree in Telecommunications
from Ecole Nationale Superieure des Telecommunications and an MBA from HEC,
France/University of California at Los Angeles.
Gaurav Garg is one of our co-founders and has served as our Vice President
of Business Development and Strategic Planning since August 1996. Previously,
Mr. Garg was a principal engineer at Bay Networks, a networking company, from
July 1990 to July 1996. Mr. Garg holds BAEE, BACS and MSEE degrees from
Washington University at St. Louis.
Edward S. Harriman has served as our Chief Technology Officer since March
1999 and has been with Redback Networks since November 1996. Prior to joining
Redback Networks, Mr. Harriman was a Consulting Engineer at Bay Networks, a
networking company, from February 1989 to November 1996. Previously, Mr.
Harriman was Principal Engineer at Bolt Beranek Newman, an Internet company,
from February 1980 to February 1989. Mr. Harriman received his BA in Electrical
Engineering and Computer Science from the Massachusetts Institute of Technology.
Sean K. Laskey has served as our Vice President of Operations since October
1997. Previously, Mr. Laskey was Director of Operations at Tut Systems, a
provider of advanced communications products from July 1996 to July 1997. From
September 1990 to June 1996, Mr. Laskey held various management positions at
Network Peripherals, a maker of networking equipment. Prior to that time, he was
a Manufacturing and Materials Manager at Sun Microsystems, a software and
computer systems company, from April 1987 to September 1990.
Carrie J. Perzow has served as our Vice President of Human Resources since
October 1998. From February 1995 to September 1998, she was the Vice President
of Human Resources for Centigram, a telecommunications company. Prior to that
time, she held various management positions at Sun Microsystems, a software and
computer systems company, from June 1992 to January 1995. Ms. Perzow previously
worked in various HR management positions at 3Com Corporation and Scientific
Micro Systems. Ms. Perzow holds a BA in Sociology from the University of
California at Santa Barbara.
William M. Salkewicz is one of our co-founders and has served as our
Director of Software Development since December 1996. Previously, Mr. Salkewicz
was a Principal Engineer at Bay Networks, a networking company, from February
1992 to November 1996. From June 1988 to February
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<PAGE> 43
1992, Mr. Salkewicz was a Principal Engineer at Digital Equipment Corporation, a
maker of computer peripherals. Mr. Salkewicz holds a BSEE and a BSCS from
Western New England College.
Daniel A. Simone has served as our Vice President of Product Management
since January 1997. Previously, Mr. Simone worked at Bay Networks, a networking
company, from June 1992 to January 1997 as Director of Product Management. Prior
to Bay Networks, Mr. Simone held various positions at Motorola, a maker of
communications equipment. Mr. Simone holds a BSEE from Marquette University, an
MSEE from Marquette University and an MBA from the University of Chicago.
James R. Flach has served as one of our directors since January 1997. From
January 1997 to November 1997, Mr. Flach served as our President and Chief
Executive Officer. Mr. Flach has been a partner of Accel Partners, a venture
capital firm, since September 1992. He currently serves as Chairman of Sentient
Networks, a multi-service access switch company, and is also a director of
Hybrid Networks, a broadband access equipment company. Additionally, Mr. Flach
serves on the board of a number of private companies. Mr. Flach holds a BS in
Physics from Rensselaer Polytechnic Institute and an MS in Applied Mathematics
from the Rochester Institute of Technology.
Pierre R. Lamond has served as our Chairman of the Board since November
1996. Mr. Lamond has been a partner with Sequoia Capital, a venture capital
firm, since 1981. He is currently the Chairman of CombiChem, a computational
drug discovery company, and Vitesse Semiconductor, a semiconductor company.
Additionally, Mr. Lamond serves on the board of a number of private companies.
Prior to joining Sequoia, Mr. Lamond was a founder and technical director of
National Semiconductor and the general manager of its Integrated Circuit
Division. Mr. Lamond holds an MS in Electrical Engineering from Northeastern
University and an MS in Physics from Toulouse University.
Daniel J. Warmenhoven has served as one of our directors since January
1998. Mr. Warmenhoven has been President, Chief Executive Officer and a Director
of Network Appliance, a network data storage devices company, since October
1994. Prior to that time, Mr. Warmenhoven served as Chairman, President and
Chief Executive Officer of Network Equipment Technologies. Prior to joining
Network Equipment Technologies, he spent five years with Hewlett-Packard serving
in a number of senior management positions. Before that time, he served thirteen
years with IBM. Mr. Warmenhoven holds a BSEE from Princeton University.
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers.
BOARD COMMITTEES
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors, including stock
compensation and loans. In addition, the compensation committee reviews and
makes recommendations on bonus and stock compensation arrangements for all of
our employees. As part of the foregoing, the compensation committee also
administers our 1999 Stock Incentive Plan, 1999 Employee Stock Purchase Plan and
1999 Directors' Option Plan. The current members of the compensation committee
are Messrs. Flach and Warmenhoven.
Audit Committee. The audit committee of the board of directors reviews and
monitors our corporate financial reporting and our internal and external audits,
including, among other things, our internal audit and control functions, the
results and scope of the annual audit and other services provided by our
independent auditors and our compliance with legal matters that have a
significant impact on our financial reports. The audit committee also consults
with our management and our independent auditors prior to the presentation of
financial statements to stockholders and, as appropriate, initiates inquiries
into aspects of our financial affairs. In addition, the audit committee has the
responsibility to consider
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<PAGE> 44
and recommend the appointment of, and to review fee arrangements with, our
independent auditors. The current members of the audit committee are Messrs.
Lamond and Warmenhoven.
DIRECTOR COMPENSATION
Directors do not receive any cash fees for their service on the board or
any board committee, but they are entitled to reimbursement for all reasonable
out-of-pocket expenses incurred in connection with their attendance at board and
board committee meetings. Mr. Warmenhoven received options to purchase 75,000
shares of common stock when he joined the board of directors. Following this
offering, Messrs. Lamond and Flach will each receive an initial grant of options
to purchase 25,000 shares of common stock and all directors will receive
automatic annual option grants under our 1999 Directors' Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
Messrs. Flach and Warmenhoven. No interlocking relationship exists between any
member of our board of directors or our compensation committee and any member of
the board of directors or compensation committee of any other company, and no
such interlocking relationship has existed in the past.
INDEMNIFICATION
In March 1999, the board of directors authorized Redback Networks to enter
into indemnification agreements with each of our directors and executive
officers. The form of indemnification agreement provides that we will indemnify
our directors and executive officers to the fullest extent permitted by Delaware
law, our certificate of incorporation and our bylaws, against any and all of
their expenses incurred by reason of their status as a director or executive
officer.
Our certificate of incorporation and bylaws each contain certain provisions
relating to the limitation of liability and indemnification of our directors and
officers. Our certificate of incorporation provides that our directors will not
be personally liable to Redback Networks or our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability
- for any breach of the director's duty of loyalty to Redback Networks or
our stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- in respect of certain unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
- for any transaction from which the director derives any improper personal
benefit.
This provision in the certificate of incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware General Corporation law.
Our certificate of incorporation also provides that if the Delaware General
Corporation Law is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of our
directors will be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law. The foregoing provisions of our certificate of
incorporation are not intended to limit the liability of our directors or
officers for any violation of applicable federal securities laws.
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<PAGE> 45
In addition, as permitted by Section 145 of the Delaware General
Corporation Law, our bylaws provide that
- we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law;
- we may, in our discretion, indemnify other current and former employees
of Redback Networks as provided by the Delaware General Corporation Law;
- to the fullest extent permitted by the Delaware General Corporation Law,
we are required to advance all expenses incurred bY our directors and
officers in connection with a legal proceeding (subject to certain
exceptions);
- the rights conferred in the bylaws are not exclusive; and
- any retroactive amendment of our bylaw provisions relating to
indemnification shall not affect any indemnification rights or
obligations relating to any pre-existing state of facts.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
the fiscal year ended December 31, 1998 paid by us for services rendered by our
Chief Executive Officer and our other executive officers whose total salary and
bonus for such fiscal year exceeded $100,000, collectively referred to below as
the Named Executive Officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
--------------------------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Dennis L. Barsema.......................... $180,000 $ 90,000 $ -- --
President, Chief Executive Officer
and Director
Geoffrey C. Darby(1)....................... 72,000 7,000 225,000 --
Vice President of Finance,
Chief Financial Officer and Secretary
Randall J. Kruep........................... 90,000 135,422(2) 75,000 53,000(3)
Vice President of Worldwide Sales
William E. Miskovetz(4).................... 93,750 15,000 317,500 --
Vice President of Engineering
</TABLE>
- -------------------------
(1) Represents the total amount of compensation Mr. Darby received in 1998 for
the portion of the year during which he was one of our executive officers.
Mr. Darby joined us in August 1998. See "Management -- Directors and
Officers."
(2) Represents commission income.
(3) Represents reimbursement for relocation expenses.
(4) Represents the total amount of compensation Mr. Miskovetz received in 1998
for the portion of the year during which he was one of our executive
officers. Mr. Miskovetz joined us in May 1998.
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<PAGE> 46
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the year
ended December 31, 1998 to each of the Named Executive Officers. No stock
appreciation rights were granted to these individuals during that year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(4)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED(#)(1) 1998(2) ($/SH)(3) DATE 5%($) 10%($)
---- ------------- --------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dennis L. Barsema(5)........ -- --% $ -- -- -- --
Geoffrey C. Darby........... 125,000 4.6 .80 8/3/08 $62,889 $159,374
100,000 3.7 .80 8/3/08 50,312 127,499
Randall J. Kruep(6)......... 30,000 1.1 .60 5/27/08 11,320 28,687
27,333 1.0 3.00 12/15/08 51,569 130,685
17,667 .7 3.00 12/15/08 33,332 84,470
William E. Miskovetz........ 247,500 9.1 .30 4/13/08 46,695 118,335
30,000 1.1 1.00 9/1/08 18,867 47,812
20,000 .7 3.00 12/15/08 37,734 95,625
20,000 .7 3.00 12/15/08 37,734 95,625
</TABLE>
- -------------------------
(1) Each of the options listed in the table is immediately exercisable. The
shares purchasable under the options may be repurchased by Redback Networks
at the original exercise price paid per share if the optionee ceases service
before vesting in such shares. The repurchase right lapses and the optionee
vests as to 25% of the option shares upon completion of 12 months of service
from the vesting start date and the balance in a series of equal monthly
installments over the next three years of service thereafter. The option
shares will vest upon an acquisition of Redback Networks by merger or asset
sale, unless our repurchase right with respect to the unvested option shares
is transferred to the acquiring entity. In addition, the repurchase right as
to Mr. Barsema's shares will lapse in full, and the vesting as to Mr.
Darby's shares will be accelerated in full if, upon a merger or asset sale,
they are not offered a position equal to or better than their existing
position. In the event of a merger or asset sale, the vesting on Mr. Kruep's
shares will be redetermined as if the shares vested over a three, rather
than four, year period.
(2) Based on a total of 2,709,100 options granted to our employees during the 12
months ended December 31, 1998.
(3) The exercise price was equal to the fair market value of our common stock as
valued by our board of directors on the date of grant. In determining this
fair market value, the board of directors took into account the purchase
price paid by investors for shares of our preferred stock (taking into
account the liquidation preferences and other rights, privileges and
preferences associated with such preferred stock) and an evaluation by the
board of directors of our revenues, operating history and prospects. The
exercise price may be paid in cash, in shares of our common stock valued at
fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. We may also
finance the option exercise by lending the optionee sufficient funds to pay
the exercise price for the purchased shares, together with any federal and
state income tax liability incurred by the optionee in connection with such
exercise.
(4) The potential realizable value is calculated based on the ten-year term of
the option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. The potential realizable value at 5% and 10% appreciation is
calculated by assuming that the estimated fair market value on the date of
grant appreciates at the indicated rate for the
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<PAGE> 47
entire term of the option and that the option is exercised at the exercise price
and sold on the last day of its term at the appreciated price. See footnote 3
for information on how the fair market value of our common stock was estimated.
The initial public offering price is higher than the estimated fair market
value on the date of grant, and the potential realizable value of the
option grants would be significantly higher than the numbers shown in the
table if future stock prices were projected to the end of the option term
by applying the same annual rates of stock price appreciation to the
initial public offering price.
(5) Does not include 1,053,480 shares of restricted stock granted to Mr. Barsema
in December 1997. See "Management -- Certain Transactions."
(6) Does not include 300,000 shares of restricted stock granted to Mr. Kruep in
August 1997. See "Management -- Certain Transactions."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth for each of the Named Executive Officers the
number of options exercised during the fiscal year ended December 31, 1998 and
the number and value of securities underlying unexercised options that are held
by the Named Executive Officers as of December 31, 1998. No stock appreciation
rights were exercised by the Named Executive Officers in fiscal year 1998, and
no stock appreciation rights were outstanding at the end of that year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, DECEMBER 31,
SHARES 1998(#)(2) 1998($)(3)
ACQUIRED ON VALUE ----------------- -----------------
NAME EXERCISE(#) REALIZED($)(1) VESTED UNVESTED VESTED UNVESTED
---- ----------- -------------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Dennis L. Barsema.............. -- $ -- -- -- -- $ --
Geoffrey C. Darby.............. -- -- -- 225,000 -- 495,000
Randall J. Kruep............... 30,000 0 -- 45,000 -- --
William E. Miskovetz........... 97,500 0 -- 220,000 -- 465,000
</TABLE>
- -------------------------
(1) Equal to the fair market value of the purchased shares on the option
exercise date, less the exercise price paid for such shares.
(2) The options are immediately exercisable for all of the option shares, but
any shares purchased under those options will be subject to repurchase by
Redback Networks, at the original exercise price paid per share, if the
optionee ceases service with Redback Networks before vesting in such shares.
The heading "Vested" refers to shares that are no longer subject to
repurchase; the heading "Unvested" refers to shares subject to repurchase as
of December 31, 1998.
(3) Based on the fair market value of our common stock as determined by our
board of directors at the end of 1998 of $3.00 per share, less the exercise
price payable or paid for such shares. The fair market value of our common
stock at the end of 1998 was estimated by the board of directors on the
basis of the purchase price paid by investors for shares of our preferred
stock (taking into account the liquidation preferences and other rights,
privileges and preferences associated with the preferred stock) and an
evaluation by the board of our revenues, operating history and prospects.
The initial public offering price is higher than the estimated fair market
value at fiscal year-end, and the value of unexercised options would be
higher than the numbers shown in the table if the value were calculated by
subtracting the exercise price from the initial public offering price.
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<PAGE> 48
STOCK PLANS
1999 STOCK INCENTIVE PLAN
Share Reserve. Our board of directors adopted our 1999 Stock Incentive Plan
on March 3, 1999, subject to stockholder approval. We have reserved 2,500,000
shares of our common stock for issuance under the 1999 Stock Incentive Plan. Any
shares not yet issued under our 1997 Stock Plan on the date of this offering
will also be available under the 1999 Stock Incentive Plan. On January 1 of each
year, starting with the year 2000, the number of shares in the reserve will
automatically increase by 5% of the total number of shares of common stock that
are outstanding at that time or by 1,500,000 shares, whichever is less. In
general, if options or shares awarded under the 1999 Stock Incentive Plan or the
1997 Stock Plan are forfeited, then those options or shares will again become
available for awards under the 1999 Stock Incentive Plan. We have not yet
granted any options under the 1999 Stock Incentive Plan.
Administration. The compensation committee of our board of directors
administers the 1999 Stock Incentive Plan. The committee has the complete
discretion to make all decisions relating to the interpretation and operation of
our 1999 Stock Incentive Plan. The committee has the discretion to determine who
will receive an award, what type of award it will be, how many shares will be
covered by the award, what the vesting requirements will be (if any), and what
the other features and conditions of each award will be. The compensation
committee may also reprice outstanding options and modify outstanding awards in
other ways.
Eligibility. The following groups of individuals are eligible to
participate in the 1999 Stock Incentive Plan:
- Employees;
- Members of our board of directors who are not employees; and
- Consultants.
Types of Award. The 1999 Stock Incentive Plan provides for the following
types of award:
- Incentive stock options to purchase shares of our common stock;
- Nonstatutory stock options to purchase shares of our common stock; and
- Restricted shares of our common stock.
Options. An optionee who exercises an incentive stock option may qualify
for favorable tax treatment under Section 422 of the Internal Revenue Code of
1986. Nonstatutory stock options, however, do not qualify for such favorable tax
treatment. The exercise price for incentive stock options granted under the 1999
Stock Incentive Plan may not be less than 100% of the fair market value of our
common stock on the option grant date. In the case of nonstatutory stock
options, the minimum exercise price is 30% of the fair market value of our
common stock on the option grant date. Optionees may pay the exercise price by
using:
- Cash;
- Shares of common stock that the optionee already owns;
- A full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- An immediate sale of the option shares through a broker designated by us;
or
- A loan from a broker designated by us, secured by the option shares.
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<PAGE> 49
Options vest at the time or times determined by the compensation committee.
In most cases, our options vest over the four-year period following the date of
grant. Options generally expire 10 years after they are granted, except that
they generally expire earlier if the optionee's service terminates earlier. The
1999 Stock Incentive Plan provides that no participant may receive options
covering more than 1,000,000 shares in the same year, except that a newly hired
employee may receive options covering up to 2,000,000 shares in the first year
of employment.
Salary Reduction Option Program. The compensation committee may offer our
employees, non-employee directors and consultants the opportunity to convert a
portion of their salaries or fees into nonstatutory stock options. Individuals
who have been selected for this program, if they wish to participate, must file
an irrevocable election before the end of a calendar year. In the election, they
must specify how much they would like to contribute during the next year, within
the limits established by the committee. On the first business day in January of
the next year, we will grant them an option under the 1999 Stock Incentive Plan.
The exercise price of this option will be equal to one-third of the market price
of our stock on the date of grant. The number of shares covered by the option
will be equal to the amount of the salary or fee reduction that the participant
elected, divided by an amount equal to two-thirds of the market price of our
stock on the date of grant. As a result, the total discount under the option
(the market price of the option shares on the grant date less the aggregate
exercise price payable for those shares) will be equal to the dollar amount of
the reduction in the optionee's compensation for the calendar year in which the
grant is made. The option will generally become exercisable in 12 equal monthly
installments, as the optionee completes each calendar month of service in the
year of the grant. The option generally remains exercisable for 10 years from
the date of grant, even if the optionee's service terminates earlier. The other
terms applicable to grants under this program are substantially the same as the
terms described above for regular nonstatutory option grants.
Restricted Shares. Restricted shares may be awarded under the 1999 Stock
Incentive Plan in return for:
- Cash;
- A full-recourse promissory note, except that the par value of newly
issued shares must be paid in cash;
- Services already provided to us; and
- In the case of treasury shares only, services to be provided to us in the
future.
Restricted shares vest at the time or times determined by the compensation
committee.
Change in Control. If a change in control of Redback Networks occurs, an
option or restricted stock award under the 1999 Stock Incentive Plan will
generally become fully vested. However, if the surviving corporation assumes the
option or award or replaces it with a comparable award, then vesting accelerates
only to the extent determined by the compensation committee. A change in control
includes:
- A merger of Redback Networks after which our own stockholders own 50% or
less of the surviving corporation (or its parent company);
- A sale of all or substantially all of our assets;
- A proxy contest that results in the replacement of more than one-half of
our directors over a 24-month period; or
- An acquisition of 50% or more of our outstanding stock by any person or
group, other than a person related to Redback Networks (such as a holding
company owned by our stockholders).
Amendments or Termination. Our board may amend or terminate the 1999 Stock
Incentive Plan at any time. If our board amends the plan, it does not need to
ask for stockholder approval of the
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<PAGE> 50
amendment unless applicable law requires it. The 1999 Stock Incentive Plan will
continue in effect indefinitely, unless the board decides to terminate the plan
earlier.
1999 EMPLOYEE STOCK PURCHASE PLAN
Share Reserve and Administration. Our board of directors adopted our 1999
Employee Stock Purchase Plan on March 3, 1999, subject to stockholder approval.
Our 1999 Employee Stock Purchase Plan is intended to qualify under Section 423
of the Internal Revenue Code. We have reserved 1,000,000 shares of our common
stock for issuance under the plan. On May 1 of each year, starting with the year
2000, the number of shares in the reserve will automatically be restored to
1,000,000. In other words, the reserve will be increased by the number of shares
that have been issued under the 1999 Employee Stock Purchase Plan during the
prior 12-month period. The plan will be administered by the compensation
committee of our board of directors.
Eligibility. All of our employees are eligible to participate if they are
employed by us for more than 20 hours per week and for more than five months per
year. Eligible employees may begin participating in the 1999 Employee Stock
Purchase Plan at the start of any offering period. Each offering period lasts 24
months. Overlapping offering periods start on May 1 and November 1 of each year.
However, the first offering period will start on the effective date of this
offering and end on April 30, 2001.
Amount of Contributions. Our 1999 Employee Stock Purchase Plan permits each
eligible employee to purchase common stock through payroll deductions. Each
employee's payroll deductions may not exceed 15% of the employee's cash
compensation. Purchases of our common stock will occur on April 30 and October
31 of each year. Each participant may purchase up to 1,000 shares on any
purchase date (2,000 shares per year). But the value of the shares purchased in
any calendar year (measured as of the beginning of the applicable offering
period) may not exceed $25,000.
Purchase Price. The price of each share of common stock purchased under our
1999 Employee Stock Purchase Plan will be 85% of the lower of:
- The fair market value per share of common stock on the date immediately
before the first day of the applicable offering period; or
- The fair market value per share of common stock on the purchase date.
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
- The price per share to the public in this offering; or
- The fair market value per share of common stock on the purchase date.
Other Provisions. Employees may end their participation in the 1999
Employee Stock Purchase Plan at any time. Participation ends automatically upon
termination of employment with Redback Networks. If a change in control of
Redback Networks occurs, our 1999 Employee Stock Purchase Plan will end and
shares will be purchased with the payroll deductions accumulated to date by
participating employees, unless the plan is assumed by the surviving corporation
or its parent. Our board of directors may amend or terminate the 1999 Employee
Stock Purchase Plan at any time. Our Chief Executive Officer may also amend the
plan in certain respects. If our board increases the number of shares of common
stock reserved for issuance under the plan (except for the automatic increases
described above), it must seek the approval of our stockholders.
1999 DIRECTORS' OPTION PLAN
Share Reserve. Our board of directors adopted our 1999 Directors' Option
Plan on March 3, 1999, subject to stockholder approval. We have reserved 200,000
shares of our common stock for issuance under the plan. On January 1 of each
year, starting with the year 2000, the number of shares in the
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<PAGE> 51
reserve will automatically be restored to 200,000. In other words, the reserve
will be increased by the number of shares that have been optioned under the 1999
Directors' Option Plan during the prior 12-month period. In general, if options
granted under the 1999 Directors' Option Plan are forfeited, then those options
will again become available for grants under the plan. The Directors' Option
Plan will be administered by the compensation committee of our board of
directors, although all grants under the plan are automatic and
non-discretionary.
Initial Grants. Only the non-employee members of our board of directors
will be eligible for option grants under the 1999 Directors' Option Plan. Each
non-employee director who did not previously receive options to buy our common
stock will receive an initial option to buy 25,000 shares on the date of this
offering. Each non-employee director who first joins our board after the
effective date of this offering will receive an initial option for 25,000
shares. That grant will occur when the director takes office. The initial
options vest in equal monthly installments over the four-year period following
the date of grant, except that all vesting for the first year occurs at the
close of that year.
Annual Grants. At the time of each of our annual stockholders' meetings,
beginning in 2000, each non-employee director who will continue to be a director
after that meeting will automatically be granted an annual option for 10,000
shares of our common stock. However, a new non-employee director who is
receiving the 25,000-share initial option will not receive the 10,000-share
annual option in the same calendar year. The annual options vest in equal
monthly installments over the one-year period following the date of grant.
Other Option Terms. The exercise price of each non-employee director's
option will be equal to the fair market value of our common stock on the option
grant date. A director may pay the exercise price by using cash, shares of
common stock that the director already owns, or an immediate sale of the option
shares through a broker designated by us. The non-employee directors' options
have a 10-year term, except that they expire one year after a director leaves
the board (if earlier). If a change in control of Redback Networks occurs, a
non-employee director's option granted under the 1999 Directors' Option Plan
will become fully vested (unless the accounting rules applicable to a pooling of
interests preclude acceleration). Vesting also accelerates in the event of the
optionee's death or disability.
Amendments or Termination. Our board may amend or terminate the 1999
Directors' Option Plan at any time. If our board amends the plan, it does not
need to ask for stockholder approval of the amendment unless applicable law
requires it. The 1999 Directors' Option Plan will continue in effect
indefinitely, unless the board decides to terminate the plan.
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<PAGE> 52
CERTAIN TRANSACTIONS
SALES OF STOCK TO INSIDERS
Since August 30, 1996, we have issued and sold securities to the following
persons who are executive officers, directors or principal stockholders of
Redback Networks. These figures reflect activity through December 31, 1998.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D TOTAL SHARES
PREFERRED PREFERRED PREFERRED PREFERRED COMMON AS
INVESTOR(1) STOCK(2) STOCK(3) STOCK(4) STOCK(5) STOCK CONVERTED(6)
----------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dennis L. Barsema............... -- -- -- -- 1,053,480 1,053,480
Geoffrey C. Darby............... -- -- -- -- -- --
Randall J. Kruep................ -- -- -- -- 330,000 330,000
William E. Miskovetz............ -- -- -- -- 97,500 97,500
James R. Flach(7)............... -- 2,500,001 392,171 409,508 150,000 3,451,680
Pierre R. Lamond(8)............. 1,500,000 2,555,004 622,453 419,130 -- 5,096,587
Daniel J. Warmenhoven........... -- -- -- -- 75,000 75,000
Funds affiliated with Sequoia
Capital(9).................... 1,500,000 2,455,002 612,703 419,130 -- 4,986,835
Funds Affiliated with Accel
Partners(10).................. -- 2,500,001 387,296 409,508 -- 3,296,805
Funds affiliated with Mayfield
Fund(11)...................... -- -- 1,500,000 212,746 -- 1,712,746
</TABLE>
- -------------------------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) The per share purchase price for our series A preferred stock was $.13.
(3) The per share purchase price for our series B preferred stock was $1.00.
(4) The per share purchase price for our series C preferred stock was $2.00.
(5) The per share purchase price for our series D preferred stock was $7.87.
(6) Reflects the conversion to common stock of each share of series A, series
B, series C and series D preferred stock that will be effective upon the
closing of our initial public offering.
(7) These figures include 4,875 shares of our series C preferred stock and
150,000 shares of our common stock held individually by Mr. Flach. These
figures also include holdings by entities related to Accel Partners which
include: Accel Internet/Strategic Technology Fund L.P., Accel Investors '96
L.P., Accel Keiretsu V L.P., Accel V L.P. and Ellmore C. Patterson
Partners. Mr. Flach, a director of Redback Networks, is a partner of Accel
Partners.
(8) These figures include 50,001 shares of our series B preferred stock and
4,875 shares of our series C preferred stock held by the Pierre R. and
Christine E. Lamond Trust dated November 22, 1985 and 50,001 shares of our
series B preferred stock and 4,875 shares of our series C preferred stock
held by the David A. Lamond Trust dated November 16, 1992. These figures
also include holdings by entities related to Sequoia Capital which include:
Sequoia 1995 LLC, Sequoia 1997, Sequoia Capital VIII, Sequoia Technology
Partners VII and SQP 1997. Mr. Lamond, a director and chairman of the board
of Redback Networks, is a partner of Sequoia Capital.
(9) Sequoia Capital includes the following entities managed by Sequoia Capital:
Sequoia 1995 LLC, Sequoia 1997, Sequoia Capital VIII, Sequoia Technology
Partners VII and SQP 1997. Pierre R. Lamond, a director and chairman of the
board of Redback Networks, is a partner of Sequoia Capital.
(10) Accel Partners includes the following entities managed by Accel Partners:
Accel Internet/ Strategic Technology Fund L.P., Accel Investors '96 L.P.,
Accel Keiretsu V L.P., Accel V L.P.
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<PAGE> 53
and Ellmore C. Patterson Partners. James R. Flach, a director of Redback
Networks, is a partner of Accel Partners.
(11) Mayfield Fund includes the following entities managed by Mayfield Fund:
Mayfield Associates Fund III and Mayfield VIII.
In addition, we have granted options to certain of our executive officers.
See "Management -- Option Grants."
SERIES A FINANCING
On September 24, 1996, we issued an aggregate of 1,687,500 shares of series
A preferred stock at a per share purchase price of $.13 to four investors,
including entities affiliated with Sequoia Capital.
SERIES B FINANCING
On January 14, 1997, we issued an aggregate of 5,134,498 shares of series B
preferred stock at a per share purchase price of $1.00 to 14 investors,
including entities affiliated with Sequoia Capital, Accel Partners and Pierre
Lamond.
SERIES C FINANCING
On October 23, 1997, we issued an aggregate of 2,557,999 shares of series C
preferred stock at a per share purchase price of $2.00 to 16 investors,
including James Flach and entities affiliated with Sequoia Capital, Accel
Partners, Mayfield Fund and Pierre Lamond.
SERIES D FINANCING
On July 2, 1998, we issued an aggregate of 1,076,624 shares of series D
preferred stock at a per share purchase price of $7.87 to 14 investors,
including entities affiliated with Sequoia Capital, Accel Partners and Mayfield
Fund. On January 21, 1999, we issued an aggregate of 63,532 shares of series D
preferred stock at a per share purchase price of $7.87 to TDF Management Pte
Ltd.
LOANS TO CERTAIN EXECUTIVE OFFICERS
In April 1997, we loaned $105,000 to Live Wire Communications Inc. under a
promissory note. Darrell Scherbarth, who was then one of our officers, was
president and chief executive officer of Live Wire Communications Inc. The note
accrued interest at a rate of 5.9%. We forgave the principal of $105,000 and
recorded this amount as a compensation expense in 1997.
In December 1997, we loaned $104,696 to Dennis Barsema, our president,
chief executive officer and a director, under a promissory note. The note
accrues interest at a rate of 5.81% compounded annually and expires on December
3, 2000, on which date all unpaid interest and principal is due on demand. The
full amount of this note is currently outstanding, plus accrued interest. In
January 1998, we advanced $210,626 to Mr. Barsema for the purchase of Redback
Networks common stock pursuant to a subscription agreement dated December 1997.
The principal balance of this note, together with interest accrued and unpaid to
date, is due and payable in January 2002. Interest will accrue under the note on
any unpaid principal balance at the rate of 5.93% per annum, compounded
annually. The full amount of this note is currently outstanding, plus accrued
interest. This note is secured by a pledge of the purchased common stock.
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<PAGE> 54
OPTION GRANTS
In the past, we have granted options to our executive officers and
directors. We intend to grant additional options to our directors and officers
in the future. See "Management -- Option Grants in Last Fiscal Year" and
"Management -- Director Compensation."
INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY
We have entered into an Indemnification Agreement with each of our
executive officers and directors. See "Management -- Indemnification."
-------------------------
We believe that the transactions set forth above were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
All future transactions, including loans between us and our officers, directors,
principal stockholders and their affiliates will be approved by a majority of
the board of directors, and will continue to be on terms no less favorable to us
than could be obtained from unaffiliated third parties.
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<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Redback Networks
common stock as of December 31, 1998 and as adjusted to reflect the sale of the
common stock offered hereby for: (1) each person who is known by us to
beneficially own more than 5% of our common stock; (2) the chief executive
officer and each of our executive officers, (3) each of our directors; (4)
Gaurav Garg, one of our founders; and (5) all of our directors and executive
officers as a group. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares. The percentage of beneficial ownership for the following table is
based on 18,281,923 shares of common stock outstanding as of December 31, 1998
assuming conversion of all outstanding shares of preferred stock into common
stock, and shares of common stock outstanding after the
completion of this offering assuming no exercise of the underwriters'
over-allotment option.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES -------------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING(1) OFFERING(1)(2)
------------------------ ---------------- -------------- --------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS, DIRECTORS AND FOUNDER
Dennis J. Barsema............................. 953,480 5.2%
Geoffrey C. Darby(3).......................... 225,000 1.2
Randall J. Kruep(4)........................... 375,000 2.0
William E. Miskovetz(5)....................... 317,500 1.7
Gaurav Garg................................... 872,550 4.8
James R. Flach(6)............................. 3,451,680 18.9
Pierre R. Lamond(7)........................... 5,096,587 27.9
Daniel J. Warmenhoven......................... 75,000 *
OTHER 5% STOCKHOLDERS
Entities affiliated with Sequoia Capital(8)... 4,986,835 27.3
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
Entities affiliated with Accel Partners(9).... 3,296,805 18.0
428 University Avenue
Palo Alto, CA 94301
Entities affiliated with Mayfield Fund(10).... 1,712,746 9.4
2800 Sand Hill Road
Menlo Park, CA 94025
All executive officers and directors as a
group (7 persons)(11)....................... 10,494,247 55.9
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Common stock subject to
options currently exercisable within 60 days of December 31, 1998 are
deemed outstanding for purposes of computing the percentage ownership of
the person holding such option but are not deemed outstanding for purposes
of computing the percentage ownership of any other person. Except where
indicated, and subject to community property laws where applicable, the
persons in the table above have sole voting and investment power with
respect to all common stock shown as beneficially owned by them. Unless
otherwise indicated, the address of each of the
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<PAGE> 56
individuals listed in the table is c/o Redback Networks Inc., 1389 Moffett
Park Drive, Sunnyvale, CA 94089.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Includes options immediately exercisable for 225,000 shares.
(4) Includes options immediately exercisable for 45,000 shares.
(5) Includes options immediately exercisable for 220,000 shares.
(6) Includes 154,875 shares owned individually by Mr. Flach, 356,053 shares
held by Accel Internet/ Strategic Technology Fund L.P., 158,247 shares held
by Accel Investors '96 L.P., 52,746 shares held by Accel Keiretsu V L.P.,
2,657,230 shares held by Accel V L.P. and 72,529 shares held by Ellmore C.
Patterson Partners.
(7) Includes 54,876 shares owned by the Pierre R. and Christine E. Lamond Trust
dated November 22, 1985, 54,876 shares held in the David A. Lamond Trust
dated November 16, 1992, 137,031 shares held by Sequoia 1995 LLC, 4,441
shares held by Sequoia 1997, 4,614,266 shares held by Sequoia Capital VII
and 223,218 shares held by Sequoia Technology Partners VII.
(8) Includes 137,031 shares held by Sequoia 1995 LLC, 4,441 shares held by
Sequoia 1997, 4,614,266 shares held by Sequoia Capital VII, 223,218 shares
held by Sequoia Technology Partners VII and 7,879 shares held by SQP 1997.
(9) Includes 356,053 shares held by Accel Internet/Strategic Technology Fund
L.P., 158,247 shares held by Accel Investors '96 L.P., 52,746 shares held
by Accel Keiretsu V L.P., 2,657,230 shares held by Accel V L.P. and 72,529
shares held by Ellmore C. Patterson Partners.
(10) Includes 85,638 shares held by Mayfield Associates Fund III and 1,627,108
shares held by Mayfield VIII.
(11) Includes options immediately exercisable for 490,000 shares.
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<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
GENERAL
On the closing of this offering, our authorized capital stock will consist
of 80,000,000 shares of common stock, $.0001 par value, and 10,000,000 shares of
preferred stock, $.0001 par value. The following summary of certain provisions
of the common stock and the preferred stock does not purport to be complete and
is subject to, and qualified in its entirety by, our certificate of
incorporation and bylaws and by the provisions of applicable law.
COMMON STOCK
As of December 31, 1998, there were 7,825,302 shares of common stock
outstanding that were held of record by approximately 120 stockholders. There
will be shares of Common Stock outstanding (assuming no exercise of
the underwriters' over-allotment option and assuming no exercise after December
31, 1998, of outstanding options) after giving effect to the sale of the shares
of common stock to the public offered hereby and the conversion of our preferred
stock into common stock at a one-to-one ratio.
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 therefor. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up of
Redback Networks, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, 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 completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority to issue the preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of preferred stock may have the effect of delaying, deferring or preventing a
change in control of Redback Networks without further action by the stockholders
and may adversely affect the voting and other rights of the holders of common
stock. The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of common stock, including the
loss of voting control to others. At present, we have no plans to issue any of
the preferred stock.
WARRANTS
Immediately following the closing of this offering, there will be four
warrants to purchase preferred stock convertible into common stock. There are
two warrants outstanding to purchase an aggregate of 99,375 shares of series B
preferred stock at $1.00 per share, one warrant outstanding to purchase 24,000
shares of series C preferred stock at $2.00 per share and one warrant
outstanding to purchase 6,096 shares of series D preferred stock at $7.87 per
share. Each of the outstanding warrants for the series B preferred stock expire
on February 14, 2002 and July 31, 2003 respectively. The outstanding warrant to
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<PAGE> 58
purchase series C preferred stock expires on February 28, 2004. The outstanding
warrant to purchase series D preferred stock expires on August 21, 2004.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
CERTIFICATE OF INCORPORATION AND BYLAWS
The certificate of incorporation provides that, effective upon the closing
of this offering, all stockholder actions must be effected at a duly called
meeting and not by a consent in writing. The bylaws provide that our
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 50% of our capital stock. These provisions of the
certificate of incorporation and bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of Redback Networks.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board of directors and in the policies
formulated by the board of directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of
Redback Networks. These provisions are designed to reduce the vulnerability of
Redback Networks to an unsolicited acquisition proposal. The provisions also are
intended to discourage certain tactics that may be used in proxy fights.
However, these provisions could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result from actual or
rumored takeover attempts. These provisions also may have the effect of
preventing changes in our management. See "Risk Factors -- Antitakeover
provisions in our charter documents and Delaware law could prevent or delay a
change in control of our company."
DELAWARE TAKEOVER STATUTE
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the interested stockholder became
an interested stockholder, unless:
- prior to becoming an interested stockholder, the board of directors of
the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or subsequent to becoming an interested stockholder, the business
combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
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<PAGE> 59
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
REGISTRATION RIGHTS
After this offering, the holders of 11,634,435 shares of common stock will
be entitled to certain rights with respect to the registration of these shares
under the Securities Act. Under the terms of our agreement with the holders of
these registrable securities, if we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, these holders are entitled to
notice of that registration and are entitled to include shares of their
registrable common stock therein. Additionally, holders of 10,520,153 shares of
common stock are also entitled to certain demand registration rights pursuant to
which they may require us to file a registration statement under the Securities
Act at our expense with respect to their shares of common stock, and we are
required to use our best efforts to effect that registration. Further, the
holders of these demand rights may require us to file additional registration
statements on Form S-3. All of these registration rights are subject to certain
conditions and limitations, including the right of the underwriters of an
offering to limit the number of shares included in that registration and our
right not to effect a requested registration within six months following an
offering of our securities, including the offering made hereby.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is U.S. Stock
Transfer Corporation.
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<PAGE> 60
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, we will have shares of
common stock outstanding, assuming the issuance of shares of common
stock offered hereby and no exercise of options after December 31, 1998. Of
these shares, the shares sold in the offering will be
freely tradable without restriction or further registration under the Securities
Act, except that any shares held by our affiliates, as that term is defined
under the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 18,281,923 shares of common stock are deemed restricted
shares under Rule 144. The number of shares of common stock available for sale
in the public market is limited by restrictions under the Securities Act and
lock-up agreements under which the holders of these shares have agreed, subject
to limited exceptions, not to sell or otherwise dispose of any of their shares
for a period of 180 days after the date of this prospectus without the prior
written consent of Morgan Stanley & Co. Incorporated. On the date of this
prospectus, no shares other than the shares offered hereby
will be eligible for sale. Beginning 180 days after the date of this prospectus,
or earlier with the consent of Morgan Stanley & Co. Incorporated 18,281,923
restricted shares will become available for sale in the public market subject to
certain limitations of Rule 144 of the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate, is entitled to sell within
any three-month period a number of shares of common stock that does not exceed
the greater of 1% of the then-outstanding shares of our common stock
(approximately shares after giving effect to this offering) and the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding that sale. Sales under Rule 144 of the
Securities Act are subject to certain restrictions relating to manner of sale,
notice and the availability of current public information about us. A person who
is not our affiliate at any time during the 90 days preceding a sale, and who
has beneficially owned shares for at least two years, would be entitled to sell
their shares immediately following this offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144 of the Securities Act. However, the transfer agent may require an opinion of
counsel that a proposed sale of shares comes within the terms of Rule 144 of the
Securities Act prior to effecting a transfer of the subject shares.
Prior to this offering, there has been no public market for our common
stock and we do not know the effect, if any, that the sale or availability for
sale of shares of additional common stock will have on the market price of our
common stock. Nevertheless, sales of substantial amounts of these shares in the
public market, or the perception that these sales could occur, could adversely
affect the market price of the common stock and could impair our future ability
to raise capital through an offering of our equity securities.
OPTIONS
As of December 31, 1998, there were a total of 2,064,725 shares of common
stock subject to outstanding options under our 1997 Stock Option Plan, of which
124,156 were vested, and 40,000 shares of common stock subject to outstanding
options issued outside our 1997 Stock Option Plan, none of which were vested.
However, all of these shares are subject to lock-up agreements. Immediately
after the completion of the offering, Redback Networks intends to file
registration statements on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under the 1997
Stock Option Plan and issued outside the 1997 Stock Option Plan. On the date 180
days after the effective date of the offering, a total of
shares of common stock subject to
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<PAGE> 61
outstanding options will be vested. After the effective dates of the
registration statements on Form S-8, shares purchased upon exercise of options
granted pursuant to the 1997 Stock Plan and shares granted outside the 1997
Stock Plan generally would be available for resale in the public market.
Rule 701 under the Securities Act provides that shares of common stock
acquired on the exercise of outstanding options may be resold by persons other
than our affiliates, beginning 90 days after the date of this prospectus,
subject only to the manner of sale provisions of Rule 144, and by affiliates,
beginning 90 days after the date of this prospectus, subject to all provisions
of Rule 144 except its one-year minimum holding period. We intend to file one or
more registration statements on form S-8 under the Securities Act to register
all shares of common stock subject to outstanding stock options and common stock
issued or issuable pursuant to our 1997 Stock Plan. We expect to file the
registration statement covering shares offered pursuant to the 1997 Stock Plan
and the 1999 Stock Incentive Plan approximately 30 days after the closing of
this offering. Such registration statements are expected to become effective
upon filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, subject to the lock-up agreements, if
applicable.
LOCK-UP AGREEMENTS
The officers, directors and stockholders of Redback Networks have agreed,
subject to limited exceptions, not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of the offering. Morgan Stanley &
Co. Incorporated, however, may in its sole discretion, at any time without
notice, release all or any portion of the shares subject to lock-up agreements.
See "Underwriters."
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<PAGE> 62
UNDERWRITERS
Under the terms and subject to conditions contained in the underwriting
agreement dated the date hereof, the underwriters named below, for whom Morgan
Stanley & Co. Incorporated, BancBoston Robertson Stephens Inc., and Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, are serving as
representatives, have severally agreed to purchase, and we have agreed to sell
to them, an aggregate of shares of common stock. The number of shares
of common stock that each underwriter has agreed to purchase is set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BancBoston Robertson Stephens Inc. .........................
Dain Rauscher Wessels.......................................
-------
Total.............................................
=======
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept delivery
of the shares of common stock offered hereby are subject to the approval of
certain legal matters by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the shares of common stock
offered hereby, other than those covered by the over-allotment option described
below, if any of the shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to certain other dealers. After
the initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives of the
underwriters.
Pursuant to the underwriting agreement, we have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to purchase
up to an aggregate of additional shares of common stock at the
public offering price set forth on the cover page hereof, less underwriting
discounts and commissions. The underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, made in connection with the
offering of the shares of common stock offered hereby. To the extent such option
is exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of common stock as the number set forth next to such underwriter's name
in the preceding table bears to the total number of shares of common stock set
forth next to the names of all underwriters in the preceding table.
At our request, the underwriters have reserved up to 10% of the shares of
common stock to be sold in the offering and offered hereby for sale, at the
initial public offering price, to certain persons designated by us. The number
of shares of common stock available for sale to the general public will be
reduced to the extent these persons purchase the 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 hereby.
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We, our directors, officers and certain other of our stockholders have each
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, or otherwise during the period
ending 180 days after the date of this prospectus, we will not directly or
indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or similar agreement that transfers to another, in
whole or in part, the economic risk of ownership of the common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
- the sale of any shares to the underwriters;
- the issuance by Redback Networks of shares of common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters have
been advised in writing;
- transactions by any person other than Redback Networks relating to shares
of common stock or other securities acquired in open market transactions
after the completion of the offering of the shares;
- the granting of stock options pursuant to our existing employee benefit
plans, provided that such options do not become exercisable and such
options do not vest during such 180-day period; or
- certain gifts or transfers to trusts, provided that the transferees enter
into lock-up agreements similar to those described in the previous
paragraph.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "RBAK."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
61
<PAGE> 64
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock will be determined by negotiations between Redback Networks and the
representatives of the underwriters. Among the factors to be considered in
determining the public offering price will be:
- our record of operations, current financial position and future
prospects;
- the experience of our management;
- our sales, earnings and certain other financial operating information in
recent periods; and
- the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies
engaged in activities similar to ours.
Our estimated public offering price range is subject to change as a result
of market conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park,
California. As of the date of this prospectus, certain members and employees of
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, beneficially
owned an aggregate of 29,871 shares of our common stock. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and for the
period from August 30, 1996 (inception) to December 31, 1996 and for each of the
two years in the period ended December 31, 1998, included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
62
<PAGE> 65
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission, or SEC, Washington,
D.C. 20549, a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock offered hereby. This prospectus does not
contain all the information set forth in the registration statement and the
exhibits and schedules filed therewith. For further information with respect to
Redback Networks and the common stock offered hereby, reference is made to the
registration statement and to the exhibits and schedules filed therewith.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and each of these
statements is qualified in all respects by reference to the full text of such
contract or other document filed as an exhibit to the registration statement. A
copy of the registration statement and the exhibits and schedules filed
therewith may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W. Washington, D.C.
20549, and at the SEC's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part of the registration statement may be obtained from such offices upon
payment of the fees prescribed by the SEC. The SEC maintains a World Wide Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. 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 therewith, will file periodic reports, proxy statements and other
information with the SEC. 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 SEC referred to above.
63
<PAGE> 66
REDBACK NETWORKS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet............................................... F-3
Statement of Operations..................................... F-4
Statement of Stockholders' Equity........................... F-5
Statement of Cash Flows..................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 67
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Redback Networks Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Redback Networks Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from August 30, 1996 (inception) through December 31, 1996 and the years
ended December 31, 1997 and 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
March 5, 1999
F-2
<PAGE> 68
REDBACK NETWORKS INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,084,000 $ 8,189,000
Short-term investments.................................... 3,139,000 --
Accounts receivable, less allowances of $0 and $340,000... 48,000 2,342,000
Inventory................................................. 89,000 821,000
Other current assets...................................... 211,000 262,000
----------- ------------
Total current assets.............................. 6,571,000 11,614,000
Property and equipment, net................................. 1,066,000 2,822,000
Notes receivable from related party......................... 105,000 111,000
Other assets................................................ 107,000 135,000
----------- ------------
$ 7,849,000 $ 14,682,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings, current....................................... $ 247,000 $ 1,747,000
Capital lease obligations, current........................ 149,000 560,000
Accounts payable.......................................... 451,000 2,060,000
Accrued liabilities....................................... 94,000 2,005,000
Deferred revenue.......................................... -- 781,000
----------- ------------
Total current liabilities......................... 941,000 7,153,000
Borrowings, less current portion............................ 391,000 144,000
Capital lease obligations, less current portion............. 436,000 1,131,000
----------- ------------
1,768,000 8,428,000
----------- ------------
Commitments (Note 6)
Stockholders' equity:
Convertible Preferred Stock: Series A, B, C and D; $0.0001
par value; 13,500,000 shares authorized; 9,379,997 and
10,456,621 issued and outstanding at December 31, 1997
and 1998............................................... 10,419,000 18,884,000
Common Stock: $0.0001 par value; 22,500,000 shares
authorized; 6,734,132 and 7,825,302 shares issued and
outstanding at December 31, 1997 and 1998.............. 426,000 6,741,000
Deferred stock compensation............................... -- (4,731,000)
Stock subscription receivable............................. (211,000) --
Notes receivable from stockholder......................... -- (211,000)
Accumulated deficit....................................... (4,553,000) (14,429,000)
----------- ------------
Total stockholders' equity........................ 6,081,000 6,254,000
----------- ------------
$ 7,849,000 $ 14,682,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 69
REDBACK NETWORKS INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 30,
1996
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net revenues....................................... $ -- $ 48,000 $ 9,206,000
Cost of revenues................................... -- 29,000 3,603,000
--------- ----------- -----------
Gross profit....................................... -- 19,000 5,603,000
--------- ----------- -----------
Operating expenses:
Research and development......................... 124,000 3,249,000 5,727,000
Selling, general and administrative.............. 19,000 1,317,000 8,875,000
Amortization of deferred stock compensation...... -- -- 880,000
--------- ----------- -----------
Total operating expenses................. 143,000 4,566,000 15,482,000
--------- ----------- -----------
Loss from operations............................... (143,000) (4,547,000) (9,879,000)
Interest and other income.......................... 1,000 221,000 254,000
Interest expense................................... -- (85,000) (251,000)
--------- ----------- -----------
Net loss........................................... $(142,000) $(4,411,000) $(9,876,000)
========= =========== ===========
Basic and diluted net loss per share............... $ (.22) $ (4.10) $ (3.57)
========= =========== ===========
Shares used in computing net loss per share........ 658,000 1,076,000 2,769,000
========= =========== ===========
Pro-forma net loss per share (unaudited):
Basic and diluted net loss per share............. $ (.78)
===========
Shares used in computing net loss per share...... 12,684,000
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 70
REDBACK NETWORKS INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK DEFERRED STOCK RECEIVABLE
------------------------ ---------------------- STOCK SUBSCRIPTION FROM
SHARES AMOUNT SHARES AMOUNT COMPENSATION RECEIVABLE STOCKHOLDER
---------- ----------- --------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series A Convertible
Preferred Stock, net............. 1,687,500 $ 217,000 -- $ -- $ -- $ -- $ --
Issuance of Common Stock.......... -- -- 2,829,996 8,000 -- -- --
Net loss.......................... -- -- -- -- -- -- --
---------- ----------- --------- ---------- ----------- --------- ---------
Balance at December 31, 1996...... 1,687,500 217,000 2,829,996 8,000 -- -- --
Issuance of Series B Convertible
Preferred Stock, net............. 5,134,498 5,119,000 -- -- -- -- --
Issuance of Series C Convertible
Preferred Stock, net............. 2,557,999 5,083,000 -- -- -- -- --
Exercise of stock options......... -- -- 106,875 6,000 -- -- --
Issuance of Common Stock.......... -- -- 4,199,730 385,000 -- (211,000) --
Issuance of Common Stock and
warrants for services............ -- -- 90,746 31,000 -- -- --
Repurchase of Common Stock........ -- -- (493,215) (4,000) -- -- --
Net loss.......................... -- -- -- -- -- -- --
---------- ----------- --------- ---------- ----------- --------- ---------
Balance at December 31, 1997...... 9,379,997 10,419,000 6,734,132 426,000 -- (211,000) --
Issuance of Series D Convertible
Preferred Stock, net............. 1,076,624 8,465,000 -- -- -- -- --
Exercise of stock options......... -- -- 836,875 345,000 -- -- --
Issuance of Common Stock.......... -- -- 631,502 142,000 -- -- --
Issuance of Common Stock and
warrants for services............ -- -- 102,900 255,000 -- -- --
Repurchase of Common Stock........ -- -- (480,107) (38,000) -- -- --
Deferred stock compensation....... -- -- -- 5,611,000 (5,611,000) -- --
Amortization of deferred stock
compensation..................... -- -- -- -- 880,000 -- --
Issuance of notes receivable...... -- -- -- -- -- 211,000 (211,000)
Net loss.......................... -- -- -- -- -- -- --
---------- ----------- --------- ---------- ----------- --------- ---------
Balance at December 31, 1998...... 10,456,621 $18,884,000 7,825,302 $6,741,000 $(4,731,000) $ -- $(211,000)
========== =========== ========= ========== =========== ========= =========
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Issuance of Series A Convertible
Preferred Stock, net............. $ -- $ 217,000
Issuance of Common Stock.......... -- 8,000
Net loss.......................... (142,000) (142,000)
------------ -----------
Balance at December 31, 1996...... (142,000) 83,000
Issuance of Series B Convertible
Preferred Stock, net............. -- 5,119,000
Issuance of Series C Convertible
Preferred Stock, net............. -- 5,083,000
Exercise of stock options......... -- 6,000
Issuance of Common Stock.......... -- 174,000
Issuance of Common Stock and
warrants for services............ -- 31,000
Repurchase of Common Stock........ -- (4,000)
Net loss.......................... (4,411,000) (4,411,000)
------------ -----------
Balance at December 31, 1997...... (4,553,000) 6,081,000
Issuance of Series D Convertible
Preferred Stock, net............. -- 8,465,000
Exercise of stock options......... -- 345,000
Issuance of Common Stock.......... -- 142,000
Issuance of Common Stock and
warrants for services............ -- 255,000
Repurchase of Common Stock........ -- (38,000)
Deferred stock compensation....... -- --
Amortization of deferred stock
compensation..................... -- 880,000
Issuance of notes receivable...... -- --
Net loss.......................... (9,876,000) (9,876,000)
------------ -----------
Balance at December 31, 1998...... $(14,429,000) $ 6,254,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 71
REDBACK NETWORKS INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 30, 1996
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
--------------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(142,000) $(4,411,000) $(9,876,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................. 2,000 281,000 922,000
Amortization of deferred stock compensation... -- -- 880,000
Write-off of fixed assets..................... -- 200,000 --
Other noncash charges......................... -- 136,000 255,000
Changes in assets and liabilities:
Accounts receivable........................ -- (48,000) (2,294,000)
Inventory.................................. -- (89,000) (732,000)
Other current assets....................... (26,000) (185,000) (51,000)
Other assets............................... (34,000) (73,000) (34,000)
Accounts payable........................... 31,000 420,000 1,609,000
Accrued liabilities........................ 102,000 (8,000) 1,911,000
Deferred revenue........................... -- -- 781,000
--------- ----------- -----------
Net cash used by operating activities...... (67,000) (3,777,000) (6,629,000)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................. (39,000) (899,000) (1,234,000)
Purchase of short-term investments................. -- (3,139,000) --
Sale of short-term investments..................... -- -- 3,139,000
Advances to related parties........................ -- (210,000) --
--------- ----------- -----------
Net cash (used) provided by investing
activities............................... (39,000) (4,248,000) 1,905,000
--------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Convertible Preferred
Stock, net...................................... 217,000 10,202,000 8,465,000
Proceeds from issuance of Common Stock, net........ 8,000 176,000 449,000
Principal payments on capital lease obligations.... -- (26,000) (338,000)
Proceeds from bank borrowings...................... -- 700,000 1,500,000
Repayments of bank borrowings...................... -- (62,000) (247,000)
--------- ----------- -----------
Net cash provided by financing
activities............................... 225,000 10,990,000 9,829,000
--------- ----------- -----------
Net increase in cash and cash equivalents............ 119,000 2,965,000 5,105,000
Cash and cash equivalents at beginning of period..... -- 119,000 3,084,000
--------- ----------- -----------
Cash and cash equivalents at end of period........... $ 119,000 $ 3,084,000 $ 8,189,000
========= =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............................. $ -- $ 60,000 $ 222,000
========= =========== ===========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITY:
Property and equipment acquired under capital
leases.......................................... $ -- $ 611,000 $ 1,444,000
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 72
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Redback Networks Inc., (the "Company" or "Redback"), was incorporated in
Delaware on August 30, 1996. Redback is a leading provider of advanced
networking solutions that enable carriers, cable multiple system operators and
service providers to rapidly deploy high-speed broadband access to the Internet
and corporate networks. Redback's Subscriber Management System connects and
manages large numbers of subscribers using any of the major high-speed access
technologies including digital subscriber line, cable and wireless. The Company
operates in one business segment.
Through December 31, 1997, the Company was considered to be in the
development stage and was principally engaged in research and development,
raising capital and building its management team. During 1998, the Company
ceased to be in the development stage.
STOCK SPLITS
Share information for all periods has been retroactively adjusted to
reflect a 4-for-1 Common Stock split effected in January 1997 and a 3-for-2
Common Stock split effected in September 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Product sales are recognized upon shipment provided that no significant
vendor obligations remain and collection is considered probable.
Services revenue consists primarily of post-contract customer support,
training, consulting and installation services. Post-contract customer support
revenues are recognized ratably over the support period, which is generally one
year. Revenues from training, consulting services and installation are
recognized as the services are performed. Service revenues to date have not been
significant.
WARRANTY AND SALES RETURNS ALLOWANCES
The Company provides a limited warranty for its products. A provision for
the estimated warranty cost and a provision for sales returns are recorded at
the time revenue is recognized based on the Company's historical experience.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents, and
investments with original maturity dates greater than three months but less than
12 months to be short-term investments. Cash equivalents at December 31, 1997
and 1998 consist of money-market funds and commercial paper totaling $2,930,000
and $7,735,000, respectively, the carrying amounts of which approximates fair
value. At December 31, 1997, the
F-7
<PAGE> 73
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company had short-term investments which consisted of $3,139,000 of commercial
paper which was held to maturity. The cost of this investment approximated fair
value at December 31, 1997.
CONCENTRATION OF CREDIT RISK, FOREIGN OPERATIONS AND SIGNIFICANT CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and accounts receivable. The Company places its temporary
cash investments in money market funds and commercial paper with high credit
quality financial institutions. The Company's accounts receivable are derived
from revenue earned from customers located in the U.S. and certain foreign
countries, including Canada, Korea, Finland and China. Sales to foreign
customers in 1998, which were denominated in U.S. dollars, accounted for 15% of
total revenues. Sales to any one foreign country did not exceed 10% of total
revenues in 1998. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts receivable
based upon the expected collectibility of accounts receivable. The Company has
generated all of its revenues to date from the sale of one product, the SMS
1000.
During the year ended December 31, 1998, two customers accounted for 18%
and 19% of the Company's revenue and at December 31, 1998, these two customers
each accounted for 9% of total gross receivables.
The Company is dependent on a single contract manufacturer and some of the
key components in the Company's product come from single or limited sources of
supply.
INVENTORY
Inventory, which consists principally of raw materials and finished goods,
is stated at the lower of cost or market, cost being determined under the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally two to five years, or the lease term of the respective assets.
LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of its long-lived
assets based on expected undiscounted cash flows and recognizes impairment from
the carrying value of long-lived assets, if any, based on the fair value of such
assets.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation ("SFAS No. 123").
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") 96-18.
F-8
<PAGE> 74
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires, among other things, that deferred income taxes be provided for
temporary differences between the tax bases of the Company's assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future benefit of utilizing net
operating losses and research and development credit carryforwards. A valuation
allowance is provided against deferred tax assets unless it is more likely than
not that they will be realized.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
FAIR VALUE
The carrying value of the Company's financial instruments, including cash
and cash equivalents, short-term investments, accounts receivable, accounts
payable and accrued liabilities approximate their fair values due to their
relatively short maturities. The Company does not hold or issue financial
instruments for trading purposes.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs not qualifying for capitalization are included
in research and development and are expensed as incurred. After technological
feasibility is established, material software development costs are capitalized.
The capitalized cost is then amortized on a straight-line basis over the
estimated product life or on the ratio of current revenues to total projected
product revenues, if greater. The Company defines technological feasibility as
the establishment of a working model, which typically occurs upon completion of
the first beta version. To date, the period between achieving technological
feasibility, and the general availability of the related products has been short
and software development costs qualifying for capitalization have been
insignificant. Accordingly, the Company has not capitalized any software
development costs.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources. To date, the Company has not had any transactions that
are required to be reported in comprehensive income.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed
by dividing the net loss for the period by the weighted average number of common
shares outstanding during the period. Weighted average shares exclude shares
subject to repurchase ("restricted shares"). Diluted net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common and common equivalent shares outstanding during the period, if
dilutive. Common equivalent shares, composed of unvested restricted
F-9
<PAGE> 75
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
shares and incremental common shares issuable upon the exercise of stock options
and warrants and upon conversion of Series A, B, C, and D Convertible Preferred
Stock.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 30,
1996
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Numerator:
Net loss..................................... $ (142,000) $(4,411,000) $(9,876,000)
=========== =========== ===========
Denominator:
Weighted average common shares outstanding... 1,911,000 4,534,000 7,420,000
Weighted average unvested common shares
subject to repurchase..................... (1,253,000) (3,458,000) (4,651,000)
----------- ----------- -----------
Denominator for basic and diluted
calculation............................... 658,000 1,076,000 2,769,000
=========== =========== ===========
Basic and diluted net loss per share........... $ (.22) $ (4.10) $ (3.57)
=========== =========== ===========
</TABLE>
Options to purchase 232,500, and 2,104,725 shares of Common Stock at an
average exercise price of $.16 and $1.49, per share and warrants to purchase
99,375 and 129,421 shares of Preferred Stock at an average exercise price of
$1.00 and $1.51 per share, have not been included in the computation of diluted
net loss per share for 1997 and 1998, respectively, as their effect would have
been anti-dilutive.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share for the year ended December 31, 1998 is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of the Company's
Series A, B, C and D Convertible Preferred Stock into shares of the Company's
common stock effective upon the closing of the Company's initial public offering
as if such conversion occurred on January 1, 1998, or at date of original
issuance, if later. The resulting pro forma adjustment includes an increase in
the weighted average shares used to compute basic net loss per share of
9,915,000 for the year ended December 31, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1
requires that entities capitalize certain costs related to internal-use software
once certain criteria have been met. The Company expects that the adoption of
SOP No. 98-1 will not have a material impact on its financial position, results
of operations or cash flows. The Company will be required to implement SOP No.
98-1 for the year ending December 31, 1999.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In
F-10
<PAGE> 76
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
addition, all start-up costs that were capitalized in the past must be written
off when SOP No. 98-5 is adopted. The Company expects that the adoption of SOP
No. 98-5 will not have a material impact on its financial position, results of
operations or cash flows. The Company will be required to implement SOP No. 98-5
for the year ending December 31, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the Company
currently holds no derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133 will not have
a material impact on its financial position, results of operations or cash
flows. The Company will be required to implement SFAS No. 133 for the year
ending December 31, 2000.
NOTE 2 -- BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
---------- -----------
<S> <C> <C>
INVENTORY
Raw materials....................................... $ 89,000 $ 563,000
Finished goods...................................... -- 258,000
---------- -----------
$ 89,000 $ 821,000
========== ===========
PROPERTY AND EQUIPMENT, NET
Computer equipment.................................. $1,180,000 $ 3,554,000
Furniture and fixtures.............................. 148,000 358,000
Leasehold improvements.............................. 21,000 115,000
---------- -----------
1,349,000 4,027,000
Less: Accumulated depreciation and amortization..... (283,000) (1,205,000)
---------- -----------
$1,066,000 $ 2,822,000
========== ===========
ACCRUED LIABILITIES
Accrued compensation................................ $ 94,000 $ 494,000
Accrued professional fees........................... -- 458,000
Accrued warranty.................................... -- 338,000
Other............................................... -- 715,000
---------- -----------
$ 94,000 $ 2,005,000
========== ===========
</TABLE>
Property and equipment includes $611,000 and $2,055,000 of computer
equipment, internal-use software and furniture and fixtures under capital leases
at December 31, 1997 and 1998, respectively. Accumulated amortization of assets
under capital leases totaled $80,000 and $552,000 at December 31, 1997 and 1998,
respectively.
NOTE 3 -- RELATED PARTY TRANSACTIONS:
In April 1997, the Company loaned $105,000 to an affiliate of an officer
under a promissory note. The note accrued interest at a rate of 5.9%. The
principal of $105,000 was forgiven by the Company and recorded as compensation
expense in 1997.
F-11
<PAGE> 77
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In December 1997, the Company loaned $105,000 to an officer under a
promissory note. The note accrues interest at a rate of 5.81% compounded
annually and expires on December 3, 2000, on which date all unpaid interest and
principal is due on demand. The balance of the note and accrued interest was
$111,000 at December 31, 1998.
In January 1998, the Company advanced $211,000 under a full recourse
promissory note to one of its officers for the purchase of Common Stock of the
Company pursuant to a December 1997 stock subscription. The principal balance of
this note, together with interest accrued and unpaid to date, is due and payable
in January 2002. Interest accrues under the note on any unpaid principal balance
at the rate of 5.93% per annum, compounded annually.
NOTE 4 -- INCOME TAXES:
No provisions for income taxes have been recorded as the Company has
incurred net losses since inception.
At December 31, 1998, the Company had approximately $11.6 million of
federal and state net operating loss carryforwards available to offset future
taxable income which expire in varying amounts beginning in 2011 and 2004,
respectively. Under the Tax Reform Act of 1986, the amounts of and benefits from
net operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50%, as defined, over a three
year period. Such a change may have occurred as a result of the preferred stock
issuances during 1997 and 1998.
As of December 31, 1998, the Company had gross deferred tax assets of
approximately $5.4 million, related primarily to net operating loss
carryforwards and certain reserves that are not currently deductible for tax
purposes. Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
NOTE 5 -- BORROWINGS:
The Company had $638,000 and $391,000 outstanding under a loan and security
agreement with a bank at December 31, 1997 and 1998, respectively. The loan
agreement provides for borrowings of up to $750,000 which are secured by the
Company's property and equipment. Under the terms of the loan agreement, certain
transactions, including payment of dividends, are prohibited without the bank's
consent. The loan bears interest at the prime rate (7.75% at December 31, 1998)
plus .5% per annum. The Company is required to make monthly repayments on this
loan through July 2000.
Principal payments under the loan are due as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1999........................................................ $247,000
2000........................................................ 144,000
--------
$391,000
========
</TABLE>
In August 1998, the Company's loan and security agreement with its bank was
amended to include a revolving line that provides for additional borrowings of
up to, the lessor of $2 million, or 80% of eligible
F-12
<PAGE> 78
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
accounts receivable. The line bears interest at the prime rate plus .5% per
annum. At December 31, 1998, the Company had $1,500,000 outstanding and due
under this line. No additional amounts were available under the line as of
December 31, 1998. Borrowings under the agreement are secured by certain of the
Company's assets. The revolving line matures in July 1999 and contains certain
financial covenants, mainly relating to liquidity and profitability. See Note
12.
The Company was not in compliance with a covenant under this line at
December 31, 1998. The Company has obtained a waiver of this covenant as of
December 31, 1998.
NOTE 6 -- COMMITMENTS:
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2001. The terms of the
facility lease provide for rental payments on a graduated scale. The facility
lease expires in September 1999. The Company recognizes rent expense on a
straight-line basis over the lease period. Rental expense for 1996, 1997 and
1998 was $0, $144,000 and $441,000, respectively.
At December 31, 1998, the Company had an equipment lease line that provides
for a total purchases under the facility of $2,750,000.
Future minimum lease payments under noncancelable operating and capital
leases, including operating lease commitments entered into subsequent to
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ---------- ---------
<S> <C> <C>
1999..................................................... $ 767,000 $479,000
2000..................................................... 813,000 --
2001..................................................... 443,000 --
---------- --------
Total minimum lease payments................... 2,023,000 $479,000
========
Less: Amount representing interest....................... 332,000
----------
Present value of capital lease obligations............... 1,691,000
Less: Current portion.................................... 560,000
----------
Non-current portion of capital lease obligations....... $1,131,000
==========
</TABLE>
NOTE 7 -- CONVERTIBLE PREFERRED STOCK:
Convertible Preferred Stock at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
PROCEEDS
SHARES NET OF
------------------------ LIQUIDATION ISSUANCE
SERIES DESIGNATED OUTSTANDING AMOUNT COSTS
------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
A...................................... 1,687,500 1,687,500 $ 225,000 $ 217,000
B...................................... 5,233,875 5,134,498 5,135,000 5,119,000
C...................................... 2,582,001 2,557,999 5,116,000 5,083,000
D...................................... 1,350,000 1,076,624 8,477,000 8,465,000
---------- ---------- ----------- -----------
10,853,376 10,456,621 $18,953,000 $18,884,000
========== ========== =========== ===========
</TABLE>
F-13
<PAGE> 79
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The holders of the Convertible Preferred Stock have various rights and
preferences as follows:
VOTING
Each share of Series A, B, C and D has voting rights equal to an equivalent
number of shares of Common Stock into which it is convertible and votes together
as one class with the Common Stock.
As long as at least 375,000 shares of Convertible Preferred Stock remain
outstanding, the Company must obtain approval from a majority of the holders of
Convertible Preferred Stock in order to alter the articles of incorporation as
related to the rights, preferences or privileges of the Convertible Preferred
Stock. As long as any shares of Convertible Preferred Stock remain outstanding,
the Company must obtain approval from a majority of the holders of Convertible
Preferred Stock in order to change the authorized number of shares of
Convertible Preferred Stock, change the authorized number of Directors,
authorize a dividend for any class or series other than Convertible Preferred
Stock, create a new class of stock or effect a merger, consolidation or sale of
assets where the existing stockholders retain less than 50% of the voting stock
of the surviving entity.
The holders of the existing Convertible Preferred Stock and Common Stock,
respectively, voting separately as a class, shall be entitled to elect two
directors at each annual meeting of the stockholders.
DIVIDENDS
Holders of Series A, B, C and D Convertible Preferred Stock are entitled to
receive noncumulative dividends at the per annum rate of $.013, $.10, $.20 and
$.787 per share, respectively, when and if declared by the Board of Directors.
No dividends on Convertible Preferred Stock or Common Stock have been declared
from inception through December 31, 1998.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners of
the Company's Common Stock and Convertible Preferred Stock own less than 50% of
the resulting voting power of the surviving entity, the holders of Series A, B,
C and D Convertible Preferred Stock are entitled to receive an amount of $.13,
$1.00, $2.00 and $7.87 per share, respectively, plus any declared but unpaid
dividends prior to and in preference to any distribution to the holders of
Common Stock. The remaining assets, if any, shall be distributed among the
holders of Series C Preferred Stock, Series D Preferred Stock and Common Stock
pro rata in proportion to the number of shares of Common Stock held by each
(assuming conversion of all such Series C and Series D Preferred Stock) until,
with respect to the holders of Series C Preferred Stock, such holders shall have
received an aggregate of $4.00 per share, and with respect to the holders of
Series D Preferred Stock, such holders shall have received an aggregate of
$11.81 per share; thereafter, the holders of Common Stock shall receive all of
the remaining assets of the Company pro rata based on the number of shares of
Common Stock held by each. Should the Company's legally available assets be
insufficient to satisfy the liquidation preferences, the funds will be
distributed ratably to the Series A, B, C and D Convertible Preferred Stock
holders.
CONVERSION
Each share of Series A, B, C and D Convertible Preferred Stock is
convertible, at the option of the holder, according to a conversion ratio which
is subject to adjustment for dilution. Each share of Series A, B, C and D
Convertible Preferred Stock automatically converts into the number of shares of
F-14
<PAGE> 80
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Common Stock into which such shares are convertible, at the then effective
conversion ratio, upon: (1) the closing of a public offering of Common Stock at
a per share price of at least $.66, $2.50, $5.00 and $10.00 per share,
respectively, with gross proceeds of at least $7,500,000, (2) a merger, sale of
substantially all of the assets or other transactions which result in a change
in control or (3) the consent of the holders of the majority of Convertible
Preferred Stock.
At December 31, 1998, the Company has reserved 1,687,500, 5,233,875,
2,582,001 and 1,350,000 shares of Common Stock for the conversion of Series A,
B, C and D Convertible Preferred Stock, respectively.
WARRANTS FOR CONVERTIBLE PREFERRED STOCK
In connection with certain borrowings, the Company issued warrants to
purchase 99,375, 24,000 and 6,096 shares of Series B, C and D Convertible
Preferred Stock for $1.00, $2.00 and $7.87 per share, respectively, in 1997 and
1998. Such warrants expire through 2004. Using the Black-Scholes pricing model,
the Company estimated that the fair value of the warrants was $98,000 at the
dates of grant. The Company recognized $25,000 and $28,000 of interest expense
associated with these warrants during 1997 and 1998, respectively.
NOTE 8 -- COMMON STOCK:
A portion of the Common Stock outstanding is subject to a right of
repurchase by the Company which generally lapses over a four year period. All
grants to non-employee service providers and other non-employees were fully
vested at the date of issuance. At December 31, 1997 and 1998, there were
4,985,588 and 4,241,400 shares subject to repurchase.
The Company issued 90,746 and 102,900 shares of Common Stock to consultants
and other service providers of the Company in 1997 and 1998, respectively. The
fair value of the Common Stock issued was determined to be $6,000 and $227,000
in 1997 and 1998, respectively, based on the fair value of the services received
or Common Stock issued, whichever was more reliably measurable, and has been
recognized in general and administrative expenses.
The Company issued 2,829,996, 2,072,230 and 29,252 restricted shares of
Common Stock outside the 1997 Stock Option Plan in 1996, 1997 and 1998,
respectively. The weighted average fair value of the restricted shares issued
was $0, $.05 and $.50, in 1996, 1997 and 1998, respectively.
NOTE 9 -- STOCK OPTIONS
In April 1997, the Company adopted the 1997 Stock Plan (the "Plan"). The
Plan provides for the granting of stock options and common stock to employees
and consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees and consultants. The Company has reserved 7,071,096
shares of Common Stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the
F-15
<PAGE> 81
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
shares on the date of grant, respectively. Options are generally exercisable
immediately, subject to repurchase options held by the Company. The repurchase
options lapse over a maximum period of five years at such times and under such
conditions as determined by the Board of Directors. To date, options and
restricted stock granted generally vest over four years.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- --------
<S> <C> <C> <C>
Authorized............................................. 3,900,000 -- $ --
Options granted........................................ (331,500) 331,500 .13
Common Stock granted................................... (2,218,246) -- --
Options exercised...................................... -- (99,000) .06
Common Stock repurchased............................... 7,500 -- --
---------- ---------
Balance at December 31, 1997............................. 1,357,754 232,500 .16
Authorized............................................. 3,171,096 -- --
Options granted........................................ (2,669,100) 2,669,100 1.25
Common Stock granted................................... (705,150) -- --
Options exercised...................................... -- (836,875) .41
Common Stock repurchased............................... 118,500 -- --
---------- ---------
Balance at December 31, 1998............................. 1,273,100 2,064,725 1.47
========== =========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1998 DECEMBER 31, 1998
----------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ---------- ------------ ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.05 - 1.00 1,111,725 9.36 years $ .56 1,011,725 $ .54
2.00 449,000 9.79 years 2.00 409,000 2.00
3.00 504,000 9.94 years 3.00 469,416 3.00
--------- ---------
2,064,725 9.60 years 1.47 1,890,141 1.46
========= =========
</TABLE>
A total of 124,156 options with an average exercise price of $.18 per share
are vested at December 31, 1998.
In 1997, the Company issued, to an employee, options to purchase 7,875
shares of Common Stock at an exercise price of $0.20 per share outside the Plan.
These options were exercised in 1997. In 1998, the Company issued, to two
employees, options to purchase 40,000 shares of Common Stock at an exercise
price of $3.00 per share outside the Plan. These options were outstanding at
December 31, 1998.
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would not have been
materially different.
F-16
<PAGE> 82
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes pricing model with the following
assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1997 1998
----- -----
<S> <C> <C>
Expected life (years)....................................... 5 5
Risk free interest rate..................................... 6.03% 5.12%
Expected volatility......................................... -- --
Dividend yield.............................................. -- --
</TABLE>
The weighted average fair values of options granted during 1997 and 1998
were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
YEAR ENDED DECEMBER 31, 1997 EXERCISE PRICE FAIR VALUE
---------------------------- ----------------- -----------------
<S> <C> <C>
Exercise price equal to market value.................... $ .13 $ .03
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------
<S> <C> <C>
Exercise price equal to market value.................... .60 .13
Exercise price less than market value................... 1.31 2.46
</TABLE>
The weighted average fair value of restricted shares of Common Stock
granted under the Plan in 1997 and 1998 was $.13 and $.77, respectively.
NOTE 10 -- DEFERRED STOCK COMPENSATION:
In the year ended December 31, 1998, the Company recorded deferred stock
compensation expense of approximately $5,611,000 related to the issuance of
stock options and restricted shares at prices subsequently determined to be
below fair market value. These charges are being amortized over a period of four
years from the date of option or restricted shares issuance. Amortization of
$880,000 has been recognized as stock compensation expense in the year ended
December 31, 1998.
NOTE 11 -- EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually by the
Board of Directors. There have been no Company contributions to the plan since
inception.
NOTE 12 -- SUBSEQUENT EVENTS:
LOAN AGREEMENT
In January 1999, the Company repaid the $1.5 million in borrowings under
the loan and security agreement with a bank which was outstanding as of December
31, 1998. In January 1999, the Company's loan and security agreement with the
bank was amended to increase the revolving line from $2.0 million to $5.0
million.
PREFERRED STOCK
In January 1999, the Company sold 63,532 shares of Series D Preferred Stock
for $500,000.
F-17
<PAGE> 83
REDBACK NETWORKS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AMENDMENT TO CERTIFICATE OF INCORPORATION
In March 1999, the Board of Directors approved, subject to stockholder
approval, an amendment to the Company's certificate of incorporation to provide
for an increase in the authorized capital stock to 24,500,000 shares of common
stock.
In March 1999, the Company also approved an amendment to the Company's
certificate of incorporation to provide for an increase in the authorized
capital stock to 80,000,000 shares of Common Stock and 10,000,000 shares of
undesignated Preferred Stock upon the completion of the Company's proposed
initial public offering. Upon completion of the initial public offering, all
previously issued and outstanding Preferred Stock will be converted into shares
of Common Stock and warrants to purchase shares of Preferred Stock will be
converted into warrants to purchase shares of Common Stock.
STOCK PLANS
During the period from January 1, 1999 to February 28, 1999, the Company
granted options to purchase 838,100 shares of Common Stock at exercise prices of
$4.75 to $8.75 per share. The Company recorded deferred stock compensation
expense of approximately $3.0 million related to the issuance of these options.
In March 1999, the Board of Directors approved, subject to stockholder
approval, an increase in the common shares available for issuance under the 1997
Stock Plan of 600,000 shares.
In March 1999, the Board of Directors approved, subject to stockholder
approval, the adoption of the 1999 Stock Incentive Plan ("1999 Plan") and
reserved 2,500,000 shares of common shares for issuance under this Plan. Shares
not yet issued under the 1997 Stock Plan will also be available under the 1999
Plan. The 1999 Plan allows the grant of ISO, NSO and restricted stock to
employees, non-employee board members and consultants.
In March 1999, the Board of Directors approved, subject to stockholder
approval, the adoption of the 1999 Employee Stock Purchase Plan and reserved
1,000,000 shares of Common Stock for issuance under this Plan.
In March 1999, the Board of Directors approved, subject to stockholder
approval, the adoption of the 1999 Directors' Option Plan and reserved 200,000
shares of Common Stock for issuance under this Plan.
F-18
<PAGE> 84
[GRAPHIC -- INSIDE BACK COVER]
Across the top of the page reads "Redback Networks. Enabling high-speed
access for the masses."
The page has two graphics on the right side and one graphic on the bottom
left side.
The first graphic on the right is a picture of the SMS 1000. Below that is
a picture of the SMS 500. The following caption is above these graphics:
- "Redback Networks' Subscriber Management Systems are used by leading
carriers and service providers to deploy high-speed services and
manage subscribers."
Next to these graphics is the following text:
- "Deployed in production networks worldwide by leading carriers and
service providers. Supports all major broadband technologies.
Scalable to thousands of subscribers. Ease of delivering
connectivity cuts time to market. Multiple service creation
opportunities."
Text runs down the left side of the page and down to the bottom right which
reads:
- "Redback Networks delivers solutions that allow carriers, cable MSOs
and service providers to quickly and cost-effectively bring
high-speed Internet access services to market."
"Powerful solutions for managing high-speed subscribers
Redback Networks' Subscriber Management Systems, or SMSs are powerful,
advanced networking solutions that bridge the operational gap between high-speed
access networks that serve businesses and homes and backbone routers. The SMS
accepts the high-speed data traffic of thousands of individual subscribers and
translates it to simple Internet protocol data streams, relieving backbone
routers of processing and management tasks. By relieving routers of subscriber
management functions, the SMS enhances router performance and helps reduce the
need for additional router investment.
Rapid, scalable deployment of Internet access
The SMS allows providers to offer high-speed Internet access using DSL,
cable and wireless technologies alone or in combination. Because the SMS
leverages existing access, accounting and management control systems, it speeds
the deployment of these technologies and gives providers a competitive
advantage. For example, the SMS supports the same industry-standard RADIUS
database technology used with traditional dial network subscribers, thus
reducing staff training and operational costs.
Service creation enables new revenues for service providers
In addition to streamlining basic high-speed access, the SMS allows
providers to create and market new service offerings that leverage high-speed
connectivity.
With the SMS's service selection capabilities, service providers can add
value to their high-speed access offerings by "re-profiling" and "re-selling"
lines to subscribers multiple times. Possible services include "business by
day/family by night" billing as well as different qualities of service. In
addition, wholesale providers of network transport can use the SMS to
cost-effectively provide access bandwidth to service provider customers."
The graphic on the bottom-left side of the page depicts three distinct
Internet access modes, DSL, cable and wireless, each connected to the SMS 1000
product, which is connected to both the Internet and a corporate network. The
caption for this graphic reads:
- "The SMS bridges the operational gap between high-speed subscribers
and the Internet, supports all major high-speed access technologies,
and accelerates the deployment of new services."
In the bottom right corner is our logo.
<PAGE> 85
[REDBACK NETWORKS LOGO]
<PAGE> 86
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 the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 10,391
NASD fee.................................................... 4,238
Nasdaq National Market listing fee.......................... 27,795
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 250,000
Blue sky fees and expenses.................................. 10,000
Transfer agent fees......................................... 10,000
Miscellaneous fees and expenses............................. 87,576
--------
Total............................................. $950,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers, including reimbursement for expenses incurred, in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VII, Section 6, of the Registrant's Bylaws provides
for mandatory indemnification of its directors and permissible indemnification
of officers and employees to the maximum extent permitted by the Delaware
General Corporation Law. The Registrant's Certificate of Incorporation provides
that, pursuant to Delaware law, its directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty as directors to the Company
and its stockholders. This provision in the Certificate of Incorporation does
not eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Company for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Registrant has entered into Indemnification Agreements with its officers and
directors, a form of which is attached as Exhibit 10.1 hereto and incorporated
herein by reference. The Indemnification Agreements provide the Registrant's
officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. Reference is made to Section
7 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying
officers and directors of the Registrant against certain liabilities.
II-1
<PAGE> 87
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Company's inception on August 30, 1996, the Company has issued
and sold the following securities (which numbers reflect the four for one stock
split effected January 13, 1997 and the three for two stock split effected
September 11, 1998):
1. From inception through December 31, 1998, the Company granted
options to purchase 3,000,600 shares of common stock and granted 2,923,396
shares of restricted common stock at exercise prices ranging from $.053 to
$3.00 per share to employees, consultants, directors and other service
providers pursuant to its 1997 Stock Plan. Additionally, the Company
granted options to purchase 47,875 shares of common stock and granted
4,931,478 shares of restricted common stock at exercise prices ranging from
$.001667 to $3.00 per share to employees, consultants, directors and other
service providers outside of the 1997 Stock Plan.
2. From inception through December 31, 1998, the Company issued and
sold an aggregate of 8,798,624 shares of its common stock to employees,
consultants, directors and other service providers for aggregate
consideration of approximately $1,172,000 pursuant to direct issuances or
exercises of options granted both under its 1997 Stock Plan and outside of
that 1997 Stock Plan.
3. In September 1996, the Company issued and sold an aggregate of
1,687,500 shares of its Series A Preferred Stock for an aggregate purchase
price of approximately $225,000, or $.13 per share.
4. In January 1997, the Company issued and sold 5,134,498 shares of
its Series B Preferred Stock for an aggregate purchase price of
approximately $5,135,000, or $1.00 per share.
5. In February and July 1997, the Company issued warrants to purchase
52,500 and 46,875 shares respectively, of its Series B Preferred Stock at
an exercise price of $1.00 per share.
6. In October 1997, the Company issued and sold 2,557,999 shares of
its Series C Preferred Stock for an aggregate purchase price of
approximately $5,116,000, or $2.00 per share.
7. In March 1998, the Company issued a warrant to purchase 24,000
shares of its Series C Preferred Stock at an exercise price of $2.00 per
share.
8. In July 1998, the Company issued and sold 1,076,624 shares of its
Series D Preferred Stock for an aggregate purchase price of approximately
$8,477,000, or $7.87.
9. In October 1998, the Company issued a warrant to purchase 6,096
shares of its Series D Preferred Stock at an exercise price of $7.87 per
share.
10. In January 1999, the Company issued and sold 63,532 shares of its
Series D Preferred Stock for an aggregate purchase price of approximately
$499,997, or $7.87 per share.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving any public
offering or transactions pursuant to compensation benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.
II-2
<PAGE> 88
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as amended
to date
3.2* Form of Restated Certificate of Incorporation of the
Registrant, to be filed upon the closing of the offering
made pursuant to this Registration Statement
3.3 Bylaws of the Registrant
3.4* Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the closing of the offering made pursuant to
this Registration Statement
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
4.2* Form of Registrant's Common Stock Certificate
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP
10.1 Form of Indemnification Agreement
10.2 1999 Stock Incentive Plan
10.3 1999 Employee Stock Purchase Plan
10.4 1999 Directors' Option Plan
10.5 Sublease between Registrant and Infoseek Corporation, dated
January 12, 1998 (without exhibits)
10.6 First Amendment to Sublease between Registrant and Infoseek
Corporation, dated January 15, 1999
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2* Consent of Counsel. Reference is made to Exhibit 5.1........
24.1 Power of Attorney. Reference is made to page II-5...........
27.1 Financial Data Schedule.....................................
</TABLE>
- ------------------------
* to be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of 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.
II-3
<PAGE> 89
The 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 the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, 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-4
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale,
State of California, on this 16th day of March, 1999.
REDBACK NETWORKS INC.
By: /s/ DENNIS L. BARSEMA
------------------------------------
Dennis L. Barsema
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Dennis L. Barsema and Geoffrey C. Darby,
and each of them, his true and lawful attorneys-in-fact and agents with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said 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, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF
OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DENNIS L. BARSEMA President, Chief Executive March 16, 1999
- ------------------------------------------------ Officer (Principal Executive
Dennis L. Barsema Officer) and Director
/s/ GEOFFREY C. DARBY Chief Financial Officer March 16, 1999
- ------------------------------------------------ (Principal Financial and
Geoffrey C. Darby Accounting Officer) and Secretary
/s/ JAMES R. FLACH Director March 16, 1999
- ------------------------------------------------
James R. Flach
/s/ PIERRE R. LAMOND Director March 16, 1999
- ------------------------------------------------
Pierre R. Lamond
/s/ DANIEL J. WARMENHOVEN Director March 16, 1999
- ------------------------------------------------
Daniel J. Warmenhoven
</TABLE>
II-5
<PAGE> 91
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S> <C>
1.1* Form of Underwriting Agreement..............................
3.1 Certificate of Incorporation of the Registrant, as amended
to date.....................................................
3.2* Form of Restated Certificate of Incorporation of the
Registrant, to be filed upon the closing of the offering
made pursuant to this Registration Statement................
3.3 Bylaws of the Registrant....................................
3.4* Form of Amended and Restated Bylaws of the Registrant, to be ...
effective upon the closing of the offering made pursuant to
this Registration Statement.................................
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.........
4.2* Form of Registrant's Common Stock Certificate...............
5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP..............................................
10.1 Form of Indemnification Agreement...........................
10.2 1999 Stock Incentive Plan...................................
10.3 1999 Employee Stock Purchase Plan...........................
10.4 1999 Directors' Option Plan.................................
10.5 Sublease between Registrant and Infoseek Corporation, dated
January 12, 1998 (without exhibits).........................
10.6 First Amendment to Sublease between Registrant and Infoseek
Corporation, dated January 15, 1999.........................
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.................................................
23.2* Consent of Counsel. Reference is made to Exhibit 5.1........
24.1 Power of Attorney. Reference is made to page II-5...........
27.1 Financial Data Schedule.....................................
</TABLE>
- ------------------------
* to be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF
"REDBACK NETWORKS INC.", FILED IN THIS OFFICE ON THE ELEVENTH DAY OF SEPTEMBER,
A.D. 1998, AT 1 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
[SEAL OF THE STATE OF DELAWARE]
/s/ EDWARD J. FREEL
-----------------------------------
Edward J. Freel, Secretary of State
[SECRETARY'S OFFICE SEAL]
2658224 8100 AUTHENTICATION: 9298751
981354296 DATE: 09-14-98
<PAGE> 2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF REDBACK NETWORKS INC.,
A DELAWARE CORPORATION
The undersigned, Dennis L. Barsema and Robert V. Gunderson, Jr.,
hereby certify that:
ONE: They are the duly elected and acting President and Assistant
Secretary, respectively, of said corporation.
TWO: The name of the corporation is RedBack Networks Inc. and
that the corporation was originally incorporated on August 30, 1996 pursuant to
the General Corporation Law.
THREE: Pursuant to Section 242 and Section 245 of the General
Corporation Law of the State of Delaware, RedBack Networks Inc. has adopted this
Amended and Restated Certificate of Incorporation, restating, integrating and
further amending its Amended and Restated Certificate of Incorporation dated on
or about July 1, 1998, which Amended and Restated Certificate of Incorporation
has been duly proposed by the directors and adopted by the stockholders of this
corporation (by written consent pursuant to Section 228 of said General
Corporate Law) in accordance with the provisions of said Section 242 and Section
245.
FOUR: The Amended and Restated Certificate of Incorporation of
said corporation shall be amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is RedBack Networks Inc.
ARTICLE II
The address of the registered office of this corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, 19801, County of New Castle. The name of its registered agent at
such address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
ARTICLE IV
Upon the filing of this Amended and Restated Certificate of
Incorporation, each two (2) shares of this corporation's outstanding Common
Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock shall be automatically
<PAGE> 3
split into three (3) shares of this corporation's Common Stock, Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, respectively, without any action by the holder thereof. No
fractional shares shall be issued upon the split of such shares. Any shares of
Common Stock surrendered in connection with the split provided for herein that
would otherwise result in a fractional share shall be redeemed for $1.50 per
share, the current fair market value of this corporation's Common Stock. Any
shares of Preferred Stock surrendered in connection with the split provided for
herein that would otherwise result in a fractional share shall be redeemed for
the applicable Original Issue Price (as defined in Article 5, Section B(2)(a))
per share. Whether or not fractional shares are issuable upon such split shall
be determined on the basis of the total number of shares of Common Stock, Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series
D Preferred Stock held by each holder and the number of shares of Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock issuable upon such aggregate split.
ARTICLE V
A. Classes of Stock. This corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares that this corporation is authorized to issue
is thirty-six million (36,000,000) shares. Twenty-two million, five hundred
thousand (22,500,000) shares shall be Common Stock, par value $.0001 per share,
and thirteen million, five hundred thousand (13,500,000) shares shall be
Preferred Stock, par value $.0001 per share.
B. Rights, Preferences and Restrictions of Preferred Stock. The
Preferred Stock authorized by this Amended and Restated Certificate of
Incorporation may be issued from time to time in one or more series. The rights,
preferences, privileges, and restrictions granted to and imposed on the Series A
Preferred Stock, which series shall consist of 1,687,500 shares, the Series B
Preferred Stock, which series shall consist of 5,233,875 shares, the Series C
Preferred Stock, which series shall consist of 2,582,001 shares, and the Series
D Preferred Stock, which series shall consist of 1,350,000 shares, are as set
forth below in this Article V(B). The Board of Directors is hereby authorized to
fix or alter the rights, preferences, privileges and restrictions granted to or
imposed upon additional series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or of any of them.
Subject to compliance with applicable protective voting rights that have been or
may be granted to the Preferred Stock or series thereof in Certificates of
Determination or this corporation's Amended and Restated Certificate of
Incorporation ("Protective Provisions"), but notwithstanding any other rights of
the Preferred Stock or any series thereof, the rights, privileges, preferences
and restrictions of any such additional series may be subordinated to, pari
passu with (including, without limitation, inclusion in provisions with respect
to liquidation and acquisition preferences, redemption and/or approval of
matters by vote or written consent), or senior to any of those of any present or
future class or series of Preferred or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors is also authorized to
increase or decrease the number of shares of any series (other than the Series
A, Series B, Series C and Series D Preferred Stock), prior or subsequent to the
issue of that series, but not below the number of
2
<PAGE> 4
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status that they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
1. Dividend Provisions.
(a) Subject to the rights of series of Preferred Stock that may
from time to time come into existence, the holders of shares of Series A, Series
B, Series C and Series D Preferred Stock (together, the "Existing Preferred
Stock") shall be entitled to receive dividends, out of any assets legally
available therefor, prior and in preference to any declaration or payment of any
dividend (payable other than in Common Stock or other securities and rights
convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock of this corporation) on the Common
Stock of this corporation, at the rate of $0.013 per share per annum with
respect to the Series A Preferred Stock, $0.10 per share per annum with respect
to the Series B Preferred Stock, $0.20 per share per annum with respect to the
Series C Preferred Stock and $0.787 per share per annum with respect to the
Series D Preferred Stock, or, if greater (as determined on a per annum basis and
an as converted basis for the Existing Preferred Stock), an amount equal to that
paid on any other outstanding shares of this corporation, payable when, as and
if declared by the Board of Directors. Such dividends shall not be cumulative.
The provisions of Section (B)(1)(a) of this Article V shall apply to any
distribution payable in securities of this corporation or other persons,
evidences of indebtedness issued by this corporation or other persons, assets or
options or rights to purchase any such securities or evidences of indebtedness
(other than in connection with a transaction referred to in Section (B)(2)(c),
(B)(4)(d) or (B)(4)(e) of this Article V).
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
this corporation, either voluntary or involuntary, subject to the rights of
series of Preferred Stock that may from time to time come into existence, the
holders of Existing Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of this corporation to the
holders of Common Stock by reason of their ownership thereof, (A) for the Series
A Preferred Stock, an amount per share equal to the sum of (i) $0.13 for each
outstanding share of Series A Preferred Stock (the "Original Series A Issue
Price") and (ii) an amount equal to declared but unpaid dividends on such
shares, (B) for the Series B Preferred Stock, an amount per share equal to the
sum of (i) $1.00 for each outstanding share of Series B Preferred Stock (the
"Original Series B Issue Price") and (ii) an amount equal to declared but unpaid
dividends on such shares, (C) for the Series C Preferred Stock, an amount per
share equal to the sum of (i) $2.00 for each outstanding share of Series C
Preferred Stock (the "Original Series C Issue Price") and (ii) an amount equal
to declared but unpaid dividends on such shares and (D) for the Series D
Preferred Stock, an amount per share equal to the sum of (i) $7.87 for each
outstanding share of Series D Preferred Stock (the "Original Series D Issue
Price") and (ii) an amount equal to declared but unpaid dividends on such shares
(the Original Series A Issue Price, the Original Series B Issue Price, the
Original Series C Issue Price and the Original Series D Issue Price being the
applicable "Original Issue Price" for such series). If upon the occurrence of
such event,
3
<PAGE> 5
the assets and funds thus distributed among the holders of the Existing
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then, subject to the rights of series
of Preferred Stock that may from time to time come into existence, the entire
assets and funds of this corporation legally available for distribution shall be
distributed ratably among the holders of the Existing Preferred Stock in
proportion to the amount of such stock owned by each such holder.
(b) Upon the completion of the distribution required by
subparagraph (a) of this Section 2 and any other distribution that may be
required with respect to series of Preferred Stock that may from time to time
come into existence, the remaining assets of this corporation available for
distribution to stockholders shall be distributed among the holders of Series C
Preferred Stock, Series D Preferred Stock and Common Stock pro rata in
proportion to the number of shares of Common Stock held by each (assuming
conversion of all such Series C Preferred Stock and Series D Preferred Stock)
until, with respect to the holders of Series C Preferred Stock, such holders
shall have received an aggregate of $4.00 per share (including amounts paid
pursuant to subsection (a) of this Section 2) and, with respect to the holders
of Series D Preferred Stock, such holders shall have received an aggregate of
$11.81 per share (including amounts paid pursuant to subsection (a) of this
Section 2); thereafter, subject to the rights of series of Preferred Stock that
may from time to time come into existence, the holders of the Common Stock of
this corporation shall receive all of the remaining assets of this corporation
pro rata based on the number of shares of Common Stock held by each.
(c) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of this corporation (a "Liquidation Event") shall be
deemed to be occasioned by, or to include, (A) the acquisition of this
corporation by another entity by means of any transaction or series of related
transactions (including, without limitation, any reorganization, merger or
consolidation) that results in the transfer of fifty percent (50%) or more of
the outstanding voting power of this corporation; or (B) a sale of all or
substantially all of the assets of this corporation .
(ii) In any of such events, if the consideration received
by this corporation is other than cash, its value will be deemed its fair market
value. Any securities shall be valued as follows:
(A) Securities not subject to investment letter or other
similar restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or through
NASDAQ-NMS, the value shall be deemed to be the average of the closing prices of
the securities on such exchange over the thirty (30) day period ending three (3)
days prior to the closing;
(2) 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 (30) day period ending three (3) days prior to
the closing; and
4
<PAGE> 6
(3) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by this
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by this corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
such Preferred Stock.
(iii) In the event the requirements of this subsection
2(c) are not complied with, this corporation shall forthwith either:
(A) cause such Liquidation Event to be postponed
until such time as the requirements of this Section 2 have been complied with;
or
(B) cancel such Liquidation Event, in which event the
rights, preferences and privileges of the holders of the Existing Preferred
Stock shall revert to and be the same as such rights, preferences and privileges
existing immediately prior to the date of the first notice referred to in
subsection 2(c)(iv) hereof.
(iv) This corporation shall give each holder of record of
Existing Preferred Stock written notice of such impending transaction not later
than twenty (20) days prior to the stockholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 2, and this corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after this corporation has given the first notice
provided for herein or sooner than ten (10) days after this corporation has
given notice of any material changes provided for herein; provided, however,
that such periods may be shortened upon the written consent of the holders of
Preferred Stock that are entitled to such notice rights or similar notice rights
and that represent at least a majority of the voting power of all then
outstanding shares of such Preferred Stock.
3. Redemption. The Existing Preferred Stock is not redeemable.
4. Conversion. The holders of the Existing Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Existing Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share, at the office of this corporation or any
transfer agent for such stock, into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing the Original Issue Price by
the Conversion Price applicable to such share, determined as hereafter provided,
in
5
<PAGE> 7
effect on the date the certificate is surrendered for conversion. The initial
Conversion Price per share for shares of Series A Preferred Stock shall be the
Original Series A Issue Price, the initial Conversion Price per share for shares
of Series B Preferred Stock shall be the Original Series B Issue Price, the
initial Conversion Price per share for shares of Series C Preferred Stock shall
be the Original Series C Issue Price and the initial Conversion Price per share
for shares of Series D Preferred Stock shall be the Original Series D Issue
Price; provided, however, that the Conversion Price for the Existing Preferred
Stock shall be subject to adjustment as set forth in section (B)(4)(d) of this
Article V.
(b) Automatic Conversion.
(i) Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Price
at the time in effect for such Series A Preferred Stock immediately upon the
consummation of this corporation's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement on Form S-1 or
Form SB-2 under the Securities Act of 1933, as amended, the public offering
price of which was not less than $0.66 per share (adjusted to reflect subsequent
stock dividends, stock splits or recapitalization) and aggregate proceeds in
excess of $7,500,000.
(ii) Each share of Series B Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Price
at the time in effect for such Series B Preferred Stock immediately upon the
consummation of this corporation's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement on Form S-1 or
Form SB-2 under the Securities Act of 1933, as amended, the public offering
price of which was not less than $2.50 per share (adjusted to reflect subsequent
stock dividends, stock splits or recapitalization) and aggregate proceeds in
excess of $7,500,000.
(iii) Each share of Series C Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Price
at the time in effect for such Series C Preferred Stock immediately upon the
consummation of this corporation's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement on Form S-1 or
Form SB-2 under the Securities Act of 1933, as amended, the public offering
price of which was not less than $5.00 per share (adjusted to reflect subsequent
stock dividends, stock splits or recapitalization) and aggregate proceeds in
excess of $7,500,000.
(iv) Each share of Series D Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Price
at the time in effect for such Series D Preferred Stock immediately upon the
consummation of this corporation's sale of its Common Stock in a firm commitment
underwritten public offering pursuant to a registration statement on Form S-1 or
Form SB-2 under the Securities Act of 1933, as amended, the public offering
price of which was not less than $10.00 per share (adjusted to reflect
subsequent stock dividends, stock splits or recapitalization) and aggregate
proceeds in excess of $7,500,000.
(v) Each share of Existing Preferred Stock shall
automatically be converted into shares of Common Stock at the applicable
Conversion Ratio then in effect for such shares at the election of the holders
of more than two-thirds of the outstanding Existing
6
<PAGE> 8
Preferred Stock voting together as a single class in accordance with Section
(B)(5) of this Article V.
(c) Mechanics of Conversion. Before any holder of Existing
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of this corporation or of any transfer agent for the
Existing Preferred Stock, and shall give written notice to this corporation at
its principal corporate office, of the election to convert the same and shall
state therein the name or names in which the certificate or certificates for
shares of Common Stock are to be issued. This corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Existing Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. 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 Existing Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date. If the conversion is in
connection with an underwritten offering of securities registered pursuant to
the Securities Act of 1933, as amended, the conversion may, at the option of any
holder tendering Existing Preferred Stock for conversion, be conditioned upon
the closing with the underwriters of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the Common Stock upon
conversion of the Existing Preferred Stock shall not be deemed to have converted
such Existing Preferred Stock until immediately prior to the closing of such
sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for Splits
and Combinations. The Conversion Price of the Existing Preferred Stock shall be
subject to adjustment from time to time as follows:
(i) In the event this corporation should at any time or
from time to time after the date ""of filing of this Amended and Restated
Certificate of Incorporation fix a record date for the effectuation of a split
or subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of each series of Existing Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be increased in proportion to such increase of
the aggregate of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents.
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(ii) If the number of shares of Common Stock outstanding
at any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for each series of Existing Preferred Stock
shall be appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of such series shall be decreased in
proportion to such decrease in outstanding shares.
(e) Other Distributions. In the event this corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by this corporation or other persons, assets (excluding cash
dividends) or options or rights not otherwise referred to herein or in Article
IV of this Amended and Restated Certificate of Incorporation, then, in each such
case for the purpose of this Section, the holders of the Existing Preferred
Stock shall be entitled to a proportionate share of any such distribution as
though they were the holders of the number of shares of Common Stock of the
corporation into which their shares of Series A, Series B, Series C or Series D
Preferred Stock, each as the case may be, are convertible as of the record date
fixed for the determination of the holders of Common Stock of the corporation
entitled to receive such distribution.
(f) Recapitalizations. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section (B)(4) or in Section (B)(2) of this Article V or the stock split
provided for in Article IV of this Amended and Restated Certificate of
Incorporation) provision shall be made so that the holders of the Existing
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Existing Preferred Stock the number of shares of stock or other securities or
property of this corporation or otherwise, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such recapitalization.
In any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of the
Existing Preferred Stock after the recapitalization to the end that the
provisions of this Section 4 (including adjustment of the Conversion Price then
in effect and the number of shares purchasable upon conversion of the Existing
Preferred Stock) shall be applicable after that event as nearly equivalent as
may be practicable.
(g) No Impairment. This corporation will not, by amendment of its
Restated Certificate of Incorporation or through any reorganization,
recapitalization, 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 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Existing Preferred Stock against
impairment.
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(h) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon the
conversion of any share or shares of the Existing Preferred Stock, and the
number of shares of Common Stock to be issued shall be rounded to the nearest
whole share. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of Existing
Preferred Stock the holder is at the time converting into Common Stock and the
number of shares of Common Stock issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of Existing Preferred Stock pursuant to
this Section 4, this corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Existing Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. This corporation shall, upon the written
request at any time of any holder of Existing Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Conversion Price for such series of
Preferred Stock at the time in effect, and (C) the number of shares of Common
Stock and the amount, if any, of other property that at the time would be
received upon the conversion of a share of Existing Preferred Stock.
(i) Notices of Record Date. In the event of any taking by this
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Existing Preferred Stock, at least
twenty (20) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(j) 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 Stock, solely for the purpose of effecting the
conversion of the shares of the Existing Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Existing Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Existing Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, 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 Stock to such number of shares as
shall be sufficient for such purposes, including, without limitation, engaging
in best efforts to obtain the requisite stockholder approval of any necessary
amendment to this certificate.
(k) Notices. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Existing Preferred Stock shall
be deemed given if deposited in
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the United States mail, postage prepaid, and addressed to each holder of record
at his address appearing on the books of this corporation.
5. Voting Rights.
(a) The holder of each share of Existing Preferred Stock shall
have the right to one vote for each share of Common Stock into which such
Existing Preferred Stock could then be converted, and with respect to such vote,
such holder shall have full voting rights and powers equal to the voting rights
and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting in
accordance with the bylaws of this corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. Fractional votes shall not,
however, be permitted and any fractional voting rights available on an
as-converted basis (after aggregating all shares into which shares of Existing
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half being rounded upward).
(b) Election of Directors.
(i) The holders of the Existing Preferred Stock, voting
separately as a class, shall be entitled to elect two directors at each annual
meeting of stockholders of this corporation at which any director is elected or
at the time of any written consent to action in lieu of any such meeting. No
director so elected by the holders of the Existing Preferred Stock may be
removed without the prior consent, given in person or by proxy, either in
writing or at a special meeting called for that purpose, of the holders of the
Existing Preferred Stock voting separately as a class. In case of the death,
resignation or other removal of any director elected by the holders of the
Existing Preferred Stock pursuant to this Subsection (B)(5)(b)(i), such holders
may elect, voting separately as a class, by written notification delivered to
the Board of Directors of the Corporation, a successor to hold office for the
unexpired term of such removed director.
(ii) The holders of the Common Stock, voting separately as
a class, shall be entitled to elect two directors at each annual meeting of
stockholders of this corporation at which any director is elected or at the time
of any written consent to action in lieu of any such meeting. No director so
elected by the holders of the Common Stock may be removed without the prior
consent, given in person or by proxy, either in writing or at a special meeting
called for that purpose, of the holders of the Common Stock voting separately as
a class. In case of the death, resignation or other removal of any director
elected by the holders of the Common Stock pursuant to this Subsection
(B)(5)(b)(ii), such holders may elect, voting separately as a class, by written
notification delivered to the Board of Directors of the corporation, a successor
to hold office for the unexpired term of such removed director.
(iii) The holders of the Common and Existing Preferred
Stock, voting together, shall be entitled to elect one director at each annual
meeting of stockholders of the corporation at which any director is elected or
at the time of any written consent to action in lieu of any such meeting. No
director so elected by the holders of the Common and Existing Preferred Stock
may be removed without the prior consent given in person or by proxy, either in
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writing or at a special meeting called for that purpose, of the holders of the
Common and Existing Preferred Stock voting together. In case of the death,
resignation or other removal of the director elected by the holders of the
Common and Existing Preferred Stock pursuant to this Subsection (B)(5)(b)(iii),
such holders may elect, voting together, by written notification delivered to
the Board of Directors of the corporation, a successor to hold office for the
unexpired term of such removed director.
6. Protective Provisions.
(a) Subject to the rights of series of Preferred Stock that may
from time to time come into existence, so long as any shares of Existing
Preferred Stock are outstanding, this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Existing
Preferred Stock voting as a class:
(i) sell, convey, or otherwise dispose of all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of this corporation is disposed of;
(ii) alter or change the rights, preferences or privileges
of the shares of Existing Preferred Stock so as to affect adversely the shares;
(iii) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of any series of Existing
Preferred Stock;
(iv) authorize, create or issue, or obligate itself to
issue, any other equity security, including any other security convertible into
or exercisable for any equity security having a preference over, or being on a
parity with, the Existing Preferred Stock with respect to voting, dividends or
upon liquidation;
(v) pay any dividends on the Common Stock;
(vi) change the number of directors of this corporation;
or
(vii) amend this Amended and Restated Certificate of
Incorporation or the Bylaws of this corporation.
(b) So long as at least three hundred seventy-five thousand
(375,000) shares of a series of Existing Preferred Stock are outstanding after
taking into account for the two-for-three split of the outstanding Existing
Preferred Stock (effected upon the filing of this Amended and Restated
Certificate of Incorporation), the corporation shall not without first obtaining
the approval (by vote or written consent, as provided by law) of the holders of
at least a majority of the shares of such series then outstanding, amend this
corporation's Amended and Restated
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Certificate of Incorporation to alter or change the rights, preferences or
privileges of the shares of such series, if such series would be adversely
affected by such amendment in a manner different from other then outstanding
series of Existing Preferred Stock (it being understood that, without limiting
the foregoing, different series of Existing Preferred Stock shall not be
affected differently because of differences in the amounts of their respective
issue prices, liquidation preferences and redemption prices).
7. Status of Converted or Redeemed Stock. In the event any shares
of Existing Preferred Stock shall be converted pursuant to Section (B) 4 hereof,
the shares so converted shall be canceled and shall not be issuable by this
corporation. The Restated Certificate of Incorporation of this corporation shall
be appropriately amended to effect the corresponding reduction in this
corporation's authorized capital stock.
C. Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of this corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or
winding up of this corporation, the assets of this corporation shall be
distributed as provided in Section 2 of Division (B) of this Article V hereof.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. The holder of each share of Common Stock shall
have (i) the right to one vote, and shall be entitled to notice of any
stockholders' meeting in accordance with the bylaws of this corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law and (ii) the right to vote for the election of directors as
provided in Section 5(b) of Division (B) of this Article V hereof.
ARTICLE VI
Except as otherwise provided in this Amended and Restated
Certificate of Incorporation, in furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to make,
repeal, alter, amend and rescind any or all of the Bylaws of this corporation.
ARTICLE VII
The number of directors of this corporation shall be fixed from
time to time by a bylaw or amendment thereof duly adopted by the Board of
Directors or by the stockholders.
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ARTICLE VIII
Elections of directors need not be by written ballot unless the
Bylaws of this corporation shall so provide.
ARTICLE IX
Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of this corporation may be
kept (subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of this corporation.
ARTICLE X
A director of this corporation shall, to the full extent
permitted by the Delaware General Corporation Law as it now exists or as it may
hereafter be amended, not be liable to this corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. Neither any
amendment nor repeal of this Article X, nor the adoption of any provision of
this Restated Certificate of Incorporation inconsistent with this Article X,
shall eliminate or reduce the effect of this Article X in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article X,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
ARTICLE XI
This corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
* * *
FIVE: That thereafter said amendment and restatement was duly
adopted in accordance with the provisions of Section 242 and Section 245 of the
General Corporation Law by obtaining the vote of the holders of the majority of
the outstanding stock of the corporation in favor of said amendment and
restatement in the manner set forth in Section 222 of the General Corporation
Law.
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IN WITNESS WHEREOF, the undersigned have executed this
certificate on September 11, 1998.
/s/ DENNIS L. BARSEMA
---------------------------------------------
Dennis L. Barsema, President
/s/ ROBERT V. GUNDERSON, JR.
---------------------------------------------
Robert V. Gunderson, Jr., Assistant Secretary
<PAGE> 1
EXHIBIT 3.3
BYLAWS
OF
REDBACK NETWORKS INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held in the City of Santa Clara, State of California, at such
place as may be fixed from time to time by the Board of Directors, or at such
other place either within or without the State of Delaware as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting. Meetings of stockholders for any other purpose may be held at
such time and place, within or without the State of Delaware, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders, commencing with the
year 1996, shall be held at such date and time as shall be designated from time
to time by the Board of Directors and stated in the notice of the meeting, at
which they shall elect by a plurality vote a
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board of directors, and transact such other business as may properly be brought
before the meeting.
Section 3. Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose
or purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or secretary at the request in writing of a majority of the Board of
Directors, or at the request in writing of stockholders owning at least ten
percent (10%) in amount of the entire capital stock of the corporation issued
and outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
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Section 6. Written notice of a special meeting stating the place,
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given not fewer than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty percent (50%) of the stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of
the holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express
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provision of the statutes or of the certificate of incorporation, a different
vote is required, in which case such express provision shall govern and control
the decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three years from its date, unless the proxy provides for a longer period.
Section 11. Unless otherwise provided in the certificate of
incorporation, any action required to be taken at any annual or special meeting
of stockholders of the corporation, or any action which may be taken at any
annual or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the
whole board shall be determined by resolution of the Board of Directors or by
the stockholders at the annual meeting of the stockholders, except as provided
in Section 2 of this Article, and each director
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elected shall hold office until his successor is elected and qualified.
Directors need not be stockholders.
Section 2. Vacancies and new created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
annual election and until their successors are duly elected and shall qualify,
unless sooner displaced. If there are no directors in office, then an election
of directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 3. The business of the corporation shall be managed by or
under the direction of its board of directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the certificate of incorporation or by these bylaws directed or required
to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
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Section 5. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board.
Section 7. Special meetings of the board may be called by the
president on two (2) days' notice to each director by mail or forty-eight (48)
hours notice to each director either personally or by telegram; special meetings
shall be called by the president or secretary in like manner and on like notice
on the written request of two directors unless the board consists of only one
director, in which case special meetings shall be called by the president or
secretary in like manner and on like notice on the written request of the sole
director.
Section 8. At all meetings of the board a majority of the
directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn
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the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation of these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or
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they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board of Directors.
Section 12. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
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corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or bylaw, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of
the certificate of incorporation or of these bylaws, notice is required to be
given to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
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Section 1. The officers of the corporation shall be chosen by the
Board of Directors and shall be a president, treasurer and a secretary. The
Board of Directors may elect from among its members a Chairman of the Board and
a Vice Chairman of the Board. The Board of Directors may also choose one or more
vice-presidents, assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a president, a treasurer, and a
secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers
and agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 4. The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office
until their successors are chosen and qualify. Any officer elected or appointed
by the Board of Directors may be removed at any time by the affirmative vote of
a majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
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THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at
all meetings of the Board of Directors and of the stockholders at which he shall
be present. He shall have and may exercise such powers as are, from time to
time, assigned to him by the Board and as may be provided by law.
Section 7. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which he shall be present. He shall have
and may exercise such powers as are, from time to time, assigned to him by the
Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The president shall be the chief executive officer of
the corporation; and in the absence of the Chairman and Vice Chairman of the
Board he shall preside at all meetings of the stockholders and the Board of
Directors; he shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect.
Section 9. He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the corporation.
Section 10. In the absence of the president or in the event of
his inability or refusal to act, the vice-president, if any, (or in the event
there be more than one vice-president, the vice-presidents in the order
designated by the directors, or in the absence of any designation,
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then in the order of their election) shall perform 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 perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The secretary shall attend all meetings of the Board
of Directors and all meetings of the stockholders and record all the proceedings
of the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
Section 12. The assistant secretary, or if there be more than
one, the assistant secretaries in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as the board of
directors may from time to time prescribe.
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THE TREASURER AND ASSISTANT TREASURERS
Section 13. The treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. He shall disburse the funds of the corporation as may
be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 15. If required by the Board of Directors, he shall give
the corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his office and for the restoration
to the corporation, in case of his death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
corporation.
Section 16. The assistant treasurer, or if there shall be more
than one, the assistant treasurers in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall
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perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be
entitled to have a certificate, signed by, or in the name of the corporation by,
the chairman or vice-chairman of the Board of Directors, or the president or a
vice-president and the treasurer or an assistant treasurer, or the secretary or
an assistant secretary of the corporation, certifying the number of shares owned
by him in the corporation.
Certificates may be issued for partly paid shares and in such
case upon the face or back of the certificates issued to represent any such
partly paid shares, the total amount of the consideration to be paid therefor,
and the amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating,
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optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
Section 2. Any of or all 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 upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
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TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholder or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
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REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside
out of any funds of the corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purposes as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
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CHECKS
Section 3. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal
having inscribed thereon the name of the corporation, the year of its
organization and the words "Corporate Seal, Delaware". The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent
authorized under the laws of the State of Delaware, as those laws may be amended
and supplemented from time to time, indemnify any director made, or threatened
to be made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of being a director of the
corporation or a predecessor corporation or, at the corporation's request, a
director or officer of another corporation, provided, however, that the
corporation shall indemnify any such agent in connection with a proceeding
initiated by such agent only if such proceeding was authorized by the Board of
Directors of the corporation. The indemnification provided for in this Section 6
shall: (i) not be deemed exclusive of any other rights to which those
indemnified may be entitled
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under any bylaw, agreement or vote of stockholders or disinterested directors or
otherwise, both as to action in their official capacities and as to action in
another capacity while holding such office, (ii) continue as to a person who has
ceased to be a director, and (iii) inure to the benefit of the heirs, executors
and administrators of such a person. The corporation's obligation to provide
indemnification under this Section 6 shall be offset to the extent of any other
source of indemnification or any otherwise applicable insurance coverage under a
policy maintained by the corporation or any other person.
Expenses incurred by a director of the corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the corporation (or was serving at the corporation's request
as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation as authorized by relevant sections of the
General Corporation Law of Delaware. Notwithstanding the foregoing, the
corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors of the corporation which alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 6 shall be deemed to be
a contract between the corporation and each director who serves in such capacity
at any time while this
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bylaw is in effect, and any repeal or modification thereof shall not affect any
rights or obligations then existing with respect to any state of facts then or
theretofore existing or any action, suit or proceeding theretofore or thereafter
brought based in whole or in part upon any such state of facts.
The Board of Directors in its discretion shall have power on
behalf of the corporation to indemnify any person, other than a director, made a
party to any action, suit or proceeding by reason of the fact that he, his
testator or intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Section 6 of all directors,
officers and employees who are determined by the corporation or otherwise to be
or to have been "fiduciaries" of any employee benefit plan of the corporation
which may exist from time to time, Section 145 of the General Corporation Law of
Delaware shall, for the purposes of this Section 6, be interpreted as follows:
an "other enterprise" shall be deemed to include such an employee benefit plan,
including without limitation, any plan of the corporation which is governed by
the Act of Congress entitled "Employee Retirement Income Security Act of 1974,"
as amended from time to time; the corporation shall be deemed to have requested
a person to serve an employee benefit plan where the performance by such person
of his duties to the corporation also imposes duties on, or otherwise involves
services by, such person to the plan or participants or beneficiaries of the
plan; excise taxes assessed on a person with respect to an employee benefit plan
pursuant to such Act of Congress shall be deemed "fines."
ARTICLE VIII
AMENDMENTS
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Section 1. These bylaws may be altered, amended or repealed or
new bylaws may be adopted by the stockholders or by the Board of Directors, when
such power is conferred upon the Board of Directors by the certificate of
incorporation at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
bylaws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal bylaws is conferred upon the Board of Directors by the
certificate or incorporation it shall not divest or limit the power of the
stockholders to adopt, amend or repeal bylaws.
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CERTIFICATE OF SECRETARY OF
REDBACK NETWORKS INC.
The undersigned, Robert V. Gunderson, Jr., hereby certifies that
he is the duly elected and acting Secretary of Redback Networks Inc., a Delaware
corporation (the "Corporation"), and that the Bylaws attached hereto constitute
the Bylaws of said Corporation as duly adopted by Action by Written Consent in
Lieu of Organizational Meeting by the Directors on August 30, 1996.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his
name this 30th day of August, 1996.
/s/ Robert V. Gunderson, Jr.
------------------------------------------------
Robert V. Gunderson, Jr.
Secretary
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EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of
March __, 1999, between REDBACK NETWORKS INC., a Delaware corporation ("the
Company"), and ________________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company;
and
WHEREAS, the Board of Directors of the Company has adopted Bylaws
(the "Bylaws") providing for the indemnification of the officers and directors
of the Company to the maximum extent authorized by Section 145 of the Delaware
General Corporation Law, as amended ("Law"); and
WHEREAS, the Bylaws and the Law, by their nonexclusive nature,
permit contracts between the Company and the officers or directors of the
Company with respect to indemnification of such officers or directors; and
WHEREAS, in accordance with the authorization as provided by the
Law, the Company may purchase and maintain a policy or policies of directors'
and officers' liability insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its officers or directors in the
performance of their obligations to the Company; and
WHEREAS, in recognition of past services and in order to induce
Indemnitee to continue to serve as an officer or director of the Company, the
Company has determined and agreed to enter into this contract with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's service as an
officer or director after the date hereof, the parties hereto agree as follows:
1. Indemnity of Indemnitee. The Company hereby agrees to hold
harmless and indemnify Indemnitee to the full extent authorized or permitted by
the provisions of the Law, as such may be amended from time to time, and Article
VII of the Bylaws, as such may be amended. In furtherance of the foregoing
indemnification, and without limiting the generality thereof:
(a) Proceedings Other Than Proceedings by or in the Right
of the Company. Indemnitee shall be entitled to the rights of indemnification
provided in this Section 1(a) if, by reason of his Corporate Status (as
hereinafter defined), he is, or is threatened to be made, a party to or
participant in any Proceeding (as hereinafter defined) other than a Proceeding
by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee
shall be indemnified against all Expenses (as hereinafter defined), judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him or on his behalf in connection with such Proceeding or any claim, issue
or matter therein, if he acted in good faith
<PAGE> 2
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal Proceeding, had no
reasonable cause to believe his conduct was unlawful.
(b) Proceedings by or in the Right of the Company.
Indemnitee shall be entitled to the rights of indemnification provided in this
Section 1(b) if, by reason of his Corporate Status, he is, or is threatened to
be made, a party to or participant in any Proceeding brought by or in the right
of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified
against all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; provided, however, that, if applicable law so provides, no
indemnification against such Expenses shall be made in respect of any claim,
issue or matter in such Proceeding as to which Indemnitee shall have been
adjudged to be liable to the Company unless and to the extent that the Court of
Chancery of the State of Delaware shall determine that such indemnification may
be made.
(c) Indemnification for Expenses of a Party Who is Wholly
or Partly Successful. Notwithstanding any other provision of this Agreement, to
the extent that Indemnitee is, by reason of his Corporate Status, a party to and
is successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses actually
and reasonably incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf in connection
with each successfully resolved claim, issue or matter. For purposes of this
Section and without limitation, the termination of any claim, issue or matter in
such a Proceeding by dismissal, with or without prejudice, shall be deemed to be
a successful result as to such claim, issue or matter.
2. Additional Indemnity. In addition to, and without regard to
any limitations on, the indemnification provided for in Section 1, the Company
shall and hereby does indemnify and hold harmless Indemnitee against all
Expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf if, by reason of his Corporate
Status, he is, or is threatened to be made, a party to or participant in any
Proceeding (including a Proceeding by or in the right of the Company),
including, without limitation, all liability arising out of the negligence or
active or passive wrongdoing of Indemnitee. The only limitation that shall exist
upon the Company's obligations pursuant to this Agreement shall be that the
Company shall not be obligated to make any payment to Indemnitee that is finally
determined (under the procedures, and subject to the presumptions, set forth in
Sections 6 and 7 hereof) to be unlawful under Delaware law.
3. Contribution in the Event of Joint Liability.
(a) Whether or not the indemnification provided in
Sections 1 and 2 hereof is available, in respect of any threatened, pending or
completed action, suit or proceeding
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in which Company is jointly liable with Indemnitee (or would be if joined in
such action, suit or proceeding), Company shall pay, in the first instance, the
entire amount of any judgment or settlement of such action, suit or proceeding
without requiring Indemnitee to contribute to such payment and Company hereby
waives and relinquishes any right of contribution it may have against
Indemnitee. Company shall not enter into any settlement of any action, suit or
proceeding in which Company is jointly liable with Indemnitee (or would be if
joined in such action, suit or proceeding) unless such settlement provides for a
full and final release of all claims asserted against Indemnitee.
(b) Without diminishing or impairing the obligations of
the Company set forth in the preceding subparagraph, if, for any reason,
Indemnitee shall elect or be required to pay all or any portion of any judgment
or settlement in any threatened, pending or completed action, suit or proceeding
in which Company is jointly liable with Indemnitee (or would be if joined in
such action, suit or proceeding), Company shall contribute to the amount of
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred and paid or payable by Indemnitee in
proportion to the relative benefits received by the Company and all officers,
directors or employees of the Company other than Indemnitee who are jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), on the one hand, and Indemnitee, on the other hand, from the
transaction from which such action, suit or proceeding arose; provided, however,
that the proportion determined on the basis of relative benefit may, to the
extent necessary to conform to law, be further adjusted by reference to the
relative fault of Company and all officers, directors or employees of the
Company other than Indemnitee who are jointly liable with Indemnitee (or would
be if joined in such action, suit or proceeding), on the one hand, and
Indemnitee, on the other hand, in connection with the events that resulted in
such expenses, judgments, fines or settlement amounts, as well as any other
equitable considerations which the law may require to be considered. The
relative fault of Company and all officers, directors or employees of the
Company other than Indemnitee who are jointly liable with Indemnitee (or would
be if joined in such action, suit or proceeding), on the one hand, and
Indemnitee, on the other hand, shall be determined by reference to, among other
things, the degree to which their actions were motivated by intent to gain
personal profit or advantage, the degree to which their liability is primary or
secondary, and the degree to which their conduct is active or passive.
(c) Company hereby agrees to fully indemnify and hold
Indemnitee harmless from any claims of contribution which may be brought by
officers, directors or employees of the Company other than Indemnitee who may be
jointly liable with Indemnitee.
4. Indemnification for Expenses of a Witness. Notwithstanding any
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness in any Proceeding to which Indemnitee is not
a party, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith.
5. Advancement of Expenses. Notwithstanding any other provision
of this Agreement, the Company shall advance all Expenses incurred by or on
behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's
Corporate Status within ten (10) days
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after the receipt by the Company of a statement or statements from Indemnitee
requesting such advance or advances from time to time, whether prior to or after
final disposition of such Proceeding. Such statement or statements shall
reasonably evidence the Expenses incurred by Indemnitee and shall include or be
preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay
any Expenses advanced if it shall ultimately be determined that Indemnitee is
not entitled to be indemnified against such Expenses. Any advances and
undertakings to repay pursuant to this Section 5 shall be unsecured and interest
free. Notwithstanding the foregoing, the obligation of the Company to advance
Expenses pursuant to this Section 5 shall be subject to the condition that, if,
when and to the extent that the Company determines that Indemnitee would not be
permitted to be indemnified under applicable law, the Company shall be entitled
to be reimbursed, within thirty (30) days of such determination, by Indemnitee
(who hereby agrees to reimburse the Company) for all such amounts theretofore
paid; provided, however, that if Indemnitee has commenced or thereafter
commences legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, any
determination made by the Company that Indemnitee would not be permitted to be
indemnified under applicable law shall not be binding and Indemnitee shall not
be required to reimburse the Company for any advance of Expenses until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed).
6. Procedures and Presumptions for Determination of Entitlement
to Indemnification. It is the intent of this Agreement to secure for Indemnitee
rights of indemnity that are as favorable as may be permitted under the law and
public policy of the State of Delaware. Accordingly, the parties agree that the
following procedures and presumptions shall apply in the event of any question
as to whether Indemnitee is entitled to indemnification under this Agreement:
(a) To obtain indemnification (including, but not limited
to, the advancement of Expenses and contribution by the Company) under this
Agreement, Indemnitee shall submit to the Company a written request, including
therein or therewith such documentation and information as is reasonably
available to Indemnitee and is reasonably necessary to determine whether and to
what extent Indemnitee is entitled to indemnification. The Secretary of the
Company shall, promptly upon receipt of such a request for indemnification,
advise the Board of Directors in writing that Indemnitee has requested
indemnification.
(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 6(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case by one of the following three methods, which
shall be at the election of Indemnitee: (1) by a majority vote of the
disinterested directors, even though less than a quorum, or (2) by independent
legal counsel in a written opinion, or (3) by the stockholders.
(c) If the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 6(b) hereof, the
Independent Counsel shall be selected as provided in this Section 6(c). The
Independent Counsel shall be selected by
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Indemnitee (unless Indemnitee shall request that such selection be made by the
Board of Directors). Indemnitee or the Company, as the case may be, may, within
10 days after such written notice of selection shall have been given, deliver to
the Company or to Indemnitee, as the case may be, a written objection to such
selection; provided, however, that such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirements
of "Independent Counsel" as defined in Section 13 of this Agreement, and the
objection shall set forth with particularity the factual basis of such
assertion. Absent a proper and timely objection, the person so selected shall
act as Independent Counsel. If a written objection is made and substantiated,
the Independent Counsel selected may not serve as Independent Counsel unless and
until such objection is withdrawn or a court has determined that such objection
is without merit. If, within 20 days after submission by Indemnitee of a written
request for indemnification pursuant to Section 6(a) hereof, no Independent
Counsel shall have been selected and not objected to, either the Company or
Indemnitee may petition the Court of Chancery of the State of Delaware or other
court of competent jurisdiction for resolution of any objection which shall have
been made by the Company or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected
by the court or by such other person as the court shall designate, and the
person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 6(b) hereof. The
Company shall pay any and all reasonable fees and expenses of Independent
Counsel incurred by such Independent Counsel in connection with acting pursuant
to Section 6(b) hereof, and the Company shall pay all reasonable fees and
expenses incident to the procedures of this Section 6(c), regardless of the
manner in which such Independent Counsel was selected or appointed.
(d) In making a determination with respect to entitlement
to indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.
(e) Indemnitee shall be deemed to have acted in good faith
if Indemnitee's action is based on the records or books of account of the
Enterprise, including financial statements, or on information supplied to
Indemnitee by the officers of the Enterprise in the course of their duties, or
on the advice of legal counsel for the Enterprise or on information or records
given or reports made to the Enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Enterprise. In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall not be imputed
to Indemnitee for purposes of determining the right to indemnification under
this Agreement. Whether or not the foregoing provisions of this Section 6(e) are
satisfied, it shall in any event be presumed that Indemnitee has at all times
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.
5
<PAGE> 6
(f) If the person, persons or entity empowered or selected
under Section 6 to determine whether Indemnitee is entitled to indemnification
shall not have made a determination within thirty (30) days after receipt by the
Company of the request therefor, the requisite determination of entitlement to
indemnification shall be deemed to have been made and Indemnitee shall be
entitled to such indemnification, absent (i) a misstatement by Indemnitee of a
material fact, or an omission of a material fact necessary to make Indemnitee's
statement not materially misleading, in connection with the request for
indemnification, or (ii) a prohibition of such indemnification under applicable
law; provided, however, that such 30 day period may be extended for a reasonable
time, not to exceed an additional fifteen (15) days, if the person, persons or
entity making the determination with respect to entitlement to indemnification
in good faith requires such additional time for the obtaining or evaluating
documentation and/or information relating thereto; and provided, further, that
the foregoing provisions of this Section 6(g) shall not apply if the
determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 6(b) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors or the Disinterested Directors, if
appropriate, resolve to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy five (75)
days after such receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
determination is made thereat.
(g) Indemnitee shall cooperate with the person, persons or
entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
Independent Counsel, member of the Board of Directors, or stockholder of the
Company shall act reasonably and in good faith in making a determination under
the Agreement of the Indemnitee's entitlement to indemnification. Any costs or
expenses (including attorneys' fees and disbursements) incurred by Indemnitee in
so cooperating with the person, persons or entity making such determination
shall be borne by the Company (irrespective of the determination as to
Indemnitee's entitlement to indemnification) and the Company hereby indemnifies
and agrees to hold Indemnitee harmless therefrom.
(h) The Company acknowledges that a settlement or other
disposition short of final judgment may be successful if it permits a party to
avoid expense, delay, distraction, disruption and uncertainty. In the event that
any action, claim or proceeding to which Indemnitee is a party is resolved in
any manner other than by adverse judgment against Indemnitee (including, without
limitation, settlement of such action, claim or proceeding with or without
payment of money or other consideration) it shall be presumed that Indemnitee
has been successful on the merits or otherwise in such action, suit or
proceeding. Anyone seeking to overcome this presumption shall have the burden of
proof and the burden of persuasion, by clear and convincing evidence.
6
<PAGE> 7
7. Remedies of Indemnitee.
(a) In the event that (i) a determination is made pursuant
to Section 6 of this Agreement that Indemnitee is not entitled to
indemnification under this Agreement, (ii) advancement of Expenses is not timely
made pursuant to Section 5 of this Agreement, (iii) no determination of
entitlement to indemnification shall have been made pursuant to Section 6(b) of
this Agreement within 90 days after receipt by the Company of the request for
indemnification, (iv) payment of indemnification is not made pursuant to this
Agreement within ten (10) days after receipt by the Company of a written request
therefor, or (v) payment of indemnification is not made within ten (10) days
after a determination has been made that Indemnitee is entitled to
indemnification or such determination is deemed to have been made pursuant to
Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in
an appropriate court of the State of Delaware, or in any other court of
competent jurisdiction, of his entitlement to such indemnification. Indemnitee
shall commence such proceeding seeking an adjudication within 180 days following
the date on which Indemnitee first has the right to commence such proceeding
pursuant to this Section 7(a). The Company shall not oppose Indemnitee's right
to seek any such adjudication.
(b) In the event that a determination shall have been made
pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding commenced pursuant to this Section 7
shall be conducted in all respects as a de novo trial, on the merits and
Indemnitee shall not be prejudiced by reason of that adverse determination under
Section 6(b).
(c) If a determination shall have been made pursuant to
Section 6(b) of this Agreement that Indemnitee is entitled to indemnification,
the Company shall be bound by such determination in any judicial proceeding
commenced pursuant to this Section 7, absent a prohibition of such
indemnification under applicable law.
(d) In the event that Indemnitee, pursuant to this Section
7, seeks a judicial adjudication of his rights under, or to recover damages for
breach of, this Agreement, or to recover under any directors' and officers'
liability insurance policies maintained by the Company the Company shall pay on
his behalf, in advance, any and all expenses (of the types described in the
definition of Expenses in Section 13 of this Agreement) actually and reasonably
incurred by him in such judicial adjudication, regardless of whether Indemnitee
ultimately is determined to be entitled to such indemnification, advancement of
expenses or insurance recovery.
(e) The Company shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Section 7 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Company is bound by all the provisions of
this Agreement.
7
<PAGE> 8
8. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to which Indemnitee
may at any time be entitled under applicable law, the certificate of
incorporation of the Company, the Bylaws, any agreement, a vote of stockholders
or a resolution of directors, or otherwise. No amendment, alteration or repeal
of this Agreement or of any provision hereof shall limit or restrict any right
of Indemnitee under this Agreement in respect of any action taken or omitted by
such Indemnitee in his Corporate Status prior to such amendment, alteration or
repeal. To the extent that a change in the Law, whether by statute or judicial
decision, permits greater indemnification than would be afforded currently under
the Bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change. No right or remedy herein conferred is intended to be exclusive of
any other right or remedy, and every other right and remedy shall be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment
of any right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance
policy or policies providing liability insurance for directors, officers,
employees, or agents or fiduciaries of the Company or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Company, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available for any such director, officer,
employee or agent under such policy or policies.
(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement
to make any payment of amounts otherwise indemnifiable hereunder if and to the
extent that Indemnitee has otherwise actually received such payment under any
insurance policy, contract, agreement or otherwise.
9. Exception to Right of Indemnification. Notwithstanding any
other provision of this Agreement, Indemnitee shall not be entitled to
indemnification under this Agreement with respect to any Proceeding brought by
Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or
making of such claim shall have been approved by the Board of Directors of the
Company or (b) such Proceeding is being brought by the Indemnitee to assert,
interpret or enforce his rights under this Agreement.
10. Duration of Agreement. All agreements and obligations of the
Company contained herein shall continue during the period Indemnitee is an
officer or director of the
8
<PAGE> 9
Company (or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise) and shall continue thereafter so long as Indemnitee
shall be subject to any Proceeding (or any proceeding commenced under Section 7
hereof) by reason of his Corporate Status, whether or not he is acting or
serving in any such capacity at the time any liability or expense is incurred
for which indemnification can be provided under this Agreement. This Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors (including any direct or indirect
successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), assigns, spouses,
heirs, executors and personal and legal representatives. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as an
officer or director of the Company or any other Enterprise at the Company's
request.
11. Security. To the extent requested by the Indemnitee and
approved by the Board of Directors of the Company, the Company may at any time
and from time to time provide security to the Indemnitee for the Company's
obligations hereunder through an irrevocable bank line of credit, funded trust
or other collateral. Any such security, once provided to the Indemnitee, may not
be revoked or released without the prior written consent of the Indemnitee.
12. Enforcement.
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on it hereby in
order to induce Indemnitee to serve as an officer or director of the Company,
and the Company acknowledges that Indemnitee is relying upon this Agreement in
serving as an officer or director of the Company.
(b) This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied,
between the parties hereto with respect to the subject matter hereof.
13. Definitions. For purposes of this Agreement:
(a) "Corporate Status" describes the status of a person
who is or was a director, officer, employee or agent or fiduciary of the Company
or of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at the express
written request of the Company.
(b) "Disinterested Director" means a director of the
Company who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(c) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is
9
<PAGE> 10
or was serving at the express written request of the Company as a director,
officer, employee, agent or fiduciary.
(d) "Expenses" shall include all reasonable attorneys'
fees, retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or expenses
of the types customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, participating, or being or
preparing to be a witness in a Proceeding.
(e) "Independent Counsel" means a law firm, or a member of
a law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five years has been, retained to represent: (i)
the Company or Indemnitee in any matter material to either such party (other
than with respect to matters concerning the Indemnitee under this Agreement, or
of other indemnitees under similar indemnification agreements), or (ii) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall
not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either the Company or Indemnitee in an action to determine Indemnitee's rights
under this Agreement. The Company agrees to pay the reasonable fees of the
Independent Counsel referred to above and to fully indemnify such counsel
against any and all Expenses, claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.
(f) "Proceeding" includes any threatened, pending or
completed action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was a director of the Company, by reason of any
action taken by him or of any inaction on his part while acting as an officer or
director of the Company, or by reason of the fact that he is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other Enterprise; in each case
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement; including one pending on or before the date of this Agreement;
and excluding one initiated by an Indemnitee pursuant to Section 7 of this
Agreement to enforce his rights under this Agreement.
14. Severability. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, illegal or otherwise unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including without limitation, each portion of any section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby and shall remain enforceable to the
fullest extent permitted by law; and (b) to the fullest extent
10
<PAGE> 11
possible, the provisions of this Agreement (including, without limitation, each
portion of any section of this Agreement containing any such provision held to
be invalid, illegal or unenforceable, that is not itself invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent manifested
thereby.
15. Modification and Waiver. No supplement, modification,
termination or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
16. Notice By Indemnitee. Indemnitee agrees promptly to notify
the Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this Agreement or otherwise unless and only
to the extent that such failure or delay materially prejudices the Company.
17. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to the address set forth below
Indemnitee signature hereto.
(b) If to the Company, to:
1389 Moffett Park Drive
Sunnyvale, California 94089-1134
Attention: Dennis Barsema
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
18. Identical Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
19. Headings. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
11
<PAGE> 12
20. Governing Law. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware without application of the conflict of laws principles
thereof.
21. Gender. Use of the masculine pronoun shall be deemed to
include usage of the feminine pronoun where appropriate.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
REDBACK NETWORKS INC.
By:______________________________________
Name:_____________________________
Title:____________________________
Address: 1389 Moffett Park Drive
Sunnyvale, California 94089-1134
INDEMNITEE
________________________________________
Address:
________________________________________
________________________________________
________________________________________
________________________________________
13
<PAGE> 1
EXHIBIT 10.2
REDBACK NETWORKS INC.
1999 STOCK INCENTIVE PLAN
(AS ADOPTED EFFECTIVE _______ __, 1999)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1. INTRODUCTION..................................................................... 1
ARTICLE 2. ADMINISTRATION................................................................... 1
2.1 Committee Composition........................................................... 1
2.2 Committee Responsibilities...................................................... 1
2.3 Committee for Non-Officer Grants................................................ 1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS...................................................... 2
3.1 Basic Limitation................................................................ 2
3.2 Annual Increase in Shares....................................................... 2
3.3 Additional Shares............................................................... 2
ARTICLE 4. ELIGIBILITY...................................................................... 2
4.1 Nonstatutory Stock Options and Restricted Shares................................ 2
4.2 Incentive Stock Options......................................................... 2
ARTICLE 5. OPTIONS.......................................................................... 3
5.1 Stock Option Agreement.......................................................... 3
5.2 Number of Shares................................................................ 3
5.3 Exercise Price.................................................................. 3
5.4 Exercisability and Term......................................................... 3
5.5 Effect of Change in Control..................................................... 3
5.6 Modification or Assumption of Options........................................... 4
5.7 Buyout Provisions............................................................... 4
5.8 Salary Reduction Option Grants.................................................. 4
ARTICLE 6. PAYMENT FOR OPTION SHARES........................................................ 4
6.1 General Rule.................................................................... 4
6.2 Surrender of Stock.............................................................. 5
6.3 Exercise/Sale................................................................... 5
6.4 Exercise/Pledge................................................................. 5
6.5 Promissory Note................................................................. 5
6.6 Other Forms of Payment.......................................................... 5
ARTICLE 7. RESTRICTED SHARES................................................................ 5
7.1 Restricted Stock Agreement...................................................... 5
7.2 Payment for Awards.............................................................. 5
7.3 Vesting Conditions.............................................................. 6
7.4 Voting and Dividend Rights...................................................... 6
ARTICLE 8. PROTECTION AGAINST DILUTION...................................................... 6
8.1 Adjustments..................................................................... 6
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C>
8.2 Dissolution or Liquidation...................................................... 6
8.3 Reorganizations................................................................. 7
ARTICLE 9. DEFERRAL OF DELIVERY OF SHARES................................................... 7
ARTICLE 10. AWARDS UNDER OTHER PLANS........................................................ 7
ARTICLE 11. LIMITATION ON RIGHTS............................................................ 7
11.1 Retention Rights............................................................... 7
11.2 Stockholders' Rights........................................................... 7
11.3 Regulatory Requirements........................................................ 8
ARTICLE 12. WITHHOLDING TAXES............................................................... 8
12.1 General........................................................................ 8
12.2 Share Withholding.............................................................. 8
ARTICLE 13. LIMITATION ON PAYMENTS.......................................................... 8
13.1 Scope of Limitation............................................................ 8
13.2 Basic Rule..................................................................... 9
13.3 Reduction of Payments.......................................................... 9
13.4 Overpayments and Underpayments................................................. 9
13.5 Related Corporations........................................................... 10
ARTICLE 14. FUTURE OF THE PLAN.............................................................. 10
14.1 Term of the Plan............................................................... 10
14.2 Amendment or Termination....................................................... 10
ARTICLE 15. DEFINITIONS..................................................................... 10
ARTICLE 16. EXECUTION....................................................................... 13
</TABLE>
ii
<PAGE> 4
REDBACK NETWORKS INC.
1999 STOCK INCENTIVE PLAN
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board effective as of the date of the
Company's initial public offering. The purpose of the Plan is to promote the
long-term success of the Company and the creation of stockholder value by (a)
encouraging Employees, Outside Directors and Consultants to focus on critical
long-range objectives, (b) encouraging the attraction and retention of
Employees, Outside Directors and Consultants with exceptional qualifications and
(c) linking Employees, Outside Directors and Consultants directly to stockholder
interests through increased stock ownership. The Plan seeks to achieve this
purpose by providing for Awards in the form of Restricted Shares or Options
(which may constitute incentive stock options or nonstatutory stock options).
The Plan shall be governed by, and construed in accordance with,
the laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more directors of
the Company, who shall be appointed by the Board. In addition, the composition
of the Committee shall satisfy:
(a) Such requirements as the Securities and Exchange Commission
may establish for administrators acting under plans intended to qualify
for exemption under Rule 16b-3 (or its successor) under the Exchange
Act; and
(b) Such requirements as the Internal Revenue Service may
establish for outside directors acting under plans intended to qualify
for exemption under section 162(m)(4)(C) of the Code.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the
Employees, Outside Directors and Consultants who are to receive Awards under the
Plan, (b) determine the type, number, vesting requirements and other features
and conditions of such Awards, (c) interpret the Plan and (d) make all other
decisions relating to the operation of the Plan. The Committee may adopt such
rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.
2.3 COMMITTEE FOR NON-OFFICER GRANTS. The Board may also appoint a
secondary committee of the Board, which shall be composed of one or more
directors of the Company who need not satisfy the requirements of Section 2.1.
Such secondary committee may administer the Plan with respect to Employees and
Consultants who are not considered officers or directors of
<PAGE> 5
the Company under section 16 of the Exchange Act, may grant Awards under the
Plan to such Employees and Consultants and may determine all features and
conditions of such Awards. Within the limitations of this Section 2.3, any
reference in the Plan to the Committee shall include such secondary committee.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Options and Restricted Shares awarded under the Plan shall not exceed (a)
2,500,000 plus (b) the aggregate number of Common Shares remaining available for
grants under the Predecessor Plan on the date of the Company's initial public
offering plus (c) the additional Common Shares described in Sections 3.2 and
3.3. No additional grants shall be made under the Predecessor Plan after the
date of the Company's initial public offering. The limitations of this Section
3.1 and Section 3.2 shall be subject to adjustment pursuant to Article 8.
3.2 ANNUAL INCREASE IN SHARES. As of January 1 of each year, commencing
with the year 2000, the aggregate number of Options and Restricted Shares that
may be awarded under the Plan shall automatically increase by a number equal to
the lesser of (a) five percent of the total number of Common Shares then
outstanding or (b) 1,500,000.
3.3 ADDITIONAL SHARES. If Options granted under this Plan or the
Predecessor Plan are forfeited or terminate for any other reason before being
exercised, then the corresponding Common Shares shall again become available for
the grant of Options or Restricted Shares under this Plan. If Common Shares
issued upon the exercise of Options granted under this Plan or the Predecessor
Plan are forfeited, then such Common Shares shall again become available for the
grant of NSOs and Restricted Shares under this Plan. If Restricted Shares issued
under this Plan or the Predecessor Plan are forfeited, then the corresponding
Common Shares shall again become available for the grant of NSOs and Restricted
Shares under this Plan. The aggregate number of Common Shares that may be issued
under the Plan upon the exercise of ISOs shall not be increased when Restricted
Shares or other Common Shares are forfeited.
ARTICLE 4. ELIGIBILITY.
4.1 NONSTATUTORY STOCK OPTIONS AND RESTRICTED SHARES. Only Employees,
Outside Directors and Consultants shall be eligible for the grant of NSOs and
Restricted Shares.
4.2 INCENTIVE STOCK OPTIONS. Only Employees who are common-law employees
of the Company, a Parent or a Subsidiary shall be eligible for the grant of
ISOs. In addition, an Employee who owns more than 10% of the total combined
voting power of all classes of outstanding stock of the Company or any of its
Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the
requirements set forth in section 422(c)(6) of the Code are satisfied.
2
<PAGE> 6
ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. A Stock Option Agreement may provide that a new Option
will be granted automatically to the Optionee when he or she exercises a prior
Option and pays the Exercise Price in the form described in Section 6.2.
5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 8. Options granted to any
Optionee in a single fiscal year of the Company shall not cover more than one
million Common Shares, except that Options granted to a new Employee in the
fiscal year of the Company in which his or her service as an Employee first
commences shall not cover more than two million Common Shares. The limitations
set forth in the preceding sentence shall be subject to adjustment in accordance
with Article 8.
5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no event
be less than 100% of the Fair Market Value of a Common Share on the date of
grant and the Exercise Price under an NSO shall in no event be less than 30% of
the Fair Market Value of a Common Share on the date of grant. In the case of an
NSO, a Stock Option Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the NSO is outstanding.
5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date or event when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option; provided that the term of an ISO shall in no event exceed 10 years from
the date of grant. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, disability or retirement or
other events and may provide for expiration prior to the end of its term in the
event of the termination of the Optionee's service.
5.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become
exercisable as to all or part of the Common Shares subject to such Option in the
event that a Change in Control occurs with respect to the Company, subject to
the following limitations:
(a) In the case of an ISO, the acceleration of exercisability
shall not occur without the Optionee's written consent.
(b) If the Company and the other party to the transaction
constituting a Change in Control agree that such transaction is to be
treated as a "pooling of interests" for financial reporting purposes,
and if such transaction in fact is so treated, then the acceleration of
exercisability shall not occur to the extent that the Company's
independent accountants and such other party's
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independent accountants separately determine in good faith that such
acceleration would preclude the use of "pooling of interests"
accounting.
In addition, acceleration of exercisability may be required under Section 8.3.
5.6 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the grant of new options for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of an Option shall, without the
consent of the Optionee, alter or impair his or her rights or obligations under
such Option.
5.7 BUYOUT PROVISIONS. The Committee may at any time (a) offer to buy
out for a payment in cash or cash equivalents an Option previously granted or
(b) authorize an Optionee to elect to cash out an Option previously granted, in
either case at such time and based upon such terms and conditions as the
Committee shall establish.
5.8 SALARY REDUCTION OPTION GRANTS. The Committee, at its sole
discretion, may offer one or more Employees, Outside Directors and Consultants
an opportunity to receive NSOs in consideration of a voluntary reduction in
their cash compensation from the Company, a Parent or a Subsidiary. The
Committee shall determine the maximum and minimum amounts of the reduction that
an Employee, Outside Director or Consultant may elect. If an Employee, Outside
Director or Consultant designated by the Committee wishes to receive NSOs under
this Section 5.8, then he or she shall file a written and irrevocable election
with the Company prior to the close of a calendar year. Such election shall
specify the dollar amount by which the compensation of the Employee, Outside
Director or Consultant shall be reduced during the next following calendar year
(within the limitations prescribed by the Committee). On the first trading day
of the calendar year next following the receipt of an election by the Company,
the Employee, Outside Director or Consultant who filed such election shall
automatically receive an NSO. Such NSO shall cover a number of Common Shares
equal to (a) the amount of the compensation reduction elected by the Optionee
divided by (b) two-thirds of the Fair Market Value of one Common Share on the
date of grant. The Exercise Price of such NSO shall be equal to one-third of the
Fair Market Value of one Common Share on the date of grant. Such NSO shall
become exercisable in 12 equal monthly installments over the calendar year in
which the grant occurred, but no portion of such NSO shall become exercisable
after the Optionee's service has terminated for any reason. The term of such NSO
shall be 10 calendar years, commencing with the calendar year in which the grant
occurred (regardless of whether the Optionee's service has terminated). Except
as provided in this Section 5.8, the NSOs granted under this Section 5.8 shall
be subject to the provisions applicable to other NSOs granted under the Plan.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash or cash equivalents at the time
when such Common Shares are purchased, except as follows:
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<PAGE> 8
(a) In the case of an ISO granted under the Plan, payment shall
be made only pursuant to the express provisions of the applicable Stock
Option Agreement. The Stock Option Agreement may specify that payment
may be made in any form(s) described in this Article 6.
(b) In the case of an NSO, the Committee may at any time accept
payment in any form(s) described in this Article 6.
6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, all or any part of the Exercise Price may be paid by surrendering,
or attesting to the ownership of, Common Shares that are already owned by the
Optionee. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan. The Optionee shall
not surrender, or attest to the ownership of, Common Shares in payment of the
Exercise Price if such action would cause the Company to recognize compensation
expense (or additional compensation expense) with respect to the Option for
financial reporting purposes.
6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to a
securities broker approved by the Company to sell all or part of the Common
Shares being purchased under the Plan and to deliver all or part of the sales
proceeds to the Company.
6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to
pledge all or part of the Common Shares being purchased under the Plan to a
securities broker or lender approved by the Company, as security for a loan, and
to deliver all or part of the loan proceeds to the Company.
6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) a full-recourse promissory
note. However, the par value of the Common Shares being purchased under the
Plan, if newly issued, shall be paid in cash or cash equivalents.
6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid in any other form that is consistent with applicable laws, regulations
and rules.
ARTICLE 7. RESTRICTED SHARES.
7.1 RESTRICTED STOCK AGREEMENT. Each grant of Restricted Shares under
the Plan shall be evidenced by a Restricted Stock Agreement between the
recipient and the Company. Such Restricted Shares shall be subject to all
applicable terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The provisions of the various Restricted Stock
Agreements entered into under the Plan need not be identical.
7.2 PAYMENT FOR AWARDS. Subject to the following sentence, Restricted
Shares may be sold or awarded under the Plan for such consideration as the
Committee may determine,
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including (without limitation) cash, cash equivalents, full-recourse promissory
notes, past services and future services. To the extent that an Award consists
of newly issued Restricted Shares, the consideration shall consist exclusively
of cash, cash equivalents or past services rendered to the Company (or a Parent
or Subsidiary) or, for the amount in excess of the par value of such newly
issued Restricted Shares, full-recourse promissory notes, as the Committee may
determine.
7.3 VESTING CONDITIONS. Each Award of Restricted Shares may or may not
be subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Restricted Stock Agreement. A
Restricted Stock Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events. The Committee
may determine, at the time of granting Restricted Shares or thereafter, that all
or part of such Restricted Shares shall become vested in the event that a Change
in Control occurs with respect to the Company, except as provided in the next
following sentence. If the Company and the other party to the transaction
constituting a Change in Control agree that such transaction is to be treated as
a "pooling of interests" for financial reporting purposes, and if such
transaction in fact is so treated, then the acceleration of vesting shall not
occur to the extent that the Company's independent accountants and such other
party's independent accountants separately determine in good faith that such
acceleration would preclude the use of "pooling of interests" accounting.
7.4 VOTING AND DIVIDEND RIGHTS. The holders of Restricted Shares awarded
under the Plan shall have the same voting, dividend and other rights as the
Company's other stockholders. A Restricted Stock Agreement, however, may require
that the holders of Restricted Shares invest any cash dividends received in
additional Restricted Shares. Such additional Restricted Shares shall be subject
to the same conditions and restrictions as the Award with respect to which the
dividends were paid.
ARTICLE 8. PROTECTION AGAINST DILUTION.
8.1 ADJUSTMENTS. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares in an amount that has a
material effect on the price of Common Shares, a combination or consolidation of
the outstanding Common Shares (by reclassification or otherwise) into a lesser
number of Common Shares, a recapitalization, a spin-off or a similar occurrence,
the Committee shall make such adjustments as it, in its sole discretion, deems
appropriate in one or more of (a) the number of Options and Restricted Shares
available for future Awards under Article 3, (b) the limitations set forth in
Section 5.2, (c) the number of Common Shares covered by each outstanding Option
or (d) the Exercise Price under each outstanding Option. Except as provided in
this Article 8, a Participant shall have no rights by reason of any issue by the
Company of stock of any class or securities convertible into stock of any class,
any subdivision or consolidation of shares of stock of any class, the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class.
8.2 DISSOLUTION OR LIQUIDATION. To the extent not previously exercised,
Options shall terminate immediately prior to the dissolution or liquidation of
the Company.
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8.3 REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options and Restricted Shares shall
be subject to the agreement of merger or reorganization. Such agreement shall
provide for (a) the continuation of the outstanding Awards by the Company, if
the Company is a surviving corporation, (b) the assumption of the outstanding
Awards by the surviving corporation or its parent or subsidiary, (c) the
substitution by the surviving corporation or its parent or subsidiary of its own
awards for the outstanding Awards, (d) full exercisability or vesting and
accelerated expiration of the outstanding Awards or (e) settlement of the full
value of the outstanding Awards in cash or cash equivalents followed by
cancellation of such Awards.
ARTICLE 9. DEFERRAL OF DELIVERY OF SHARES.
The Committee (in its sole discretion) may permit or require an
Optionee to have Common Shares that otherwise would be delivered to such
Optionee as a result of the exercise of an Option converted into amounts
credited to a deferred compensation account established for such Optionee by the
Committee as an entry on the Company's books. Such amounts shall be determined
by reference to the Fair Market Value of such Common Shares as of the date when
they otherwise would have been delivered to such Optionee. A deferred
compensation account established under this Article 9 may be credited with
interest or other forms of investment return, as determined by the Committee. An
Optionee for whom such an account is established shall have no rights other than
those of a general creditor of the Company. Such an account shall represent an
unfunded and unsecured obligation of the Company and shall be subject to the
terms and conditions of the applicable agreement between such Optionee and the
Company. If the conversion of Options is permitted or required, the Committee
(in its sole discretion) may establish rules, procedures and forms pertaining to
such conversion, including (without limitation) the settlement of deferred
compensation accounts established under this Article 9.
ARTICLE 10. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such
awards may be settled in the form of Common Shares issued under this Plan. Such
Common Shares shall be treated for all purposes under the Plan like Restricted
Shares and shall, when issued, reduce the number of Common Shares available
under Article 3.
ARTICLE 11. LIMITATION ON RIGHTS.
11.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an Employee,
Outside Director or Consultant. The Company and its Parents, Subsidiaries and
Affiliates reserve the right to terminate the service of any Employee, Outside
Director or Consultant at any time, with or without cause, subject to applicable
laws, the Company's certificate of incorporation and by-laws and a written
employment agreement (if any).
11.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the time when a stock certificate for such
Common Shares is issued or, in the case of an
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<PAGE> 11
Option, the time when he or she becomes entitled to receive such Common Shares
by filing a notice of exercise and paying the Exercise Price. No adjustment
shall be made for cash dividends or other rights for which the record date is
prior to such time, except as expressly provided in the Plan.
11.3 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 12. WITHHOLDING TAXES.
12.1 GENERAL. To the extent required by applicable federal, state, local
or foreign law, a Participant or his or her successor shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.
12.2 SHARE WITHHOLDING. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Common Shares that otherwise
would be issued to him or her or by surrendering all or a portion of any Common
Shares that he or she previously acquired. Such Common Shares shall be valued at
their Fair Market Value on the date when they are withheld or surrendered.
ARTICLE 13. LIMITATION ON PAYMENTS.
13.1 SCOPE OF LIMITATION. This Article 13 shall apply to an Award only
if:
(a) The independent auditors most recently selected by the Board
(the "Auditors") determine that the after-tax value of such Award to the
Participant, taking into account the effect of all federal, state and
local income taxes, employment taxes and excise taxes applicable to the
Participant (including the excise tax under section 4999 of the Code),
will be greater after the application of this Article 13 than it was
before the application of this Article 13; or
(b) The Committee, at the time of making an Award under the Plan
or at any time thereafter, specifies in writing that such Award shall be
subject to this Article 13 (regardless of the after-tax value of such
Award to the Participant).
If this Article 13 applies to an Award, it shall supersede any contrary
provision of the Plan or of any Award granted under the Plan.
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13.2 BASIC RULE. In the event that the Auditors determine that any
payment or transfer by the Company under the Plan to or for the benefit of a
Participant (a "Payment") would be nondeductible by the Company for federal
income tax purposes because of the provisions concerning "excess parachute
payments" in section 280G of the Code, then the aggregate present value of all
Payments shall be reduced (but not below zero) to the Reduced Amount. For
purposes of this Article 13, the "Reduced Amount" shall be the amount, expressed
as a present value, which maximizes the aggregate present value of the Payments
without causing any Payment to be nondeductible by the Company because of
section 280G of the Code.
13.3 REDUCTION OF PAYMENTS. If the Auditors determine that any Payment
would be nondeductible by the Company because of section 280G of the Code, then
the Company shall promptly give the Participant notice to that effect and a copy
of the detailed calculation thereof and of the Reduced Amount, and the
Participant may then elect, in his or her sole discretion, which and how much of
the Payments shall be eliminated or reduced (as long as after such election the
aggregate present value of the Payments equals the Reduced Amount) and shall
advise the Company in writing of his or her election within 10 days of receipt
of notice. If no such election is made by the Participant within such 10-day
period, then the Company may elect which and how much of the Payments shall be
eliminated or reduced (as long as after such election the aggregate present
value of the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Article 13, present
value shall be determined in accordance with section 280G(d)(4) of the Code. All
determinations made by the Auditors under this Article 13 shall be binding upon
the Company and the Participant and shall be made within 60 days of the date
when a Payment becomes payable or transferable. As promptly as practicable
following such determination and the elections hereunder, the Company shall pay
or transfer to or for the benefit of the Participant such amounts as are then
due to him or her under the Plan and shall promptly pay or transfer to or for
the benefit of the Participant in the future such amounts as become due to him
or her under the Plan.
13.4 OVERPAYMENTS AND UNDERPAYMENTS. As a result of uncertainty in the
application of section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
section 7872(f)(2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount which is subject to taxation under section 4999 of
the Code. In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to or for the benefit of the Participant, together with interest at the
applicable federal rate provided in section 7872(f)(2) of the Code.
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13.5 RELATED CORPORATIONS. For purposes of this Article 13, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with section 280G(d)(5) of the Code.
ARTICLE 14. FUTURE OF THE PLAN.
14.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on the date of the Company's initial public offering. The Plan shall
remain in effect until it is terminated under Section 14.2, except that no ISOs
shall be granted on or after the 10th anniversary of the later of (a) the date
when the Board adopted the Plan or (b) the date when the Board adopted the most
recent increase in the number of Common Shares available under Article 3 which
was approved by the Company's stockholders.
14.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Awards shall be granted under the Plan
after the termination thereof. The termination of the Plan, or any amendment
thereof, shall not affect any Award previously granted under the Plan.
ARTICLE 15. DEFINITIONS.
15.1 "AFFILIATE" means any entity other than a Subsidiary, if the
Company and/or one or more Subsidiaries own not less than 50% of such entity.
15.2 "AWARD" means any award of an Option or a Restricted Share under
the Plan.
15.3 "BOARD" means the Company's Board of Directors, as constituted from
time to time.
15.4 "CHANGE IN CONTROL" shall mean:
(a) The consummation of a merger or consolidation of the Company
with or into another entity or any other corporate reorganization, if
persons who were not stockholders of the Company immediately prior to
such merger, consolidation or other reorganization own immediately after
such merger, consolidation or other reorganization 50% or more of the
voting power of the outstanding securities of each of (i) the continuing
or surviving entity and (ii) any direct or indirect parent corporation
of such continuing or surviving entity;
(b) The sale, transfer or other disposition of all or
substantially all of the Company's assets;
(c) A change in the composition of the Board, as a result of
which 50% or fewer of the incumbent directors are directors who either
(i) had been directors of the Company on the date 24 months prior to the
date of the event that may constitute a Change in Control (the "original
directors") or (ii) were elected, or nominated for election, to the
Board with the affirmative votes of at
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least a majority of the aggregate of the original directors who were
still in office at the time of the election or nomination and the
directors whose election or nomination was previously so approved; or
(d) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing at
least 50% of the total voting power represented by the Company's then
outstanding voting securities. For purposes of this Subsection (d), the
term "person" shall have the same meaning as when used in sections 13(d)
and 14(d) of the Exchange Act but shall exclude (i) a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or of a Parent or Subsidiary and (ii) a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of the common
stock of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
15.5 "CODE" means the Internal Revenue Code of 1986, as amended.
15.6 "COMMITTEE" means the compensation committee of the Board, as
described in Article 2.
15.7 "COMMON SHARE" means one share of the common stock of the Company.
15.8 "COMPANY" means Redback Networks Inc., a Delaware corporation.
15.9 "CONSULTANT" means a consultant or adviser who provides bona fide
services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered employment
for all purposes of the Plan, except as provided in Section 4.2.
15.10 "EMPLOYEE" means a common-law employee of the Company, a Parent, a
Subsidiary or an Affiliate.
15.11 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
15.12 "EXERCISE PRICE" means the amount for which one Common Share may
be purchased upon exercise of such Option, as specified in the applicable Stock
Option Agreement.
15.13 "FAIR MARKET VALUE" means the market price of Common Shares,
determined by the Committee in good faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal. Such determination
shall be conclusive and binding on all persons.
15.14 "ISO" means an incentive stock option described in section 422(b)
of the Code.
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15.15 "NSO" means a stock option not described in sections 422 or 423 of
the Code.
15.16 "OPTION" means an ISO or NSO granted under the Plan and entitling
the holder to purchase Common Shares.
15.17 "OPTIONEE" means an individual or estate who holds an Option.
15.18 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not an
Employee. Service as an Outside Director shall be considered employment for all
purposes of the Plan, except as provided in Section 4.2.
15.19 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
15.20 "PARTICIPANT" means an individual or estate who holds an Award.
15.21 "PREDECESSOR PLAN" means the Redback Networks Inc. 1997 Stock
Plan.
15.22 "PLAN" means this Redback Networks Inc. 1999 Stock Incentive Plan,
as amended from time to time.
15.23 "RESTRICTED SHARE" means a Common Share awarded under the Plan.
15.24 "RESTRICTED STOCK AGREEMENT" means the agreement between the
Company and the recipient of a Restricted Share that contains the terms,
conditions and restrictions pertaining to such Restricted Share.
15.25 "STOCK OPTION AGREEMENT" means the agreement between the Company
and an Optionee that contains the terms, conditions and restrictions pertaining
to his or her Option.
15.26 "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
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ARTICLE 16. EXECUTION.
To record the adoption of the Plan by the Board on March 3, 1999,
the Company has caused its duly authorized officer to execute this document in
the name of the Company.
REDBACK NETWORKS INC.
By:
----------------------------------
Title:
-------------------------------
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<PAGE> 1
Exhibit 10.3
REDBACK NETWORKS INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
(AS ADOPTED EFFECTIVE _______ __, 1999)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. PURPOSE OF THE PLAN.......................................................... 1
SECTION 2. ADMINISTRATION OF THE PLAN................................................... 1
(a) Committee Composition........................................................ 1
(b) Committee Responsibilities................................................... 1
SECTION 3. ENROLLMENT AND PARTICIPATION................................................. 1
(a) Offering Periods............................................................. 1
(b) Accumulation Periods......................................................... 1
(c) Enrollment................................................................... 1
(d) Duration of Participation.................................................... 1
(e) Applicable Offering Period................................................... 2
SECTION 4. EMPLOYEE CONTRIBUTIONS....................................................... 2
(a) Frequency of Payroll Deductions.............................................. 2
(b) Amount of Payroll Deductions................................................. 2
(c) Changing Withholding Rate.................................................... 2
(d) Discontinuing Payroll Deductions............................................. 3
(e) Limit on Number of Elections................................................. 3
SECTION 5. WITHDRAWAL FROM THE PLAN..................................................... 3
(a) Withdrawal................................................................... 3
(b) Re-Enrollment After Withdrawal............................................... 3
SECTION 6. CHANGE IN EMPLOYMENT STATUS.................................................. 3
(a) Termination of Employment.................................................... 3
(b) Leave of Absence............................................................. 3
(c) Death........................................................................ 3
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES......................................... 4
(a) Plan Accounts................................................................ 4
(b) Purchase Price............................................................... 4
(c) Number of Shares Purchased................................................... 4
(d) Available Shares Insufficient................................................ 4
(e) Issuance of Stock............................................................ 4
(f) Unused Cash Balances......................................................... 5
(g) Stockholder Approval......................................................... 5
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP............................................... 5
(a) Five Percent Limit........................................................... 5
(b) Dollar Limit................................................................. 5
</TABLE>
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<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 9. RIGHTS NOT TRANSFERABLE...................................................... 6
SECTION 10. NO RIGHTS AS AN EMPLOYEE..................................................... 6
SECTION 11. NO RIGHTS AS A STOCKHOLDER................................................... 6
SECTION 12. SECURITIES LAW REQUIREMENTS.................................................. 6
SECTION 13. STOCK OFFERED UNDER THE PLAN................................................. 7
(a) Authorized Shares............................................................ 7
(b) Anti-Dilution Adjustments.................................................... 7
(c) Reorganizations.............................................................. 7
SECTION 14. AMENDMENT OR DISCONTINUANCE.................................................. 7
SECTION 15. DEFINITIONS.................................................................. 7
(a) Accumulation Period.......................................................... 7
(b) Board........................................................................ 7
(c) Code......................................................................... 7
(d) Committee.................................................................... 8
(e) Company...................................................................... 8
(f) Compensation................................................................. 8
(g) Corporate Reorganization..................................................... 8
(h) Eligible Employee............................................................ 8
(i) Exchange Act................................................................. 8
(j) Fair Market Value............................................................ 8
(k) IPO.......................................................................... 9
(l) Offering Period.............................................................. 9
(m) Participant.................................................................. 9
(n) Participating Company........................................................ 9
(o) Plan......................................................................... 9
(p) Plan Account................................................................. 9
(q) Purchase Price............................................................... 9
(r) Stock........................................................................ 9
(s) Subsidiary................................................................... 9
SECTION 15. EXECUTION.................................................................... 9
</TABLE>
ii
<PAGE> 4
REDBACK NETWORKS INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE OF THE PLAN.
The Plan was adopted by the Board effective as of the date of the IPO.
The purpose of the Plan is to provide Eligible Employees with an opportunity to
increase their proprietary interest in the success of the Company by purchasing
Stock from the Company on favorable terms and to pay for such purchases through
payroll deductions. The Plan is intended to qualify under section 423 of the
Code.
SECTION 2. ADMINISTRATION OF THE PLAN.
(a) COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of one or more directors of
the Company, who shall be appointed by the Board.
(b) COMMITTEE RESPONSIBILITIES. The Committee shall interpret the Plan
and make all other policy decisions relating to the operation of the Plan. The
Committee may adopt such rules, guidelines and forms as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
SECTION 3. ENROLLMENT AND PARTICIPATION.
(a) OFFERING PERIODS. While the Plan is in effect, two overlapping
Offering Periods shall commence in each calendar year. The Offering Periods
shall consist of the 24-month periods commencing on each May 1 and November 1,
except that the first Offering Period shall commence on the date of the IPO and
end on April 30, 2001.
(b) ACCUMULATION PERIODS. While the Plan is in effect, two Accumulation
Periods shall commence in each calendar year. The Accumulation Periods shall
consist of the six-month periods commencing on each May 1 and November 1, except
that the first Accumulation Period shall commence on the date of the IPO and end
on October 31, 1999.
(c) ENROLLMENT. Any individual who, on the day preceding the first day
of an Offering Period, qualifies as an Eligible Employee may elect to become a
Participant in the Plan for such Offering Period by executing the enrollment
form prescribed for this purpose by the Committee. The enrollment form shall be
filed with the Company at the prescribed location not later than five days prior
to the commencement of such Offering Period.
(d) DURATION OF PARTICIPATION. Once enrolled in the Plan, a Participant
shall continue to participate in the Plan until he or she ceases to be an
Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end
of the Accumulation Period in which his or her employee contributions were
discontinued under Section 4(d) or 8(b). A Participant who
<PAGE> 5
discontinued employee contributions under Section 4(d) or withdrew from the Plan
under Section 5(a) may again become a Participant, if he or she then is an
Eligible Employee, by following the procedure described in Subsection (c) above.
A Participant whose employee contributions were discontinued automatically under
Section 8(b) shall automatically resume participation at the beginning of the
earliest Accumulation Period ending in the next calendar year, if he or she then
is an Eligible Employee.
(e) APPLICABLE OFFERING PERIOD. For purposes of calculating the Purchase
Price under Section 7(b), the applicable Offering Period shall be determined as
follows:
(i) Once a Participant is enrolled in the Plan for an Offering
Period, such Offering Period shall continue to apply to him or her until
the earliest of (A) the end of such Offering Period, (B) the end of his
or her participation under Subsection (d) above or (C) re-enrollment for
a subsequent Offering Period under Paragraph (ii) or (iii) below.
(ii) In the event that the Fair Market Value of Stock on the
last trading day before the commencement of the Offering Period for
which the Participant is enrolled is higher than on the last trading day
before the commencement of any subsequent Offering Period, the
Participant shall automatically be re-enrolled for such subsequent
Offering Period.
(iii) Any other provision of the Plan notwithstanding, the
Company (at its sole discretion) may determine prior to the commencement
of any new Offering Period that all Participants shall be re-enrolled
for such new Offering Period.
(iv) When a Participant reaches the end of an Offering Period
but his or her participation is to continue, then such Participant shall
automatically be re-enrolled for the Offering Period that commences
immediately after the end of the prior Offering Period.
SECTION 4. EMPLOYEE CONTRIBUTIONS.
(a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may purchase shares
of Stock under the Plan solely by means of payroll deductions. Payroll
deductions, as designated by the Participant pursuant to Subsection (b) below,
shall occur on each payday during participation in the Plan.
(b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall designate
on the enrollment form the portion of his or her Compensation that he or she
elects to have withheld for the purchase of Stock. Such portion shall be a whole
percentage of the Eligible Employee's Compensation, but not less than 1% nor
more than 15%.
(c) CHANGING WITHHOLDING RATE. If a Participant wishes to change the
rate of payroll withholding, he or she may do so by filing a new enrollment form
with the Company at the prescribed location at any time. The new withholding
rate shall be effective as soon as
2
<PAGE> 6
reasonably practicable after such form has been received by the Company. The new
withholding rate shall be a whole percentage of the Eligible Employee's
Compensation, but not less than 1% nor more than 15%.
(d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes to
discontinue employee contributions entirely, he or she may do so by filing a new
enrollment form with the Company at the prescribed location at any time. Payroll
withholding shall cease as soon as reasonably practicable after such form has
been received by the Company. (In addition, employee contributions may be
discontinued automatically pursuant to Section 8(b).) A Participant who has
discontinued employee contributions may resume such contributions by filing a
new enrollment form with the Company at the prescribed location. Payroll
withholding shall resume as soon as reasonably practicable after such form has
been received by the Company.
(e) LIMIT ON NUMBER OF ELECTIONS. No Participant shall make more than
two elections under Subsection (c) or (d) above during any Accumulation Period.
SECTION 5. WITHDRAWAL FROM THE PLAN.
(a) WITHDRAWAL. A Participant may elect to withdraw from the Plan by
filing the prescribed form with the Company at the prescribed location at any
time before the last day of an Accumulation Period. As soon as reasonably
practicable thereafter, payroll deductions shall cease and the entire amount
credited to the Participant's Plan Account shall be refunded to him or her in
cash, without interest. No partial withdrawals shall be permitted.
(b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who has
withdrawn from the Plan shall not be a Participant until he or she re-enrolls in
the Plan under Section 3(c). Re-enrollment may be effective only at the
commencement of an Offering Period.
SECTION 6. CHANGE IN EMPLOYMENT STATUS.
(a) TERMINATION OF EMPLOYMENT. Termination of employment as an Eligible
Employee for any reason, including death, shall be treated as an automatic
withdrawal from the Plan under Section 5(a). (A transfer from one Participating
Company to another shall not be treated as a termination of employment.)
(b) LEAVE OF ABSENCE. For purposes of the Plan, employment shall not be
deemed to terminate when the Participant goes on a military leave, a sick leave
or another bona fide leave of absence, if the leave was approved by the Company
in writing. Employment, however, shall be deemed to terminate 90 days after the
Participant goes on a leave, unless a contract or statute guarantees his or her
right to return to work. Employment shall be deemed to terminate in any event
when the approved leave ends, unless the Participant immediately returns to
work.
(c) DEATH. In the event of the Participant's death, the amount credited
to his or her Plan Account shall be paid to a beneficiary designated by him or
her for this purpose on the prescribed form or, if none, to the Participant's
estate. Such form shall be valid only if it was filed with the Company at the
prescribed location before the Participant's death.
3
<PAGE> 7
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES.
(a) PLAN ACCOUNTS. The Company shall maintain a Plan Account on its
books in the name of each Participant. Whenever an amount is deducted from the
Participant's Compensation under the Plan, such amount shall be credited to the
Participant's Plan Account. Amounts credited to Plan Accounts shall not be trust
funds and may be commingled with the Company's general assets and applied to
general corporate purposes. No interest shall be credited to Plan Accounts.
(b) PURCHASE PRICE. The Purchase Price for each share of Stock purchased
at the close of an Accumulation Period shall be the lower of:
(i) 85% of the Fair Market Value of such share on the last
trading day in such Accumulation Period; or
(ii) 85% of the Fair Market Value of such share on the last
trading day before the commencement of the applicable Offering Period
(as determined under Section 3(e)) or, in the case of the first Offering
Period under the Plan, 85% of the price at which one share of Stock is
offered to the public in the IPO.
(c) NUMBER OF SHARES PURCHASED. As of the last day of each Accumulation
Period, each Participant shall be deemed to have elected to purchase the number
of shares of Stock calculated in accordance with this Subsection (c), unless the
Participant has previously elected to withdraw from the Plan in accordance with
Section 5(a). The amount then in the Participant's Plan Account shall be divided
by the Purchase Price, and the number of shares that results shall be purchased
from the Company with the funds in the Participant's Plan Account. The foregoing
notwithstanding, no Participant shall purchase more than 1,000 shares of Stock
with respect to any Accumulation Period nor more than the amounts of Stock set
forth in Sections 8(b) and 13(a). The Committee may determine with respect to
all Participants that any fractional share, as calculated under this Subsection
(c), shall be (i) rounded down to the next lower whole share or (ii) credited as
a fractional share.
(d) AVAILABLE SHARES INSUFFICIENT. In the event that the aggregate
number of shares that all Participants elect to purchase during an Accumulation
Period exceeds the maximum number of shares remaining available for issuance
under Section 13(a), then the number of shares to which each Participant is
entitled shall be determined by multiplying the number of shares available for
issuance by a fraction, the numerator of which is the number of shares that such
Participant has elected to purchase and the denominator of which is the number
of shares that all Participants have elected to purchase.
(e) ISSUANCE OF STOCK. Certificates representing the shares of Stock
purchased by a Participant under the Plan shall be issued to him or her as soon
as reasonably practicable after the close of the applicable Accumulation Period,
except that the Committee may determine that such shares shall be held for each
Participant's benefit by a broker designated by the Committee (unless the
Participant has elected that certificates be issued to him or her). Shares may
be registered in the name of the Participant or jointly in the name of the
Participant and his or her spouse as joint tenants with right of survivorship or
as community property.
4
<PAGE> 8
(f) UNUSED CASH BALANCES. An amount remaining in the Participant's Plan
Account that represents the Purchase Price for any fractional share shall be
carried over in the Participant's Plan Account to the next Accumulation Period.
Any amount remaining in the Participant's Plan Account that represents the
Purchase Price for whole shares that could not be purchased by reason of
Subsection (c) above, Section 8(b) or Section 13(a) shall be refunded to the
Participant in cash, without interest.
(g) STOCKHOLDER APPROVAL. Any other provision of the Plan
notwithstanding, no shares of Stock shall be purchased under the Plan unless and
until the Company's stockholders have approved the adoption of the Plan.
SECTION 8 .LIMITATIONS ON STOCK OWNERSHIP.
(a) FIVE PERCENT LIMIT. Any other provision of the Plan notwithstanding,
no Participant shall be granted a right to purchase Stock under the Plan if such
Participant, immediately after his or her election to purchase such Stock, would
own stock possessing more than 5% of the total combined voting power or value of
all classes of stock of the Company or any parent or Subsidiary of the Company.
For purposes of this Subsection (a), the following rules shall apply:
(i) Ownership of stock shall be determined after applying the
attribution rules of section 424(d) of the Code;
(ii) Each Participant shall be deemed to own any stock that he
or she has a right or option to purchase under this or any other plan;
and
(iii) Each Participant shall be deemed to have the right to
purchase 1,000 shares of Stock under this Plan with respect to each
Accumulation Period.
(b) DOLLAR LIMIT. Any other provision of the Plan notwithstanding, no
Participant shall purchase Stock with a Fair Market Value in excess of the
following limit:
(i) In the case of Stock purchased during an Offering Period
that commenced in the current calendar year, the limit shall be equal to
(A) $25,000 minus (B) the Fair Market Value of the Stock that the
Participant previously purchased in the current calendar year (under
this Plan and all other employee stock purchase plans of the Company or
any parent or Subsidiary of the Company).
(ii) In the case of Stock purchased during an Offering Period
that commenced in the immediately preceding calendar year, the limit
shall be equal to (A) $50,000 minus (B) the Fair Market Value of the
Stock that the Participant previously purchased (under this Plan and all
other employee stock purchase plans of the Company or any parent or
Subsidiary of the Company) in the current calendar year and in the
immediately preceding calendar year.
5
<PAGE> 9
(iii) In the case of Stock purchased during an Offering Period
that commenced in the second preceding calendar year, the limit shall be
equal to (A) $75,000 minus (B) the Fair Market Value of the Stock that
the Participant previously purchased (under this Plan and all other
employee stock purchase plans of the Company or any parent or Subsidiary
of the Company) in the current calendar year and in the two preceding
calendar years.
For purposes of this Subsection (b), the Fair Market Value of Stock shall be
determined in each case as of the beginning of the Offering Period in which such
Stock is purchased. Employee stock purchase plans not described in section 423
of the Code shall be disregarded. If a Participant is precluded by this
Subsection (b) from purchasing additional Stock under the Plan, then his or her
employee contributions shall automatically be discontinued and shall resume at
the beginning of the earliest Accumulation Period ending in the next calendar
year (if he or she then is an Eligible Employee).
SECTION 9. RIGHTS NOT TRANSFERABLE.
The rights of any Participant under the Plan, or any Participant's
interest in any Stock or moneys to which he or she may be entitled under the
Plan, shall not be transferable by voluntary or involuntary assignment or by
operation of law, or in any other manner other than by beneficiary designation
or the laws of descent and distribution. If a Participant in any manner attempts
to transfer, assign or otherwise encumber his or her rights or interest under
the Plan, other than by beneficiary designation or the laws of descent and
distribution, then such act shall be treated as an election by the Participant
to withdraw from the Plan under Section 5(a).
SECTION 10. NO RIGHTS AS AN EMPLOYEE.
Nothing in the Plan or in any right granted under the Plan shall confer
upon the Participant any right to continue in the employ of a Participating
Company for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Participating Companies or of the
Participant, which rights are hereby expressly reserved by each, to terminate
his or her employment at any time and for any reason, with or without cause.
SECTION 11. NO RIGHTS AS A STOCKHOLDER.
A Participant shall have no rights as a stockholder with respect to any
shares of Stock that he or she may have a right to purchase under the Plan until
such shares have been purchased on the last day of the applicable Accumulation
Period.
SECTION 12. SECURITIES LAW REQUIREMENTS.
Shares of Stock shall not be issued under the Plan unless the issuance
and delivery of such shares comply with (or are exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations, and the regulations of any stock exchange or other
securities market on which the Company's securities may then be traded.
6
<PAGE> 10
SECTION 13. STOCK OFFERED UNDER THE PLAN.
(a) AUTHORIZED SHARES. The number of shares of Stock available for
purchase under the Plan shall be 1,000,000 (subject to adjustment pursuant to
this Section 13). On May 1 of each year, commencing with May 1, 2000, the
aggregate number of shares of Stock available for purchase during the life of
the Plan shall automatically be increased by the number of shares necessary to
cause the number of shares then available for purchase to be restored to
1,000,000 (subject to adjustment pursuant to this Section 13).
(b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares of Stock
offered under the Plan, the 1,000-share limitation described in Section 7(c) and
the price of shares that any Participant has elected to purchase shall be
adjusted proportionately by the Committee for any increase or decrease in the
number of outstanding shares of Stock resulting from a subdivision or
consolidation of shares or the payment of a stock dividend, any other increase
or decrease in such shares effected without receipt or payment of consideration
by the Company, the distribution of the shares of a Subsidiary to the Company's
stockholders or a similar event.
(c) REORGANIZATIONS. Any other provision of the Plan notwithstanding,
immediately prior to the effective time of a Corporate Reorganization, the
Offering Period and Accumulation Period then in progress shall terminate and
shares shall be purchased pursuant to Section 7, unless the Plan is continued or
assumed by the surviving corporation or its parent corporation. The Plan shall
in no event be construed to restrict in any way the Company's right to undertake
a dissolution, liquidation, merger, consolidation or other reorganization.
SECTION 14. AMENDMENT OR DISCONTINUANCE.
The Board shall have the right to amend, suspend or terminate the Plan
at any time and without notice. In addition, the Company's Chief Executive
Officer may amend the Plan at any time, except to increase the number of shares
of Stock that may be issued under the Plan in the aggregate or to any individual
Participant. Except as provided in Section 13, any increase in the aggregate
number of shares of Stock to be issued under the Plan shall be subject to
approval by a vote of the stockholders of the Company. In addition, any other
amendment of the Plan shall be subject to approval by a vote of the stockholders
of the Company to the extent required by an applicable law or regulation.
SECTION 15. DEFINITIONS.
(a) "ACCUMULATION PERIOD" means a six-month period during which
contributions may be made toward the purchase of Stock under the Plan, as
determined pursuant to Section 3(b).
(b) "BOARD" means the Board of Directors of the Company, as constituted
from time to time.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
7
<PAGE> 11
(d) "COMMITTEE" means the compensation committee of the Board, as
described in Section 2.
(e) "COMPANY" means Redback Networks Inc., a Delaware corporation.
(f) "COMPENSATION" means (i) the total compensation paid in cash to a
Participant by a Participating Company, including salaries, wages, bonuses,
incentive compensation, commissions, overtime pay and shift premiums, plus (ii)
any pre-tax contributions made by the Participant under section 401(k) or 125 of
the Code. "Compensation" shall exclude all non-cash items, moving or relocation
allowances, cost-of-living equalization payments, car allowances, tuition
reimbursements, imputed income attributable to cars or life insurance, severance
pay, fringe benefits, contributions or benefits received under employee benefit
plans, income attributable to the exercise of stock options, and similar items.
The Committee shall determine whether a particular item is included in
Compensation.
(g) "CORPORATE REORGANIZATION" means:
(i) The consummation of a merger or consolidation of the Company
with or into another entity or any other corporate reorganization; or
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets or the complete liquidation or
dissolution of the Company.
(h) "ELIGIBLE EMPLOYEE" means any employee of a Participating Company
whose customary employment is for more than five months per calendar year and
for more than 20 hours per week. The foregoing notwithstanding, an individual
shall not be considered an Eligible Employee if his or her participation in the
Plan is prohibited by the law of any country which has jurisdiction over him or
her or if he or she is subject to a collective bargaining agreement that does
not provide for participation in the Plan.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(j) "FAIR MARKET VALUE" means the market price of Stock, determined by
the Committee as follows:
(i) If the Stock was traded on The Nasdaq National Market on the
date in question, then the Fair Market Value shall be equal to the
last-transaction price quoted for such date by The Nasdaq National
Market;
(ii) If the Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date;
or
(iii) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good faith
on such basis as it deems appropriate.
8
<PAGE> 12
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal or as reported
directly to the Company by Nasdaq or a stock exchange. Such determination shall
be conclusive and binding on all persons.
(k) "IPO" means the initial offering of Stock to the public pursuant to
a registration statement filed by the Company with the Securities and Exchange
Commission.
(l) "OFFERING PERIOD" means a 24-month period with respect to which the
right to purchase Stock may be granted under the Plan, as determined pursuant to
Section 3(a).
(m) "PARTICIPANT" means an Eligible Employee who elects to participate
in the Plan, as provided in Section 3(c).
(n) "PARTICIPATING COMPANY" means (i) the Company and (ii) each present
or future Subsidiary designated by the Committee as a Participating Company.
(o) "PLAN" means this Redback Networks Inc. 1999 Employee Stock Purchase
Plan, as it may be amended from time to time.
(p) "PLAN ACCOUNT" means the account established for each Participant
pursuant to Section 7(a).
(q) "PURCHASE PRICE" means the price at which Participants may purchase
Stock under the Plan, as determined pursuant to Section 7(b). (r) "STOCK" means
the Common Stock of the Company.
(r) "STOCK" means the Common Stock of the Company.
(s) "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
SECTION 16. EXECUTION.
To record the adoption of the Plan by the Board on March 3, 1999, the
Company has caused its duly authorized officer to execute this document in the
name of the Company.
REDBACK NETWORKS INC.
By:
-----------------------------------
Title:
--------------------------------
9
<PAGE> 1
EXHIBIT 10.4
REDBACK NETWORKS INC.
1999 DIRECTORS' OPTION PLAN
(AS ADOPTED EFFECTIVE _______ __, 1999)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1. INTRODUCTION.....................................................................1
ARTICLE 2. ADMINISTRATION...................................................................1
2.1 Committee Composition...........................................................1
2.2 Committee Responsibilities......................................................1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS......................................................1
3.1 Basic Limitation................................................................1
3.2 Annual Increase in Shares.......................................................1
3.3 Additional Shares...............................................................2
ARTICLE 4. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS................................2
4.1 Eligibility.....................................................................2
4.2 Initial Grants..................................................................2
4.3 Annual Grants...................................................................2
4.4 Accelerated Exercisability......................................................2
4.5 Exercise Price..................................................................3
4.6 Term............................................................................3
4.7 Affiliates of Non-Employee Directors............................................3
4.8 Stock Option Agreement..........................................................3
ARTICLE 5. PAYMENT FOR OPTION SHARES........................................................3
5.1 Cash............................................................................3
5.2 Surrender of Stock..............................................................3
5.3 Exercise/Sale...................................................................3
5.4 Other Forms of Payment..........................................................3
ARTICLE 6. PROTECTION AGAINST DILUTION......................................................4
6.1 Adjustments.....................................................................4
6.2 Dissolution or Liquidation......................................................4
6.3 Reorganizations.................................................................4
ARTICLE 7. LIMITATION ON RIGHTS.............................................................4
7.1 Stockholders' Rights............................................................4
7.2 Regulatory Requirements.........................................................4
7.3 Withholding Taxes...............................................................5
ARTICLE 8. FUTURE OF THE PLAN...............................................................5
8.1 Term of the Plan................................................................5
8.2 Amendment or Termination........................................................5
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE 9. DEFINITIONS......................................................................5
ARTICLE 10. EXECUTION.......................................................................7
</TABLE>
ii
<PAGE> 4
REDBACK NETWORKS INC.
1999 DIRECTORS' OPTION PLAN
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board effective as of the date of the
Company's initial public offering. The purpose of the Plan is to promote the
long-term success of the Company and the creation of stockholder value by (a)
encouraging Non-Employee Directors to focus on critical long-range objectives,
(b) encouraging the attraction and retention of Non-Employee Directors with
exceptional qualifications and (c) linking Non-Employee Directors directly to
stockholder interests through increased stock ownership. The Plan seeks to
achieve this purpose by providing for automatic and non-discretionary grants of
Options to Non-Employee Directors.
The Plan shall be governed by, and construed in accordance with,
the laws of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more directors of
the Company, who shall be appointed by the Board. In addition, the composition
of the Committee shall satisfy such requirements as the Securities and Exchange
Commission may establish for administrators acting under plans intended to
qualify for exemption under Rule 16b-3 (or its successor) under the Exchange
Act.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall interpret the
Plan and make all decisions relating to the operation of the Plan. The Committee
may adopt such rules or guidelines as it deems appropriate to implement the
Plan. The Committee's determinations under the Plan shall be final and binding
on all persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may
be authorized but unissued shares or treasury shares. The aggregate number of
Common Shares subject to Options granted under the Plan shall not exceed (a)
200,000 plus (b) the additional Common Shares described in Sections 3.2 and 3.3.
The limitations of this Section 3.1 and Section 3.2 shall be subject to
adjustment pursuant to Article 6.
3.2 ANNUAL INCREASE IN SHARES. As of January 1 of each year,
commencing with the year 2000, the aggregate number of Common Shares available
for the grant of Options under the Plan shall automatically be increased by the
number necessary to cause the total number of Common Shares then available to be
restored to 200,000.
<PAGE> 5
3.3 ADDITIONAL SHARES. If Options are forfeited or terminate for any
other reason before being exercised, then the Common Shares subject to such
Options shall again become available for the grant of Options under the Plan.
ARTICLE 4. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS.
4.1 ELIGIBILITY. Only Non-Employee Directors shall be eligible for the
grant of Options under the Plan.
4.2 INITIAL GRANTS. Each Non-Employee Director who first becomes a
member of the Board after the date of the Company's initial public offering
shall receive a one-time grant of an Option covering 25,000 Common Shares
(subject to adjustment under Article 6) on the date when such Non-Employee
Director first joins the Board. Each Non-Employee Director who is a member of
the Board on the date of the Company's initial public offering, and who did not
previously receive an option to purchase Common Shares, shall receive a one-time
grant of an Option covering 25,000 Common Shares on the date of the Company's
initial public offering. Options granted under this Section 4.2 shall become
exercisable in equal monthly installments over the 48-month period commencing on
the date of grant, except that all of the first 12 installments shall become
exercisable on the first anniversary of the date of grant. A Non-Employee
Director who previously was an Employee shall not receive a grant under this
Section 4.2.
4.3 ANNUAL GRANTS. Upon the conclusion of each regular annual meeting
of the Company's stockholders held in the year 2000 or thereafter, each
Non-Employee Director who will continue serving as a member of the Board
thereafter shall receive an Option covering 10,000 Common Shares (subject to
adjustment under Article 6), except that such Option shall not be granted in the
calendar year in which the same Non-Employee Director received the Option
described in Section 4.2. Options granted under this Section 4.3 shall become
exercisable in equal monthly installments over the 12-month period commencing on
the date of grant. A Non-Employee Director who previously was an Employee shall
be eligible to receive grants under this Section 4.3.
4.4 ACCELERATED EXERCISABILITY. All Options granted to a Non-Employee
Director under this Article 4 shall also become exercisable in full in the event
of:
(a) The termination of such Non-Employee Director's
service because of death or total and permanent disability; or
(b) A Change in Control with respect to the Company,
except as provided in the next following sentence.
If the Company and the other party to the transaction constituting a Change in
Control agree that such transaction is to be treated as a "pooling of interests"
for financial reporting purposes, and if such transaction in fact is so treated,
then the acceleration of exercisability shall not occur to the extent that the
Company's independent accountants and such other party's independent
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<PAGE> 6
accountants separately determine in good faith that such acceleration would
preclude the use of "pooling of interests" accounting.
4.5 EXERCISE PRICE. The Exercise Price under all Options granted to a
Non-Employee Director under this Article 4 shall be equal to 100% of the Fair
Market Value of a Common Share on the date of grant, payable in one of the forms
described in Article 5.
4.6 TERM. All Options granted to a Non-Employee Director under this
Article 4 shall terminate on the earlier of (a) the 10th anniversary of the date
of grant or (b) the date 12 months after the termination of such Non-Employee
Director's service for any reason.
4.7 AFFILIATES OF NON-EMPLOYEE DIRECTORS. The Committee may provide
that the Options that otherwise would be granted to a Non-Employee Director
under this Article 4 shall instead be granted to an affiliate of such
Non-Employee Director. Such affiliate shall then be deemed to be a Non-Employee
Director for purposes of the Plan, provided that the service-related vesting and
termination provisions pertaining to the Options shall be applied with regard to
the service of the Non-Employee Director.
4.8 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms of the Plan and
may be subject to any other terms that are not inconsistent with the Plan.
ARTICLE 5. PAYMENT FOR OPTION SHARES.
5.1 CASH. All or any part of the Exercise Price may be paid in cash or
cash equivalents.
5.2 SURRENDER OF STOCK. All or any part of the Exercise Price may be
paid by surrendering, or attesting to the ownership of, Common Shares that are
already owned by the Optionee. Such Common Shares shall be valued at their Fair
Market Value on the date when the new Common Shares are purchased under the
Plan. The Optionee shall not surrender, or attest to the ownership of, Common
Shares in payment of the Exercise Price if such action would cause the Company
to recognize compensation expense (or additional compensation expense) with
respect to the Option for financial reporting purposes.
5.3 EXERCISE/SALE. All or any part of the Exercise Price and any
withholding taxes may be paid by delivering (on a form prescribed by the
Company) an irrevocable direction to a securities broker approved by the Company
to sell all or part of the Common Shares being purchased under the Plan and to
deliver all or part of the sales proceeds to the Company.
5.4 OTHER FORMS OF PAYMENT. At the sole discretion of the Committee,
all or any part of the Exercise Price and any withholding taxes may be paid in
any other form that is consistent with applicable laws, regulations and rules.
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<PAGE> 7
ARTICLE 6. PROTECTION AGAINST DILUTION.
6.1 ADJUSTMENTS. In the event of a subdivision of the outstanding
Common Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares in an
amount that has a material effect on the price of Common Shares, a combination
or consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off
or a similar occurrence, the Committee shall make such adjustments as it, in its
sole discretion, deems appropriate in one or more of (a) the number of Common
Shares available for future grants under Article 3, (b) the number of Options to
be granted to Non-Employee Directors under Article 4, (c) the number of Common
Shares covered by each outstanding Option or (d) the Exercise Price under each
outstanding Option. Except as provided in this Article 6, an Optionee shall have
no rights by reason of any issue by the Company of stock of any class or
securities convertible into stock of any class, any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class.
6.2 DISSOLUTION OR LIQUIDATION. To the extent not previously
exercised, Options shall terminate immediately prior to the dissolution or
liquidation of the Company.
6.3 REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options shall be subject to the
agreement of merger or reorganization. Such agreement shall provide for (a) the
continuation of the outstanding Options by the Company, if the Company is a
surviving corporation, (b) the assumption of the outstanding Options by the
surviving corporation or its parent or subsidiary, (c) the substitution by the
surviving corporation or its parent or subsidiary of its own options for the
outstanding Options, (d) full exercisability and accelerated expiration of the
outstanding Options or (e) settlement of the full value of the outstanding
Options in cash or cash equivalents followed by cancellation of such Options.
ARTICLE 7. LIMITATION ON RIGHTS.
7.1 STOCKHOLDERS' RIGHTS. A Optionee shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Option prior to the time when he or she becomes entitled
to receive such Common Shares by filing a notice of exercise and paying the
Exercise Price. No adjustment shall be made for cash dividends or other rights
for which the record date is prior to such time, except as expressly provided in
the Plan.
7.2 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Option prior to the satisfaction of all legal requirements relating to
the issuance of such Common Shares, to their registration, qualification or
listing or to an exemption from registration, qualification or listing.
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<PAGE> 8
7.3 WITHHOLDING TAXES. To the extent required by applicable federal,
state, local or foreign law, an Optionee or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.
ARTICLE 8. FUTURE OF THE PLAN.
8.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on the date of the Company's initial public offering. The Plan shall
remain in effect until it is terminated under Section 8.2.
8.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Options shall be granted under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Option previously granted under the
Plan.
ARTICLE 9. DEFINITIONS.
9.1 "BOARD" means the Company's Board of Directors, as constituted from
time to time.
9.2 "CHANGE IN CONTROL" means:
(a) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization, if persons who were not stockholders of the Company
immediately prior to such merger, consolidation or other reorganization
own immediately after such merger, consolidation or other reorganization
50% or more of the voting power of the outstanding securities of each of
(i) the continuing or surviving entity and (ii) any direct or indirect
parent corporation of such continuing or surviving entity;
(b) The sale, transfer or other disposition of all or
substantially all of the Company's assets;
(c) A change in the composition of the Board, as a result
of which 50% or fewer of the incumbent directors are directors who
either (i) had been directors of the Company on the date 24 months prior
to the date of the event that may constitute a Change in Control (the
"original directors") or (ii) were elected, or nominated for election,
to the Board with the affirmative votes of at least a majority of the
aggregate of the original directors who were still in office at the time
of the election or nomination and the directors whose election or
nomination was previously so approved; or
(d) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or
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<PAGE> 9
indirectly, of securities of the Company representing at least 50% of
the total voting power represented by the Company's then outstanding
voting securities. For purposes of this Subsection (d), the term
"person" shall have the same meaning as when used in sections 13(d) and
14(d) of the Exchange Act but shall exclude (i) a trustee or other
fiduciary holding securities under an employee benefit plan of the
Company or of a Parent or Subsidiary and (ii) a corporation owned
directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of the common
stock of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
9.3 "CODE" means the Internal Revenue Code of 1986, as amended.
9.4 "COMMITTEE" means a committee of the Board, as described in Article
2.
9.5 "COMMON SHARE" means one share of the common stock of the Company.
9.6 "COMPANY" means Redback Networks Inc., a Delaware corporation.
9.7 "EMPLOYEE" means a common-law employee of the Company, a Parent or
a Subsidiary.
9.8 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
9.9 "EXERCISE PRICE" means the amount for which one Common Share may
be purchased upon exercise of such Option, as specified in the applicable Stock
Option Agreement.
9.10 "FAIR MARKET VALUE" means the market price of Common Shares,
determined by the Committee in good faith on such basis as it deems appropriate.
The Committee's determination of Fair Market Value by shall be based on the
prices reported in The Wall Street Journal whenever possible, except that the
Fair Market Value on the date of the Company's initial public offering shall be
equal to the price of Common Shares to the public in such offering. Such
determination shall be conclusive and binding on all persons.
9.11 "NON-EMPLOYEE DIRECTOR" means a member of the Board who is not an
Employee.
9.12 "OPTION" means an option granted under the Plan and entitling the
holder to purchase Common Shares. Options do not qualify as incentive stock
options described in section 422(b) of the Code.
9.13 "OPTIONEE" means an individual or estate who holds an Option.
9.14 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company
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<PAGE> 10
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain. A corporation
that attains the status of a Parent on a date after the adoption of the Plan
shall be considered a Parent commencing as of such date.
9.15 "PLAN" means this Redback Networks Inc. 1999 Directors' Option
Plan, as amended from time to time.
9.16 "STOCK OPTION AGREEMENT" means the agreement between the Company
and an Optionee that contains the terms, conditions and restrictions pertaining
to his or her Option.
9.17 "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
ARTICLE 10. EXECUTION.
To record the adoption of the Plan by the Board on March 3, 1999,
the Company has caused its duly authorized officer to execute this document in
the name of the Company.
REDBACK NETWORKS INC.
By:_________________________________________
Title:______________________________________
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<PAGE> 1
EXHIBIT 10.5
SUBLEASE
THIS SUBLEASE ("Sublease") is dated, for reference purposes only, as of
January 12, 1998, and is made by and between INFOSEEK CORPORATION, a California
corporation ("Sublessor"), and REDBACK NETWORKS, INC., a Delaware corporation
("Sublessee"). Sublessor and Sublessee hereby agree as follows:
1. Recitals: This Sublease is made with reference to the fact that
Limar Realty Corp. #8, a California corporation ("Master Lessor"), as Landlord,
and Sublessor, as Tenant, entered that certain Lease, dated March 4, 1997, as
amended by that certain First Amendment to Lease dated June 9, 1997, and that
certain Second Amendment to Lease dated July 15, 1997 (collectively, "Master
Lease"), with respect to that certain real property commonly known as 1399 East
Moffett Park Drive, Sunnyvale, CA (the "Premises"or "Property"), as more
particularly described in the Master Lease. A copy of the Master Lease is
attached hereto as Exhibit "A" and incorporated by reference herein.
2. Premises: Sublessor hereby subleases to Sublessee, and Sublessee
hereby subleases from Sublessor, a portion of the Premises, deemed to be 20,462
square feet of space (the "Subleased Premises"), being a portion of that
approximately 91,900 square foot building (the "Building") located on the
Premises. The Subleased Premises are more particularly described on Exhibit "B"
attached hereto and incorporated by reference herein.
3. Term: The term of this Sublease ("Term") shall commence (the
"Commencement Date") on the date of completion of the demising wall depicted on
Exhibit C attached hereto and incorporated by reference herein. The Term shall
end on September 30, 1999 ("Termination Date"), unless this Sublease is sooner
terminated pursuant to its terms or the Master Lease is sooner terminated
pursuant to its terms. The parties acknowledge that Sublessee has no option to
extend the Term of this Sublease.
4. Rent:
A. Monthly Base Rent. Sublessee shall pay to Sublessor as
monthly base rent ("Monthly Base Rent") for the Subleased Premises equal monthly
installments as follows:
<TABLE>
<CAPTION>
Months Rent/Month
------ ----------
<S> <C>
1- 12 $32,330
13-last month of the Term $33,353
</TABLE>
As used herein, the word "month" shall mean a period beginning on the first
(1st) day of a month and ending on the last day of that month. Rent (as defined
in Paragraph 4.B) shall be paid on or before three (3) days prior to the first
(1st) day of each calendar month during the Term. Rent for any period during the
term hereof which is for less than one month of the Term shall be a pro rata
portion of the monthly installment based on a thirty (30)-day month. Rent shall
be payable without notice or
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<PAGE> 2
demand and without any deduction, offset, or abatement, in lawful money of the
United States of America. Rent shall be paid directly to Sublessor at the
address of the Premises, Attn. Chief Financial Officer, or such other address as
may be designated in writing by Sublessor.
B. Additional Rent. All monies required to be paid by
Sublessee under this Sublease (excluding Monthly Base Rent pursuant to Paragraph
4.A), including, without limitation, any amounts payable by Sublessor to Master
Lessor under the Master Lease (including, without limitation, "Operating
Expenses," as defined in Section 13 of the Master Lease), shall be deemed
additional rent ("Additional Rent"). Monthly Base Rent and Additional Rent
hereinafter collectively shall be referred to herein as "Rent." Sublessee and
Sublessor agree, as a material part of the consideration given by Sublessee to
Sublessor for this Sublease, that from and after the Commencement Date,
Sublessee shall pay all costs, expenses, taxes, insurance, maintenance and other
charges of every kind and nature arising in connection with the Subleased
Premises under this Sublease and the Master Lease; in this regard, Sublessee
shall pay 22.27% of Sublessor's share of "Operating Expenses" (as such terms is
defined in the Master Lease). Notwithstanding anything to the contrary set forth
in this Sublease, Sublessor's obligation to pay Additional Rent (attributable to
the Term) shall survive the expiration or earlier termination of this Sublease,
and if Sublessor is unable to determine the amount of Additional Rent due and
payable by Sublessee at the expiration or earlier termination of this Sublease,
then the parties shall make an adjusting payment between them when the correct
amount can be determined.
C. Payment of First Month's Rent. Upon execution hereof by
Sublessee, Sublessee shall pay to Sublessor, in cash, the sum of Thirty-Two
Thousand Three Hundred Thirty Dollars ($32,330), which shall constitute Rent for
the first month of the Term.
5. Security Deposit: Upon execution hereof by Sublessee, Sublessee
shall deposit with Sublessor, in cash, the sum of Sixty-Four Thousand Six
Hundred Sixty Dollars ($64,660), as security for the performance by Sublessee of
the terms and conditions of this Sublease. If Sublessee fails to pay Rent or
other charges due hereunder or otherwise defaults with respect to any provision
of this Sublease, then Sublessor may draw upon, use, apply or retain all or any
portion of the security deposit for the payment of any Rent or other charge in
default, for the payment of any other sum which Sublessor has become obligated
to pay by reason of Sublessee's default, or to compensate Sublessor for any loss
or damage which Sublessor has suffered thereby. If Sublessor so uses or applies
all or any portion of the security deposit, then Sublessee shall, within five
(5) days after demand therefor, deposit cash with Sublessor in the amount
required to restore the deposit to the full amount stated above. Upon the
expiration or earlier termination of this Sublease, Sublessor shall return to
Sublessee (without interest) so much of the security deposit as has not been
applied by Sublessor pursuant to this Paragraph, or which is not otherwise
required to cure Sublessee's defaults.
6. Late Charge: In addition to any interest payable pursuant to the
terms of the Master Lease, as incorporated herein pursuant to Paragraph 25.A
below, if Sublessee fails to pay Sublessor any amount due hereunder on or before
the date when such payment is due, Sublessee shall pay to Sublessor upon demand
a late charge equal to ten percent (10%) of the delinquent amount. The parties
agree that the foregoing late charge represents a reasonable estimate of the
cost and expense
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<PAGE> 3
which Sublessor will incur in processing each delinquent payment. Sublessor's
acceptance of any interest or late charge shall not waive Sublessee's default in
failing to pay the delinquent amount.
7. Repairs: Except as set forth in Paragraph 14 below with respect to
the construction of the demising wall, or as otherwise provided herein,
Sublessor shall have no obligation whatsoever to make or pay the cost of any
alterations, improvements or repairs to the Subleased Premises.
8. Indemnity: Sublessee shall indemnify, protect, defend with counsel
reasonably acceptable to Sublessor and hold Sublessor harmless against any and
all claims, liabilities, judgments, causes of action, damages, costs (including
reasonable attorneys' and experts' fees), and expenses (collectively, "Claims"),
caused by or arising in connection with: (i) the use, occupancy or condition of
the Subleased Premises; (ii) the negligence or willful misconduct of Sublessee
or its employees, contractors, agents or invitees; or (iii) a breach of
Sublessee's obligations under this Sublease; provided, however, that Sublessee
shall have no obligation to indemnify, protect, or hold harmless Sublessor
against, nor shall Sublessor be deemed released from, any of such Claims to the
extent it is caused by or arises in connection with: (i) the gross or active
negligence or willful misconduct of Sublessor or its employees, contractors,
agents, or invitees; or (ii) a breach of Sublessor's obligations under this
Sublease.
9. Right to Cure Defaults: If Sublessee fails to pay any sum of money
to Sublessor, or fails to perform any other act on its part to be performed
hereunder, then Sublessor may, but shall not be obligated to, make such payment
or perform such act. All such sums paid, and all costs and expenses of
performing any such act, shall be deemed Additional Rent payable by Sublessee to
Sublessor upon demand. In addition, Sublessee shall pay to Sublessor interest on
all amounts due, at the rate of ten percent (10%) per annum or the maximum rate
allowed by law, whichever is less (the "Interest Rate"), from the due date to
and including the date of the payment, from the date of the expenditure until
repaid.
10. Assignment and Subletting: Sublessee may not assign this Sublease,
sublet the Subleased Premises, transfer any interest of Sublessee therein, or
permit any use of the Subleased Premises by another party ("Transfer"). Any
Transfer by Sublessee shall be void and shall, at the option of Sublessor,
terminate this Sublease. Notwithstanding anything to the contrary contained in
this Sublease or in the Master Lease, at Sublessor's sole option, Sublessor
shall have the right to terminate this Sublease if Sublessee requests
Sublessor's consent to an assignment of this Sublease or a sublet of all or any
portion of the Subleased Premises.
11. Use: Sublessee may use the Subleased Premises only for the uses set
forth in Paragraph 1.c and Sections 6 and 7 of the Master Lease and for no other
purpose. With respect to Hazardous Materials (defined below), Sublessee shall
not engage in or permit any activities in or about the Premises or Project which
involve the use or presence of Hazardous Materials. Sublessee shall not do or
permit anything to be done in or about the Subleased Premises which would (i)
injure the Subleased Premises, or (ii) vibrate, shake, overload, or impair the
efficient operation of the Subleased Premises or the sprinkler systems, heating,
ventilating or air conditioning equipment, or utilities systems located therein.
Sublessee shall not store any materials, supplies, finished or
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<PAGE> 4
unfinished products, or articles of any nature outside of the Subleased
Premises. Sublessee shall comply with all reasonable rules and regulations
promulgated from time to time by Sublessor and Master Lessor with respect to the
Subleased Premises and the Premises. As used herein, the term "Hazardous
Materials" shall mean any material or substance that is now or hereafter
prohibited or regulated by any statute, law, rule, regulation or ordinance or
that is now or hereafter designated by any governmental authority to be
radioactive, toxic, hazardous or otherwise a danger to health, reproduction or
the environment.
12. Effect of Conveyance: As used in this Sublease, the term
"Sublessor" means the holder of the tenant's interest under the Master Lease. In
the event of any transfer of said tenant's interest, Sublessor shall be and
hereby is entirely relieved of all covenants and obligations of Sublessor
hereunder first arising after the effective date of such transfer, and it shall
be deemed and construed, without further agreement between the parties, that the
transferee has assumed and shall carry out all covenants and obligations from
and after the effective date of such transfer to be performed by Sublessor
hereunder. Sublessor may transfer and deliver any security of Sublessee to the
transferee of said tenant's interest in the Master Lease, and thereupon
Sublessor shall be discharged from any further liability with respect thereto.
13. Acceptance: By taking possession of the Subleased Premises,
Sublessee shall conclusively be deemed to have accepted the Subleased Premises
in their "as-is," then-existing condition; provided, however, that as of the
Commencement Date, all Building systems serving the Subleased Premises,
including, but not limited to, electrical, plumbing, HVAC, and fire sprinklers,
will be in good working order. Sublessee shall have five (5) days after the
Commencement Date to notify Sublessor in writing of any defects in the foregoing
Building systems and if written notice of any such defects in such systems is
not received by Sublessor within said five (5) day period, then correction of
any such defects shall be the obligation of Sublessee, not Sublessor.
14. Improvements: No alterations or improvements shall be made to the
Subleased Premises, except in accordance with this Sublease and the Master
Lease, and with the prior written consent, when required, of both Master Lessor
and Sublessor. Sublessor's consent to any proposed alteration or improvement
shall not be unreasonably withheld or delayed; provided, however, that it shall
be deemed reasonable for Sublessor to withhold its consent to any proposed
alteration or improvement which is not approved by Master Lessor. As more fully
described in Section 14 of the Master Lease, as incorporated herein, all
alterations or improvements made by Sublessee to the Subleased Premises shall
remain on and be surrendered with the Subleased Premises upon the expiration or
earlier termination of this Sublease, except that Sublessor may, within thirty
(30) days before or thirty (30) days after termination of the Sublease, elect to
require Sublessee to remove some or all of the alterations or improvements which
Sublessee may have made to the Subleased Premises, unless Sublessor has
previously agreed in writing that any one or more of such alterations or
improvements need not be removed at the end of the Term. If Sublessor so elects,
Sublessee shall at its own cost restore the Subleased Premises to the condition
designated by Sublessor in Sublessor's election, before the last day of the Term
or within thirty (30) days after notice of Sublessor's election is given to
Sublessee, whichever is later. Sublessor shall not be required to provide a
tenant improvement allowance to Sublessee in connection with Sublessee's
construction of any alterations or
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<PAGE> 5
improvements to the Subleased Premises. Notwithstanding the foregoing, Sublessor
shall use reasonable good faith efforts to cause the construction of the
demising wall depicted on Exhibit C to be completed as soon reasonably
practicable following the approval of this Sublease by Master Lessor. Sublessor
shall cause the demising wall to be constructed in accordance with applicable
laws and in a good and workmanlike manner.
15. Limitation of Liability: Except to the extent of the gross or
active negligence or willful misconduct of Sublessor, its agents, employees,
contractors or invitees, Sublessor shall not be liable to Sublessee for: (i)
failure or interruption of any utility system or service, or (ii) failure of
Master Lessor to maintain the Subleased Premises as may be required under the
Master Lease. In the event that Sublessor is entitled to an abatement of rent
(with respect to the Subleased Premises) under the terms of the Master Lease,
Sublessee shall be entitled to a proportionate share of abatement of Rent under
this Sublease. Sublessor and Sublessee are corporations, and the obligations of
Sublessor and Sublessee hereunder shall not constitute the personal obligations
of the officers, directors, trustees, partners, joint venturers, members,
owners, stockholders or other principals or representatives of the corporations.
16. Default: Sublessee shall be in material default of its obligations
under this Sublease if any of the following events occur:
A. Sublessee fails to pay any Rent when due, when such failure
continues for three (3) days after written notice from Sublessor to Sublessee
that any such sum is due; or
B. Sublessee fails to perform any term, covenant or condition
of this Sublease (except those requiring payment of Rent) and fails to commence
cure of such breach within seven (7) days after delivery of a written notice
from Sublessor specifying the nature of the breach or to thereafter
expeditiously complete such cure within a reasonable time; or
C. Sublessee makes a general assignment of its assets for the
benefit of its creditors, including attachment of, execution on, or the
appointment of a custodian or receiver with respect to a substantial part of
Sublessee's property or any property essential to the conduct of its business;
or
D. Sublessee abandons the Subleased Premises or ceases to
conduct business in the Subleased Premises for more than seven (7) consecutive
days in any thirty (30) day period; or
E. A petition is filed by or against Sublessee under the
bankruptcy laws of the United States or any other debtors' relief law or
statute, unless such petition is dismissed within sixty (60) days after filing;
or a court directs the winding up or liquidation of Sublessee; or a substantial
part of Sublessee's property or any property essential to the conduct of its
business is attached or executed upon and not released from the attachment or
execution within sixty (60) days; or a custodian or receiver is appointed for a
substantial part of Sublessee's property or any property essential to the
conduct of its business and not discharged within sixty (60) days; or
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<PAGE> 6
F. Sublessee commits any other act or omission which
constitutes an event of default under the Master Lease, which has not been cured
after delivery of written notice and passage of the applicable grace period
provided in the Master Lease as modified, if at all, by the provisions of this
Sublease.
17. Remedies. In the event of any default by Sublessee under this
Sublease (including, without limitation, a default pursuant to Section 20 of the
Master Lease, as incorporated herein), Sublessor shall have all remedies
provided by applicable law, including, without limitation, all rights pursuant
to Paragraph 21 of the Master Lease, as incorporated herein and under California
Civil Code Sections 1951.2 and 1951.4. Sublessor may resort to its remedies
cumulatively or in the alternative.
18. Surrender: Prior to expiration of this Sublease, Sublessee shall
remove all of its trade fixtures and shall surrender the Subleased Premises to
Sublessor in the condition received, free of Hazardous Materials brought onto
the Property by Sublessee, its agents, employees, contractors or invitees,
reasonable wear and tear excepted. If the Subleased Premises are not so
surrendered, then Sublessee shall be liable to Sublessor for all costs incurred
by Sublessor in returning the Subleased Premises to the required condition, plus
interest thereon at the Interest Rate. Sublessee shall indemnify, defend with
counsel reasonably acceptable to Sublessor, protect and hold harmless Sublessor
against any and all claims, liabilities, judgments, causes of action, damages,
costs, and expenses (including attorneys' and experts' fees) resulting from
Sublessee's delay in surrendering the Subleased Premises in the condition
required.
19. Estoppel Certificates: Within five (5) days after demand by
Sublessor, Sublessee shall execute and deliver to Sublessor an estoppel
certificate to Sublessor in connection with the Sublease in the form required
pursuant to Section 24 of the Master Lease.
20. Broker: Sublessor and Sublessee each represent to the other that
they have dealt with no real estate brokers, lenders, agents or salesmen other
than Cooper/Brady Corporate Real Estate Services, representing Sublessor, and
Wayne Macia Associates, representing Sublessee, in connection with this
transaction. Each party agrees to hold the other party harmless from and against
all claims for brokerage commissions, finder's fees, or other compensation made
by any other agent, broker, salesman or finder as a consequence of said party's
actions or dealings with such agent, broker, salesman, or finder. Sublessor
shall pay a commission due in connection with this transaction pursuant to a
separate written agreement between Sublessor and its broker, Cooper/Brady
Corporate Real Estate Services.
21. Notices: Unless five (5) days' prior written notice is given in the
manner set forth in this Paragraph, the address of each party for all purposes
connected with this Sublease shall be that address set forth below their
signatures at the end of this Sublease. The address for Master Lessor shall be
as set forth in the Master Lease. All notices, demands, or communications in
connection with this Sublease shall be considered received when (i) personally
delivered; or (ii) if properly addressed and either sent by nationally
recognized overnight courier or deposited in the mail (registered or certified,
return receipt requested, and postage prepaid), on the date shown on the return
receipt for acceptance or rejection. All notices given to the Master Lessor
under the Master Lease shall be
-6-
<PAGE> 7
considered received only when delivered in accordance with the Master Lease to
all parties hereto at the address set forth below their signatures at the end of
this Sublease.
22. Severability: If any term of this Sublease is held to be invalid or
unenforceable by any court of competent jurisdiction, then the remainder of this
Sublease shall remain in full force and effect to the fullest extent possible
under the law, and shall not be affected or impaired.
23. Amendment: This Sublease may not be amended except by the written
agreement of all parties hereto.
24. Attorneys' Fees: If either party brings any action or legal
proceeding with respect to this Sublease, the prevailing party shall be entitled
to recover reasonable attorneys' fees, experts' fees, and court costs.
Notwithstanding the foregoing and in addition thereto, Sublessor shall be
entitled to immediate receipt from Sublessee, for each breach hereof, of such
reasonable attorneys' fees (but not less than Fifty Dollars ($50.00)), as may be
incurred in connection with each notice or demand delivered to Sublessee.
Sublessee agrees that such sum constitutes reimbursement to Sublessor of the
reasonable cost of the preparation and delivery of each notice caused by
Sublessee's breach.
25. Other Sublease Terms:
A. Incorporation by Reference. Except as otherwise provided in
this Sublease, the terms and provisions contained in the Master Lease are
incorporated herein by reference, and are made a part hereof as if set forth at
length; provided, however, that: (i) each reference in such incorporated
sections to "Lease" and to "Premises" shall be deemed a reference to this
"Sublease" and the "Subleased Premises," respectively; (ii) each reference to
"Landlord" and "Tenant" shall be deemed a reference to "Sublessor" and
"Sublessee", respectively; (iii) with respect to work, services, repairs,
restoration, insurance or the performance of any other obligation of Landlord
under the Master Lease, the sole obligation of Sublessor shall be to request the
same in writing from Master Lessor, as and when requested to do so by Sublessee,
and to use Sublessor's reasonable efforts (provided Sublessee pays all costs
incurred by Sublessor in connection therewith) to obtain Master Lessor's
performance, including, if reasonably necessary under the circumstances, the
commencement and prosecution of legal proceedings in the name of Sublessor or
otherwise against Master Lessor, with counsel reasonably satisfactory to
Sublessee, and Sublessor agrees to coordinate such enforcement proceedings with
Sublessee, but control of such proceedings shall be with Sublessor; (iv) with
respect to any obligation of Sublessee to be performed under this Sublease,
wherever the Master Lease grants to Sublessor a specified number of days to
perform its obligations under the Master Lease, except as otherwise provided
herein, Sublessee shall have three (3) fewer days to perform the obligation,
including, without limitation, curing any defaults; (v) Sublessor shall have no
liability to Sublessee with respect to (a) representations and warranties made
by Master Lessor under the Master Lease, (b) any indemnification obligations of
Master Lessor under the Master Lease, or other obligations or liabilities of
Master Lessor under the Master Lease with respect to compliance with laws,
condition of the Subleased Premises or Hazardous Materials, and (c) obligations
under the Master Lease to repair, maintain, restore, or insure all or any
portion of the Premises, regardless of whether the incorporation of one or more
provisions of the Master Lease might otherwise operate to
-7-
<PAGE> 8
make Sublessor liable therefor; (vi) with respect to any approval or consent
required to be obtained from the Master Lessor under the Master Lease, such
approval or consent must be obtained from both Master Lessor and Sublessor, and
the approval of Sublessor may be withheld if Master Lessor's approval or consent
is not obtained; (vii) the following provisions of the Master Lease are
expressly not incorporated herein by reference: Paragraphs 1.a, 1.b, 1.d, l.g,
1.h, and 1.j through 1.o, inclusive; Paragraphs 2.a and 2.f; Section 3;
Paragraphs 4.a and 4.b; Section 5; the second sentence of Subparagraph 12.b(4)
(but only delete the words "Tenant Improvements as outlined in P. 28 hereof" and
replace them with "demising wall to be constructed by Sublessor as outlined in
this Sublease"); Section 12(b)(5); Section 13.a (but see Section 4.B of this
Sublease regarding Tenant's obligation to pay Operating Expenses); Section 19
(except for the sixth sentence of Paragraph 19.a); Section 20; Paragraph 23.c;
Sections 27, 28, 29, 30, 31, 32, 33, 34 and 35; Paragraph 36(d); Exhibits A and
E; (viii) notwithstanding clause (ii) above, references to "Landlord" in the
following provisions of the Master Lease shall mean Master Lessor, not
Sublessor: 1.f; Paragraph 2.d (second sentence only); Subparagraph 7.c(2);
Section 9; Paragraph 10.a (but only the first sentence and the and the last
reference to "Landlord" in the second sentence); Paragraph 12.a; Subparagraph
12.b(5) and 12.d(1); Paragraph 13.b; Section 15; Subparagraph 16.b(2); Paragraph
16.c; Paragraphs 17.a, 17.b (also, replace the first reference to "Tenant" in
the last sentence of this paragraph with "Sublessor or Sublessee") and 17.e;
18.a; and Paragraphs 23.a, 23.b and 36.f; and (ix) notwithstanding clause (ii)
above, references to "Landlord" in the following provisions of the Master Lease
shall mean both Master Lessor and Sublessor: Paragraphs 2.d (second sentence
only) and 2.e; Section 6; Paragraphs 7.d and 7.f; Section 8; Paragraph 10.a
(first sentence only); Paragraph 12.a; Subparagraph 12.b(4) (third sentence
only); Paragraphs 13.c through 13.e, inclusive; Section 14 (the first, second,
third and sixth sentences only); Subparagraph 16.b(1); Paragraph 18.c (the last
sentence only); Sections 22, 24, and 25; and Paragraphs 36.c, 36.h and Exhibit
C.
B. Assumption of Obligations: This Sublease is and all times
shall be subject and subordinate to the Master Lease and the rights of Master
Lessor thereunder. Sublessee hereby expressly assumes and agrees: (i) to comply
with all provisions of the Master Lease applicable to the Subleased Premises to
the extent incorporated herein, (ii) to perform all the obligations on the part
of the "Tenant" to be performed under the terms of the Master Lease applicable
to the Subleased Premises during the term of this Sublease to the extent
incorporated herein, and (iii) to hold Sublessor free and harmless of and from
all liability, judgments, costs, damages, claims, demands. and expenses
(including reasonable attorneys' and experts' fees) arising out of Sublessee's
failure to comply with or to perform Sublessee's obligations hereunder or to act
or omit to act in any manner which will constitute a breach of the Master Lease.
C. Sublessor's Representations: To the best of Sublessor's
knowledge, Sublessor represents and warrants with respect to the Subleased
Premises (i) that the document attached as Exhibit a to this Agreement is a
true, correct and complete copy of the Master Lease, and that the Master Lease
is in full force and effect, (ii) there is no default, or any condition which
with the passage of time or the giving of notice, or both, would constitute a
default, on the part of either party to the Master Lease, and (iii) Sublessor
has not assigned, encumbered or otherwise transferred any interest of Tenant
under the Master Lease. Sublessor shall perform all obligations of the Tenant
under the Master Lease to the extent that Sublessee has not agreed to perform
such obligations under
-8-
<PAGE> 9
the Sublease and shall cooperate with Sublessee to obtain the consent of Master
Lessor in a timely manner to any act which requires such consent and Sublessor
shall not unreasonably withhold or delay consent to any such act.
26. Condition Precedent: Notwithstanding anything to the contrary
contained herein, this Sublease and Sublessor's and Sublessee's obligations
hereunder are conditioned upon having obtained the written consent of the Master
Lessor. If Sublessor has not obtained Master Lessor's consent within thirty (30)
days after the date of Sublessor's execution of this Sublease, either party may
terminate this Sublease, and Sublessor shall return to Sublessee all sums paid
by Sublessee to Sublessor in connection with its execution of this Sublease.
Sublessee shall provide to Master Lessor all financial and other information
requested by Master Lessor pursuant to Section 19 of the Master Lease.
27. Sublease Common Areas:
A. Sublessee's Rights. The areas identified on Exhibit B as
"Common Area" shall constitute the "Sublease Common Areas." All areas within the
Building other than the Subleased Premises and the Sublease Common Areas are
reserved for the exclusive use of Sublessor. Subject to the terms and conditions
set forth herein, Sublessee and its employees, contractors and invitees shall
have the non-exclusive right, in common with Sublessor and Sublessor's
employees, contractors and invitees, to use the Sublease Common Areas as they
exist from time to time, subject to any rights, powers or privileges reserved by
Sublessor under the terms of this Sublease. Sublessor makes no warranty express
or implied with respect to the condition of the Sublease Common Areas or any
equipment located therein. Sublessee shall not store any property, temporarily
or permanently, in the Sublease Common Areas.
B. Rules and Regulations. Sublessor shall have the exclusive
control and management of the Sublease Common Areas and may from time to time
promulgate reasonable rules and regulations for the care and orderly management
of the Sublease Common Areas and the safety of Sublessor, Sublessee and their
employees, agents and invitees. Such rules and regulations shall be binding upon
Sublessee upon delivery of a copy thereof to Sublessee, and Sublessee agrees to
abide by such rules and regulations and to cause its employees, contractors and
invitees to abide by such rules and regulations.
C. Changes. Sublessor shall have the right from time to time
to: (i) make physical changes to the Sublease Common Areas; (ii) close
temporarily any of the Sublease Common Areas for maintenance purposes provided
reasonable access to the Subleased Premises remains available; (iii) add
improvements to the Sublease Common Areas; and (iv) to do or perform such other
acts and make such other changes to the Sublease Common Areas and Building as
Sublessor, in its reasonable discretion, deems appropriate.
D. Parking. Sublessee and its employees, contractors and
invitees shall be entitled to the non-exclusive use, in common with Sublessor
and Sublessor's employees, contractors and
-9-
<PAGE> 10
invitees, of eighty (80) parking spaces only on those portions of the common
areas of the Premises designated from time to time by Sublessor for parking.
Sublessee and its employees, contractors and invitees shall not use more parking
spaces than the foregoing number and no overnight parking shall be permitted.
Said parking spaces may be used for parking by vehicles no larger than full-size
passenger automobiles and pick-up trucks. If Sublessee permits or allows any
vehicles to be parked on the Premises in violation of this Sublease, then
Sublessor may, in addition to Sublessor's other rights and remedies, remove or
tow away the vehicles involved and charge the cost thereof to Sublessee, which
cost shall be immediately payable upon demand by Sublessor.
28. Board Approval: Sublessee represents and warrants to Sublessor that
Sublessee's Board of Directors has authorized Sublessee's execution hereof.
29. Waiver of Subrogation: Notwithstanding anything to the contrary
contained in this Sublease or the Master Lease, Sublessor, Sublessee and Master
Lessor (by its consent to this Sublease) agree that the waiver of subrogation
provisions set forth in paragraph 16.f of the Master Lease shall be deemed
binding among and inure to the benefit of Sublessor, Sublessee and Master
Lessor.
[Signature page follows]
-10-
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Sublease as of the
day and year first above written.
SUBLESSEE: SUBLESSOR:
INFOSEEK CORPORATION, REDBACK NETWORKS, INC.,
a California corporation a Delaware corporation
By: /s/ LESLIE E. WRIGHT By: /s/ DENNIS BARSEMA
----------------------------- --------------------------------
Printed Printed
Name: Leslie E. Wright Name: DENNIS BARSEMA
----------------------------- ------------------------------
Its: VP FINANCE & CFO Its:
----------------------------- -------------------------------
Address: Prior to the Commencement Date: Address: 1399 Moffett Drive
2570 North First Street, Ste. 401 Sunnyvale, CA 94089
San Jose, CA 94131 Attn: Chief Financial
Officer
After the Commencement Date:
At the Subleased Premises
CONSENT OF MASTER LESSOR
Master Lessor hereby acknowledges receipt of a copy of this Sublease,
and consents to this Sublease. By this consent, Master Lessor shall not be
deemed in any way to have entered into the Sublease or to have consented to any
further assignment or sublease.
MASTER LESSOR:
LIMAR REALTY CORP. #8, a California
corporation
By: /s/ THOMAS A. NUMAINVILLE
--------------------------------------
Printed
Name: THOMAS A. NUMAINVILLE
-----------------------------------
Its: SENIOR VICE PRESIDENT
-------------------------------------
-11-
<PAGE> 1
EXHIBIT 10.6
FIRST AMENDMENT TO SUBLEASE
THIS FIRST AMENDMENT TO SUBLEASE ("Amendment") is dated for reference
purposes only as of January 15, 1999, and is made by and between INFOSEEK
CORPORATION, a Delaware Corporation ("Sublessor"), and REDBACK NETWORKS, INC., a
Delaware corporation ("Sublessee").
RECITALS
A. Pursuant to that certain Standard NNN Lease dated March 4, 1997, as
amended by that certain First Amendment to Lease dated June 9, 1997, and that
certain Second Amendment to Lease dated July 15, 1997 (collectively, the "Master
Lease"), Sublessor leases that certain real property commonly known as 1399 East
Moffett Park Drive, Sunnyvale, CA (the "Master Premises") from Limar Realty
Corp. #8 (the "Master Lessor").
B. Pursuant to that certain Sublease dated as of January 12, 1998 (the
"Sublease"), Sublessor subleases to Sublessee a portion of the Building located
on the Master Premises, which subleased portion is deemed to contain 20,462
square feet of space (the "Subleased Premises").
C. Sublessor and Sublessee wish to amend the Sublease on the terms and
conditions stated herein to increase the square footage of the Subleased
Premises and to modify and amend certain other provisions of the Sublease.
AGREEMENT
NOW, THEREFORE, for consideration, the adequacy and receipt of which are
hereby acknowledged, Sublessor and Sublessee agree as follows:
1. Incorporation of Recitals and Definitions. The foregoing recitals are
incorporated into and made a part of this Amendment. Terms which are capitalized
in this Amendment and which are not defined herein shall have the meanings
ascribed to them in the Sublease.
2. Modifications of Sublease. Notwithstanding anything to the contrary
contained in the Sublease, as of the Effective Date (as defined in Section 3
below), the Sublease shall hereby be modified and amended as follows:
2.1 Subleased Premises. The Subleased Premises shall be increased
to include an additional twelve thousand (12,000) square feet of space (the
"Additional Space") located on the first floor of the Building, as more
particularly described on Exhibit A attached hereto and made a part hereof. The
total square footage of the Subleased Premises, including the Additional Space,
shall be deemed to be 32,462 square feet of space.
2.2 Rent. The Monthly Base Rent for the remainder of the Term
shall be increased from Thirty-Three Thousand Three Hundred Fifty-Three Dollars
($33,353) to Fifty-Two Thousand Nine Hundred Thirteen Dollars ($52,913).
2.3 Additional Rent. The percentage share of Sublessor's
Operating Expenses due and payable by Sublessee shall be increased from 22.27%
to 35.32%.
1
<PAGE> 2
2.4 Sublease Common Areas.
2.4.1 Exercise Room. As more particularly described on
Exhibit A, the Sublease Common Areas shall include Sublessor's exercise room
located on the first floor of the Building; provided, however, that the use of
such exercise room by Sublessee and its employees shall be (i) restricted to
only those employees of Sublessee who have signed a release and waiver of
liability agreement in a form acceptable to Sublessor and shall be subject to
all other rules, regulations and restrictions promulgated by Sublessor in its
sole but reasonable discretion, (ii) subject to all other terms and conditions
regarding the Sublease Common Areas stated in the Sublease, and (iii) at
Sublessee's sole risk and responsibility, notwithstanding anything to the
contrary contained in the Sublease. In addition to Sublessee's other indemnity
obligations under the Sublease, Sublessee shall indemnify, protect, defend and
hold harmless Sublessor and Master Lessor and their agents, employees,
successors and assigns from and against all liabilities, losses, claims, demands
costs, expenses (including reasonable attorneys fees), causes of action, and
judgements, including, without limitation, injury or death to persons or damage
or loss to property, arising from or in any way connected with Sublessee's or
its employees' use of the exercise room.
2.4.2 Security Card Reader. Sublessee shall as soon as
reasonably practicable, at Sublessee's sole cost and expense, and in accordance
with all requirements of the Sublease regarding the installation of improvements
or alterations to the Subleased Premises, install a security card reader on the
"C" Lobby door located in the Building which will allow employees of either
Sublessor or Sublessee to enter that set of doors. The plans and specifications
for such installation work shall be subject to the advance written approval (not
to be unreasonably withheld or delayed) of Sublessor and no such installation
work will be performed by Sublessee unless and until such approval is given by
Sublessor.
2.5 Office Cubicle Reimbursement. The cubicles currently located
in the Additional Space (the "Cubicles") shall remain and be delivered with the
Additional Space in "as-is, where is" condition, without any representation or
warranty whatsoever by Sublessor as to the adequacy, condition, or suitability
of such Cubicles for any particular use or purpose. Subject to the terms and
conditions of the Sublease, as modified by this Amendment, Sublessee may use the
Cubicles in the Additional Space during the Term. At the expiration or earlier
termination of the Sublease, and in addition to Sublessee's other surrender
obligations under the Sublease, Sublessee shall surrender all of the Cubicles to
Sublessor in the same condition and location where they were received, normal
wear and tear excepted. If the Cubicles are not so surrendered, Sublessee shall
be deemed in default under the Sublease and, in addition to any other rights or
remedies that Sublessor may have, Sublessor may perform any necessary repair or
replacement of such Cubicles and deduct all costs incurred in connection
therewith from Sublessee's security deposit. As reimbursement to Sublessor for
the rental cost of the Cubicles, Sublessee shall pay to Sublessor during the
Term Three Thousand Dollars ($3,000) per month, which reimbursement shall be
paid to Sublessor at the same time that Rent is due and payable under the
Sublease.
3. Effective Date. As used herein, the "Effective Date" shall mean the
date upon which Sublessor has delivered possession of the Additional Space to
Sublessee. Notwithstanding the foregoing, if for any reason, Sublessor does not
deliver possession of the Additional Space to Sublessee by March 31, 1999, then
Sublessee, as its sole and exclusive remedy, may by written notice delivered to
Sublessor not later than April 10, 1999, cancel this Amendment, whereupon this
Amendment shall be deemed null, void and of no further force or effect, except
that Sublessee shall be obligated to immediately surrender possession of any
temporary space (as
2
<PAGE> 3
described below) to Sublessor in the condition required by the Sublease, and
Sublessee shall continue to be bound by and to perform its obligations under the
Sublease.
4. Temporary Space. If prior to the Effective Date, Sublessor determines
that office space within the Building is available for temporary use by
Sublessee's employees, then Sublessor shall offer such space to Sublessee on a
temporary basis. The temporary use of such space by Sublessee's employees shall
be subject to all of the terms and conditions of the Sublease, including without
limitation, the payment of Rent (Monthly Base Rent for such temporary space
shall be calculated at the rate of $1.63 per square foot of such space,
reimbursement for the use of any cubicles will be calculated at the rate of
$0.25 per square foot, and Sublessee's share of Sublessor's Operating Expenses
shall be increased proportionately by the amount of such space), and any other
terms and conditions reasonably requested by Sublessor. The parties shall
memorialize their agreement regarding any such temporary space in writing as an
amendment to the Sublease.
5. Miscellaneous.
5.1 Consent of Master Lessor. Notwithstanding anything to the
contrary contained in this Amendment, this Amendment shall have no force or
effect unless and until it has been approved by Master Lessor in writing.
5.2 Counterparts. This Amendment may be executed in any number of
original counterparts, all of which evidence only one agreement, and only one of
which need be produced for any purpose.
5.3 Confirmation. Sublessor and Sublessee hereby ratify and
confirm all of the terms and provisions of the Sublease, as amended by this
Amendment, and the Sublease, as so amended, shall continue in full force and
effect.
[Signature page follows]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
"Sublessor" "Sublessee"
INFOSEEK CORPORATION, REDBACK NETWORKS, INC.,
a Delaware corporation a Delaware corporation
By: /s/ LESLIE E. WRIGHT By: /s/ Geoffrey C. Darby
------------------------- --------------------------
Printed Printed
Name: Leslie E. Wright Name: Geoffrey C. Darby
------------------------- --------------------------
Title: COO/CFO Title: CFO
------------------------- --------------------------
By: By:
------------------------------ ------------------------------
Printed Printed
Name: Name:
---------------------------- ----------------------------
Title: Title:
--------------------------- ---------------------------
CONSENT OF MASTER LESSOR
Master Lessor hereby acknowledges receipt of a copy of this Amendment.
Master Lessor hereby consents to this Amendment. By this consent, Master Lessor
shall not be deemed to have entered into the Sublease or to have consented to
any further amendment of the Sublease.
Master Lessor:
LIMAR REALTY CORP. #8,
a California corporation
By: /s/ THOMAS A. NUMAINVILLE
----------------------------------
Printed
Name: THOMAS A. NUMAINVILLE
--------------------------------
Its: SENIOR V.P.
--------------------------------
4
<PAGE> 5
Exhibit A
Depiction of Subleased Premises
(To be attached)
5
<PAGE> 6
BUILDING LAYOUT
6
<PAGE> 7
MEMORANDUM OF UNDERSTANDING
BETWEEN
INFOSEEK, INC. AND REDBACK NETWORKS, INC.
1. RedBack will sublease the rest of Bldg. C's first floor - approximately
12,000 sq. ft. starting no later than 3/31/99.
2. Triple Net square foot cost before allocated/shared expenses, for $1.63
per sq. ft.
3. Monthly cost per square foot for leasing the existing cubicles will be 25
cents per sq. ft./mo.
4. Monthly allocated expense percentage will be recalculated using the
formula in the original sublease.
5. The add-on sublease contract to be co-terminus with the current sublease
termination date of 9/30/99.
6. Until RedBack can take over the rest of the first floor, Infoseek will
work with RedBack, on a space available basis, to house additional
employees.
7. Both companies will share the first floor workout room.
8. RedBack will install a security card reader on the "C" Lobby door so that
either Infoseek or RedBack employees can use that set of doors.
/s/ GEOFF DARBY /s/ LES WRIGHT
- ------------------------------ -------------------------------
Geoff Darby, CFO, Redback Les Wright, COO, Infoseek
1/11/99 1/11/99
- ------------------------------ -------------------------------
Date Date
THIS MEMORANDUM OF UNDERSTANDING ("MOU") IS INTENDED SOLELY TO FACILITATE
DISCUSSIONS AMONG THE PARTIES. THIS MOU IS NOT INTENDED TO CREATE NOR SHALL IT
BE DEEMED TO CREATE A LEGALLY BINDING OR ENFORCEABLE AGREEMENT, OFFER, OR THE
LIKE OF ANY TYPE OR NATURE AND NEITHER PARTY SHALL HAVE ANY LEGAL OBLIGATION
WHATSOEVER PURSUANT TO THIS MOU.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 5, 1999 relating to
the financial statements of Redback Networks Inc., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,189,000
<SECURITIES> 0
<RECEIVABLES> 2,682,000
<ALLOWANCES> 340,000
<INVENTORY> 821,000
<CURRENT-ASSETS> 11,614,000
<PP&E> 4,027,000
<DEPRECIATION> 1,205,000
<TOTAL-ASSETS> 14,682,000
<CURRENT-LIABILITIES> 7,153,000
<BONDS> 0
0
18,884,000
<COMMON> 6,741,000
<OTHER-SE> (19,371)
<TOTAL-LIABILITY-AND-EQUITY> 6,254,000
<SALES> 9,206,000
<TOTAL-REVENUES> 9,206,000
<CGS> 3,603,000
<TOTAL-COSTS> 3,603,000
<OTHER-EXPENSES> 15,482,000
<LOSS-PROVISION> 340,000
<INTEREST-EXPENSE> 251,000
<INCOME-PRETAX> (9,876,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,876,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,876,000)
<EPS-PRIMARY> (3.57)
<EPS-DILUTED> (3.57)
</TABLE>
